CFTC Grants No-Action Relief from Swap Clearing Requirement (CFTC Letters 16-01 and 16-02)
Commentary by Bob Zwirb and Nihal Patel
The CFTC Division of Clearing and Risk granted no-action relief from the swap clearing requirement to: (i) small bank holding companies and to savings and loan holding companies that have consolidated assets of $10 billion or less; and (ii) Community Development Financial Institutions ("CDFIs") that have received a certification from the U.S. Department of the Treasury.
The Division provided that these entities may elect not to clear a swap subject to the CFTC’s clearing requirement provided that they elect the end-user exception (CFTC Rule 50.50) and comply with certain other conditions described in the letters granting relief.
Additional conditions for CDFIs include:
- Participant Scope: CDFIs must be certified and maintain certification from the Treasury Department.
- Product Scope: Certified CDFIs may elect not to clear interest rate swaps in the fixed-to floating swap class and forward rate agreement class denominated in U.S. dollars that are subject to the clearing mandate pursuant to CFTC Rule 50.4(a).
- Limited Notional Amount: Each certified CDFI may elect not to clear interest rate swaps and forward rate agreements outlined above up to a total aggregate notional value of $200,000,000 per year.
- Limited Number: Each certified CDFI may elect not to clear no more than 10 swap transactions outlined above per year.
- Reporting and Hedging or Mitigating Commercial Risk Requirements: Each certified CDFI that elects the exception the Clearing Requirement must file a notice of election and additional information, as described in CFTC Rule 50.50(b). Certified CDFIs may elect the exception to the Clearing Requirement only for swaps that are entered into for the sole purpose of hedging or mitigating commercial risk, as described in CFTC Rule 50.50(c).
Commentary
The no-action relief provided by the CFTC here is limited to 1) certain CDFIs that serve “public interest” goals, and 2) certain bank holding companies (“BHCs”) with consolidated assets of no more than $10 billion. Both types of institutions are “financial entities,” and absent relief would be required to clear the swaps they enter into to manage their financial risks. Both, however, seek to enter into such swaps “without paying the costs associated with clearing,” which include the cost of posting margins to a DCO and the cost of initial and annual fixed clearing fees and other expenses. In the case of CDFIs, it is claimed that incurring such costs “would divert resources away from the CDFIs’ public interest projects,” while in the case of small BHCs, it is claimed that such costs would be “disproportionate to the limited number and notional value of the swaps” they enter into.
The letters granting such relief, likely inadvertently, illustrate the real burden that mandatory clearing imposes on swap market participants, including other small businesses. The letters thus raise a larger issue as to whether relief should be extended beyond the type of financial entities presented here—those financial institutions that are deemed to serve a politically favored purpose. Further, the question is particularly acute given the signficant issues that have been lately raised as to whether, or at the least the extent to which, central clearing actually reduces systemic risk.
Commentary
The relief granted to bank holding companies and savings and loan holding companies effectively addresses a technical drafting point in CFTC Regulation 50.50(d). The regulation refers to “banks” and “savings associations” but not to their holding companies.