The CFTC issued a final rule exempting swaps between certain affiliates from the clearing requirement. The exemption is available only if one counterparty to the swap directly or indirectly holds a majority ownership interest in the other or if a third party directly or indirectly owns a majority ownership interest in both counterparties. In both cases, the entity holding the majority ownership interest in the other(s) must report its financial statements on a consolidated basis under either Generally Accepted Accounting Principles or International Financial Reporting Standards, with such financial statements including the owned counterparty or counterparties to the swap. In addition, both parties must elect not to clear the swap, the terms of the swap must be documented in a written swap trading relationship document (or, if one of the swap counterparties is a swap dealer or major swap participant, it must satisfy the swap trading relationship documentation requirements established in CFTC Regulation 23.504), and the swap must be subject to a centralized risk management program that is reasonably designed to monitor and manage the risks associated with the swap.
In addition, the reporting counterparty of an inter-affiliate swap must provide certain information about the swap to a swap data repository, including confirmation that both affiliates are electing not to clear the swap and information about how each affiliate generally meets its financial obligations associated with entering into non-cleared swaps. SEC filers party to the swap must also provide their SEC Central Index Key number and an acknowledgement that the appropriate committee of its board of directors has reviewed and approved the decision to enter into uncleared swaps. Some of the information may be reported on an annual, rather than swap-by-swap, basis.
The rule also requires that each affiliate that enters into a swap for which clearing is required with an unaffiliated counterparty must clear that swap, comply with an exception to or exemption from the clearing requirement, or comply with certain foreign jurisdictions’ clearing requirements or exceptions thereto or exemptions therefrom.
The final rule does not include a proposed requirement mandating the posting of variation margin as a condition for electing the inter-affiliate exemption.
The rule becomes effective 60 days after its forthcoming publication in the Federal Register, but it includes an implementation provision stating that the clearing requirement shall not apply to a swap executed between eligible affiliated counterparties that elect not to clear the swap until the effective date of the rule.