CFTC Staff Provides Inter-Affiliate Clearing Relief for Australia and Mexico
The CFTC Division of Clearing and Risk issued a no-action letter relating to the implementation of mandatory clearing regimes in Australia and Mexico. The relief, which extends relief previously granted in CFTC Letter 16-81, comes in response to a letter from ISDA requesting that certain provisions of the exemption from the swap clearing requirement for affiliated counterparties be available for swaps executed between certain U.S. swap market participants and their affiliated counterparties in Australia, Canada, Hong Kong, Mexico, Singapore, or Switzerland.
Specifically, the Division granted no-action relief to permit swap market participants affiliated with counterparties located in Australia or Mexico to rely on CFTC Rule 50.52(b)(4)(ii), a provision of the CFTC's inter-affiliate exemption from mandatory clearing. The letter comes in light of the CFTC's December 13, 2016 compliance date for the expansion of mandatory clearing certain interest rate swaps denominated in Australian dollars or Mexican pesos, as well as basis swaps denominated in Australian dollars.
Commentary
Ideally, the CFTC will amend this particular regulation (as ISDA requested). Rule 50.52(b)(4) is a regulation that captured the world as the CFTC saw it when the rule was adopted but did not foresee potential market changes. The regulation provides an exemption that is available only for counterparties in the EU, Japan and Singapore, while 50.52(b)(4)(iii) contains a percentage limitation for inter-affiliate swaps in other jurisdictions. The percentage limitation becomes impractical when swaps in such jurisdictions are also subject to CFTC mandatory clearing determinations.