The US regulatory authorities’ complex rulings with relation to the structure by which clearing of swaps can be carried out between counterparties continue to evolve.
Following last year’s implementation of full reporting requirements by CCPs, the CFTC has provided time-limited no-action relief from trade execution requirements to certain Affiliated Counterparties until December 2014.
The Commodity Futures Trading Commission (CFTC) Divisions of Clearing and Risk (DCR) and Market Oversight (DMO) yesterday announced that it has provided time-limited no-action relief to certain affiliated counterparties.
The DCR issued a no-action letter extending the time-limitation contained in the alternative compliance frameworks available to certain affiliated counterparties pursuant to Commission regulation 50.52(b)(4)(ii)-(iii).
In addition, the DMO issued a no-action letter providing time-limited no-action relief from the requirements of the trade execution requirement in Commodity Exchange Act (CEA) section 2(h)(8) to Eligible Affiliate Counterparties, as defined in Commission regulation 50.52(a), that engage in swap transactions with one another that involve a swap subject to the trade execution requirement.
On April 11, 2013, the Commission published a final rule providing an exemption from required clearing for swaps between certain affiliated entities, known as Eligible Affiliate Counterparties, subject to specific requirements and conditions set forth in CFTC regulation 50.52.
One of those conditions, known as the “treatment of outward-facing swaps condition,” requires the clearing of swaps between Eligible Affiliate Counterparties claiming the Inter-Affiliate Exemption and unaffiliated counterparties. The Inter-Affiliate Exemption contains several temporary alternative compliance frameworks to satisfy the treatment of outward-facing swaps condition, all of which expire on March 11, 2014.
DCR’s No-Action Letter provides relief from the March 11, 2014 date for Eligible Affiliate Counterparties that are otherwise eligible to use the alternative compliance frameworks in Commission regulation 50.52(b)(4)(ii)-(iii) until December 31, 2014. This relief may promote the adoption of comparable and comprehensive clearing requirements. In addition, this extension 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.
In order to be eligible for this relief:
The Eligible Affiliate Counterparties claiming the Inter-Affiliate Exemption otherwise satisfy all of the requirements of CFTC regulation 50.52;
A counterparty to the swap must not be located in a non-U.S. jurisdiction in which the Commission has determined a comparable and comprehensive clearing requirement exists.
Furthermore, the Eligible Affiliate Counterparties electing the relief provided by this no-action letter are expected to promptly provide to DCR, upon request, documentation regarding their compliance with any aspect of this no-action letter and Commission regulation 50.52.
The CFTC also previously determined that swaps entered into by Eligible Affiliate Counterparties that elect and comply with the provisions of the Inter-Affiliate Exemption would not be subject to the trade execution requirement.
DMO’s No-Action Letter, provides temporary relief, likewise until December 31, 2014, from the trade execution requirement to Eligible Affiliate Counterparties that do not elect the Inter-Affiliate Exemption.
During this period of relief, DMO will continue to evaluate, based on ongoing observations of inter-affiliate market activity occurring both on and off of swap execution facilities (SEFs) and designated contract markets (DCMs), whether such swap transactions should be subject to the trade execution requirement. In particular, DMO will assess whether applying the trade execution requirement to inter-affiliate swap transactions would promote pre-trade price transparency in the swaps market.
Moreover, DMO will continue to consider the implications of this relief on the policy goals of the conditions set forth in the Inter-Affiliate Exemption.
Whilst almost a year has passed since the CFTC set forward the proposed rulings on central counterparties and how reporting of trade activity should be conducted in accordance with the Dodd-Frank Act, it appears that there is some ground yet to be covered with relation to affiliate counterparties.