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Treasury Affiliate Clearing Exception Codified as Part of Consolidated Appropriations Act
Practical Law Legal Update w-001-3906 (Approx. 4 pages)
Treasury Affiliate Clearing Exception Codified as Part of Consolidated Appropriations Act
by Practical Law Finance
| Published on 28 Jan 2016 • USA (National/Federal) |
As part of the Consolidated Appropriations Act, 2016, Congress has codified a swap clearing exception for affiliates of non-financial counterparties that enter into swaps to hedge or mitigate commercial risk.
As part of the Consolidated Appropriations Act, 2016, Congress has amended portions of the Commodity Exchange Act (CEA) and Securities Exchange Act of 1934 (Exchange Act) to codify an exception for treasury affiliates of non-financial swap counterparties from mandatory swap clearing under Title VII of the Dodd-Frank Act (the Affiliate Exception) (7 U.S.C. § 2(h)(7)(D)).
The Affiliate Exception originated in CFTC No-action Letters 14-144 and 13-22 (see Legal Updates, CFTC Expands Dodd-Frank Clearing Exemption for Treasury Affiliates and Certain Affiliate Financial Entity Transactions Exempted from Mandatory Clearing by CFTC), and is an extension of the Title VII commercial end-user clearing exception (see Practice Note, The Commercial End-user Exception to the Mandatory Swap Clearing Requirement).
Under the Affiliate Exception, an affiliate of a non-financial counterparty that qualifies for an exception for non-financial commercial end users from mandatory swap clearing (7 U.S.C. § 2(h)(7)) may itself qualify if the affiliate:
- Enters into the swap to hedge or mitigate commercial risk;
- Is directly and wholly-owned by another affiliate separately qualifying for the Affiliate Exception or by a non-financial entity;
- Is not indirectly controlled by a financial entity (for details on the definition of "financial entity" in the context of the clearing exception, see Practice Note, The Dodd-Frank Act: The Commercial End-user Exception to the Mandatory Swap Clearing Requirement: Financial Entities);
- Is not ultimately owned by a parent that qualifies as a financial entity; and
- Does not provide any services to an affiliate that qualifies as a "nonbank financial company supervised by the Board of Governors" pursuant to the CFTC's or SEC's authority. In this context, "nonbank financial company" means, generally, a company predominately engaged in financial activities whose annual gross revenues from financial activities or consolidated assets related to financial activities account for 85 percent of more of consolidated gross income/assets (12 U.S.C. § 5311(a)(4)).
Application of the Affiliate Exception is further restricted to affiliates that are not:
- swap dealers (SDs);
- security-based swap dealers (SBSDs);
- major swap participants (MSPs);
- major security-based swap participants (MSBSPs);
- commodity pools;
- bank holding companies (BHCs);
- private funds (as defined by the Investment Advisors Act);
- employee benefit plans or government plans (as defined by the Employee Retirement Income Security Act);
- insured depository institutions (IDIs);
- farm credit system institutions;
- credit unions;
- "nonbank financial company[ies] supervised by the Board of Governors" (as defined above); or
- any entity engaged in the insurance business and subject to capital requirements.
The Affiliate Exception does not apply to affiliates that are themselves affiliated with:
- a MSBSP;
- a SBSD;
- a MSP; or
- a SD.
The Affiliate Exception may therefore be used only by affiliates that:
- do not enter into any swaps other than for mitigating or hedging commercial risk; and
- do not enter into any swaps (either themselves or through an affiliate that is not a financial entity) with or on behalf of an affiliate that is a financial entity, or otherwise assume, combine, or consolidate the risk of swaps entered into by such financial entity, except those that qualify for the general exception above.
All affiliates that qualify for the Affiliate Exception must be subject to an internal risk management system designed to monitor and manage risks associated with swaps.
For more information on mandatory swap clearing see Practice Note, The Dodd-Frank Act: Swap Clearing and Exchange Trading under Title VII.
For details on the Title VII mandatory swap clearing exception for non-financial commercial end users, see Practice Note, The Commercial End-user Exception to the Mandatory Swap Clearing Requirement.