CFTC Proposes Inter-Affiliate Clearing Exemption


[authors: Kenneth M. Rosenzweig, 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.


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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