Financial Services Bulletin: Action at the CFTC

by Perkins Coie

CFTC Proposes Inter-Affiliate Clearing Exemption

On Thursday, August 16, 2012, the Commodity Futures Trading Commission (the "CFTC") issued a proposed rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Section 723 of the Dodd-Frank Act added Section 2(h) to the Commodity Exchange Act (the "CEA") to establish a clearing requirement for swaps. As a general matter, the new section makes it unlawful for any person to engage in a swap that the CFTC determines must be cleared, unless the swap is submitted for clearing to a derivatives clearing organization. The proposed rule, however, asks the public to comment on whether inter-affiliate swaps pose less counterparty risk than swaps transactions with third parties. Accordingly, the CFTC is considering whether alternative methods of counterparty risk mitigation may be appropriate for swaps between majority-owned affiliates of the same corporate group.

Specifically, the proposed rule would use Section 4(c)(1) of the CEA, which grants the CFTC general exemptive powers, to exempt certain inter-affiliate swaps from the clearing requirement in CEA Section 2(h) subject to the following conditions:

  • The proposed exemption would be limited to swaps between majority-owned affiliates whose financial statements are included in the same consolidated financial statements.
  • The proposed rules would require the following: centralized risk management; swap trading relationship documentation; variation margin payments; and satisfaction of reporting requirements.

  • The proposed rules would permit affiliates of the same corporate group to elect the exemption for their inter-affiliate swaps if one of the following four conditions is satisfied for each affiliate: (i) the affiliate is located in the United States; (ii) the affiliate is located in a jurisdiction with a comparable and comprehensive clearing requirement; (iii) the affiliate is required to clear all swaps it enters into with non-affiliate counterparties; or (iv) the affiliate does not enter into swaps with non-affiliate counterparties.

Read the CFTC press release

CFTC Proposes Exemption For Certain Non-Financial Energy Derivative Transactions

On Friday, August 17, 2012, the CFTC issued a Proposed Order that would exempt certain non-financial energy derivative transactions among government-owned electric utilities and cooperatively-owned electric utilities from most of the requirements of the CEA. The entities eligible for the proposed relief are not-for-profit electric utilities charged with a unique public service mission of providing their customers with reliable, affordable electric energy. The exemption is adopted pursuant to Section 4(c)(6)(C) of the CEA and enacted by Section 722(f) of the Dodd-Frank Act. Section 4(c)(6)(C) directs the CFTC to provide an exemption for certain transactions between certain electric utilities if it is in the public interest.

Read the CFTC press release

CFTC Approves Conforming Rule on Registration of Intermediaries

On Friday, August 17, 2012, the CFTC approved a final rule to conform the CFTC’s existing intermediary registration rules to changes made to the CEA by Title VII of the Dodd-Frank Act. The final rule also seeks to create uniformity in the treatment of previously regulated and newly regulated commodity interest transactions (e.g., swaps and futures) by registered intermediaries, such as futures commission merchants ("FCMs") and other registrants.

The final rule applies the intermediary registration process to new categories of registrants, such as swap dealers and major swap participants that were added by the Dodd-Frank Act. The final rule also expands an existing exemption from being registered as a FCM to foreign brokers and other foreign intermediaries that execute a swap transaction either bilaterally or on subject to the rules of a designated contract market or on subject a swap execution facility on behalf of non-U.S. persons.

In addition to various technical, conforming, and modernization amendments, the final rule adds references to new terms, including swap execution facility, swap dealer, and major swap participant, where appropriate. The rule also removes all references to a derivatives transaction execution facility, a regulatory category that was removed by the Dodd-Frank Act.

Finally, the rule includes technical changes that will permit legal entities (in addition to natural persons) to now register as floor traders – a change required to implement the exception from swap dealer consideration for cleared swaps entered into by floor traders on a swap execution facility.

Read the CFTC press release

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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