CFTC DSIO Time-Limited No-Action Relief: Cleared Swaps in Ags, Exempt Commodities and Swaps Exchanged for Futures Not Counted for SD Calcs (with Lofchie Comment)

The Division of Swap Dealer and Intermediary Oversight (DSIO) issued a letter that it will not recommend that the CFTC take enforcement action against any person for failure to include, in its calculation of the aggregate gross notional amount of swaps connected with its swap dealing activity for purposes of CFTC Rule 1.3(ggg)(4) (which relates to the dealer registration requirement), certain ag and non-financial swaps. Any carved-out swap must meet the following three conditions:

• references an exempt commodity or agricultural commodity;
• is executed prior to December 31, 2012;and
• is either cleared on a derivatives clearing organization registered with the Commission, or entered into, contingent upon its being subsequently exchanged for and cleared as a futures position, as part of an exchange for a related position transaction conducted in accordance with a DCM's rules.

Lofchie Comment: Firms entering into swaps that meet the first two conditions should consider amending their swap documents to include a representation as to the third condition. I have noted with interest that the CFTC has not acted to prevent ICE from redenominating its cleared swaps as futures (in fact, the CFTC has seemingly facilitated this redenomination, as this no-action position indicates). Now, other exchanges are following suit in order to escape the harsh regulation of swaps under Dodd-Frank. Perhaps the CFTC is reaching the view that the market simply can not bear the burden of swaps regulation that the CFTC is imposing, and so the CFTC is allowing what were formerly "swaps" to be called "futures" as an escape valve from the very burdens that the CFTC has imposed. That would certainly be a positive move, although it also points out the absurdity of regulations that treat swaps and futures in such a disparate manner given that in many cases the only difference between them seems to be their name.

See: CFTC Letter 12-16 Regulation 1.3(ggg)(4); No-Action