Derivatives Clearing Organizations Regulation - Inter-Affiliate Clearing Exemption - Comment Letters

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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

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. Associated comment letters can be found below.

ISDA/SIFMA - September 20, 2012[edit]

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

Recommendations from the comment letter:

  • The proposed conditions relating to the collection of variation margin and the extraterritorial clearing of swaps related to interaffiliate swaps should be eliminated.
  • In the event that the Commission decides to retain the variation margin condition, it should make certain changes and clarifications to the proposed rule text, including the elimination of the “common guarantor” requirement from its proposed exception to the variation margin condition.
  • In the event that the Commission decides to retain the extraterritorial clearing condition, it should provide for an appropriate transition period to allow foreign jurisdictions time to implement their G-20 clearing mandates and should make certain other changes and clarifications.
  • The trade execution requirement should not apply to interaffiliate swaps, regardless of whether the conditions for the interaffiliate clearing exemption are met.
  • The Commission should adopt a more flexible formulation of the proposed documentation requirement.
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Financial Services Roundtable - September 20, 2012[edit]

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

Recommendations from the comment letter:

  • Clarify no requirement to exchange initial margin.
  • Limit requirement to exchange variation margin to circumstances in which entities are subject to affiliate transaction restrictions under other applicable law.
  • Requirements for variation margin for inter-affiliate swaps should be clarified.
  • Financial entities with 100% common ownership should not be required to post margin to each other, even if they do not have a common guarantor.
  • The inter-affiliate exemption should apply to swaps between two non-U.S. affiliates, even if such non-U.S. affiliates are not located in countries with clearing regimes comparable to the U.S. regime.
  • Eliminate requirements for integrated risk management.
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Better Markets - September 21, 2012[edit]

Clearing Exemption for Swaps between Certain Affiliated Entities
September 21, 2012

Recommendations from the comment letter:

  • Majority ownership is too weak a standard. Only true subsidiaries - 100 percent owned affiliates - should be eligible for the clearing exemption.
  • In addition to variation margin, the exchange of initial margin must also be required.
  • The requirement to post margin must be extended to non-financial entities.
  • Rehypothecation of posted collateral must be banned.

Anaanalysis of each point follows.

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Coalition for Derivatives End-Users - September 20, 2012[edit]

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

From the comment letter:

"The Coalition believes that regulation of inter-affiliate swaps should square with economic reality: inter-affiliate swaps do not increase systemic risk by creating counterparty credit risk or increasing interconnectedness between major financial institutions. Instead, such swaps are used by end-users to transfer risk within a corporate group for effective risk management. Thus, requiring entities to comply with the requirements that were designed to address systemic risk for their inter-affiliate swaps in addition to any requirements on their external swaps would create costs without any corresponding benefit and place substantial burdens on end-users and consumers. Such an additional and unnecessary regulatory burden could force companies to abandon proven and efficient methods of managing their risk through centralized risk-mitigation centers and result in corresponding costs to the economy."

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Americans for Financial Reform - September 20, 2012[edit]

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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Commercial Energy Working Group - September 20, 2012[edit]

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

From the comment letter:

"Many commercial enterprises use a corporate structure with multiple entities and transactions, including swaps, between such entities for a number of business purposes such as to: (i) efficiently allocate risks and responsibilities among affiliated entities; (ii) optimize tax consequences; and (iii) comply with customs, licensing and other regulatory requirements for doing business in certain jurisdictions. In this context, inter-affiliate swaps serve legitimate business purposes, such as risk management, accounting, and treasury management.2 Requiring the conditions in the Proposed Rule to be satisfied to avoid central clearing in certain circumstances or to require central clearing of inter-affiliate swaps in any circumstance would render what is often an internal management matter too costly for its intended purpose."

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References[edit]

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