Burr Alert: CFTC Issues New Guidelines Concerning Eligibility Of Swap Guarantors

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In secured lending transactions, lenders frequently allow, and even require, borrowers to enter into swap agreements and other financial derivatives to hedge against different business risks, including fluctuations in interest rates, currency rates, and commodity prices. Performance by the borrower under such swap agreements generally constitutes a guaranteed obligation of the borrower under the loan documentation.

Until recently, there were no regulatory limitations as to who could guarantee a swap obligation. However, with the implementation of The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the U.S. Commodity Futures Trading Commission (the “CFTC”) has promulgated regulations governing swap obligations. Namely, beginning March 31, 2013, in addition to the borrowers to a swap, any guarantor of a swap obligation must be an “eligible contract participant” (“ECP”). As discussed in more detail below, a guarantor must generally have more than $10 million in assets to qualify as an ECP. This ruling has far-reaching consequences to a lender, because non-compliance with this requirement may result in the illegality and unenforceability of the entire guaranty by the non-ECP guarantor.

Please see full Alert below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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