November 2, 2020

CFTC Expands Exemptions to Swap Clearing Requirements

The CFTC unanimously adopted several amendments to swap clearing exemptions, including expanded exemptions for sovereign entities and small banking entities.

As previously covered, the final rules make, among other things, the following changes:

  • Small Bank Exception. The amendments move the exception for "small banks" (generally, certain banking entities with no more than $10 billion in assets) from Rule 50.50(d) to new Rule 50.53 ("Banks, Savings Associations, Farm Credit System Institutions, and Credit Unions Exempt from the Clearing Requirement").
  • Sovereigns and Multilaterals. The CFTC adopted new Rule 50.75 ("Swaps Entered into by Central Banks or Sovereign Entities"), which provides an exemption from clearing for swaps entered into by "central banks" and "sovereign entities." The CFTC adopted new Rule 50.76 ("Swaps Entered into by International Financial Institutions"), which provides an exemption from clearing for swaps with a specified list of multilateral development institutions (e.g., the IMF and World Bank), along with "any other entity that provides financing for national or regional development in which the U.S. government is a shareholder or contributing member."
  • Other Banking Entities. New Rules 50.77 ("Interest Rate Swaps Entered into by Community Development Financial Institutions"), 50.78 ("Swaps Entered into by Bank Holding Companies") and 50.79 ("Swaps Entered into by Savings and Loan Holding Companies") provide clearing exemptions for the interest rate swaps of community development financial institutions (subject to a number of conditions), and swaps entered into by bank holding companies and savings and loan holding companies.
  • Compliance Schedule. A new compliance schedule was adopted, as per Rule 50.26 ("Swap Clearing Requirement Compliance Dates"), that includes prior compliance dates from 2012 to 2016.

The amendments were largely adopted as proposed, with the exception of an added statement clarifying that (i) the exemptions under Rules 50.75 and 50.76 are not contingent on the reporting of the exempted swaps to swap data repositories under Rules 45.3 ("Swap Data Reporting: Creation Data") and 45.4 ("Swap Data Reporting: Continuation Data"), and (ii) central banks, sovereign entities and international financial institutions are not required to comply with the reporting requirement under Rules 45.3 and 45.4.

The final rule will go into effect 30 days after the date of its publication in the Federal Register.

Commissioner Statements

CFTC Chair Heath P. Tarbert asserted that the final rule (i) represented the CFTC's "evolving philosophy" regarding collaboration with international regulators and (ii) reduced regulatory burdens for small banking entities.

CFTC Commissioner Dan M. Berkovitz responded to criticism by a public interest group suggesting that there are too many exemptions to the clearing requirement, noting that "the number and scope of swaps entered into by [] institutions that will be included within the exemptions has been relatively limited."

CFTC Commissioner Brian Quintenz urged foreign jurisdictions to apply similar treatment to instrumentalities of the U.S. government engaging in transactions overseas.