01 April 2013

CFTC approves final regulations governing exemption from required clearing for inter-affiliate swaps

The Commodity Futures Trading Commission (CFTC) today issued a final rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement under section 2(h)(1)(A) of the Commodity Exchange Act (CEA) and Commission regulations, subject to a number of conditions.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the CEA to require clearing of certain swaps. On November 29, 2012, the Commission adopted its first clearing requirement determination, requiring that swaps meeting the specifications outlined in four classes of interest rate swaps and two classes of credit default swaps (CDS) are required to be cleared. On March 11, 2013, swap dealers, major swap participants, and private funds active in the swaps market began clearing certain index CDS and interest rate swaps that they entered into on or after March 11, 2013.

Pursuant to its authority under section 4(c)(1) of the CEA, which grants the Commission general exemptive authority, the Commission today approved a rule that permits affiliated counterparties to elect not to clear a swap subject to the clearing requirement if those counterparties are majority-owned affiliates whose financial statements are included in the same consolidated financial statements. In addition, both affiliated counterparties must elect not to clear the swap, the terms of the swap must be documented in a swap trading relationship document (or comply with the requirements of Commission regulation 23.504, if one of the affiliated counterparties is a swap dealer or a major swap participant), the swap must be subject to a centralised risk management programme that is reasonably designed to monitor and manage the risks associated with the swap (or if one of the affiliated counterparties is a swap dealer or a major swap participant, the requirements of Commission regulation 23.600 must be met), and each swap entered into by the affiliated counterparties with unaffiliated counterparties must be cleared.

The requirement to clear swaps entered into with unaffiliated counterparties may be met by: (1) complying with the Commission’s clearing requirement; (2) complying with a foreign jurisdiction’s clearing mandate that the Commission has determined is comparable, and comprehensive but not necessarily identical, to the Commission’s clearing requirement; (3) complying with an exception or exemption from the clearing requirement under the CEA or the Commission’s regulations (4) complying with an exception or exemption under a foreign jurisdiction’s clearing mandate, provided that the Commission has determined that the foreign jurisdiction’s clearing mandate is comparable, and comprehensive but not necessarily identical, to the Commission’s clearing requirement, and the foreign jurisdiction’s exception or exemption is comparable to an exception or exemption under the CEA or the Commission’s regulations; or (5) clearing such swaps through a registered derivatives clearing organisation or a clearing organisation that is subject to supervision by appropriate government authorities in the home country of the clearing organisation and has been assessed to be in compliance with the Principles for Financial Market Infrastructures.

The final rulemaking provides for two, time-limited alternative compliance frameworks for swaps entered into with unaffiliated counterparties in jurisdictions outside of the United States.

The final rule requires the reporting counterparty to report to a swap data repository (SDR) (or if no SDR is available, to the Commission) the following information for each swap for which the inter-affiliate exemption applies: (1) confirmation that both affiliated counterparties to the swap are electing not to clear the swap and that each of the electing eligible affiliate counterparties satisfies the requirements of the rule; (2) information regarding how both affiliated counterparties generally meet their financial obligations associated with entering into non-cleared swaps; and (3) certain information, if the affiliated counterparties are issuers of securities registered under section 12, or are required to file reports under section 15(d), of the Securities Exchange Act of 1934.

The Commission also clarified the status of inter-affiliate swaps during the period between today and when the final rule becomes effective. The effective date of the rulemaking is 60 days after publication of the final rule in the Federal Register. The Commission stated that the clearing requirement will not apply until the effective date of these final rules to swaps executed between affiliated counterparties that are majority-owned, report their financial statements on a consolidated basis, and elect not to clear such swaps.

“The rule requires documentation of such exempted swaps, centralised risk management and reporting requirements for such swaps”, CFTC Chairman Gary Gensler said in a statement.

Press release

Statement of support by Chairman Gensler

Further reporting by Bloomberg, 2.4.13 © Bloomberg

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