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Inter-affiliate Swap Clearing Exemption Further Extended
Practical Law Legal Update 3-589-7586 (Approx. 5 pages)
Inter-affiliate Swap Clearing Exemption Further Extended
by Practical Law Finance
| Published on 25 Nov 2014 • USA (National/Federal) |
The CFTC further extended, until December 31, 2015, previously granted no-action relief relating to the inter-affiliate exemption from mandatory CFTC swap clearing and trade execution. The relief permits the continued use of alternatives to the “outward facing swaps condition” (OFSC) to qualify for these inter-affiliate exemptions.
On November 7, 2014, the CFTC released two no-action letters, which together further extend until December 31, 2015 previously granted no-action relief relating to the inter-affiliate exemption from mandatory CFTC swap clearing and trade execution The relief permits the continued use of alternatives to the “outward facing swaps condition” (OFSC) to qualify for these inter-affiliate exemptions.
- No-action Letter 14-135 (No-action 14-135), which extends relief previously granted under No-action Letter 14-25 (No-action 14-25) to eligible affiliates from the OFSC set out in the final inter-affiliate exemption rules under Part 50 of the CFTC Regulations (17 CFR 50.52(a)), and therefore from Title VII's mandatory swap clearing requirement under CEA Section 2(h)(1). For further information, see Legal Update, Inter-affiliate Swap Clearing Relief Extended to December 31, 2014: Outward-facing Swaps Condition and No-action 14-25.
- No-action Letter 14-136 (No-action 14-136), which extends relief analogous to that in No-action 14-135, previously granted under No-action Letter 14-26 (No-action 14-26), to eligible affiliates from Title VII's mandatory swap exchange-trading requirement under CEA Section 2(h)(8) (see Legal Update, Inter-affiliate Swap Clearing Relief Extended to December 31, 2014).
Under the final inter-affiliate exemption's OFSC requirement (17 CFR 50.52(b)(4)(i)), in order to qualify for the inter-affiliate swap clearing exemption, each eligible affiliate that enters into a swap that is subject to mandatory clearing under CEA Section 2(h)(1) (see 17 CFR 50.4 for a list of these swaps) with an unaffiliated counterparty must either:
- Clear the swap as required under CEA Section 2(h)(1) or qualify for the end-user exemption to clearing under Section 2(h)(7) of the CEA (see Practice Note, The Commercial End-user Exception to the Dodd-Frank Mandatory Swap Clearing Requirement).
- Clear the swap pursuant to a foreign jurisdiction's clearing requirement that the CFTC has deemed comparable to that of the US or qualify for a foreign jurisdiction's exception to the clearing mandate that the CFTC has deemed comparable to that of the US.
- Clear the swap through a registered derivatives clearing organization (DCO) that is subject to regulation in its home country that has been assessed to be in compliance with the BIS-IOSCO international Principles for Financial Markets.
Under the final inter-affiliate exemption, the CFTC allowed temporary compliance with either 17 CFR 50.52(b)(4)(ii) or 17 CFR 50.52(b)(4)(iii) in place of the OFSC, as it recognized that it had not yet deemed any foreign jurisdiction's clearing requirement comparable to that of the US. These alternatives were set to expire on March 11, 2014.
However, because the CFTC had still not deemed any foreign jurisdiction's clearing requirement comparable to that of the US, No-action 14-25 extended the use of these alternatives to the OFSC until December 31, 2014. No-action 14-135 further extends this relief to December 31, 2015. As a result, eligible affiliates that would otherwise qualify for the inter-affiliate swaps exemption but for the OFSC, may instead continue to comply with either:
- 17 CFR 50.52(b)(4)(ii), under which eligible affiliates located in the European Union (EU), Japan and Singapore may satisfy the OFSC by either:
- paying and collecting full daily variation margin on all swaps with unaffiliated counterparties; or
- paying and collecting full daily variation margin on all swaps with all other eligible affiliates, including eligible affiliates outside of those jurisdictions.
- 17 CFR 50.52(b)(4)(iii), under which eligible affiliates located in the US that enter into swaps with eligible affiliates in non-US jurisdictions outside of the EU, Japan and Singapore may satisfy the OFSC by either:
- paying and collecting full daily variation margin on all swaps with unaffiliated counterparties; or
- paying and collecting full daily variation margin on all swaps with all other eligible affiliate counterparties.
No-action 14-135 further extends the availability of these two alternatives to the OFSC for eligible affiliates until December 31, 2015, provided that:
- All other requirements of 17 CFR 50.52 are satisfied.
- The counterparty to the swap is located outside of a jurisdiction for which the CFTC has determined a comparable clearing requirement exists (as noted, currently there are no such jurisdictions).
- The party seeking the eligible affiliate exemption must be prepared to provide the CFTC with documentation supporting its compliance with the regulations and the no-action guidance.
No-action 14-136 further extends relief for eligible-affiliate counterparties that execute a swap transaction with another eligible-affiliate counterparty from compliance with mandatory Title VII exchange-trading requirements under CEA section 2(h)(8). This section requires transactions involving swaps subject to the CEA section 2(h)(1) clearing requirement to be executed on or pursuant to the rules of a designated contract market (DCM) or swap execution facility (SEF).
CFTC Regulation 50.52 exempts swaps between affiliates from CFTC clearing requirements if:
•The counterparties are eligible affiliate counterparties under CFTC Regulation 50.52(a)
•The conditions under CFTC Regulation 50.52(b) for the inter-affiliate clearing exemption are met.
•The counterparties satisfies reporting requirements set forth in CFTC Regulation 50.52(c) and (d).
Under CFTC regulations, swaps involving eligible-affiliate counterparties that do not satisfy the above exception from clearing are subject to the trade-execution requirement. Under No-action 14-136, swaps involving eligible-affiliate counterparties that do not satisfy the above exception from clearing may still be exempted from the trade execution requirement.
The relief granted under No-action 14-135 and No-action 14-136 expires at 11:59 p.m. ET on December 31, 2015. After that date, under the final CFTC inter-affiliate exemption rules:
- Eligible affiliates must comply with the OFSC to qualify for the inter-affiliate exemption from clearing.
- Swaps between eligible affiliates that are required to be cleared must also be exchange traded.
For a background on eligible affiliates, see Legal Update, Inter-affiliate Swap Clearing Relief Extended to December 31, 2014: Eligible Affiliates.