CFTC Staff Issues Interpretive Letter Regarding Use of "Captive Finance" Clearing Exception (CFTC Letter 15-27)
The CFTC Division of Clearing and Risk ("Division") issued a letter to Ford Motor Credit Company LLC ("FMCC"). The letter interprets CEA Section 2(h) to mean that a securitization special purpose vehicle ("SPV") that is a wholly owned subsidiary of FMCC (as an entity described CEA in Section 2(h)(7)(C)(iii), the "Captive Finance Company") may use the end user exception from mandatory clearing in Section 2(h)(7)(C)(iii) (the "Captive Finance Exception").
CEA Section 2(h)(7)(C)(iii) permits an entity to use the Captive Finance Exception if it meets the following two-prong test:
1. the entity's primary business is to provide financing; and
2. the entity uses derivatives for the purpose of hedging underlying commercial risks related to interest rate and foreign currency exposures,
A. 90 percent or more of which arise from financing that facilitates the purchase or lease of products and
B. 90 percent or more of which are manufactured by the parent company or another subsidiary of the parent company.
The Division reasoned that, because (i) FMCC's securitization SPVs are wholly owned by a FMCC (which itself may use the Captive Finance Exception), (ii) the SPVs' financial statements are consolidated with FMCC's and (iii) the SPVs' sole activity is to facilitate the financing undertaken by FMCC, it is appropriate to consider the business of these SPVs to be part of the business of FMCC.
The Division went on to note that its interpretation would apply not only to FMCC and its SPVs, but also to "any similarly situated securitization SPV that is wholly-owned by, and consolidated with, a Captive Finance Company."
See: CFTC Press Release; CFTC Letter 15-27.
Commentary
The relief provided is limited in scope. In essence, where an entity uses a wholly owned and consolidated subsidiary, and such subsidiary's sole activity is to facilitate the activities of the parent, it makes sense that the subsidiary should not be subject to greater costs (i.e., clearing) than the parent when engaged in the same activity on its own. (The Division also noted that a policy aim of the Captive Finance Exception is to "facilitate necessary financing for the purchase of the manufacturer's products.")
One question that the letter does not address is whether the Division's view of the Captive Finance Exception for clearing purposes also would apply with respect to the (yet-to-be-adopted) margin requirements applicable to uncleared swaps. Recent amendments to Section 4s(e) of the CEA provide an exclusion from margin requirements that would apply, inter alia, to entities that qualify for an exception from mandatory clearing under Section 2(h)(7)(A).