CFTC Divisions Confirm Legacy Swap Status in Entity Merger

The CFTC’s Market Participants Division and Division of Clearing and Risk ("Divisions") issued an interpretative letter to a registered swap dealer confirming that the transfer of certain legacy swaps resulting from an internal corporate merger does not trigger new margin and clearing requirements.

The requesting firm argued that the merger of its fixed income and foreign exchange businesses into a surviving bank entity will occur by "operation of state corporation law" and will not alter the "economic terms and valuation" of the swaps. The firm emphasized that the transaction serves legitimate business objectives and involves no change in ownership via assignment or novation, noting that the only update to the contracts would be the name of the swap dealer.

In the interpretative letter, the Divisions acknowledged that the merger would not result in a "change in ownership, including assignment, novation, exchange, transfer or conveyance" that typically triggers new regulatory obligations. Consequently, the Divisions confirmed that the swaps at issue would retain their status as "Legacy Swaps" and remain exempt from the margin requirements under Section 4s ("Registration and regulation of swap dealers and major swap participants") of the CEA and Regulations 23.150 ("Scope") through 23.161 ("Compliance dates"), as well as the clearing requirements under Section 2(h) ("Jurisdiction of Commission; liability of principal for act of agent; Commodity Futures Trading Commission; transaction in interstate commerce") of the CEA and Regulations 50.2 ("Treatment of swaps subject to a clearing requirement") and 50.4 ("Classes of swaps required to be cleared").

The Divisions highlighted the following factors in their interpretation: (i) the merger will occur by operation of law rather than via novation or asset sale; (ii) the transaction will not result in any changes to the contractual terms of the swaps other than a name change; (iii) the reorganization is driven by "legitimate business objectives" rather than an intent to evade requirements; and (iv) the structure of the transaction moots Commission concerns regarding "incentives to 'trade' historical swaps" to avoid required clearing.

The interpretation is based on the specific facts and circumstances represented by the requesting firm.