Derivatives Regulation Case Study: Clearing Selection Our Client: A regional bank that uses derivatives for asset-liability management and offers hedges to its customers in connection with variable-rate loans. Situation: The client, who will be required to centrally clear certain derivatives transactions, hired Chatham to evaluate and help in the selection of futures commission merchants (FCMs), with whom the client will need to establish a relationship in order to be able to access clearing houses for the central clearing of derivatives trades. Outcome: Chatham conducted an independent RFP (request-for-proposal) process for the client involving eight FCMs. The RFP assessed fee schedules, creditworthiness, initial margin estimates and complementary services available to customers. The client received a full analysis and evaluation of the FCM proposals customized to align with the client’s specific needs. The RFP evaluation was presented to the client’s senior management…

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Overview of Central Clearing Requirements for End-User Exception: 1. Must not be a financial entity (small bank exemption can be used for banks with less than $10bn in assets) 2. Must be hedging commercial risk 3. If public, must have board approval to not clear trades 4. Must complete CFTC end-user exception questionnaire and submit to a swap data repository Clearing Timeline 1. Proposed mandatory clearing determination published by CFTC in the Federal Register on August 7th, 2012. 2. 30 day comment period ends September 6th, 2012. 3. Final mandatory clearing determination released as early as September 7th, 2012 (not expected to slip more than a month or two if it does slip) 4. Swap dealers, major swap participants, and active funds (private funds executing an average of 20 trades or more a month) required to clear as early as…

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