CFTC Provides Third Extension of Inter-Affiliate Swap Clearing Exemption

Practical Law Legal Update w-000-9131 (Approx. 5 pages)

CFTC Provides Third Extension of Inter-Affiliate Swap Clearing Exemption

by Practical Law Finance

No-Action 15-63

In order to qualify for the inter-affiliate swap clearing exemption, each eligible affiliate that enters into a swap that is subject to mandatory Title VII clearing under CEA Section 2(h)(1) with an unaffiliated counterparty must adhere to the OFSC (17 CFR 50.52(b)(4)(i)) (see Legal Update, Inter-affiliate and Certain Other Swaps Exempted from Mandatory Clearing Requirements by CFTC). Under the OFSC, the parties must undertake one of the following:

Clear the swap as required under CEA Section 2(h)(1) or qualify for the end-user exception to swap clearing under Section 2(h)(7) of the CEA (see Practice Note, The Commercial End-user Exception to the 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; or
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 Market Infrastructures.

Because US regulators have not yet deemed any foreign jurisdiction’s clearing requirement comparable to that of the US, affiliate counterparties that have been permitted to rely on an alternative compliance framework in lieu of the OFSC to qualify for the inter-affiliate exemption are able to continue to do so until the earlier of:

December 31, 2016.
For each jurisdiction, 60 days after the date on which the CFTC announces that it has made a comparability determination described in CFTC regulation 50.52(b)(4)(i).

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 15-63 further extends the availability of the above alternatives to the OFSC for eligible affiliates until December 31, 2016, 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 is prepared to provide the CFTC with documentation supporting its compliance with the regulations and the no-action guidance.

This relief was previously set to expire December 31, 2015 (see Legal Update, Inter-affiliate Swap Clearing Relief Extended to December 31, 2014: Outward-facing Swaps Condition and No-action 14-25).

For background on eligible affiliates, see Legal Update, Inter-affiliate Swap Clearing Relief Extended to December 31, 2014: Eligible Affiliates.

No-Action 15-62

No-Action 15-62 further extends, until December 16, 2016, 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 15-62, swaps involving eligible-affiliate counterparties that do not satisfy the above exception from clearing may still be exempted from the trade execution requirement.

According to No-Action 15-62, on February 19, 2014, ISDA requested this relief for inter-affiliate swap transactions between eligible affiliate counterparties that do not satisfy the above exceptions. ISDA pointed out that imposing the trade-execution requirement on inter-affiliate swap transactions would introduce unnecessary costs.

The CFTC has now extended this relief to allow more time to assess whether applying the trade-execution requirement to inter-affiliate swap transactions would promote pre-trade price transparency in the swaps market.

CFTC Provides Third Extension of Inter-Affiliate Swap Clearing Exemption | Practical Law