CFTC Expands Dodd-Frank Clearing Exemption for Treasury Affiliates | Practical Law

CFTC Expands Dodd-Frank Clearing Exemption for Treasury Affiliates | Practical Law

The CFTC issued a no-action letter amending relief previously granted to provide additional flexibility for treasury affiliates that undertake hedging activities on behalf of nonfinancial affiliates within a corporate group from mandatory swap clearing under Title VII of the Dodd-Frank Act.

CFTC Expands Dodd-Frank Clearing Exemption for Treasury Affiliates

Practical Law Legal Update 6-590-9045 (Approx. 4 pages)

CFTC Expands Dodd-Frank Clearing Exemption for Treasury Affiliates

by Practical Law Finance
Published on 05 Dec 2014 • USA (National/Federal)
The CFTC issued a no-action letter amending relief previously granted to provide additional flexibility for treasury affiliates that undertake hedging activities on behalf of nonfinancial affiliates within a corporate group from mandatory swap clearing under Title VII of the Dodd-Frank Act.
On November 26, 2014, the CFTC issued No-action Letter 14-144 (No-action 14-144), amending some of the conditions and requirements included in the relief previously granted under No-action Letter 13-22 (No-action 13-22) and expanding relief from mandatory Dodd-Frank swap clearing and exchange-trading requirements for so-called "treasury affiliates." 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. Certain treasury affiliates were precluded from the relief granted under No-action 13-22 because they do not meet certain conditions required under No-action 13-22.
On June 4, 2013, the CFTC issued No-action 13-22 (see Legal Update, Certain Affiliate Financial Entity Transactions Exempted from Mandatory Clearing by CFTC), which exempted swaps entered into by certain financial entities from mandatory swap clearing and exchange-trading requirements because the financial entity is a treasury affiliate entering into the swap on behalf of a nonfinancial affiliate from its corporate group that is hedging commercial risk, and thus qualifies for the nonfinancial commercial end-user exemption to mandatory Title VII swap clearing rules (see Practice Note, The Dodd-Frank Act: Swap Clearing and Exchange Trading under Title VII).
No-action 14-144 amended the following requirements and conditions for eligible treasury affiliate status under No-action 13-22:
  • Prior to the release of No-action 14-144, one of the conditions for eligible treasury affiliate status under No-action 13-22 required that the ultimate parent of a treasury affiliate identify all wholly- or majority-owned affiliates within the corporate group and ensure that a majority qualify for the end-user exception. No-action 14-144 removes this requirement on the grounds that the ratio of the absolute number of financial entities to nonfinancial entities in the corporate group does not necessarily provide meaningful information about the corporate family as a whole and just adds ongoing corporate surveillance responsibilities and expenses.
  • No-action 13-22 also prohibited eligible treasury affiliates from being, or being affiliated with, a nonbank financial company that the Financial Stability Oversight Council (FSOC) had designated as systemically important. No-action 14-144 maintains the requirement that the treasury affiliate itself cannot be a systemically important nonbank financial company, but amends the language to restrict the treasury affiliate from:
    • entering into transactions with, or on behalf of, a systemically important nonbank financial company; and
    • providing any services, financial or otherwise, to a systemically important nonbank financial company.
    The CFTC believes that these restrictions provide sufficient protection from the risks of systemically important affiliates while allowing the treasury affiliate to provide the necessary support to its related operating entities.
  • Prior to the release of No-action 14-144, the definition of "related affiliate" under No-action 13-22 included:
    • nonfinancial entities that are, or are directly or indirectly wholly- or majority-owned by, the ultimate parent; and
    • persons that are another eligible treasury affiliate for such an entity.
    No-action 14-144 amends this definition to allow entities that provide financial services on behalf of a financial entity to nonetheless qualify as an eligible treasury affiliate.
  • No action 13-22 requires that the treasury affiliate enter into the exempted swap for the sole purpose of hedging or mitigating the commercial risk of one or more related affiliates that was transferred to the treasury affiliate by operation of one or more swaps with those related affiliates. No-action 14-144 amends this limitation on the grounds that it is unnecessarily strict. However, because the transfer of risk from the related affiliate to the treasury affiliate must no longer be evinced by back-to-back swaps, No-action 14-144 requires that the treasury affiliate be able to identify the related affiliate or affiliates on whose behalf the swap was entered into by the treasury affiliate. The CFTC also clarifies in No-action 14-144 that a swap "hedges or mitigates commercial risk" if it meets the requirement of CFTC Regulation 50.50(c) (17 CFR 50.50(c)).
  • Under No-action 13-22, treasury affiliates were prohibited from entering into swaps other than for the purpose of hedging or mitigating the commercial risk of one or more related affiliates. No-action 14-144 amends the language of this requirement to allow an eligible treasury affiliate to enter into its own hedging transactions. However, the CFTC also notes that these transactions entered into by the eligible treasury affiliate on its own behalf are not necessarily "exempted swaps," and may be required to be cleared if subject to the clearing requirement and no other exception or exemption to clearing applies.
  • Under No-action 13-22, related affiliates entering into swaps with the treasury affiliates, or the treasury affiliate itself, could not enter into swaps with, or on behalf of, any affiliate that is a financial entity. No-action 14-144 amends this condition to clarify that the financial entity affiliate may be an eligible treasury affiliate.
  • No-action 13-22 stated that the payment obligations of the eligible treasury affiliate on exempted swaps must be guaranteed by:
    • its nonfinancial parent;
    • an entity that wholly-owns or is wholly-owned by its nonfinancial parent; or
    • the related affiliates for which the swap hedges or mitigates commercial risk.
    No-action 14-144 removes this condition to accommodate additional support arrangements that may exist with regard to the eligible treasury affiliates payment obligations.