[author: Steve Quinlivan]

The Commodity Futures Trading Commission, or CFTC, has issued a proposed rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Section 723 of the Dodd-Frank Act added Section 2(h) to the Commodity Exchange Act, or CEA, to establish a clearing requirement for swaps.  As a general matter, the new section makes it unlawful for any person to engage in a swap that the CFTC determines must be cleared, unless the swap is submitted for clearing to a derivatives clearing organization.  The proposed rule, however, asks the public to comment on whether inter-affiliate swaps pose less counterparty risk than swaps transactions with third parties. Accordingly, the CFTC is considering whether alternative methods of counterparty risk mitigation may be appropriate for swaps between majority-owned affiliates of the same corporate group. 

Specifically, the proposed rule would use Section 4(c)(1) of the CEA, which grants the CFTC general exemptive powers.  Pursuant to that authority, the Commission is proposing to exempt certain inter-affiliate swaps from the clearing requirement in CEA section 2(h) subject to the following conditions:

• The proposed exemption would be limited to swaps between majority-owned affiliates whose financial statements are included in the same consolidated financial statements.
• The proposed rules would require the following: centralized risk management; swap trading relationship documentation; variation margin payments; and satisfaction of reporting requirements.
• The proposed rules would permit affiliates of the same corporate group to elect the exemption for their inter-affiliate swaps if one of the following four conditions is satisfied for each affiliate: the affiliate is located in the United States; the affiliate is located in a jurisdiction with a comparable and comprehensive clearing requirement; the affiliate is required to clear all swaps it enters into with non-affiliate counterparties; or the affiliate does not enter into swaps with non-affiliate counterparties.