Blake J. Brockway
On August 16, the Commodity Futures Trading Commission issued a proposed rule to exempt swaps between certain affiliated entities from the clearing requirement set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Dodd-Frank Act amended the Commodity Exchange Act to establish a clearing requirement, which makes it unlawful for any person to engage in a swap that is subject to the mandatory clearing requirement unless that swap is submitted to a derivatives clearing organization.
Under the proposed rule, counterparties may elect not to clear a swap if one counterparty directly or indirectly holds a majority ownership interest in the other or a third party directly or indirectly holds a majority ownership interest in both counterparties and the financial statements of both counterparties are reported on a consolidated basis. Eligible counterparties must also satisfy the following conditions: (i) both counterparties must elect not to clear the swap; (ii) the swap trading relationship must be adequately documented; (iii) a centralized risk management program must be used to monitor and manage the risks of the swap; (iv) variation margin must be collected unless there is 100% common ownership of the counterparties; (v) the swap reporting requirements must be fulfilled; and (vi) both counterparties must be located in the United States or, if not, the foreign affiliate must be located in a jurisdiction that has a comparable and comprehensive clearing requirement, be required to clear swaps with non-affiliated counterparties under US law, or not enter into swaps with non-affiliated parties.
Commissioners Sommers and O’Malia dissented. The dissenting Commissioners support a clearing exemption for swaps between affiliated entities within a corporate group, but did not support the proposed rule to the extent it requires variation margin to be paid by corporate entities that engage in inter-affiliate trades.
The proposed rule is available here.