United States: No-Action Relief Relating To The Inter-Affiliate Exemption Under Dodd-Frank

On March 6, 2014, the Commodity Futures Trading Commission ("CFTC") issued two no-action letters relating to the April 2013 inter-affiliate exemption from the clearing requirement (the "Inter-Affiliate Exemption").¹ Pursuant to the Inter-Affiliate Exemption, the clearing requirement generally will not apply to any swap for which either (i) the counterparties have a common majority-owning parent or (ii) one counterparty is a majority owner of the other ("Eligible Affiliate Counterparties"), provided that certain additional requirements are met.² One such requirement is that each Eligible Affiliate Counterparty, whether or not a U.S. person, clear all outward-facing swaps to which the clearing requirement applies³ ("Designated Swaps") or be eligible for an exception or exemption from clearing.⁴ Consequently, a non-U.S. Eligible Affiliate Counterparty that elects to use the Inter-Affiliate Exemption may be required to clear its outward-facing Designated Swaps with non-U.S. counterparties that otherwise, pursuant to the CFTC Cross-Border Guidance,⁵ would not be subject to CFTC jurisdiction. However, the Inter-Affiliate Exemption provided that, subject to certain conditions described below, the requirement that outward-facing swaps be cleared would not apply until March 11, 2014.⁶

The first no-action letter provides relief by extending that date to December 31, 2014. To be eligible for this relief: (i) the Eligible Affiliate Counterparties claiming the Inter-Affiliate Exemption must satisfy the various requirements of the Inter-Affiliate Exemption, including, for example, that the risks associated with the Designated Swap be monitored and managed under a centralized risk management program and that certain information be reported to a swap data repository; (ii) a counterparty to the swap must not be located in a non-U.S. jurisdiction in which the CFTC has determined that a "comparable and comprehensive" clearing requirement exists;⁷ and (iii) the Eligible Affiliate Counterparties must promptly provide to the CFTC Division of Clearing and Risk, upon request, documentation regarding their compliance with any aspect of the no-action letter and the Inter-Affiliate Exemption. The no-action letter notes that the time extension may promote the adoption by other jurisdictions of comparable and comprehensive clearing requirements.

The second no-action letter provides that, until December 31, 2014, the trade execution requirement generally will not apply to a swap between Eligible Affiliate Counterparties even if they do not elect the Inter-Affiliate Exemption. (The CFTC previously determined that swaps entered into between Eligible Affiliate Counterparties that elect to use the Inter-Affiliate Exemption will not be subject to the trade execution requirement.)⁸ Generally, all Designated Swaps must be executed through a swap execution facility or a designated contract market, unless an exemption or exception is available or the type of swap has not yet been determined by the CFTC to have been "made available to trade."⁹ During the period of relief, the CFTC Division of Market Oversight will continue to evaluate whether applying the trade execution requirement to inter-affiliate swaps would promote price transparency in the market, since such swaps often are not entered into on an arm's-length basis.

Footnotes

1. CFTC Letter No. 14-25, Re: Time-Limited No-Action Relief from Certain Provisions of the Treatment of Outward-Facing Swaps Condition in the Inter-Affiliate Exemption (March 6, 2014); CFTC Letter No. 14-26, Time-Limited No-Action Relief from the Commodity Exchange Act Section 2(h)(8) for Swaps Executed Between Certain Affiliated Entities Not Electing Commission Regulation § 50.52 (March 6, 2014).

2. See Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 Fed. Reg. 21,749 (April 11, 2013).

3. That is, pursuant to the 2012 clearing determination, currently certain index credit default swaps and interest rate swaps.

4. CFTC Regulation 50.52(b)(4).

5. Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45,292 (July 26, 2013).

6. CFTC Regulation 50.52(b)(4).

7. To date, the CFTC has not announced that any non-U.S. jurisdiction has a comparable and comprehensive clearing requirement.

8. Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act, 78 Fed. Reg. 33,606, 33,606 n.1 (June 4, 2013).

9. See, e.g., 7 U.S.C. § 2(h)(8). See also " Dodd-Frank Trade Execution Developments," posted March 20, 2014.

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