On March 18, the Commodity Futures Trading Commission’s Division of Clearing and Risk granted no-action relief relating to the clearing requirement for swaps resulting from multilateral portfolio compression exercises (as defined in CFTC Regulation 23.500(h)).

The no-action relief provides that amended and replacement swaps that are generated as part of a multilateral portfolio compression exercise, where the original swap was not required to be cleared at the time of execution but is subsequently amended or replaced after the relevant clearing requirement compliance date (e.g., after March 11, 2013 for a swap between two swap dealers), are not required to be cleared if the following five conditions are met:

1. The multilateral portfolio compression exercise generating the amended and replacement swaps meets the definition set forth in CFTC Regulation 23.500(h) and involves more than two market participants.
2. The original swap(s) submitted as part of the multilateral portfolio compression exercise does not include any swap that has been cleared by a derivatives clearing organization.
3. The original swap(s) submitted as part of the multilateral portfolio compression exercise does not include any swap that is required to be cleared under 2(h)(1)(A) of the Commodity Exchange Act and Part 50 of CFTC Regulations because it was executed on or after an applicable compliance date.
4. Each amended swap or replacement swap generated by the multilateral portfolio compression exercise:
   
   a. is generated in accordance with a multilateral portfolio compression service provider’s established rules and parameters for multilateral portfolio compression exercises;
   
   b. is entered into between the same counterparties as the original swap(s) that is amended or terminated;
   
   c. with the exception of reducing the notional amount, has the same material terms as the original swap(s), as defined in Part 45 of CFTC Regulations, including the reference entity, the maximum maturity of the swap, and the average weighted maturity of the swap; and
   
   d. is entered into for the sole purpose of reducing operational or counterparty credit risk.
5. Once the original swaps have been selected and submitted by market participants as part of the multilateral portfolio compression exercise, the multilateral portfolio compression methodology does not permit participants to specify which swaps may be amended or replaced.

Click here for the CFTC no-action letter.