Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules 50425 

1 17 CFR 145.9. Commission regulations may be 

accessed through the Commission’s Web site, 

http://www.cftc.gov. 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (July 21, 2010). 

3 7 U.S.C. 1 et seq. (2006). 

4CEA section 2(h)(1)(A), 7 U.S.C. 2(h)(1)(A). 

5See CEA section 2(h)(1)(A), 7 U.S.C. 2(h)(1)(A). 

The CEA’s clearing requirement states that, ‘‘[i]t 

shall be unlawful for any person to engage in a 

swap unless that person submits such swap for 

Continued 

distance references; and retaining ILS at 

current sites with installation of new 

ILSs by military where needed in lieu of 

LP and LPV. 

* * * * * 

Issued in Washington, DC, on August 14, 

2012. 

Lansine Toure, 

Acting Manager, Navigation Programs. 

[FR Doc. 2012–20464 Filed 8–20–12; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 39 

RIN 3038–AD47 

Clearing Exemption for Swaps 

Between Certain Affiliated Entities 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is proposing a rule to 

exempt swaps between certain affiliated 

entities within a corporate group from 

the clearing requirement (the ‘‘interaffiliate clearing exemption’’ or the 

‘‘proposed exemption’’) under Section 

2(h)(1)(A) of the Commodity Exchange 

Act (‘‘CEA’’). The Commission also is 

proposing rules that detail specific 

conditions counterparties must satisfy 

to elect the proposed inter-affiliate 

clearing exemption, as well as reporting 

requirements for affiliated entities that 

avail themselves of the proposed 

exemption. The Commission has 

finalized a rule that addresses swaps 

that are subject to the end-user 

exception. Counterparties to interaffiliate swaps that qualify for the enduser exception would be able to elect to 

not clear swaps pursuant to the end-user 

exception or the proposed rule. The 

proposed rule does not address swaps 

that an affiliate enters into with a third 

party that are related to inter-affiliate 

swaps that are subject to the end-user 

exception. The Commission intends 

separately to propose a rule addressing 

swaps between an affiliate and a third 

party where the swaps are used to hedge 

or mitigate commercial risk arising from 

inter-affiliate swaps for which the enduser exception has been elected. 

DATES: Comments must be received on 

or before September 20, 2012. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD47, 

by any of the following methods: 

• The agency’s Web site, at: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. ‘‘Inter-affiliate 

Clearing Exemption’’ must be in the 

subject field of responses submitted via 

email, and clearly indicated on written 

submissions. Comments will be posted 

as received to http://www.cftc.gov. You 

should submit only information that 

you wish to make available publicly. If 

you wish the Commission to consider 

information that is exempt from 

disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the established procedures in CFTC 

regulation 145.9.1

Throughout this proposed 

rulemaking, the Commission requests 

comment in response to specific 

questions. For convenience, the 

Commission has numbered each of 

these comment requests. The 

Commission asks that, in submitting 

responses to these requests, commenters 

identify the specific number of each 

request to which their comments are 

responsive. 

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse, or 

remove any or all of a submission from 

www.cftc.gov that it may deem to be 

inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Gloria Clement, Assistant General 

Counsel, (202) 418–5122, 

gclement@cftc.gov, Office of General 

Counsel; Jonathan Lave, Associate 

Director, Exchange & Data Repository, 

(202) 418–5983, jlave@cftc.gov, and 

Alexis Hall-Bugg, Attorney-Advisor, 

(202) 418–6711, ahallbugg@cftc.gov, 

Division of Market Oversight; Warren 

Gorlick, Supervisory Attorney-Advisor, 

(202) 418–5195, wgorlick@cftc.gov, and 

Anuradha Banerjee, Attorney-Advisor, 

(202) 418–5661, abanerjee@cftc.gov, 

Office of International Affairs; Theodore 

Kneller, Attorney-Advisor, (202) 418– 

5727, tkneller@cftc.gov, Division of 

Enforcement; Elizabeth Miller, 

Attorney-Advisor, (202) 418–5985, 

emiller@cftc.gov, Division of Swap 

Dealer and Intermediary Oversight; Esen 

Onur, Research Economist, (202) 418– 

6146, eonur@cftc.gov, Office of the Chief 

Economist; and Jolanta Sterbenz, 

Counsel, (202) 418–6639, 

jsterbenz@cftc.gov, Office of General 

Counsel, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. 

I. Background 

A. Clearing Requirement for Swaps 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’ or ‘‘DFA’’).2 Title 

VII of the Dodd-Frank Act amended the 

CEA,3 and established a new regulatory 

framework for swaps. The legislation 

was enacted to reduce systemic risk, 

increase transparency, and promote 

market integrity within the financial 

system by, among other things: (1) 

Imposing clearing and trade execution 

requirements on standardized derivative 

products; (2) creating rigorous 

recordkeeping and data reporting 

regimes with respect to swaps, 

including real-time public reporting; 

and (3) enhancing the Commission’s 

rulemaking and enforcement authorities 

over all registered entities, 

intermediaries, and swap counterparties 

subject to the Commission’s oversight. 

Section 723 of the Dodd-Frank Act 

added section 2(h) to the CEA, which 

establishes a clearing requirement for 

swaps.4 The new section makes it 

unlawful for any person to engage in a 

swap, if the Commission determines 

such swap is required to be cleared, 

unless the person submits the swap for 

clearing to a registered derivatives 

clearing organization (‘‘DCO’’) (or a DCO 

that is exempt from registration).5 The 


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50426 Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules 

clearing to a derivatives clearing organization that 

is registered under this Act or a derivatives clearing 

organization that is exempt from registration under 

this Act if the swap is required to be cleared.’’ 

6CEA section 2(h)(7)(A), 7 U.S.C. 2(h)(7)(A). CEA 

section 2(h)(7)(A) provides an elective exception to 

the clearing requirement to any counterparty to a 

swap that is not a financial entity, is using the swap 

to hedge or mitigate commercial risk, and notifies 

the Commission how it generally meets the 

financial conditions associated with entering into 

non-cleared swaps. The Commission issued the 

end-user exception in a rulemaking entitled, ‘‘EndUser Exception to the Clearing Requirement for 

Swaps,’’ 77 FR 42560, July 19, 2012 (final). 

7CEA section 2(h)(7)(D), 7 U.S.C. 2(h)(7)(D). 

8CEA section 2(h)(7)(C)(ii), 7 U.S.C. 2(h)(7)(C)(ii) 

(‘‘The Commission shall consider whether to 

exempt small banks, savings associations, farm 

credit system institutions, and credit unions 

* * * ’’). 

9CEA section 4(c), 7 U.S.C. 6(c). 

10 ‘‘End-User Exception to the Clearing 

Requirement for Swaps,’’ 77 FR 42560, July 19, 

2012 (see § 39.6(d)). 

11Section 4(c)(1) of the CEA empowers the 

Commission to exempt any transaction or class of 

transactions, including swaps, from certain CEA 

provisions, such as the clearing requirement. 

12 ‘‘Clearing Exemption for Certain Swaps Entered 

into by Cooperatives,’’ 77 FR 41940, July 17, 2012. 

13For the purposes of this proposed rulemaking, 

‘‘inter-affiliate swaps’’ refers to swaps between 

‘‘affiliates,’’ as that term is defined in proposed 

§ 39.6(g)(1): ‘‘[c]ounterparties to a swap * * * may 

elect not to clear a swap with an affiliate if one 

party directly or indirectly holds a majority 

ownership interest in the other, or if a third party 

directly or indirectly holds a majority interest in 

both, based on holding 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.’’ See infra pt. II.B.1 for 

further discussion. 

14There does not appear to be a common 

definition of a ‘‘treasury affiliate’’ or a ‘‘conduit 

affiliate.’’ For purposes of this proposed 

rulemaking, a treasury/conduit affiliate (or 

structure) is an affiliate that enters into interaffiliate swaps and enters into swaps with third 

parties that are related to such inter-affiliate swaps 

on a back-to-back or aggregate basis. 

15The Commission notes that comment letters to 

other proposed rulemakings under Title VII of the 

Dodd-Frank Act are not part of the administrative 

record for this rulemaking unless specifically cited 

herein. 

16Prudential Financial, Inc. comment letter to the 

proposed rulemaking, ‘‘Further Definition of ‘Swap 

Dealer,’ ‘Security-Based Swap Dealer,’ ‘Major Swap 

Participant,’ ‘Major Security-Based Swap 

Participant’ and ‘Eligible Contract Participant,’ ’’ 75 

FR 80147, Dec. 21, 2010. 

17 J.P. Morgan commented that the most efficient 

way to manage risk is often at one entity and on 

a portfolio level. This way all the risk for the 

corporate group resides in one entity. J.P. Morgan 

maintained that this reduces market risk at each 

legal entity and can reduce risk on a group level 

because offsetting positions held by different 

members of the group can be aggregated to mitigate 

the overall risk of the portfolio. J.P. Morgan asserted 

that portfolio risk management enables regulators to 

more easily assess the net risk position on a group 

level rather than piecing together data from separate 

affiliates to reconstruct the actual risk profile of the 

group. J.P. Morgan comment letter to the proposed 

rulemaking, ‘‘Process for Review of Swaps for 

Mandatory Clearing,’’ 75 FR 67277, Nov. 2, 2010. 

18Coalition for Derivatives End-Users comment 

letter for H.R. 2682, H.R. 2779, and H.R. 2586 (Mar. 

23, 2012). 

CEA, however, permits exceptions and 

exemptions to the clearing requirement. 

A person may elect not to clear 

certain swaps if such person qualifies 

for an exception under CEA section 

2(h)(7) and the Commission regulations 

issued in connection therewith (the 

‘‘end-user exception’’).6 To summarize 

the principal components of the enduser exception, for a swap to qualify, a 

counterparty to the swap electing the 

exception must (i) not be a ‘‘financial 

entity,’’ as defined in CEA section 

2(h)(7)(C)(i) or qualify for an exemption 

from that defined term under section 

2(h)(7)(D),7 or through a Commissionissued exemption under CEA sections 

2(h)(7)(C)(ii) 8 or 4(c) 9 and (ii) be using 

the swap to hedge or mitigate 

commercial risk. The Commission has 

determined to exempt certain small 

banks, savings associations, farm credit 

institutions, and credit unions under 

section 2(h)(7)(C)(ii) of the CEA from the 

definition of ‘‘financial entity.’’10

Importantly, a counterparty to an 

inter-affiliate swap that qualifies for 

both the end-user exception and the 

inter-affiliate exemption may elect not 

to clear the inter-affiliate swap under 

either the end-user exception or the 

inter-affiliate exemption. As such, the 

Commission believes that the rule 

proposed in this rulemaking may not be 

necessary for the vast majority of interaffiliate swaps involving a non-financial 

entity or a small financial institution 

because the end-user exception can be 

elected for those swaps. Accordingly, it 

is likely the proposed rule will be used 

for inter-affiliate swaps between two 

financial entities that do not qualify for 

the end-user exception or for swaps 

involving a non-financial entity that do 

not qualify for the end-user exception 

because the swaps do not hedge or 

mitigate commercial risk. 

Finally, CEA section 4(c)(1), described 

in more detail below, grants the 

Commission general exemptive 

powers.11 Pursuant to that authority, the 

Commission has proposed a rule that 

would allow cooperatives meeting 

certain conditions to elect not to submit 

for clearing certain swaps subject to a 

clearing requirement.12

B. Swaps Between Affiliated Entities 

Except as provided with respect to 

certain financing affiliates as noted 

above, CEA section 2(h) does not 

provide any specific exception to swaps 

entered into by affiliates that are subject 

to a clearing requirement (‘‘inter-affiliate 

swaps’’).13 Inter-affiliate swaps that are 

hedged by back-to-back or matching 

book swaps entered into with third 

parties may pose risks to the financial 

system if the inter-affiliate swaps are not 

properly risk managed thereby raising 

the likelihood of default on the outward 

facing swaps. Furthermore, there could 

be systemic risk implications if an 

affiliate used by the corporate group to 

trade outward facing swaps (commonly 

referred as centralized treasury or 

conduit affiliates) has large positions 

and defaulted on obligations arising 

from inter-affiliate swaps if such swaps 

are hedged with third-party swaps.14

Such a default could harm third-party 

swap counterparties, and potentially, 

financial markets as a whole, if the 

treasury/conduit affiliate was unable to 

satisfy third-party obligations as a 

consequence of the default. 

A number of commenters in a variety 

of Commission rulemakings have 

recommended that the Commission 

adopt an exemption to the clearing 

requirement for inter-affiliate swaps.15

Some commenters claimed that interaffiliate swaps offer significant benefits 

with substantially less risk than swaps 

between unaffiliated entities. They 

contended that inter-affiliate swaps 

enable a corporate group to aggregate its 

risks on a global basis in one entity 

through risk transfers between affiliates. 

Commenters also described varying 

structures through which corporate 

groups entered into inter-affiliate swaps 

and manage risks. 

Prudential Financial, Inc. (‘‘PFI’’), 

stated that it employs a ‘‘conduit’’ 

structure where separate legal entities 

are commonly owned by PFI.16 Under 

this structure, PFI uses one affiliate to 

directly face the market as a ‘‘conduit’’ 

to hedge the net commercial and 

financial risk of the various operating 

affiliates within PFI. PFI contended that 

the use of a conduit diminishes the 

demands on PFI’s financial liquidity, 

operational assets, and management 

resources, because ‘‘affiliates within PFI 

avoid having to establish independent 

relationships and unique infrastructure 

to face the market.’’ Moreover, PFI 

explained that its conduit facilitates the 

netting of its affiliates’ trades (e.g., 

where one affiliate hedges floating rates 

while another hedges fixed rates). PFI 

stated that this conduit structure 

effectively reduces the overall risk of 

PFI and its affiliates, and it allows PFI 

to manage fewer outstanding positions 

with external market participants.17

In a letter to Congress, the Coalition 

for Derivatives End-Users (‘‘CDEU’’) 

asserted that inter-affiliate swaps do not 

create external counterparty exposure 

and, therefore, pose none of the 

systemic or other risks that the clearing 

requirement is designed to protect 

against.18 Thus, in CDEU’s view, the 


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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules 50427 

19Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), 

provides, in pertinent part, that: 

In order to promote responsible economic or 

financial innovation and fair competition, the 

Commission by rule, regulation, or order, after 

notice and opportunity for hearing, may (on its own 

initiative or on application of any person * * * ) 

exempt any agreement, contract, or transaction (or 

class thereof) that is otherwise subject to subsection 

(a) of this section * * * either unconditionally or 

on stated terms or conditions or for stated periods 

and either retroactively or prospectively, or both, 

from any of the requirements of subsection (a) of 

this section, or from any other provision of this Act. 

By issuing a proposed exemptive rule, the 

Commission also is exercising its general 

rulemaking authority under CEA section 8a(5), 7 

U.S.C. 12a(5). 

20House Conf. Report No. 102–978, 1992 

U.S.C.C.A.N. 3179, 3213 (‘‘4(c) Conf. Report’’). 

21The meaning of ‘‘majority-owned’’ is set forth 

and discussed in part B1. 

22A’s corporate group is the group that contains 

the person with a majority ownership interest of A. 

Similarly, B’s corporate group is the group that 

contains the person with a majority ownership 

interest of B. 

23Treasury/conduit affiliates, for example, often 

enter into swaps with third parties that hedge 

aggregate inter-affiliate swap risk. The aggregation 

is based on risk correlations. If those correlations 

break down, then the treasury/conduit affiliate may 

no longer be able to satisfy its third-party swap 

obligations. 

imposition of required clearing on interaffiliate swaps would not reduce 

systemic risk. CDEU also commented 

that a conduit or treasury structure is 

beneficial because it centralizes trade 

expertise and execution in a single or 

limited number of entities. Finally, 

CDEU claimed that a treasury or conduit 

structure benefits affiliates because they 

can enjoy their parents’ corporate credit 

ratings and associated pricing benefits. 

These comments suggest that swaps 

entered into between corporate 

affiliates, if properly risk-managed, may 

be beneficial to the operation of the 

corporate group as a whole. They 

indicate that inter-affiliate swaps may 

improve a corporate group’s risk 

management internally and allow the 

corporate group to use the most efficient 

means to effectuate swaps with third 

parties. While the Commission 

recognizes these potential benefits of 

inter-affiliate swaps, the Commission is 

also taking into account the systemic 

risk repercussions of inter-affiliate 

swaps as it considers and proposes an 

exemption to the CEA’s clearing 

requirement applicable to those interaffiliate swaps. 

II. Inter-Affiliate Clearing Exemption 

Under CEA Section 4(c)(1) 

A. The Commission’s Section 4(c)(1) 

Authority 

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

the Commission to ‘‘promote 

responsible economic or financial 

innovation and fair competition’’ by 

exempting any transaction or class of 

transactions, including swaps, from any 

of the provisions of the CEA (subject to 

exceptions not relevant here).19 In 

enacting CEA section 4(c)(1), Congress 

noted that the goal 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.’’ 20 Observant 

of that objective, the Commission has 

determined preliminarily that it would 

be appropriate to exempt inter-affiliate 

swaps from the clearing requirement in 

CEA section 2(h) under certain terms 

and conditions. The proposed 

exemption, however, would not extend 

to swaps that affiliates entered into with 

third parties. 

The primary benefit of clearing is the 

reduction of counterparty risk. The 

Commission notes commenters’ 

assertions that there is less counterparty 

risk associated with inter-affiliate swaps 

than swaps with third parties to the 

extent that affiliated counterparties 

internalize each other’s counterparty 

risk because they are members of the 

same corporate group. This 

internalization can be demonstrated by 

the example of a swap entered into 

between affiliates A and B that are 

majority owned by the same person.21 If 

affiliate A fails to perform, then affiliate 

B would be harmed. However, affiliate 

A also may be harmed if (1) B’s harm 

adversely impacts the profits of A and 

B’s corporate group 22 or (2) A’s failure 

to perform drives the group into 

bankruptcy, because, for instance, B has 

entered into a swap with a third party 

and B is unable to perform as a 

consequence of A’s failure to perform. 

The potential harm to A for failing to 

perform is greater than the harm A 

would experience if B was not a 

majority-owned affiliate. Accordingly, A 

internalizes B’s counterparty risk and A 

has a greater economic incentive to 

perform than if B were a third party. 

The Commission does not believe 

there is significantly reduced 

counterparty risk with respect to swaps 

between affiliates that are not majorityowned by the same person because 

there is less economic feedback. If A is 

a majority-owned affiliate and B is a 

minority-owned affiliate, then any harm 

that B experiences as a consequence of 

A’s failure to perform is likely to have 

a less adverse impact on the profits of 

A’s corporate group than if B was a 

majority-owned affiliate. In addition, 

the Commission believes that B’s failure 

to perform would be significantly less 

likely to drive A’s corporate group into 

bankruptcy than if B were majorityowned. 

On the basis of reduced counterparty 

risk, the Commission has determined 

preliminarily that inter-affiliate swap 

risk may not need to be mitigated 

through clearing, but can be reduced 

through other means. The Commission 

also believes at the proposal stage that 

exempting inter-affiliate swaps would 

enable corporations to structure their 

groups so that corporate risk is 

concentrated in one entity—whether it 

be at a treasury- or conduit-type 

affiliate, or at the parent company.23

The Commission recognizes there may 

be advantages for the corporate group 

and regulators if risk is appropriately 

managed and controlled on a 

consolidated basis and at a single 

affiliate. Based upon the comments 

received, the Commission understands 

that some corporate groups use this type 

of structure. 

The Commission, nevertheless, 

believes that uncleared inter-affiliate 

swaps could pose risk to corporate 

groups and market participants, 

generally. Uncleared inter-affiliate 

swaps also may pose risk to other 

market participants, and therefore the 

financial system, if the treasury/conduit 

affiliate enters into swaps with third 

parties that are related on a back-to-back 

or matched book basis with interaffiliate swaps. To continue the above 

example, if A’s failure to perform (for 

whatever reason) makes it impossible 

for B to meet its third-party swap 

obligations, then those third parties 

would be harmed and risk could spread 

into the marketplace. However, A’s risk 

of nonperformance is less than it would 

be if B were a third party to the extent 

A internalizes B’s counterparty risk. 

To address these concerns, the 

Commission is proposing rules that 

would exempt inter-affiliate swaps from 

clearing if certain conditions are 

satisfied. First, the proposed exemption 

would be limited to swaps between 

majority-owned affiliates whose 

financial statements are reported on a 

consolidated basis. Second, the 

proposed rules would require the 

following: Centralized risk management, 

documentation of the swap agreement, 

variation margin payments (for financial 

entities), and satisfaction of reporting 

requirements. In addition, the 

exemption would be limited to swaps 

between U.S. affiliates, and swaps 

between a U.S. affiliate and a foreign 

affiliate located in a jurisdiction with a 

comparable and comprehensive clearing 

regime or the non-United States 

counterparty is otherwise required to 

clear the swaps it enters into with third 


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50428 Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules 

24The affiliate status required by proposed 

§ 39.6(g)(1) to elect the proposed exemption is 

based on and functionally equivalent to the 

definition of majority-owned affiliates in recently 

adopted CFTC regulation 1.3(ggg)(6)(i). 25 In 2009, the G20 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.’’ G20 

Leaders’ Final Statement at Pittsburgh Summit: 

Framework for Strong, Sustainable and Balanced 

Growth (Sept. 29, 2009). 26See 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) available at http:// 

eur-lex.europa.eu/LexUriServ/LexUriServ.do?

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

27The Internal Revenue Service allows a business 

conglomerate to file consolidated tax returns if the 

parent company and its subsidiaries meet a 

relationship test that is outlined in 26 U.S.C. 

1504(a)(2): 

(a) Affiliated group defined for purposes of this 

subtitle— 

(1) In general. The term ‘‘affiliated group’’ 

means— 

(A) 1 or more chains of corporations connected 

through stock ownership with a common parent 

corporation which is a corporation, but only if— 

(B) (i) the common parent owns directly stock 

meeting the requirements of paragraph (2) in at least 

1 of the other corporations, and 

(ii) stock meeting the requirements of paragraph 

(2) in each of the includible corporations (except 

the common parent) is owned directly by 1 or more 

of the other includible corporations. 

(2) 80-percent voting and value test The 

ownership of stock of any corporation meets the 

requirements of this paragraph if it— 

(A) possesses at least 80 percent of the total 

voting power of the stock of such corporation, and 

(B) has a value equal to at least 80 percent of the 

total value of the stock of such corporation. 

(3) Stock not to include certain preferred stock 

For purposes of this subsection, the term ‘‘stock’’ 

does not include any stock which—(A) is not 

entitled to vote, 

(B) is limited and preferred as to dividends and 

does not participate in corporate growth to any 

significant extent, 

(C) has redemption and liquidation rights which 

do not exceed the issue price of such stock (except 

for a reasonable redemption or liquidation 

premium), and 

(D) is not convertible into another class of stock. 

parties in compliance with United 

States law or does not enter into swaps 

with third parties. Additionally, the 

Commission notes that the proposed 

exemption does not limit the 

applicability of any CEA provision or 

Commission regulation to any person or 

transaction except as provided in the 

proposed rulemaking. These conditions 

will be discussed in further detail 

below. 

Request for Comments 

Q1. The Commission requests 

comment on whether it should exercise 

its authority under CEA section 4(c). 

Q2. Do inter-affiliate swaps pose risk 

to the corporate group? If so, what risk 

is posed? In particular, do inter-affiliate 

swaps pose less risk to a corporate 

group than swaps with third parties? If 

so, why is that the case? 

Q3. Do inter-affiliate swaps pose risk 

to the third parties that have entered 

into swaps that are related to the interaffiliate swaps? If so, what risk is posed? 

Q4. Would the proposed exemption 

promote responsible economic or 

financial innovation and fair 

competition? 

Q5. Would the proposed exemption 

promote the public interest? 

Q6. Inter-affiliate swaps that do not 

meet the conditions to the proposed 

exemption would be subject to the 

clearing requirement under CEA section 

2(h)(1)(A) and, potentially, the trade 

execution requirement under CEA 

section 2(h)(8) as well. What would be 

the costs and benefits of imposing the 

trade execution requirement on these 

inter-affiliate swaps? Should the 

Commission exempt some or all interaffiliate swaps from the trade execution 

requirement regardless of whether the 

conditions to the proposed inter-affiliate 

clearing exemption are met? 

B. Proposed Regulations 

1. Proposed § 39.6(g)(1): Definition of 

Affiliate Relationship 

Under proposed § 39.6(g)(1), the interaffiliate clearing exemption would only 

be available for swaps between majorityowned affiliates. As explained above, 

the Commission believes there is 

reduced counterparty risk with respect 

to such swaps. Under the proposed rule, 

affiliates would be majority-owned if 

one affiliate directly or indirectly holds 

a majority ownership interest in the 

other affiliate, or if a third party directly 

or indirectly holds a majority ownership 

interest in both affiliates and the 

financial statements of both affiliates are 

reported on a consolidated basis. A 

majority-ownership interest would be 

based on holding 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.24

The Commission is not proposing to 

extend the exemption to affiliates that 

are related on a minority-owned basis. 

As explained above, the Commission 

does not believe there is significantly 

reduced counterparty risk with respect 

to swaps between such affiliates. The 

Commission also believes it is important 

for the proposed 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.25 For example, the European 

Parliament and Council of the European 

Union have adopted the European 

Market Infrastructure Regulation 

(‘‘EMIR’’).26 Subject to the relevant 

provisions, technical standards, and 

regulations under EMIR, certain 

derivatives transactions between parent 

and subsidiary entities, could be exempt 

from its general clearing requirement. 

Request for Comments 

Q7. The Commission requests 

comments on all aspects of the 

Commission’s proposed requirement 

that the inter-affiliate clearing 

exemption be available to majorityowned affiliates. 

Q8a. Should the Commission consider 

requiring a percentage of ownership 

greater than majority ownership to 

qualify for the inter-affiliate clearing 

exemption? 

Q8b. If so, what percentage should be 

used and what are the benefits and 

burdens of such ownership 

requirements? 

Q8b. Should the Commission require 

a 100% ownership threshold for the 

inter-affiliate clearing exemption? 

Would a 100% ownership threshold 

reduce counterparty risk and protect 

minority owners better than the 

proposed threshold. Are there other 

means to lessen risk to minority owners, 

such as consent? 

Q9. Should the Commission consider 

an 80% ownership threshold based on 

section 1504 of the Internal Revenue 

Code, which establishes an 80% voting 

and value test for an affiliate group.27 In 

light of the potential benefits from 

centralized risk management in an 

affiliated group, would an 80% 

threshold sufficiently reduce overall 

risk to financial system 

2. Proposed § 39.6(g)(2)(i): Both 

Counterparties Must Elect the InterAffiliate Clearing Exemption 

The Commission believes that 

affiliates within a corporate group may 

make independent determinations on 

whether to submit an inter-affiliate 

swap for clearing. Ostensibly, each 

affiliate may reach different conclusions 

regarding the appropriateness of 

clearing. Given this possibility, 

proposed § 39.6(g)(2)(i) would require 

that both counterparties elect the 

proposed inter-affiliate clearing 

exemption (each, an ‘‘electing 

counterparty’’). 

Request for Comments 

Q10. Would this requirement create 

any operational issues? 

3. Proposed § 39.6(g)(2)(ii): Swap 

Documentation 

The Commission understands that 

affiliates may enter into swaps with 


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28For swap dealers and major swap participants, 

these issues are addressed in the swap trading 

relationship documentation rules proposed by the 

Commission in § 23.504. See ‘‘Swap Trading 

Relationship Documentation Requirements for 

Swap Dealers and Major Swap Participants,’’ 76 FR 

6715, Feb. 8, 2011. The proposed rule requires that 

if one or more of the parties to the swap for which 

the inter-affiliate exemption is elected is a swap 

dealer or major swap participant, then that party 

shall comply with § 23.504 for that swap. Swap 

dealers and major swap participants that comply 

with that provision would also satisfy the proposed 

requirements. 

29The requirements of the swap trading 

relationship document are informed by proposed 

CFTC regulation 23.504(b)(1). See ‘‘Swap Trading 

Relationship Documentation Requirements for 

Swap Dealers and Major Swap Participants,’’ 76 FR 

6715, Feb. 8, 2011. 

30The Commission has adopted risk management 

rules for swap dealers and major swap participants 

in § 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 20128, 20173–75, April 3, 2012 

(final rule). The rule requires that if one or more 

of the parties to the swap for which the interaffiliate exemption is elected is a swap dealer or 

major swap participant, then that party shall 

comply with § 23.600 for that swap. Swap dealers 

and major swap participants that comply with that 

provision will also satisfy the proposed 

requirements. 

31See, e.g., Letter from SIFMA and ISDA 

submitted to the Commission on their own 

initiative (May 14, 2012). 

32 Id. 

33See 3/23/23 Letter from CDEU. 

34See EMIR Article 3, paragraphs 1 and 2. EMIR 

identifies factors necessary to establish a 

transaction as an intra-group transaction. 

35 Discussed in pt. II.B.8., below. 

36 Variation margin is distinguished from initial 

margin, which is intended to serve as a performance 

bond against potential future losses. If a party 

defaults, the other party may use initial margin to 

cover most or all of any loss that may result 

between the time the default occurs and when the 

non-defaulting party replaces the open position. 

each other with little documentation 

about the terms and conditions of the 

swaps. The Commission is concerned 

that without proper documentation 

affiliates would be unable to effectively 

track and manage risks arising from 

inter-affiliate swaps or offer sufficient 

proof of claim in the event of 

bankruptcy. This could create 

challenges and uncertainty that could 

adversely affect affiliates, third party 

creditors, and potentially the financial 

system. The Commission also is 

concerned about transparency should 

there be a need for an audit or 

enforcement proceeding. 

Proposed § 39.6(g)(2)(iii) would 

address these concerns by requiring 

affiliates to enter into swaps with a 

swap trading relationship document.28

The proposed rule would require the 

document to be in writing and to 

include all terms governing the trading 

relationship between the affiliates, 

including, without limitation, terms 

addressing payment obligations, netting 

of payments, events of default or other 

termination events, calculation and 

netting of obligations upon termination, 

transfer of rights and obligations, 

governing law, valuation, and dispute 

resolution procedures.29 The 

Commission believes this requirement 

would not be onerous because affiliates 

should be able to use a master 

agreement to document most of the 

terms of their inter-affiliate swaps. 

Request for Comments 

Q11. The Commission requests 

comment as to the burden or cost of the 

proposed rule requiring documentation 

of inter-affiliate swaps. 

Q12. The Commission also requests 

comment as to whether its risk tracking 

and management and proof-of-claim 

concerns could be addressed by other 

means of documentation. 

Q13. The Commission requests 

comment as to whether the Commission 

should create a specific document 

template. Should the industry do so? 

4. Proposed § 39.6(g)(2)(iii): Centralized 

Risk Management 

Proposed § 39.6(g)(2)(iii) would 

require inter-affiliate swaps to be subject 

to a centralized risk management 

program reasonably designed to monitor 

and manage the risks associated with 

the inter-affiliate swaps. As noted in 

Part I.B. above, inter-affiliate swaps may 

pose risk to third parties if risks are not 

properly managed. Accordingly, to 

encourage prudent risk management, 

the proposed inter-affiliate clearing 

exemption would be conditioned on a 

corporate group’s evaluation, 

measurement and control of such risks. 

The Commission anticipates that the 

program would be implemented and run 

by the parent company or the treasury/ 

conduit affiliate, but the rule provides 

flexibility to determine how best to 

satisfy this requirement.30

The Commission understands that 

some groups that use inter-affiliate 

swaps, particularly large financial 

entities, already have a centralized risk 

management program.31 Indeed, several 

commenters—e.g., SIFMA and ISDA— 

supported centralized risk management 

and claimed that centralized risk 

management for inter-affiliate swaps 

‘‘would be compromised’’ by a clearing 

requirement.32 CDEU also commented 

that inter-affiliate swaps are beneficial 

because they allow swaps with third 

parties to be traded at a treasury-type 

structure which contains risk 

management expertise.33 Based on 

comments received, the Commission 

believes that the proposed rule is in line 

with industry practice. Proposed 

§ 39.6(g)(2)(iii) also is in harmony with 

similar requirements under EMIR, 

which would require under certain 

circumstances for both counterparties to 

intra-group transactions to be ‘‘subject 

to an appropriate centrali[z]ed risk 

evaluation, measurement and control 

procedures. * * *’’ 34

Request for Comments 

Q14. The Commission requests 

comments that explain how current 

centralized risk management programs 

operate. 

Q15. The Commission requests 

comment on whether it should 

promulgate additional regulations that 

set forth minimum standards for a 

centralized risk management program. If 

so, what should those standards be? Is 

there a consistent industry practice 

which could be observed? 

Q16. Is the proposed rule in line with 

industry practice? 

5. Proposed § 39.6(g)(2)(iv): Variation 

Margin 

Proposed § 39.6(g)(2)(iv) would 

require that variation margin be 

collected for swaps between affiliates 

that are financial entities, as defined in 

CEA section 2(h)(7)(C), in compliance 

with the proposed variation margin 

requirements set forth in proposed 

§ 39.6(g)(3).35 Variation margin is an 

essential risk-management tool. A welldesigned variation margin system 

protects both parties to a trade. It 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. 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.36 This 

process prevents uncollateralized 

exposures from accumulating over time 

and thereby reduces the size of any loss 

resulting from a default should one 

occur. Required margining also might 

cause parties to more carefully consider 

the risks involved with swaps and 

manage those risks more closely over 

time. The Commission believes, at this 

stage, that inter-affiliate swap risk may 

be mitigated through variation margin 

and notes that requiring variation 

margin for inter-affiliate swaps is being 

discussed by international regulators 

working on harmonizing regulations 

governing swap clearing. 

The Commission understands that a 

number of financial entities currently 


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37See, e.g., 5/14/12 Letter from SIFMA and ISDA. 38The Commission does not propose that 

variation margin posted in respect of inter-affiliate 

swaps be required to be held in a segregated 

account or be otherwise unavailable for use and 

rehypothecation by the counterparty holding such 

variation margin. 

39 In contrast, if two affiliates do not have the 

same owners, the potential exists that the two 

affiliates may have differing economic interests. See 

also Copperweld v. Independence Tube—467 U.S. 

752 (1984) at 771 (‘‘The coordinated activity of a 

parent and its wholly owned subsidiary must be 

viewed as that of a single enterprise for purposes 

of § 1 of the Sherman Act. A parent and its wholly 

owned subsidiary have a complete unity of interest. 

Their objectives are common, not disparate, and 

their general corporate objectives are guided or 

determined not by two separate corporate 

consciousnesses, but one.’’). 

40Under such circumstances, the two affiliates 

are subject to common control, in actuality or 

potentially—i.e., the common owner could assert 

full control when one or both affiliates cease to act 

in the common owner’s best interest. 

41For example, if a financial entity established a 

trust, partnership, corporation or other type of 

entity, and sells the equity interests therein to 

investors, but retains the right to call, repurchase, 

or otherwise take control of the equity interest, or 

has a contingent obligation to call, repurchase or 

otherwise take control of the equity interest, such 

right or obligation would not be sufficient to 

constitute ownership of the affiliate for purposes of 

this provision. 

post variation margin for their interaffiliate swaps. According to SIFMA and 

ISDA, ‘‘[t]he posting of variation margin 

limiting the impact of market 

movements upon the respective 

positions of the affiliated parties now 

occurs routinely in financial groups and 

its imposition on affiliates who transact 

directly with affiliated swap dealers 

(SDs) or major swap participants (MSPs) 

should not be unduly disruptive.’’ 37

The Commission has proposed rules 

requiring certain financial entities to 

pay and collect variation and initial 

margin for uncleared swaps entered into 

with other financial entities.38

The proposed requirement would not 

apply to 100% commonly-owned and 

commonly-guaranteed affiliates, 

provided that the common guarantor is 

also under 100% common ownership. 

As discussed above, the risk of an interaffiliate swap may be mitigated through 

the posting of variation margin. The 

Commission believes that when the 

economic interests of two affiliates are 

both (i) fully aligned and (ii) a common 

guarantor bears the ultimate risk 

associated swaps entered into with a 

third party, non-affiliated counterparty, 

the posting of variation margin does not 

substantially mitigate the risk of an 

inter-affiliate swap. This exception is 

intended to apply to swaps between two 

wholly-owned subsidiaries of a common 

parent or in instances where one 

affiliate is wholly owned by the other. 

The first of the conditions required to 

claim the exception to the requirement 

under proposed regulation 39.6(g)(2)(iv) 

to post variation margin relates to 

complete common ownership. When 

two affiliates are owned by the same 

owner or one is wholly owned by the 

other, the underlying owners are the 

same and the economic interests of the 

two affiliates are aligned.39 In such 

circumstances, the two affiliates are 

subject to the control of a common 

owner or common set of owners.40

A person would not be able to claim 

100 percent ownership for the purposes 

of this provision based on a contingent 

right or obligation, by contract or 

otherwise, to take ownership of the 

equity interest in the affiliate by 

purchase or otherwise.41 Conversely, 

structures in which a person owns 100 

percent of the equity but has an 

obligation or right, by contract or 

otherwise, to give up, by sale or 

otherwise, all or a portion of that equity 

interest would not meet the 100 percent 

ownership test. Such contingent or 

residual rights evidence a less than 

complete responsibility for the affiliate, 

including its swap obligations, that the 

100 percent ownership and guaranty 

provision is intended to require. Under 

such circumstances, the interests of the 

owner and the affiliate are not fully 

aligned. The second condition requires 

the existence of a common guarantor. 

When two affiliates share a common 

guarantor that is under the same 

common ownership, the Commission 

believes that the risk created by a swap 

with a non-affiliated third party is 

ultimately borne by the enterprise 

(which is defined by an alignment of 

economic interests). To provide an 

example, assume that A and B are 

guaranteed wholly-owned subsidiaries 

of X. B enters into a swap with nonaffiliated third party T. B then enters 

into a back-to-back swap (mirroring the 

risk created in the swap with T) with A 

(i.e., an inter-affiliate swap). In this 

scenario, the risk associated with the 

swap with T is effectively borne by X 

and therefore ultimately borne by the 

enterprise. In such circumstances 

therefore the inter-affiliate swap does 

not create new risks for the enterprise, 

rather, it allocates the risk from one 

wholly-owned subsidiary to another. 

The posting of variation margin here 

would not substantially mitigate the risk 

of the inter-affiliate swap because the 

inter-affiliate swap itself does not create 

new risks for the enterprise. 

Request for Comments 

Q17a. The Commission requests 

comment as to whether it should 

promulgate regulations that set forth 

minimum standards for variation 

margin. If so, what should those 

standards be? 

Q17b. The Commission requests 

comment as to whether it should 

promulgate regulations that set forth 

minimum standards for initial margin. If 

so, what should those standards be? 

Q17c. The Commission requests 

comment as to whether it should 

promulgate regulations that set forth 

minimum standards for both initial and 

variation margin for inter-affiliate 

swaps. If so, what should those 

standards be? 

Q17d. The Commission’s proposed 

rule ‘‘Margin Requirements for 

Uncleared Swaps for Swap Dealers and 

Major Swap Participants’’—17 CFR Part 

23—would require initial and variation 

margin for certain swaps that are not 

cleared by a registered designated 

clearing organization. Should interaffiliate swaps that are not subject to the 

clearing requirement of CEA section 

2(h)(1)(A) be subject to the margin 

requirements as set out in proposed Part 

23 or otherwise? 

Q18. The Commission requests 

comment on the costs and benefits of 

requiring variation margin for interaffiliate swaps, both in general and 

specifically, regarding corporate groups 

that do not currently transfer variation 

margin in respect of inter-affiliate 

swaps. 

Q19. The Commission requests 

comment on whether 100% commonlyowned affiliates sharing a common 

guarantor—that is, a guarantor that is 

also 100% commonly owned—should 

be exempt from the requirement to 

transfer variation margin. Please explain 

the impact on the corporate group, if 

any, if the described affiliates are 

required to transfer variation margin. 

Q20a. Should any other categories of 

entities or corporate groups, such as 

non-swap dealers and non-major swap 

participants, be exempt from the 

variation margin requirement for their 

inter-affiliate swaps? If so, which 

categories and why? 

Q20b. Should the Commission limit 

the variation margin requirements to 

those inter-affiliate swaps for which at 

least one counterparty is a swap dealer, 

major swap participant, or financial 

entity, as defined in paragraph (g)(6) of 

the proposed rule text, that is subject to 

prudential regulation? 

Q21. The Commission requests 

comment as to whether it should 

eliminate the proposed exemption’s 

variation margin condition for swaps 

between 100% owned affiliates. 

Q22. The Commission requests 

comment as to whether it should 

eliminate the proposed exemption’s 


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42See CEA section 2(h)(4)(A), 7 U.S.C. 2(h)(4)(A). 

Additionally, CEA section 6(e)(4)–(5) states that any 

DCO, SD, or MSP may be subject to double civil 

monetary penalties should they evade the clearing 

requirement, among other things. The relevant CEA 

sections state, ‘‘that knowingly or recklessly evades 

or participates in or facilitates an evasion of the 

requirements of section 2(h) shall be liable for a 

civil monetary penalty twice the amount otherwise 

available for a violation of section 2(h).’’ See CEA 

section 6(e)(4)–(5), 7 U.S.C. 9a(4)–(5). 

43See, generally, EMIR Articles 3, 4, 11, 13. 

44For example, a counterparty located in a 

country that does not have a comparable clearing 

regime may be required to clear swaps with third 

parties in compliance with United States law if it 

meets the definition of a ‘‘conduit’’ as described in 

the Commission’s proposed interpretive guidance 

and policy statement entitled, ‘‘Cross-Border 

Application of Certain Swaps Provisions of the 

Commodity Exchange Act,’’ 77 FR 41214, July 12, 

2012. 

45Rule 1.6 was included in the Commission’s 

‘‘Product Definitions’’ rulemaking, which was 

adopted jointly with the SEC. See ‘‘Further 

Definition of ‘Swap,’ ‘Security-Based Swap,’ and 

‘Security-Based Swap Agreement;’ Mixed Swaps; 

Security-Based Swap Agreement Recordkeeping,’’ 

77 FR 39626 (July 23, 2012). 

46The Commission has proposed separately 

interpretative guidance on certain entity-level and 

transaction-level requirements imposed by Title VII 

of Dodd-Frank for cross-border swaps. See Proposed 

Interpretive Guidance and Policy Statement 

entitled, ‘‘Cross-Border Application of Certain 

Swaps Provisions of the Commodity Exchange 

Act,’’ 77 FR 41214 (July 12, 2012). 

variation margin condition for swaps 

between 80% owned affiliates. 

Q23. The Commission requests 

comment on whether all types of 

financial entities identified in CEA 

section 2(h)(7)(C) should be subject to 

the variation margin requirement. 

Should entities that are part of a 

commercial corporate group and are 

financial entities solely because of CEA 

section 2(h)(7)(C)(i)(VIII) be excluded 

from such requirement? Why? 

6. Proposed § 39.6(g)(2)(v): Both 

Affiliates Must Be Located in the United 

States or in a Country With a 

Comparable and Comprehensive 

Clearing Regime or the Non-United 

States Counterparty Is Otherwise 

Required To Clear Swaps With Third 

Parties in Compliance With United 

States Law or Does Not Enter Into 

Swaps With Third Parties 

The Commission is proposing to limit 

the inter-affiliate clearing exemption to 

inter-affiliate swaps between two U.S.- 

based affiliates or swaps where one 

affiliate is located abroad in a 

jurisdiction with a comparable and 

comprehensive clearing regime or the 

non-United States counterparty is 

otherwise required to clear swaps with 

third parties in compliance with United 

States law or does not enter into swaps 

with third parties. The limitation in 

§ 39.6(g)(2)(v) is designed to address the 

Commission’s concerns about risk and 

to deter evasion as directed by CEA 

section 2(h)(4)(A). 

Under section 2(h)(4)(A), the 

Commission must prescribe rules 

necessary to prevent evasion of the 

clearing requirement.42 The 

Commission is concerned that an interaffiliate clearing exemption could 

enable entities to evade the clearing 

requirement through trades, for 

example, with affiliates that are located 

in foreign jurisdictions that do not have 

a comparable and comprehensive 

clearing regime. Informed in part by 

certain relevant intra-group transactions 

provisions under EMIR,43 proposed 

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

affiliates be U.S. persons or one of the 

affiliates is a U.S. person and the other 

affiliate is domiciled in a non-U.S. 

jurisdiction with a comparable and 

comprehensive regulatory regime for 

swap clearing or the non-United States 

counterparty is otherwise required to 

clear swaps with third parties in 

compliance with United States Law or 

does not enter into swaps with third 

parties.44

The Commission recognizes that there 

may be a legitimate reason for an interaffiliate swap where one affiliate is 

located in a country that does not have 

a comparable clearing regime. However, 

the Commission believes that financial 

markets may be at risk if the foreign 

affiliate enters into a related third-party 

swap that would be subject to clearing 

were it entered into in the United States, 

but is not cleared. On balance, the 

Commission believes that the risk of 

evasion and the systemic risk associated 

with uncleared swaps necessitates that 

the exemption be limited to swaps 

between affiliates located in the United 

States or in foreign countries with 

comparable clearing regimes or the nonUnited States counterparty is otherwise 

required to clear swaps with third 

parties in compliance with United 

States law or does not enter into swaps 

with third parties. 

Request for Comments 

Q24a. The Commission requests 

comment on proposed § 39.6(g)(2)(v). Is 

the proposed condition that both 

affiliates must be located in the United 

States or in a country with a comparable 

and comprehensive clearing jurisdiction 

or the non-United States counterparty is 

otherwise required to clear swaps with 

third parties or does not enter into 

swaps with third parties a necessary and 

appropriate means of reducing risk and 

evasion concerns related to interaffiliate swaps? If not, how should these 

concerns be addressed? 

Q24b. Should the Commission limit 

the inter-affiliate clearing exemption to 

foreign affiliates that only enter into 

inter-affiliate swaps if such foreign 

affiliates are not located in a jurisdiction 

with a comparable and comprehensive 

clearing requirement or are otherwise 

required to clear swaps with third 

parties in compliance with United 

States? 

Q24c. Should the Commission limit 

the inter-affiliate clearing exemption to 

foreign affiliates that enter into swaps 

with third parties on an occasional basis 

if such foreign affiliates are not located 

in a jurisdiction with a comparable and 

comprehensive clearing requirement or 

are otherwise required to clear swaps 

with third parties in compliance with 

United States. What would constitute an 

occasional basis? For example, would 

once a year be an appropriate time 

frame? 

Q25. The Commission requests 

comment on (1) the prevalence of crossborder inter-affiliate swaps and the 

mechanics of moving swap-related risks 

between U.S. and non-U.S. affiliates for 

risk management and other purposes 

(including an identification of such 

purposes); (2) the risk implications of 

cross-border inter-affiliate swaps for the 

U.S. markets; and (3) specific means to 

address the risk issues potentially 

presented by cross-border inter-affiliate 

swaps. 

Q26. The Commission recently 

adopted anti-evasion provisions relating 

to cross-border swap activities in its 

new rule 1.6.45 To what extent are the 

risk issues potentially presented by 

cross-border inter-affiliate swaps 

addressed by the anti-evasion 

provisions in rule 1.6? 

Q27. The Commission also is 

considering an alternative condition to 

address evasion. That condition would 

require non-U.S. affiliates to clear all 

swap transactions with non-U.S. 

persons, provided that such transactions 

are related to inter-affiliate swaps which 

would be subject to a clearing 

requirement if entered into by two U.S. 

persons.46 Should the Commission 

adopt such a condition? Would such a 

condition help enable the Commission 

to ensure that the proposed interaffiliate clearing exemption is not 

abused or used to evade the clearing 

requirement? Are there any other means 

to prevent evasion of the clearing 

requirement or abuse of the proposed 

inter-affiliate clearing exemption that 

the Commission should adopt? 

7. Proposed § 39.6(g)(2)(vi): Notification 

to the Commission 

As explained in more detail below, 

the Commission has preliminarily 

determined that it must receive certain 


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50432 Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules 

47For further discussion on the concept of 

variation margin for uncleared swaps, see proposed 

rulemaking, ‘‘Margin Requirements for Uncleared 

Swaps for Swap Dealers and Major Swap 

Participants,’’ 76 FR 27621, Feb. 12, 2011. 

48CEA section 4r; 7 U.S.C. 6r. 

49See CEA sections 2(a)(13) (reporting of swaps 

to SDRs) and 4r (reporting alternatives for uncleared 

swaps); 7 U.S.C. 2(a)(13) and 7 U.S.C. 6r. 

50See ‘‘Swap Data Recordkeeping and Reporting 

Requirements,’’ 77 FR 2136, Jan. 13, 2012 (‘‘Swap 

Data Recordkeeping and Reporting’’). Regulation 

45.11 contemplates that this information may be 

delivered to the Commission directly in limited 

circumstances when a SDR is not available. 77 FR 

at 2168. When permitted, such delivery would also 

meet the proposed inter-affiliate clearing exemption 

reporting requirement. 

51 7 U.S.C. 2(j), in pertinent part: 

Exemptions from the requirements of subsection 

(h)(1) to clear a swap and subsection (h)(8) to 

execute a swap through a board of trade or swap 

execution facility shall be available to a 

counterparty that is an issuer of securities that are 

registered under section 12 of the Securities 

Exchange Act of 1934 (15 U.S.C. 78l) or that is 

required to file reports pursuant to section 15(d) of 

the Securities Exchange Act of 1934 (15 U.S.C. 78o) 

only if an appropriate committee of the issuer’s 

board or governing body has reviewed and 

approved its decision to enter into swaps that are 

subject to such exemptions. 

52 15 U.S.C. 78l. 

53 15 U.S.C. 78o. 

54For example, a board resolution or an 

amendment to a board committee’s charter could 

expressly authorize such committee to review and 

approve decisions of the electing person not to clear 

the swap being reported. In turn, such board 

committee could adopt policies and procedures to 

review and approve decisions not to clear swaps, 

on a periodic basis or subject to other conditions 

determined to be satisfactory to the board 

committee. 

information to effectively regulate interaffiliate swaps. Proposed § 39.6(g)(2)(vi) 

would require one of the counterparties 

to an inter-affiliate swap to comply with 

the reporting requirements set forth in 

§ 39.6(g)(4.). 

8. Proposed § 39.6(g)(3): Variation 

Margin Requirements 

Proposed § 39.6(g)(3) would set forth 

the requirements for transferring 

variation margin. Proposed 

§ 39.6(g)(3)(i) would require that if both 

counterparties to the swap are financial 

entities, each counterparty shall pay and 

collect variation margin for each interaffiliate swap for which the proposed 

exemption is elected. Proposed 

§ 39.6(g)(3)(ii) would require that the 

swap trading relationship document set 

forth and describe the methodology to 

be used to calculate variation margin 

with sufficient specificity to allow the 

counterparties, the Commission, and 

any appropriate prudential regulator to 

calculate the margin requirement 

independently. The Commission 

believes that the proposed rule would 

help ensure that affiliates have a written 

methodology. The proposed rule also 

would allow affiliates to manage their 

risks more effectively throughout the 

life of the swap and to avoid disputes 

regarding issues such as valuation.47

9. Proposed § 39.6(g)(4): Reporting 

Requirements 

Pursuant to CEA section 4r,48

uncleared swaps must be reported to a 

Swap Data Repository (‘‘SDR’’), or to the 

Commission if no repository will accept 

such information, by one of the 

counterparties (the ‘‘reporting 

counterparty’’).49 In addition to any 

general reporting requirements 

applicable under other applicable rules 

to a particular type of entity that is an 

affiliate or to the inter-affiliate swap, 

proposed § 39.6(g)(4) would implement 

reporting requirements specifically for 

uncleared inter-affiliate swaps.50

Proposed § 39.6(g)(4)(i) would require 

the reporting counterparty to affirm 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). Besides alerting the Commission of 

the election, the information would help 

ensure that each counterparty is aware 

of, and satisfies the definitions and 

conditions set forth in proposed 

§ 39.6(g)(1)–(2). 

Proposed § 39.6(g)(4)(ii)–(iii) would 

require the reporting counterparty to 

provide certain information, unless such 

information had been provided in a 

current annual filing pursuant to 

proposed § 39.6(g)(5). Proposed 

§ 39.6(g)(4)(ii) would require the 

reporting counterparty to submit 

information regarding how the financial 

obligations of both counterparties are 

generally satisfied with respect to 

uncleared swaps. The information is 

valuable because it would provide the 

Commission a more complete view of 

the risk characteristics of uncleared 

swaps. The information also would 

enhance the Commission’s efforts to 

identify and reduce potential systemic 

risk. 

Proposed § 39.6(g)(4)(iii) would 

implement CEA section 2(j) for purposes 

of the inter-affiliate exemption.51 That 

CEA section places a prerequisite on 

issuers of securities registered under 

section 12 of the Securities Exchange 

Act of 1934 (‘‘Exchange Act’’) 52 or 

required to file reports under Exchange 

Act section 15(g) 53 (‘‘electing SEC 

Filer’’) that elect exemptions from the 

CEA’s clearing requirement under 

section 2(h)(1)(A). 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 

the clearing exemption. 

Proposed § 39.6(g)(4)(iii)(A) would 

require an electing SEC Filer to notify 

the Commission of its SEC Filer status 

by submitting its SEC Central Index Key 

number. This information would enable 

the Commission to cross-reference 

materials filed with the relevant SDR 

with information in periodic reports and 

other materials filed by the electing SEC 

Filer with the U.S. Securities and 

Exchange Commission (‘‘SEC’’). In 

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

would require 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.54 If both affiliates/ 

counterparties are electing SEC Filers, 

both counterparties would have to 

report the additional information in 

proposed § 39.6(g)(4)(iii). 

Finally, proposed § 39.16(g)(5) would 

permit counterparties to provide the 

information listed in proposed (g)(4)(ii)– 

(iii) on an annual basis in anticipation 

of electing the inter-affiliate clearing 

exemption for one or more swaps. Any 

such reporting under this paragraph 

would be effective for inter-affiliate 

swaps entered into within 365 days 

following the date of such reporting. 

During the 365-day period, the affiliate 

would be required to amend the 

information as necessary to reflect any 

material changes to the reported 

information. In addition, the 

Commission anticipates that for most 

corporate groups, affiliates would 

submit identical annual reports. 

Request for Comments 

Q28. The Commission requests 

comment on whether affiliates would 

submit identical annual reports for most 

corporate groups. 

Q29a. The Commission requests 

comment as to whether reporting 

counterparties that would not report to 

an SDR should be subject to swap-byswap reporting requirements? Should 

the Commission allow such entities to 

report all information on an annual 

basis? Please provide any information as 

to the number of reporting 

counterparties that would be affected by 

such a rule change. 

Q29b. The Commission requests 

comment as to whether different sized 

entities should be subject to the 

proposed reporting requirements or the 

reporting requirements for affiliates that 

elect the end-user exception, as 

applicable. If different sized entities 

should not be subject to such reporting 

requirements, please explain why. 

Alternatively, should the Commission 


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55 7 U.S.C. 19(a). 

56See Section 2(h)(1) of the CEA, 7 U.S.C. 2(h)(1). 

57When 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. 

58Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1). CEA 

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

in part II.A. 

59See pt.II.A. 

60See, e.g., costs and benefits discussion in the 

following rulemakings: ‘‘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 20128, 20194, Apr. 3, 2012; 

‘‘Business Conduct Standards for Swap Dealers and 

Major Swap Participants with Counterparties,’’ 77 

FR 9803, 9804, Feb. 17, 2012; ‘‘Swap Data Record 

Keeping and Reporting Requirements,’’ 77 FR 2136, 

2171, Jan. 13, 2012; ‘‘Opting Out of Segregation,’’ 

66 FR 20740, 20743, Apr. 25, 2001; ‘‘Swap Data 

Recordingkeeping and Reporting Requirements: 

Pre-Enactment and Transition Swaps,’’ 77 FR 

35200, Jun. 12, 2012. 

61The cost of clearing includes posting initial and 

variation margin. 

allow phased compliance for different 

sized entities? 

III. Consideration of Costs and Benefits 

A. Introduction 

Section 15(a) of the CEA 55 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.56 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 such swaps 

could cause or exacerbate instability in 

the financial system.57 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.58 For reasons explained 

above,59 the Commission proposes to 

exercise its authority under CEA section 

4(c)(1) to exempt inter-affiliate swaps— 

that is, swaps between majority-owned 

affiliates—from the Section 2(h)(1)(A) 

clearing requirement. 

In the discussion that follows, the 

Commission considers the costs and 

benefits of the proposed 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 proposed 

exemption: (1) Swap trading 

relationship documentation, which 

would require affiliates to document in 

writing all terms governing the trading 

relationship; (2) centralized risk 

management and variation-margin 

requirements, which would require 

affiliates to subject the swap to 

centralized risk management and to post 

variation margin; and (3) reporting 

requirements, which would require 

counterparties to advise an SDR, or the 

Commission if no SDR is available, that 

both counterparties elect the interaffiliate 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 than swap-by-swap. 

Finally, the inter-affiliate clearing 

exemption would require one of the 

following four conditions be satisfied 

for each affiliate: The affiliate is located 

in the United States; the affiliate is 

located in a jurisdiction with a 

comparable and comprehensive clearing 

requirement; the affiliate is required to 

clear all swaps it enters into with nonaffiliated counterparties; or the affiliate 

does not enter into swaps with nonaffiliated counterparties. 

B. Proposed Baseline 

The Commission’s proposed baseline 

for consideration of the costs and 

benefits of this proposed exemption are 

the costs and benefits that the public 

and market participants (including 

potentially eligible affiliates) would 

experience in the absence of this 

regulatory action. In other words, the 

proposed baseline is an alternative 

situation in which the Commission 

takes no action, meaning that 

potentially eligible affiliates would be 

required to comply with the clearing 

requirement. More specifically, under 

the CEA, as amended by the Dodd-Frank 

Act, and Commission regulations 

(finalized or future) inter-affiliate swaps 

will be subject to a clearing requirement 

and, depending on whether the affiliate 

is an SD, MSP, or eligible contract 

participant, a variety of record-keeping 

and reporting requirements. In such a 

scenario, the public and market 

participants, including corporate 

affiliates transacting swaps with each 

other, would experience the costs and 

benefits related to clearing and 

complying with Commission regulations 

under parts 23, 45, and 46.60 The 

proposed exemption would alter these 

costs and benefits. For example, among 

other things, the public and market 

participants would not experience the 

full benefits related to clearing or 

satisfying all the requirements under 

parts 23, 45, and 46. At the same time, 

affiliates electing the exemption would 

likely incur lower costs for two reasons. 

First, the cost of variation margin is 

significantly less than the cost of 

clearing.61 Second, the costs of 

satisfying the reporting requirements 

under the proposed exemption would 

be less than the costs associated with 

satisfying all of the requirements under 

parts 23, 45, and 46. 

The Commission also considers the 

regulatory landscape as it existed before 

the Dodd-Frank Act’s enactment. 

Entities that transacted inter-affiliate 

swaps within a corporate group were 

neither subject to a clearing requirement 

nor compelled to comply with 

regulatory requirements, including 

requirements to record and report interaffiliate swaps. Thus, measured against 

a pre-Dodd-Frank Act reference point, 

affiliates that avail themselves of the 

proposed exemption would experience 

incremental costs and benefits 

occasioned by compliance with the 

conditions for exercising the proposed 

exemption. 


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62For a discussion of the costs and benefits 

incurred by swap dealers and major swap 

participants that must satisfy requirements under 

§ 23.504, see ‘‘Swap Trading Relationship 

Documentation Requirements for Swap Dealers and 

Major Swap Participants,’’ 76 FR 6715, 6724–25, 

Feb. 8, 2011 (proposed rule). 

63For 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 20128, 20173–75, April 3, 2012 

(final rule). 

64As 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. 

65This 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. 

In the discussion that follows, where 

reasonably feasible, the Commission 

endeavors to estimate quantifiable 

dollar costs. The benefits of the 

proposed exemption, as well as certain 

costs, however, are not presently 

susceptible to meaningful 

quantification. Where it is unable to 

quantify, the Commission discusses 

proposed costs and benefits in 

qualitative terms. 

C. Costs 

1. To Market Participants and the Public 

As discussed above, inter-affiliate 

swaps—though possessing a lesser 

degree of counterparty risk than swaps 

transacted between non-affiliated 

counterparties—are not risk-free. As 

evidenced in the 2008 financial crisis, 

counterparty swap risk, transmitted 

systemically, can exact a heavy cost on 

market participants as well as the 

public. Thus, unconditionally 

exempting inter-affiliate swaps from the 

clearing requirement would come with 

a cost of increased risk that clearing is 

intended to contain. This includes the 

risk that the failure of one party to 

perform under the terms of a swap 

transaction would cause the 

counterparty to be unable to perform 

under the terms of swaps it had entered 

into with other counterparties, thereby 

causing a cascading series of nonperformance throughout the financial 

system. Clearing both reduces this risk 

of non-performance and promotes 

confidence throughout the financial 

system that the failure of one firm will 

not lead to a systemic crisis, thereby 

lessening the chance of such a crisis or 

the need for the federal government to 

intervene to prevent any such failures. 

Accordingly, the Commission does not 

propose an unconditional, blanket 

exemption. Rather, the Commission 

proposes an exemption with conditions 

carefully tailored to offset the narrower, 

counterparty-risk profile that interaffiliate swaps present relative to all 

swaps generally. Based on the 

expectation that for the subset of interaffiliate swaps covered by this proposed 

exemption these conditions are capable 

of closely approximating the risk 

protections that clearing provides to 

swaps more generally, the Commission 

foresees no significant additional risk 

cost from the proposed exemption. 

2. To Potentially Eligible Entities 

The proposed rule is exemptive and 

would provide potentially eligible 

affiliates with relief from the clearing 

requirement and attendant Commission 

regulations. As with any exemptive rule 

or order, the proposed rule is 

permissive, meaning that potentially 

eligible affiliates are not required to 

elect it. Accordingly, the Commission 

assumes that an entity would rely on the 

proposed exemption only if the 

anticipated benefits warrant the costs. 

Here, the proposed inter-affiliate 

clearing exemption identifies three 

categories of conditions that an eligible 

affiliate must satisfy to elect the 

proposed exemption: documentation, 

risk management, and reporting. The 

Commission believes that a person 

would have to incur costs to satisfy 

these conditions. The Commission also 

believes that an affiliate would elect the 

exemption only if these costs are less 

than the costs that an affiliate would 

incur should it decide not to elect the 

exemption. 

Regarding the documentation 

condition, the Commission believes that 

affiliates electing the exemption (other 

than SDs/MSPs satisfying the swap 

documentation condition and riskmanagement conditions by satisfying 

the requirements of regulations 23.504 

and 23.600, respectively) would likely 

incur costs to develop a standardized 

document to comply with the proposed 

§ 39.6(g)(2)(ii) requirement that all terms 

governing the trading relationship be in 

writing.62 The Commission estimates 

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. Unless otherwise stated, 

the remaining wage calculations used in 

this proposed rule also are derived from 

this source and modified in the same 

manner. The Commission, however, is 

unable to estimate such costs with 

greater specificity because it is unable to 

estimate the frequency of, and costs 

associated with modifying a swap 

agreement. 

Affiliates also would incur costs 

related to signing swap documents and 

retaining copies. The Commission 

believes that affiliates would incur less 

than $1,000 per year for such activities. 

The Commission notes, however, that 

these estimates may overstate the actual 

costs because it expects that affiliates 

within a corporate group would be able 

to share legal-drafting and recordretention costs, as well as labor costs. 

The second category of conditions 

concerns risk management. Affiliates 

electing the proposed exemption would 

have to subject inter-affiliate swaps to 

centralized risk management, which 

would include variation margin.63 To 

meet the centralized-risk-management 

condition under § 39.16(g)(2)(iii), some 

affiliates may have to create a risk 

management system.64 To do so, 

affiliates would have to purchase 

equipment and software to adequately 

evaluate and measure inter-affiliate 

swap risk. The Commission believes 

that such costs could be possibly as high 

as $150,000. For example, these costs 

might include 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. 

The total would amount to $75,000. 

There also might be installation and 

unexpected costs that could increase 

up-front costs to approximately 

$150,000. In addition to these start-up 

costs, there could be ongoing costs. The 

Commission estimates that centralized 

risk management could require up to ten 

full-time staff at an average salary of 

$150,000 per year.65 Finally, a data 

subscription for price and other market 

data may have to be purchased at cost 

of up to $100,000 per year. 

Proposed § 39.6(g)(2)(iv) would 

require counterparties to post variation 

margin in compliance with proposed 

§ 39.6(g)(3)’s documentation and other 


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66The opportunity cost of posting collateral is the 

highest return an affiliate would have earned by 

investing that collateral instead of using it to cover 

variation margin under similar conditions. 

67See generally, ‘‘Swap Data Recordkeeping and 

Reporting Requirements,’’ 77 FR 2137 at 2176– 

2193, Jan. 13, 2012 (for costs and benefits incurred 

by SDRs). 

requirements. The Commission believes 

that companies may have to hire 

attorneys and financial analysts to 

develop and document the variation 

margin methodology to comply with 

this rule, resulting in a one-time cost of 

$29,000 per entity electing the proposed 

exemption. This estimate assumes up to 

100 hours of financial analyst time at an 

average cost of $208 per hour, and up 

to 20 hours of compliance attorney time 

at an average cost of $390 per hour. 

The Commission also believes that 

affiliates would incur certain costs to 

comply with the proposed 

§ 39.16(g)(2)(iv) condition to post 

variation margin. The Commission 

anticipates that affiliates would have to 

hire up to three people at an average 

salary of $150,000 per year to estimate 

the price of inter-affiliate swaps and to 

manage variation margin payments 

between affiliates. In addition, the 

Commission expects that companies 

would have to purchase equipment and 

software to estimate the price of interaffiliate swaps and to subscribe to a data 

service. However, the Commission 

anticipates that such costs also would 

be incurred to satisfy the centralized 

risk management condition in proposed 

§ 39.6(g)(2)(iii). Finally, affiliates would 

have to incur the opportunity costs 

associated with posting collateral to 

cover variation margin.66

The third category of conditions 

involves reporting requirements. 

Proposed § 39.6(g)(4) would require 

affiliates to report specific information 

to an SDR or to the Commission if no 

SDR would accept such information. 

Proposed § 39.16(g)(4)(i) would require 

notice reporting on a swap-by-swap 

basis that two affiliates are electing the 

exemption and that they both meet the 

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

(2). The Commission believes 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. 

Affiliates would incur costs to satisfy 

the conditions that the reporting party 

(1) identify how the affiliates expect to 

meet the financial obligations associated 

with their uncleared swap as required 

under proposed § 39.6(g)(4)(ii), and (2) 

provide the information required under 

proposed § 39.6(g)(4)(iii) if either 

electing affiliate is an SEC Filer. 

Affiliates may decide to report this 

information on either a swap-by-swap or 

annual basis, and the costs would vary 

depending on the reporting frequency. 

Regarding the financial information in 

proposed § 39.6(g)(4)(ii)-(iii), the 

Commission believes 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 complying with 

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

inter-affiliate swap, and a cost range of 

$6.50–$32.50 for complying with 

proposed § 39.6(g)(4)(ii)–(iii) for 

subsequent inter-affiliate swaps. 

The Commission anticipates that 

companies electing not to clear would 

have established reporting systems to 

comply with other Commission rules 

regarding swap reporting. However, all 

reporting counterparties likely would 

need to modify their reporting systems 

to accommodate the additional data 

fields required by this rule. The 

Commission estimates that those 

modifications would create a one-time 

programming expense of approximately 

one to ten burden hours per affiliate. 

The Commission estimates that the 

hourly wage for a senior programmer is 

$341, which means that the one-time, 

per entity cost for modifying reporting 

systems would likely be between $341 

and $3,410. 

An affiliate that does not function as 

the reporting counterparty may need to 

communicate information to the 

reporting counterparty after the swap is 

entered. That information could 

include, among other things, whether 

the affiliate has filed an annual report 

pursuant to proposed § 39.6(g)(5) and 

information to facilitate any due 

diligence that the reporting counterparty 

may conduct. These 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. The Commission estimates 

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. The hourly wage 

for a compliance attorney is $390, 

translating to an aggregate annual cost 

for communicating information to the 

reporting counterparty of between $33 

to $3,900. 

The Commission expects a proportion 

of affiliates would choose to file an 

annual report pursuant to proposed 

§ 39.6(g)(5). The annual filing option 

may be less costly than swap-by-swap 

reporting. The Commission estimates 

that it would take an average of 30 to 90 

minutes to complete and submit this 

filing. The average hourly wage for a 

compliance attorney is $390, translating 

to an aggregate annual cost for 

submitting the annual report of between 

$195 to $585. 

The Commission anticipates that 

SDRs and the Commission also would 

bear costs associated with the proposed 

reporting conditions. SDRs would be 

required to add or edit reporting data 

fields to accommodate information 

reported by affiliates electing the interaffiliate clearing exemption.67 Similarly, 

the Commission would need to create a 

reporting system for affiliates electing 

the exemption should there be no 

available SDR. 

Finally, the rule would impose a 

limitation on those affiliates electing the 

inter-affiliate clearing exemption. 

Namely, the inter-affiliate clearing 

exemption would require one of the 

following four conditions be satisfied 

for each affiliate: the affiliate is located 

in the United States; the affiliate is 

located in a jurisdiction with a 

comparable and comprehensive clearing 

requirement; the affiliate is required to 

clear all swaps it enters into with nonaffiliated counterparties; or the affiliate 

does not enter into swaps with nonaffiliated counterparties. This limitation 

would impose no additional cost over 

not providing the exemption. However, 

as compared to the state of regulation 

that existed pre-Dodd-Frank Act, this 

condition would impose the costs of 

clearing for those inter-affiliate swaps 

that occur in countries without a 

clearing regime comparable to the 

United States. 

D. Benefits 

The CEA does not require the 

Commission to issue an exemption to 

the clearing requirement for interaffiliate swaps. Section 4(c)(1) of the 

CEA, however, provides the 

Commission with authority to exempt 

certain entities and types of transactions 

from CEA obligations. The statutory 

section requires that the Commission 

consider two objectives when it decides 

to issue an exemption: (1) The 

promotion of responsible economic or 

financial innovation, and (2) the 

promotion of fair competition. 

The Commission believes there are 

benefits to exempting swaps between 

certain affiliated entities. For example, 


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68See pt. I.B. for in-depth discussion of relevant 

comments regarding inter-affiliate swaps and the 

advantages of such treasury or conduit structures. 

69See pt. II.A. 

70See pt. II.B.1 for further discussion and other 

requests for comment on this issue. 

71 In the Paperwork Reduction Act, the 

Commission points out that it does not possess 

sufficient information to estimate the number of 

affiliates, even majority-owned, that might avail 

themselves of the proposed inter-affiliate clearing 

exemption. 

as explained above,68 a number of 

commenters stated that clearing swaps 

through treasury or conduit affiliates 

enables entities to more efficiently and 

effectively manage corporate risk. 

The Commission also is considering 

the previously-discussed comments that 

an exemption is appropriate because 

inter-affiliate swaps pose reduced 

counterparty risk relative to swaps with 

third parties.69 The Commission 

remarks that this proposition is more 

likely to hold true provided that the 

terms and conditions of the swaps are 

the same. The Commission believes that 

inter-affiliate swap risk may be 

appropriately managed, in lieu of 

clearing, through the proposed 

conditions that affiliates would be 

required to satisfy to elect the proposed 

exemption. It has considered the 

benefits of each of these conditions. The 

Commission believes that the first 

category—documentation of the swap 

trading relationship between affiliates— 

would benefit affiliates and the overall 

financial system. Specifically, the 

Commission believes that requiring 

documentation of inter-affiliate swaps 

in a swap confirmation would help 

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. Also, though not a 

documentation condition, the proposed 

exemption would require that the 

affiliates would be able to elect this 

exemption for their inter-affiliate swaps 

if one of the following four conditions 

is satisfied for each affiliate: The 

affiliate is located in the United States; 

the affiliate is located in a jurisdiction 

with a comparable and comprehensive 

clearing requirement; the affiliate is 

required to clear all swaps it enters into 

with non-affiliate counterparties; or the 

affiliate does not enter into swaps with 

non-affiliate counterparties. This 

limitation should help mitigate systemic 

risk attributable to affiliates who, 

subsequent to conducting inter-affiliate 

swaps, transact uncleared, market-facing 

(i.e., not inter-affiliate) swaps in a 

jurisdiction without a clearing regime 

comparable to the United States. 

The Commission recognizes that there 

may be a legitimate reason for interaffiliate swaps where one affiliate is 

located in a country that does not have 

a comparable clearing regime or the 

non-United States counterparty is 

otherwise required to clear swaps with 

third parties. However, the Commission 

believes that the corporate group and 

financial markets may be at risk if the 

foreign affiliate is free to enter into a 

related, uncleared swap with a third 

party that would be subject to clearing 

were it entered into in the United States. 

On balance, the Commission believes 

that the risk associated with uncleared 

swaps necessitates that the proposed 

exemption be limited to swaps between 

affiliates located in the United States or 

in foreign countries with comparable 

clearing regimes or the non-United 

States counterparty is otherwise 

required to clear swaps with third 

parties or the affiliates do not enter into 

swaps with third parties. 

Centralized-risk management and 

variation margin are also beneficial 

conditions. The requirement that an 

inter-affiliate swap be subject to 

centralized-risk management is 

beneficial because it is intimately 

connected to the variation-margin 

condition. Centralized-risk management 

establishes appropriate measurements 

and procedures so that affiliates can 

mitigate the amount being concentrated 

in a single treasury or conduit-type 

affiliate. Moreover, the Commission 

believes that proper risk management 

benefits the public by reducing risk and 

the losses related to defaults. 

The requirement that affiliates post 

variation margin should protect both 

parties to a trade by ensuring that each 

party to the swap has the financial 

wherewithal to meet the obligations of 

the swap. Variation margin also would 

serve as a resource that could reduce 

losses to a counterparty when there is a 

default. Overall, the variation-margin 

condition would benefit each affiliate 

and the financial system, at large, by 

increasing the security of affiliate 

positions. 

The final category of conditions, 

reporting certain information about 

inter-affiliate swaps, should enhance the 

level of transparency associated with 

inter-affiliate swaps activity, afford the 

Commission new insights into the 

practices of affiliates that engage in 

inter-affiliate swaps, and help the 

Commission and other appropriate 

regulators identify emerging or potential 

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. 

E. Costs and Benefits as Compared to 

Alternatives 

The Commission considered several 

alternatives to the proposed rulemaking. 

For instance, the Commission could 

have: (1) Chosen not to propose an interaffiliate clearing exemption; (2) 

proposed an alternative definition of 

affiliate; or (3) decided not to place 

certain conditions on those electing the 

inter-affiliate clearing exemption. The 

Commission, however, has proposed 

what it considers a measured 

approach—in terms of the implicated 

costs and benefits of the exemption— 

given its current understanding of interaffiliate swaps. 

First, the Commission considered not 

exempting inter-affiliate swaps from the 

clearing requirement. Without an 

exemption, inter-affiliate swaps subject 

to a clearing requirement would have to 

be cleared. This alternative was not 

favored by the Commission because the 

Commission believes that there are 

considerable benefits of exempting 

inter-affiliate swaps from clearing to the 

market, as discussed in detail above. In 

addition, while the Commission does 

not believe inter-affiliate swaps are 

riskless, the Commission is considering 

comments that inter-affiliate swaps pose 

less risk than swaps with third parties 

because of reduced counterparty risk 

and therefore risk-reducing conditions 

may be a satisfactory alternative to 

clearing for these swaps. Commenters in 

other rulemakings as discussed above 

recognized implicitly risk concerns by 

sharing that some corporate groups 

manage inter-affiliate risk via 

centralized risk management programs 

that include variation-margin 

calculations. Consequently, it would not 

be prudent to exempt inter-affiliate 

swaps categorically from the CEA’s 

clearing requirement without conditions 

that address inter-affiliate swap risk. 

Second, the Commission also 

considered ownership requirements of 

greater than, and lesser than majority 

ownership.70 Increasing the ownership 

requirement would reduce the number 

of affiliates that could benefit from the 

exemption.71 At the same time, a higher 

ownership threshold for affiliates could 

help protect minority owners and 

reduce counterparty risk and risk to 

third parties who have entered into 

swaps that are related to inter-affiliate 

swaps. 

Nevertheless, the Commission 

believes that any benefit from an 

ownership requirement of greater than 

majority ownership, in the form of 

reduced counterparty risk, would not be 


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72See pt. I.B. for in-depth discussion of relevant 

comments regarding inter-affiliate swaps and the 

advantages of such treasury or conduit structures. 

73 17 CFR 43.2. See also ‘‘Real-Time Public 

Reporting of Swap Transaction Data,’’ 77 FR 1182, 

Jan. 9, 2012 (Real-Time Reporting). 

74Transactions that fall outside the definition of 

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

they are not arms-length—‘‘do not serve the price 

discovery objective of CEA section 2(a)(13)(B).’’ 

Real-Time Reporting, 77 FR at 1195. See also Id. at 

1187 (discussion entitled ‘‘Swaps Between 

Affiliates and Portfolio Compression Exercises’’). 

75The definition of ‘‘publicly reportable swap 

transaction’’ identifies two examples of transactions 

that fall outside definition, including ‘‘internal 

swaps between one-hundred percent owned 

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

(adopted by Real-Time Reporting, 77 FR at 1244). 

The Commission remarks that the list of examples 

is not exhaustive. 

76Furthermore, CEA section 8a(5) states that ‘‘in 

the judgment of the Commission,’’ it is authorized 

to make and promulgate rules ‘‘necessary to 

Continued 

substantial due to the risk mitigation 

conditions such as centralized risk 

management programs that are being 

proposed with majority ownership. The 

Commission welcomes comments as to 

the costs and benefits of an increased 

ownership requirement. 

Similarly, the Commission considered 

an ownership requirement of less than 

majority ownership. While a reduction 

in the ownership requirement would 

allow more affiliates to benefit from the 

exemption, it would also considerably 

increase the counterparty risk in the 

market. The Commission welcomes 

comments as to the costs and benefits of 

a decreased ownership requirement. 

Finally, the Commission considered 

not requiring each condition—i.e., swap 

trading relationship documentation; 

centralized risk management that 

includes variation margin; or reporting. 

In other words, the Commission could 

have proposed an inter-affiliate clearing 

exemption with fewer or no conditions. 

Because there is no indication at this 

stage that inter-affiliate swaps are 

riskless, the Commission proposed 

conditions. The Commission’s views on 

the costs and benefits of each condition 

are discussed above. The Commission 

invites comments as to the costs and 

benefit of each condition. 

F. Consideration of CEA Section 15(a) 

Factors 

1. Protection of Market Participants and 

the Public 

In deciding to propose the interaffiliate clearing exemption, the 

Commission assessed how to protect 

affiliated entities, third parties in the 

swaps market, and the public. The 

Commission sought to ensure that in the 

absence of a clearing requirement the 

risks presented by uncleared interaffiliate swaps would be minimized 

should there be significant losses to one 

affiliate counterparty or a default of one 

of the affiliate counterparties. Toward 

that end, the Commission proposed that 

affiliates eligible to elect the proposed 

exemption must execute swap trading 

relationship documentation; post 

variation margin as part of a centralizedrisk management process; and report 

specific information to an SDR, or to the 

Commission if no SDR would accept the 

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

multiple objectives that ultimately 

protect market participants and the 

public. 

For instance, the documentation 

requirement would 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 would be 

less contractual ambiguity should 

disagreements between affiliates arise. 

The proposed condition that an interaffiliate swap be subject to a centralized 

risk management program reasonably 

designed to monitor and manage risk 

would help mitigate the risks associated 

with inter-affiliate swaps. As noted 

throughout this proposed rulemaking, 

inter-affiliate swap risk could adversely 

impact third parties who enter into 

swaps that are related to an interaffiliate swap. In addition, if interaffiliate swap risk is not carefully 

monitored, there could be greater 

probability that an adverse financial 

event could lead to bankruptcy, which 

could harm market participants and the 

public overall. Similarly, the proposed 

condition that affiliated counterparties 

post variation margin should help to 

prevent unrealized losses from 

accumulating over time and thereby 

reduce both the chance of default and 

the size of any default should one occur. 

In turn, this should lessen the 

likelihood and extent of harm to third 

parties that enter into swaps that are 

related to inter-affiliate swaps. 

The proposed reporting obligations 

would help the Commission monitor 

compliance with the proposed interaffiliate 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 informed. 

2. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

Exempting swaps between majorityowned affiliates within a corporate 

group from the clearing requirement 

would promote efficiency by reducing 

overall clearing costs for eligible 

counterparties. The Commission is also 

considering comments that the 

proposed exemption would increase the 

efficiency and financial integrity of 

markets because it would enable 

corporate groups to clear swaps through 

their treasury or conduit affiliates. As 

explained above,72 commenters in other 

rulemakings have stated that clearing 

swaps through treasury or conduit 

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, that affiliates post 

variation margin, and that certain 

information be reported, also would 

discourage abuse of the exemption. 

Together, these conditions would 

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.’’ 73 The Commission does not 

consider non-arms-length swaps as 

contributing to price discovery in the 

markets.74 Given that inter-affiliate 

swaps as defined in this proposed 

rulemaking are generally not arm’s 

length transactions, the Commission 

does not anticipate the proposed interaffiliate clearing exemption would have 

any effect on price discovery.75

4. Sound Risk Management Practices 

As a general rule, the Commission 

believes that clearing swaps is a sound 

risk management practice. But, in 

proposing the inter-affiliate clearing 

exemption, the Commission has 

assessed the risks of inter-affiliate 

swaps, and proposes that it can impose 

alternative, sound risk-management 

practices for these particular swaps in 

the form of conditions. In other words, 

a prudent use of the Commission’s 

exemptive authority would include 

proposing an exemption that requires 

affiliates to manage risks 

appropriately.76 In this case, the specific 


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effectuate any’’ CEA provisions or to accomplish 

any CEA purpose. 7 U.S.C. 12a(5). 

77See pt. II.B.9 and proposed § 39.6(g)(4)(iii). 

78For SDs and MSPs, see, e.g., ‘‘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 20128, 20194, Apr. 

3, 2012 (SDs and MSPs); ‘‘Business Conduct 

Standards for Swap Dealers and Major Swap 

Participants with Counterparties,’’ 77 FR 9803, 

9804, Feb. 17, 2012 (SDs and MSPs); ‘‘Policy 

Statement and Establishment of Definitions of 

‘Small Entities’ for Purposes of the Regulatory 

Flexibility Act,’’ 47 FR 18618, Apr. 30, 1982 

(MSPs). For ECPs, see, e.g., ‘‘Commodity Options,’’ 

77 FR 25320, 25334, Apr. 27, 2012; ‘‘Swap Data 

Record Keeping and Reporting Requirements,’’ 77 

FR 2136, 2171, Jan. 13, 2012; ‘‘Opting Out of 

Segregation,’’ 66 FR 20740, 20743, Apr. 25, 2001. 

79See Swap Data Repositories, 75 FR 80898, 

80926, Dec. 23, 2010; Registration of Swap Dealers 

and Major Swap Participants, 75 FR 71379, 71385, 

Nov. 23, 2010. 

80 44 U.S.C. 3501 et seq. 

risk-management conditions include: 

documentation of swap terms; 

establishment of centralized risk 

management, and the posting of 

variation margin. The Commission also 

believes that SEC Filer reporting is a 

prudent practice. As detailed in this 

preamble and the proposed rule text,77

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 

The Commission believes that the 

proposed exemptive rulemaking would 

reduce the costs of transacting swaps 

between majority-owned affiliates. At 

the same time, the proposed rulemaking 

would foster the financial integrity of 

swap markets by mandating that certain 

conditions be satisfied by affiliates 

electing the inter-affiliate clearing 

exemption. The Commission believes 

that the financial savings by affiliates, 

and, ultimately, corporate groups would 

serve public-interest considerations. For 

example, affiliates and corporate groups 

could use the cost-savings to provide 

new services or products for the public. 

They could also pass-on some or all of 

the cost-savings through prices they 

charge the public for their services and 

products. 

G. Request for Public Comment on Costs 

and Benefits 

Q30. The Commission invites public 

comment on its cost-benefit 

considerations, including the 

consideration of reasonable alternatives. 

Q31. If the Commission were to 

propose a clearing exemption limited to 

100% owned affiliates, what costs and 

benefits would affect market 

participants and the public? 

Q32. If the Commission were to 

propose a clearing exemption with an 

ownership requirement of greater or less 

than majority ownership what costs and 

benefits would affect market 

participants and the public? 

Q33. If the Commission were to issue 

a proposed clearing exemption limited 

to those affiliates that file consolidated 

tax returns, what costs and benefits 

would affect market participants and the 

public? 

Q34. Do inter-affiliate swaps affect 

price discovery? To what extent would 

the inter-affiliate clearing exemption 

affect price discovery? 

Q35. Besides variation margin, is 

there a less costly risk-management tool 

that would serve the same riskmanagement objectives as variation 

margin? 

Q36. Besides affiliates, SDRs, and the 

Commission, are there any other entities 

that might bear a direct cost as a result 

of the proposed inter-affiliate clearing 

exemption? If so, who and to what 

extent? 

Q37. Commenters are invited to 

submit any data or other information 

that they may have quantifying or 

qualifying the costs and benefits of the 

proposal with their comment letters. 

Q38. Commenters are invited to 

submit any data or other information 

that they may have quantifying or 

qualifying start-up and on-going costs 

and benefits associated with 

establishing a centralized risk 

management program. 

IV. Administrative Compliance 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that agencies consider 

whether the proposed rules will have a 

significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact. 

Consistent with other Commission 

rulemakings, the proposed rules will not 

have a significant economic impact on 

a substantial number of small entities. 

The proposed rules would affect the 

electing and reporting parties, which 

could be SDs, MSPs, and Eligible 

Contract Participants (‘‘ECPs’’). The 

Commission has certified previously 

that neither category involves small 

entities for purposes of the RFA in other 

Commission rulemakings, including 

those implementing requirements of the 

Dodd-Frank Act.78 The Commission is 

making a similar determination for 

purposes of this proposal. Accordingly, 

the Chairman, on behalf of the 

Commission, hereby certifies, pursuant 

to 5 U.S.C. 605(b), that the proposed 

rules will not have a significant 

economic impact on a substantial 

number of small entities with respect to 

SDs, MSPs, and ECPs. 

The proposed rules also would affect 

SDRs, which the Commission has 

similarly determined not to be small 

entities for purposes of the RFA.79 The 

Commission is making the same 

determination with respect to the 

proposed rules. Accordingly, the 

Chairman, on behalf of the Commission, 

hereby certifies, pursuant to 5 U.S.C. 

605(b), that the proposed regulation 

would not have a significant economic 

impact on a substantial number of small 

entities with respect to SDRs. 

Request for Comments 

Q39. The Commission invites 

comments on the impact of this 

proposed regulation on small entities. 

B. Paperwork Reduction Act 

1. Overview 

The Paperwork Reduction Act 

(‘‘PRA’’) 80 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 

displays a currently valid control 

number issued by the Office of 

Management and Budget (‘‘OMB’’). 

Certain provisions of proposed § 39.6(g) 

would result in new collection of 

information requirements within the 

meaning of the PRA. These new 

reporting requirements are not currently 

covered by any existing OMB control 

number and OMB has not yet assigned 

a control number for this new 

collection. The Commission therefore is 

submitting this proposal to the OMB for 

review in accordance with 44 U.S.C. 

3507(g) and 5 CFR 1320.11. 


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81See 5 CFR 1320.3(b) for the definition of the 

term ‘‘burden.’’ 

82The BEA’s Web site is located at http:// 

www.bea.gov/. BEA’s most recent data on the 

number of U.S. parent companies of multinational 

corporations and their affiliates is listed in the 

‘‘U.S. Direct Investment Abroad: Preliminary 

Results from the 2009 Benchmark Survey,’’ located 

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

usdia2009p.htm. 

83See 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 an 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, located at http://www.bea.gov/scb/pdf/ 

internat/usinvest/1995/0395iid.pdf. 

84See Table II.A 1., ‘‘Selected Data for Foreign 

Affiliates in All Countries in Which Investment 

Was Reported,’’ located at http://www.bea.gov/ 

international/pdf/usdia_2009p/ 

Group%20II%20tables.pdf. The BEA limited 

foreign affiliates to those with total assets, sales, or 

net income of more than $25 million. 

85The Commission is unable to provide 

additional information regarding the survey because 

information was submitted on a confidential basis. 

86 Due to the small sample size and data 

inconsistencies, this estimate may not provide a 

complete representation of the affiliate corporate 

structure or inter-affiliate swaps. For instance, 

responses were not consistent in format (quarterly 

figures versus six-month or annual figures) and also 

provided data for different time periods in 2010 or 

2011. To generate its estimates, the Commission 

had to extrapolate this data by assuming that the 

amount of inter-affiliate swaps transacted during 

one quarter would be the same for the remaining 

three quarters of the year, or that inter-affiliate swap 

data from 2010 and 2011 are comparable and can 

be combined for averaging purposes. The 

Commission also notes that responses regarding the 

number of inter-affiliate swap transactions varied 

widely and a much larger sample size would be 

required to generate a more accurate estimate. The 

Commission requests comment on the typical 

annual inter-affiliate swap activity within corporate 

groups and the total number of affiliates that would 

potentially elect the proposed inter-affiliate clearing 

exemption. 

87As noted above, the Commission assumes that 

95% of MNCs are commercial entities and 5% are 

financial companies. Based on these numbers, the 

Commission believes that most of the swaps 

between affiliates are likely to qualify for the enduser exception because in most cases one of the 

affiliates will be a manufacturer and the interaffiliate swap will hedge or mitigate the commercial 

risk of that affiliate. The Commission, however, 

does not have information as to how many interaffiliate swaps would qualify for the end-user 

exception. Accordingly, the Commission has taken 

a conservative approach and assumed that none of 

the inter-affiliate swaps would qualify for the enduser exception. 

The title for this collection of 

information is ‘‘Rule 39.6(g) Affiliate 

Transaction Uncleared Swap 

Notification.’’ If adopted, responses to 

this collection of information would be 

mandatory. The Commission will 

protect proprietary information 

according to the Freedom of Information 

Act and 17 CFR part 145, ‘‘Commission 

Records and Information.’’ In addition, 

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

prohibits the Commission, unless 

specifically authorized by the CEA, 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.’’ The 

Commission is also required to protect 

certain information contained in a 

government system of records according 

to the Privacy Act of 1974, 5 U.S.C. 

552a. 

2. Information Provided by Reporting 

Entities 

Proposed § 39.6(g) would set forth 

certain reporting conditions that must 

be satisfied for affiliates to elect the 

inter-affiliate clearing exemption. As 

described above, these conditions are 

designed to address Commission 

concerns regarding inter-affiliate swap 

risk and to provide the Commission 

with information necessary to regulate 

swaps markets. In particular, the 

reporting conditions in proposed 

§ 39.6(g)(4) and the optional annual 

report set forth in proposed § 39.6(g)(5) 

would establish new collection of 

information requirements within the 

meaning of the PRA. Additionally, 

affiliates may be required to update 

their reporting systems for purposes of 

complying with the proposed reporting 

requirement, and non-reporting 

affiliates electing the proposed 

exemption may incur costs in 

transmitting information to their 

reporting counterparties. 

The Commission has estimated the 

time burden required for entities to 

comply with the proposed 

requirements.81 The Commission has 

estimated quantifiable costs, including 

one-time and annual costs per affiliate 

and costs that are incurred on a swapby-swap basis. The dollar estimates are 

offered as ranges with upper and lower 

bounds, which is necessary to 

accommodate uncertainty regarding the 

estimates. The Commission notes that 

the most likely outcome with respect to 

each estimate is the average cost. With 

that in mind, the Commission has 

included tables that provide the average 

burden hour and average cost for each 

of the PRA requirements in the 

proposed exemption. 

The total cost of the inter-affiliate 

clearing exemption would depend on 

the number of affiliates electing the 

proposed exemption, as well as the 

number of inter-affiliate swaps for 

which affiliates would elect to use the 

proposed exemption. To identify the 

number of affiliates that could elect the 

proposed exemption, the Commission is 

relying upon the most recent data 

collected by the U.S. Bureau of 

Economic Analysis (‘‘BEA’’).82 The BEA 

has determined that there are 2,347 U.S. 

multinational parent companies 

(‘‘MNCs’’),83 and 25,424 foreign 

subsidiaries that are majority-owned by 

such MNCs.84 Because the BEA does not 

provide the number of majority-owned 

U.S. subsidiaries, the Commission has 

decided to double BEA’s foreignsubsidiary total to identify the number 

of potential U.S. subsidiaries that might 

elect the proposed inter-affiliate clearing 

exemption. The result is that there are 

an estimated 50,848 U.S. and foreign 

subsidiaries [25,424 × 2], or 

approximately 22 subsidiaries per MNC 

[50,848 ÷ 2,347], that is, 11 U.S. 

subsidiaries and 11 foreign subsidiaries. 

This total number of U.S. and foreign 

subsidiaries combined with the total 

U.S. parent companies equals 53,195 

[2,347 + 50,848] affiliates that might 

elect the inter-affiliate clearing 

exemption. 

To obtain information on the average 

number of inter-affiliate swaps, the 

Commission surveyed five 

corporations.85 Two corporations were 

large financial companies and the other 

three were manufacturing companies. 

Recognizing that most MNCs are 

manufacturers as opposed to financial 

companies, the Commission decided to 

take a weighted average of the sample 

and assumed that 95% of MNCs are 

manufacturers and 5% are financial 

companies. Based on this weighted 

average, the Commission estimates that 

affiliates enter into 2,230 inter-affiliate 

swaps annually on average.86

Using the figures above, namely 2,347 

MNCs with 22 subsidiaries each and 

each affiliate transacting an average of 

2,230 swaps, the Commission has 

estimated that there are approximately 

64,768,399 inter-affiliate swaps entered 

into annually. To make this calculation, 

the Commission assumed that all U.S. 

inter-affiliate swaps and most foreign 

inter-affiliate swaps are with a single 

U.S. treasury/conduit affiliate. The 

Commission also assumed that 75% of 

treasury/conduit affiliates would be 

subsidiaries and would therefore be 

subject to this rulemaking. The 

remaining 25% of treasury/conduit 

affiliates would be the parent MNC and 

would not be the subject of this 

rulemaking because in general such 

swaps would qualify for the end-user 

exception.87 Finally, the Commission 

assumed that 50% of the inter-affiliate 

swaps entered into by foreign affiliates 

would be entered into with a U.S. 

treasury/conduit affiliate while the 

remaining swaps would be entered into 

with foreign affiliates and would not be 


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88Eleven of the 22 affiliates are assumed to be 

U.S. affiliates. 

89The Commission assumed that at least 90% of 

MNCs would elect to file annual reports, see further 

discussion below. 

90The Total Annual Number of Inter-Affiliate 

Swaps is the total number of inter-affiliate swaps 

that MNCs, U.S. subsidiaries, and foreign 

subsidiaries entered into that would be subject to 

this rule. The total number of inter-affiliate swaps 

that MNC’s entered into that would be subject to 

this rule is the number of MNCs (2,347) times the 

number of swaps per MNC (2,230) times 75%, or 

0.75 × 2,347 × 2,230. The total number of interaffiliate swaps that U.S. subsidiaries entered into 

that would be subject to this rule is 10 × (0.75 × 

2,230 × 2,347). There are 11 U.S. subsidiaries per 

MNC and each subsidiary enters into as many as 

swaps as each MNC, on average. However, 1 of the 

U.S. subsidiaries is the treasury/conduit affiliate 

and it enters into swaps with every other affiliate, 

including foreign affiliates. To avoid double 

counting, that subsidiary is removed from the 

equation and the number of U.S. subsidiaries is 10. 

Finally, the total number of inter-affiliate swaps 

that foreign subsidiaries entered into that would be 

subject to this rule is 0.5 × (11 × 0.75 × 2,230 × 

2,347). Each foreign subsidiary enters into as many 

swaps as each U.S. subsidiary, but only 50% of 

foreign subsidiary swaps would be subject to this 

rule. 

subject to this rulemaking. Table A 

summarizes the Commission’s estimates 

of the number of MNCs, subsidiaries, 

affiliates, and annual inter-affiliate 

swaps. 

TABLE A—MNC, AFFILIATE, AND INTER-AFFILIATE SWAP ESTIMATES

Number of MNCs ........................................................................................................................................................................... 2,347 

Number of Subsidiaries per MNC ................................................................................................................................................. 22 88

Total Number of Subsidiaries ........................................................................................................................................................ 50,848 

Total Number of Affiliates Potentially Electing the Proposed Exemption ..................................................................................... 53,195 

[50,848 + 2,347] 

Estimated Number of MNCs Subject to Proposed Reporting Requirements ............................................................................... 1,760 

[2,347 × 75%] 

Estimated Number of Reporting MNCs that Would File Annual Reports 89 ................................................................................. 1,584 

[1,760 × 90%] 

Average Annual Number of Inter-Affiliate Swaps per Affiliate ...................................................................................................... 2,230 

Total Annual Number of Inter-Affiliate Swaps 90 ........................................................................................................................... 64,768,399 

Request for Comments 

Q40. As discussed above, the 

Commission does not have information 

as to how many inter-affiliate swaps 

would qualify for the end-user 

exception. The Commission invites 

comments on whether most interaffiliate swaps would qualify for the 

end-user exception because one of the 

affiliates is a commercial entity and the 

swap hedges or mitigates the 

commercial risk of that affiliate. The 

Commission also requests any 

information that would help to quantify 

the number of inter-affiliate swaps or 

the share of inter-affiliate swaps that 

would qualify for the end-user 

exception. 

a. Proposed § 39.6(g)(4) Reporting 

Requirements 

Proposed § 39.6(g)(4) would require 

electing entities that are reporting 

counterparties to notify the Commission 

each time the inter-affiliate clearing 

exemption is elected by delivering 

specified information to a registered 

SDR or, if no registered SDR is available, 

the Commission. Except as noted below, 

the notification would occur only once 

at the beginning of the swap life cycle. 

The reporting counterparty would 

have to report the information required 

in proposed § 39.6(g)(4)(i) for each 

swap. It would also have to report the 

information required in proposed 

§§ 39.6(g)(4)(ii)–(iii) for each swap if no 

annual report had been filed. To comply 

with proposed § 39.6(g)(4)(i), each 

reporting counterparty would be 

required to check one box indicating 

that both counterparties to the swap are 

electing not to clear the swap. The 

Commission expects that each reporting 

counterparty would likely spend 15 

seconds to two minutes per transaction 

entering this information into the 

reporting system. Regarding the 

proposed §§ 39.6(g)(4)(ii)–(iii) 

information, the Commission expects 

that it would 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 Commission expects 

a compliance attorney may be 

responsible for the collection at $390 

per hour, resulting in the following per 

transaction costs to reporting 

counterparties: A range of $1.63–$13.00 

for proposed § 39.6(g)(4)(i); a cost of 

$65.00 for complying with proposed 

§§ 39.6(g)(4)(ii)–(iii) for the first interaffiliate swap; and range of $6.50– 

$32.50 for complying with proposed 

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

inter-affiliate swaps with the same 

counterparty. Table B summarizes the 

estimated average burden hours and 

costs per reporting entity under 

proposed § 39.6(g)(4), as follows: 

TABLE B—BURDEN AND COST ESTIMATES OF PROPOSED § 39.6(g)(4) 

Proposed regulation/requirement description Average burden hours per 

transaction 

Average cost 

per transaction 

Total average annual burden 

hours Total average annual cost 

§ 39.6(g)(4)(i) .......................... 0.019 hours (1.14 minutes) ... $7.41 1,230,600 [64,768,399 × .019] $479,933,837 [64,768,399 × 

$7.41] 91

§§ 39.6(g)(4)(ii)–(iii) (costs incurred if no annual report 

filed under § 39.6(g)(5) 92). 

First Transaction: 0.17 hours 

(10 minutes).

65.00 648 [(50,848 × 75% × 10% × 

0.17] 

$247,884 [(50,848 × 75%) × 

10% × $65] 93

Subsequent Transactions: 

0.05 hours (3 minutes).

19.50 323,651 [(64,768,399 ¥ 

50,848 × 75%) × 10% × 

.05] 

$126,224,013 [(64,768,399 ¥ 

50,848 × 75%) × 10% × 

$19.50]94


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91To derive the annual burden hours and cost for 

this row, the Commission calculated the following: 

the average burden hours or cost per transaction 

times total number of inter-affiliate swaps annually. 92The Commission assumes that at least 90% of 

corporations would elect to file an annual report to 

supply the information required by proposed 

§ 39.6(g)(4)(ii)–(iii) rather than report the 

information on a swap-by-swap basis; 10% of 

affiliates would report the required information on 

a swap-by-swap basis. 93To derive the annual burden hours and cost for 

this row, the Commission calculated the following: 

(A) The total number of subsidiaries (see Table A) 

times 75% to determine the number of affiliates 

involved in a first transaction subject to reporting; 

(B) then multiplied that number—38,136—with 

10% to determine the number of affiliates that 

would report swap-by-swap, i.e., 3,813.6, and (C) 

then multiplied that number by 0.16667, to obtain 

the average burden hours to report, or $65, to obtain 

the average cost to report. 

94To derive the annual burden hours and cost for 

this row, the Commission calculated following: (A) 

The total number of subsequent transactions, which 

is the total number of transactions (64,768,399) 

minus the total number of first time transactions 

(0.75 × 50,848); (B) then multiplied that number— 

64,730,263—by 10% to determine the number of 

affiliates that would report swap-by-swap, i.e., 

6,473,26.3, and (C) then multiplied that number by 

0.05, to obtain the average burden hours to report, 

or $19.50, to obtain the average cost to report. 

95The Commission assumes that there is only one 

reporting counterparty at each MNC. 

96 1,760 represents the 75% of 2,347 MNCs that 

the Commission estimates would be reporting 

parties. 

97 38,136 represents 75% of 50,848, the total 

number of affiliates potentially electing the 

proposed exemption. 

98This calculation represents the total burden 

hours for the estimated 90% of MNCs—1,584.2— 

that would file annual reports. 

99These numbers are obtained by adding all of 

the burden hours or costs in Tables B and C. 

b. Other Costs 

i. Updating Reporting Procedures 

The Commission believes that 

companies subject to this rule would 

have established reporting systems to 

comply with other Commission rules 

regarding swap reporting. However, 

reporting counterparties may need to 

modify their reporting systems in order 

to accommodate the additional data 

fields required by this rule. The 

Commission estimates that those 

modifications would create a one-time 

expense of approximately one to ten 

burden hours per reporting 

counterparty. The Commission 

estimates that the hourly wage for a 

senior programmer is $341, which 

means that the one-time, per entity cost 

for modifying reporting systems to 

comply with proposed § 39.6(g)(4) 

would likely be between $341 and 

$3,410. 

ii. Burden on Non-Reporting Affiliates 

An affiliate who does not function as 

the reporting counterparty may need to 

communicate information to the 

reporting counterparty after the swap is 

entered. That information could 

include, among other things, 

information to facilitate any due 

diligence that the reporting counterparty 

may conduct. These costs would likely 

vary substantially depending on how 

frequently the affiliate enters into swaps 

and the due diligence that the reporting 

counterparty chooses to conduct. The 

Commission estimates that a nonreporting affiliate would incur a burden 

of between five minutes and ten hours 

annually. The hourly wage for a 

compliance attorney is $390, which 

means that the aggregate annual cost for 

an electing counterparty communicating 

information to the reporting 

counterparty would likely be between 

$33 and $3,900. 

iii. Annual Reporting Under Proposed 

§ 39.6(g)(5) 

The Commission expects at least 90% 

of MNCs would choose to file an annual 

report pursuant to proposed § 39.6(g)(5). 

This assumption is based on feedback in 

comment letters submitted in response 

to other proposed rulemakings, in 

which commenters proposed an annual 

reporting requirement in lieu of swapby-swap reporting. Additionally, the 

Commission believes that there is an 

economic incentive for corporate groups 

to file an annual report because filing 

annually is less costly and operationally 

simpler than swap-by-swap reporting. 

The Commission estimates that it would 

take an average of 30 minutes to 90 

minutes to complete and submit this 

filing, resulting in 0.5 to 1.5 burden 

hours per MNC that elects to file the 

annual report. The average hourly wage 

for a compliance attorney is $390, 

which means that the aggregate annual 

cost for submitting the annual report 

would likely be approximately $195 to 

$585. Table C summarizes the estimated 

average burden hours and costs for 

modifying the reporting system, for nonreporting affiliates to communicate 

information to the reporting 

counterparty after the swap is entered 

into, and for providing the annual report 

under proposed § 39.6(g)(5), as follows: 

TABLE C—OTHER BURDENS AND COSTS TO REPORTING AND NON-REPORTING AFFILIATES

Proposed regulation/requirement description Average burden hours per 

affiliate 

Average 

cost per 

affiliate 

Total average 

annual burden 

hours 

Total average 

annual cost 

Modifying Reporting System 

(One-time cost).95

5.5 hours ................................ $1,875.50 9,680 [5.5 × 1,760] $3,300,880 [$1,875.50 × 

1,760] 96

Burden on Non-Reporting Affiliates.5.04 hours .............................. 1,966.25 192,205 [5.04 × 38,136] $74,984,910 [$1,966.25 × 

38,136] 97

§ 39.6(g)(5) Annual Report ..... 1 hour ..................................... 390.00 1,584 [(1,760 × 90%) × 1] 98 $617,760 [$390 × 1,760 * 

90%] 

c. Total Burden Hours 

The Commission estimates that the 

proposed exemption could result in an 

average total annual burden of 1,758,369 

hours and average total annual costs of 

$685,309,281.99 The burden and cost 

estimates are approximately 1.8 minutes 

and $10.48 per inter-affiliate swap. 

Table D provides the total burden hours 

and costs of the proposed exemption 

and breaks down the totals into burden 

hours and costs per MNC, per affiliate, 

and per inter-affiliate swap. 

TABLE D—AVERAGE ANNUAL BURDEN

AND COST ESTIMATES OF THE PROPOSED EXEMPTION

Burden 

hours 

Cost of 

proposed 

exemption 

Total .................. 1,758,369 685,309,281 

TABLE D—AVERAGE ANNUAL BURDEN

AND COST ESTIMATES OF THE PROPOSED EXEMPTION—Continued 

Burden 

hours 

Cost of 

proposed 

exemption 

Total Average 

Annual per 

MNC 100 ......... 999 389,380 


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100Total Hours or Costs divided by 1,760 MNCs, 

which is equal to 75% × 2,347. 

101Total Hours or Costs divided by 38,136 

affiliates, which is equal to 75% × 50,848. 

102Total Hours or Costs per Affiliate divided by 

64,768,399 inter-affiliate swaps. 

103The ‘‘Total Average per Inter-Affiliate Swap’’ 

of $10.58 is less than the average transaction costs 

listed in Table B (i.e., $65 and $19.50) for two 

reasons. First, $10.58 is the average cost for over 64 

million inter-affiliate swaps. Second, the ‘‘average 

total transaction costs’’ in Table B apply only to the 

assumed ten percent (10%) of reporting 

counterparties that might choose to report swap-byswap under §§ 39.6(g)(4)(ii)–(iii). 

TABLE D—AVERAGE ANNUAL BURDEN

AND COST ESTIMATES OF THE PROPOSED EXEMPTION—Continued 

Burden 

hours 

Cost of 

proposed 

exemption 

Total Average 

Annual per Affiliate 101 ......... 46 17,970 

Total Average 

per Inter-Affiliate Swap 102 * 0.03 103 10.58 

* (1.8 minutes). 

3. Information Collection Comments 

The Commission invites public 

comment on any aspect of the reporting 

burdens discussed above. Pursuant to 44 

U.S.C. 3506(c)(2)(B), the Commission 

solicits comments in order to: (i) 

Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed collection 

of information; (iii) determine whether 

there are ways to enhance the quality, 

utility, and clarity of the information to 

be collected; and (iv) minimize the 

burden of the collection of information 

on those who are to respond, including 

through the use of automated collection 

techniques or other forms of information 

technology. 

Comments may be submitted directly 

to the Office of Information and 

Regulatory Affairs (‘‘OIRA’’) in OMB, by 

fax at (202) 395–6566, or by email at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

submitted comments so that they can be 

considered in connection with a final 

rule. Refer to the ADDRESSES section of 

this release for comment submission 

instructions to the Commission. A copy 

of the supporting statements for the 

collections of information discussed 

above may be obtained by visiting 

www.RegInfo.gov. OMB is required to 

make a decision concerning the 

collection of information between 30 

and 60 days after publication of this 

release in the Federal Register. 

Consequently, a comment to OMB is 

most assured of being fully effective if 

received by OMB (and the Commission) 

within 30 days after publication. 

V. Text of Proposed Rules 

List of Subjects in 17 CFR Part 39 

Business and industry, Clearing, 

Cooperatives, Reporting requirements, 

Swaps. 

For the reasons stated in the 

preamble, the Commission proposes to 

amend 17 CFR part 39 as follows: 

PART 39—DERIVATIVES CLEARING 

ORGANIZATIONS 

1. The authority citation for part 39 is 

revised to read as follows: 

Authority: 7 U.S.C. 2, 6, 12a, and 24a, 7a– 

1 as amended by Pub. L. 111–203, 124 Stat. 

1376 (2010). 

2. In § 39.6, add paragraph (g) to read 

as follows: 

§ 39.6 Exceptions to the clearing 

requirement. 

* * * * * 

(g) Exemption for swaps between 

affiliates. 

(1) Affiliate Status. 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 if one 

counterparty directly or indirectly holds 

a majority ownership interest in the 

other, or if a third party directly or 

indirectly holds a majority ownership 

interest in both counterparties, and the 

financial statements of both 

counterparties are reported on a 

consolidated basis (‘‘eligible affiliate 

counterparties’’). 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. 

(2) Conditions. Eligible affiliate 

counterparties to a swap may elect the 

exemption described in paragraph (g)(1) 

of this section if: 

(i) Both counterparties elect not to 

clear the swap; 

(ii)(A) A swap dealer or major swap 

participant that is an eligible affiliate 

counterparty to the swap satisfies the 

requirements of § 23.504; or (B) the 

swap is, if neither eligible affiliate 

counterparty is a swap dealer or major 

swap participant, documented in a swap 

trading relationship document that shall 

be in writing and shall include all terms 

governing the trading relationship 

between the affiliates, including, 

without limitation, payment obligations, 

netting of payments, events of default or 

other termination events, calculation 

and netting of obligations upon 

termination, transfer of rights and 

obligations, governing law, valuation, 

and dispute resolution procedures; 

(iii) 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; 

(iv) With the exception of 100% 

commonly-owned and commonlyguaranteed affiliates where the common 

guarantor is also 100% commonlyowned, for a swap for which both 

counterparties are financial entities, as 

defined in paragraph (g)(6), both parties 

shall pay and collect variation margin 

and comply with paragraph (g)(3) of this 

section; 

(v) Each counterparty either: 

(A) Is located in the United States; 

(B) Is located in a jurisdiction that has 

a clearing requirement that is 

comparable and comprehensive to the 

clearing requirement in the United 

States; 

(C) Is required to clear swaps with 

non-affiliated parties in compliance 

with United States law; or 

(D) Does not enter into swaps with 

non-affiliated parties; and 

(vi) The reporting counterparty for the 

swap, as determined in accordance with 

§ 45.8 of this chapter, complies with 

paragraph (g)(4) of this section with 

respect to each of the counterparties. 

(3) Variation Margin. When both 

counterparties are financial entities each 

counterparty shall pay and collect any 

variation margin as calculated pursuant 

to paragraph (g)(3)(i) for each uncleared 

swap for which the exemption 

described in paragraph (1) is elected. 

(i) The swap trading relationship 

documentation required in paragraph 

(g)(2)(ii) of this section must set forth 

the methodology to be used to calculate 

variation margin and describe it with 

sufficient specificity to allow the 

counterparties, the Commission, and 

any appropriate prudential regulator to 

calculate the margin requirement 

independently. 

(ii) Variation margin calculations and 

payments shall start on the business day 

after the swap is executed and continue 


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each business day until the swap is 

terminated. 

(iii) Each counterparty shall pay the 

entire variation margin amount as 

calculated pursuant to paragraph 

(g)(3)(i) when due. 

(iv) The swap trading relationship 

documentation required in paragraph 

(g)(2)(ii) of this section shall specify for 

each counterparty where margin assets 

will be held and under what terms. 

(4) Reporting Requirements. When the 

exemption described in paragraph (g)(1) 

of this section is elected, the reporting 

counterparty 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: 

(i) Confirmation that both 

counterparties to the swap are electing 

not to clear the swap and that each of 

the counterparties satisfies the 

requirements in paragraphs (g)(1) and 

(2) of this section applicable to it; 

(ii) For each counterparty, how the 

counterparty generally meets its 

financial obligations associated with 

entering into non-cleared swaps by 

identifying one or more of the following 

categories, as applicable: 

(A) A written credit support 

agreement; 

(B) Pledged or segregated assets 

(including posting or receiving margin 

pursuant to a credit support agreement 

or otherwise); 

(C) A written guarantee from another 

party; 

(D) The counterparty’s available 

financial resources; or 

(E) Means other than those described 

in subparagraphs (A), (B), (C) or (D); and 

(iii) If a 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: 

(A) The relevant SEC Central Index 

Key number for that counterparty; and 

(B) Acknowledgment that an 

appropriate committee of the board of 

directors (or equivalent body) of the 

counterparty has reviewed and 

approved the decision not to clear the 

swap. 

(5) Annual Reporting. An affiliate that 

qualifies for the exemption described in 

paragraph (g)(1) of this section may 

report the information listed in 

paragraphs (g)(4)(ii) and (iii) of this 

section annually in anticipation of 

electing the exemption for one or more 

swaps. Any such reporting under this 

paragraph will be effective for purposes 

of paragraphs (g)(4)(ii) and (iii) of this 

section for 365 days following the date 

of such reporting. During the 365-day 

period, the affiliate 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 § 39.6(g). 

(6) Financial Entity. For purposes of 

this § 39.6(g), the term ‘‘financial entity’’ 

shall have the meaning given such term 

in section 2(h)(7)(C) of the Act. 

Issued in Washington, DC, on August 15, 

2012, by the Commission. 

Sauntia Warfield, 

Assistant Secretary of the Commission. 

Appendices to Clearing Exemption for 

Swaps Between Certain Affiliated 

Entities—Commission Voting Summary 

and Statements of Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton and Wetjen voted in 

the affirmative; Commissioner Sommers and 

O’Malia voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rules to exempt 

swaps between certain affiliated entities 

within a corporate group, known as interaffiliates, from the clearing requirement in 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act. 

One of the primary benefits of swaps 

market reform is that standard swaps 

between financial firms will move into 

central clearing, which will significantly 

lower the risks of the highly interconnected 

financial system. 

Transactions between affiliates, however, 

pose less risk to the financial system because 

the risks are internalized within the financial 

institution. 

The proposed rule would allow for an 

exemption from clearing for swaps between 

affiliates under the following limitations. 

First, the proposed exemption would be 

limited to swaps between majority-owned 

affiliates whose financial statements are 

reported on a consolidated basis. 

Second, the proposed rules would require 

centralized risk management, documentation 

of the swap agreement, payment of variation 

margin and completion of reporting 

requirements. 

Third, the exemption would be limited to 

swaps between U.S. affiliates and swaps 

between a U.S. affiliate and a foreign affiliate 

located in a jurisdiction with a comparable 

and comprehensive clearing regime. 

This approach largely aligns with the 

Europeans’ approach to an exemption for 

inter-affiliate clearing. 

I look forward to the public’s comments on 

this proposal. 

Appendix 2—Joint Statement of 

Commissioners Jill Sommers and Scott 

O’Malia 

We respectfully dissent from the notice of 

proposed rulemaking to exempt swaps 

between certain affiliated entities from the 

clearing requirement. While we wholly 

support a clearing exemption for swaps 

between affiliated entities within a corporate 

group, we cannot support the proposal before 

the Commission today because in certain 

instances it imposes an unnecessary 

requirement for variation margin on 

corporate entities that engage in inter-affiliate 

trades. 

Inter-affiliate swaps enable a corporate 

group to aggregate risk on a global basis in 

one entity through risk transfers between 

affiliates. Once aggregated, commercial risk 

of various affiliates is netted, thereby 

reducing overall commercial and financial 

risk. This practice allows for more 

comprehensive risk management within a 

single corporate structure. 

Another benefit to this practice is that it 

allows one affiliate to face the market and 

hedge the risk of various operating affiliates 

within the group. Notably, inter-affiliate 

swaps between majority owned affiliates do 

not create external counterparty exposure 

and therefore do not pose the systemic risks 

that the clearing requirement is designed to 

protect against. The practice actually reduces 

risk and simply allows for more efficient 

business management of the entire group. 

We believe it is entirely appropriate that 

the Commission exempt inter-affiliate swaps 

from the clearing mandate. Unfortunately, 

this proposal inserts a requirement that most 

financial entities engaging in inter-affiliate 

swaps post variation margin to one another. 

It is not clear that this requirement will do 

anything other than create administrative 

burdens and operational risk while 

unnecessarily tying up capital that could 

otherwise be used for investment. 

The variation margin requirement is also 

largely inconsistent with the requirements 

included in the European Market 

Infrastructure Regulation. As we have both 

made clear during the implementation 

process, we believe coordination with our 

global counterparts is critical to the success 

of this new framework. 

Finally, the legislative history on this issue 

is clear. During the passage of the DoddFrank Act many Members’ statements 

directly addressed the concerns regarding 

inter-affiliate swaps. Additionally, Members 

of the U.S. House of Representatives passed, 

by an overwhelming bi-partisan majority, an 

inter-affiliate swap exemption that does not 

include a variation margin requirement. 

We believe this proposal may have the 

unintended consequence of imposing 

substantial costs on the economy and 

consumers. With this in mind, we welcome 

comments from the public as to the costs and 

benefits of the variation margin requirement 

and hope that we incorporate those views in 

adopting the final rule. 

[FR Doc. 2012–20508 Filed 8–20–12; 8:45 am] 

BILLING CODE P 


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