On May 4, 2015, the CFTC's Division of Clearing and Risk published Staff Letter 15-27 clarifying that a securitization special purpose vehicle (SPV) that is wholly owned by, and consolidated with, an entity that qualifies for the non-financial commercial end-user exception to mandatory swap clearing under Section 2(h)(7)(C)(iii) of the Commodity Exchange Act (CEA) qualifies as a captive finance company (CFC) and is therefore eligible to elect the end-user exception from mandatory Dodd-Frank swap clearing rules under Section 2(h) of the CEA.

Letter 15-27 was issued in response to a request for clarification from Ford Motor Credit Company LLC (Ford Credit) and an almost identical request from American Honda Finance Corporation, CNH Industrial Capital LLC, General Motors Financial Company Inc., Mercedes-Benz Financial Services, Mitsubishi Motors Credit of America Inc., Nissan Motor Acceptance Corporation, Toyota Financial Services, and VW Credit Inc.

CFCs are entities whose primary business is providing financing and which use derivatives for the purposes of hedging underlying commercial risks related to interest rate and foreign currency exposure. Since CFCs use derivatives to hedge legitimate business risks, they are specifically exempted from the definition of "financial entity" (see Practice Note, The Dodd-Frank Act: The Commercial End-user Exception to the Mandatory Swap Clearing Requirement: Exempt Financial Entities).

To qualify as a CFC under Section 2(h)(7)(C)(iii), the following four conditions must be met:

The automakers requested clarification on whether the "primary business" of these SPVs is "providing financing," since the SPVs role in providing financing is indirect because the securitization SPVs do not make loans but rather facilitate the extension of credit by purchasing loans and securitizing them (see Practice Notes, Securitization: US Overview and Securitization: The SPV).

SPVs enter into swaps in connection with asset-backed securities (ABS) transactions to hedge interest rate and currency risks related to the transaction and ensure the timeliness of payments to ABS holders and other transaction parties (see Practice Note, Securitization: US Overview: Use of Derivatives in Securitization). SPVs issues of auto-loan ABS are wholly owned by and consolidated on the balance sheets of automakers that engage in auto-loan securitization transactions (since FAS 166/167 accounting rules went into effect in 2010). Clearing and exchange trading increases the costs of entering into swaps that are integral to the ABS transaction, impacting the transaction's cash flows, spreads and the feasibility of the transaction.

Because Ford Credit makes loans to customers of Ford, Ford Credit’s primary business is providing financing.

The CFTC agreed with Ford Credit that a securitization SPV that is consolidated with a CFC is primarily involved in "providing financing," as the first element of CEA Section 2(h)(7)(C)(iii) uses that phrase. The adopting release to the CFTC's regulation implementing the end-user exception discussed CFCs but did not address the first element of the four-prong test. The release did specify that in determining whether a CFC meets the third element, entities should assess the CFC, its parent company, and other affiliates of the parent company "on a consolidated basis." Therefore, the CFTC thinks it is appropriate to evaluate the first element in the same manner and in this case it is appropriate to consider the business of the SPVs to be part of the business of Ford Credit since:

This interpretation of Section 2(h)(7)(C)(iii) is extended to Ford Credit’s securitization SPVs, as well as any similarly situated securitization SPV that is wholly owned by, and consolidated with, a CFC that allows SPVs to elect the end-user exception like its CFC parent.

This interpretive letter allows Ford and the other large automakers to engage in securitization-related swap transactions without using the centralized clearing and exchange-trading process mandated under Title VII of the Dodd-Frank Act (see Practice Note, The Dodd-Frank Act: Swap Clearing and Exchange Trading under Title VII).

For more information on the end-user exception, see Practice Note, The Dodd-Frank Act: The Commercial End-user Exception to the Mandatory Swap Clearing Requirement.