CFTC Issues Two No-Action Letters Extending Relief to Certain Affiliated Counterparties (CFTC Letters 14-135 and 14-136)

The CFTC Divisions of Clearing and Risk ("DCR") and Market Oversight ("DMO") extended until December 31, 2015 previously-issued no-action relief in Letters 14-25 and 14-26.

Letter 14-135 extends the time-limited exemption contained in the alternative compliance frameworks available to certain affiliated counterparties, pursuant to CFTC Rule 50.52(b)(4)(ii)-(iii) ("Exemption for Swaps Between Affiliates"). On April 11, 2013, the CFTC published a final rule providing an exemption from required clearing for swaps between certain affiliated entities, subject to specific requirements and conditions (the "Inter-Affiliate Exemption"). One of those conditions, the treatment of Outward-Facing Swaps Condition, requires the clearing of swaps between affiliated counterparties claiming the Inter-Affiliate Exemption ("Eligible Affiliate Counterparties") and unaffiliated counterparties. The CFTC provided two temporary, alternative compliance frameworks to satisfy the Outward-Facing Swaps Condition to assist counterparties to transition to full compliance with CFTC Rule 50.52(b)(4)(i), both of which expired on March 11, 2014.

Letter 14-136 extends the relief in CFTC Letter 14-26, which provides time-limited no-action relief from the trade execution requirement in CEA Section 2(h)(8) ("Commission Review of Swaps for Clearing") to Eligible Affiliate Counterparties, as defined in CFTC Rule 50.52(a), that engage in swap transactions with one another that involve a swap subject to the trade execution requirement. The letter stated that the DMO will continue to evaluate, based on ongoing observations of inter-affiliate market activity occurring both on and off of swap execution facilities ("SEFs") and designated contract markets ("DCMs"), whether such swap transactions should be subject to the trade execution requirement. In particular, the DMO will assess whether applying this requirement to inter-affiliate swap transactions would promote pre-trade price transparency in the swaps market. Moreover, the DMO will continue to consider the implications of this relief on the policy goals of the conditions set forth in the Inter-Affiliate Exemption.

In order to qualify for the relief:

• the Eligible Affiliate Counterparties claiming the Inter-Affiliate Exemption must otherwise satisfy all of the requirements of Commission regulation 50.52;
• a counterparty to the swap must not be located in a non-U.S. jurisdiction in which the Commission has determined a comparable and comprehensive clearing requirement exists; and
• the Eligible Affiliate Counterparties electing the relief provided by this no-action letter must promptly provide to DCR, upon request, documentation regarding their compliance with any aspect of this no-action letter and Commission regulation 50.52.

See: CFTC Letter 14-135; CFTC Letter 14-136; CFTC Press Release.Related news: CFTC Issues Two Time-Limited No-Action Letters to Certain Affiliated Counterparties (CFTC Letters 14-25 and 14-26) (with Lofchie Comment) (March 7, 2014).