CFTC Approves Final Regulations Governing Exemption From Required Clearing For Inter-Affiliate Swaps

by Stinson Leonard Street - Dodd-Frank and the Jobs Act
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The CFTC has issued a final rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement under the Commodity Exchange Act, or CEA, and CFTC regulations.

The CFTC rule permits affiliated counterparties to elect not to clear a swap subject to the clearing requirement if those counterparties are majority-owned affiliates whose financial statements are included in the same consolidated financial statements. In addition:

  • both affiliated counterparties must elect not to clear the swap,
  • the terms of the swap must be documented in a swap trading relationship document (or comply with the requirements of Commission regulation 23.504, if one of the affiliated counterparties is a swap dealer or a major swap participant),
  • the swap must be subject to a centralized risk management program that is reasonably designed to monitor and manage the risks associated with the swap (or if one of the affiliated counterparties is a swap dealer or a major swap participant, the requirements of Commission regulation 23.600 must be met), and
  • each swap entered into by the affiliated counterparties with unaffiliated counterparties must be cleared.

The requirement to clear swaps entered into with unaffiliated counterparties may be met by:

  • complying with the Commission’s clearing requirement;
  • complying with a foreign jurisdiction’s clearing mandate that the Commission has determined is comparable, and comprehensive but not necessarily identical, to the Commission’s clearing requirement;
  • complying with an exception or exemption from the clearing requirement under the CEA or the Commission’s regulations;
  • complying with an exception or exemption under a foreign jurisdiction’s clearing mandate, provided that the Commission has determined that the foreign jurisdiction’s clearing mandate is comparable, and comprehensive but not necessarily identical, to the Commission’s clearing requirement, and the foreign jurisdiction’s exception or exemption is comparable to an exception or exemption under the CEA or the Commission’s regulations; or
  • clearing such swaps through a registered derivatives clearing organization or a clearing organization that is subject to supervision by appropriate government authorities in the home country of the clearing organization and has been assessed to be in compliance with the Principles for Financial Market Infrastructures.

The final rule requires the reporting counterparty to report to a swap data repository, or SDR (or if no SDR is available, to the Commission) the following information for each swap for which the inter-affiliate exemption applies:

  • confirmation that both affiliated counterparties to the swap are electing not to clear the swap and that each of the electing eligible affiliate counterparties satisfies the requirements of the rule;
  • information regarding how both affiliated counterparties generally meet their financial obligations associated with entering into non-cleared swaps; and
  • certain information, if the affiliated counterparties are issuers of securities registered under section 12, or are required to file reports under section 15(d), of the Securities Exchange Act of 1934.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

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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