CFTC Final Rule: Inter-Affiliate Clearing Exemption

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Gavel.png FINAL RULE: CFTC Final Rule on the exemption from required clearing for inter-affiliate swaps approved April 1, 2013. The rule's effective date is June 18, 2013.
Timeline-Inter-Affiliate Swaps
Proposal Date Final Rule Issue Effective Date
August 21, 2012 April 11, 2013 June 18, 2013
Dodd-Frank Timeline, Process for Review of Swaps for Mandatory Clearing
Final Rule Issue Effective Date Compliance Date
November 2, 2010 September 26, 2011 September 26, 2011

One of the provisions of the Dodd-Frank Act is an amendment to the Commodity Exchange Act that would prohibit swap transactions unless it were submitted to a Derivatives Clearing Organization (DCO) for clearing, or if the swap met one of the requirements for exemption. In separate meetings, the SEC and CFTC issued final rules regarding the process for review of swaps for mandatory clearing.

On April 1, 2013, the CFTC approved its final rule that exempts affiliated entities within a corporate group from the mandatory clearing requirement[1], provided that:

  • the counterparties are majority-owned affiliates whose financial statements are included in the same consolidated financial statements; and
  • the entities possess centralized risk management, file necessary swap trading relationship documentation, post applicable variation margin, and satisfy reporting requirements.

The rule passed by a vote of 4-1, with Commissioner Jill Sommers voting against. It entered the Federal Register on April 11, 2013, and its effective date is June 18, 2013.

Background

On August 16, 2012, the CFTC issued a proposed rule that would exempt from the clearing requirement swaps between certain affiliated corporate entities. Under the rule, such inter-affiliate swaps would be exempt from the clearing mandate, provided certain conditions are met:

The exemption would be permitted if one of these conditions is satisfied for each affiliate:

  • the affiliate is located in the United States;
  • the affiliate is located in a jurisdiction with a comparable and comprehensive clearing requirement;
  • the affiliate is required to clear all swaps it enters into with non-affiliate counterparties; or
  • the affiliate does not enter into swaps with non-affiliate counterparties.

The proposal appeared in the Federal Register on August 21, 2012. The deadline for public comment was September 20, 2012. On November 28, 2012, the CFTC issued "No-Action" relief from this rule until April 1, 2013, when the final rulemaking was issued.

Mandatory clearing of the majority of credit default and interest rate swaps began a phased implementation on March 11, 2013. For the full implementation schedule, click HERE.

Summary of the Final Rule

Under the final rule, the exemption from clearing is allowed if:

  • the entities are majority-owned affiliates whose financial statements are reported on a consolidated basis,
  • such exempted swaps are properly documented (which may include a swap trading relationship document), subjected to risk management standards, and reported to a swap data repository or, if no SDR is available to receive the data, to the commission.

Implementation - Comparable Jurisdictions

Implementation will be phased in until March 11, 2014 for affiliated counterparties located in jurisdictions with comparable regulations - the European Union, Japan and Singapore. During the phase-in period financial entities that are affiliated with swap dealers will be able to pay and collect variation margin in lieu of clearing. Non-financial entities (that are not affiliated with swap dealers or major swap participants) will not have to pay or collect such variation margin during the phase-in period.

Until March 11, 2014, affiliated counterparties located outside the United States, the European Union, Japan and Singapore do not have to clear its swaps with unaffiliated counterparties so long as the aggregate notional value of such swaps does not exceed five percent of the notional value of all swaps entered into by the affiliated counterparty located in the United States.

According to CFTC Chairman Gary Gensler in his statement of support, the phasing is intended to provide a transition period for foreign jurisdictions to implement "comparable and comprehensive" clearing regimes.[2]

Annual Reporting

An eligible affiliate counterparty that qualifies for the exemption may report the information listed in annually in anticipation of electing the exemption for one or more swaps. Any such reporting by a reporting counterparty under this paragraph will be effective for 365 days following the date of such reporting. During the 365-day period, the reporting counterparty shall amend the report as necessary to reflect any material changes to the information reported. Each reporting counterparty shall have a reasonable basis to believe that the eligible affiliate counterparties meet the requirements for the exemption.


Related Document:Federal Register Entry

References

  1. CFTC Approves Final Regulations Governing Exemption from Required Clearing for Inter-Affiliate Swaps. CFTC. Retrieved on April 2, 2013.
  2. Statement of Support by Chairman Gary Gensler: Clearing Exemption for Swaps Between Certain Affiliated Entities. CFTC. Retrieved on April 2, 2013.

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