Derivatives Clearing Organizations Regulation - Comment Letter - Americans for Financial Reform - September 20, 2012

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Timeline-Inter-Affiliate Swaps
Proposal Date Final Rule Issue Effective Date
August 21, 2012 April 11, 2013 June 18, 2013

Clearing Exemption for Swaps between Certain Affiliated Entities
September 20, 2012

According to the comment letter, inter-affiliate swaps raise many potential issues related to systemic risk:

  • The failure to properly risk manage swaps across the entire holding company may endanger the parent company. Since inter-affiliate swaps are part of this risk management, their proper conduct has implications for financial stability.
  • An inter-affiliate swap may be one part of a larger transaction that includes an outward-facing swap.
  • An inter-affiliate swap may be executed between two affiliated companies that do not share 100 percent common ownership. In this case, the swap will transfer risk across corporate entities. This is a particular issue in this proposal.
  • An inter-affiliate swap may be used to transport swaps to a jurisdiction that has little or no regulatory oversight, at which point outward-facing transactions could be done in that jurisdiction. Such transactions could result in the movement of parts of the U.S. swaps market outside of regulatory oversight.
  • An inter-affiliate swap can contribute to financial contagion across different groups within a large complex financial institution, and can make it more difficult to ‘ring-fence’ risks in one part of an organization.
  • An inter-affiliate swap could involve an affiliate in a jurisdiction with laws or regulations that would prevent access of U.S. counterparties to the resources of that affiliate in the event of a bankruptcy or resolution of a failing financial firm. Inter-affiliate swaps thus represent an issue for U.S. bank resolution authorities.
  • An exemption for inter-affiliate swaps may deprive clearinghouses of swaps volume and liquidity that is necessary for risk management. If volume was reduced sufficiently, this could restrict the type of swaps that can be safely designated for clearing and in general make risk management at clearinghouses more difficult.



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