IIB, SIFMA, ISDA No-Action Request Regarding Legacy Swap Affiliates or Their Aggregation Affiliates (with Lofchie Comment)
The no-action request from ISDA, IIB and SIFMA to the CFTC requests grandfathering of swap positions by "Legacy Swap Affiliates" so that these entities would not be required to register as swap dealers even if they were unable to transfer or novate existing swap positions to registered swap dealers by the SD Effective Date. Since the novation or termination of legacy swaps away from "Legacy Swap Affiliates" cannot be done unilaterally (generally requiring counterparty consent), many Legacy Swap Affiliate positions will not expire or be novated and transferred to a registered swap dealer by the SD Effective date with the result that such Legacy Swap Affiliates would be required to register as swap dealers unless the proposed relief is granted, even though the entities do not intend to engage in swap dealing activities going forward.
In addition, the letter requests that any trades enter into by the Legacy Swap Affiliates be ignored for purposes of determining whether their affiliates (referred to as "Aggregation Affiliates") should be required to register.
Permitted Swap Transactions of a Legacy Swap Affiliate. A Legacy Swap Affiliate would (1) only entertain a counterparty request (or, in the case of a non-U.S. Legacy Swap Affiliate, a U.S. counterparty request) in relation to the legacy swap transactions where the proposed transaction met its own criteria for reducing the legacy swap transaction portfolio, its duration or its risk profile and (2) would limit new swap transactions (or, in the case of a non-U.S. Legacy Swap Affiliate, new swap transactions with U.S. persons) to those that were required under terms of the relevant swap or that were entered into for purposes of hedging, clearing or portfolio compression.
Prohibited Swap Transactions of a Legacy Swap Affiliate. Legacy Swap Affiliates would not engage in in market-making, supplying liquidity, quoting two-sided markets or seeking to profit from bid-offerspreads or other activities generally indicative of swap dealing in relation to the legacy swap transactions (or, in the case of a non-U.S. Legacy Swap Affiliate, legacy swap transactions with U.S. persons).
Lofchie Comment: Although it is not the subject of the relief requested in the letter, I suspect that the general restructuring of swap business activities described in the letter is illustrative of the damage that will be done to the U.S. economy by Dodd-Frank. That is, non-U.S. entities will seek to restructure their swap activities to keep them, as much as possible, outside of the United States. This would likely seem to be to the long-term detriment of the United States as a world financial center. As to the relief itself, I hope that it will be quickly granted. It is a strange regulatory environment where regulators issue a whirlwind of exemptions on the very day that they are required or, worse, somewhat late or not at all. Failing to issue the exemptions could leave entities, both buy-side and sell-side, unable to trade out of unwanted positions, a result that would be likely to increase risk in the market.
Click here to view the letter in full (links externally to IIB website).Related News Item: SIFMA and ASF Submit Comments to the CFTC Requesting Relief for Legacy Structured Finance Transactions (with Lofchie Comment).