"CFTC Adopts 'Legal Segregation with Operational Commingling' Model for Treatment of Cleared Swaps Collateral" by Julia Lu and John Clark

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February 1, 2012

The CFTC believes the collateral segregation model referred to as “legal separation with operational commingling,” or “LSOC,” will enhance the transferability of non-defaulting swap end-users’ positions and collateral from failed to solvent dealers while substantially protecting customers from the defaults and collateral shortfalls of fellow customers. However, LSOC is not a remedy for all risks posed to the pledged assets of swap customers. In this memorandum, Richards Kibbe & Orbe LLP attorneys Julia Lu and John A. Clark provide background on the mechanics of swap clearing and collateral segregation, describe the CFTC’s final rules and identify the protections offered and risks allocated by LSOC to participants in the cleared swaps market.

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