Clearing Exemption for Swaps between Certain Affiliated Entities; Proposed Rule (CFTC - Fed. Reg. Version)

Summary: (This item was previously reported when the CFTC adopted the rule proposal and before it was published in the Federal Register.) The CFTC is proposing a rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement (the "inter-affiliate clearing exemption" or the "proposed exemption") under Section 2(h)(1)(A) of the Commodity Exchange Act. The CFTC also is proposing rules that detail specific conditions which counterparties must satisfy to elect the proposed inter-affiliate clearing exemption, as well as reporting requirements for affiliated entities that avail themselves of the proposed exemption. The CFTC has finalized a rule that addresses swaps which are subject to the end-user exception. Counterparties to inter-affiliate swaps which qualify for the end-user exception would be able to elect not to clear swaps pursuant to the end-user exception or the proposed rule. The proposed rule does not address swaps that an affiliate enters into with a third party and that are related to inter-affiliate swaps which are subject to the end-user exception. The CFTC intends separately to propose a rule addressing swaps between an affiliate and a third party where the swaps are used to hedge or mitigate commercial risk arising from inter-affiliate swaps for which the end-user exception has been elected.

[Lofchie Comment: For non-U.S. affiliates, the proposed exemption is actually quite narrow. Non-U.S. affiliates that do enter into uncleared swaps with unrelated parties can benefit from the exemption only if the CFTC determines that the affiliate is located in a jurisdiction with a "comparable and comprehensive" clearing requirement (which, at this point, would probably exclude any country in the world, including the United States). The third prong is by its terms available only if the affiliate does not enter into any uncleared swaps with non-affiliates (which severely limits the types of swaps the affiliate could enter, as most types of swaps will not clear); the fourth prong is available only if the affiliate does not enter into any swaps with non-affiliates (which is in fact just a subset of the prior prong). In summary, this proposed exemption will have limited applicability to trades between a U.S. entity and its non-U.S. affiliates. The proposal is open for comment and the proposing release contains a good number of questions; accordingly, firms would be advised to consider comments after having regard to whether the exemption would be available in their specific situations.]

The two dissenting Commissioners criticized the requirement that the availability of the exemption would depend on the affiliates posting variation margin. (Their dissenting statement, as well as the other relevant documents, are linked below.) To see other recent regulatory news with respect to clearing, select "Clearing" from the items in the left column, select "30 days" at the top for the search, and select "search" at the bottom.

Comments Due: September 20, 2012.

Cross Reference(s): CFTC Rules Part 39 (Rule 39.6 - Exceptions to the Clearing Requirement); Proposed CFTC Rule page; Dodd-Frank Section 723 (Clearing); Commodity Exchange Act Sections 2(h) and 4(c)(1).

View rule release in full here: 77 FR 50425.See also: Submit comments to CFTC; View comments.Additional Materials: CFTC Press Release; CFTC Commissioners' Jill Sommers and Scott O'Malia's Statement of Dissent; CFTC Chairman Gary Gensler's Statement of Support.