15 U.S.C. § 78c–3 — Clearing for security-based swaps

(a) In general It's illegal to enter into a security-based swap unless you submit it for clearing — to a clearing agency registered under this chapter, or one that's exempt from registration — if that swap is required to be cleared. A clearing agency's rules must do two things. They must treat every swap submitted to it with the same terms and conditions as economically equivalent, so they can be offset against each other inside that clearing agency. And they must clear swaps without discrimination, whether the swap was made directly between two parties or through an unaffiliated stock exchange or swap execution facility. (b) Commission review The Commission continually reviews individual swaps, and groups or types of swaps, to decide whether they should be required to be cleared. Before making that call, it must give the public at least 30 days to comment. Separately, a clearing agency must tell the Commission about any swap, or group or type of swap, that it plans to start accepting for clearing, and notify its own members when it does. Any swap that a clearing agency was already listing for clearing as of July 21, 2010, counts as already submitted. The Commission must make every submission public, review each one, decide whether that swap or group of swaps must be cleared, and give the public at least 30 days to comment on that decision. The Commission has 90 days after receiving a submission to decide, unless the clearing agency agrees to give it more time. In reviewing a submission, the Commission checks whether it lines up with section 78q–1. It must also weigh five things: how much trading exists in the swap and whether pricing data is solid; whether there's a rule framework, staff expertise, and credit support in place to clear it on realistic terms; how clearing it would affect systemic risk, given the market's size and the clearing agency's resources; the effect on competition, including fees; and whether customers' and counterparties' funds and positions would be legally protected if the clearing agency or a member firm became insolvent. When the Commission decides clearing is required, it can attach whatever terms and conditions it thinks are appropriate. Within a year of July 21, 2010, the Commission had to write rules for how clearing agencies submit swaps for this review. That requirement doesn't stop the Commission from also deciding, on its own, whether swaps already listed as of July 21, 2010 must be cleared. (c) Stay of clearing requirement After deciding a swap must be cleared, the Commission — either because a counterparty asked, or on its own — can pause that clearing requirement while it takes a closer look at the swap's terms and the clearing arrangement. It has 90 days to finish that closer look, unless the clearing agency agrees to more time. At the end of the review, the Commission can either confirm that the swap must be cleared, possibly with conditions, if that fits the five factors described above, or decide the clearing requirement doesn't apply after all. Within a year of July 21, 2010, the Commission had to write rules for this review process too. (d) Prevention of evasion The Commission must write rules — and can interpret them — to stop people from dodging the mandatory clearing requirements. If the Commission finds that a swap should be cleared but no clearing agency has agreed to clear it, the Commission must investigate the facts, publish a public report on what it found within 30 days, and take whatever action is necessary and in the public interest — which could include requiring extra margin or capital from the parties involved. None of this lets the Commission force a clearing agency to clear a swap that would threaten the clearing agency's own financial soundness. And none of it limits the Commission's power to enforce the open-access rules described above in subsection (a)(2). (e) Reporting transition rules Swaps entered into before July 21, 2010, had to be reported to a registered swap data repository or the Commission within 180 days after this section's effective date. Swaps entered into on or after July 21, 2010, had to be reported by the later of 90 days after the effective date, or whatever other deadline the Commission set by rule. (f) Clearing transition rules Swaps entered into before July 21, 2010, don't have to be cleared, as long as they were reported under the rule above. The same goes for swaps entered into before a clearing requirement started to apply to them, as long as they were reported under the later-swaps reporting rule. (g) Exceptions The mandatory clearing rule doesn't apply to a swap if one of the two parties isn't a "financial entity," is using the swap to hedge or reduce a real business risk, and tells the Commission — in whatever way the Commission requires — how it generally covers its financial obligations on uncleared swaps. Only that non-financial party gets to decide whether to use this exception; it's entirely up to them. "Financial entity" means a swap dealer, a security-based swap dealer, a major swap participant, a major security-based swap participant, a commodity pool, a private fund, an employee benefit plan, or a business mainly engaged in banking or financial activities. The Commission has to consider exempting small banks, savings associations, farm credit institutions, and credit unions with $10 billion or less in total assets. An affiliate of a company that qualifies for this exception can sometimes use the exception too. To qualify, the affiliate must be hedging a business risk that was actually passed to it from a non-financial affiliate; it must be wholly owned by another qualifying affiliate or by a non-financial company; it can't be majority-owned, even indirectly, by a financial entity; it can't ultimately be owned by a financial-entity parent; and it can't provide services to a nonbank financial company that the Federal Reserve Board supervises. But the exception is off the table if the affiliate is itself a swap dealer, a major participant, a bank holding company, a private fund, an ERISA or government benefit plan, an insured bank, a farm credit institution, a credit union, a Board-supervised nonbank financial company, or a regulated insurance company — and, unless the Commission finds it's in the public interest, it's also off the table if the affiliate is affiliated with a swap dealer or major participant. A qualifying affiliate can only use swaps to hedge real business risk, and it can't trade with, or pool risk with, its own financial-entity affiliates, other than other qualifying ones. There's a two-year transition window starting July 21, 2010, during which certain financing affiliates — ones that finance the purchase or lease of merchandise — are exempt from both the margin rule and the clearing rule for swaps that hedge that financing activity. And any swap an affiliate enters under this exception has to be covered by a centralized risk-management program that tracks the risk and identifies which affiliate the swap was really for. When a swap must be cleared and is between a dealer or major participant and an ordinary counterparty that is not itself a dealer or major participant, the counterparty alone picks which clearing agency handles it. When a swap isn't required to be cleared in that same dealer-to-ordinary-counterparty situation, the counterparty can still choose to have it cleared, and again gets to pick the clearing agency. Finally, the Commission can write rules to stop people from abusing these exceptions, and can demand information from anyone claiming one. (h) Trade execution When a swap must be cleared, the parties have to execute it either on an exchange, or on a registered — or exemption-qualified — security-based swap execution facility. That requirement drops away if no exchange or execution facility actually offers that swap for trading, or if the swap qualifies for the hedging exception described above. (i) Board approval A company can only use the exemptions from clearing or exchange-execution if it's the kind of issuer that's registered under section 78l or has to file reports under section 78o(d) — and even then, only if an appropriate committee of its board has reviewed and signed off on its decision to enter into swaps under those exemptions. (j) Designation of chief compliance officer Every registered clearing agency has to name a chief compliance officer. That officer reports directly to the board or the agency's senior officer, works with the board or senior officer to resolve conflicts of interest, runs the required compliance policies and procedures, and makes sure the agency follows this chapter and the Commission's rules under it. The officer must also set up ways to fix compliance problems found through compliance reviews, look-backs, audit findings, self-reported mistakes, or verified complaints, and must follow through on handling, responding to, fixing, retesting, and closing out those problems. Each year, the compliance officer has to write and sign a report describing how well the agency followed this chapter, and describing its policies and procedures, including its ethics code and conflict-of-interest rules. That report has to accompany the agency's required financial reports to the Commission, and it must include a certification — made under penalty of law — that the report is accurate and complete.