CFTC Proposed Rule: Inter-Affiliate Clearing Exemption

From MarketsReformWiki
Jump to: navigation, search
DTCC logo large.gif


Gavel.png FINAL RULE: This page refers to the proposed rule on inter-affiliate swaps. The CFTC Final Rule on the exemption was approved on April 1, 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 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 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 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.

Summary of the August 16, 2012 Rulemaking

Rather than vote upon the proposed rule in an open meeting, as has been the case with virtually all of the Dodd-Frank related rulemakings, this proposal was considered in seriatim. The proposal passed by a vote of 3-2, with Commissioners O'Malia and Sommers voting against it, citing opposition to the requirement that affiliates post variation margin. According to the commissioners' joint statement, such posting will "create administrative burdens and operational risk while unnecessarily tying up capital that could otherwise be used for investment." Furthermore, they suggested that the margin requirement is "inconsistent with the requirements included in the European Market Infrastructure Regulation."

According to Chairman Gensler's statement of support, however, the rule's approach "largely aligns with the Europeans’ approach to an exemption for inter-affiliate clearing."

One important aspect of the inter-affiliate exemption is that, if both counterparties are financial entities, they must still mark positions to market on a daily basis and post variation margin, unless the counterparty is a 100 percent owned and guaranteed entity. [1]

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

Related Documents:Federal Register Entry; Q&A

References

  1. Clearing Exemption for Inter-Affiliate Swaps. Sullivan & Cromwell LLP. Retrieved on September 18, 2012.

MarketsReformWiki Sponsors

McGladrey ADM Investor Services DTCC Fidessa