CFTC Adopts Amendment to Inter-Affiliate Clearing Rule
The CFTC voted unanimously to adopt amendments to the exception from clearing for swaps between affiliates.
The final rule amends CFTC Rule 50.52 ("Exemption for swaps between affiliates") to make permanent certain temporary alternative compliance frameworks that are "intended to make this anti-evasionary condition workable for international corporate groups in the absence of foreign clearing regimes determined to be comparable to CFTC requirements." The CFTC further noted that the rulemaking would "effectively codify CFTC Letter No. 17-66."
The final rule will go into effect 30 days after the date of publication in the Federal Register.
Commentary
The change by the CFTC is sensible, though it more or less retains the status quo, given the current no-action relief. As noted before, this particular aspect of the rule never made a great deal of sense.
The most interesting part of the rulemaking is the discussion on p. 11-15, in which the CFTC responds to a comment from ISDA suggesting that the rule should permit persons relying on the "variation margin" condition to take into account the actual variation margin requirements under foreign margin regimes deemed comparable to the CFTC requirements. As ISDA noted, the effect of the CFTC approach to inter-affiliate clearing is to impose, in certain circumstances, VM requirements when no such requirements exist under relevant margin rules. The CFTC said it was not making the change because (i) current requirements represent a "well-established status quo that ... has been working well over that period of time"; (ii) the "distinct purpose" of the condition in preventing risk transfer back into the United States; and (iii) the distinction from treatment under margin rules because of the specific purpose here to protect against evasion of the clearing requirement.
For this particular aspect of the rules, it is good that the CFTC is providing a rational policy explanation (very little found in the existing rules and adopting release), even though the explanation itself isn't entirely satisfying. (E.g., Is there a good reason the CFTC is hyper-focused on affiliate margining practices for clearable swaps but not other swaps, but at the same time effectively imposes VM requirements on all inter-affiliate swaps as a result of the concern about clearable swaps?)