Swap clearing: Clear as mud in a minefield
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Swap clearing: Clear as mud in a minefield

Why did Isda beg the CFTC for more time? The International Swaps & Derivatives Association (Isda), with a long history of success in Washington, needed a few more days to frame a response last month to a movement from left field ­ a petition from one of its associate members, the London Clearing House (LCH), to Isda's old arch-enemy, the Commodity Futures Trading Commission (CFTC).

LCH is planning to launch SwapClear, an interbank clearing arrangement for over-the-counter swaps and forward rate agreements (FRAs) whereby two counterparties to a swap can cut the credit risk to almost zero by doing back-to-back deals with LCH in the middle: LCH becomes a multilateral clearing counterparty. The Financial Services Authority is the LCH's regulator, but in order to attract US participants the LCH felt it had to clarify the legal situation in the US.

The status of swaps in the US is still precarious, according to doom-mongers. The CFTC claims jurisdiction over swaps under the Commodity Exchange Act (CEA), because it sees a case for regarding them as futures, even though they enjoy a special exemption for the moment.

Swaps are over-the-counter instruments and should not logically come under the CEA ­ that's the derivative industry view.

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