The Dodd-Frank Act imposes clearing and trade execution requirements on standardized derivative products affecting swap dealers and participants in their dealings with their swap counterparties, including "special entities." Employee benefit plans defined under ERISA are "special entities" (see Practice Note, Swap Dealers and MSPs: Final Dodd-Frank External Business Conduct (EBC) Rules: Swaps with Special Entities).

The DOL conferred with the officials of the CFTC regarding this AO and states that it generally seeks to avoid giving clearing members and CCPs inconsistent obligations under ERISA and Dodd-Frank.

Under the Dodd-Frank Act, all swaps that the CFTC requires to be centrally cleared must be cleared by a CCP. For a pension plan engaging in swaps, central clearing requires the plan's fiduciary to contact swap dealers, identify a desired counterparty and select a clearing member to clear the swap (replacing the original swap with two opposing swaps, one with each counterparty to the transaction) (see Practice Note, Mechanics of Derivatives Clearing).

In certain cases, if the original counterparty defaults under the swap, its clearing member is obligated to the CCP and the CCP is obligated to the other counterparty to the swap. CFTC rules and the agreements between the plan and the clearing member give the clearing member certain liquidation rights. The clearing member is typically allowed to liquidate the plan's positions through offsetting and risk-reducing transactions. These rights can also be triggered in other situations where a plan's default is reasonably foreseeable, and the clearing member deems it advisable to protect itself, the CCP and other market participants.

When a clearing member's customer counterparty is an ERISA-covered pension plan, an independent and qualified plan fiduciary approves the agreement between the clearing member and the plan before the contract is executed. The agreement authorizes the clearing member to either:

According to the AO, a clearing member acting pursuant to an agreement with a pension plan would not be a plan fiduciary under ERISA Section 3(21)(A)(i) exercising discretionary control over ERISA plan assets solely by reason of:

The DOL reasoned that a clearing member does not exercise authority or control over the management or disposition of ERISA plan assets when engaging in these close-out or risk-reducing transactions because:

Regarding the margin held by clearing members, analogizing to the treatment of margin in the context of the futures contract markets, the DOL opined that margin is not a plan asset under Title I of ERISA because:

Regarding the clearing member's contractual rights in the event of a default, the DOL concluded that, assuming the agreement was negotiated with a plan fiduciary, the clearing member itself would not be an ERISA plan fiduciary solely by reason of liquidating the swap contracts in a plan's account and selling any collateral posted as margin in order to pay off the account's losses. The DOL emphasized that:

Furthermore, the DOL noted that the plan fiduciaries entering into agreements with clearing members are required under ERISA to determine that the investment in the swap contract is prudent and made solely in the interest of the plan's participants and beneficiaries. In this context, a plan fiduciary's analysis should include:

Note that parties enter into a number of different types of contracts and agreements with clearing members, including futures account agreements, futures and options agreements and cleared swaps addenda. "Agreements" is defined in the AO to mean "standard contracts" so it is not clear whether these agreements are covered or if it is just the swap agreement entered into with the plan. Because liquidation and settlement of the cleared swap transaction may be governed, at least in part, by these documents, it would make sense that the AO would apply to these agreements, as the AO language implies.

The AO also addresses whether a CCP that clears its swap or a clearing member with which it enters into the swap is a party in interest with respect to a plan (see Status as a Party in Interest Checklist).

The DOL's view is that a CCP, when performing clearing services for the plan's clearing member, does not provide services to the plan, and therefore will not be deemed to be a party in interest within the meaning of ERISA Section 3(14)(B). The DOL supports this position by explaining that the actions taken by a CCP in the event of a plan default should not amount to discretionary authority or control over ERISA plan assets because the agreement between a plan and clearing member is already heavily regulated by the CFTC under the CEA.

However, the DOL opined that a clearing member representing a pension plan is a party in interest with respect to the plan within the meaning of ERISA Section 3(14)(B). The clearing member is a service provider to the plan under a direct contractual agreement with the plan, by which the clearing member clears swap transactions (see Practice Notes, Negotiating ERISA Service Provider Agreements and Service Provider Disclosure Requirements for Pension Plans).

Because a clearing member is a service provider to a plan when facilitating its swap transactions, and therefore a party in interest to the plan, certain transactions between the plan and the clearing member are prohibited under ERISA Section 406(a), unless an exemption applies. ERISA Section 406(a)(1)(B) prohibits direct or indirect lending of money or other extension of credit between a plan and a party in interest (which includes a guarantor of an obligation). Therefore, a clearing member's guarantee of a plan's obligations to a CCP would be a prohibited transaction under ERISA Section 406(a)(1)(B).

However, Prohibited Transaction Exemption 84-14 (the QPAM Exemption) provides relief from ERISA Section 406(a)(1)(A) through (D) that may apply to a plan's agreement with a clearing member for services and certain guarantees of plan obligations that would otherwise be considered a prohibited extension of credit, provided the investment fund is managed by a qualified professional asset manager (QPAM). Section I(c) of the QPAM Exemption requires:

The AO explains that this requirement is satisfied if the clearing member enters into its agreement with the QPAM on behalf of the plan and that agreement sets out all of the material terms of the provision of services and guarantee by the clearing member.

The AO also addresses whether relief for a liquidation or close-out transaction could be covered by the QPAM Exemption. In the preamble to the QPAM Exemption, the DOL stated that Section I(c) is satisfied in subsidiary transactions (transactions that are "subsidiary to a primary transaction") if the QPAM reviews the terms of the subsidiary transactions as part of its determination that the transaction, as a whole, is prudent; that is, if the QPAM reviews the actual terms of a pre-existing subsidiary transaction.

The AO states the DOL's view that the QPAM Exemption covers subsidiary transactions that are:

The QPAM Exemption applies to these subsidiary transactions so long as the agreement governing the primary transaction includes specific provisions relating to subsidiary transactions so that the QPAM can reasonably foresee the potential outcomes. Specifically, the DOL states that the QPAM must look to the terms of the agreement regarding the clearing member's rights upon a plan default or other contractually specified event, including, but not limited to, provisions discussing:

The AO explains that if the QPAM executes an agreement including these terms, the liquidation and close-out transactions made under the agreement would satisfy Section I(c) of the QPAM Exemption.

The AO clears the way for ERISA plans to invest in the cleared swaps market.

Before investing in a cleared swap, a pension plan fiduciary under ERISA must consider: