Monday, January 11, 2016

Additional Small Companies, Community Development Institutions May Avoid CFTC Clearing Requirement

By Amy Leisinger, J.D.

The CFTC’s Division of Clearing and Risk has issued no-action relief allowing small bank holding companies (BHCs) and savings and loan holding companies (SLHCs) having assets of $10 billion or less to elect not to clear a swap subject to the CFTC’s clearing requirement provided that they comply with certain conditions. In a separate letter, the division granted similar relief to community development financial institutions (CDFIs) certified by the Treasury Department.

BHC and SLHC relief. The American Bankers Association contacted the CFTC to request relief from the swap clearing requirement for certain companies. If the Commission requires a particular swap to be cleared, then a person entering into the swap must clear it at a derivatives clearing organization (DCO). Under Section 2(h)(7) of the Commodity Exchange Act and Commission Regulation 50.50, a “bank” or “savings association” may be eligible to elect an exception from the requirement if has assets totaling $10 billion or less, but the provision does not apply to BHCs and SLHCs.

The association noted that BHCs and SLHCs enter into swaps to hedge interest rate risk incurred as a result of issuing debt securities or making loans. These swaps generally have a notional amount of $10 million or less, it said, and BHCs and SLHCs enter into swaps less frequently than other counterparties. As such, the association explained, the costs of clearing these swaps are disproportionate to the end value. In issuing Regulation 50.50(d), the association stated, the Commission noted that swaps executed by small institutions are likely what Congress was considering when it directed the Commission to consider an exemption.

The staff agreed that the same considerations are applicable to these holding company entities and stated that it would not recommend enforcement action against a BHC or SLHC for electing not to comply with the clearing requirement, provided that the entity has $10 billion or less in consolidated assets and complies with the same conditions that other entities do under Regulation 50.50 in order to elect not to clear a swap.

CDFI relief. A group of CDFIs also requested relief from the swap clearing requirement. CDFIs are small entities that provide financial services to underserved markets and fall within the definition of a “financial entity” required to clear swaps. The group noted that these entities serve the public interest and must apply for and receive Treasury Department certifications regarding their missions of promoting community development and their services in order to participate in the Treasury’s CDFI Fund. Like BHCs and SLHCs, CDFIs would use swaps to manage financial risk, and the group said that they would enter into only a small number of swaps each year and that the notional value for a transaction would be between $5 million and $50 million. As such, the swap activities by the CDFIs would present a low level of systemic risk and would be used to carry out their missions.

The staff agreed that the public interest may be served by permitting CDFIs to engage in tailored and limited swaps without meeting the clearing requirement and granted the requested relief. However, the staff stated, CDFIs will only be permitted to elect the exception under Regulation 50.50 if they maintain Treasury certification and file a notice of election and additional information pursuant to the Commission’s regulations. Certified CDFIs may only elect not to clear swaps in the fixed-to-floating swap class and forward rate agreement class subject to the clearing mandate and may not elect to clear more than ten swap transactions per year up to a total aggregate notional value of $200 million.