Sullivan & Cromwell discusses the CFTC’s final rules on the Inter-Affiliate Swap Clearing Exemption

On April 1, 2013, the Commodity Futures Trading Commission (the “CFTC”) voted four to one to adopt final rules implementing an exemption from the mandatory clearing requirement (the “Clearing Mandate”) under section 2(h) of the Commodity Exchange Act, as amended (the “CEA”), for transactions between certain affiliated parties (the “Inter-Affiliate Exemption”).  The Inter-Affiliate Exemption finalized previously proposed rules published on August 21, 2012 (the “Proposed Rules”).

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) amended the CEA to require clearing of any swap that the CFTC determines should be subject to mandatory clearing. However, the Dodd-Frank amendments to the CEA did not expressly exempt from this requirement transactions between affiliates. A number of market participants urged the CFTC to adopt a regulatory exemption from the Clearing Mandate for inter-affiliate swaps, arguing that such swaps offer significant benefits and create substantially less risk than do swaps between unaffiliated entities. These market participants also argued that subjecting inter-affiliate swaps to the Clearing Mandate would be burdensome and expensive to corporate groups, without offering countervailing benefits.

The Inter-Affiliate Exemption was adopted pursuant to the CFTC’s authority under section 4(c)(1) of the CEA to exempt any transaction or class of transactions from certain provisions of the CEA in order to “promote responsible economic or financial innovation and fair competition.” Reliance on the Inter-Affiliate Exemption is limited to Eligible Affiliates (as defined below) that comply with additional conditions (as described below). The final Inter-Affiliate Exemption will be effective June 10, 2013.

Click here to view Sullivan & Cromwell LLP’s full memo on the Inter-Affiliate Swap Clearing Exemption, originally published on April 15, 2013.