United States: DOL Provides Important ERISA Guidance Regarding Cleared Swaps


On February 7, 2013, the U.S. Department of Labor (the "DOL") issued an advisory opinion1 concerning the application of the fiduciary and prohibited transaction provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")2 to certain "cleared swap" transactions conducted pursuant to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). The DOL clarified, subject to the conditions specified in the advisory opinion, that (i) clearing members are not considered fiduciaries under ERISA solely by reason of exercising contractually determined rights in the event of a plan default or other specified events; (ii) margin held by a clearing member or central counterparty ("CCP") is not considered a "plan asset" under ERISA; (iii) CCPs are not parties in interest under ERISA with respect to plans engaging in swaps, but clearing members are parties in interest; and (iv) the guarantee of customer positions, services performed by clearing members, and the exercise of default or similar rights in connection with cleared swaps could constitute prohibited transactions under Section 406 of ERISA except that an exemption, such as Prohibited Transaction Exemption ("PTE") 84-14 (the "QPAM Exemption"), may apply.


The Dodd-Frank Act established a regulatory framework for swaps by, among other things, imposing clearing and trade execution requirements on swap participants, including ERISA plans. Under the central clearing model established by the statute, in order for an ERISA plan to enter into a swap that must be centrally cleared, a plan fiduciary must first identify an appropriate counterparty (generally a swap dealer). Then, the fiduciary must select a CCP and, if it is not a direct member of that CCP, a futures commission merchant ("FCM") that is a member and is willing to clear the swap as the ERISA plan's clearing agent. Upon the CCP's acceptance of the swap for clearing, the original swap would be extinguished and replaced by equal and opposite swaps between the CCP and the party on each side of the original trade. To the extent either of the parties is clearing through an FCM, the FCM acts as the party's agent for purposes of the cleared swap contract and guarantees the party's obligations on such swap to the CCP. Under this structure, CCPs are responsible for setting margin requirements with respect to swap transactions, but the FCM provides for the collection, transmission and/or receipt of initial and variation margin to and from the CCP, and may itself demand margin from the ERISA plan above the CCP's minimum requirement.

If an ERISA plan customer were to default under a swap, the FCM, as guarantor, would be contractually obligated to the CCP (and the CCP to the other counterparty). As a result, standard contracts between a clearing member and the customer provide for a specific set of rights in the event of a default. These rights, which typically include the right to liquidate the customer's positions by entering into risk-offsetting transactions, and, in connection with the liquidation, entering into risk-reducing transactions, may also be triggered by a number of other contractually determined events.

Due to perceived uncertainty regarding the interaction of this newly established swaps clearing framework with various provisions of ERISA, the Securities Industry and Financial Markets Association ("SIFMA") requested an advisory opinion from the DOL on the matters discussed below.

Fiduciary Status

According to the DOL, a clearing member acting pursuant to an agreement negotiated with an ERISA plan customer would not be a fiduciary under ERISA Section 3(21)(A)(i)3 solely by reason of the termination and close-out of a customer's swap position, or the sale of any assets posted as margin (whether held by the CCP or the clearing member) to satisfy losses and costs incurred due to the customer's default or other contractually determined events. The DOL stated its view that exercising such contractual liquidation or close-out rights does not necessarily amount to the type of authority or control over plan assets contemplated under ERISA, assuming that such rights result from negotiations between a clearing member and an independent plan fiduciary, and that the parties understand that the clearing member will not be acting in a fiduciary capacity. The DOL cautioned, however, that plan fiduciaries must discharge all of their duties in accordance with ERISA's standards for fiduciary conduct. This would include determining that an investment in a swap is prudent and made solely in the interests of the plan's participants and beneficiaries. In making the determination as to whether to invest in a swap, plan fiduciaries would be required to engage in the same procedures and same type of analysis involved in making any other investment decision, including consideration of:

  • How the investment fits within the plan's investment policy;
  • The role the particular swap plays in a plan's portfolio;
  • The plan's potential exposure to losses through the swap;
  • The contractual rights the plan is granting to any of the parties to the arrangement, including the clearing member; and
  • The potential economic exposure to the plan as a result of the exercise of those rights.

The DOL noted that the Dodd-Frank Act imposes the same clearing requirements on ERISA plans as on other swap participants. Therefore, Congress did not appear to intend to treat plan customers differently, and did not appear to contemplate that clearing members or CCPs would act as ERISA fiduciaries. Any contrary result would potentially expose a clearing member to an incompatible set of obligations: those that it owes to itself and the CCP, and those that it would owe to the plan customer as an ERISA fiduciary. As a result, the DOL stated that it would defer to Congress' understanding of how clearing members would operate, and interpret ERISA so as to not impair the cleared swaps framework.


The DOL would not consider collateral that a plan customer may post as margin under a swap transaction to be a "plan asset." The DOL likened such margin to a performance bond – an assurance that a swap counterparty would comply with its agreement. Additionally, the DOL noted that Commodity Futures Trading Commission ("CFTC") rules require clearing members to collect margin from customers, and that a plan customer will generally have no rights to any assets in the margin account. Rather, when a plan enters into a cleared swap transaction, its assets are the "rights embodied in the swap contract as evidenced by the written agreement" between the plan and clearing member.4

Whether Clearing Members and CCPs are Parties in Interest to Plans

CCP. The DOL would not consider a CCP a party in interest solely due to its role in the swaps clearing framework. The DOL noted that it is of the view that the CCP does not provide services to the plan customer, and would not be deemed to be a party in interest to the plan customer solely by reason of providing clearing services for the plan's clearing member.5 The DOL further provided that because the rights and obligations under the plan customer's agreement with the clearing member are subject to the Commodity Exchange Act, CFTC rules and the CCP's rules regarding defaults, actions taken by the CCP pursuant to such rules with regard to customer accounts in connection with clearing member defaults would not necessarily amount to the authority and control that would give rise to fiduciary status under Section 3(21)(A)(i) of ERISA.

Clearing Member. In contrast, a clearing member would be a party in interest with respect to a plan entering into a cleared swap transaction. The DOL stated that, due to the direct contractual relationship between a plan customer and a clearing member, such clearing member would be considered to provide services to the plan within the meaning of Section 3(14)(B) of ERISA.

Prohibited Transactions/Exemptions

Clearing members, as parties in interest with respect to a plan, would be subject to the prohibited transaction provisions of Section 406 of ERISA when dealing with plan customers. These prohibitions, unless exempted, would prohibit the provision of services,6 any extensions of credit (including, in the view of the DOL, the guarantee of any obligations)7 or any sale or exchange of property between a plan and a party in interest.8

The DOL advisory opinion expresses the view that the QPAM Exemption9 would provide relief from the prohibited transaction provisions of ERISA with respect to the agreement between the clearing member and plan customer for services, as well as the extension of credit provided to the customer by the clearing member.10 All of the conditions of Part I of the QPAM Exemption must be satisfied, including the condition that the terms of the transaction at issue be negotiated on behalf of the investment fund by, or under the authority and general direction of, a "qualified plan asset manager" (the "QPAM") as that term is defined in the QPAM Exemption, and that the QPAM makes the decision on behalf of the investment fund to enter into the transaction. On this point, the DOL stated that this condition will be met so long as the agreement between the QPAM and clearing member sets forth all the material terms of the provision of services and guarantee by the clearing member.

With respect to a clearing member's exercise of contractually agreed liquidation or close-out rights, the DOL stated that it would consider such transactions to be "subsidiary transactions," as the term is discussed in the preamble to the QPAM Exemption, so long as certain conditions are met. The advisory opinion explains that subsidiary transactions include those transactions that are authorized by default or other contractual provisions "forming an integral part of a primary transaction negotiated by the QPAM, but that are contemplated to occur subsequent to the execution of a primary transaction." The relief provided by the QPAM Exemption to a primary transaction would apply to a subsidiary transaction so long as the agreement governing the primary transaction (in this case, the agreement between the plan customer and clearing member) includes specific provisions relating to the subsidiary transactions "such that the QPAM can reasonably foresee their potential outcomes." This would enable the QPAM to evaluate the subsidiary transactions as part of its decision to enter into the primary transaction. Specifically, the DOL indicated that the QPAM would look to the terms of the agreement regarding the rights of the clearing member on default or other specified events in evaluating the potential outcomes of these transactions, including:

  • Provisions addressing how the clearing member may engage the plan in risk-offsetting positions;
  • Provisions regarding the price at which the clearing member may liquidate provisions, and the liquidation process;
  • Provisions addressing how the plan's positions may be auctioned off; and
  • Provisions addressing how the clearing member may purchase the plan's positions directly.

The DOL cautioned that, in certain cases, the QPAM may need to request and evaluate additional information from the clearing member before entering into an agreement.

Unanswered Questions and Material Implications

The advisory opinion does not address whether any prohibited transaction exemptions other than the QPAM or INHAM Exemption might apply in this context. These other exemptions might include PTEs 91-38, 90-1, 95-60, or ERISA Section 408(b)(17). The advisory opinion also does not address any issues with respect to any conditions of the QPAM Exemption other than the condition in Part I(c). For example, a frequent concern with reliance on the QPAM Exemption is the condition in Part I(a), regarding whether the party in interest has the authority to negotiate the terms of the arrangement between the QPAM and the plan, or the authority to retain or dismiss the QPAM. There are a number of other points raised or overlooked by the advisory opinion which will need to be addressed in relevant market practice, if not by the DOL in further guidance.


1 Advisory Opinion 2013-01A.

2 References to sections of ERISA in this memorandum are deemed to include references to the corresponding provisions of the United States Internal Revenue Code of 1986, as amended.

3 Under Section 3(21)(A)(i) of ERISA, a person will be a fiduciary with respect to a plan to the extent such person "exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets."

4 Much of the DOL's analysis with respect to cleared swaps margin is based off of the analysis in Advisory Opinion 82-49A (Sept. 21, 1982), which addresses (among other things) the classification of margin in the context of futures contracts.

5 Section 3(14)(B) of ERISA provides that "a person providing services" to a plan is a party in interest to such plan.

6 ERISA §406(a)(1)(C).

7 ERISA §406(a)(1)(B).

8 ERISA §406(a)(1)(A).

9 PTE 84-14.

10 The DOL stated that its analysis under the QPAM Exemption would also be applicable with respect to relief provided by PTE 96 23 (the "INHAM Exemption").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.