The CFTC issued a no-action letter exempting from mandatory Dodd-Frank swap clearing requirements swaps entered into by certain financial entities (known as "treasury affiliates") that would otherwise be subject to clearing but need not be cleared because the financial entity is entering into the swap on behalf of a non-financial affiliate hedging commercial risk.
On June 4, 2013, the CFTC issued No-action Letter 13-22 exempting from mandatory swap clearing requirements added to the CEA by Title VII of the Dodd-Frank Act swaps entered into by certain financial entities (known as "treasury affiliates") that would otherwise be subject to clearing but need not be cleared because the financial entity is entering into the swap on behalf of a non-financial affiliate from its corporate group that is hedging commercial risk. Treasury affiliates are entities that are part of a corporate group and engage in financial activities on behalf of the other members of the corporate group, such as cash management, debt administration and risk hedging.
An entity may qualify as a treasury affiliate that is not required to clear certain types of swaps if it both:
Qualifies as a "financial entity" under section 2(h)(7)(C)(i) of the CEA solely because of section 2(h)(7)(C)(i)(VIII).
Is part of a corporate group that includes non-financial entities and engages in activities that are financial in nature on behalf of its corporate affiliates.
Non-financial entities that execute swaps through a centralized treasury unit (CTU) such as a treasury subsidiary, may avail themselves of this relief provided, among other things:
The CTU is wholly owned directly by a non-financial entity.
The CTU's ultimate parent company is a non-financial entity.
The CTU does not trade on behalf of any financial affiliates.
Absent no-action relief, treasury affiliates that engage in swaps activity to hedge commercial risk on behalf of affiliated end-users would be ineligible for either of these swaps clearing exceptions. Under this no-action letter, an eligible treasury affiliate that enters into a swap on behalf of another member of its corporate group (a term which is not defined in the release) need not clear that swap.
Certain CFTC requirements remain in place for swaps that a counterparty elects not to clear, whether under this no-action letter or otherwise, including, among others, the requirement that the reporting party to the swap:
Give notice to a registered swap data repository (SDR), or if none is available to the CFTC, that the election not to clear the swap has been made.
Specify under which exception the election not to clear the swap has been made (in this case, for example, under No-action Letter 13-22).
Include other information about the entity electing the exception from the clearing requirement.