The CFTC has issued two separate no-action relief letters to provide time-limited no-action relief pertaining to swaps between certain affiliated counterparties. The letters both pertain to CFTC Regulation 50.52, which exempts swaps between affiliates from the swap clearing requirement (subject to certain conditions) (the “inter-affiliate swap exemption”). Regulation 50.52 was described in the April 9, 2013 Financial Services Alert.
The DCR Letter
The first no-action letter (the “DCR Letter”), issued by the Division of Clearing and Risk (“DCR”), essentially extends two temporary provisions of Regulation 50.52. Regulation 50.52(b)(4)(i), which is not a temporary provision, requires that a party availing itself of the inter-affiliate swap exemption must, for each swap subject to the clearing requirement that the party enters into with an unaffiliated counterparty, either comply with the clearing requirement with respect to such swap, comply with an exception to or exemption from the clearing requirement, comply with the requirements for clearing the swap under a foreign jurisdiction’s clearing mandate that is “comparable, and comprehensive but not necessarily identical, to” the US clearing requirement, or comply with certain other alternatives. CFTC Regulation 50.52(b)(4)(ii) and Regulation 50.52(b)(4)(iii) provide temporary alternatives to the foregoing requirement. CFTC Regulation 50.52(b)(4)(ii) is available when one of the affiliated counterparties is located in the European Union, Japan, or Singapore, while CFTC Regulation 50.52(b)(4)(iii) is available when an affiliate located in the United States enters into swaps with a counterparty located outside the United States, European Union, Japan, and Singapore. Both CFTC Regulation 50.52(b)(4)(ii) and CFTC Regulation 50.52(b)(4)(iii) expire, by their own terms, on March 11, 2014.
Because the CFTC has not yet announced that any non-U.S. jurisdiction has promulgated a comparable and comprehensive clearing requirement, thereby complicating the ability of market participants to fulfill the requirements of Regulation 50.52(b)(4)(i), the International Swaps and Derivatives Association (“ISDA”) petitioned DCR for relief. In response, the DCR Letter provides that DCR will not recommend that the CFTC commence an enforcement action against an entity that utilizes Regulation 50.52(b)(4)(ii) or Regulation 50.52(b)(4)(iii) to meet the requirements of the inter-affiliate exemption until December 31, 2014. Relief is conditional on the affiliated counterparties satisfying the other requirements of the inter-affiliate exemption, neither of the affiliated counterparties being located in a non-U.S. jurisdiction in which the CFTC has determined that a comparable and comprehensive clearing requirement exists, and the affiliated counterparties promptly providing to DCR upon request documentation regarding their compliance with the DCR Letter and the requirements of the inter-affiliate exemption.
DCR chose to issue the no-action letter in part, because, as it states in the DCR Letter, it “believes that extending the alternative compliance frameworks” (Regulations 50.52(b)(4)(ii) and 50.52(b)(4)(iii)) “may promote the adoption of comparable and comprehensive clearing requirements. [DCR] also believes that such extensions will allow for a more orderly transition as jurisdictions establish and implement clearing requirements and the Commission issues comparability determinations with regard to those requirements.”
The DMO Letter
The second no-action letter (the “DMO Letter”), issued by the Division of Market Oversight (“DMO”), provides time-limited no-action relief from the trade execution requirement for inter-affiliate swaps. The trade execution requirement refers to the requirement that certain cleared swaps must be executed on or through a designated contract market (“DCM”) or swap execution facility (“SEF”). ISDA requested relief from the trade execution requirement for inter-affiliate swaps, asserting that the trade execution requirement conflicts with the reasons that affiliates execute such transactions (for example, to manage risk between affiliates rather than to seek fully competitive pricing) and will impose “unnecessary” costs and inefficiencies.
The DMO Letter provides that DMO will grant time-limited no-action relief from the trade execution requirement to eligible affiliate counterparties that transact swap transactions with one another that involve a swap subject to the trade execution requirement. The relief is scheduled to expire on December 31, 2014. The DMO Letter explicitly states that other requirements, such as applicable swap reporting and clearing requirements, are not affected by the relief.
DMO acknowledges in the DMO Letter the goals of the trade execution requirement and the conditions of the inter-affiliate exemption from the clearing requirement. While noting that ISDA requested non-time-limited relief, DMO chose to provide time-limited relief to permit it time to “continue to evaluate, based on ongoing observations of inter-affiliate market activity occurring both on and off of SEFs and DCMs, whether such swap transactions should be subject to the trade execution requirement.”