Alert June 11, 2013

CFTC Provides No-Action Relief from Clearing Requirement for Swaps Entered into by “Eligible Treasury Affiliates”

The CFTC’s Division of Clearing and Risk has issued a no-action relief letter allowing an “eligible treasury affiliate” not to clear a swap with an unaffiliated counterparty or another eligible treasury affiliate even if the swap is subject to mandatory clearing.  The relief is intended to cover entities that meet the definition of “financial entity”—and are therefore unable to utilize the end-user exception to mandatory swap clearing—solely because they are “predominantly engaged in activities that are financial in nature, as defined in section 4(k) of the Bank Holding Company Act of 1956,” when such financial entities are acting on behalf of non-financial affiliates within a corporate group.  In other words, it is intended to benefit treasury subsidiaries or finance subsidiaries within a non-financial corporate group entering into swaps on behalf of affiliates that would otherwise be eligible to elect the end-user exception.

The letter offers a fairly lengthy definition of “eligible treasury affiliate” that includes requirements that the person be directly wholly-owned by a non-financial entity (or another eligible treasury affiliate) and not indirectly majority-owned by a financial entity; the person must be a financial entity solely as a result of acting as principal to swaps with or on behalf of one or more of its related affiliates or providing other services that are financial in nature to such affiliates; the person must not be, and must not be affiliated with, a swap dealer, major swap participant, or certain other types of entity; and the person must not be a private fund, commodity pool, ERISA plan, bank holding company, or certain other types of entity. 

The relief is subject to a number of conditions.  For example, the swap must be entered into for the sole purpose of hedging or mitigating the commercial risk of one or more related affiliates; the eligible treasury affiliate must not enter into swaps other than for the purpose of hedging or mitigating the commercial risk of one or more related affiliates; and neither the eligible treasury affiliate nor any related affiliate that enters into swaps with the eligible treasury affiliate may enter into swaps with or on behalf of any affiliate that is a financial entity.  Furthermore, certain information must be reported to a swap data repository, but persons relying on the relief need not comply with the reporting requirement until September 9, 2013.