Vol. 78 Thursday, 

No. 70 April 11, 2013 

Part III 

Commodity Futures Trading Commission 

17 CFR Part 50 

Clearing Exemption for Swaps Between Certain Affiliated Entities; Final 

Rule 


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21750 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

1Clearing Exemption for Swaps Between Certain 

Affiliated Entities, 77 FR 50425 (Aug. 21, 2012). 

2For ease of reference, the Commission is recodifying proposed § 39.6(g) as § 50.52 so that 

market participants are able to locate all rules 

related to the clearing requirement in one part of 

the Code of Federal Regulations. 

3Section 2(h)(7) of the CEA provides an 

exception to the clearing requirement when one of 

the counterparties to a swap (i) is not a financial 

entity, (ii) is using the swap to hedge or mitigate 

commercial risk, and (iii) notifies the Commission 

how it generally meets its financial obligations 

associated with entering into a non-cleared swap. 

4Clearing Requirement Determination Under 

Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 

2012) (hereinafter ‘‘Clearing Requirement 

Determination’’). 5See Clearing Requirement Determination at 

74319–21. 6The first compliance date for required clearing 

applies to Category 1 Entities, as defined in 

§ 50.25(a). SDs and MSPs and private funds active 

in the swaps market are defined as Category 1 

Entities. Security-based swap dealers and major 

security-based participants also are included in the 

definition. However, as the Commission has stated, 

if a security-based swap dealer or a major securitybased swap participant is not yet required to 

register with the Securities and Exchange 

Commission (SEC) at such time as the Commission 

issues a clearing determination, then the securitybased swap dealer or a major security-based swap 

participant would be treated as a Category 2 Entity, 

as defined in § 50.25(a). See Swap Transaction 

Compliance Implementation Schedule: Clearing 

and Trade Execution Requirements under Section 

2(h) of the CEA, 76 FR 58186, 58190 n.38 (Sept. 20, 

2011). 

7Clearing Requirement Determination at 74319– 

21. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 50 

RIN 3038–AD47 

Clearing Exemption for Swaps 

Between Certain Affiliated Entities 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is adopting regulations to exempt 

swaps between certain affiliated entities 

within a corporate group from the 

clearing requirement under the 

Commodity Exchange Act (CEA or Act), 

enacted by Title VII of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act). The 

regulations include specific conditions, 

as well as reporting requirements, that 

affiliated entities must satisfy in order to 

elect the inter-affiliate exemption from 

required clearing. 

DATES: This final rule is effective June 

10, 2013. 

FOR FURTHER INFORMATION CONTACT: 

Sarah E. Josephson, Deputy Director, 

202–418–5684, sjosephson@cftc.gov; 

Nadia Zakir, Associate Director, 202– 

418–5720, nzakir@cftc.gov; Eric 

Lashner, Special Counsel, 202–418– 

5393, elashner@cftc.gov; Meghan Tente, 

Law Clerk, 202–418–5785, 

mtente@cftc.gov; Division of Clearing 

and Risk, Erik Remmler, Associate 

Director, 202–418–7630, 

eremmler@cftc.gov; Camden Nunery, 

Economist, 202–418–5723, 

cnunery@cftc.gov, Office of the Chief 

Economist, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

II. Comments on the Notice of Proposed 

Rulemaking 

A. Overview of Comments Received 

B. Section 4(c) Authority 

C. Definition of Affiliate Status 

D. Inter-Affiliate Swap Documentation 

E. Centralized Risk Management Program 

F. Variation Margin 

G. Treatment of Outward-Facing Swaps 

and Relief 

H. Reporting Requirements and Annual 

Election 

I. Implementation 

III. Cost-Benefit Considerations 

A. Statutory and Regulatory Background 

B. Costs and Benefits of Exemption for 

Eligible Affiliate Counterparties 

C. Costs and Benefits of Exemption’s 

Conditions 

D. Costs and Benefits to Market 

Participants and the Public 

E. Costs and Benefits Compared to 

Alternatives 

F. Consideration of CEA Section 15(a) 

Factors 

IV. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

I. Background 

On August 21, 2012, the Commission 

published a notice of proposed 

rulemaking proposing to exempt swaps 

between certain affiliated entities from 

the clearing requirement under section 

2(h)(1)(A) of the CEA (NPRM).1 As 

proposed, § 39.6(g) provides that 

counterparties to a swap may elect an 

inter-affiliate exemption from the 

clearing requirement if: (1) The financial 

statements of both counterparties are 

reported on a consolidated basis, and 

either one counterparty directly or 

indirectly holds a majority ownership 

interest in the other, or a third party 

directly or indirectly holds a majority 

ownership interest in both 

counterparties; (2) both counterparties 

comply with the conditions set forth in 

the proposed rule; and (3) one of the 

counterparties provides certain 

information on behalf of both affiliated 

counterparties to either a registered 

swap data repository (SDR) or the 

Commission if a registered SDR does not 

accept the information. The 

Commission is hereby adopting 

proposed § 39.6(g), finalized as § 50.52,2

subject to the changes discussed below. 

Section 723(a)(3) of the Dodd-Frank 

Act amended the CEA to provide, under 

new section 2(h)(1)(A) of the CEA, that 

it shall be unlawful for any person to 

engage in a swap unless that person 

submits such swap for clearing to a 

derivatives clearing organization (DCO) 

that is registered under the CEA or a 

DCO that is exempt from registration 

under the CEA if the swap is required 

to be cleared.3 Section 2(h)(2) of the 

CEA charges the Commission with the 

responsibility for determining whether a 

swap is required to be cleared, through 

one of two means: (1) Pursuant to a 

Commission-initiated review; or (2) 

pursuant to a submission from a DCO of 

each swap, or any group, category, type, 

or class of swaps that the DCO ‘‘plans 

to accept for clearing.’’ On November 

29, 2012, the Commission adopted its 

first clearing requirement 

determination, requiring that swaps 

meeting the specifications outlined in 

four classes of interest rate swaps and 

two classes of credit default swaps 

(CDS) are required to be cleared.4

The Clearing Requirement 

Determination adopting release 

provided a specific compliance 

schedule for market participants to 

bring their swaps into compliance with 

the clearing requirement.5 Swap dealers 

(SDs), major swap participants (MSPs), 

and private funds active in the swaps 

market were required to comply 

beginning on March 11, 2013, for swaps 

they enter into on or after that date.6

Accounts managed by third-party 

investment managers, as well as ERISA 

pension plans, have until September 9, 

2013, to begin clearing swaps entered 

into on or after that date. All other 

financial entities are required to clear 

swaps beginning on June 10, 2013, for 

swaps entered into on or after that date. 

With regard to the CDS indices on 

European corporate names, iTraxx, the 

Clearing Requirement Determination 

provided that, if no DCO offered iTraxx 

for client clearing by February 11, 2013, 

the Commission would delay 

compliance for those swaps until 60 

days after an eligible DCO offers iTraxx 

indices for client clearing. On February 

25, 2013, the Commission received 

notice from ICE Clear Credit LLC that it 

had begun offering customer clearing of 

the iTraxx CDS indices that are subject 

to the clearing requirement under 

§ 50.4(b). In accordance with the 

timeframe previously set forth by the 

Commission,7 the following compliance 


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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 21751 

8See Press Release, CFTC’s Division of Clearing 

and Risk Announces Revised Compliance Schedule 

for Required Clearing of iTraxx CDS Indices (Feb. 

25, 2013), available at http://www.cftc.gov/ 

PressRoom/PressReleases/pr6521-13. 

9Cravath, Swaine & Moore LLP (Cravath), the 

Coalition for Derivatives End-Users (CDEU), the 

Financial Services Roundtable (FSR), Chris 

Barnard, the Commercial Energy Working Group 

(The Working Group), the Edison Electric Institute 

(EEI), The Prudential Insurance Company of 

America (Prudential), Metropolitan Life Insurance 

Company (MetLife), the International Swaps and 

Derivatives Association and Securities Industry and 

Financial Markets Association, (together, ISDA & 

SIFMA), and DLA Piper. 

10EEI commented that ‘‘corporate families 

typically face bankruptcy together’’ and that it is 

‘‘unusual for only one member of a corporate group 

to go bankrupt.’’ EEI also noted that a bankruptcy 

could cause increased risk to clearinghouses that 

would face multiple entities going into default at 

the same time if all affiliates of one corporate group 

were required to clear their inter-affiliate swaps. 

11 ISDA & SIFMA commented that inter-affiliate 

swaps do not introduce risk into a corporate group, 

stating, ‘‘[b]ecause capital, liquidity and risk 

allocation decisions, as well as the exercise of 

default remedies between group members are under 

unified management, group entities do not face 

default risk of other group entities, so long as the 

group as a whole is solvent.’’ 

dates shall apply to the clearing of 

iTraxx indices: Category 1 Entities: 

Friday, April 26, 2013; Category 2 

Entities: Thursday, July 25, 2013; and 

all other entities: Wednesday, October 

23, 2013.8

II. Comments on the Notice of Proposed 

Rulemaking 

The Commission received 13 

comments during the 30-day public 

comment period following publication 

of the NPRM on August 21, 2012, and 

one additional comment after the 

comment period ended. The 

Commission considered each of these 

comments in formulating the final 

regulation, § 39.6(g) (finalized as 

§ 50.52). 

During the process of proposing and 

finalizing this rule, the Chairman and 

Commissioners, as well as Commission 

staff, participated in informational 

meetings with market participants, trade 

associations, public interest groups, and 

other interested parties. In addition, the 

Commission has consulted with other 

U.S. financial regulators including: (i) 

The SEC; (ii) the Board of Governors of 

the Federal Reserve System; (iii) the 

Office of the Comptroller of the 

Currency; and (iv) the Federal Deposit 

Insurance Corporation (FDIC). Staff from 

each of these agencies has had the 

opportunity to provide oral and/or 

written comments to this adopting 

release, and the final regulations 

incorporate elements of the comments 

provided. 

The Commission is mindful of the 

benefits of harmonizing its regulatory 

framework with that of its counterparts 

in foreign countries. The Commission 

has therefore monitored global advisory, 

legislative, and regulatory proposals, 

and has consulted with foreign 

authorities in developing the final 

regulations. 

A. Overview of Comments Received 

Of the 14 comment letters received by 

the Commission in response to its 

NPRM, ten commenters expressed 

general support for the concept of an 

inter-affiliate exemption from the 

clearing requirement.9 These 

commenters offered comments 

addressing the proposed rule generally 

and comments addressing specific 

provisions of the proposed rule. 

Comments addressing specific 

provisions of the proposed rule are 

discussed in detail below. 

A number of commenters requested a 

broader exemption with few or no 

conditions. Cravath and DLA Piper 

requested that the Commission exempt 

swaps between affiliates from all 

clearing, margining, and reporting 

obligations. The Working Group, 

Cravath, CDEU, ISDA & SIFMA, DLA 

Piper, and EEI 10 recommended that the 

Commission eliminate, simplify or 

minimize the conditions imposed, or 

unconditionally exempt inter-affiliate 

swaps from clearing. These commenters 

stated that inter-affiliate swaps pose 

little or no risk to the U.S. financial 

system and do not increase the 

interconnectedness between major 

financial institutions, particularly if 

affiliates’ financial statements are 

consolidated for accounting purposes. 

The Working Group commented that 

entities use inter-affiliate trades not only 

to net risk related to market-facing 

swaps, but also to transfer physical 

commodity or futures exposure between 

affiliates for compliance with 

international tax law, customs, or 

accounting laws. Similarly, MetLife and 

Prudential supported the proposed 

exemption and noted that transactions 

between affiliates do not present the 

same risks as market-facing swaps. 

ISDA & SIFMA commented that interaffiliate swaps provide important 

benefits to corporate groups by enabling 

centralized management of market, 

liquidity, capital, and other risks, and 

allowing affiliated groups to realize 

associated hedging efficiencies and 

netting benefits. Imposing mandatory 

clearing on inter-affiliate swaps, 

according to ISDA & SIFMA, could 

compromise the ability of affiliated 

groups to realize these benefits.11 ISDA 

& SIFMA also commented that third 

parties face no increased risk from interaffiliate swaps. In their view, the credit 

risks faced by a third party entering into 

an uncleared swap with a group 

member are a function of the group 

member’s entire portfolio of assets and 

liabilities and other credit factors. 

Along the same lines, CDEU 

commented that non-financial entities 

typically enter into external swaps with 

swap dealers and other large banks that 

typically evaluate the risks of entering 

into swaps based on the overall 

creditworthiness of their counterparties. 

These financial entity counterparties, 

according to CDEU, have the 

opportunity to review financial 

statements, the creditworthiness of any 

guarantor, and a number of other creditrelated items. After the credit review, 

according to CDEU, the counterparties 

may request credit risk mitigants such 

as corporate parent guarantees, 

collateral, and credit-based legal terms. 

On the other hand, Americans for 

Financial Reform (AFR) commented that 

a wide-ranging exemption for interaffiliate swaps could create systemic 

risk and threaten the U.S. financial 

system. AFR cited a number of reasons 

for its concern such as: the risk transfer 

between separate corporate entities; the 

possibility for financial contagion to be 

transferred from one part of a large 

financial institution to different groups 

within the institution; restrictions on 

access to affiliate assets across national 

boundaries; and reduction in volumes at 

DCOs that could hurt liquidity and risk 

management. AFR further noted that 

because the end-user exception is 

available for non-financial and small 

financial entities in connection with 

swaps that hedge or mitigate systemic 

risk, the inter-affiliate exemption is 

primarily available for large financial 

institutions and speculative trades by 

large commercial institutions with many 

affiliates. 

Better Markets Inc. (Better Markets) 

also expressed concern that an interaffiliate exemption could be contrary to 

Congressional intent, as expressed in 

the Dodd-Frank Act, if it is not a very 

narrow and strictly implemented 

exemption. 

Two individual persons commented 

against the proposed exemption. Steve 

Wentz requested that the Commission 

not issue any exemptions because the 

exemptions ‘‘would just open the door 

to divert trades through that open door 

to avoid protective oversight.’’ Aaron D. 

Small commented that the ‘‘unregulated 

derivatives market has been a disaster 

for the U.S. and world economy and 

must be reined in.’’ 

Having considered these comments, 

and the specific comments discussed 

below, the Commission is adopting the 


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12See Clearing Requirement Determination at 

74284–86; Cross-Border Application of Certain 

Swaps Provisions of the Commodity Exchange Act, 

77 FR 41214, 41215–17 (July 12, 2012) (hereinafter 

‘‘Proposed Cross-Border Interpretive Guidance’’). 

13See Financial Crisis Inquiry Commission, ‘‘The 

Financial Crisis Inquiry Report: Final Report of the 

National Commission on the Causes of the 

Financial and Economic Crisis in the United 

States,’’ Jan. 2011, at 386, available at http:// 

www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPOFCIC.pdf (‘‘The scale and nature of the [OTC] 

derivatives market created significant systemic risk 

throughout the financial system and helped fuel the 

panic in the fall of 2008: millions of contracts in 

this opaque and deregulated market created 

interconnections among a vast Web of financial 

institutions through counterparty credit risk, thus 

exposing the system to a contagion of spreading 

losses and defaults.’’). 

14Adam Davidson, ‘‘How AIG fell apart,’’ Reuters, 

Sept. 18, 2008, available at http://www.reuters.com/ 

article/2008/09/18/us-how-aig-fell-apartidUSMAR85972720080918. 

15Hugh Son, ‘‘AIG’s Trustees Shun ‘Shadow 

Board,’ Seek Directors,’’ Bloomberg, May 13, 2009, 

available at http://www.bloomberg.com/apps/ 

news?pid

=newsarchive&sid=aaog3i4yUopo&refer=us. 

16Congress did not provide for an exception or 

exemption for inter-affiliate swaps in the DoddFrank Act. However, commenters have pointed to 

legislative history and statements made by members 

of Congress supporting such an exemption at the 

time the Dodd-Frank Act was enacted. 

17Note, for example, that while the Rule 1015 of 

the Federal Rules of Bankruptcy Procedure (FRBP) 

permits a court to consolidate bankruptcy cases 

between a debtor and affiliates, FRBP Rule 2009 

provides that, among other things, if the court 

orders a joint administration of two or more estates 

under FRBP Rule 1015, the trustee shall keep 

separate accounts of the property and distribution 

of each estate. See Federal Rules of Bankruptcy 

Procedure (2011). 

18See In re L & S Indus., Inc., 122 B.R. 987, 993– 

994 (Bankr. N.D. Ill. 1991), aff’d 133 B.R. 119, aff’d 

989 F.2d 929 (7th Cir. 1993) (‘‘A trustee in 

bankruptcy represents the interests of the debtor’s 

estate and its creditors, not interests of the debtor’s 

principals, other than their interests as creditors of 

estate.’’); In re New Concept Housing, Inc., 951 F.2d 

932, 938 (8th Cir. 1991) (quoting In re L & S Indus., 

Inc.). While the concept of ‘‘substantive 

proposed inter-affiliate exemption rule, 

subject to several important 

modifications. The Commission 

recognizes the need for an exemption 

from clearing for inter-affiliate swaps, 

but believes it is important to establish 

certain conditions for entities electing 

the exemption. In reaching this 

conclusion, the Commission considered 

the benefits of clearing as recognized by 

the fact that Congress included a 

clearing requirement in the Dodd-Frank 

Act, against the benefit to market 

participants of being able to continue 

entering into inter-affiliate swaps on an 

uncleared basis. The Commission 

believes it has reached an appropriate 

balance by allowing an exemption from 

required clearing for certain interaffiliate swaps while imposing 

necessary conditions on that exemption 

in order to ensure that all inter-affiliate 

swaps exempted from required clearing 

meet certain risk-mitigating conditions. 

1. Benefits of Clearing and Its Role in 

the Dodd-Frank Act 

As the Commission has previously 

stated,12 in the fall of 2008, a series of 

large financial institution failures 

triggered a financial and economic crisis 

that led to unprecedented governmental 

intervention to ensure the stability of 

the U.S. financial system. The financial 

crisis made clear that an uncleared, 

over-the-counter (OTC) derivatives 

market can pose significant risks to the 

U.S. financial system.13

One of the most significant examples 

of this risk was the accumulation of 

uncleared CDS entered into by an 

affiliate in the AIG corporate group 

providing default protection on more 

than $440 billion in bonds, leaving it 

with obligations that the AIG corporate 

family could not cover as a result of 

changed market conditions.14 As a 

result of the CDS exposure of this one 

affiliate, the U.S. Federal government 

bailed out the AIG corporate group with 

over $180 billion of taxpayer money in 

order to prevent AIG’s failure and a 

possible contagion event in the broader 

economy.15 While the downfall of AIG 

was not caused by inter-affiliate swaps, 

the events surrounding AIG during the 

2008 crisis demonstrate how the risks of 

uncleared swaps at one affiliate can 

have significant ramifications for the 

entire affiliated business group. 

Recognizing the peril that the U.S. 

financial system faced during the 

financial crisis, Congress and the 

President came together to pass the 

Dodd-Frank Act in 2010. Title VII of the 

Dodd-Frank Act establishes a 

comprehensive new regulatory 

framework for swaps, and the 

requirement that certain swaps be 

cleared by DCOs is one of the 

cornerstones of that reform. The CEA, as 

amended by Title VII, now requires a 

swap to be cleared through a DCO if the 

Commission has determined that the 

swap, or group, category, type, or class 

of swaps, is required to be cleared, 

unless an exception to the clearing 

requirement applies. As noted above, 

the only exception to the clearing 

requirement provided by Congress was 

the end-user exception in section 2(h)(7) 

of the CEA.16

The benefits of clearing derivatives 

have been recognized internationally, as 

well. In September 2009, leaders of the 

Group of 20 (G–20)—whose 

membership includes the United States, 

the European Union, and 18 other 

countries—agreed that: (1) OTC 

derivatives contracts should be reported 

to trade repositories; (2) all standardized 

OTC derivatives contracts should be 

cleared through central counterparties 

by the end of 2012; and (3) noncentrally cleared contracts should be 

subject to higher capital requirements. 

The Commission believes that 

required clearing through a DCO is the 

best means of mitigating counterparty 

credit risk and providing an organized 

mechanism for collateralizing the risk 

exposures posed by swaps. By clearing 

a swap, each counterparty no longer 

needs to rely on the individual 

creditworthiness of the other 

counterparty for payment. Both original 

counterparties now look to the DCO that 

has cleared their swap to ensure that the 

payment obligations associated with the 

swap are fulfilled. The DCO manages 

the risk of failure of a counterparty 

through appropriate margining, a 

mutualized approach to default 

management among clearinghouse 

members, and other risk management 

mechanisms that have been developed 

over the more than 100 years that 

modern clearinghouses have been in 

operation. Clearing can avert the 

development of systemic risk by 

reducing the potential knock-on, or 

domino, effect resulting from 

counterparties with large outstanding 

exposures defaulting on their swap 

obligations and causing their 

counterparties—counterparties that 

would otherwise be financially sound if 

they had been paid—to default. Failure 

of those counterparties could lead to the 

failure of yet other counterparties, 

cascading through the economy and 

potentially causing systemic harm to the 

U.S. financial system. Required clearing 

reduces this risk by ensuring that 

uncollateralized risk does not 

accumulate in the financial system. 

2. Risks and Benefits Posed by Interaffiliate Swaps 

The Commission is not persuaded by 

comments suggesting that inter-affiliate 

swaps pose no risk to the financial 

system or that clearing would not 

mitigate those risks. Entities that are 

affiliated with each other are separate 

legal entities notwithstanding their 

affiliation. As separate legal entities, 

affiliates generally are not legally 

responsible for each other’s contractual 

obligations. This legal reality becomes 

readily apparent when one or more 

affiliates become insolvent.17 Affiliates, 

as separate legal entities, are managed in 

bankruptcy as separate estates and the 

trustee for each debtor estate has a duty 

to the creditors of the affiliate, not the 

corporate family, the parent of the 

affiliates, or the corporate family’s 

creditors.18 This potential for separate 


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consolidation’’ of affiliates in a business enterprise 

when they all enter into bankruptcy is sometimes 

used by a bankruptcy court, substantive 

consolidation is generally considered an 

extraordinary remedy to be used in limited 

circumstances. See Substantive Consolidation—A 

Post-Modern Trend, 14 Am. Bankr. Inst. L. Rev. 527 

(Winter 2006). 

19See Bankrupt Subsidiaries: The Challenges to 

the Parent of Legal Separation, 25 Emory Bankr. 

Dev. J. 65 (2008); Liability of a Parent Corporation 

for the Obligations of an Insolvent Subsidiary 

Under American Case Law and Argentine Law, 10 

Am. Bankr. Inst. L. Rev. 217 (Spring 2002). 

20See, e.g., the bankruptcy of Residential Capital 

(ResCap) and its subsidiaries. ResCap was a 

mortgage subsidiary of Ally Financial Inc. ResCap 

declared bankruptcy independent of Ally Financial 

Inc., which is not part of the bankruptcy proceeding 

and continues to operate as a legally separate, 

solvent entity. See In re Residential Capital, LLC, 

No. 12–12020 (MG) (Bankr. S.D.N.Y. 2012), 

available at http://www.kccllc.net/rescap. While the 

bankruptcy of ResCap was not the direct result of 

inter-affiliate swaps, ResCap’s bankruptcy 

demonstrates that an affiliate can be put into 

bankruptcy without forcing the affiliated parent to 

declare bankruptcy or to be legally responsible for 

the affiliate’s debts. 

21 7 U.S.C. 6(c)(2). 

22House Conf. Report No. 102–978, 1992 

U.S.C.C.A.N. 3179, 3213. 

23See NPRM at 50428. 

treatment in bankruptcy, calls into 

question commenters’ claims that third 

parties can rely on the creditworthiness 

of the entire corporate group when 

entering into swaps with affiliates. 

On the other hand, inter-affiliate 

swaps offer certain risk-mitigating, 

hedging, and netting benefits as 

described by several commenters 

including ISDA & SIFMA, The Working 

Group, CDEU, and EEI. Furthermore, 

because affiliates in a corporate family 

generally internalize the risks of interaffiliate transactions in the affiliated 

group, as described in the NPRM, the 

corporate family could face serious 

reputational harm if affiliates default on 

their swaps. Consequently, the entities 

within an affiliated group are 

incentivized to fulfill their inter-affiliate 

swap obligations to each other, to 

support each other to prevent outwardfacing failures, and to resolve any 

disagreements about the terms of interaffiliate swaps more quickly and 

amicably. As noted by ISDA & SIFMA, 

when an affiliated business group is 

fiscally sound, the capital, liquidity, and 

risk allocation decisions and default 

remedies between group members may 

be centrally managed thereby reducing 

the likelihood of group entities facing 

default risk of other group entities, ‘‘so 

long as the group as a whole is solvent.’’ 

While in many circumstances, these 

characteristics of inter-affiliate swaps 

may mitigate the risk of an affiliate 

defaulting on its obligations— 

particularly when the group as a whole 

is financially healthy—they do not 

constitute legally enforceable 

obligations pre-bankruptcy or in 

bankruptcy.19 Accordingly, despite the 

existence of mutual support incentives, 

a corporate group facing insolvency risk 

may ultimately make the decision to 

allow some affiliates to fail and default 

on their swap obligations so that other 

affiliates can survive without becoming 

insolvent.20 In cases where an insolvent 

affiliate has multiple obligations to third 

parties (swap-related or otherwise), 

those third parties may be subject to a 

pro rata distribution along with other 

creditors if the trust estate of the 

defaulting affiliate does not have 

sufficient liquid assets to cover losses 

on its uncleared swaps. It is at such 

times of financial stress that central 

clearing serves as the most effective 

systemic risk mitigant. 

3. The Commission’s Consideration of 

the Risks and Benefits 

In providing an inter-affiliate 

exemption from required clearing, the 

Commission has considered the benefits 

that inter-affiliate swaps offer corporate 

groups against the risk of allowing an 

exemption from required clearing for 

swaps entered into by separate, but 

affiliated, legal entities. In considering 

the risks and benefits, the Commission 

was guided, in part, by comments 

pointing to the risk-mitigating 

characteristics of inter-affiliate swaps 

and the sound risk management 

practices of corporate groups that rely 

on inter-affiliate swaps. In crafting the 

rule, the Commission sought to codify 

these characteristics as eligibility 

criteria, or conditions, for the exemption 

from required clearing. The conditions 

imposed are designed to increase the 

likelihood that affiliates will take into 

consideration their mutual interests 

when entering into, and fulfilling, their 

inter-affiliate swap obligations. For 

example, the inter-affiliate exemption 

may be elected only if the affiliates are 

majority owned and their financial 

statements are consolidated, thereby 

increasing the likelihood that entities 

will be mutually obligated to meet the 

group’s swap obligations. Additionally, 

the affiliates must be subject to a 

centralized risk management program, 

the swaps and the trading relationship 

between affiliates must be documented, 

and outward-facing swaps must be 

cleared or subject to an exemption or 

exception from clearing. 

Despite the conditions to the 

exemption adopted in this final rule, the 

Commission reminds market 

participants that the conditions 

included in the final rule do not 

mitigate potential losses between interaffiliates to the extent that clearing 

would, particularly if one or more 

affiliated entities become insolvent. 

B. Section 4(c) Authority 

Section 4(c)(1) of the CEA grants the 

Commission the authority to exempt 

any transaction or class of transactions, 

including swaps, from certain 

provisions of the CEA, including the 

clearing requirement, in order to 

‘‘promote responsible economic or 

financial innovation and fair 

competition.’’ Section 4(c)(2) of the Act 

further provides that the Commission 

may not grant exemptive relief unless it 

determines that: (1) The exemption is 

appropriate for the transaction and 

consistent with the public interest; (2) 

the exemption is consistent with the 

purposes of the CEA; (3) the transaction 

will be entered into solely between 

‘‘appropriate persons’’; and (4) the 

exemption will not have a material 

adverse effect on the ability of the 

Commission or any contract market to 

discharge its regulatory or selfregulatory responsibilities under the 

CEA.21 In enacting section 4(c), 

Congress noted that the purpose of the 

provision is to give the Commission a 

means of providing certainty and 

stability to existing and emerging 

markets so that financial innovation and 

market development can proceed in an 

effective and competitive manner.22

In the NPRM, the Commission 

requested comment as to whether 

exempting inter-affiliate swaps from the 

clearing requirement under certain 

terms and conditions would be an 

appropriate exercise of its section 4(c) 

authority.23 A number of commenters 

supported the Commission’s use of its 

section 4(c) authority to exempt interaffiliate swaps from clearing. According 

to MetLife and Prudential, the interaffiliate exemption as proposed 

promotes responsible economic or 

financial innovation and fair 

competition by allowing corporate 

groups to use inter-affiliate swaps to 

engage in effective and efficient risk 

management activities. As an example, 

MetLife and Prudential explained that 

corporate groups can use a single 

conduit in the market on behalf of 

multiple affiliates within the group, 

which permits the corporate group to 

net affiliates’ trades. This netting 

effectively reduces the overall risk of the 

corporate group and the number of open 

positions with external market 

participants, which in turn reduces 

operational, market, counterparty credit, 

and settlement risk. MetLife and 

Prudential both expressed the view that 

inter-affiliate swaps do not pose risks to 


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24As noted above, CDEU, MetLife, Prudential, 

and ISDA & SIFMA stated that an inter-affiliate 

exemption is consistent with the public interest. 

25As discussed further below, both AFR and 

Better Markets contend that all the proposed 

conditions must be retained and the conditions 

must be strengthened in a number of ways. 26 7 U.S.C. 6(c)(3)(K). 

corporate groups and third parties, and 

both stated that inter-affiliate swaps 

may pose less risk to corporate groups 

given efficient netting across the 

corporate group. EEI also supported the 

Commission’s use of its section 4(c) 

authority for similar reasons to those 

stated by MetLife and Prudential. 

ISDA & SIFMA stated that the 

Commission’s proposed exemption 

meets the requirements of section 4(c) of 

the CEA by promoting innovation and 

competition, and the exemption serves 

the public interest. ISDA & SIFMA 

noted that inter-affiliate swaps are 

integral to the strategies consolidated 

financial institutions rely upon to meet 

customer needs in an efficient, 

competitive, and sound manner. 

According to ISDA & SIFMA, interaffiliate swaps maximize hedging 

efficiencies and allow customers to 

transact with a single client-facing 

entity in the customer’s jurisdiction, 

which increases the scope of riskreducing netting with individual 

customers as well as risk-reducing 

netting of offsetting positions within the 

financial group. This allows the 

institution to meet customer needs 

across jurisdictions and provide 

improved pricing or other risk 

management benefits to customers, 

thereby promoting financial innovation 

and competition. ISDA & SIFMA also 

commented that inter-affiliate swaps 

allocate and transfer risks among 

members of a corporate group rather 

than increasing risks. 

CDEU also supported the 

Commission’s use of its section 4(c) 

authority. CDEU stated that the interaffiliate exemption would promote 

financial innovation, fair competition, 

and the public interest by preserving the 

ability of corporate entities to centrally 

hedge the risks of their affiliates. CDEU 

stated that without such an exemption 

firms that currently use a central 

hedging model will be disadvantaged as 

compared to direct competitors that do 

not use the same, efficient risk 

management model. CDEU also noted 

the additional costs that would be 

incurred from subjecting inter-affiliate 

swaps to clearing. 

In the NPRM, the Commission 

requested comments on whether the 

inter-affiliate exemption would be in the 

public interest. In addition to responses 

noted above with regard to the public 

interest,24 the Commission received two 

comment letters questioning whether 

the proposed exemption serves the 

public interest. 

According to AFR, there are serious 

doubts about whether the inter-affiliate 

exemption is in the public interest. AFR 

stated that any hedging and netting 

benefits gained from corporate groups 

engaging in inter-affiliate swaps must be 

weighed against the benefits of full 

novation to a central counterparty in the 

form of a clearinghouse, which is a more 

comprehensive level of risk 

management. Given the experience of 

the 2008 financial crisis, AFR noted that 

any risk-reducing benefit of corporate 

group risk management practices 

assumes that the corporate group 

actually implements and adheres to 

sufficient risk management procedures. 

AFR is concerned about relying on such 

an assumption in light of the fact that 

there was a large-scale failure of proper 

risk management prior to and during the 

2008 financial crisis. 

Better Markets similarly commented 

that only a very narrow and strict interaffiliate exemption could be in the 

public interest. Better Markets suggested 

ways in which the Commission should 

strengthen the proposed exemption to 

satisfy the public interest standard, 

including requiring a 100% majority 

ownership interest standard, requiring 

that both initial and variation margin be 

exchanged, and banning 

rehypothecation of posted collateral.25

After considering the complete record 

in this matter, the Commission has 

determined that the requirements of 

section 4(c) of the Act have been met 

with respect to the exemptive relief 

described above. The Commission 

believes that the exemption, as modified 

in this release, is consistent with the 

public interest and with the purposes of 

the CEA. The Commission’s 

determination is based, in large part, on 

the transactions that are covered under 

the exemption. Namely, as most 

commenters noted, inter-affiliate 

transactions provide an important risk 

management role within corporate 

groups. In addition, and as discussed in 

the NPRM, the Commission recognizes 

that swaps entered into between 

corporate affiliates, if properly riskmanaged, may be beneficial to the entity 

as a whole. Accordingly, in 

promulgating this rule, the Commission 

concludes that an exemption subject to 

certain conditions is appropriate for the 

transactions at issue, promotes 

responsible financial innovation and 

fair competition, and is consistent with 

the public interest. As the Commission 

noted in the NPRM and as reiterated in 

AFR’s comment, any benefits to the 

corporate entity have to be considered 

in light of the risks that uncleared swaps 

pose to corporate groups and market 

participants generally. For this reason, 

the Commission is adopting an interaffiliate exemption that is narrowly 

tailored and subject to a number of 

important conditions, including that 

affiliates seeking eligibility for the 

exemption document and manage the 

risks associated with the swaps. 

Further, the Commission finds that 

the exemption is only available to 

‘‘appropriate persons.’’ Section 4(c)(3) of 

the CEA includes within the term 

‘‘appropriate person’’ a number of 

specified categories of persons, 

including ‘‘such other persons that the 

Commission determines to be 

appropriate in light of their financial or 

other qualifications, or the applicability 

of appropriate regulatory 

protections.’’ 26 Given that only eligible 

contract participants (ECPs) can enter 

into uncleared swaps and that the 

elements of the ECP definition (as set 

forth in section 1a(18)(A) of the CEA 

and Commission regulation 1.3(m)) 

generally are more restrictive than the 

comparable elements of the enumerated 

‘‘appropriate person’’ definition, the 

Commission finds that ECPs are 

appropriate persons within the scope of 

section 4(c)(3)(K) for purposes of this 

final release and that in so doing, the 

class of persons eligible to rely on the 

exemption will be limited to 

‘‘appropriate persons’’ within the scope 

of section 4(c)(3) of the CEA. 

Finally, the Commission finds that 

this exemption will not have a material 

effect on the ability of the Commission 

to discharge its regulatory 

responsibilities. This exemption is 

limited in scope and, as described 

further below, the Commission will 

have access to information regarding the 

inter-affiliate swaps subject to this 

exemption because they will be reported 

to an SDR pursuant to the conditions of 

the exemption. In addition to the 

reporting conditions in the rule, the 

Commission retains its special call, antifraud, and anti-evasion authorities, 

which will enable it to adequately 

discharge its regulatory responsibilities 

under the CEA. 

For the reasons described in this 

release, the Commission believes it is 

appropriate and consistent with the 

public interest to adopt such an 

exemption. 


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27The Working Group also stated that it was 

unable to determine the scope of the proposed rule 

until the Commission provides further guidance on 

the definition of ‘‘financial entity’’ under section 

2(h)(7) of the CEA. In particular, The Working 

Group asked that the Commission clarify the status 

of treasury affiliates acting on behalf of affiliates 

able to claim an exception or exemption from 

required clearing. The Working Group further 

requested that the Commission provide guidance 

regarding what constitutes being predominantly 

engaged in activities that are in the business of 

banking or in activities that are financial in nature, 

as defined in section 4(k) of the Bank Holding 

Company Act of 1956, and clarify that trading 

physical commodities is not financial in nature. In 

response to The Working Group and other 

comments regarding the applicability of the enduser exception for certain inter-affiliate swaps, the 

Commission notes that it will address the use of 

treasury affiliates under a separate Commission 

action. With regard to the definition of financial 

entity, the Commission provided additional 

guidance in the end-user exception rulemaking, and 

declined to interpret statutory provisions within the 

jurisdiction of other U.S. authorities. See End-User 

Exception to the Clearing Requirement for Swaps, 

77 FR 42560, 42567 (July 19, 2012) (explaining that 

‘‘business of banking’’ is a term of art found in the 

National Bank Act and is within the jurisdiction of, 

and therefore subject to interpretation by, the Office 

of the Comptroller of the Currency and section 4(k) 

of the Bank Holding Company Act is within the 

jurisdiction of, and therefore subject to 

interpretation by, the Board of Governors of the 

Federal Reserve System). Accordingly, further 

guidance on this issue is beyond the scope of this 

rulemaking, except as provided in note 76 of this 

release. 

28Prudential stated that its affiliates are all 

wholly-owned affiliates and expressed no view on 

the issue of majority-owned affiliates. 

29Two other commenters also discussed the issue 

of minority investors. ISDA & SIFMA stated that 

any concerns about the protection of minority 

investors in group entities is ‘‘the province of 

corporate and securities laws.’’ EEI noted that ‘‘to 

the extent minority owners have an opinion about 

electing the exemption, they may negotiate with 

majority-owners as they deem commercially 

appropriate for the right to participate in interaffiliate clearing decisions.’’ 

30At the G–20 meeting in Pittsburgh in 2009, as 

noted above, the G–20 Leaders declared that, ‘‘[a]ll 

standardized OTC derivative contracts should be 

traded on exchanges or electronic trading platforms, 

where appropriate, and cleared through central 

counterparties by end-2012 at the latest.’’ G–20 

Leaders’ Final Statement at Pittsburgh Summit: 

Framework for Strong, Sustainable and Balanced 

Growth (Sept. 29, 2009). 

31See Regulation (EU) No 648/2012 of the 

European Parliament and of the Council on OTC 

Derivatives, Central Counterparties and Trade 

Repositories, 2012 O.J. (L 201) (hereinafter ‘‘EMIR’’) 

available at http://eur-lex.europa.eu/LexUriServ/ 

LexUriServ.do?

uri=OJ:L:2012:201:0001:0059:EN:PDF. 

32 Id. at Articles 3 and 4. 

C. Definition of Affiliate Status 

As proposed, § 39.6(g)(1) provides 

that counterparties to a swap may elect 

the inter-affiliate exemption to the 

clearing requirement if the financial 

statements of both counterparties are 

reported on a consolidated basis, and 

either one counterparty directly or 

indirectly holds a majority ownership 

interest in the other, or a third party 

directly or indirectly holds a majority 

ownership interest in both 

counterparties. The proposed rule 

further specified that a counterparty or 

third party directly or indirectly holds 

a majority ownership interest if it 

directly or indirectly holds a majority of 

the equity securities of an entity, or the 

right to receive upon dissolution, or the 

contribution of, a majority of the capital 

of a partnership. 

1. Majority Ownership Interest 

Four commenters supported proposed 

§ 39.6(g)(1), which set forth the 

requirements of an affiliate status. CDEU 

commented that the majority-ownership 

test strikes an appropriate balance 

between ensuring that the rule is not 

overly broad and providing companies 

with the flexibility to account for 

differences in corporate structures. EEI 

stated that majority ownership is 

sufficient to mitigate what EEI believes 

is ‘‘minimal’’ risk posed by uncleared 

inter-affiliate swaps. In addition, EEI 

noted that majority-owned affiliates will 

have strong incentives to internalize one 

another’s risks because the failure of one 

affiliate impacts all affiliates within the 

corporate group. The Working Group 

generally supported the Commission’s 

definition, but stated that inter-affiliate 

swaps should be unconditionally 

exempt from mandatory clearing when 

the affiliates are consolidated for 

accounting purposes.27 MetLife stated 

that it would likely limit inter-affiliate 

trading to ‘‘commonly-owned’’ affiliates, 

but agreed with the flexibility of 

including majority-owned affiliates.28

Two commenters objected to 

proposed § 39.6(g)(1) and requested the 

Commission require 100% ownership of 

affiliates. AFR stated that the systemic 

impact of swaps is based on ownership, 

not on corporate control. AFR also 

stated that permitting such a low level 

of joint ownership would lead to 

evasion of the clearing requirement 

through the creation of joint ventures set 

up to enable swap trading between 

banks without the need to clear the 

swaps. Similarly, Better Markets agreed 

that only 100% owned affiliates should 

be eligible for the exemption because 

allowing the exemption for the majority 

owner permits that owner to disregard 

the views of its minority partners 29 and 

creates an incentive to evade the 

clearing requirement by structuring 

subsidiary partnerships. Finally, Better 

Markets stated that the majorityownership standard would result in 

corporate groups transferring price risk 

and credit risk to different locations, 

facilitating interconnectedness and 

potentially giving rise to systemic risk 

during times of market stress. 

Having considered these comments, 

the Commission is adopting proposed 

§ 39.6(g)(1) (now § 50.52(a)) with the 

modifications discussed below. The 

Commission believes that the majorityowned standard is not overly broad and 

provides entities with flexibility to 

account for differences in corporate 

structure. In particular, requiring 

majority ownership serves to ensure that 

counterparty credit risk posed by interaffiliate swaps is internalized by the 

corporate group. 

In addition, as the NPRM noted, it is 

important for the inter-affiliate clearing 

exemption to be harmonized with 

foreign jurisdictions that have or are 

developing comparable clearing regimes 

consistent with the 2009 G–20 Leaders’ 

Statement.30 For example, the European 

Parliament and Council of the European 

Union have adopted the European 

Market Infrastructure Regulation 

(EMIR).31 Subject to the relevant 

provisions, technical standards, and 

regulations under EMIR, certain OTC 

derivatives transactions between parent 

and subsidiary entities, could be exempt 

from its general clearing requirement. 

Generally speaking, it appears that the 

intragroup exemptions under EMIR will 

require majority-ownership rights and 

consolidated accounting and annual 

reporting.32

In response to the concerns of AFR 

and Better Markets regarding the need 

for the Commission to adopt a stricter 

requirement of 100% ownership, the 

Commission recognizes the potential for 

corporate entities to structure their 

affiliates in such a manner as to evade 

the clearing requirement. However, the 

Commission believes it has carefully 

crafted a narrow exemption based on 

the condition that the affiliate is 

majority-owned, along with the other 

conditions imposed under this 

exemption. In terms of the interests of 

minority shareholders, the Commission 

believes that the views of all 

shareholders should be taken into 

account when an entity decides whether 

to clear a swap, but ultimately, the 

decision is a matter for corporate and 

securities laws. 

2. Consolidated Financial Statements 

In addition to the majority-ownership 

requirement, proposed § 39.6(g)(1) 

provided that counterparties to a swap 

may elect the inter-affiliate exemption 

to the clearing requirement if the 

financial statements of both 

counterparties are reported on a 

consolidated basis. The Commission 

received several comments on this 

provision. The FSR requested that the 


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33While it did not address the documentation 

requirements specifically, AFR stated that the 

proposed conditions on the exemption should be 

fully retained. Similarly, Chris Barnard generally 

expressed support for the proposed rules but did 

not specifically mention the documentation 

provisions. 

34CDEU recognized that SDs and MSPs and their 

counterparties, including affiliates, will be subject 

to the requirements of § 23.504, but stated that it is 

not appropriate to apply the same requirements to 

non-registrant affiliates. 

35EEI commented on the NPRM’s consideration 

of costs and benefits and stated that the costs of the 

proposed documentation requirement are 

unjustified. The NPRM included an estimate that 

there would be a one-time cost of $15,000 to 

Commission clarify that alternative 

accounting standards can be used for 

purposes of meeting the requirement 

that the financial statements of both 

affiliates be reported on a consolidated 

basis. In response to a question in the 

NPRM regarding whether the exemption 

should be limited to the ownership 

threshold based on section 1504 of the 

Internal Revenue Code, MetLife and 

Prudential both explained that a U.S. 

taxpayer cannot file consolidated U.S. 

tax returns with its non-U.S. affiliate. 

Accordingly, both MetLife and 

Prudential stated that they did not 

support such a limitation on the 

exemption. 

In an effort to clarify the consolidated 

financial reporting condition, the 

Commission is modifying the 

requirement that financial statements be 

reported on a consolidated basis in two 

ways. First, the Commission is 

clarifying which entities are subject to 

the consolidated reporting condition. 

Under revised § 50.52(a)(1)(i), if one of 

the two affiliate counterparties claiming 

the exemption holds a majority interest 

in the other affiliate counterparty (the 

‘‘majority-interest holder’’), then the 

financial statements of the majorityinterest holder must be reported on a 

consolidated basis and such statements 

must include the financial results of the 

majority-owned counterparty. On the 

other hand, under revised 

§ 50.52(a)(1)(ii), if a third party is the 

majority-interest holder of both affiliate 

counterparties claiming the exemption 

(the ‘‘third-party majority-interest 

holder’’), then the financial statements 

of the third-party majority-interest 

holder must be reported on a 

consolidated basis and such statements 

must include the financial results of 

both affiliate counterparties to the swap. 

In essence, the rule requires that the 

financial statements of the majorityowner (whether a third party or not) are 

subject to consolidation under 

accounting standards and must include 

either the other affiliate counterparty’s 

or both majority-owned affiliate 

counterparties’ financial results. The 

Commission is using the term ‘‘financial 

results’’ to refer to the financial 

statements, reports, or other material of 

the majority-owned counterparty or 

counterparties that must be 

consolidated with the majority owner’s 

financial statements. 

The second modification to the 

proposed rule responds to FSR’s request 

that the Commission clarify that 

alternative accounting standards are 

permitted. Accordingly, the 

consolidated financial statements of the 

majority-interest holder or the thirdparty majority-interest holder, as 

appropriate, may be prepared under 

either Generally Accepted Accounting 

Principles (GAAP) or International 

Financial Reporting Standards (IFRS). 

The modification reflects the fact that 

entities claiming the exemption may be 

subject to different accounting 

standards. 

The Commission is not modifying the 

rule to limit the exemption to an 

ownership threshold based on section 

1504 of the Internal Revenue Code. 

D. Inter-Affiliate Swap Documentation 

As proposed, § 39.6(g)(2)(ii) provided 

that eligible affiliate counterparties that 

elect the inter-affiliate exemption must 

enter into swaps with a swap trading 

relationship document that is in writing 

and includes all the terms governing the 

relationship between the affiliates. 

These terms include, but are not limited 

to, payment obligations, netting of 

payments, transfer of rights and 

obligations, governing law, valuation, 

and dispute resolution. This 

requirement will be satisfied if an 

eligible affiliate counterparty is an SD or 

MSP that complies with the swap 

trading relationship documentation 

requirements of § 23.504. Regulation 

23.504 includes all the proposed terms 

under proposed § 39.6(g)(2)(ii) plus a 

number of other specific requirements. 

The NPRM stated that the burden on 

affiliates would not be onerous because 

all affiliates should be able to use a 

master agreement to document their 

swaps, however, in the NPRM the 

Commission did not require the use of 

such a master agreement. 

The Commission received a number 

of comments both supporting and 

opposing the swap documentation 

requirement. Better Markets, MetLife, 

and Prudential all supported the 

proposed documentation requirement. 

Specifically, MetLife and Prudential did 

not believe that the documentation 

requirement would be any more 

‘‘burdensome or costly’’ for them 

because they already document all of 

their swaps. Additionally, MetLife and 

Prudential commented that the 

proposed documentation method is 

‘‘preferable’’ to any other method and 

represents industry best practice. Better 

Markets agreed with the conditions 

imposed on the exemption, including 

the documentation requirements, and 

stated that the conditions should not be 

weakened.33

Cravath, EEI, CDEU, and DLA Piper 

opposed the proposed documentation 

requirement. Cravath stated that the 

costs associated with the imposition of 

documentation requirements outweigh 

any benefits to the financial system, and 

that the Commission should leave the 

determination as to the appropriate 

level of documentation to boards of 

directors and management of 

companies, to determine based on the 

‘‘reasonable exercise of their fiduciary 

responsibilities.’’ DLA Piper commented 

that inter-affiliate swaps are typically 

documented by a simple intercompany 

agreement, trade ticket or accounting 

entry rather than ISDA Master 

Agreements, and that the 

documentation requirements would be 

burdensome. 

CDEU expressed concern that 

proposed § 39.6(g)(2)(ii)(B) would 

require that full ISDA Master 

Agreements be used to document interaffiliate swaps. CDEU explained that 

while many market participants use 

master agreements, some end users 

many not have full master agreements 

because inter-affiliate swaps are purely 

internal and do not increase systemic 

risk.34 CDEU recommended that the 

proposed rule be revised to require that 

the swap documentation ‘‘include all 

terms necessary for compliance with its 

centralized risk management program’’ 

and eliminate the list of required terms. 

CDEU also requested that the 

Commission clarify that (1) market 

participants can continue to use 

documentation required by their risk 

management programs, and (2) the rule 

does not require market participants to 

use the ISDA Master Agreements. 

EEI recommended that the 

Commission eliminate the 

documentation requirement because the 

requirement is duplicative of corporate 

accounting records that affiliates 

maintain as a matter of prudent business 

practice. According to EEI, current 

accounting practices will address the 

Commission’s tracking and proof-ofclaim concerns related to inter-affiliate 

swaps. EEI commented that a 

documentation requirement imposes 

‘‘an additional, costly layer of 

ministerial process and documentation 

that is unnecessary to achieve the 

Commission’s stated objectives.’’ 35 EEI 


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develop appropriate documentation for use by an 

entity’s affiliates. EEI objected to this estimate 

because, in its view, the legal costs associated with 

individually negotiating and amending standard 

agreements between individual affiliates would 

exceed the NPRM’s estimates. In addition, EEI 

objected to the NPRM’s estimate of 22 affiliated 

counterparties for each corporate group as ‘‘far too 

low’’ for U.S. energy companies. However, EEI did 

not provide specific, quantitative information in 

terms of either the legal costs of complying with the 

proposed documentation requirement or number of 

affiliates for a corporate group subject to this rule. 

36See Confirmation, Portfolio Reconciliation, 

Portfolio Compression, and Swap Trading 

Relationship Documentation Requirements for 

Swap Dealers and Major Swap Participants, 77 FR 

55904, 55906 (Sept. 11, 2012) (recognizing that the 

ISDA Master Agreement, and other associated 

documents in their pre-printed form as published 

by ISDA are capable of compliance with the rules, 

but noting that such agreements are subject to 

customization by counterparties and such 

customization may or may not comply with 

Commission requirements). 

37See 17 CFR 23.504(b)(2); 77 FR 55907–08. 

38See 17 CFR 23.501. 

39See, e.g., 17 CFR 45.3(c)(1)(iii) (requiring the 

reporting counterparty to report all confirmation 

data for the swap as soon as technologically 

practicable after confirmation, but no later than 30 

minutes after confirmation if confirmation occurs 

electronically or 24 business hours after 

confirmation if confirmation does not occur 

electronically). 

40 17 CFR 23.600; Swap Dealer and Major Swap 

Participant Recordkeeping, Reporting, and Duties 

Rules; Futures Commission Merchant and 

Introducing Broker Conflict of Interest Rules; and 

Chief Compliance Officer Rules for Swap Dealers, 

Major Swap Participants, and Futures Commission 

Merchants, 77 FR 20128 (Apr. 2, 2012). 

requested that the Commission allow 

market participants ‘‘to document their 

inter-affiliate risk transfers pursuant to 

standard commercial accounting and 

business records practices.’’ 

ISDA & SIFMA stated that the 

documentation requirements were 

overly prescriptive and would impose 

unnecessary costs on affiliates. 

Specifically, ISDA & SIFMA identified 

the valuation and dispute resolution 

requirements as serving little purpose. 

ISDA & SIFMA recommended a more 

flexible approach that would require 

adequate documentation of ‘‘all 

transaction terms under applicable 

law.’’ 

The Commission considered all of the 

comments relating to the proposed 

documentation requirement and is 

retaining the swap documentation 

requirement subject to certain 

modifications recommended by 

commenters. As discussed in the NPRM, 

the Commission is concerned that 

without adequate documentation 

entities will be unable to track and 

manage the risks arising from interaffiliate swaps. Equally important, 

affiliates must be able to offer sufficient 

proof of claim in the event of 

insolvency. The Commission is 

adopting proposed § 39.6(g)(2)(ii)(A) 

(now § 50.52(b)(2)(i)), which essentially 

confirms the applicability of § 23.504 to 

swaps between affiliates where one of 

the affiliates is an SD or MSP. However, 

with regard to swaps between affiliates 

that are not SDs or MSPs, and in 

response to commenters’ requests for a 

more flexible standard, the Commission 

is adopting ISDA & SIFMA’s 

recommendation that the focus of the 

documentation requirement be on 

documenting all of an inter-affiliate 

transaction’s terms. Accordingly, the 

Commission is modifying proposed 

§ 39.6(g)(2)(ii)(B) (now § 50.52(b)(2)(ii)), 

to require that ‘‘the terms of the swap 

are documented in a swap trading 

relationship document that shall be in 

writing and shall include all terms 

governing the trading relationship 

between the eligible affiliate 

counterparties.’’ 

Under this modification, the 

Commission is eliminating the nonexclusive list of terms, which included 

payment obligations, netting of 

payments, transfer of rights and 

obligations, governing law, valuation, 

and dispute resolution. The change 

responds to commenters’ requests for a 

more flexible approach that reflects 

current market best practices. While, in 

most instances, the Commission 

anticipates that documentation between 

affiliates will include all of the 

previously enumerated terms, the more 

general rule formulation signals that 

market participants retain the ability to 

craft appropriate documentation for 

their affiliated entities. This 

modification also serves to address 

concerns that the intent of the proposed 

rule was to require formal master 

agreements, such as the ISDA Master 

Agreement. As explained above, the 

proposed rule was not intended to 

require affiliates to enter into formal 

master agreements. Rather, the 

Commission observed that parties that 

already use master agreements to 

document their inter-affiliate swaps 

would likely meet the requirements of 

the inter-affiliate exemption without 

additional costs.36 This observation was 

supported by commenters such as 

MetLife and Prudential. 

This modification also responds, in 

part, to CDEU’s request that the 

documentation ‘‘include all terms 

necessary for compliance with its 

centralized risk management program.’’ 

While the Commission is modifying the 

rule to delete the specific references to 

valuation and dispute resolution 

procedures, ensuring that affiliates 

entering into swaps have sound 

procedures in place to value their swaps 

and resolve any disputes is critical to 

risk management. Accordingly, as 

discussed further below, the 

Commission anticipates that affiliates 

will include rigorous valuation 

provisions and procedures for elevating 

and resolving disputes in their risk 

management programs. 

In response to comments from Better 

Markets and AFR that the proposed 

regulations should be retained and not 

weakened, the Commission does not 

believe that eliminating the nonexclusive list of terms and replacing it 

with a simple requirement that all terms 

of the swap transaction and the 

relationship between the affiliates be 

documented will weaken the rule. 

Rather, eligible affiliates will have some 

discretion, but also have the obligation 

to ensure that their documentation 

contains an accurate and thorough 

written record of their swaps. The 

Commission clarifies, however, that 

book entries would not suffice for 

purposes of complying with the swap 

documentation condition because such 

entries do not contain sufficient 

information to adequately document the 

swap or the trading relationship 

between affiliates. 

EEI requested that, if the Commission 

retains the documentation requirement, 

the Commission clarify that swap 

confirmations are not required because 

executing confirmations would impose 

substantial costs. In response to this 

request, the Commission clarifies that 

for swaps between affiliates where one 

or both of the affiliates is an SD or MSP, 

the confirmation rules under § 23.501 

are incorporated into § 23.504.37 As a 

result, those affiliates must confirm all 

the terms of their transactions according 

to the applicable timeframes set forth 

under § 23.501.38 By contrast, for swaps 

between affiliates that are not SDs or 

MSPs, the provisions of § 23.501 do not 

apply and formal confirmation pursuant 

to § 23.501 is not required. However, the 

Commission notes that the terms of the 

swap will be documented by the 

affiliates and confirmation of those 

terms will be reported to an SDR under 

the Commission’s reporting rules.39

E. Centralized Risk Management 

Program 

Proposed § 39.6(g)(2)(iii) requires the 

swap to be subject to a centralized risk 

management program that is 

‘‘reasonably designed to monitor and 

manage the risks associated with the 

swap.’’ If at least one of the eligible 

affiliate counterparties is an SD or MSP, 

the centralized risk management 

requirement is satisfied by complying 

with the requirements of § 23.600.40


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41 17 CFR 23.600(c)(1)(ii) (‘‘The Risk Management 

Program shall take into account risks posed by 

affiliates and the Risk Management Program shall 

be integrated into risk management at the 

consolidated entity level.’’). 

Five commenters generally supported 

proposed § 39.6(g)(2)(iii). AFR 

supported the proposed risk 

management program requirement and 

stated that dispensing with or 

weakening this condition, or any of the 

conditions, would heighten systemic 

risk and call into question the 

Commission’s exemptive authority. 

Better Markets agreed that requiring a 

centralized risk management program 

was wholly appropriate and should be 

maintained as a requirement. 

Prudential and MetLife confirmed 

that both companies currently have 

centralized risk management programs 

and consider them to be consistent with 

current practice in the industry. 

Prudential noted that it structured its 

risk management system to allow only 

one affiliate to enter into swaps with 

third parties, which permits Prudential 

to impose a single credit limit on its 

market-facing counterparty 

relationships. MetLife’s enterprise-wide 

risk management system provides all 

affiliates trading derivatives with 

affiliate-specific sets of guidelines and 

limits that are also included in 

enterprise-wide guidance and limits. 

Finally, CDEU expressed support for 

the centralized risk management 

program requirement, but requested that 

the Commission clarify that the level of 

risk management for inter-affiliate 

swaps not be interpreted as requiring 

the same level of risk management that 

end-users maintain for external thirdparty swaps. CDEU noted that most end 

users that use inter-affiliate swaps 

currently have robust centralized risk 

management programs in place to 

monitor all external swap risks and 

affiliates are required to follow groupwide risk polices. CDEU was supportive 

of the proposal so long as the 

requirement is interpreted reasonably 

and permits entities to ‘‘implement risk 

policies and procedures appropriate to 

the risks of a corporate group’s interaffiliate swaps.’’ 

Four commenters objected to the 

proposed requirement, suggested 

alternatives, and/or requested 

clarification. FSR stated that the 

condition should be eliminated because 

integrated risk management systems 

‘‘are generally not established across 

international boundaries’’ and are not 

consistent with general risk practices in 

large, multinational organizations. FSR 

suggested that the requirement be 

dropped in favor of each entity making 

‘‘its own evaluations of the risk 

associated with an inter-affiliate 

position.’’ 

Cravath stated that in many cases, for 

companies outside of the financial 

sector, the proposed rule will require a 

substantial change in the processes and 

procedures currently maintained by 

such companies, and the cost of 

complying with the risk management 

program requirements outweigh any 

benefits to the financial system. Cravath 

commented that rather than subject 

companies to a risk management rule, 

‘‘[c]ompanies should have the flexibility 

to engage in prudent risk management 

for their corporate group in a manner 

consistent with the overall level of risks 

to their business.’’ 

EEI suggested that the Commission 

eliminate the centralized risk 

management program requirement on 

the grounds that it would be duplicative 

for corporate groups that already have 

risk management programs in place. 

According to EEI, it is standard industry 

practice for both private and public 

companies to have a risk management 

program. EEI accordingly does not see a 

‘‘need to impose a separate, discrete 

regulatory requirement to document 

with an SDR or the Commission the 

existence of a centralized risk 

management program.’’ If the 

Commission decides to retain the 

requirement, EEI requested that the 

Commission require a program be 

‘‘reasonably designed to monitor and 

manage the risks associated with the 

swap’’ and provide the flexibility to 

design risk management programs that 

address the unique risks of an entity’s 

business. 

The Working Group requested that the 

Commission clarify whether non-SDs 

and non-MSPs would be subject to the 

same enterprise-level risk management 

program as required for SDs and MSPs 

under § 23.600. If the Commission 

intended to require the same level of 

risk management, The Working Group 

commented that there are ‘‘a number of 

commercially and legally valid reasons’’ 

why a centralized risk management 

program in accordance with § 23.600 

would be inconsistent with current 

industry practice. The Working Group 

cited cost as a reason companies do not 

provide for centralized risk management 

on different continents, in addition to 

antitrust and other regulatory reasons. 

The Working Group requested that the 

Commission clarify that the rule 

requires only that both counterparties be 

subject to a ‘‘robust risk management 

program.’’ 

In response to comments, the 

Commission observes a general 

consensus that market participants have 

risk management policies and 

procedures in place, at least with regard 

to affiliates located in the same 

jurisdiction. FSR and The Working 

Group questioned whether entities have 

centralized risk management programs 

for affiliates in different jurisdictions 

and whether such cross-border risk 

management systems are prohibitively 

costly. In response to these comments, 

the Commission points to comments 

stating that inter-affiliate swaps play a 

critical role in an entity’s overall 

management of risk and provide netting 

benefits among affiliates. Consequently, 

it stands to reason that inter-affiliate 

swaps between affiliates in different 

jurisdictions are as much a part of an 

entity’s overall risk management 

framework as swaps between affiliates 

located in the same jurisdiction. The 

Commission does not believe that it 

would be prudent business practice for 

affiliates to enter into inter-affiliate 

swaps without risk management 

systems integrated across international 

boundaries to the extent that the entity 

permits affiliates across jurisdictions to 

enter into swaps with one another. 

In response to comments asking that 

the Commission clarify the level of risk 

management required for non-SDs and 

non-MSPs, the Commission confirms 

that the requirements of proposed 

§ 39.6(g)(2)(iii) (now § 50.52(b)(3)) are 

intended to be flexible and do not 

require the same level of policies and 

procedures as required under § 23.600 

for SDs and MSPs. Under the rule, a 

company is free to structure its 

centralized risk management program 

according to its unique needs, provided 

that the program reasonably monitors 

and manages the risks associated with 

its uncleared inter-affiliate swaps. In all 

likelihood, if a corporate group has a 

centralized risk management program in 

place that reasonably monitors and 

manages the risk associated with its 

inter-affiliate swaps as part of current 

industry practice, it is likely that the 

program would fulfill the requirements 

of proposed § 39.6(g)(2)(iii) (now 

§ 50.52(b)(3)). 

The Commission did not receive 

comments regarding the requirement 

that SD and MSP affiliates must comply 

with § 23.600.41 The Commission is 

adopting that provision of the rule as 

proposed. 

Given that a number of commenters 

stated that it is common practice for 

market participants, including end 

users, to have risk management 

programs in place, the Commission is 

not persuaded by Cravath’s comment 

that the rule will require a substantial 

change in the processes and procedures 

currently maintained by companies to 

manage risk. Accordingly, costs will be 


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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 21759 

42The Commission also requested comments on, 

among other things, whether the Commission 

should promulgate regulations that set forth 

minimum standards for initial margin for interaffiliate swaps. 

43Prudential also commented that there is ‘‘no 

less costly risk-management tool’’ than variation 

margin. 

44MetLife also commented that the Commission 

should not impose initial margin requirements for 

the inter-affiliate exemption. 

45See Margin Requirements for Non-CentrallyCleared Derivatives, Consultative Report (July 

2012), available at http://www.bis.org/publ/ 

bcbs226.pdf. 

46Better Markets also suggested that the 

Commission ban the rehypothecation of collateral. 

47Better Markets commented that initial margin 

should be required because initial margin is the true 

‘‘statistical estimate of the potential consequences 

of a default’’ and that variation margin is merely the 

‘‘daily recalibration’’ of the risk estimation of initial 

margin. 

48Cravath commented that variation margin 

requirements ‘‘tie up capital that could otherwise be 

used for investment purposes to create jobs and 

goods and services for the economy.’’ MetLife 

commented that while it is subject to variation 

margin under state insurance law, MetLife believes 

that the Commission should eliminate the variation 

margin requirement for 100%-owned affiliates and 

should not require ‘‘inter-affiliate guarantees.’’ DLA 

Piper also urged the Commission to provide 

corporate groups with legal certainty that no margin 

requirements will be imposed on any intercompany swaps. 

49 ISDA & SIFMA claimed that the additional 

liquidity demands resulting from variation margin 

will distort the group’s risk management choices. 

ISDA & SIFMA further claimed that while they have 

previously stated that inter-affiliate margin occurs 

‘‘routinely,’’ this does not mean that it occurs 

‘‘uniformly’’ or that imposing variation margin 

would not increase cost. 

50Citing to sections 23A and 23B of the Federal 

Reserve Act and Regulation W as well as public 

utility, insurance, and investment company law, 

FSR commented that a number of regulated entities 

may be subject to various restrictions on affiliate 

transactions and that for purposes of the interaffiliate exemption, margin requirements should 

only apply ‘‘to the extent other applicable law . . . 

imposes such restrictions on affiliate transactions.’’ 

FSR also points out that subsidiaries of banks are 

‘‘generally not treated as ‘affiliates’ ’’ within the 

restrictions of sections 23A and 23B of the Federal 

Reserve Act. 

51FSR further requested that the Commission 

clarify that to the extent that financial entities are 

required, through credit support arrangements with 

their affiliates, to have minimum transfer amounts, 

thresholds, and other similar arrangements in place, 

that such arrangements would be permitted in 

connection with inter-affiliate swaps relying on the 

inter-affiliate exemption. 

52Moreover, CDEU claims that many interaffiliate swaps between end-user corporate groups 

are not subject to variation margin requirements, 

and that these entities likely will not have the 

liquidity to exchange variation margin, and would 

likely be required to borrow the money from the 

centralized hedging unit with which it is entering 

the internal swap. Such an arrangement, according 

to CDEU, would transfer the loan back to the 

centralized hedging unit and effectively eliminate 

any perceived benefit from the exchange of 

variation margin. 

limited where an entity only needs to 

make modifications to existing risk 

management programs. Moreover, a 

corporate group may not have to incur 

any costs if it already has a risk 

management system that meets the 

requirements of the inter-affiliate 

exemption in place. 

F. Variation Margin 

Proposed § 39.6(g)(2)(iv) required that 

variation margin be collected for swaps 

between affiliates that are financial 

entities, in compliance with the 

proposed variation margin requirements 

in proposed § 39.6(g)(3).42 The rule 

further proposed an exception to the 

variation margin requirement for 100% 

commonly-owned and commonlyguaranteed affiliates, provided that the 

common guarantor is under 100% 

common ownership. 

Some commenters expressed support 

for the proposed variation margin 

requirement. Prudential commented 

that it did not take issue with the 

variation margin requirement, but noted 

that variation margin may not be 

appropriate or required in every 

circumstance.43 Prudential also 

commented that the Commission should 

not impose initial margin requirements 

for the inter-affiliate exemption.44 Chris 

Barnard agreed that the Commission 

should require the exchange of variation 

margin for financial entities and noted 

that the exchange of variation margin is 

consistent with the key principles 

proposed by the Basel Committee on 

Banking Supervision (BCBS) and the 

Board of the International Organization 

of Securities Commissions (IOSCO).45

Better Markets expressed support for the 

variation margin requirement and 

commented that it should be expanded 

to non-financial entities.46 AFR 

expressed support for the variation 

margin proposal. Both Better Markets 

and AFR also expressed support for the 

requirement that affiliates post initial 

margin for inter-affiliate swaps subject 

to the exemption.47

Several commenters stated that the 

proposed variation margin requirement 

for swaps between affiliates that are 

financial entities is not necessary and 

should not be a condition of the interaffiliate exemption to clearing.48 ISDA & 

SIFMA commented that the benefits of 

variation margin for inter-affiliate swaps 

are ‘‘tenuous’’ because the third party to 

a swap is exposed to the credit risk of 

the entire group not just the specific 

affiliate with which it enters into a 

swap. ISDA & SIFMA maintain that it is 

not necessary to protect group entities 

from the credit risk of other group 

entities because group management 

possesses the tools needed to resolve 

potential defaults within the group. 

According to ISDA & SIFMA, the 

Commission can fully achieve its 

regulatory mandate to protect thirdparty swap counterparties through the 

application of the clearing requirement 

to those outward-facing swaps that are 

subject to the Commission’s regulation, 

as well as regulation of those group 

entities whose outward-facing swap 

activities are sufficiently large to subject 

them to SD and MSP registration.49

FSR commented that affiliates should 

be required to post margin only in 

instances where their primary regulator 

imposes such a requirement for affiliate 

transactions.50 FSR states that requiring 

variation margin for inter-affiliate swaps 

involving non-bank financial entities 

will limit the ability of companies to 

efficiently allocate risk among affiliates 

and manage risk centrally.51 FSR further 

commented that initial margin should 

not be required between affiliates, and 

requested that the Commission clarify 

that the exemption does not require the 

exchange of initial margin between 

affiliates. 

CDEU commented that the 

Commission should not require 

variation margin, or initial margin, with 

respect to inter-affiliate swaps between 

end-user affiliates. According to CDEU, 

while margin requirements may serve as 

a risk-management tool for marketfacing swaps, inter-affiliate swaps do 

not increase counterparty credit risk or 

contribute to interconnectedness among 

market participants. CDEU stated that a 

number of specific entities, including 

banks and insurance companies, already 

post variation margin for inter-affiliate 

swaps, largely because of prudential 

requirements, and that applying 

variation margin requirement to these 

entities is unnecessary.52 CDEU 

requested that if the Commission retains 

the variation margin requirement, that it 

limit the exchange of variation margin 

to SDs and MSPs, and that the 

requirement should not apply to entities 

that are considered ‘‘financial entities.’’ 

With respect to the proposed common 

guarantor exception to the variation 

margin requirement, ISDA & SIFMA 

commented that the Commission has 

not provided adequate rationale for 

requiring a common guarantor as a 

condition for exempting group members 

from the proposed variation margin 

requirement, nor has the Commission 

made it clear which obligations must be 

guaranteed. ISDA & SIFMA requested 

that the Commission further clarify the 

guarantee exception in proposed 

§ 39.6(g)(2)(iv), including to clarify that 

it includes ‘‘direct or indirect’’ 

ownership, and that swaps between the 


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21760 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

53 ISDA requested that the Commission clarify 

that the shareholders of a publicly-owned holding 

company are the common owners and that its 100% 

owned subsidiaries meet the definition of ‘‘100% 

commonly owned,’’ and further stated that the 

Commission should address the consequences of a 

guarantee of a swap being considered a swap itself. 

54 In this release, the requirements of proposed 

§ 39.6(g)(2)(v), which are now being adopted in new 

§ 50.52(b)(4), are referred to as the ‘‘treatment of 

outward-facing swaps condition.’’ 

55AFR suggested that the Commission consult 

with the U.S. banking agencies, such as the FDIC, 

regarding the potential issues relating to bankruptcy 

of non-U.S. affiliates. As noted above, the 

Commission has consulted with both U.S. and 

international authorities in preparing this adopting 

release. In response to AFR’s comments pertaining 

to the limitations of foreign bankruptcy laws, the 

Commission notes that the specific bankruptcy 

limitations attendant to U.S. counterparties with 

respect to their non-U.S. affiliates are outside the 

scope of this rulemaking. The Commission further 

notes that the conditions imposed by the rules 

being adopted in this release, in large part, are 

aimed at ensuring that the benefits of central 

clearing, particularly with respect to counterparty 

and systemic risk mitigation, are maintained with 

respect to inter-affiliate swaps involving non-U.S. 

affiliates. Specifically, the Commission believes that 

the conditions imposed by the rules being adopted 

in this release will help to mitigate potential issues 

that could arise in uncleared inter-affiliate swaps 

when financial solvency is not an issue for the 

corporate enterprise. Furthermore, these conditions 

may, to some extent, diminish the impact of swaps 

in transmitting losses across affiliates, and in turn, 

to third-party creditors, following a default. 

56AFR also noted restrictions under U.S. banking 

law with respect to the transfer of risk from nondepository to depository institutions, and stated 

that it may be necessary to require ‘‘ring-fencing’’ 

and separate capitalization of swaps affiliates. The 

Commission believes that these issues are outside 

of the scope of this rulemaking, and as AFR 

correctly noted, may be an issue that is more 

common guarantor and its affiliates are 

eligible for the exception.53

CDEU commented that the 

Commission should not limit the 

guarantee exception to 100% 

commonly-owned affiliates and should 

allow the exception for majority-owned 

affiliates. CDEU requested that the 

Commission clarify that only the related 

market-facing swaps with third parties 

are required to be guaranteed by the 

common owner or parent. CDEU 

suggested that the Commission clarify 

that the parent company has the option 

to act as the guarantor of the 

transactions. 

FSR commented that the variation 

margin requirement should not apply to 

100% commonly-owned affiliates even 

if they do not have a common guarantor 

that is under 100% common ownership. 

According to FSR, the 100% common 

ownership requirement creates 

sufficient alignment of interests between 

swap counterparties and places the risk 

of the swap on the ultimate parent 

entity, and thus, the exchange of 

variation margin would do little to 

mitigate intercompany risk. 

MetLife and Prudential commented 

that inter-affiliate swaps should not be 

commonly guaranteed by a 100% 

wholly-owned affiliate in order to be 

exempt from the variation margin 

requirement. Specifically, MetLife 

stated that the Commission should not 

require guarantees or explicit credit 

support as a condition for an exception 

from the variation margin requirement 

and should rely instead on the direct or 

indirect common ownership 

requirement. Both MetLife and 

Prudential stated that the corporate 

group of 100% wholly owned affiliates 

should be able to decide whether 

internal swaps need to be guaranteed by 

an affiliate. 

After considering the comments 

submitted in response to the proposed 

variation margin requirement, the 

Commission is determining not to 

require variation or initial margin as a 

condition for electing the inter-affiliate 

exemption. In so doing, the Commission 

was guided by comments expressing 

concern that a variation margin 

requirement will limit the ability of U.S. 

companies to efficiently allocate risk 

among affiliates and manage risk 

centrally. Notwithstanding the 

Commission’s determination not to 

impose variation margin as a condition 

of the inter-affiliate exemption, the 

Commission is encouraged by 

comments noting that many companies 

already exchange variation margin, and 

agrees with commenters that 

collateralizing risk exposure with 

respect to any swaps, including interaffiliate swaps, is critical, and 

encourages market participants to do so 

as a matter of sound business practice. 

G. Treatment of Outward-Facing Swaps 

and Relief 

Proposed § 39.6(g)(2)(v) provided that 

eligible affiliate counterparties to a swap 

may elect the inter-affiliate exemption 

from clearing provided that each 

affiliate counterparty either: (i) Is 

located in the United States; (ii) is 

located in a jurisdiction with a clearing 

requirement that is comparable and 

comprehensive to the clearing 

requirement in the United States; (iii) is 

required to clear swaps with nonaffiliated parties in compliance with 

U.S. law; or (iv) does not enter into 

swaps with non-affiliated parties.54

The Commission received several 

comments both in support of and in 

opposition to various aspects of the 

conditions related to the treatment of 

outward-facing swaps in proposed 

§ 39.6(g)(2)(v). The Commission has 

considered each of the comments and 

has determined to adopt the treatment 

of outward-facing swaps conditions of 

the inter-affiliate exemption, with 

certain modifications described below, 

because such conditions are necessary 

to prevent evasion of the clearing 

requirement and to help protect the U.S. 

financial markets. The remainder of this 

Section II.G describes the comments 

received in response to proposed 

§ 39.6(g)(2)(v) (now § 50.52(b)(4)), along 

with the Commission’s responses and 

clarifications with respect to those 

comments. 

1. Basis for the Cross-border Conditions 

While recognizing the benefits of 

exempting certain inter-affiliate 

transactions from the clearing 

requirement, in the NPRM, the 

Commission described two separate 

grounds for proposing the treatment of 

outward-facing swaps condition to the 

inter-affiliate exemption. First, the 

Commission explained that an interaffiliate exemption from required 

clearing could enable entities to evade 

the clearing requirement through trades 

with affiliates that are located in foreign 

jurisdictions that do not have a 

comparable and comprehensive clearing 

regime. In addition, the Commission 

noted in the NPRM that uncleared interaffiliate swaps may pose risk to other 

market participants, and therefore, the 

financial system if the affiliate enters 

into swaps with third parties that are 

related on a back-to-back or matched 

book basis with inter-affiliate swaps. 

In support of the proposed treatment 

of outward-facing swaps conditions, 

AFR stated that inter-affiliate swaps 

could, without appropriate restrictions, 

bring risk back to the U.S. from foreign 

affiliates. AFR commented that an interaffiliate swap might be used to move 

parts of the U.S. swaps market outside 

of U.S. regulatory oversight by 

transferring risk to jurisdictions with 

little or no regulatory oversight, 

whereby a non-U.S. affiliate of a U.S. 

entity could enter into an outwardfacing swap. AFR stated that an interaffiliate swap could contribute to 

financial contagion across different 

groups within a complex financial 

institution, making it more difficult to 

‘‘ring-fence’’ risks in one part of an 

organization. AFR further commented 

that laws and regulations of a foreign 

country might prevent U.S. 

counterparties to swaps from having 

access to the financial resources of an 

affiliate in the event of a bankruptcy or 

insolvency.55 The inability of an affiliate 

to access resources in other 

jurisdictions, according to AFR, may 

threaten the ability of U.S. creditors to 

retrieve assets and may put U.S. 

taxpayers at risk.56 Better Markets also 


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appropriate for the prudential regulators of such 

entities to consider. 

57Prudential also commented that in relation to 

its own structure, it did not have concerns with the 

proposed cross-border conditions applicable to 

inter-affiliate swaps involving foreign affiliates. 

58See e.g., Section 2(i)(2) of the CEA (providing 

authority to promulgate rules addressing activities 

outside of the U.S. to prevent evasion of the DoddFrank Act); section 2(h)(4) of the CEA (requiring the 

Commission to issue rules to prevent evasion of the 

mandatory clearing requirement); section 721(c) of 

the Dodd-Frank Act (requiring the Commission to 

promulgate a rule defining certain terms to prevent 

evasion of the Dodd-Frank Act). 

59Entities that are subject to capital regulations 

include SDs, MSPs, and banking entities subject to 

prudential regulation. 

60CDEU further stated that inter-affiliate swaps 

do not create systemic risk. 

61Prudential also stated that it does not believe 

that there are any additional risk implications of 

cross-border inter-affiliate swaps for the U.S. 

market, to the extent that the market-facing entity 

is located in the U.S. 

62See sections 2(h)(4) and 2(i)(2) of the CEA. 

63 7 U.S.C. 2(h)(4). 

64Under the authority of sections 2(h)(4)(A), 

2(h)(7)(F), and 8a(5) of the CEA, the Commission 

recently adopted § 50.10 to prohibit evasions of the 

requirements of section 2(h) of the CEA, including 

the end-user exception or any other exception or 

exemption that the Commission may provide by 

rule, regulation, or order. See Clearing Requirement 

Determination at 74317–19. 

supported the proposed treatment of 

outward-facing swaps condition.57

By contrast, ISDA & SIFMA, The 

Working Group, and CDEU all stated 

that the treatment of outward-facing 

swaps condition of the proposed rule is 

not necessary or appropriate and that 

the Commission should eliminate it 

altogether. FSR commented that the 

inter-affiliate exemption should extend 

to swaps between non-U.S. affiliates, 

such that the swaps should not be 

subject to mandatory clearing or margin 

requirements, even if the affiliated 

parties are financial entities. 

Certain commenters stated that the 

proposed treatment of outward-facing 

swaps condition is not necessary to 

prevent evasion. ISDA & SIFMA noted 

that the Commission’s existing antievasion authority 58 can address the 

anti-evasion objectives of the proposed 

condition, and the CDEU made a similar 

argument with respect to the 

Commission’s new anti-evasion 

authority under section 721(c) of the 

Dodd-Frank Act. ISDA & SIFMA further 

noted that the Commission should limit 

application of its anti-evasion authority 

to instances where a foreign affiliate 

engages in a pattern of back-to-back 

swaps with the U.S. affiliate and where 

neither the affiliates nor the third-party 

counterparty are subject to capital 

regulation.59

Other commenters opposed the 

proposed treatment of outward-facing 

swaps condition based on their view 

that inter-affiliate swaps involving nonU.S. affiliates do not pose a risk to the 

U.S. financial markets. CDEU 

commented that the proposed 

‘‘comparable and comprehensive’’ 

condition is not necessary or 

appropriate to reduce risk and prevent 

evasion because, according to CDEU, 

transactions between affiliates do not 

increase systemic risk, regardless of the 

location of the affiliate.60 ISDA & 

SIFMA stated that the concern that 

foreign inter-affiliate swaps pose risk to 

the U.S. financial system is unfounded 

because internal swaps have no 

conclusive effect on systemic risk.61

The Commission has considered these 

comments, and for the reasons 

described below, has determined to 

retain the treatment of outward-facing 

swaps condition to the inter-affiliate 

exemption, with certain modifications 

and amendments, in order to address 

comments and provide greater clarity. 

i. Prevention of Evasion 

As an initial matter, as discussed 

above, the Commission believes that the 

benefits of inter-affiliate swaps for 

entities in affiliated groups warrant the 

Commission’s use of its exemptive 

authority under section 4(c) of the Act 

to exclude certain inter-affiliate swaps 

from the clearing requirement. However, 

the Commission must exercise its 

exemptive authority in view of the 

Commission’s charge under the CEA to 

prevent evasion of the clearing 

requirement.62 The Commission 

remains concerned that absent the 

treatment of outward-facing swaps 

condition, the inter-affiliate exemption 

from clearing may create a ready means 

through which some U.S. entities may 

be able to evade the clearing 

requirement. Accordingly, the 

Commission believes that the treatment 

of outward-facing swaps condition to 

the inter-affiliate clearing exemption is 

necessary to address the potential for 

evasion. 

Section 2(h)(4)(A) of the CEA requires 

that ‘‘the Commission shall prescribe 

rules * * * as determined by the 

Commission to be necessary to prevent 

evasions of the clearing requirement 

under this Act.’’ 63 As the Commission 

explained in the NPRM, and as AFR 

also described in its comments, a broad 

inter-affiliate exemption from the 

clearing requirement could enable 

entities to evade the clearing 

requirement potentially through thirdparty trades with their foreign affiliates 

that are located in jurisdictions that do 

not have a clearing regime that is 

comparable to, or as comprehensive as, 

the Commission’s clearing requirement. 

For example, rather than execute a swap 

opposite a U.S. counterparty, which 

would be subject to the clearing 

requirements of section 2(h) of the Act, 

a U.S. entity could execute an uncleared 

swap with its foreign affiliate or 

subsidiary, which could then execute a 

swap with a non-affiliated third-party in 

a jurisdiction that is either unregulated 

or does not have a clearing requirement 

that is comparable to or as 

comprehensive as the U.S. clearing 

requirement. 

The Commission disagrees with 

commenters that suggest that the 

treatment of outward-facing swaps 

condition is not necessary to deter 

evasion because the Commission can 

rely on its general anti-evasion authority 

under the CEA or under section 721(c) 

of the Dodd-Frank Act to address the 

Commission’s evasion concerns 

pertaining to the inter-affiliate 

exemption. The Commission notes that 

section 2(h)(4)(A) of the CEA 

specifically imposes an obligation on 

the part of the Commission to ‘‘prescribe 

rules’’ and ‘‘issue interpretations of 

rules’’ that are necessary to prevent 

evasions of the clearing requirement.64

Furthermore, from an enforcement 

perspective, a specific regulation 

provides more transparency to market 

participants with respect to the 

Commission’s enforcement program. 

While the Commission has ample 

general authority to prevent evasion of 

the CEA and the swaps-related 

provisions of the Dodd-Frank Act, the 

Commission believes it is appropriate to 

impose the treatment of outward-facing 

swaps condition to the inter-affiliate 

exemption to prevent evasion of the 

clearing requirement. 

In response to ISDA & SIFMA’s claim 

that anti-evasion authority should only 

be applied in limited scenarios where 

there are back-to-back trades involving 

affiliates and non-affiliates who are not 

subject to capital requirements, the 

Commission declines to pre-judge the 

potential incentives or ways of evading, 

or complying with, the Commission’s 

clearing requirement and the interaffiliate exemption from clearing. To the 

extent that ISDA & SIFMA suggest that 

the treatment of outward-facing swaps 

condition should be limited to 

transactions involving back-to-back 

trades where the affiliates and the 

respective third-party are subject to 

capital requirements, the Commission is 

not persuaded that the rule should be so 

narrowly tailored to address only the 

scenario ISDA & SIFMA describe. In 

particular, the Commission notes that 

back-to-back transactions may not serve 

as the only potential means by which 


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21762 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

65See NPRM at 50427. 

66 In the Proposed Cross-Border Interpretive 

Guidance, the Commission specifically discussed 

the flow of risk to the U.S. by entities that facilitate 

a U.S. person’s ability to execute swaps outside the 

Dodd-Frank Act regulatory regime. 77 FR 41228–29, 

41234. 

67For a discussion of specific institutional risks 

leading up to the 2008 financial crisis, see Proposed 

Cross-Border Interpretive Guidance at 41215–16. 

68Currently, the scope of the Commission’s 

clearing requirement is limited to four classes of 

interest rate swaps and two classes of CDS. 

69See Principles for Financial Market 

Infrastructures, April 2012, available at http:// 

www.iosco.org/library/pubdocs/pdf/ 

IOSCOPD377.pdf. 

affiliates can evade the U.S. clearing 

mandate, and for that matter, transfer 

risk to one another. Accordingly, the 

Commission does not believe that the 

treatment of outward-facing swaps 

condition should be limited to the 

specific circumstances described by 

ISDA & SIFMA. 

ii. Protection of Financial Markets 

In addition to preventing evasion, the 

Commission believes that the treatment 

of outward-facing swaps condition will 

help to limit the potential transfer of 

risks to U.S. companies and financial 

markets that may result from third-party 

swaps between affiliates and nonaffiliated entities domiciled in 

jurisdictions that do not regulate swaps 

or where the regulation is not 

comparable to, or as comprehensive as, 

the CEA and Commission regulations. 

As described in the preceding sections 

of this adopting release, there are 

numerous benefits associated with 

central clearing of swaps. In particular, 

clearing mitigates counterparty credit 

risk, provides an organized mechanism 

for collateralizing the risk exposures 

posed by swaps, and when applied on 

a market-wide scale, clearing reduces 

systemic risk. The counterparty and 

systemic risk mitigation benefits of 

central clearing are also realized from 

clearing transactions between affiliates. 

The benefits of clearing 

notwithstanding, the Commission 

recognized in the NPRM, commenters’ 

assertions that there is less counterparty 

risk associated with inter-affiliate swaps 

than with swaps between third parties 

to the extent that the affiliated 

counterparties that are members of the 

same corporate group internalize each 

other’s counterparty credit risk.65 While 

the Commission recognizes, generally, 

the benefits of inter-affiliate swaps and 

the incentives for inter-affiliates to 

fulfill their inter-affiliate swap 

obligations to each other, these swaps 

are not immune from some of the risks 

that are associated with swaps between 

non-affiliated parties. 

In particular, the Commission is not 

persuaded that inter-affiliate swaps, and 

swaps between affiliate counterparties 

outside the U.S. and non-affiliated 

counterparties, pose no risks to the U.S 

financial markets or that central clearing 

would not mitigate the risks associated 

with such swaps. To the contrary, the 

counterparty and systemic risks 

associated with inter-affiliate swaps are 

heightened where, for example, the 

inter-affiliate transaction involves an 

uncleared swap with a foreign affiliate 

counterparty that is subsequently 

hedged with a third-party uncleared 

swap. Thus, the Commission disagrees 

with commenters that suggested that 

inter-affiliate swaps involving foreign 

affiliates do not have the potential to 

create systemic risk. As the Commission 

noted in the NPRM, systemic risk 

implications may be present where the 

foreign affiliate has large inter-affiliate 

swap positions and enters into related 

outward-facing swaps. If the foreign 

affiliate defaults on its obligations 

arising from the inter-affiliate swaps, it 

then increases the likelihood that the 

foreign affiliate could default on the 

outward-facing swaps, potentially 

jeopardizing the financial integrity of 

the third-party counterparty. 

Furthermore, to the extent that a foreign 

affiliate enters into both inter-affiliate 

swaps and related third-party swaps, 

any losses incurred by the foreign 

affiliate with respect to its inter-affiliate 

swaps may flow not only to the 

unaffiliated third-party counterparty, 

but conceivably, to the broader financial 

system.66

Moreover, the Commission notes 

AFR’s comment that inter-affiliate 

swaps can, in some circumstances, 

contribute to financial contagion across 

different groups within a complex 

financial institution, making it more 

difficult to contain risks in one part of 

an organization. As evidenced by the 

events surrounding the 2008 financial 

crisis, many large financial institutions 

are interconnected and highly interdependent, with affiliated legal entities 

that are inextricably linked to each 

other.67 The interconnected nature of 

corporate groups, therefore, increases 

the potential that risk in any part of a 

corporate group may spread throughout 

the organization, jeopardizing the 

financial integrity of not only the U.S 

affiliate, but depending on the scope of 

a potential default, the broader financial 

system. 

For the aforementioned reasons, the 

Commission believes that the risk of 

evasion of U.S. laws and the potential 

systemic risk associated with uncleared 

inter-affiliate swaps involving foreign 

affiliates necessitates that the interaffiliate exemption include the 

treatment of outward-facing swaps 

condition. 

The treatment of outward-facing 

swaps condition that is being adopted as 

part of the inter-affiliate clearing 

exemption in this final release is aimed 

at addressing the potential risks 

associated with an eligible foreign 

affiliate’s swaps with non-affiliated 

counterparties. As modified, the final 

rule requires that, as a condition to the 

inter-affiliate exemption, each eligible 

affiliate counterparty must clear all 

swaps that it enters into with an 

unaffiliated counterparty to the extent 

that the swap is included in the 

Commission’s clearing requirement, i.e., 

in a class of swaps identified in § 50.4.68

In order to satisfy this requirement, 

eligible affiliate counterparties must 

clear their third-party swaps pursuant to 

the Commission’s clearing requirement 

or comply with the requirements for 

clearing the swap under a foreign 

jurisdiction’s clearing mandate that is 

comparable, and comprehensive but not 

necessarily identical, to the clearing 

requirement of section 2(h) of the Act 

and part 50 of the Commission’s 

regulations, as determined by the 

Commission. In addition, the 

Commission is modifying the interaffiliate exemption to allow for 

recognition of clearing exceptions and 

exemptions under the CEA and an 

exception or exemption under a foreign 

clearing mandate provided that the 

foreign jurisdiction’s clearing mandate 

is comparable, and comprehensive but 

not necessarily identical, to the clearing 

requirement of section 2(h) of the Act 

and part 50 and the foreign 

jurisdiction’s exception or exemption is 

comparable to an exception or 

exemption under the CEA or part 50, in 

each instance as determined by the 

Commission. 

For eligible affiliate counterparties 

that are not located in the U.S. or in a 

comparable foreign jurisdiction, as 

determined by the Commission, the rule 

permits such eligible affiliates to clear 

any outward-facing swap that is 

required to be cleared under § 50.4 

through a registered DCO or a clearing 

organization that is subject to 

supervision by appropriate government 

authorities in the home country of the 

clearing organization and has been 

assessed to be in compliance with the 

Principles for Financial Market 

Infrastructures (PFMIs).69

The Commission believes that this 

modified formulation of the treatment of 

outward-facing swaps condition being 

adopted as part of the final rule will 


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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 21763 

70See EMIR Article 13(1)–(3). The European 

Union has yet to make determinations as to whether 

third countries have equivalent requirements to 

EMIR. The European Commission (EC) has 

instructed the European Securities and Markets 

Authority (ESMA) to prepare possible 

implementing acts concerning the equivalence 

between the legal and supervisory frameworks of 

certain third countries and EMIR. Pursuant to the 

EC’s instructions, ESMA must make its 

determination regarding the United States’ clearing 

requirement by March 15, 2013. ‘‘Formal Request to 

ESMA for Technical Advice on Possible 

Implementing Acts Concerning Regulation 648/ 

2012 on OTC Derivatives, Central Counterparties 

and Trade Repositories (EMIR)’’ available at 

http://www.esma.europa.eu/system/files/formal_

request_for_technical_advice_on_equivalence.pdf. 

71See Clearing Requirement at 74319–21 

(discussing the compliance dates for the first 

clearing requirement determination). 72This assertion is no longer accurate. As 

discussed below, Japan has adopted a clearing 

mandate for certain interest rate swaps and CDS. 

73 ‘‘G20 Leaders Declaration Los Cabos Mexico’’ 

(June 18–19, 2012) at paragraph 39. According to 

the October 2012 Report of the Financial Stability 

Board (FSB), 10 out of the 19 members of the G– 

20 group have either proposed or adopted 

legislation and/or regulations to implement their 

clearing framework, as of the date of that release. 

FSB, OTC Derivatives Market Reforms: Fourth 

Progress Report on Implementation, Oct. 31, 2012 

at 74–77, available at https:// 

www.financialstabilityboard.org/publications/ 

r_121031a.pdf. 

more clearly establish the conditions to 

the exemption and alternative methods 

by which eligible affiliates may satisfy 

the requirements. 

Moreover, in finalizing the 

requirement that eligible affiliate 

counterparties clear their swaps with 

unaffiliated counterparties, the 

Commission considered the approach 

adopted in EMIR. Articles 3, 4, and 13 

of EMIR generally exempt from clearing 

OTC derivatives transactions between 

intragroup counterparties, where one 

counterparty is located in the European 

Union and the other counterparty is 

located outside the European Union, 

provided that, among other things, the 

European Commission determines that 

the foreign counterparty is established 

in a country with ‘‘equivalent’’ 

requirements to EMIR.70 By requiring 

that a foreign counterparty to an 

intragroup transaction be located in a 

country with equivalent requirements to 

EMIR, including clearing, any thirdparty swaps entered into by either the 

European Union counterparty or the 

non-European Union counterparty 

would be subject to a clearing 

requirement under EMIR or one that is 

equivalent to that required under EMIR, 

respectively. 

In addition to the modifications to the 

treatment of outward-facing swaps 

condition described above, the 

Commission also is providing a 

transition period with alternative 

compliance frameworks, in response to 

concerns raised by commenters 

pertaining to the timing and sequencing 

of the implementation of the interaffiliate exemption, which are discussed 

below. 

2. Time-limited Alternative Compliance 

Frameworks 

A number of commenters expressed 

concern with respect to the ‘‘comparable 

and comprehensive’’ requirement of the 

proposed rule. Several commenters 

expressed concern with respect to the 

timing and sequencing of the 

Commission’s comparability 

determination in relation to the 

expected compliance date for the initial 

clearing requirement under section 2(h) 

of the Act.71 These commenters noted 

that the comparability requirement is 

dependent upon the adoption of 

clearing regimes by other jurisdictions, 

and that because the U.S. clearing 

requirement is likely to take effect in 

advance of other jurisdictions adopting 

or finalizing their clearing regimes, nonU.S. affiliates effectively will not be able 

to rely on the inter-affiliate exemption 

from clearing when the Commission’s 

initial clearing requirement takes effect. 

Significantly, ISDA & SIFMA 

commented that the cross-border 

condition may prove to be unnecessary 

because it is expected that the major 

financial jurisdictions will implement 

their own clearing regimes. However, 

ISDA & SIFMA and CDEU noted that 

questions of timing and criteria for 

comparability render the proposed 

treatment of outward-facing swaps 

condition problematic, and that unless 

the condition is satisfactorily resolved, 

the condition could hamper the ability 

of U.S.-based groups to compete in 

foreign markets. ISDA & SIFMA further 

commented that if the Commission 

retains the cross-border requirements, 

the Commission should provide an 

appropriate transition period in order to 

allow foreign jurisdictions to implement 

their own G–20 mandates. 

The Working Group commented that 

because no other jurisdiction has a 

comparable clearing requirement,72 the 

proposed rule would impose an 

obligation on almost all non-U.S. 

persons to comply with the U.S. 

clearing requirement in the event such 

entities wanted to engage in a nonhedge swap that was subject to 

mandatory clearing with a U.S. person 

affiliate. The Working Group claimed 

that this limitation would render the 

exemption unusable and questioned the 

public policy benefit of extending the 

clearing requirement in such instances. 

The Working Group further commented 

that the proposed rule represents a 

broad extension of U.S. law by, in effect, 

imposing the clearing requirement 

under section 2(h)(1)(A) on non-U.S. 

persons that enter into swaps with U.S. 

person affiliates in order to satisfy the 

conditions of the inter-affiliate 

exemption. AFR supported the 

comparability condition and suggested 

that the Commission should grant the 

inter-affiliate exemption only with 

respect to foreign affiliate swaps once 

foreign jurisdictions finalize and 

implement their own clearing 

requirements. 

The Commission recognizes 

commenters’ concerns pertaining to the 

timing and sequencing of the interaffiliate exemption in light of the 

Commission’s clearing requirement, and 

in view of the ongoing progress of other 

jurisdictions to adopt and implement 

their respective clearing regimes. 

Accordingly, the Commission has 

determined to modify the proposed rule, 

as described in this release. 

As an initial matter, and informed in 

large part by the reports of relevant 

international organizations and ongoing 

dialogue with international regulators, 

the Commission believes that many 

jurisdictions have made significant 

progress in implementing their clearing 

regimes. It is the Commission’s 

understanding that the G–20 Leaders 

reaffirmed their commitment that all 

standardized OTC derivatives should be 

cleared through central counterparties 

by end-2012.73 Importantly, the majority 

of G–20 members with major financial 

markets have been preparing for 

mandatory clearing, and significant 

steps towards further implementation 

have been taken by the United States, 

Japan, Singapore, and the European 

Union. In Japan, for example, the 

Japanese Financial Services Authority 

(JFSA) cabinet office ordinance 

regarding central counterparties and 

trade repositories which, among other 

things, subjects certain transactions to 

mandatory central clearing, became 

effective on November 1, 2012. The 

JFSA initially requires certain financial 

institutions to clear yen-denominated 

interest rate swaps that reference YenLIBOR, and CDS based on the Japanese 

iTraxx indices at a licensed CCP. 

On November 15, 2012, the Singapore 

Parliament passed the Securities and 

Futures (Amendment) Bill 2012 to 

amend the Singapore Securities and 

Futures Act (SFA). This bill puts in 

place the regulatory regime for OTC 

derivatives in Singapore. This 

legislation institutes mandatory 

reporting and clearing requirements for 

financial entities and large non-financial 

entities. The Monetary Authority of 


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21764 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

74See http://ec.europa.eu/internal_market/ 

financial-markets/derivatives/index_en.htm. 

75While the time-limited alternative compliance 

framework of § 50.52(b)(4)(ii) is limited to 

jurisdictions that currently have the legal authority 

to adopt mandatory clearing regimes, any 

jurisdiction that later adopts a mandatory clearing 

regime will be eligible for a comparability 

determination for purposes of this rule. 

76For purposes of meeting the requirements of 

§ 50.52(b)(4)(ii)(B)(1) until March 11, 2014, the 

holding company (i.e., the ultimate parent of the 

corporate group) may not be considered to be a 

‘‘financial entity,’’ as defined in section 2(h)(7)(C)(i) 

of the CEA, under certain circumstances. The 

holding company must be able to identify all 

affiliates that meet the requirements of § 50.52(a). 

Of those identified affiliates, a predominant number 

must qualify for the end-user exception under 

§ 50.50. If a predominant number of the affiliates 

meeting the requirements of § 50.52(a) qualify for 

the end-user exception under § 50.50, then the 

holding company may treat the activities of all of 

its affiliates meeting the requirements of § 50.52(a) 

as if the holding company was engaged directly in 

such activities and consider such affiliates’ 

activities on a cumulative basis with the holding 

company’s other activities when assessing whether 

the holding company is ‘‘predominantly engaged in 

activities that are in the business of banking, or in 

activities that are financial in nature, as defined in 

section 4(k) of the Bank Holding Company Act of 

1956’’ under section 2(h)(7)(C)(i)(VIII) of the CEA. 

In effect, the holding company may ‘‘look through’’ 

its investment in affiliates to all of the activities of 

the affiliates meeting the requirements of § 50.52(a). 

Accordingly, the activities of affiliates meeting the 

requirements of § 50.52(a) that are not in the 

business of banking or financial in nature, as 

defined in section 4(k) of the Bank Holding 

Company Act of 1956, would be attributed to the 

holding company. Conversely, if the affiliates 

meeting the requirements of § 50.52(a) are engaged 

in activities that are in the business of banking or 

of a financial nature, then those activities would be 

attributed to the holding company for purposes of 

determining whether the holding company is a 

financial entity for purposes of meeting the 

requirements of § 50.52(b)(4)(ii)(B)(1). 

Singapore is deliberating how to 

implement these legislative 

requirements and is expected to issue 

further consultation in 2013. 

In the European Union, EMIR entered 

into force on August 16, 2012, and 

requires the clearing of all OTC 

derivatives subject to the clearing 

obligation. Clearing determinations are 

made at the initiative of the national 

authorities or the European Securities 

and Markets Authority (ESMA). Within 

six months of ESMA receiving 

notification by a national authority that 

a central counterparty has been 

authorized to clear a class of OTC 

derivatives, ESMA must determine 

whether that the class of OTC 

derivatives should be subject to the 

clearing obligation. At its own initiative, 

ESMA can also identify classes of OTC 

derivatives that should be subject to the 

clearing obligation. Additional details 

regarding the specific manner in which 

clearing determinations will be made 

have been set forth in implementing 

regulations adopted by the European 

Commission on December 19, 2012.74

As evidenced by the progress of these 

jurisdictions, and others that host major 

financial markets across the world in 

implementing their clearing 

frameworks, the Commission agrees 

with ISDA & SIFMA that the 

comparability requirement of the interaffiliate exemption is unlikely to pose a 

significant impediment to the use of the 

inter-affiliate exemption by most foreign 

affiliates because it is expected that the 

major financial jurisdictions will 

implement their own mandatory 

clearing regimes. Notwithstanding the 

progress of other jurisdictions to 

implement their clearing regimes, as 

discussed above, the Commission is 

mindful of commenters’ concerns that 

the compliance timeframe for the 

clearing requirement in the U.S. is likely 

to precede the adoption and/or 

implementation of the clearing regimes 

of most other jurisdictions. 

Accordingly, the Commission believes 

that it is important to provide for a 

transition period for foreign regimes to 

implement their clearing mandates to 

bring swaps into clearing. For certain 

eligible affiliate counterparties located 

in jurisdictions that have adopted swap 

clearing regimes and are currently in the 

process of implementation, namely 

Japan, the European Union, and 

Singapore, the Commission is modifying 

the proposed rule to allow for a 

transition period of one year from the 

first compliance date of the U.S. 

clearing mandate, until March 11, 2014, 

for those foreign jurisdictions that are 

working to implement their mandatory 

clearing regimes.75 The Commission 

believes that a transition period of 12 

months after required clearing began in 

the U.S. is appropriate given its 

understanding of the progress being 

made on mandatory clearing in the 

specified foreign jurisdictions. 

Regulation 50.52(b)(4)(ii)(A) provides 

that during that one-year period, 

affiliates domiciled in such foreign 

jurisdictions can satisfy the 

requirements of § 50.52(b)(4)(i) through 

the following: (i) Each eligible affiliate 

counterparty, or a majority-interest 

holder on behalf of both eligible affiliate 

counterparties, pays and collects full 

variation margin daily on all its swaps 

with unaffiliated counterparties; or (ii) 

each eligible affiliate counterparty, or a 

majority-interest holder on behalf of 

both eligible affiliate counterparties, 

pays and collects full variation margin 

daily on all its swaps with other eligible 

affiliate counterparties. 

Moreover, the Commission has 

determined to provide further timelimited relief for certain eligible 

affiliated counterparties located in the 

European Union, Japan, or Singapore 

from complying with the requirements 

of § 50.52(b)(4)(i) (or (b)(4)(ii)(A)) as a 

condition of electing the inter-affiliate 

exemption. In particular, 

§ 50.52(b)(4)(ii)(B) provides that if one 

of the eligible affiliate counterparties is 

located in the European Union, Japan, 

or Singapore, the requirements of 

paragraph (b)(4)(i) will not apply to 

such eligible affiliate counterparty until 

March 11, 2014, provided that two 

conditions are met. The first condition 

provides that the one counterparty that 

directly or indirectly holds a majority 

ownership interest in the other 

counterparty or the third party that 

directly or indirectly holds a majority 

ownership interest in both 

counterparties is not a ‘‘financial entity’’ 

as defined in section 2(h)(7)(C)(i) of the 

Act.76 The second condition requires 

that neither eligible affiliate 

counterparty is affiliated with an entity 

that is an SD or MSP, as defined in § 1.3. 

This condition essentially requires that 

the eligible affiliate counterparties are 

not part of a corporate group with a 

member affiliate that is an SD or MSP. 

Accordingly, eligible affiliate 

counterparties that are located in 

European Union, Japan, or Singapore 

and meet these two conditions, are 

exempt from the requirements of 

§ 50.52(b)(4)(i) until March 11, 2014. 

The Commission believes that providing 

the time-limited exemption in 

§ 50.52(b)(4)(ii)(B) to the specific 

entities described above is consistent 

with comments requesting that the 

exchange of variation margin 

requirement, to the extent retained, be 

limited to SDs and MSPs. Specifically, 

ISDA & SIFMA noted in their comments 

that the scope of the Commission’s 

regulatory concern should be limited to 

SDs and MSPs, and that the regulatory 

regime applicable to SDs already 

contained applicable safeguards, 

including variation margin 

requirements. Similarly, CDEU 

commented that any variation margin 

requirements be limited to SDs and 

MSPs. 

For eligible affiliate counterparties 

that are located in jurisdictions other 

than the European Union, Japan or 

Singapore, the Commission also is 

providing another time-limited 

alternative compliance framework for 

meeting the requirements of 

§ 50.52(b)(4)(i). Specifically, 

§ 50.52(b)(4)(iii) provides that if an 

eligible affiliate counterparty located in 

the United States enters into swaps (that 

are included in a class of swaps 

identified in § 50.4), with eligible 


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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 21765 

77As described in the NPRM, variation margin 

entails marking open positions to their current 

market value each day and transferring funds 

between the parties to reflect any change in value 

since the previous time the positions were marked. 

This process prevents uncollateralized exposures 

from accumulating over time and thereby reduces 

the size of any loss resulting from a default should 

one occur. NPRM at 50429. 

78The Commission believes that the use of an 

international standard that is substantially similar, 

though not identical, to the requirements under part 

39 imposed upon DCOs registered with the 

Commission is appropriate for purposes of the 

condition. The PFMIs were developed with broad 

participation and comment from entities from 

multiple nations and have been approved by both 

IOSCO’s Technical Committee and the CPSS. The 

Commission further notes that eligible affiliate 

counterparties that are not located in the U.S. or in 

a comparable and comprehensive jurisdiction must 

comply with the requirements of § 50.52(b)(4)(i)(E). 

However, if such entities prefer to clear their swaps 

pursuant to the clearing requirement regime in the 

U.S. or in a jurisdiction that the Commission has 

determined to have a comparable clearing 

requirement, they also may comply with one of the 

conditions in § 50.52(b)(4)(i)(A) or (b)(4)(i)(B). 

affiliate counterparties located in 

jurisdictions other than the United 

States, the European Union, Japan, and 

Singapore, and the aggregate notional 

value of such swaps, which are 

included in a class of swaps identified 

in § 50.4 does not exceed five percent of 

the aggregate notional value of all 

swaps, which are included in a class of 

swaps identified in § 50.4, in each 

instance the notional value as measured 

in U.S. dollar equivalents and 

calculated for each calendar quarter, 

held by the eligible affiliate 

counterparty located in the United 

States, then such swaps shall be deemed 

to satisfy the requirements of paragraph 

(b)(4)(i) until March 11, 2014, provided 

that: (A) Each eligible affiliate 

counterparty, or a third party that 

directly or indirectly holds a majority 

interest in both eligible affiliate 

counterparties, pays and collects full 

variation margin daily on all swaps 

entered into between the eligible 

affiliate counterparties located in 

jurisdictions other than the United 

States, the European Union, Japan, and 

Singapore and an unaffiliated 

counterparty; or (B) each eligible 

affiliate counterparty, or a third party 

that directly or indirectly holds a 

majority interest in both eligible affiliate 

counterparties, pays and collects full 

variation margin daily on all of the 

eligible affiliate counterparties’ swaps 

with the other eligible affiliate 

counterparties. 

The options provided under the two 

alternative compliance frameworks 

described above are intended to mitigate 

the risk associated with uncleared thirdparty swaps. The payment and 

collection of variation margin is a vital 

component of the clearing process. As 

the Commission noted in the NPRM, 

variation margin is an essential riskmanagement tool that serves both as a 

check on risk-taking that might exceed 

a party’s financial capacity and as a 

limitation on losses when there is a 

failure.77 In addition to the riskmanagement benefits of variation 

margin, certain commenters expressed 

support for the inclusion of variation 

margin as a condition of the interaffiliate exemption, and thus, the 

inclusion of variation margin within the 

alternative compliance frameworks is 

consistent with those comments. The 

Commission further clarifies that 

eligible affiliate counterparties that are 

eligible to comply with the alternative 

compliance frameworks in 

§ 50.52(b)(4)(ii) or § 50.52(b)(4)(iii) and 

choose to pay and collect variation 

margin daily on either all of their interaffiliate swaps or all of their third party 

swaps, will have flexibility in tailoring 

their daily variation margin 

arrangements, including with respect to 

establishing appropriate prices for 

purposes of marking to market and 

threshold levels at which margin will be 

settled. 

Notwithstanding the alternative 

compliance frameworks, the 

Commission encourages all eligible 

affiliate counterparties to clear their 

outward-facing swaps on a voluntary 

basis in order to best mitigate the risks 

associated with those swaps. The 

Commission notes that in lieu of 

complying with the alternative 

compliance frameworks through March 

11, 2014, eligible affiliate counterparties 

also may satisfy the outward-facing 

swap condition by complying with 

§ 50.52(b)(4)(ii)(E) by clearing their 

third-party swaps through a registered 

DCO or a clearing organization that is 

subject to supervision by the 

appropriate government authorities in 

the home country of the clearing 

organization and has been assessed to be 

in compliance with the PFMIs. 

The Commission believes that the 

alternative compliance framework 

adopted in this release addresses 

commenters’ concerns pertaining to the 

timing and sequencing of the interaffiliate exemption and the effective 

date of the Commission’s initial clearing 

determination, and incorporates ISDA & 

SIFMA’s recommendation to provide an 

appropriate transition period for foreign 

jurisdictions to implement their clearing 

regimes. 

In response to The Working Group, 

the Commission notes that the treatment 

of outward-facing swaps condition is 

needed to protect U.S. financial markets 

and to prevent evasion of the clearing 

requirement. The modified condition 

requires that eligible affiliate 

counterparties, whether domiciled in 

the U.S. or in a foreign jurisdiction, that 

elect the inter-affiliate exemption must 

clear their outward-facing swaps, if such 

swaps fall within a class identified in 

§ 50.4, or satisfy one the provisions in 

the alternative compliance frameworks, 

as applicable, until March 11, 2014. The 

alternative compliance frameworks are a 

direct response to concerns raised by 

The Working Group, and other 

commenters, regarding providing other 

jurisdictions with sufficient time to 

implement their clearing regimes. The 

alternative compliance framework 

provides eligible affiliates that elect the 

inter-affiliate exemption with other 

options, in addition to clearing, for 

managing the risks associated with their 

outward-facing swaps. In response to 

concerns that foreign-domiciled eligible 

affiliates would not be able to enter into 

uncleared non-hedge swaps with third 

parties that are foreign-domiciled end 

users, the Commission notes that it 

would take into consideration any 

comparable exceptions or exemptions 

granted under a comparable foreign 

jurisdiction’s clearing regime. 

In response to The Working Group’s 

statement that the treatment of outwardfacing swap condition expands the 

cross-border application of the clearing 

requirement to cover swaps between 

U.S. persons and non-U.S. persons, the 

Commission observes that U.S. persons 

are subject to the CEA’s clearing 

requirement and part 50 of the 

Commission’s regulations. Furthermore, 

the Commission notes that the final rule 

would permit eligible affiliate 

counterparties that are not located in the 

U.S. or in a comparable and 

comprehensive jurisdiction, to elect the 

inter-affiliate exemption provided that 

they clear any outward-facing swaps 

that are required to be cleared under 

§ 50.4, through a registered DCO or a 

clearing organization that is subject to 

supervision by appropriate government 

authorities in the home country of the 

clearing organization and has been 

assessed to be in compliance with the 

PFMIs.78

Although the Commission believes 

that the alternative frameworks 

described above are necessary in the 

circumstances described, these 

alternatives are not equivalent to 

clearing and would not mitigate 

potential losses between swap 

counterparties in the same manner that 

clearing would. Thus, notwithstanding 

the alternative compliance frameworks, 

the Commission believes that the 

requirement that eligible affiliates clear 


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21766 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

79CDEU claimed that end users would be 

adversely impacted by the increased costs for riskmitigating transactions between affiliates, and noted 

that the Dodd-Frank Act did not contemplate 

regulation of end-user transactions in the same 

manner as SD and MSP transactions. 

80According to The Working Group, the proposed 

rule, for instance, would require certain non-U.S. 

persons to enter into an agreement with a futures 

commission merchant (FCM), and to enter into a 

commercial relationship in the U.S. including 

posting capital in U.S. markets that would subject 

such entities to U.S. bankruptcy law. 

81Proposed Cross-Border Interpretive Guidance at 

41232–35. 

82The Proposed Cross-Border Interpretive 

Guidance identified transaction-level requirements 

to include mandatory clearing and swap processing, 

margining, segregation, trade execution, swap 

trading documentation, portfolio reconciliation and 

compression, real time public reporting, trade 

confirmation, and daily trading records 

requirements. The Proposed Cross-Border 

Interpretive Guidance proposed to allow substituted 

compliance with respect to transaction level 

requirements for swaps between a non-U.S. SD or 

non-U.S. MSP with a non-U.S. person that is 

guaranteed by a U.S. person, as well as swaps with 

non-U.S. affiliate conduits. See Proposed CrossBorder Interpretive Guidance at 41230. 

swaps entered into with non-affiliated 

counterparties is the most appropriate 

method in which to prevent evasion of 

the clearing requirement and to help 

protect U.S. financial markets, and 

encourages market participants to do so. 

As noted above, incorporated within the 

requirement that eligible affiliate 

counterparties clear their outwardfacing swaps is the option to comply 

with the requirements of a foreign 

jurisdiction’s clearing mandate for the 

outward-facing swaps, including any 

comparable exception or exemption 

granted under the foreign clearing 

mandate, provided that such foreign 

jurisdiction’s clearing mandate is 

determined by the Commission to be 

comparable, and comprehensive but not 

necessarily identical, to the clearing 

requirement established under the CEA, 

and the exception or exemption is 

determined by the Commission to be 

comparable to an exception or 

exemption provided under the CEA or 

part 50. 

In the next section of the release, the 

Commission describes the specific 

comments raised with respect to the 

proposed ‘‘comparable and 

comprehensive’’ standard and provides 

a discussion of the its consideration of 

these comments, as well as an 

explanation of the Commission’s 

anticipated process for reviewing and 

issuing comparability determinations in 

the context of the inter-affiliate 

exemption from clearing. 

3. Application of the Comparable and 

Comprehensive Standard to Mandatory 

Clearing 

Commenters raised questions as to the 

criteria the Commission would consider 

in rendering a comparability 

determination. ISDA & SIFMA 

requested that the Commission clarify 

that ‘‘comparability’’ does not mean that 

the host country must have the ‘‘same’’ 

requirement. CDEU questioned what 

specific criteria the Commission would 

consider in making a comparability 

finding. CDEU recommended that the 

Commission limit the applicability of 

the comparability requirement to SDs 

and MSPs, and claimed that extending 

the condition to end-users would 

disproportionately impact end-users 

that have global operations, particularly 

in emerging markets.79 CDEU further 

suggested that the Commission extend 

the inter-affiliate exemption to non-U.S. 

affiliates that enter into 20 or less thirdparty swaps per month. The Working 

Group noted that many commercial 

energy firms have operations in foreign 

jurisdictions that have less 

commercially robust financial markets 

than those in the U.S., and that the 

treatment of outward-facing swaps 

condition may place significant 

limitations on the ability of commercial 

enterprises to hedge risk associated with 

such operations, thereby resulting in 

higher cost of doing business in the 

foreign country or decreasing the 

business activity of the U.S. company in 

the foreign jurisdiction. The Working 

Group further commented that the 

proposed rule extends the reach of U.S. 

law on non-U.S. persons ‘‘far beyond’’ 

the immediate clearing requirement.80

AFR suggested that the final rule 

should specifically state that the 

‘‘comparable and comprehensive’’ 

requirement must apply to each 

‘‘specific type of swap’’ being 

considered for the exemption. AFR 

further stated that the Commission 

should provide a detailed comparability 

procedure, such as the procedure 

described in the proposed cross-border 

guidance. MetLife also suggested that 

rather than broadly prohibiting non-U.S. 

affiliates (that are not located in a 

comparable jurisdiction) from entering 

into any third-party swaps as a 

condition of the inter-affiliate 

exemption, the Commission should 

narrow the prohibition in the proposed 

rule to prohibit non-U.S. affiliates (that 

are not located in a comparable 

jurisdiction) from entering into ‘‘similar 

swaps of the same product type’’ with 

unaffiliated third parties. 

As described above, a number of 

commenters requested further 

clarification on how the Commission 

will apply the ‘‘comparable and 

comprehensive’’ standard in the context 

of the mandatory clearing. The 

comparability requirement originally 

was discussed in the Commission’s 

Proposed Cross-Border Interpretive 

Guidance. Drawing on its experience in 

exempting foreign brokers from certain 

registrations requirements under its rule 

30.10 ‘‘comparability’’ determinations, 

the Commission proposed the 

‘‘comparable and comprehensive’’ 

concept in the Proposed Cross-Border 

Interpretive Guidance 81 in order to 

permit certain classes of non-U.S. 

registrants to substitute compliance 

with the requirements of its home 

jurisdiction’s law and regulations, in 

lieu of compliance with the CEA and 

the Commission’s regulations, if the 

Commission finds that the relevant 

jurisdiction’s laws and regulations are 

comparable to the relevant requirements 

of the CEA and Commission 

regulations.82

In the Proposed Cross-Border 

Interpretive Guidance, the Commission, 

in describing its intended approach to 

making comparability determinations, 

noted that similar to its policy with 

respect to rule 30.10, the Commission 

would retain broad discretion to 

determine that the objectives of any 

program elements are met, 

notwithstanding the fact that the foreign 

requirements may not be identical to 

that of the Commission. 

i. Comparability of Foreign Clearing 

Mandate 

In response to comments seeking 

additional clarity around the 

Commission’s comparability 

determination process, the Commission 

clarifies that it will review the 

comparability and comprehensiveness 

of a foreign jurisdiction’s clearing 

mandate under § 50.52(b)(4)(i)(B) by 

reviewing: (i) The foreign jurisdiction’s 

laws and regulations with respect to its 

mandatory clearing regime (i.e., 

jurisdiction-specific review), and (ii) the 

foreign jurisdiction’s clearing 

determinations with respect to each 

class of swaps for which the 

Commission has issued a clearing 

determination under § 50.4 of the 

Commission’s regulations (i.e., productspecific review). 

As noted above, and in response to 

ISDA & SIFMA, the Commission 

reiterates that for purposes of the 

treatment of outward-facing swaps 

condition of the inter-affiliate 

exemption, comparability findings with 

respect to a foreign jurisdiction’s 

clearing regime will not require an 

identical regime to the clearing 

framework established under the Act 

and Commission regulations. Rather, the 

Commission anticipates that it will 


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83See NPRM at 50432. 84 15 U.S.C. 78l. 

85The proposed requirements under regulations 

implementing section 2(j) mirror the requirements 

that the Commission finalized in its end-user 

exception rulemaking, End-User Exception to the 

Clearing Requirement for Swaps, 77 FR 42560. 

make jurisdiction-specific comparability 

determinations by comparing the 

regulatory requirements of a foreign 

jurisdiction’s clearing regime with the 

requirements and objectives of the 

Dodd-Frank Act. Notably, the 

Commission anticipates that the 

product-specific comparability 

determination will necessarily be made 

on the basis of whether the applicable 

swap is included in a class of swaps 

covered under § 50.4, and if so, whether 

such swap or class of swaps is covered 

under the foreign jurisdiction’s clearing 

mandate. 

ii. Comparability of Exemption or 

Exception Under Foreign Clearing 

Regime 

With respect to determining whether 

an exemption or exception under a 

comparable foreign clearing mandate is 

comparable to an exception or 

exemption under the CEA or part 50, as 

provided under § 50.52(b)(4)(i)(D), the 

Commission anticipates that it would 

review for comparability purposes the 

foreign jurisdiction’s laws and 

regulations with respect to its 

mandatory clearing regime, as well as 

the relevant exception or exemption. In 

doing so, the Commission would 

exercise broad discretion to determine 

whether the requirements and objectives 

of such exemption or exception are 

consistent with those under the DoddFrank Act and that such objectives are 

being met, notwithstanding the fact that 

the exemption or exception from 

clearing under the comparable foreign 

clearing regime may not be identical to 

those established under the Act or the 

Commission’s regulations. Accordingly, 

the Commission anticipates that 

comparability determinations with 

respect to a foreign jurisdiction’s 

exemption or exception from mandatory 

clearing could be made at either the 

entity level, or the transaction type, as 

appropriate. 

iii. Responses to Additional Comments 

In response to comments seeking 

clarification on what will trigger a 

Commission comparability 

determination, the Commission 

anticipates that it will render 

jurisdiction-specific and productspecific comparability determinations 

upon the adoption of clearing regimes 

by foreign jurisdictions for classes of 

swaps covered under § 50.4, upon the 

request of a counterparty that is located 

in a foreign jurisdiction, or upon receipt 

of a request from another appropriate 

party. 

The Commission further anticipates 

that once a comparability determination 

is made with respect to the foreign 

jurisdiction’s clearing regime, and with 

regard to a particular class of swaps 

covered under § 50.4, eligible affiliates 

domiciled in such jurisdiction may rely 

on such determinations for swaps 

included within the applicable class, 

without further Commission action. To 

the extent that the Commission 

proposes a change to its regulations 

governing the clearing requirement 

generally or with respect to any 

particular product class, the 

Commission will reevaluate whether the 

proposed regulatory change would 

affect the basis upon which the 

Commission made the comparability 

determination. To the extent that there 

are discrepancies in the requirements 

between the foreign jurisdiction and the 

Commission’s proposed regulatory 

change, the Commission anticipates that 

it would issue additional guidance or 

notifications to market participants to 

determine how affected entities can 

address any discrepancy in 

requirements. 

The Commission declines to limit the 

condition that eligible affiliates clear 

their outward-facing swaps to SDs and 

MSPs, as suggested by CDEU. As 

explained throughout this release, the 

Commission believes that the 

requirements of § 50.52(b)(4) are 

necessary to prevent evasion of the 

clearing requirement and to protect U.S. 

financial markets. Moreover, the 

requirements of section 2(h)(1)(A) apply 

to all market participants not able to 

elect an exception under section 2(h)(7) 

of the CEA, not just to SDs and MSPs. 

The Commission believes that the 

modified rule and time-limited 

alternative compliance frameworks 

adopted in the final rule will provide 

end users, amongst others, with 

substantial flexibility to comply with 

the conditions of the exemption. 

Furthermore, the Commission notes that 

end users also may elect the end-user 

exception from clearing for hedging 

transactions that comply with the 

requirements of the CEA and § 50.50. 

For the reasons described in this 

release, the Commission is adopting in 

§ 50.52(b) the conditions to the interaffiliate exemption, initially proposed as 

§ 39.6(g)(2)(v), pertaining to swaps 

entered into with unaffiliated 

counterparties, with the modifications 

described above. 

H. Reporting Requirement and Annual 

Election 

In the NPRM, the Commission 

explained that general reporting 

requirements under sections 2(a)(13) 

and 4r of the CEA and part 45 apply to 

uncleared inter-affiliate swaps.83 In 

addition, the proposed regulations 

require the reporting counterparty to 

provide, or cause to be provided, to a 

registered SDR, or if no registered SDR 

is available, to the Commission, certain 

additional information. Proposed 

§ 39.6(g)(4)(i) requires the reporting 

counterparty to confirm that both 

counterparties to the inter-affiliate swap 

are electing not to clear the swap and 

that both counterparties meet the 

requirements in proposed § 39.6(g)(1)– 

(2). Proposed § 39.6(g)(4)(ii) requires the 

reporting counterparty to submit 

information regarding how the financial 

obligations of both counterparties are 

generally satisfied with respect to 

uncleared swaps. Proposed 

§ 39.6(g)(4)(iii) implements section 2(j) 

of the CEA for purposes of the interaffiliate exemption. Section 2(j) of the 

CEA applies to an issuer of securities 

registered under section 12 of the 

Securities Exchange Act of 1934 

(Exchange Act) 84 or an entity required 

to file reports under Exchange Act 

section 15(g) (‘‘electing SEC Filers’’) that 

elects an exemption from the CEA’s 

clearing requirement under section 

2(h)(1)(A) of the CEA. Section 2(j) 

requires that an appropriate committee 

of the electing SEC Filer’s board or 

governing body review and approve its 

decision to enter into swaps subject to 

an exemption clearing. Proposed 

§ 39.6(g)(4)(iii)(A) requires an electing 

SEC Filer to notify the Commission of 

its SEC Filer status by submitting its 

SEC Central Index Key number. In 

addition, proposed § 39.6(g)(4)(iii)(B) 

requires the counterparty to report 

whether an appropriate committee of its 

board of directors (or equivalent 

governing body) has reviewed and 

approved the decision to enter into the 

inter-affiliate swaps that are exempt 

from clearing.85

Lastly, proposed § 39.16(g)(5) permits 

a counterparty to provide information 

related to how it generally meets its 

financial obligations and information 

related to its status as an electing SEC 

Filer on an annual basis in anticipation 

of electing the inter-affiliate clearing 

exemption for one or more swaps. This 

election is effective for inter-affiliate 

swaps entered into within 365 days 

following the date of such reporting. 

During the 365-day period, the affiliate 

counterparty would be required to 

amend the information as necessary to 


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21768 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

86EEI cited to a statement in the NPRM’s 

consideration of costs and benefits as support for 

an argument that the Commission did not intend for 

part 45 reporting to apply to inter-affiliate swaps. 

See NPRM at 50433. The statement in the costbenefit consideration of the NPRM merely drew a 

comparison between the reporting requirements 

under the proposed exemption and the general 

reporting requirements under parts 45 and 46, and 

those reporting requirements applicable to SDs and 

MSPs under part 23. The statement should not be 

read as calling into question the applicability of 

part 45 to inter-affiliate swaps. 

87Cravath stated that the Commission has 

determined that part 43 reporting does not apply to 

inter-affiliate swaps. 

88According to its comment letter, DLA Piper’s 

comments are limited to corporate end-users who 

enter into intercompany hedging transactions. 

89See 17 CFR part 45; 17 CFR 45.2 (recordkeeping 

obligations); Swap Data Recordkeeping and 

Reporting Requirements, 77 FR 2136 (Jan. 13, 2012); 

17 CFR part 46; Swap Data Recordkeeping and 

Reporting: Pre-Enactment and Transition Swaps, 77 

FR 35200 (June 12, 2012). 

90As described in the part 46 rules, historical 

swaps include pre-enactment swaps, that is, swaps 

still in existence after the date of enactment of the 

Dodd-Frank Act, and transition swaps, that is, 

swaps entered into on or after the date of enactment 

but before the compliance date specified in part 45 

and other no-action or regulatory guidance issued 

by the Commission or one of the Commission’s 

divisions or offices. 

91These reporting obligations may be subject to 

no-action or other regulatory guidance issued by the 

Commission or any of the Commission’s divisions 

or offices. See www.cftc.gov for a complete list of 

the staff no-action letters, Frequently Asked 

Questions, and other regulatory guidance. 

92See End-User Exception to the Clearing 

Requirement for Swaps, 77 FR 42567 (‘‘Congress 

did not exempt such inter-affiliate swaps from the 

reporting requirements’’ and ‘‘inter-affiliate swaps 

must be reported’’). 

93NPRM at 50432 (noting that section 4r applies 

to uncleared swaps and that counterparties must 

comply with proposed rule 39.6(g)(4) ‘‘[i]n addition 

to any general reporting requirements applicable 

under other applicable rules’’). 

94 In addition, under part 45 non-SDs and MSPs 

must keep ‘‘full, complete, and systematic records, 

together with all pertinent data and memoranda, 

with respect to each swap in which they are a 

counterparty.’’ 17 CFR 45.2(b). These recordkeeping 

obligations applied to inter-affiliate swaps as early 

as October 14, 2010. See Interim Final Rule for 

Reporting Pre-Enactment Swap Transactions, 75 FR 

63090 (Oct. 14, 2010). Thus, as of the date of this 

release, swap counterparties already have an 

obligation to maintain swap records that has existed 

for more than two years. 

95See 17 CFR 43.2 (defining ‘‘publicly reportable 

swap transaction’’ as an executed swap that is an 

arm’s length transaction between two parties that 

results in a change in the market risk position 

between the two parties and citing ‘‘internal swaps 

between one-hundred percent owned subsidiaries 

of the same parent entity’’ as an example of a swap 

that does not meet the definition); see also RealTime Public Reporting of Swap Transaction Data, 

77 FR 1182, 1187 (Jan. 9, 2012) (discussing the realtime public reporting of inter-affiliate swaps). 

96The Commission is modifying the proposed 

reporting requirements relating to section 2(j) of the 

CEA to make them consistent with the approach 

adopted in the end-user exception to required 

clearing. As finalized, under § 50.52(c)(3)(ii), the 

committee of the board of directors (or equivalent 

body) of the eligible affiliate counterparty must 

have ‘‘reviewed and approved the decision to enter 

into swaps that are exempt from the requirements 

of sections 2(h)(1) and 2(h)(8) of the Act.’’ 

reflect any material changes to the 

reported information. Under the 

proposal, confirmation that both 

counterparties are electing not to clear 

the swap and that they both satisfy the 

other requirements of the exemption 

would not be subject to an annual filing, 

but must be done on a swap-by-swap 

basis. 

The Commission received several 

comments in response to the reporting 

obligations of affiliates. Prudential and 

MetLife both commented that the 

Commission should clarify that only 

one counterparty is required to report 

the swap to an SDR. In addition, both 

Prudential and MetLife stated that 

annual reporting is more efficient than 

swap-by-swap reporting. 

EEI stated that the Commission 

should eliminate the transaction-bytransaction reporting requirement under 

proposed § 39.6(g)(4)(i) for the election 

of the exemption and confirmation that 

the conditions have the exemption have 

been met. Instead, EEI recommended 

that one of the affiliates be permitted to 

file an annual notice on behalf of both 

affiliates to exempt all of their swaps 

from clearing for an entire year. EEI 

contended that it will increase costs if 

both affiliates have to communicate that 

they elect not to clear the swap and 

meet the conditions of the exemption 

for each swap. EEI also stated that the 

Commission should state that part 45 

does not apply to inter-affiliate swaps 

because the Commission will be able to 

obtain information regarding an interaffiliate transaction based on reporting 

of a corresponding market-facing 

swap.86

CDEU also objected to reporting any 

information to an SDR on a trade-bytrade basis for inter-affiliate swaps as 

such reporting would be costly and 

onerous for parties. Instead, CDEU 

recommended that all reporting be done 

on an annual basis through a board 

resolution.87 CDEU also requested that 

part 45 data be reported on a quarterly 

basis for all inter-affiliate swaps 

between financial and non-financial end 

users, and that inter-affiliate swaps not 

be subject to historical swap reporting 

under part 46. Similarly, Cravath asked 

that the Commission ‘‘provide 

meaningful relief from the reporting 

requirements of Part 45 and Part 46.’’ 

DLA Piper commented that the 

regulatory reporting requirements are 

unnecessary for inter-affiliate swaps and 

should be eliminated.88 DLA Piper 

claimed that the reporting of both the 

outward-facing swap and the interaffiliate swap would increase systemic 

risk by distorting the risk to the 

financial system. DLA Piper also 

commented that the imposition of 

recordkeeping obligations with respect 

to inter-affiliate swaps would result in 

significant additional burdens on 

corporate groups. DLA Piper stated that 

inter-affiliate swaps should be expressly 

exempt from the part 45 and part 46 

reporting requirements. 

Under sections 2(a)(13) and 4r of the 

CEA, all swaps must be reported to an 

SDR (or the Commission if there is no 

available SDR) and are subject to 

comprehensive recordkeeping 

obligations.89 Reporting and 

recordkeeping obligations apply to both 

historical swaps 90 and those swaps 

executed after the applicable 

compliance date listed in part 45 of the 

Commission’s regulations.91 As 

indicated in the preamble to the final 

end-user exception 92 and the NPRM,93

parts 45 and 46 of the Commission’s 

regulations apply to inter-affiliate 

swaps.94 Whether an inter-affiliate swap 

is subject to the part 43 real-time 

reporting rules will depend on whether 

the transaction fits within the definition 

of a ‘‘publically reportable swap 

transaction.’’ 95

In response to commenters’ requests, 

the Commission is clarifying that the 

reporting obligations under 

§ 39.6(g)(2)(i) (now § 50.52(c)) can be 

fulfilled by one of the affiliate 

counterparties on behalf of both 

counterparties. The selection of which 

affiliate will be considered to be the 

reporting counterparty should be 

determined in accordance with the 

provisions of § 45.8 and, for part 43, the 

reporting party under § 43.3(a)(3). 

As noted in the NPRM, the 

Commission believes that affiliates 

within a corporate group may make 

independent determinations on whether 

to submit an inter-affiliate swap for 

clearing. Given the possibility that each 

affiliate may reach different conclusions 

regarding clearing the swap, 

§ 39.6(g)(2)(i) would require that both 

counterparties elect the proposed interaffiliate clearing exemption. The 

Commission is therefore adopting the 

electing requirement as proposed. 

With regard to comments 

recommending that all reporting be 

done on an annual basis rather than a 

swap-by-swap basis, the Commission 

declines to modify the rule. The 

Commission believes it is appropriate to 

provide for annual reporting of certain 

information, including how affiliates 

generally meet their financial 

obligations and information related to 

its status as an electing SEC Filer.96

However, it would not be appropriate to 

allow one annual report to cover both 


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97 If reports to the SDR were made on an annual 

basis, but included swap-by-swap information, 

regulators would not be able to monitor the 

transmission of risk through the market in a timely 

fashion. Regulators would have a one-year lag 

before such data could be used effectively for such 

purposes. If reports to the SDR were made on an 

annual basis and did not include swap-by-swap 

information, the regulators would be permanently 

hindered in their ability to monitor the swap 

markets. As noted above, inter-affiliate swaps and 

outward-facing swaps both transfer risk, but they do 

so in different ways and in differing degrees. 

Regulators must be able to distinguish between 

inter-affiliate swaps and outward-facing swaps in 

order to monitor markets effectively. If electing 

entities provided an annual statement that they are 

electing the exemption, and do not identify the 

individual swaps for which the exemption has been 

elected, the data would not allow regulators to 

distinguish between the two groups. 

98See End-User Exception to the Clearing 

Requirement for Swaps, 77 FR 42565–66. 

99 7 U.S.C. 19(a). 

100See section 2(h)(1) of the CEA, 7 U.S.C. 

2(h)(1). 

101When a bilateral swap is moved into clearing, 

the clearinghouse becomes the counterparty to each 

of the original participants in the swap. This 

standardizes counterparty risk for the original swap 

participants in that they each bear the same risk 

attributable to facing the clearinghouse as 

counterparty. In addition, clearing mitigates 

counterparty risk to the extent that the 

clearinghouse is a more creditworthy counterparty 

relative to those that each participant in the trade 

might have otherwise faced. Clearinghouses have 

demonstrated resilience in the face of past market 

stress. Most recently, they remained financially 

sound and effectively settled positions in the midst 

of turbulent events in 2007–2008 that threatened 

the financial health and stability of many other 

types of entities. 

102Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1). 

Section 4(c)(1) is discussed in greater detail above 

in Section II.A. 

103See Section II.A above. 

affiliate counterparties’ election of the 

exemption from clearing and the 

confirmation that both affiliates meet 

the conditions of the exemption because 

each affiliate is under an ongoing 

obligation to demonstrate its eligibility 

to claim the exemption and because 

effective regulatory monitoring requires 

an indication of the election on a swapby-swap basis.97 Accordingly, the 

election of the exemption and the 

confirmation that the exemption’s 

conditions are met must be made for 

each swap. The Commission does not 

believe that this reporting requirement 

will impose a significant burden on 

affiliate counterparties because, as 

discussed above, other detailed 

information for every swap must be 

reported under sections 2(a)(13) and 4r 

of the CEA and Commission regulations. 

This approach comports with the 

approach adopted for market 

participants claiming the end-user 

exception under section 2(h)(7) of the 

CEA.98

The Commission does not agree with 

EEI’s comment that the Commission 

will be able to obtain information on 

inter-affiliate swaps from the 

information reported on market-facing 

swaps, and disagrees with DLA Piper’s 

comment that reporting and 

recordkeeping obligations are 

unnecessary or would increase systemic 

risk. The reporting and recordkeeping 

requirements promote accountability 

and transparency, and will aid the 

Commission in monitoring compliance 

with the inter-affiliate exemption. 

Moreover, the Commission does not 

believe that the information relating to 

inter-affiliate swaps will necessarily be 

identical to market-facing swaps. Also, 

the Commission does not believe that all 

inter-affiliate swaps will match up to 

market-facing swaps because, as The 

Working Group commented, entities use 

inter-affiliate trades to transfer physical 

commodity or futures exposure between 

affiliates for compliance with 

international tax law, customs, or 

accounting laws. 

I. Implementation 

The clearing requirement under 

section 2(h)(1)(A) of the CEA and part 

50 of the Commission’s regulations shall 

not apply to a swap executed between 

affiliated counterparties that have the 

status of eligible affiliate counterparties, 

as defined in § 50.52(a), and elect not to 

clear such swap until the effective date 

of this rulemaking. The effective date of 

this rulemaking shall be 60 days after 

publication in the Federal Register. 

III. Cost-Benefit Considerations 

A. Statutory and Regulatory Background 

Section 15(a) of the CEA 99 requires 

the Commission to consider the costs 

and benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission considers the costs and 

benefits resulting from its discretionary 

determinations with respect to the 

section 15(a) factors. 

Prior to the passage of the Dodd-Frank 

Act, swaps were not required to be 

cleared. In the wake of the financial 

crisis of 2008, Congress adopted the 

Dodd-Frank Act, which, among other 

things, amends the CEA to impose a 

clearing requirement for swaps based on 

determinations by the Commission 

regarding which swaps are required to 

be cleared through a DCO.100 This 

clearing requirement is designed to 

reduce counterparty risk associated with 

swaps and, in turn, mitigate the 

potential systemic impact of such risk 

and reduce the risk that swaps could 

cause or exacerbate instability in the 

financial system.101 In amending the 

CEA, however, the Dodd-Frank Act 

preserved the Commission’s authority to 

‘‘promote responsible economic or 

financial innovation and fair 

competition’’ by exempting any 

transaction or class of transactions, 

including swaps, from select provisions 

of the CEA.102 For reasons explained 

above,103 the Commission proposes to 

exercise its authority under section 

4(c)(1) of the CEA to exempt interaffiliate swaps—that is, swaps between 

majority-owned affiliates with financial 

statements that are reported on a 

consolidated basis under GAAP or 

IFRS—from the clearing requirement 

under section 2(h)(1)(A) of the CEA, 

subject to certain conditions. 

In the discussion that follows, the 

Commission considers the costs and 

benefits of the inter-affiliate exemption 

to the public and market participants 

generally. The Commission also 

separately considers the costs and 

benefits of the conditions placed on 

affiliates that would elect the 

exemption: (1) Majority ownership and 

financial statements that are reported on 

a consolidated basis under GAAP or 

IFRS as conditions for status as an 

eligible affiliate counterparty; (2) swap 

trading relationship documentation, 

which would require affiliates to 

document in writing all terms governing 

the trading relationship; (3) centralized 

risk management requirement, which 

would require affiliates to subject the 

swap to centralized risk management; 

and (4) reporting requirements, which 

would require counterparties to advise 

an SDR, or the Commission if no SDR 

is available, that both counterparties 

elect the inter-affiliate clearing 

exemption and to identify the types of 

collateral used to meet financial 

obligations. In addition to the foregoing 

reporting requirements, counterparties 

that are issuers of securities registered 

under section 12 of the Securities 

Exchange Act of 1934 or those that are 

required to file reports under section 

15(d) of that Act, would be required to 

identify the SEC central index key 

number and confirm that an appropriate 

committee of board of directors has 

approved of the affiliates’ decision not 

to clear a swap. The rule also would 

permit affiliates to report certain 

information on an annual basis, rather 


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104As discussed further below, EEI commented 

on the NPRM’s consideration of costs and benefits 

and stated that the costs of the proposed 

documentation requirement are unjustified. The 

NPRM included an estimate that there would be a 

one-time cost of $15,000 to develop appropriate 

documentation for use by an entity’s affiliates. EEI 

objected to this estimate because, in its view, the 

legal costs associated with individually negotiating 

and amending standard agreements between 

individual affiliates would exceed the NPRM’s 

estimates. In addition, EEI objected to the NPRM’s 

estimate of 22 affiliated counterparties for each 

corporate group as ‘‘far too low’’ for U.S. energy 

companies. However, EEI did not provide specific, 

quantitative information in terms of either the legal 

costs of complying with the proposed 

documentation requirement or number of affiliates 

for a corporate group subject to this rule. 

105Under the § 50.50 exception, end users and 

small financial institutions that are hedging or 

mitigating commercial risk may elect not to clear 

their swaps, subject to certain conditions. Because 

of this exception, as explained in the NPRM, the 

Commission anticipates that the inter-affiliate 

exemption will be elected only when the two 

counterparties are financial entities that do not 

qualify for the end-user exception. See NPRM at 

50426. 

106See e.g., Clearing Requirement Determination 

at 74329. 

107 ISDA & SIFMA stated that valuation and 

dispute resolution procedures would appear to 

serve little purpose among majority-owned 

affiliates. This comment is discussed above in 

Section II.D, as well as in Section III.C.2. below. 

108A clearinghouse is one of the most creditworthy counterparties available in the market 

because of the panoply of risk management tools it 

has at its disposal. These tools include the 

contractual right to: (1) Collect initial and variation 

margin associated with outstanding swap positions; 

(2) mark positions to market regularly (usually one 

or more times per day) and issue margin calls 

whenever the margin in a customer’s account has 

dropped below predetermined levels set by the 

DCO; (3) adjust the amount of margin that is 

required to be held against swap positions in light 

of changing market circumstances, such as 

increased volatility in the underlying; and (4) close 

out the swap positions of a customer that does not 

meet margin calls within a specified period of time. 

Moreover, in the event that a clearing member 

defaults on their obligations to the DCO, the latter 

has a number of remedies to manage associated 

risks, including transferring the swap positions of 

the defaulted member, and covering any losses that 

may have accrued with the defaulting member’s 

margin and other collateral on deposit. In order to 

transfer the swap positions of a defaulting member 

and manage the risk of those positions while doing 

so, the DCO has the ability to: (1) Hedge the 

portfolio of positions of the defaulting member to 

limit future losses; (2) partition the portfolio into 

smaller pieces; (3) auction off the pieces of the 

portfolio, together with their corresponding hedges, 

to other members of the DCO; and (4) allocate any 

remaining positions to members of the DCO. In 

order to cover the losses associated with such a 

default, the DCO would typically draw from (in 

order): (1) The initial margin posted by the 

defaulting member; (2) the guaranty fund 

contribution of the defaulting member; (3) the 

DCO’s own capital contribution; (4) the guaranty 

fund contribution of non-defaulting members; and 

(5) an assessment on the non-defaulting members. 

These mutualized risk mitigation capabilities are 

largely unique to clearinghouses, and help to ensure 

that they remain solvent and creditworthy swap 

counterparties even when dealing with defaults by 

their members or other challenging market 

circumstances. 

than swap-by-swap. Finally, the 

Commission considers the costs and 

benefits of the condition regarding the 

treatment of outward-facing swaps. 

In the NPRM, where reasonably 

feasible, the Commission sought to 

estimate quantifiable dollar costs. In 

some instances, however, the 

Commission explained that certain costs 

were not susceptible to meaningful 

quantification, and in those instances, 

the Commission discussed proposed 

costs and benefits in qualitative terms. 

As stated above, the Commission 

received a total of 14 comment letters 

following the publication of the NPRM, 

many of which strongly supported the 

proposed regulations. Some commenters 

generally addressed the cost-and-benefit 

aspect of the current rule; none of them, 

however, provided any quantitative data 

in response to the Commission’s 

requests for comment.104

In the sections that follow the 

Commission considers: (1) Costs and 

benefits of the exemption for eligible 

affiliate counterparties; (2) costs and 

benefits of the exemption for market 

participants and the public; (3) 

alternatives contemplated by the 

Commission and the costs and benefits 

relative to the approach adopted herein; 

(4) the impact of exemption in light of 

the 15(a) factors. The Commission also 

discusses the corresponding comments 

accordingly. 

B. Costs and Benefits of Exemption for 

Eligible Affiliate Counterparties 

Without the final rule exempting 

swaps between certain affiliated 

counterparties, those entities would 

have to clear their inter-affiliate swaps 

pursuant to section 2(h)(1)(A) of the 

CEA (unless one of the affiliates is able 

to claim an exception under section 

2(h)(7) of the CEA and/or § 50.50).105

This rule allows eligible affiliates to 

exempt inter-affiliate swaps from 

clearing, which creates both costs and 

benefits for those entities. Regarding 

costs, by allowing affiliates not to clear 

certain swaps that would otherwise be 

subject to required clearing, the rule 

may allow those affiliates to be exposed 

to greater measures of counterparty 

credit risk with respect to one another. 

On the other hand, the primary benefit 

of providing this exemption for interaffiliate swaps between eligible affiliate 

counterparties is that each affiliate will 

not have to incur the costs of required 

clearing. These costs include clearing 

fees, as well as costs associated with 

margin and capital requirements. The 

rule also facilitates affiliates’ use of 

swaps to hedge various types of risk 

more efficiently. 

1. Benefits of Clearing Inter-Affiliate 

Swaps 

The benefits of required clearing have 

been well-documented by the 

Commission.106 As described in the 

preceding sections of this adopting 

release, there are numerous benefits 

associated with central clearing of 

swaps. In particular, clearing mitigates 

counterparty credit risk, provides an 

organized mechanism for collateralizing 

the risk exposures posed by swaps, and 

when applied to channels where 

systemic risk could be transmitted, 

clearing reduces systemic risk. 

The counterparty and systemic risk 

mitigation benefits of central clearing 

also are realized from clearing 

transactions between affiliates. Central 

clearing would ensure that inter-affiliate 

swaps are fully documented and abide 

by valuation procedures set by the DCO, 

which would help to ensure that 

affiliates have current and accurate 

information regarding the value of their 

positions and would help prevent the 

possibility of valuation disputes.107 In 

addition, when a bilateral swap is 

cleared, the clearinghouse becomes the 

counterparty to each of the original 

counterparties to the swap. This reduces 

and standardizes the counterparty risk 

borne by each of the original parties to 

the swap.108 Moreover, clearing 

mitigates the risk of financial contagion 

because the clearinghouse serves as a 

sort of ‘‘buffer’’ that protects each of the 

original counterparties from the credit 

risk of the other. This would also be true 

for inter-affiliate swaps. Novating the 

swap to a clearinghouse so that each 

affiliate faces the clearinghouse would 

ensure that each affiliate is facing 

minimal counterparty credit risk and 

would minimize the possibility of interaffiliate swaps becoming a mechanism 

through which financial instability 

could pass from one affiliate to another. 

This rule reduces these benefits by 

allowing affiliates to exempt swaps from 

required clearing. In the absence of 

clearing, affiliated entities will not be 

required to collect initial or variation 

margin, or to implement other measures 

that clearinghouses typically use to 

mitigate their own counterparty credit 

risk. As a consequence, the affiliates 

may accumulate large outstanding 

positions with one another as the value 

of their swap positions change value 

between payment dates. If an affiliate 

with large, out-of-the-money, interaffiliate swap positions defaulted, it 

could cause financial instability in its 

affiliates, leading to a cascading series of 

defaults among them. As discussed 

below, the Commission expects that 

internalization of costs and risks among 


TKELLEY on DSK3SPTVN1PROD with RULES3
Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 21771 

109See CME pricing charts at: http:// 

www.cmegroup.com/trading/cds/files/CDSFees.pdf; http://www.cmegroup.com/trading/ 

interest-rates/files/CME–IRS-Customer-Fee.pdf; and 

http://www.cmegroup.com/trading/interest-rates/ 

files/CME–IRS-Self-Clearing-Fee.pdf. 

110See LCH pricing for clearing services related 

to OTC interest rate swaps at: http:// 

www.lchclearnet.com/swaps/ 

swapclear_for_clearing_members/fees.asp. 

111See discussion of clearing fees in the Clearing 

Requirement Determination, 77 FR 74324–25. 

112See Clearing Requirement Determination at 

74326 (explaining how this estimate was reached 

and noting that the estimate may either overestimate or under-estimate the amount of additional 

initial margin that would need to be posted). 

113For example, swap data collected by the Bank 

of International Settlements (BIS) does not contain 

information regarding transactions between 

affiliates (i.e., branches and subsidiaries) of the 

same institution. See, e.g., Statistical release: OTC 

derivatives statistics at end-June 2012, Monetary 

and Economic Department, Bank of International 

Settlements (Nov. 2012), available at http:// 

www.bis.org/publ/otc_hy1211.pdf. The Commission 

relied on BIS data in calculating its additional 

initial margin requirements for required clearing of 

certain interest rate swaps and credit default swaps. 

114See, e.g., letters from The Working Group, EEI, 

and ISDA & SIFMA. 

115Commenters also asserted that inter-affiliate 

swaps are used in order to assist in tax management 

and compliance with international laws, stating that 

the exemption would help to preserve those 

benefits. Commenters did not provide sufficient 

information regarding their operations, tax 

management strategies, and international 

compliance requirements for the Commission to 

evaluate these stated benefits. 

116See NPRM at 50426 and Section II.A. 

affiliated entities, as well as the 

conditions for electing the exemption 

will mitigate this cost, but will not 

eliminate it entirely. 

2. Reduced Clearing Costs 

As stated above, by exempting 

qualified affiliates from clearing interaffiliate swaps that would otherwise be 

subject to the clearing requirement, the 

rule ensures that each affiliate will not 

incur the costs of required clearing for 

those swaps. These costs include 

clearing fees as well as costs associated 

with margin and capital requirements. 

Regarding clearing fees, assuming that 

the affiliated counterparties cannot clear 

on their own behalves or through an 

affiliated clearing member of a DCO, the 

affiliated counterparties would have to 

arrange to clear their swaps through a 

futures commission merchant (FCM) 

that is a member of a DCO. Regardless 

of whether the affiliated counterparties 

clear on their own behalf or contract 

with an FCM, they will incur fees from 

the DCO. 

For customer clearing, DCOs typically 

charge FCMs an initial transaction fee 

for each customer swap that is cleared, 

as well as an annual maintenance fee for 

each of the customers’ open positions. 

For example, not including customerspecific and volume discounts, the 

transaction fees for interest rate swaps at 

CME range from $1 to $24 per million 

notional amount and the maintenance 

fees are $2 per year per million notional 

amount for open positions.109 LCH 

transaction fees for interest rate swaps 

range from $1 to $20 per million 

notional amount, and the maintenance 

fee ranges from $5 to $20 per swap per 

month, depending on the number of 

outstanding swap positions that an 

entity has with the DCO.110 It is within 

the FCM’s discretion to determine 

whether or how to pass these fees on to 

their customers.111 Accordingly, 

allowing affiliates to elect not to clear 

swaps that meet the requirements of the 

final rule will result in the affiliates not 

having to pay clearing-related fees, 

either directly or indirectly, with 

respect to those swaps. 

Second, permitting an exemption 

from clearing for swaps between 

affiliates, the final rule will reduce the 

amount of initial margin that such 

entities are required to post or pay for 

those swaps. In the clearing requirement 

determination, the Commission 

estimated that if every interest rate swap 

and CDS that is not currently cleared 

were moved into clearing, the additional 

initial margin that would need to be 

posted is approximately $19.2 billion 

for interest rate swaps and $53 billion 

for CDS.112 While the estimates 

provided by the Commission in its 

clearing requirement determination 

adopting release did not include data 

related to inter-affiliate swaps,113 the 

estimates do support a conclusion that 

the exemption will reduce the amount 

of margin that affiliates would be 

obligated to allocate to initial margin in 

order to clear inter-affiliate swaps that 

are subject to the clearing requirement. 

As a consequence, the exemption is 

likely to increase the amount of capital 

that affiliates may distribute to their 

owners or put to other uses. 

Third, by exempting inter-affiliate 

swaps from required clearing, interaffiliate swaps would not be subject to 

variation margin requirements under a 

DCO’s rules. Exempting inter-affiliate 

swaps from required clearing’s variation 

margin requirements may help affiliates 

and corporate entities as a whole 

manage their liquidity needs because 

the entities would not have to routinely 

collateralize losses at the DCO. It is also 

likely to reduce the operational costs 

that the affiliates would otherwise bear 

in order to manage margin calls and 

associated variation margin payments. 

3. Risk Management Benefits of InterAffiliate Swaps 

A number of commenters stated that 

executing swaps with the market 

through one affiliate enables entities to 

more efficiently and effectively manage 

corporate risk.114 In this arrangement, 

the one affiliate engages in inter-affiliate 

swaps with other affiliated entities in 

order to hedge the risks of those 

affiliates. The one, central affiliate then 

engages in market-facing swaps to offset 

the risk that it has taken on. Executing 

swaps through one affiliate may enable 

corporate entities to concentrate their 

swap and hedging expertise and activity 

within a single affiliate, which reduces 

personnel costs. It also allows the 

corporation to net various positions 

before facing the market, thus reducing 

the number of market facing swaps, and 

the attendant fees. 

Moreover, these affiliate structures 

may not only reduce costs, but certain 

types of risk for the corporation as well. 

By concentrating personnel with swap 

and hedging expertise in one affiliate, 

and running inter-affiliate and market 

facing swap activities through a single 

entity, corporations may reduce the risk 

of operational errors. Such errors can 

create considerable risk when engaging 

in large hedging transactions. Moreover, 

the corporation’s operational risk may 

be further mitigated by reducing the 

total number of market facing swaps 

into which the affiliated entities 

enter.115

Additionally, as stated above and as 

noted in the NPRM, affiliates that are 

commonly owned internalize a portion 

of one another’s risk.116 To the extent 

that affiliated entities internalize one 

another’s risk, those entities have an 

economic incentive to perform on their 

obligations with respect to one another, 

thus reducing the counterparty risk that 

they bear as a consequence of their 

swaps with one another. However, the 

qualification ‘‘to the extent that 

affiliated entities internalize one other’s 

risk’’ is significant. Two important 

factors limit the degree to which 

affiliates internalize one another’s risk. 

First, if either of the affiliated entities 

has a portion of ownership that is not 

held in common, then a corresponding 

portion of the risks transferred to that 

entity will not be borne by the common 

owners, and thus will not be 

internalized. In other words, a smaller 

common ownership stake will cause 

less counterparty risk to be internalized, 

and will lessen the incentive affiliates 

will have to perform on their obligations 

toward one another. Second, as 

described above, there are 

circumstances in bankruptcy where 

affiliates do not internalize each other’s 

risks, which may also reduce, or 


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21772 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

117See Section II.A. 

118See, e.g., letters from MetLife and Prudential 

(explaining that it is current business practice to 

document inter-affiliate swaps); letter from EEI 

(explaining that inter-affiliate swaps are subject to 

risk management). 

eliminate, the affiliates’ incentives to 

perform with respect to their obligations 

they have toward one another.117

Reduced internalization of risk among 

affiliates may create incentives for 

certain affiliates to use inter-affiliate 

swaps to shift risk to other affiliates in 

ways that are not necessarily in the best 

interests of minority stakeholders or 

counterparties to certain affiliates. In 

order to address this concern, the 

Commission has conditioned election of 

the exemption on several requirements 

that are intended to mitigate the costs 

created by reduced internalization of 

risk among affiliates, as well as the 

foregone benefits of required clearing. 

C. Costs and Benefits of Exemption’s 

Conditions 

The inter-affiliate exemption from 

required clearing sets forth five 

conditions that must be satisfied in 

order to elect the exemption: (1) Both 

affiliates must be majority-owned and 

their financial statements must be 

reported on a consolidated basis; (2) the 

swap must be documented in a written 

swap trading relationship document; (3) 

the swap must be subject to a 

centralized risk management program; 

(4) certain information regarding the 

swap must be reported to an SDR; and 

(5) both affiliates must meet certain 

conditions with regard to their outwardfacing swaps. The Commission believes 

that entities will have to incur costs to 

satisfy these conditions. Those costs 

may offset some of the benefits that 

would otherwise result from the 

exemption. However, the exemption is 

permissive, and therefore the 

Commission also believes that an 

affiliate will elect the exemption only if 

these costs are less than the costs that 

an affiliate will incur should it decide 

not to elect the exemption. Moreover, as 

described below, the conditions provide 

certain benefits to the affiliates’ 

counterparties and to the public that the 

Commission believes are essential in 

order to mitigate counterparty credit 

risk in situations where affiliates do not 

completely internalize each other’s 

risks. Lastly, the Commission believes 

that in some cases entities are already 

meeting some or all of the requirements 

for electing the exemption, in which 

cases the affiliates would bear less new 

costs, or no new costs at all, due to the 

conditions.118

1. Eligible Affiliate Counterparty Status 

In order to qualify as an eligible 

affiliate counterparty under the terms of 

the exemption, two factors must be met. 

First, one affiliate must directly or 

indirectly hold a majority ownership 

interest in the other, or a third party 

must hold a majority ownership interest 

in both. Second, the financial 

statements of both affiliates are reported 

on a consolidated basis under Generally 

Accepted Accounting Principles 

(GAAP) or International Financial 

Reporting Standards (IFRS). 

The Commission anticipates that in a 

relatively small number of cases entities 

may alter their ownership structures in 

order to qualify for the inter-affiliate 

exemption’s majority-ownership 

condition. In these cases, entities may 

bear certain legal costs, and in some 

cases, costs associated with negotiations 

with other owners in the entity. These 

costs could vary significantly, 

depending on the complexity of the 

entity’s existing ownership structure, 

including the number of owners and the 

alignment or misalignment of their 

interests. The Commission does not 

have adequate information to determine 

which entities or how many entities 

may consider altering their ownership 

structure in order to become eligible for 

the inter-affiliate exemption, but notes 

again that entities would only do this if 

they anticipate that the benefits of the 

exemption are greater than the costs of 

meeting the qualifying criteria. 

Four commenters supported proposed 

majority-ownership requirement. CDEU 

commented that the majority-ownership 

test strikes an appropriate balance 

between ensuring that the rule is not 

overly broad and providing companies 

with the flexibility to account for 

differences in corporate structures. EEI 

noted that majority-owned affiliates will 

have strong incentives to internalize one 

another’s risks because the failure of one 

affiliate impacts all affiliates within the 

corporate group. The Working Group 

generally supported the Commission’s 

definition, but stated that inter-affiliate 

swaps should be unconditionally 

exempt from mandatory clearing when 

the affiliates are consolidated for 

accounting purposes. MetLife stated that 

it would likely limit inter-affiliate 

trading to ‘‘commonly-owned’’ affiliates, 

but agreed with the flexibility of 

including majority-owned affiliates. 

Two commenters objected to the 

proposal and requested the Commission 

require 100% ownership of affiliates. 

AFR stated that permitting such a low 

level of joint ownership would lead to 

evasion of the clearing requirement 

through the creation of joint ventures set 

up to enable swap trading between 

banks without the need to clear the 

swaps. Similarly, Better Markets agreed 

that only 100% owned affiliates should 

be eligible for the exemption because 

allowing the exemption for the majority 

owner permits that owner to disregard 

the views of its minority partners and 

creates an incentive to evade the 

clearing requirement by structuring 

subsidiary partnerships. Finally, Better 

Markets stated that the majorityownership standard will result in 

corporate groups transferring price risk 

and credit risk to different locations 

facilitating interconnectedness and 

potentially giving rise to systemic risk 

during times of market stress. 

As discussed above, the degree to 

which one affiliate’s risks are 

internalized by another affiliate depends 

significantly on the percentage of 

common ownership between them. For 

example, two affiliates that are 100% 

commonly owned are likely to 

internalize much of one another’s risk. 

This creates a strong incentive for 

affiliates to perform on their obligations 

to one another. Therefore, if the 

Commission were to increase the 

common ownership requirement above 

a majority stake, it would likely result 

in affiliate counterparties internalizing 

more of one another’s risk with respect 

to inter-affiliate swaps in order to 

qualify for the exemption. This, in turn, 

would provide additional incentives for 

affiliates to perform on their interaffiliate swap obligations. However, if 

the Commission were to increase the 

common ownership percentage 

requirement, it also would reduce the 

number of affiliates that could qualify 

for, and benefit from, the exemption. 

On the other hand, if the Commission 

lowered the percentage of common 

ownership that is required to be eligible 

for the exemption (i.e., made it 50% or 

less), it would increase the number of 

affiliates that are eligible for the 

exception. This lower standard would 

allow affiliates that internalize less of 

each other’s risks and therefore have 

weaker incentives to perform on their 

obligations to one another to qualify for 

the exemption. Moreover, the absence of 

a majority common ownership 

requirement could create opportunities 

for otherwise unrelated entities to form 

joint ventures and transact swaps with 

one another in order to claim the interaffiliate exemption from clearing, which 

would undermine the effectiveness of 

the clearing requirement. 

The Commission considered each of 

these factors and concluded that the 

majority stake requirement is sufficient 

to internalize costs and incentivize 

affiliates to perform on their obligations 


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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 21773 

119For a discussion of the costs and benefits 

incurred by swap dealers and major swap 

participants that must satisfy requirements under 

§ 23.504, see Confirmation, Portfolio Reconciliation, 

Portfolio Compression, and Swap Trading 

Relationship Documentation Requirements for 

Swap Dealers and Major Swap Participants, 77 FR 

55904, 55906 (Sept. 11, 2012) (final rule) and Swap 

Trading Relationship Documentation Requirements 

for Swap Dealers and Major Swap Participants, 76 

FR 6715, 6724–25 (Feb. 8, 2011) (proposed rule). 

120This estimate appeared in the NPRM section 

regarding the Paperwork Reduction Act not in the 

consideration of costs and benefits section. 

to one another. The Commission also 

believes that the potential for evasion is 

mitigated through the conditions to the 

final rule, which have been carefully 

crafted in order to narrow the 

exemption. For example, two unrelated 

entities cannot each hold a majority 

stake in the same affiliate. 

Consequently, such unrelated entities 

cannot use an inter-affiliate swap as an 

indirect means of trading without being 

subject to the clearing requirement 

under section 2(h) of the CEA and part 

50 of the Commission’s regulations. 

As an additional consideration, as 

noted above, the majority requirement 

also harmonizes with Commission’s 

understanding of the EMIR 

requirements. Harmonizing with EMIR 

is likely to reduce compliance 

monitoring costs for entities electing the 

affiliated entity exemption. In terms of 

potential costs in the form of 

disregarding the interests of minority 

shareholders, the Commission 

recognizes that a 100% ownership 

requirement would eliminate the risk of 

minority shareholders’ interests not 

being aligned with decisions to elect the 

exemption. However, the Commission is 

also cognizant that such a requirement 

would reduce the number of affiliates 

that are able to claim the exemption. 

The Commission believes that the 

majority-ownership requirement 

appropriately considers the risk of the 

former and the benefits of the latter. 

With regard to the consolidation of 

financial statements, FSR requested that 

the Commission clarify that alternative 

accounting standards can be used for 

purposes of meeting the requirement 

that the financial statements of both 

affiliates be reported on a consolidated 

basis. The Commission considered this 

comment and is adopting the alternative 

suggested by FSR. As modified the rule 

requires that the financial statements of 

both counterparties be reported on a 

consolidated basis under GAAP or IFRS. 

This change recognizes the fact that 

some entities claiming the exemption 

may report their financial statements 

under different accounting standards, 

and makes it possible for those entities 

to elect the exemption as long as they 

would be required to report their 

financial statements on a consolidated 

basis under GAAP or IFRS. This likely 

increases the number of entities that 

may elect the exemption relative to the 

form of the rule proposed in the NPRM 

while maintaining the protections that 

were intended with the requirement for 

consolidated financial statements. The 

Commission also modified the rule to 

clarify which entities are subject to the 

consolidated financial statement 

requirement. 

2. Inter-Affiliate Swap Documentation 

As proposed, the inter-affiliate 

exemption required that eligible affiliate 

counterparties that elect the interaffiliate exemption must enter into 

swaps with a swap trading relationship 

document that is in writing and 

includes all the terms governing the 

relationship between the affiliates. 

These terms included, but were not 

limited to, payment obligations, netting 

of payments, transfer of rights and 

obligations, governing law, valuation, 

and dispute resolution. This 

requirement would be satisfied if an 

eligible affiliate counterparty is an SD or 

MSP that complies with the swap 

trading relationship documentation 

requirements of § 23.504.119

The Commission received a number 

of comments both supporting and 

opposing the swap documentation 

requirement. Better Markets, MetLife, 

and Prudential all supported the 

proposed documentation requirement. 

Specifically, MetLife and Prudential did 

not believe that the documentation 

requirement would be any more 

‘‘burdensome or costly’’ for them 

because they already document all of 

their swaps. 

Cravath, EEI, CDEU, and DLA Piper 

opposed the proposed documentation 

requirement. Cravath stated that the 

costs associated with the imposition of 

documentation requirements outweigh 

any benefits to the financial system, and 

that the Commission should leave the 

determination as to the appropriate 

level of documentation to boards of 

directors and management of 

companies, to determine based on the 

‘‘reasonable exercise of their fiduciary 

responsibilities.’’ DLA Piper commented 

that the documentation requirements 

are burdensome and questioned the 

benefits of imposing documentation 

requirements on transactions between 

two parties. 

CDEU expressed concern that 

proposed documentation condition 

would require that full ISDA Master 

Agreements be used to document interaffiliate swaps. CDEU explained that 

while many market participants use 

master agreements, some end users 

many not have full master agreements 

because inter-affiliate swaps are purely 

internal and do not increase systemic 

risk. CDEU recommended that the 

proposed rule be revised to require that 

the swap documentation ‘‘include all 

terms necessary for compliance with its 

centralized risk management program’’ 

and eliminate the list of required terms. 

CDEU also requested that the 

Commission clarify that (1) market 

participants can continue to use 

documentation required by their risk 

management programs and (2) the rule 

does not require market participants use 

ISDA Master Agreements. 

EEI recommended that the 

Commission eliminate the 

documentation requirement because the 

requirement is duplicative of corporate 

accounting records that affiliates 

currently maintain. EEI commented that 

a documentation requirement imposes 

‘‘an additional, costly layer of 

ministerial process and documentation 

that is unnecessary to achieve the 

Commission’s stated objectives.’’ EEI 

commented on the NPRM’s 

consideration of costs and benefits and 

stated that the costs of the proposed 

documentation requirement are 

unjustified. The NPRM included an 

estimate that there would be a one-time 

cost of $15,000 to develop appropriate 

documentation for use by an entity’s 

affiliates. EEI objected to this estimate 

because, in its view, the legal costs 

associated with individually negotiating 

and amending standard agreements 

between individual affiliates would 

exceed the NPRM’s estimates. In 

addition, EEI objected to the NPRM’s 

estimate of 22 affiliated counterparties 

for each corporate group as ‘‘far too 

low’’ for U.S. energy companies.120

However, EEI did not provide specific, 

quantitative information in terms of 

either the legal costs of complying with 

the proposed documentation 

requirement or number of affiliates for 

a corporate group subject to this rule. 

Accordingly, the Commission is unable 

to verify whether the legal costs or 

average number of affiliates estimates 

are too low. 

ISDA & SIFMA stated that the 

documentation requirements were 

overly prescriptive and would impose 

unnecessary costs on affiliates. ISDA & 

SIFMA recommended a more flexible 

approach that would require adequate 

documentation of ‘‘all transaction terms 

under applicable law.’’ 

In response to commenters’ requests 

for a more flexible standard, the 

Commission modified the proposal for 

swaps between affiliates that are not 


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21774 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

121The Commission is modifying the 

documentation condition to require that ‘‘the terms 

of the swap are documented in a swap trading 

relationship document that shall be in writing and 

shall include all terms governing the trading 

relationship between the affiliates.’’ 

122See § 50.52(b)(2)(ii). 

123 In the NPRM, the Commission estimated that 

affiliates could pay a law firm for up to 30 hours 

of work at $495 per hour to modify an ISDA Master 

Agreement, resulting in a one-time cost of $15,000, 

and there may be additional costs related to revising 

documentation to address a particular swap. All 

salaries in these calculations are taken from the 

2011 SIFMA Report on Management and 

Professional Earnings in the Securities Industry. 

Annual wages were converted to hourly wages 

assuming 1,800 work hours per year and then 

multiplying by 5.35 to account for bonuses, firm 

size, employee benefits and overhead. The 

Commission also estimated that affiliates would 

incur costs of less than $1,000 per year related to 

signing swap documents and retaining copies. 

124 In response to comments from Better Markets 

and AFR that the proposed regulations should be 

retained and not weakened, the Commission does 

not believe that eliminating the non-exclusive list 

of terms and replacing it with a simple requirement 

that all terms of the swap transaction and the 

relationship between the affiliates be documented 

will weaken the rule. Rather, while affiliates will 

have discretion to select the appropriate terms to 

document their swap, they will still have an 

obligation to ensure that their documentation 

contains an accurate and thorough written record of 

their swaps. In most instances, this will necessarily 

include all of the previously enumerated terms. 

125See comments letters from MetLife and 

Prudential. 

126See NPRM at 50428–50429. 

127See id. at 50434. 

128As discussed in Section II.D above, the 

Commission expects that, in most instances, 

documentation between affiliates will include all of 

the previously enumerated terms, several of which 

are essential to effective valuation of swaps and 

resolution in bankruptcy. However, the 

Commission notes that a more flexible approach 

makes it possible that some entities could 

document the terms of their inter-affiliate swaps 

and all the terms of their trading relationship 

without covering all of the terms that are necessary 

for effective valuation or resolution in bankruptcy. 

If this occurs, it would reduce the risk management 

and bankruptcy benefits created by the 

documentation requirement. 

129For a discussion of the costs and benefits 

incurred by swap dealers and major swap 

participants that must satisfy requirements under 

§ 23.600, see Swap Dealer and Major Swap 

Participant Recordkeeping, Reporting, and Duties 

Rules; Futures Commission Merchant and 

Introducing Broker Conflicts of Interest Rules; and 

Chief Compliance Officer Rules for Swap Dealers, 

Major Swap Participants, and Futures Commission 

Merchants, 77 FR 20173–75. 

SDs or MSPs. The Commission adopted 

ISDA & SIFMA’s recommendation that 

the focus of the documentation 

requirement be on documenting all of 

an inter-affiliate transaction’s terms.121

Under this modification, the 

Commission is eliminating the nonexclusive list of terms, which included 

payment obligations, netting of 

payments, transfer of rights and 

obligations, governing law, valuation, 

and dispute resolution. The change 

responds to commenters’ requests for a 

more flexible approach that reflects 

current market best practices, and 

signals that market participants retain 

the ability to craft appropriate 

documentation for their affiliated 

entities so long as such documentation 

includes the terms of the swap and ‘‘all 

terms governing the trading relationship 

between the eligible affiliate 

counterparties.’’ 122 This modification 

also serves to address concerns that the 

intent of the proposed rule was to 

require formal master agreements, such 

as the ISDA Master Agreement.123 The 

proposed rule was not intended to 

require affiliates to enter into formal 

master agreements. Rather, the 

Commission observed that parties that 

already use master agreements (of any 

sort) to document their inter-affiliate 

swaps would likely meet the 

requirements of the proposed rule 

without additional costs. This 

observation was supported by 

commenters such as MetLife and 

Prudential. The Commission believes 

that these modifications to the proposal 

and clarifications respond to 

commenters’ concerns and will serve to 

reduce documentation costs for those 

electing the inter-affiliate exemption.124

Entities that have already established 

systems for documenting the terms of 

their inter-affiliate swaps and all the 

terms of the trading relationship 

between eligible affiliates will not bear 

any costs as a consequence of this 

requirement.125 However, as noted in 

the NPRM, the Commission understands 

that some affiliates may enter into interaffiliate swaps with little documentation 

regarding the terms of the swaps.126

Such entities may not have systems to 

document the terms of their interaffiliate swaps or all the terms of the 

trading relationship between eligible 

affiliates. They will bear some initial 

costs and ongoing costs in order to 

comply with this requirement. In the 

NPRM, the Commission estimated that 

the initial costs of up to $15,000 to 

create such the necessary 

documentation, and less than $1,000 per 

year on an ongoing basis to sign and 

retain appropriate documentation.127

In response to EEI’s comment 

regarding duplicative requirements, to 

the extent that the documentation 

requirement is duplicative of an 

affiliate’s existing recordkeeping 

practices, it will not introduce new 

costs. However, the Commission notes 

that if existing records do not contain 

the terms of each inter-affiliate swap or 

all the terms of the trading relationship 

between affiliates, affiliates will be 

required to implement new 

documentation that creates incremental 

costs, as noted above. 

Regarding benefits, documentation of 

inter-affiliate swaps is essential to 

effective risk management. In the 

absence of such documentation, 

affiliates cannot track or value their 

swaps effectively. Documentation also 

helps ensure that affiliates have proof of 

claim in the event of bankruptcy. As 

explained earlier, insufficient proof of 

claim could create challenges and 

uncertainty at bankruptcy that could 

adversely affect affiliates and third party 

creditors. The documentation 

requirement, to the extent that it 

requires entities to document all the 

terms that are necessary in order to 

value inter-affiliate swaps and to 

provide legal certainty in the event of 

bankruptcy, will promote effective risk 

management and resolution of claims in 

the event of insolvency.128

3. Centralized Risk Management 

Another condition of the inter-affiliate 

exemption requires that the swap be 

subject to a centralized risk management 

program that is ‘‘reasonably designed to 

monitor and manage the risks associated 

with the swap.’’ If at least one of the 

eligible affiliate counterparties is an SD 

or MSP, the centralized risk 

management requirement is satisfied by 

complying with the requirements of 

§ 23.600.129

Four commenters objected to the 

proposed requirement, suggested 

alternatives, and/or requested 

clarification. FSR stated that the 

condition should be eliminated because 

integrated risk management systems 

‘‘are generally not established across 

international boundaries’’ and are not 

consistent with general risk practices in 

large, multinational organizations. FSR 

suggested that the requirement be 

dropped in favor of each entity making 

‘‘its own evaluations of the risk 

associated with an inter-affiliate 

position.’’ 

Cravath stated that in many cases, for 

companies outside of the financial 

sector, the proposed rule will require a 

substantial change in the processes and 

procedures currently maintained by 

such companies, and the cost of 

complying with the risk management 

program requirements outweigh any 

benefits to the financial system. Cravath 

commented that rather than subject 

companies to a risk management rule, 

‘‘[c]ompanies should have the flexibility 

to engage in prudent risk management 

for their corporate group in a manner 

consistent with the overall level of risks 

to their business.’’ 

EEI suggested that the Commission 

eliminate the centralized risk 


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130See, e.g., letters from Prudential, MetLife, and 

CDEU. 

131As pointed out above, industry commenters 

underscored the fact that many corporate groups 

that currently use inter-affiliate swaps have 

centralized-risk-management procedures in place. 

132See NPRM at 50434 (estimating such costs to 

be as high as $150,000 for purchasing a computer 

network at approximately $20,000; purchasing 

personal computers and monitors for 15 staff 

members at approximately $30,000; purchasing 

software at approximately $20,000; purchasing 

other office equipment, such as printers, at 

approximately $5,000; and installation and 

unexpected costs that could increase up-front 

costs). 

133This average annual salary is based on 15 

senior credit risk analysts only. The Commission 

appreciates that an affiliate would likely choose to 

employ different positions as well, such as risk 

management specialists at $130,000 per year, and 

computer supervisors at $140,000. But for the 

purposes of this estimate, the Commission has 

assumed salaries at the high end for risk 

management professionals. The Commission also 

estimated a data subscription for price and other 

market data may have to be purchased at cost of up 

to $100,000 per year. 

management program requirement on 

the grounds that it would be duplicative 

for corporate groups that already have 

risk management programs in place. 

According to EEI, it is standard industry 

practice for both private and public 

companies to have a risk management 

program. EEI accordingly does not see a 

‘‘need to impose a separate, discrete 

regulatory requirement to document 

with an SDR or the Commission the 

existence of a centralized risk 

management program.’’ If the 

Commission decides to retain the 

requirement, EEI requested that the 

Commission require a program be 

‘‘reasonably designed to monitor and 

manage the risks associated with the 

swap’’ and provide the flexibility to 

design risk management programs that 

address the unique risks of an entity’s 

business. 

The Working Group requested that the 

Commission clarify whether non-SDs 

and non-MSPs would be subject to the 

same enterprise-level risk management 

program as required for SDs and MSPs 

under § 23.600. The Working Group 

proposed that the Commission require 

‘‘a robust risk management program’’ 

rather than ‘‘a centralized risk 

management program.’’ 

In response to comments asking that 

the Commission clarify the level of risk 

management required for non-SDs and 

non-MSPs, the Commission confirms 

that the risk management condition is 

intended to be flexible and does not 

require the same level of policies and 

procedures as required under § 23.600 

for SDs and MSPs. Under the rule, a 

company would be free to structure its 

centralized risk management program 

according to its unique needs, provided 

that the program reasonably monitors 

and manages the risks associated with 

its uncleared inter-affiliate swaps. In all 

likelihood, if a corporate group has a 

centralized risk management program in 

place that reasonably monitors and 

manages the risk associated with its 

inter-affiliate swaps as part of current 

industry practice, it is likely that the 

program would fulfill the requirements 

of exemption and therefore the 

exemption would not create new costs 

in such cases. 

Given that a number of commenters 

stated that it is common practice for 

market participants, including end 

users, to have risk management 

programs in place,130 expects that the 

majority of companies with eligible 

affiliates will not have to create 

centralized risk management programs 

from scratch in order to meet the 

eligibility requirements for the 

exemption. Those with existing systems 

may need to make some changes in 

order to centralize them, but the 

Commission has provided significant 

flexibility to companies in determining 

the specific contours of the centralized 

risk management system. Given this 

flexibility, and the fact that it is 

common practice for market 

participants to have risk management 

programs in place, the Commission is 

not persuaded by Cravath’s comment 

that the rule will require a substantial 

change in the processes and procedures 

currently maintained by companies to 

manage risk. Accordingly, costs will be 

limited where an entity only needs to 

make modifications to existing risk 

management programs. Moreover, a 

corporate group may not have to incur 

any costs if it already has in place a risk 

management system that meets the 

requirements of the inter-affiliate 

exemption. 

The Commission also declined to 

modify the requirement to state ‘‘a 

robust risk management program’’ rather 

than ‘‘a centralized risk management 

program.’’ While change proposed by 

the Working Group may prevent certain 

entities from having to reorganize their 

risk management program in order to 

meet the requirements of the interaffiliate exemption, it could also 

significantly reduce the ability of the 

risk management program to mitigate 

counterparty risk among affiliates. In the 

absence of variation margin, or clearing 

to mitigate counterparty credit risk 

among affiliates, risk management 

committees must have a clear line of 

sight into the financial health and 

obligations of each affiliate involved in 

inter-affiliate swaps. 

In the NPRM, the Commission 

explained that some affiliates may have 

to create a risk management system to 

meet the risk management condition.131

The Commission itemized a number of 

specific costs, including the purchase of 

equipment and software to adequately 

evaluate and measure inter-affiliate 

swap risk.132 In addition, in the NPRM, 

the Commission estimated that 

centralized risk management could 

require up to ten full-time staff at an 

average salary of $150,000 per year.133

The Commission received no comments 

in response to its risk management 

condition cost estimates. 

There are benefits that derive from the 

centralized-risk management condition. 

The Commission expects that 

centralized risk management programs 

will establish appropriate measurements 

and procedures to monitor the amount 

of risk that each individual affiliate 

bears, and to monitor the condition of 

each entity’s affiliate counterparties. 

Because a centralized risk management 

program is more likely to have a clear 

line of sight into the financial condition 

of all affiliated entities, it is better 

positioned to manage each affiliate’s 

exposure to the counterparty risk of 

other affiliates than a risk management 

program situated inside any single 

affiliate. As a consequence, centralized 

risk management programs may reduce 

the likelihood that individual affiliates 

could become insolvent because of their 

exposure to other affiliates, which not 

only benefits the affiliates, but their 

third party counterparties as well. 

4. Reporting to an SDR 

Another condition of electing the 

inter-affiliate exemption is that certain 

information about the swap and the 

election of the exemption be reported to 

an SDR. The reporting condition 

requires affiliates to report specific 

information to an SDR, or to the 

Commission if no SDR is available. 

Such information includes a notice that 

both affiliates are electing the 

exemption and that they both meet the 

other conditions of exemption, as well 

as information regarding how the 

financial obligations of both affiliates 

are generally satisfied with respect to 

uncleared swaps. The final rule also 

requires reporting certain information if 

the affiliate is an SEC filer. 

The Commission received several 

comments in response to the reporting 

obligations of affiliates. Prudential and 

MetLife both commented that the 

Commission should clarify that only 

one counterparty is required to report 

the swap to an SDR. EEI stated that the 

Commission should eliminate the 

transaction-by-transaction reporting 


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134EEI also commented that the Commission 

should state that part 45 does not apply to interaffiliate swaps because the Commission will be able 

to obtain information regarding an inter-affiliate 

transaction based on reporting of a corresponding 

market-facing swap. EEI cited to a statement in the 

NPRM’s consideration of costs and benefits as 

support for an argument that the Commission did 

not intend for part 45 reporting to apply to interaffiliate swaps. See NPRM at 50433. As explained 

above, the statement in the cost-benefit 

consideration of the NPRM merely drew a 

comparison between the reporting requirements 

under the proposed exemption and the general 

reporting requirements under parts 45 and 46, and 

those reporting requirements applicable to SDs and 

MSPs under part 23. The statement should not be 

read as calling into question the applicability of 

part 45 to inter-affiliate swaps. 

135See End-User Exception to the Clearing 

Requirement for Swaps, 77 FR 42565–66. 

136The NPRM at 50435, included an estimate that 

each counterparty may spend 15 seconds to two 

minutes per swap entering a notice of election of 

the exemption into the reporting system. The 

hourly wage for a compliance attorney is $390, 

resulting in a per transaction cost of $1.63-$13.00. 

137See NPRM at 50435. Affiliates may decide to 

report financial obligation information and SEC 

Filer information on either a swap-by-swap or 

annual basis, and the costs would vary depending 

on the reporting frequency. Regarding the financial 

obligation information, the Commission estimated 

in the NPRM that it may take the reporting 

counterparty up to 10 minutes to collect and submit 

the information for the first transaction, and one to 

five minutes to collect and submit the information 

for subsequent transactions with that same 

counterparty. The hourly wage for a compliance 

attorney is $390 resulting in a cost of $65.00 for 

reporting the first inter-affiliate swap, and a cost 

range of $6.50-$32.50 for reporting subsequent 

inter-affiliate swaps. 

138See id. (estimating that such modifications 

would create a one-time programming expense of 

approximately one to ten burden hours per affiliate, 

which means a one-time, per entity cost ranging 

from $341 and $3,410). 

139See id. (noting that costs would likely vary 

substantially depending on how frequently the 

affiliate enters into swaps, whether the affiliate 

undertakes an annual filing, and the due diligence 

that the reporting counterparty chooses to conduct, 

but estimating that a non-reporting affiliate would 

incur annually between five minutes and ten hours 

of compliance attorney time to communicate 

information to the reporting counterparty, 

translating to an aggregate annual cost for 

communicating information to the reporting 

counterparty of between $33 to $3,900). See also, 

id. (noting that an annual filing option may be less 

costly than swap-by-swap reporting and estimating 

that such an option would take an average of 30 to 

90 minutes, translating to an aggregate annual cost 

for submitting the annual report of between $195 

to $585). 

140See generally, Swap Data Recordkeeping and 

Reporting Requirements, 77 FR 2176–2193 (for 

costs and benefits incurred by SDRs). To the extent 

that no SDR is available to accept this data, the 

costs would fall to the Commission. 

141The Commission received no comments in 

response to its cost estimates for the reporting 

condition. 

requirement for the election of the 

exemption and confirmation that the 

conditions have the exemption have 

been met. Instead, EEI recommended 

that one of the affiliates be permitted to 

file an annual notice on behalf of both 

affiliates to exempt all of their swaps 

from clearing for an entire year. EEI 

contended that it will increase costs if 

both affiliates have to communicate that 

they elect not to clear the swap and 

meet the conditions of the exemption 

for each swap.134 CDEU also objected to 

reporting any information to an SDR on 

a trade-by-trade basis for inter-affiliate 

swaps as such reporting would be costly 

and onerous for parties. Instead, CDEU 

recommended that all reporting be done 

on an annual basis through a board 

resolution. 

In response to commenters’ requests, 

the Commission clarified that the 

reporting condition can be fulfilled by 

one of the affiliate counterparties on 

behalf of both counterparties. As noted 

in the NPRM, the Commission believes 

that affiliates within a corporate group 

may make independent determinations 

on whether to submit an inter-affiliate 

swap for clearing. Given the possibility 

that each affiliate may reach different 

conclusions regarding clearing the 

swap, the final rule requires that both 

counterparties elect the proposed interaffiliate clearing exemption. 

DLA Piper commented that corporate 

groups do not maintain back-office 

systems necessary to keep the level of 

detail required under parts 45 and 46 

with respect to their inter-company 

swaps. DLA Piper further commented 

that many corporate groups will need to 

develop costly systems and procedures, 

which will increase their hedging costs, 

in order to comply with the reporting 

rules. The Commission observes that the 

costs of parts 45 and 46 reporting have 

been addressed in prior rulemakings 

and are beyond the scope of this rule. 

With regard to comments 

recommending that all reporting be 

done on an annual basis rather than a 

swap-by-swap basis, the Commission 

declines to modify the rule. The 

Commission believes it is appropriate to 

provide for annual reporting of certain 

information, including how affiliates 

generally meet their financial 

obligations and information related to 

its status as an electing SEC Filer. 

However, it would not be sufficient to 

allow one annual report to cover both 

affiliate counterparties’ election of the 

exemption from clearing and the 

confirmation that both affiliates meet 

the conditions of the exemption. 

Eligible affiliates may choose to elect 

or not elect the exemption on a swapby-swap basis. As noted above, whether 

a swap is cleared or not has a significant 

impact on its ability to transfer credit 

risk from one entity to another. 

Regulators must know which swaps are 

cleared and which swaps are not cleared 

in order to monitor potential 

accumulations and transfers of risk 

within the financial system. In addition, 

they must know which exemption is 

being used to exempt certain swaps in 

order to monitor the use of each 

exemption and its possible effect on 

systemic risk. Consequently, the 

election of the exemption and the 

confirmation that the exemption’s 

conditions are met must be made for 

each swap. 

The Commission does not believe that 

this reporting requirement will impose 

a significant burden on affiliate 

counterparties because, as discussed 

above, other detailed information for 

every swap must be reported under 

sections 2(a)(13) and 4r of the CEA and 

Commission regulations. This approach 

comports with the approach adopted for 

market participants claiming the enduser exception under section 2(h)(7) of 

the CEA.135

In the NPRM, the Commission 

estimated specific costs for the reporting 

condition, including entering a notice of 

election into the reporting system.136

Cost estimates in the NPRM also 

included costs of identifying how the 

affiliates expect to meet the financial 

obligations associated with their 

uncleared swap and providing 

information if either electing affiliate is 

an SEC Filer.137 The Commission also 

estimated costs for entities to modify 

their reporting systems to accommodate 

the additional data fields required by 

this rule.138 The Commission also 

estimated costs for non-reporting 

affiliates.139 Finally, in the NPRM, the 

Commission explained that SDRs would 

bear costs associated with the reporting 

conditions insofar as SDRs would be 

required to add or edit reporting data 

fields to accommodate information 

reported by affiliates electing the interaffiliate clearing exemption.140 The 

Commission received no comments in 

response to its cost estimates for the 

reporting condition. 

The benefits of the reporting 

condition include enhancing the level of 

transparency associated with interaffiliate swaps activity, thereby 

affording the Commission new insights 

into the practices of affiliates that 

engage in inter-affiliate swaps, and 

helping the Commission and other 

appropriate regulators identify emerging 

or potential risks. As noted above, 

regulators must know whether swaps 

are cleared or uncleared in order to use 

swap data to monitor emerging risks. In 

short, the overall benefit of reporting 

would be a greater body of information 

for the Commission to analyze with the 

goal of identifying and reducing 

systemic risk.141


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142Other commenters, including The Working 

Group and FSR also opposed the condition 

regarding treatment of outward-facing swaps. See 

Section II.G above. 143See Section II.G above. 

144 In these jurisdictions, outward-facing swaps 

that are not subject to required clearing may be 

subject to margin requirements, which can serve to 

mitigate counterparty credit risk. 

5. Treatment of Outward-Facing Swaps 

The final condition imposed on the 

inter-affiliate exemption from required 

clearing relates to the treatment of 

outward-facing swaps entered into by 

the two eligible affiliate counterparties 

to the inter-affiliate swap. As proposed, 

the condition required that each affiliate 

counterparty either: (i) Is located in the 

United States; (ii) is located in a 

jurisdiction with a clearing requirement 

that is comparable and comprehensive 

to the clearing requirement in the 

United States; (iii) is required to clear 

swaps with non-affiliated parties in 

compliance with U.S. law; or (iv) does 

not enter into swaps with non-affiliated 

parties. 

The Commission received a number 

of comments in support of and opposed 

to this proposed condition, but did not 

receive any comments quantifying the 

costs or benefits of the proposed 

condition. AFR supported the proposal 

and stated that inter-affiliate swaps 

could, without appropriate restrictions, 

bring risk back to the U.S. from foreign 

affiliates. AFR commented that an interaffiliate swap might be used to move 

parts of the U.S. swaps market outside 

of U.S. regulatory oversight by 

transferring risk to jurisdictions with 

little or no regulatory oversight, 

whereby a non-U.S. affiliate of a U.S. 

entity could enter into an outwardfacing swap. AFR stated that an interaffiliate swap could contribute to 

financial contagion across different 

groups within a complex financial 

institution, making it more difficult to 

‘‘ring-fence’’ risks in one part of an 

organization. AFR further commented 

that laws and regulations of a foreign 

country might prevent U.S. 

counterparties to swaps from having 

access to the financial resources of an 

affiliate in the event of a bankruptcy or 

insolvency. Better Markets also 

supported the proposed treatment of 

outward-facing swaps condition. 

In opposition to the proposed 

condition, CDEU commented that the 

proposed ‘‘comparable and 

comprehensive’’ condition is not 

necessary or appropriate to reduce risk 

and prevent evasion because, according 

to CDEU, transactions between affiliates 

do not increase systemic risk, regardless 

of the location of the affiliate. ISDA & 

SIFMA stated that the concern that 

foreign inter-affiliate swaps pose risk to 

the U.S. financial system is unfounded 

because internal swaps have no 

conclusive effect on systemic risk.142

The Commission considered each of 

these comments and decided to adopt 

the treatment of outward-facing swaps 

condition, with certain important 

modifications, because the Commission 

believes that the risk of evasion of the 

U.S. clearing requirement and the 

potential systemic risk associated with 

uncleared inter-affiliate swaps involving 

foreign affiliates and non-affiliated 

counterparties necessitates that the 

inter-affiliate exemption include such a 

condition. As modified, the final rule 

requires that each eligible affiliate 

counterparty must clear all swaps that it 

enters into with third parties to the 

extent that the swap is subject to the 

Commission’s clearing requirement. In 

order to satisfy this requirement, eligible 

affiliates may clear their third-party 

swaps pursuant to the Commission’s 

clearing requirement or comply with the 

requirements for clearing the swap 

under a foreign jurisdiction’s clearing 

mandate that is comparable to, and as 

comprehensive as, the clearing 

requirement of section 2(h) of the Act 

and part 50 of the Commission’s 

regulations, as determined by the 

Commission. In addition, the 

Commission modified the condition to 

allow for recognition of clearing 

exemptions and exceptions under the 

CEA and an exception or exemption 

under a comparable foreign 

jurisdiction’s clearing mandate that is 

comparable to an exception or 

exemption under section 2(h)(7) of the 

CEA or part 50. For entities that are not 

in a jurisdiction with a clearing 

requirement that is comparable to, and 

as comprehensive as, the clearing 

mandate in 2(h) of the Act, they may 

comply by clearing swaps with 

unaffiliated counterparties through a 

registered DCO or clearing organization 

that is subject to supervision by 

appropriate government authorities in 

the home country of the clearing 

organization and has been assessed to be 

in compliance with the PFMIs. 

The Commission believes that this 

modification will provide greater clarity 

and transparency by more clearly 

establishing the conditions to the 

exemption and alternative methods by 

which eligible affiliates may satisfy the 

requirements. In addition, the 

Commission considered the approach 

adopted in EMIR.143 To the extent there 

is consistency with the international 

authorities, including the European 

Union, the likelihood of regulatory 

arbitrage is reduced. Regulatory 

arbitrage can impose high costs in terms 

of market efficiency. 

As AFR noted, without appropriate 

restrictions, inter-affiliate swaps could 

transfer risk back to the United States 

from foreign affiliates. The final rule 

takes steps to mitigate this risk insofar 

as the intent of the condition on 

outward-facing swaps is to narrow the 

exemption such that the risk of a 

cascading series of defaults among 

unrelated entities is reduced. 

For companies whose inter-affiliate 

swap activities are conducted 

exclusively through entities in the 

United States and jurisdictions with 

clearing mandates that are comparable 

to, and as comprehensive as, the 

clearing requirement of section 2(h) of 

the CEA, all outward-facing swaps that 

fall under a § 50.4 class will be subject 

to required clearing,144 which will serve 

as a buffer to the spread of credit risk 

from one corporation to another through 

those swaps, thus reducing the risk of 

financial contagion. Affiliates that meet 

the conditions of the inter-affiliate 

exemption will be able to transfer risk 

from one affiliate to the other without 

clearing those swaps, but third parties 

that enter into swaps that are required 

to be cleared with either of those 

affiliates will continue to be protected 

by clearing requirement. 

For companies whose inter-affiliate 

swap activities extend to countries 

without clearing mandates that are 

comparable to, and as comprehensive 

as, the clearing requirement of section 

2(h) of the CEA, the requirements of the 

rule mitigate counterparty risk 

associated with swaps that are required 

to be cleared under § 50.4 by requiring 

those swaps to be cleared at a DCO or 

a clearing organization that is subject to 

supervision by appropriate government 

authorities and that is in compliance 

with the PFMIs. In this manner, swaps 

that the Commission has determined 

must be cleared cannot be used as a 

means of transferring financial risk 

among unaffiliated entities where one of 

the counterparties is also claiming an 

exemption from required clearing under 

this inter-affiliate exemption. However, 

the Commission observes that outwardfacing swaps that are not required to be 

cleared under § 50.4 and that are 

entered into between unrelated entities 

in a jurisdiction without comparable 

margin requirements, may be a means 

through which financial risk could be 

passed between unaffiliated entities 

without the protection of required 

clearing, creating the possibility of 


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21778 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

145This risk may be mitigated if such swaps were 

subject to bilateral margining. 146Not only is there the possibility of risk transfer 

but also a potential inability for regulators to 

monitor the risks that are capable of being 

transferred. 

financial contagion.145 It is possible that 

such contagion could then be 

transferred back to the United States or 

other jurisdictions through inter-affiliate 

swaps, creating potential costs for the 

public.146 The Commission notes, 

however, that this is only a concern to 

the extent that affiliates in such 

jurisdictions enter into outward-facing 

swaps that are not required to be cleared 

under § 50.4 in order to meet their 

needs. 

The Commission does not agree with 

CDEU’s assertion that transactions 

between affiliates do not increase 

systemic risk, regardless of the location 

of the affiliate, or with ISDA & SIFMA’s 

comment that the concern that foreign 

inter-affiliate swaps pose risk to the U.S. 

financial system is unfounded. As noted 

above, in the absence of any restrictions 

on outward-facing swaps, inter-affiliate 

swaps could be used to transfer risk to 

jurisdictions without clearing 

requirements or margin requirements for 

uncleared swaps. Risk could then be 

transferred between unrelated entities 

without the protection of clearing or 

margin requirements to mitigate the risk 

of financial contagion spreading from 

one to the other. 

In addition to the modifications to the 

treatment of outward-facing swaps 

condition described above, the 

Commission also accepted commenter’s 

suggestions and is providing a transition 

period with two alternative compliance 

frameworks for eligible affiliates 

domiciled in certain foreign 

jurisdictions that have the legal 

authority to implement mandatory 

clearing regimes. As noted above, ISDA 

& SIFMA and CDEU stated that 

questions of timing and criteria for 

comparability render the proposed 

treatment of outward-facing swaps 

condition problematic, and that unless 

the condition is satisfactorily resolved, 

the condition could hamper the ability 

of U.S.-based groups to compete in 

foreign markets. ISDA & SIFMA further 

commented that if the Commission 

retains the cross-border requirements, 

the Commission should provide an 

appropriate transition period in order to 

allow foreign jurisdictions to implement 

their own G–20 mandates. The 

Commission is adopting two alternative 

compliance frameworks in response to 

concerns raised by commenters 

pertaining to the timing and sequencing 

of the implementation of the interaffiliate exemption. 

The Commission is adopting a timelimited alternative compliance 

framework, available until March 11, 

2014, for certain eligible affiliates 

transacting swaps with affiliated 

counterparties located in the European 

Union, Japan, or Singapore. The 

alternative compliance framework will 

allow affiliated counterparties, or a third 

party that directly or indirectly holds a 

majority interest in both eligible affiliate 

counterparties, to pay and collect full 

variation margin daily on all swaps 

entered into between affiliates or 

between an affiliate and its unaffiliated 

counterparties, rather than submitting 

such swaps for clearing. In addition, the 

Commission has determined to provide 

time-limited relief for certain eligible 

affiliated counterparties located in the 

European Union, Japan, or Singapore 

from complying with the requirements 

of § 50.52(b)(4)(i) as a condition of 

electing the inter-affiliate exemption. In 

particular, § 50.52(b)(4)(ii)(B) provides 

that if one of the eligible affiliate 

counterparties is located in the 

European Union, Japan, or Singapore, 

the requirements of paragraph (b)(4)(i) 

will not apply to such eligible affiliate 

counterparty until March 11, 2014, 

provided that: (1) The one counterparty 

that directly or indirectly holds a 

majority ownership interest in the other 

counterparty or the third party that 

directly or indirectly holds a majority 

ownership interest in both 

counterparties is not a ‘‘financial entity’’ 

as defined in section 2(h)(7)(C)(i) of the 

Act, and (2) neither eligible affiliate 

counterparty is affiliated with an entity 

that is a swap dealer or major swap 

participant, as defined in § 1.3. 

Another time-limited alternative 

compliance framework also will be 

available for eligible affiliates 

transacting swaps with affiliated 

counterparties located outside the 

European Union, Japan, and Singapore, 

as long as the aggregate notional value 

of such swaps, which are included in a 

class of swaps identified in § 50.4, does 

not exceed five percent of the aggregate 

notional value of all swaps, which are 

included in a class of swaps identified 

in § 50.4, in each instance the notional 

value as measured in U.S. dollar 

equivalents and calculated for each 

calendar quarter, entered into by the 

eligible affiliate counterparty located in 

the United States. 

These alternative compliance 

frameworks will mitigate the 

competitive effects that ISDA & SIFMA 

and CDEU noted by allowing certain 

entities to collect variation margin 

rather than clearing such swaps until 

March 11, 2014. The Commission 

expects that collecting full variation 

margin is likely to be less costly than 

clearing because the latter includes 

initial margin in addition to variation 

margin, as well as clearing fees. To the 

extent that the alternative compliance 

approach is less costly, it will reduce 

the competitive effects that foreign 

affiliates experience during the period 

of time when comparable clearing 

requirements do not yet exist for 

competitors operating in foreign 

jurisdictions. 

The time-limited alternative 

compliance frameworks may, 

nevertheless, have some temporary 

competitive effects in the market. 

Companies with foreign affiliates that 

are required to pay and collect variation 

margin daily on all swaps entered into 

between affiliates or between an affiliate 

and its unaffiliated counterparties will 

bear some costs that competing firms 

based entirely in foreign jurisdictions 

may not bear because comparable 

clearing mandates have not yet been 

implemented. In the European Union, 

Japan, and Singapore, these effects are 

likely to largely disappear once 

comparable regimes are established and 

companies with entities in those 

jurisdictions are required to clear. In 

jurisdictions where comparable regimes 

are never implemented, the competitive 

effects will be longer-standing. 

The Commission, however, believes 

that such costs are warranted in light of 

the benefits provided by mitigating the 

likelihood of transferring risk back to 

the United States through inter-affiliate 

swaps that are not cleared or margined. 

Requiring the payment and collection of 

full variation margin will address the 

possibility of foreign affiliates 

developing significant counterparty 

credit risk exposures and then passing 

that risk back to affiliates in the United 

States through non-cleared swaps. 

Variation margin is one of the tools used 

by clearinghouses to mitigate 

counterparty credit risk. As an 

independent risk management tool, it 

reduces counterparty credit risk by 

requiring counterparties to make daily 

payments reflecting gains or losses 

based on each swap’s value. However, it 

is not a complete replacement for the 

panoply of risk management tools that 

are used by clearinghouses to manage 

counterparty credit risk. As a 

consequence, this time-limited 

alternative compliance framework will 

mitigate counterparty credit risk, but not 

to the extent that clearing would. The 

Commission, however, believes that this 

measure will enable affiliates in the 

European Union, Japan, or Singapore to 

take advantage of the exemption while 

comparable clearing regimes are being 

established in those jurisdictions, while 


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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 21779 

147See NPRM at 50435. 

148See e.g., letter from CDEU. 

149See, e.g., letters from EEI, The Working Group, 

and DLA Piper. 

150See, e.g., letters from EEI, The Working Group, 

and ISDA & SIFMA. 151See letters from AFR and Better Markets. 

simultaneously mitigating the risk of 

financial risk being transferred back to 

the United States through uncleared 

inter-affiliate swaps. In this way it 

provides benefits to companies with 

affiliates in these jurisdictions, and also 

to the American public. 

Moreover, the Commission believes 

that providing additional time-limited 

relief for certain affiliates located in the 

European Union, Japan, or Singapore 

from the requirements of § 50.52(b)(4)(i) 

to clear their outward-facing swaps until 

March 11, 2014 under 

§ 50.52(b)(4)(ii)(B) also will mitigate the 

competitive effects noted commenters 

by allowing such entities to continue to 

enter into inter-affiliate swaps without 

requiring those swaps to be submitted to 

clearing or variation margin, and is 

likely to be less costly than requiring 

such entities to either clear or exchange 

variation margin on their inter-affiliate 

or outward-facing swaps. 

Lastly, the Commission received 

several comments regarding the criteria 

for issuing comparability 

determinations, and expressing concern 

that unless such issues are satisfactorily 

resolved, the condition could hamper 

the ability of U.S.-based groups to 

compete in foreign markets. In response, 

the Commission has provided in this 

final release a significant amount of 

additional information regarding how 

and when those determinations will be 

made. 

In the NPRM, the Commission stated 

that the condition for the treatment of 

outward-facing swaps would not impose 

additional costs.147 Commenters stated 

that the proposed condition would 

increase the costs of inter-affiliate 

swaps.148 In terms of the revised rule, 

there may be some additional costs for 

entities that must clear their outwardfacing swaps. Such costs, as discussed 

above, would include the cost of initial 

and variation margin, contributions to a 

guaranty fund, and clearing fees. 

However, in light of the comments 

discussed above, the Commission 

observes that, as modified, and with the 

transition period provided for under the 

rule, costs have been mitigated to the 

extent possible while preserving the 

goal of preventing evasion. 

In terms of benefits, the Commission 

stated in the NPRM that the corporate 

group and U.S. financial markets may 

bear additional risk if the foreign 

affiliate is free to enter into an uncleared 

swap with a third-party that would be 

subject to clearing were it entered into 

in the United States. The Commission 

believes that the requirements for 

outward-facing swaps will prevent 

foreign affiliates from taking on 

significant risk through outward-facing 

swaps that fall under a § 50.4 class, 

which reduces the risk that could then 

be transferred back to the United States 

through exempt inter-affiliate swaps. 

D. Costs and Benefits to Market 

Participants and the Public 

Many commenters asserted that interaffiliate swaps do not create any 

additional risk for third parties facing 

those affiliates.149 In addition, some 

commenters state that third parties may 

benefit from an inter-affiliate exemption 

because it will allow corporate entities 

to hedge their swaps more efficiently.150

The Commission recognizes that these 

claims may be true to the extent that 

each affiliate, or a common parent, 

completely internalizes the risks facing 

the other affiliate. Majority ownership 

facilitates such internalization of costs 

among affiliated entities, and the threat 

of reputational risk is another factor that 

may cause related entities to act in the 

best interests of affiliate counterparties. 

However, as discussed above, two other 

factors reduce the degree to which 

affiliated entities may internalize each 

other’s costs. Ownership stakes that are 

less than 100% reduce the percentage of 

costs that one affiliate internalizes from 

another, and bankruptcy laws providing 

protection for the assets of one affiliate 

from the creditors of another affiliate 

may create incentives to permit one 

affiliate to fail. These factors reduce the 

internalization of costs among affiliates. 

As a consequence, the counterparty 

risk that creditors to a given entity face 

may be increased by the inter-affiliate 

swaps into which that the entity enters. 

This risk may not be ‘‘new’’ in the sense 

that it is risk that was previously borne 

by another affiliate. But from the 

perspective of counterparties to the 

entity that now bears the risk, it is new. 

It increases the credit risk that the entity 

they face bears. 

The Commission, however, has 

established conditions on the interaffiliate exemption that are intended to 

mitigate any increase in counterparty 

risk that third parties might bear as the 

result of the exemption. As described 

above, the documentation and 

centralized risk management 

requirements help to ensure that each 

group of affiliates engaging in interaffiliate swaps has a centralized risk 

management program with adequate 

information to value and risk manage 

swap positions effectively. Moreover, 

the reporting requirements will help to 

ensure that regulators have information 

that is necessary to understand the use 

of inter-affiliate swaps under this 

exemption. 

In terms of costs, some commenters 

assert that this exception creates risk of 

contagion and systemic risk that could 

threaten the U.S. financial system.151 As 

explained above, this concern is 

substantiated to the extent that the interaffiliate exemption prevents affiliates 

from protecting themselves from 

counterparty risk they bear with respect 

to one another, and to the extent that it 

prevents third parties from protecting 

themselves from affiliates’ counterparty 

risk. The Commission believes that 

internalization of risk among affiliated 

entities mitigates this concern, and that 

the application of required clearing to 

swaps between affiliates and third 

parties further reduces the probability of 

risk cascading through the financial 

system via inter-affiliate swaps. 

AFR stated that the exemption may 

deprive DCOs of swaps volume and 

liquidity that is necessary for risk 

management. In effect, the exemption 

will reduce the number of swaps being 

cleared. All other things being equal, 

this may cause DCOs to increase the 

margin requirements for those swaps to 

compensate for having less volume, 

which may increase the cost of using 

cleared swaps. AFR also stated that the 

inter-affiliate exception will enable 

banks to set up joint ventures to trade 

swaps without clearing them. The 

Commission believes that its conditions 

with regard to treatment of outwardfacing swaps address AFR’s concerns 

about evasion of the clearing 

requirement. 

E. Costs and Benefits Compared to 

Alternatives 

The Commission considered several 

alternatives to the final rulemaking, 

including: (1) Alternative definitions of 

eligible affiliate counterparty; (2) more 

prescriptive documentation 

requirements; (3) alternative risk 

management requirements; (4) different 

requirements for treatment of outwardfacing swaps; and (5) requiring variation 

margin for swaps between affiliated 

financial entities. The first four 

alternatives are discussed at length 

above. The fifth alternative, the 

imposition of variation margin on swaps 

between affiliates that are financial 

entities, was considered by the 

Commission and ultimately rejected 

based on comments. 


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21780 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

152 17 CFR 43.2. See also Real-Time Public 

Reporting of Swap Transaction Data, 77 FR 1182 

(Jan. 9, 2012). 

153Transactions that fall outside the definition of 

‘‘publicly reportable swap transaction’’—that is, 

transactions that are not arms-length—‘‘do not serve 

the price discovery objective of CEA section 

2(a)(13)(B).’’ Real-Time Public Reporting of Swap 

Transaction Data, 77 FR 1195. See also id. at 1187 

(discussing ‘‘Swaps Between Affiliates and Portfolio 

Compression Exercises’’). 

154The definition of ‘‘publicly reportable swap 

transaction’’ identifies two examples of transactions 

that fall outside the definition, including ‘‘internal 

swaps between one-hundred percent owned 

subsidiaries of the same parent entity.’’ 17 CFR 43.2 

(adopted by Real-Time Public Reporting of Swap 

Transaction Data, 77 FR 1244). The Commission 

notes that the list of examples is not exhaustive. 

As proposed, the inter-affiliate 

exemption would have required 

affiliated financial entities to pay and 

collect variation margin associated with 

their swaps unless the affiliates were 

100% commonly owned and commonly 

guaranteed by a 100% commonly 

owned guarantor. In the final rule, the 

Commission has eliminated the 

variation margin requirement. This 

change is likely to create significant 

savings for eligible affiliates. Reduced 

margin requirements will reduce the 

capital costs that entities bear when 

transacting inter-affiliate swaps, and 

may reduce the capital requirements for 

financial entities under prudential 

regulation. In addition, it may help 

entities avoid liquidity crunches when 

their positions move significantly out of 

the money in a short period of time. 

However, eliminating the variation 

margin requirement also significantly 

reduces the protective value of the 

eligibility requirements that the 

Commission established in order to 

reduce the likelihood of cascading 

defaults among affiliated entities, and 

the associated risk to third parties 

transacting with those entities. Without 

the variation margin requirements, 

affiliated entities may develop large 

outstanding exposures toward one 

another, and to the degree that affiliated 

entities do not internalize one another’s 

costs, an affiliate that is out of the 

money will have incentives not to 

perform on its obligations. In addition if 

the obligations of one entity are 

sufficiently large, its default may 

jeopardize the health of other affiliated 

entities, which would also increase 

counterparty risk for third parties that 

have uncleared outstanding positions 

with those entities. 

F. Consideration of CEA Section 15(a) 

Factors 

1. Protection of Market Participants and 

the Public 

In deciding to finalize the interaffiliate clearing exemption, the 

Commission assessed how to protect 

affiliated entities, third parties in the 

swaps market, and the public. The 

Commission has sought to ensure that in 

the absence of a clearing requirement 

the risks presented by uncleared interaffiliate swaps would be mitigated so 

that significant losses to one affiliate 

counterparty or a default of one of the 

affiliate counterparties is less likely to 

create significant repercussions for 

third-parties or the American public. 

Toward that end, the Commission has 

required that affiliates to execute swap 

trading relationship documentation, 

maintain a centralized-risk management 

process, and report specific information 

to an SDR, and meet certain 

requirements related to outward-facing 

swaps in order to be eligible for the 

exception. As explained in this costbenefit section, these conditions serve 

multiple objectives that ultimately 

protect market participants and the 

public. 

For instance, the documentation 

requirement will reduce uncertainties 

where affiliates incur significant swapsrelated losses or where there is a 

defaulting affiliate. Because the 

documentation would be in writing, the 

Commission expects that there will be 

less contractual ambiguity should 

disagreements between affiliates arise. 

The condition that an inter-affiliate 

swap be subject to a centralized risk 

management program reasonably 

designed to monitor and manage risk 

will also help mitigate the risks 

associated with inter-affiliate swaps. As 

noted throughout this final rulemaking, 

inter-affiliate swap risk could adversely 

impact third parties that enter into 

uncleared swaps or other contracts with 

affiliates engaging in inter-affiliate 

swaps. 

The reporting condition would help 

the Commission and the affiliate’s 

leadership monitor compliance with the 

inter-affiliate clearing exemption. For 

example, an affiliate that also is an SEC 

Filer must receive a governing board’s 

approval for electing the proposed 

exemption. It cannot act independently. 

In the Commission’s opinion, the 

reporting conditions promote 

accountability and transparency, 

offering another public safeguard by 

keeping the Commission and each 

entity’s board of directors informed. 

On the other hand, the rule also 

creates certain costs that will be borne 

by eligible entities, the counterparties to 

those entities, and the public. Regarding 

costs for eligible entities, the 

qualification requirements will create 

some new costs for those that do not 

already have recordkeeping and risk 

management systems that are in 

compliance with the rule. However, as 

noted above, the Commission believes 

that some entities may already have 

systems in place that meet most or all 

of the requirements. Moreover, entities 

will elect the exemption only if they 

project the benefit of doing so is greater 

than the costs associated with the 

qualifying requirements. Therefore, 

these costs may decrease the value of 

the exemption, but they will not create 

new costs for entities that choose not to 

elect the exemption. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

Exempting swaps between majorityowned affiliates within a corporate 

group from the clearing requirement 

will promote allocational efficiency by 

reducing overall clearing costs for 

eligible affiliate counterparties. The 

Commission also anticipates that the 

exemption will increase allocational 

efficiency and the financial integrity of 

markets because it will make it less 

costly for corporate groups to centralize 

their hedging and market facing swap 

activities within a single affiliate. As 

explained above, commenters stated 

that clearing swaps through single 

affiliates enables affiliates and corporate 

groups to more efficiently and 

effectively manage corporate risk. 

Certain provisions of the proposed 

rule, such as the requirements that interaffiliate swaps be subject to centralized 

risk management and that certain 

information be reported, also would 

discourage abuse of the exemption. 

Together, these conditions promote the 

financial integrity of swap markets and 

financial markets as a whole. 

3. Price Discovery 

Under Commission regulation 43.2, a 

‘‘publicly reportable swap transaction,’’ 

means, among other things, ‘‘any 

executed swap that is an arm’s length 

transaction between two parties that 

results in a corresponding change in the 

market risk position between the two 

parties.’’ 152 The Commission does not 

consider non-arms-length swaps as 

contributing to price discovery in the 

markets.153 Given that inter-affiliate 

swaps as defined in this rulemaking are 

generally not arm’s length transactions, 

the Commission does not anticipate the 

inter-affiliate clearing exemption to 

have any significant effect on price 

discovery.154

4. Sound Risk Management Practices 

As a general rule, the Commission 

believes that clearing swaps is a sound 


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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 21781 

155The Commission notes that even in the 

absence of required clearing or margin requirements 

for swaps between certain affiliated entities, such 

entities may choose to use initial and variation 

margin to manage risks that could otherwise be 

transferred from one affiliate to another. Similarly, 

third parties that have entered into swaps with 

affiliates may also include variation margin 

requirements in their swap agreements. 

156See 5 U.S.C. 601 et seq. 

157To the extent that this rulemaking affects 

DCMs, DCOs, or FCMs, the Commission has 

previously determined that DCMs, DCOs, and FCMs 

are not small entities for purposes of the RFA. See, 

respectively and as indicated, 47 FR 18618, 18619 

(Apr. 30, 1982) (DCMs and FCMs); and 66 FR 

45604, 45609 (Aug. 29, 2001) (DCOs). 

158See 66 FR 20740, 20743 (Apr. 25, 2001). 

159See joint letter from EEI, NRECA, and ESPA, 

dated Nov. 4, 2011, (Electric Associations Letter), 

commenting on Swap Transaction Compliance and 

Implementation Schedule: Clearing and Trade 

Execution Requirements under Section 2(h) of the 

CEA, 76 FR 58186 (Sept. 20, 2011). 

160Small Business Administration, Table of Small 

Business Size Standards, Nov. 5, 2010. 

161See Electric Associations Letter, at 2. The 

letter also suggests that EEI, NRECA, and EPSA 

members are not financial entities. See id., at note 

5, and at 5 (the associations’ members ‘‘are not 

financial companies’’). 

risk management practice. Exempting 

certain inter-affiliate swaps from the 

clearing requirement creates additional 

counterparty exposure for affiliates that 

do not completely internalize each 

other’s risk, and for third parties that 

enter into uncleared swaps or other 

transactions with those affiliated 

entities. This increased counterparty 

risk among affiliates may increase the 

likelihood that a default within one 

affiliate could cause significant losses in 

other affiliated entities. If the default 

causes other affiliated entities to default, 

then third parties that have entered into 

uncleared swaps or other agreements 

with those entities also could be 

affected. But, in finalizing the interaffiliate clearing exemption, the 

Commission has assessed the risks of 

inter-affiliate swaps, and believes that 

the partial internalization of costs 

among affiliated entities, combined with 

the documentation, risk management, 

reporting, and treatment of outwardfacing swaps requirements for electing 

the exception, will mitigate some of the 

risks associated with uncleared interaffiliate swaps. However, they are not a 

complete substitute for the protections 

that would be provided by required 

clearing, or by a requirement to use 

some of the same risk management tools 

that a clearinghouse would use to 

mitigate counterparty credit risk (i.e., 

initial and variation margin). 

Also, as noted above, without clearing 

to mitigate transmission of risk among 

affiliates, the risk that any one affiliate 

takes on, and any contagion that may be 

caused by that risk, may be transferred 

more easily to other affiliates. This 

makes the risk mitigation requirements 

for outward-facing swaps more 

important. The Commission’s 

requirements for outward-facing swaps 

mitigate the risk that swaps that the 

Commission has determined are 

required to be cleared could transfer risk 

that would then be spread among the 

affiliates, but does not eliminate the 

possibility that swaps that are not 

required to be cleared and are transacted 

in a regime without mandatory clearing 

(or bilateral margin requirements) for 

uncleared swaps could result in 

financial risk that impacts its affiliates 

and counterparties of those affiliates.155

The Commission also believes that 

SEC Filer reporting is a prudent 

practice. As detailed in this preamble 

and the rule text, SEC Filers are 

affiliates that meet certain SEC-related 

qualifications, and their governing 

boards or equivalent bodies are directly 

responsible to shareholders for the 

financial condition and performance of 

the affiliate. The boards also have access 

to information that would give them a 

comprehensive picture of the company’s 

financial condition and risk 

management strategies. Therefore, any 

oversight they provide to the affiliate’s 

risk management strategies would likely 

encourage sound risk management 

practices. In addition, the condition that 

affiliates electing the inter-affiliate 

clearing exemption must report their 

boards’ knowledge of the election is a 

sound risk management practice. 

5. Other Public Interest Considerations 

Aside from those discussed in Section 

II.A above, the Commission has 

identified no other public interest 

considerations. 

IV. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

requires that agencies consider whether 

the rules they propose will have a 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.156 As stated in the NPRM, the 

clearing requirement determinations 

and rules proposed by the Commission 

will affect only ECPs because all 

persons that are not ECPs are required 

to execute their swaps on a designated 

contract market (DCM), and all contracts 

executed on a DCM must be cleared by 

a DCO, as required by statute and 

regulation; not by operation of any 

clearing requirement.157 Accordingly, 

the Chairman, on behalf of the 

Commission, certified pursuant to 5 

U.S.C. 605(b) that the proposed rules 

would not have a significant economic 

impact on a substantial number of small 

entities. The Commission then invited 

public comment on this determination. 

The Commission received no comments. 

The Commission has previously 

determined that ECPs are not small 

entities for purposes of the RFA.158

However, in its proposed rulemaking to 

establish a schedule to phase in 

compliance with certain provisions of 

the Dodd-Frank Act, including the 

clearing requirement under section 

2(h)(1)(A) of the CEA, the Commission 

received a joint comment (Electric 

Associations Letter) from the Edison 

Electric Institute (EEI), the National 

Rural Electric Cooperative Association 

(NRECA) and the Electric Power Supply 

Association (EPSA) asserting that 

certain members of NRECA may both be 

ECPs under the CEA and small 

businesses under the RFA.159 These 

members of NRECA, as the Commission 

understands, have been determined to 

be small entities by the Small Business 

Administration (SBA) because they are 

‘‘primarily engaged in the generation, 

transmission, and/or distribution of 

electric energy for sale and [their] total 

electric output for the preceding fiscal 

year did not exceed 4 million megawatt 

hours.’’ 160 Although the Electric 

Associations Letter does not provide 

details on whether or how the NRECA 

members that have been determined to 

be small entities use the interest rate 

swaps and CDS that are the subject of 

this rulemaking, the Electric 

Associations Letter does state that the 

EEI, NRECA, and EPSA members 

‘‘engage in swaps to hedge commercial 

risk.’’ 161 Because the NRECA members 

that have been determined to be small 

entities would be using swaps to hedge 

commercial risk, the Commission 

expects that they would be able to use 

the end-user exception from the clearing 

requirement and therefore would not be 

affected to any significant extent by this 

rulemaking. 

Thus, because nearly all of the ECPs 

that may be subject to the proposed 

clearing requirement are not small 

entities, and because the few ECPs that 

have been determined by the SBA to be 

small entities are unlikely to be subject 

to the clearing requirement, the 

Chairman, on behalf of the CFTC, 

hereby certifies pursuant to 5 U.S.C. 

605(b) that the rules herein will not 

have a significant economic impact on 

a substantial number of small entities. 


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162 44 U.S.C. 3501 et seq. 

163 Id. 

164 7 U.S.C. 12(a)(1). 

165NPRM at 50439–40. 

166 Id. 

167The NPRM noted that to comply with 

proposed § 39.6(g)(4)(i) (now § 50.52(c)(1)), each 

reporting counterparty would be required to check 

a box indicating that both counterparties to the 

swap are electing not to clear the swap. 

168NPRM at 50440. 

169NPRM at 50441. 

170 Id. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) 162 imposes certain requirements 

on Federal agencies in connection with 

their conducting or sponsoring any 

collection of information as defined by 

the PRA. An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it has been approved by the 

Office of Management and Budget 

(OMB) and displays a currently valid 

control number.163

Certain provisions of this final 

rulemaking impose new information 

collection requirements within the 

meaning of the PRA, for which the 

Commission must obtain a valid control 

number. Accordingly, the Commission 

requested, and OMB has assigned 

control number 3038–0104 for the new 

collection of information. The 

Commission also has submitted this 

final rule release, the proposed 

rulemaking, and all required supporting 

documentation to OMB for review in 

accordance with 44 U.S.C. 3507(d) and 

5 CFR 1320.11. The title for this new 

collection of information is ‘‘Rule 50.52 

(proposed as rule 39.6(g)) Affiliate 

Transaction Uncleared Swap 

Notification.’’ Responses to this 

collection of information will be 

mandatory. 

The Commission will protect 

proprietary information in accordance 

with the Freedom of Information Act 

and 17 CFR part 145, entitled 

‘‘Commission Records and 

Information.’’ In addition, section 

8(a)(1) of the CEA strictly prohibits the 

Commission, unless specifically 

authorized by the Act, from making 

public ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ 164 The Commission also is 

required to protect certain information 

contained in a government system of 

records according to the Privacy Act of 

1974, 5 U.S.C. 552a. 

1. Information Provided by Reporting 

Entities 

The regulations being adopted in this 

final rule release impose certain 

reporting requirements on eligible 

affiliates that enter into inter-affiliate 

swaps and elect the inter-affiliate 

exemption from clearing such swaps. As 

described in the NPRM and in this final 

release, the reporting requirements are 

designed to address Commission 

concerns regarding inter-affiliate swap 

risk and to provide the Commission 

with information necessary to regulate 

the swaps market. In particular, 

regulation 50.52(c) (proposed as 

§ 39.6(g)(4)) will require an electing 

counterparty to provide, or cause to be 

provided, certain information to a 

registered SDR or, if no registered SDR 

is available to receive the information, 

to the Commission, in the form and 

manner specified by the Commission. 

As further described in this final rule 

release, § 50.52(c)(1) requires reporting 

counterparties to notify the Commission 

each time they elect the inter-affiliate 

clearing exemption for each swap, by 

reporting certain information to a 

registered SDR, or to the Commission, if 

no registered SDR is available to receive 

the information. Reporting 

counterparties also must report the 

information required by § 50.52(c)(2) 

and (3), and have the option to report 

such information each time that the 

eligible counterparties elect the interaffiliate exemption for each swap, or on 

an annual basis in anticipation of 

electing the exemption. 

To determine the total time burden 

and cost associated with the proposed 

rule for PRA purposes, the Commission 

estimated the number of affiliates that 

likely would seek to claim the 

exemption and the average number of 

inter-affiliate swaps for which the 

affiliates would elect to use the 

proposed exemption. The Commission 

also estimated the time burden required 

for entities to comply with the reporting 

requirements. 

In estimating the number of affiliates 

and the average number of inter-affiliate 

swaps that likely would claim the interaffiliate exemption, the Commission 

used data from the U.S. Bureau of 

Economic Analysis (BEA) to estimate 

that there are approximately 22 

subsidiaries per U.S. multinational 

parent company (MNC), resulting in a 

total of 53,195 affiliates that might elect 

the inter-affiliate exemption.165 As more 

fully described in the NPRM, the 

Commission surveyed five corporations 

to obtain information that allowed it to 

estimate that affiliates enter into an 

average of 2,230 inter-affiliate swaps 

annually.166

In estimating the time burden 

associated with complying with the 

reporting requirements of the rules, the 

Commission stated in the NPRM that it 

expected each reporting counterparty 

would likely spend between 15 seconds 

to two minutes per transaction entering 

information required by § 50.52(c)(1) 

(proposed § 39.6(g)(4)(i)) into the 

reporting system.167 The Commission 

further estimated that it would take the 

reporting counterparty up to 10 minutes 

to collect and submit the information 

required under § 50.52(c)(2)–(3) 

(proposed § 39.6(g)(4)(ii)–(iii)), for the 

first transaction and one to five minutes 

to collect and submit the information for 

subsequent transactions with that same 

counterparty. The Commission 

estimated that together these 

requirements would cost a reporting 

counterparty between $1.63 and $13.00 

to comply with § 50.52(c)(1) (proposed 

§ 39.6(g)(4)(i)), $65.00 to comply with 

§ 50.52(c)(2)–(3) (proposed 

§ 39.6(g)(4)(ii)–(iii)) for the first interaffiliate swap, and between $6.50 and 

$32.50 to comply with § 50.52(c)(2)–(3) 

(proposed § 39.6(g)(4)(ii)–(iii)) for 

subsequent inter-affiliate swaps with the 

same counterparty.168

With respect to the annual reporting 

option described in § 50.52(d), the 

Commission stated in the NPRM that it 

anticipated that at least 90% of MNCs 

would choose to file an annual report in 

lieu of reporting each swap separately. 

The Commission estimated in the 

NPRM that it would take an average of 

30 to 90 minutes to complete and 

submit the filing, resulting in an annual 

aggregate cost for submitting the annual 

report of approximately $195 to $585.169

In addition to the specific reporting 

obligations described in the rules, the 

NPRM also noted that reporting 

counterparties may need to update 

established reporting systems to comply 

with the reporting requirement, and 

non-reporting affiliate counterparties 

may need to transmit information to 

reporting counterparties after entering 

into a swap subject to the rules. In the 

NPRM, the Commission stated that it 

anticipated that reporting counterparties 

may have to modify their established 

reporting systems in order to 

accommodate the additional data fields 

required by § 50.52(c) (proposed 

§ 39.6(g)(4)), and estimated that the 

modifications would create a one-time 

cost of between $341 and $3,410 per 

entity.170 The Commission further 

stated in the NPRM that it anticipated 

that an affiliate who is not the reporting 

counterparty may need to communicate 

information to the reporting 

counterparty after executing an interaffiliate swap, and estimated the cost of, 

among other things, providing 


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171 Id. 

172See 5 CFR 1320.11(f). 

173The Commission further notes that EEI’s 

comments were made exclusively with respect to 

U.S. energy companies and not the broader 

spectrum of potential MNCs that are included 

within the estimation. 

174See Table I.A 2., ‘‘Selected Data for Foreign 

Affiliates and U.S. Parents in All Industries,’’ 

located at http://www.bea.gov/international/pdf/ 

usdia_2009p/Group%20I%20tables.pdf. The BEA 

defines a U.S. Parent of a MNC as a person that is 

a resident in the United States and owns or controls 

10 percent or more of the voting securities, or the 

equivalent, of a foreign business enterprise. A 

Guide to BEA Statistics on U.S. Multinational 

Companies, available at http://www.bea.gov/scb/ 

pdf/internat/usinvest/1995/0395iid.pdf. 

information to facilitate any due 

diligence that the reporting counterparty 

may conduct, to be between $33 and 

$3,900.171

Using these figures, the Commission 

estimated that the inter-affiliate 

exemption could result in an average 

total annual burden of 1,758,369 hours 

and average total annual costs of 

$685,309,281, or approximately 1.8 

minutes and $10.48 per inter-affiliate 

swap. 

2. Information Collection Comments 

The Commission invited public 

comment on the proposed PRA analysis 

and estimates and on any aspect of the 

reporting burdens resulting from 

proposed § 39.6(g) (now § 50.52(c)). One 

commenter submitted comments in 

relation to the Commission’s estimate of 

the number of eligible affiliates seeking 

to claim the exemption. No commenters 

submitted comments to OMB, and OMB 

itself did not submit any comments to 

the Commission pertaining to the 

proposed rule.172

In the context of its comments 

pertaining to the costs and benefits of 

the reporting requirements of the 

proposed rule, EEI claimed that the 

Commission’s estimation of 22 eligible 

affiliates per MNC was ‘‘far too low’’ for 

many U.S. energy companies. Although 

EEI commented that the Commission’s 

estimate of the number of affiliates per 

MNC was too low in the context of U.S. 

energy companies, EEI did not provide 

an alternative estimate or point to any 

other sources of information that might 

provide an alternative source for 

estimating the average number of 

subsidiaries per MNC. 

The Commission has considered EEI’s 

comment and declines to revise its 

estimate of the number of affiliates of an 

MNC.173 As described in the NPRM, the 

Commission estimated that a total of 

53,195 affiliates might elect the interaffiliate clearing exemption. The 

Commission’s estimation of the number 

of affiliates of an MNC was based on the 

most recent data collected by the BEA, 

which indicated that there are 2,347 

MNCs in the U.S. and 25,424 foreign 

subsidiaries that are majority owned by 

such MNCs.174 To account for the 

number of majority-owned U.S. 

subsidiaries of MNCs, the Commission 

doubled the BEA’s foreign subsidiaries, 

and determined that there are an 

estimated 50,848 U.S. and foreign 

subsidiaries, or approximately 22 

subsidiaries per MNC. 

The Commission further notes that 

the estimate of the number of affiliates 

per MNC proposed in the NPRM and 

adopted in this release for purposes of 

the PRA, is an averaged approximation 

based on publically available 

information collected by the BEA, and 

acknowledges that the number of 

affiliates of an MNC may be higher or 

lower than 22. However, there is no 

basis for concluding that the use of a 

different source for estimating the 

average number of affiliates per MNC 

would result in a higher number 

estimate, nor did the Commission 

receive comments to that effect. 

Accordingly, the Commission believes 

that its estimation is reasonable in light 

of the information that is publicly 

available at this time, and that its 

original proposed estimates remain 

appropriate for purposes of the PRA. 

List of Subjects in 17 CFR Part 50 

Business and industry, Clearing, 

Swaps. 

For the reasons stated in the 

preamble, amend 17 CFR part 50 as 

follows: 

PART 50—CLEARING REQUIREMENT 

AND RELATED RULES 

■ 1. The authority citation for part 50 

continues to read as follows: 

Authority: 7 U.S.C. 2(h) and 7a–1 as 

amended by Pub. L. 111–203, 124 Stat. 1376. 

■ 2. The heading for part 50 is revised 

to read as set forth above. 

■ 3. Add § 50.52 to subpart C to read as 

follows: 

§ 50.52 Exemption for swaps between 

affiliates. 

(a) Eligible affiliate counterparty 

status. Subject to the conditions in 

paragraph (b) of this section: 

(1) Counterparties to a swap may elect 

not to clear a swap subject to the 

clearing requirement of section 

2(h)(1)(A) of the Act and this part if: 

(i) One counterparty, directly or 

indirectly, holds a majority ownership 

interest in the other counterparty, and 

the counterparty that holds the majority 

interest in the other counterparty 

reports its financial statements on a 

consolidated basis under Generally 

Accepted Accounting Principles or 

International Financial Reporting 

Standards, and such consolidated 

financial statements include the 

financial results of the majority-owned 

counterparty; or 

(ii) A third party, directly or 

indirectly, holds a majority ownership 

interest in both counterparties, and the 

third party reports its financial 

statements on a consolidated basis 

under Generally Accepted Accounting 

Principles or International Financial 

Reporting Standards, and such 

consolidated financial statements 

include the financial results of both of 

the swap counterparties. 

(2) For purposes of this section: 

(i) A counterparty or third party 

directly or indirectly holds a majority 

ownership interest if it directly or 

indirectly holds a majority of the equity 

securities of an entity, or the right to 

receive upon dissolution, or the 

contribution of, a majority of the capital 

of a partnership; and 

(ii) The term ‘‘eligible affiliate 

counterparty’’ means an entity that 

meets the requirements of this 

paragraph. 

(b) Additional conditions. Eligible 

affiliate counterparties to a swap may 

elect the exemption described in 

paragraph (a) of this section if: 

(1) Both counterparties elect not to 

clear the swap; 

(2)(i) A swap dealer or major swap 

participant that is an eligible affiliate 

counterparty to the swap satisfies the 

requirements of § 23.504 of this chapter; 

or 

(ii) If neither eligible affiliate 

counterparty is a swap dealer or major 

swap participant, the terms of the swap 

are documented in a swap trading 

relationship document that shall be in 

writing and shall include all terms 

governing the trading relationship 

between the eligible affiliate 

counterparties; 

(3) The swap is subject to a 

centralized risk management program 

that is reasonably designed to monitor 

and manage the risks associated with 

the swap. If at least one of the eligible 

affiliate counterparties is a swap dealer 

or major swap participant, this 

centralized risk management 

requirement shall be satisfied by 

complying with the requirements of 

§ 23.600 of this chapter; and 

(4)(i) Each eligible affiliate 

counterparty that enters into a swap, 

which is included in a class of swaps 

identified in § 50.4, with an unaffiliated 

counterparty shall: 


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21784 Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 

(A) Comply with the requirements for 

clearing the swap in section 2(h) of the 

Act and this part; 

(B) Comply with the requirements for 

clearing the swap under a foreign 

jurisdiction’s clearing mandate that is 

comparable, and comprehensive but not 

necessarily identical, to the clearing 

requirement of section 2(h) of the Act 

and this part, as determined by the 

Commission; 

(C) Comply with an exception or 

exemption under section 2(h)(7) of the 

Act or this part; 

(D) Comply with an exception or 

exemption under a foreign jurisdiction’s 

clearing mandate, provided that: 

(1) The foreign jurisdiction’s clearing 

mandate is comparable, and 

comprehensive but not necessarily 

identical, to the clearing requirement of 

section 2(h) of the Act and this part, as 

determined by the Commission; and 

(2) The foreign jurisdiction’s 

exception or exemption is comparable 

to an exception or exemption under 

section 2(h)(7) of the Act or this part, as 

determined by the Commission; or 

(E) Clear such swap through a 

registered derivatives clearing 

organization or a clearing organization 

that is subject to supervision by 

appropriate government authorities in 

the home country of the clearing 

organization and has been assessed to be 

in compliance with the Principles for 

Financial Market Infrastructures. 

(ii)(A) Except as provided in 

paragraph (b)(4)(ii)(B) of this section, if 

one of the eligible affiliate 

counterparties is located in the 

European Union, Japan, or Singapore, 

the following may satisfy the 

requirements of paragraph (b)(4)(i) of 

this section until March 11, 2014: 

(1) Each eligible affiliate counterparty, 

or a third party that directly or 

indirectly holds a majority interest in 

both eligible affiliate counterparties, 

pays and collects full variation margin 

daily on all swaps entered into between 

the eligible affiliate counterparty located 

in the European Union, Japan, or 

Singapore and an unaffiliated 

counterparty; or 

(2) Each eligible affiliate counterparty, 

or a third party that directly or 

indirectly holds a majority interest in 

both eligible affiliate counterparties, 

pays and collects full variation margin 

daily on all of the eligible affiliate 

counterparties’ swaps with other 

eligible affiliate counterparties. 

(B) If one of the eligible affiliate 

counterparties is located in the 

European Union, Japan, or Singapore, 

the requirements of paragraph (b)(4)(i) 

of this section shall not apply to the 

eligible affiliate counterparty located in 

the European Union, Japan, or 

Singapore until March 11, 2014, 

provided that: 

(1) The one counterparty that directly 

or indirectly holds a majority ownership 

interest in the other counterparty or the 

third party that directly or indirectly 

holds a majority ownership interest in 

both counterparties is not a ‘‘financial 

entity’’ as defined in section 2(h)(7)(C)(i) 

of the Act; and 

(2) Neither eligible affiliate 

counterparty is affiliated with an entity 

that is a swap dealer or major swap 

participant, as defined in § 1.3. 

(iii) If an eligible affiliate counterparty 

located in the United States enters into 

swaps, which are included in a class of 

swaps identified in § 50.4, with eligible 

affiliate counterparties located in 

jurisdictions other than the United 

States, the European Union, Japan, and 

Singapore, and the aggregate notional 

value of such swaps, which are 

included in a class of swaps identified 

in § 50.4, does not exceed five percent 

of the aggregate notional value of all 

swaps, which are included in a class of 

swaps identified in § 50.4, in each 

instance the notional value as measured 

in U.S. dollar equivalents and 

calculated for each calendar quarter, 

entered into by the eligible affiliate 

counterparty located in the United 

States, then such swaps shall be deemed 

to satisfy the requirements of paragraph 

(b)(4)(i) of this section until March 11, 

2014, provided that: 

(A) Each eligible affiliate 

counterparty, or a third party that 

directly or indirectly holds a majority 

interest in both eligible affiliate 

counterparties, pays and collects full 

variation margin daily on all swaps 

entered into between the eligible 

affiliate counterparties located in 

jurisdictions other than the United 

States, the European Union, Japan, and 

Singapore and an unaffiliated 

counterparty; or 

(B) Each eligible affiliate 

counterparty, or a third party that 

directly or indirectly holds a majority 

interest in both eligible affiliate 

counterparties, pays and collects full 

variation margin daily on all of the 

eligible affiliate counterparties’ swaps 

with other eligible affiliate 

counterparties. 

(c) Reporting requirements. When the 

exemption described in paragraph (a) of 

this section is elected, the reporting 

counterparty, as determined in 

accordance with § 45.8 of this chapter, 

shall provide or cause to be provided 

the following information to a registered 

swap data repository or, if no registered 

swap data repository is available to 

receive the information from the 

reporting counterparty, to the 

Commission, in the form and manner 

specified by the Commission: 

(1) Confirmation that both eligible 

affiliate counterparties to the swap are 

electing not to clear the swap and that 

each of the electing eligible affiliate 

counterparties satisfies the requirements 

in paragraph (b) of this section 

applicable to it; 

(2) For each electing eligible affiliate 

counterparty, how the counterparty 

generally meets its financial obligations 

associated with entering into noncleared swaps by identifying one or 

more of the following categories, as 

applicable: 

(i) A written credit support 

agreement; 

(ii) Pledged or segregated assets 

(including posting or receiving margin 

pursuant to a credit support agreement 

or otherwise); 

(iii) A written guarantee from another 

party; 

(iv) The electing counterparty’s 

available financial resources; or 

(v) Means other than those described 

in paragraphs (c)(2)(i), (ii), (iii) or (iv) of 

this section; and 

(3) If an electing eligible affiliate 

counterparty is an entity that is an 

issuer of securities registered under 

section 12 of, or is required to file 

reports under section 15(d) of, the 

Securities Exchange Act of 1934: 

(i) The relevant SEC Central Index 

Key number for that counterparty; and 

(ii) Acknowledgment that an 

appropriate committee of the board of 

directors (or equivalent body) of the 

eligible affiliate counterparty has 

reviewed and approved the decision to 

enter into swaps that are exempt from 

the requirements of section 2(h)(1) and 

2(h)(8) of the Act. 

(d) Annual reporting. An eligible 

affiliate counterparty that qualifies for 

the exemption described in paragraph 

(a) of this section may report the 

information listed in paragraphs (c)(2) 

and (3) of this section annually in 

anticipation of electing the exemption 

for one or more swaps. Any such 

reporting by a reporting counterparty 

under this paragraph will be effective 

for purposes of paragraphs (c)(2) and (3) 

of this section for 365 days following 

the date of such reporting. During the 

365-day period, the reporting 

counterparty shall amend the report as 

necessary to reflect any material 

changes to the information reported. 

Each reporting counterparty shall have 

a reasonable basis to believe that the 

eligible affiliate counterparties meet the 

requirements for the exemption under 

this section. 


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Federal Register / Vol. 78, No. 70 / Thursday, April 11, 2013 / Rules and Regulations 21785 

Issued in Washington, DC, on April 1, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Clearing Exemption for 

Swaps Between Certain Affiliated 

Entities—Commission Voting Summary 

and Statements of Commissioners 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton, O’Malia, and Wetjen 

voted in the affirmative; Commissioner 

Sommers voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final rule to exempt swaps 

between certain affiliated entities within a 

corporate group from the clearing 

requirement in the Dodd-Frank Wall Street 

Reform and Consumer Protection Act. 

Since the late 19th century, clearinghouses 

have lowered risk for the public and fostered 

competition in the futures market. Clearing 

also has democratized the market by fostering 

access for farmers, ranchers, merchants and 

other participants. 

The Commission approved the first 

clearing requirement for swaps last 

November, following through on the U.S. 

commitment at the 2009 G–20 meeting that 

standardized swaps be cleared by the end of 

2012. Following Congress’ direction, endusers are not required to bring swaps into 

central clearing. 

A key milestone was reached on March 11 

with the requirement that swap dealers and 

the largest hedge funds begin clearing the 

vast majority of interest rate and credit 

default index swaps. Compliance will 

continue to be phased in throughout this 

year. Other financial entities begin clearing 

June 10. Accounts managed by third party 

investment managers and ERISA pension 

plans have until September 9. 

The final rule allows for an exemption 

from clearing for swaps between affiliates 

under the following limitations: 

• First, the exemption covers swaps 

between majority-owned affiliates whose 

financial statements are reported on a 

consolidated basis. 

• Second, the rule requires documentation 

of such exempted swaps, centralized risk 

management, and reporting requirements for 

such swaps. 

• Third, the exemption requires that each 

swap entered into by the affiliated 

counterparties with unaffiliated 

counterparties must be cleared. This 

approach largely aligns with the Europeans’ 

approach to an exemption for inter-affiliate 

clearing. 

In order to promote international 

harmonization regarding mandatory clearing, 

the final rulemaking provides for two timelimited alternative compliance frameworks 

for swaps entered into with unaffiliated 

counterparties in jurisdictions outside of the 

United States. 

With regard to affiliated counterparties 

located in the European Union, Japan and 

Singapore—jurisdictions that have adopted 

swap clearing regimes and are currently in 

the process of implementation—the 

Commission is phasing compliance with the 

requirement to clear swaps with unaffiliated 

counterparties until March 11, 2014. During 

the phase-in period affiliated counterparties 

located in these jurisdictions will be able to 

pay and collect variation margin in lieu of 

clearing. Affiliated counterparties that are 

located in these jurisdictions (that are not 

affiliated with swap dealers or major swap 

participants) will not have to pay or collect 

such variation margin during the phase-in 

period, provided they are not directly or 

indirectly majority-owned by a financial 

entity. 

With regard to affiliated counterparties 

located in other foreign jurisdictions, the 

Commission is phasing compliance with the 

requirement to clear swaps with unaffiliated 

counterparties until March 11, 2014. Until 

that date, an affiliated counterparty located 

outside the United States, the European 

Union, Japan and Singapore does not have to 

clear its swaps with unaffiliated 

counterparties so long as the aggregate 

notional value of such swaps does not exceed 

five percent of the notional value of all swaps 

entered into by the affiliated counterparty 

located in the United States. 

This phasing in of the inter-affiliate 

exemption provides a transition period for 

foreign jurisdictions to implement 

comparable and comprehensive clearing 

regimes. 

[FR Doc. 2013–07970 Filed 4–10–13; 8:45 am] 

BILLING CODE 6351–01–P 


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