CFTC Time-Limited No-Action Relief to Small Banks from the Board Approval Requirement of the Clearing Requirement (Letter 13-26) (with Lofchie Comment)

The Division of Clearing and Risk ("DCR") of the CFTC announced the issuance of a time-limited, no-action letter, granting relief to banking institutions having assets of less than $10 billion ("Small Banks") which are issuers of securities (or subsidiaries of such issuers), from the Board approval requirements of CEA Section 2(j) ("Committee Approval by Board of Exemption from Clearing or Trade Execution Requirements") and CFTC Rule 50.50 ("Exceptions to the Clearing Requirement").

The no-action letter provides that DCR will not recommend an enforcement action for a Small Bank's election of the end-user exception from required clearing without obtaining prior approval from the Board of the Small Bank, provided that, as soon as practicable, and no later than July 10, 2013, a Small Bank obtains retroactive Board approval for entering into uncleared swaps pursuant to the end-user exception for swaps entered into on or after June 10, 2013.

Beginning on June 10, 2013, in order to elect the end-user exception to required clearing, Small Banks otherwise must be eligible to utilize CFTC Rule 50.50.

This no-action relief expires on July 10, 2013. DCR notes that all market participants electing for the end-user exception to required clearing do not have to comply with the reporting obligations contained in regulation 50.50(b) until September 9, 2013.

Lofchie Comment: As with many other CFTC no-action letters, this one is subject to conditions that are unnecessary and problematic. In this case, the problem is the requirement that Board approval be "retroactive." Essentially, the CFTC is putting the Board in a position in which it must either approve a prior action that it had not reviewed at the time the action was taken or subject the bank to the risk of a CFTC disciplinary action.Presumably, bank boards will approve the decision not to clear in every instance, so this problem will end up being a theoretical one. That said, the CFTC staff has put bank boards in a very awkward position given the conditions in this letter.

See: CFTC Letter 13-26.Related News: "OCC Warns Non-Dealer Banks of Imminent Effect of Clearing Requirement" (June 7, 2013) and "FDIC and FRB Notices Regarding New Mandatory Clearing Requirements for OTC Interest Rate and CDS Contracts" (June 10, 2013).