In No-Action letter 14-1441 (“Letter 14-144”), the Division of Clearing and Risk of the US Commodity Futures Trading Commission (the “Division”) amended and restated No-Action letter 13-222 (“Letter 13-22”) in order to remove or amend several of the restrictive conditions on the relief from mandatory clearing provided to certain treasury affiliates by the earlier letter. As with Letter 13-22, the relief is intended to help treasury affiliates undertaking hedging activities on behalf of non-financial affiliates within a corporate group.
Like the prior letter, Letter 14-144 provides conditional no-action relief to “eligible treasury affiliates” from mandatory clearing for certain swaps between the eligible treasury affiliate and an unaffiliated counterparty or another eligible treasury affiliate. However, in response to industry comments highlighting the impracticality of several of the conditions of Letter 13-22, the Division modified certain conditions to make the relief available to a broader spectrum of market participants acting as treasury affiliates. The modifications are:
- The treasury affiliate’s ultimate parent is no longer required to identify all wholly and majority-owned affiliates, or ascertain that a majority of them qualify for the end-user exemption to the clearing requirement.
- A treasury affiliate may now rely upon the relief even if it is affiliated with a nonbank financial company that has been designated as systemically important by the Financial Stability Oversight Council (but not if the treasury affiliate itself has been so designated). However, the treasury affiliate may not provide any services, financial or otherwise, to an affiliated nonbank financial company that has been so designated.
- The commercial risk of related affiliates being hedged by an exempted swap no longer needs to have been transferred to the treasury affiliate only by operation of one or more swaps with such related affiliates. However, the Division stated that it will require that the treasury affiliate be able to identify the related affiliate or affiliates on whose behalf the treasury affiliate is entering into the swap.3
- A treasury affiliate may now enter into swaps in order to hedge or mitigate its own commercial risk. However, the Division noted that swaps entered into by a treasury affiliate on its own behalf are not “exempted swaps” and are required to be cleared if subject to the clearing mandate and not otherwise exempt.
- The Division clarified that the restriction on related affiliates and eligible treasury affiliates from entering into swaps with financial entity affiliates does not apply if the financial entity affiliate qualifies as an eligible treasury affiliate.
- The requirement that the treasury affiliate’s payment obligations under an exempted swap be guaranteed by its non-financial parent or certain affiliates has been eliminated. The Division stated that it removed this condition to accommodate other types of support arrangements, such as keepwells, letters of credit or revolving credit facilities. The actual statement of conditions of the relief, however, does not require support arrangements for a treasury affiliate’s swap payment obligations.
- The definition of “related affiliate” was amended in a manner intended4 to allow entities that provide non-swap financial services (such as cash pooling) on behalf of financial entity affiliates to nonetheless qualify as “eligible treasury affiliates.”
The other conditions of Letter 14-144, including the reporting conditions, remain unchanged from Letter 13-22.
1 CFTC Letter No. 14-144, No-Action Relief from the Clearing Requirement for Swaps Entered into by Eligible Treasury Affiliates, Division of Clearing and Risk, (November 26, 2014) available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-144.pdf.
2 CFTC Letter No. 13-22, No-Action Relief from the Clearing Requirement for Swaps Entered into by Eligible Treasury Affiliates, Division of Clearing and Risk, (June 4, 2013) available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-22.pdf.
3 Letter 14-144 at 5. See also id. at 9, “General Conditions to the Swap Activity,” para. (iv) (centralized risk management program must be reasonably designed to identify the related affiliate or affiliates on whose behalf each exempted swap has been entered into by the eligible treasury affiliate).
4 Id. at 4; id. at 8, “Definition of ‘related affiliate,’” para (ii) (no longer including the language “for an entity described in (i)” from the corresponding definition in Letter 13-22). It is unclear to us as a drafting matter whether this change accomplishes the Division’s intended purpose.