On March 20, the Commodity Future Trading Commission’s Division of Clearing and Risk granted no-action relief from the clearing requirement for “stub” swaps that result when two counterparties agree to reduce the notional amount of their original swap, but all other terms of the swap remain the same as the original swap.

The no-action relief provides that, where the original swap was not required to be cleared at the time of execution but is partially novated or terminated after the relevant clearing requirement compliance date, the resulting stub swap is not required to be cleared if the following conditions are met:

1. The original swap that is partially novated or partially terminated was not cleared by a derivatives clearing organization.
2. The original swap was executed prior to the compliance date for required clearing applicable to such a swap.
3. With respect to a partially terminated original swap:
   
   a. the records of the original swap that exist in the trading and/or recordkeeping systems of the original counterparties are amended solely to reflect the reduced notional amount of the original swap;
   
   b. the stated portion of the original swap that is terminated is fully terminated, apart from the stated portion that is the stub swap; and
   
   c. all other terms of the stub swap remain the same as the terms of the original swap.
4. With respect to a partially novated original swap:
   
   a. the records of the original swap that exist in the trading and/or recordkeeping systems of the original counterparties are amended solely to reflect the reduced notional amount of the original swap;
   
   b. all other terms of the stub swap remain the same as the terms of the original swap; and
   
   c. the novated swap (i.e., the portion of an original swap that is transferred from one of the original counterparties to a third party on or after an applicable compliance date) is submitted for clearing pursuant to section 2(h)(1)(A) of the Commodity Exchange Act and Part 50 of the CFTC’s Regulations.

The no-action relief does not apply to circumstances where the original counterparties enter into and book a new swap that fully or partially offsets the risk of an existing uncleared swap and thereby achieve a similar economic result to a full termination, a partial novation or a partial termination.

Click here for the CFTC no-action letter.