Alert December 28, 2010

CFTC OTC Derivatives Rulemaking – End-User Exception to Mandatory Clearing of Swaps

The CFTC issued a release proposing rules designed to implement the elective end-user exception to the mandatory clearing requirements for swap contracts created under the Dodd-Frank Act (the “End User Exception”), and seeking comments regarding whether to except small banks, savings associations and credit unions (“Small Banks”) from the definition of “financial entity” so that Small Banks can make use of the End User Exception.  The End User Exception is generally available where one party to the swap is not a “financial entity”, the non-”financial entity” is using swaps to hedge or mitigate commercial risk, and the non-”financial entity” notifies the CFTC of how it generally meets its financial obligations associated with entering into noncleared swaps.

The proposed rules establish the requirements for (a) the non-”financial entity” to make the required notice to the CFTC, and (b) determining whether a swap is used to hedge or mitigate commercial risk.  The CFTC is seeking comments on all aspects of the rule proposal, including specifically with regards to:

  • Whether to limit swaps qualifying as hedging or risk mitigating to swaps where the underlying hedged item is a non-financial commodity; and
  • whether to adopt a definition of ‘‘hedge or mitigate commercial risk’’ that is different from the definition of ‘‘hedging or mitigating commercial risk’’ contained in the “major swap participant” definitions rule, and that is specifically designed to address the circumstances of the End User Exception, and if so, in what way the definitions should differ?

Comments on the proposals, including whether to include Small Banks from the definition of “financial entity,” are due by February 22, 2011.