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Alternative Market Briefing

CFTC adopts new rules on cleared swaps collateral segregation

Friday, March 09, 2012

Bailey McCann, Opalesque New York - The Commodity Futures Trading Commission (CFTC) has adopted a new slate of final rules concerning collateral segregation for cleared swaps. Futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) will now be required to segregate collateral posted by customers on cleared swaps. The rule changes are part of the regulator's efforts to comply with the requirements set forth in the Dodd-Frank Act.

The new rules will go into effect on April 9, 2012 but market participants will have until November 8, 2012 to be fully compliant.

Under the terms of the new rules, FCMs and DCOs must segregate cleared swap customers collateral on their books and records and cannot comingle customer collateral with their own funds. Customer collateral may only be comingled with other customer funds. The new rules also restrict derivatives clearing organizations from using non-defaulting customer collateral to cover the obligations of defaulting customers.

The changes are designed to reduce "fellow-customer risk," but will have an impact on the cost of entering into cleared swap transactions. Futures commission merchants and derivatives clearing organizations will likely bear the biggest brunt in terms of cost to implement these new rules as they require significant operational changes for both groups.

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