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 applies[3] (“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.

[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.