The CFTC provided for three types of no-action relief relating to swaps between affiliates. The relief relates to: (i) reporting of information on new swaps, (ii) reporting of information on historical swaps and (iii) certain clearing requirements. The relief will be available to entities that are not required to register as swap dealers or major swap participants, and is expected to be used primarily by non-financial entities. Unfortunately, the relief is subject to numerous conditions, some of them complicated, and some of them needlessly restrictive. Even firms that will benefit from the relief must institute procedures to assure compliance.
As to OTC swaps (i) between affiliates that are under ONE HUNDRED PERCENT COMMON OWNERSHIP, (ii) not affiliated with an SD/MSP and (iii) various other conditions are satisfied, the parties must maintain records of all of the information that would otherwise be required to be reported to the CFTC and make such information available to the CFTC.
As to OTC swaps (i) between affiliates that are under FIFTY PERCENT COMMON OWNERSHIP, (ii) not affiliated with an SD/MSP and (iii) various other conditions are satisfied, the parties are not subject to real-time reporting, but they must report all data required by part 45 of the CFTC Rules within 30 days of the end of each fiscal quarter.
As to swaps between parties that would satisfy the above conditions, the parties are not required to report data on historical swaps to the CFTC, but must maintain records of such swaps for production to the CFTC.
Lofchie Comment: As with virtually every no-action letter that the CFTC staff issues, this one is subject to some complicated and needless restrictions that will result in the relief being unavailable to many entities, and even for those entities that are entitled to the relief, will impose needless burdens on them.
For groups that seek to benefit from the CFTC’s requirements, they will have to determine which of their affiliates come within the 100% and 50% ownership requirements such that they are able to fit within either exemption. They will then have to develop procedures to maintain and have access to the information that would otherwise have to be reported to the CFTC if this no-action relief were not available. For affiliates that are not at 100% ownership, they will have to develop data collection and reporting procedures so that all of this information can be reported quarterly to the CFTC. All of these firms will have to develop procedures to assure that historical swap information is not destroyed.
For good-sized corporate groups, these requirements are neither trivial nor inexpensive. For example, the part 45 reporting requirements that must be complied with, even if complied with only quarterly, are fairly complicated. This is a task that will require some legal analysis, accounting resources and, for firms that use swaps to any extent, the development of technology.
It is a shame that there is not a trade association group that represents the interests of end-users, because it seems to me that the CFTC’s requirements fairly cry out for a lawsuit challenging the costs and benefits of the obligations that the CFTC is putting on end-users. What possible benefit could there be to the CFTC in requiring every corporate group in the United States to maintain aged information on intra-group swaps that would be worth the cost of identifying and maintaining the information? Is the CFTC really going to analyze quarterly data on every swap entered into by affiliates that are under 50% common control? Certainly before the CFTC imposes these obligations, it ought to explain how it intends to use the information it requires to have saved and reported, and even whether it is capable of using this information.
Link here to view CFTC Letter 13-09.
See Related News Story: CFTC Exemption for Clearing Inter-Affiliate Swaps