CFTC Issues Two Time-Limited No-Action Letters to Certain Affiliated Counterparties (CFTC Letters 14-25 and 14-26) (with Lofchie Comment)

The CFTC Divisions of Clearing and Risk ("DCR") and Market Oversight ("DMO") issued two no-action letters to certain affiliated counterparties.

In CFTC Letter 14-25, the DCR issued a no-action letter extending the time-limited exemption contained in the alternative compliance frameworks available to certain affiliated counterparties pursuant to CFTC Rule 50.52(b)(4)(ii)-(iii) ("Exemption for Swaps Between Affiliates"). On April 11, 2013, the CFTC published a final rule providing an exemption from required clearing for swaps between certain affiliated entities, subject to specific requirements and conditions (the “Inter-Affiliate Exemption”). One of those conditions, the treatment of Outward-Facing Swaps Condition, requires the clearing of swaps between affiliated counterparties claiming the Inter-Affiliate Exemption (“Eligible Affiliate Counterparties”) and unaffiliated counterparties. The CFTC provided two temporary, alternative compliance frameworks to satisfy the Outward-Facing Swaps Condition to assist counterparties to transition to full compliance with CFTC Rule 50.52(b)(4)(i), both of which expire on March 11, 2014. The relief expires on December 31, 2014.

In CFTC Letter 14-26, the DMO issued a no-action letter providing time-limited no-action relief from the requirements of the trade execution requirement in CEA Section 2(h)(8) ("Commission Review of Swaps for Clearing") to Eligible Affiliate Counterparties, as defined in CFTC Rule 50.52(a), that engage in swap transactions with one another that involve a swap subject to the trade execution requirement. The letter stated that the DMO will continue to evaluate, based on ongoing observations of inter-affiliate market activity occurring both on and off of swap execution facilities ("SEFs") and designated contract markets ("DCMs"), whether such swap transactions should be subject to such trade execution requirement. In particular, the DMO will assess whether applying this requirement to inter-affiliate swap transactions would promote pre-trade price transparency in the swaps market. Moreover, the DMO will continue to consider the implications of this relief on the policy goals of the conditions set forth in the Inter-Affiliate Exemption. The relief expires on December 31, 2014.

Lofchie Comment: One cannot help but wonder if the CFTC actually believes: (i) that systemic risk is caused by affiliates entering into interest rate swaps with each other or (ii) that market integrity is improved by requiring that affiliates enter into swaps with each other on a regulated exchange. This is an example of remarkably complex micro-regulation of the financial markets. These letters must be read multiple times to be understood, and only then by reading prior letters and the related rules. In the midst of budgeting season, this seems a wasteful expenditure both of the CFTC's resources and of the resources of market participants.

See: CFTC Letter 14-25; CFTC Letter 14-26.