U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Facsimile: (202) 418-5521

www.cftc.gov

Division of Clearing and 

Risk

 

CFTC Letter No. 17-58

No-Action

November 7, 2017 

Division of Clearing and Risk

Edward Ivey

Linklaters LLP

1385 Avenue of the Americas

New York, NY 10105 

Re: No-Action Relief for the European Stability Mechanism from the Swap Clearing 

Requirement in Section 2(h)(1) of the Commodity Exchange Act and Commodity Futures 

Trading Commission Regulations 50.2 and 50.4

Dear Mr. Ivey: 

On July 10, 2017, you sent a letter on behalf of the European Stability Mechanism

(“ESM”) (“Request Letter”), to the Division of Clearing and Risk (“Division”) of the 

Commodity Futures Trading Commission (“Commission”) requesting relief from the swap 

clearing requirement of section 2(h)(1) of the Commodity Exchange Act (“CEA”) (“Clearing 

Requirement”). Based on the facts described in the Request Letter, the Division has decided to 

not recommend that the Commission take enforcement action against ESM for failure to comply 

with the Clearing Requirement as implemented by Commission regulations 50.2 and 50.4.1

 The 

Division believes that granting this no-action relief to ESM would be consistent with the final

Federal Register release adopting the end-user exception to the Clearing Requirement (“EndUser Exception”),

2 in which the Commission determined that foreign governments, foreign 

central banks, and certain international financial institutions should not be subject to the Clearing 

Requirement.

3

 

1 Clearing Requirement Determination Under Section 2(h) of the CEA, 77 Fed. Reg. 74,284 (Dec. 13, 2012) and 

Clearing Requirement Determination Under Section 2(h) of the CEA for Interest Rate Swaps, 81 Fed. Reg. 71,202

(Oct. 14, 2016) (collectively, “Clearing Requirement Determination”).

 

2 End-User Exception to the Clearing Requirement for Swaps, 77 Fed. Reg. 42,560 (July 19, 2012) (“End-User 

Exception”). 

3 End-User Exception, 77 Fed. Reg. at 42,561-42,562. 
Edward Ivey 

November 7, 2017 

Page 2 

Applicable Regulatory Requirements 

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 

(“Dodd-Frank Act”)4 amended the CEA by adding section 2(h), which establishes the Clearing 

Requirement. Under section 2(h)(1)(A) of the CEA and Commission regulation 50.2, it is 

unlawful for a person to engage in a swap that is required to be cleared by the Commission 

unless the swap is submitted for clearing to an eligible derivatives clearing organization. The 

Commission has determined that two classes of credit default swaps and four classes of interest 

rate swaps are required to be cleared.5 However, pursuant to the End-User Exception, certain 

non-financial entities may enter into non-cleared swaps that would otherwise be subject to the 

Clearing Requirement to hedge or mitigate commercial risks associated with their underlying 

businesses, such as energy exploration, manufacturing, farming, transportation, or other 

commercial activities.6 In addition, in the final Federal Register release adopting the End-User 

Exception, the Commission concluded that based on considerations of public policy and 

international comity, certain international financial institutions, as well as foreign governments 

and foreign central banks, “should not be subject to” the Clearing Requirement.

7 

The Commission provided the following reasons for its conclusion that foreign 

governments, foreign central banks, and international financial institutions should not be subject 

to the Clearing Requirement. First, because many international financial institutions operate 

with the benefit of certain privileges and immunities under U.S. law, they may be treated 

similarly in other contexts under certain circumstances. Second, the Commission noted that 

there is nothing in the text or history of the swap-related provisions of the Dodd-Frank Act to 

establish that Congress intended to deviate from the traditions of the international system by 

subjecting foreign governments, foreign central banks, or international financial institutions to 

the Clearing Requirement. Third, the Commission stated that it expects that if the U.S. 

government, a Federal Reserve Bank, or any international financial institution of which the U.S. 

is a member were to engage in swap transactions in foreign jurisdictions, then the actions of that 

entity with respect to those transactions would not be subject to foreign regulation.8 

 

4 Pub. L. 111-203, 124 Stat. 1376 (2010).

5 Clearing Requirement Determination. 

6 End-User Exception and Commission regulation 50.50. 

7 End-User Exception, at 42,562. 

8 Id. For the purposes of the final release adopting the End-User Exception, the Commission considered

international financial institutions as those institutions that are defined as “international financial institutions” in 22 

U.S.C. 262r(c)(2)(Annual Report by Chairman of National Advisory Council on International Monetary and 

Financial Policies) and those institutions defined as “multilateral development banks” in the Proposal for the 

Regulation of the European Parliament and of the Council on OTC Derivative Transactions, Central Counterparties 

and Trade Repositories, Council of the European Union Final Compromise Text, Article 1(4a(a)) (Mar. 19, 2012) 

(published in final form on July 4, 2012 with no change to Article 1(4a(a))). ESM is not included on either list.
Edward Ivey 

November 7, 2017 

Page 3 

In 2013, the Division granted a request for relief from the Clearing Requirement to 

Corporación Andina de Fomento (“CAF”) because the Division found that CAF’s mission and 

ownership structure was analogous to the missions and ownership structures of the international 

financial institutions referenced in the final Federal Register release adopting the End-User 

Exception.9

Summary of Request for Relief

The Request Letter asserts that the policy considerations on which the Commission relied 

to exclude international financial institutions from the Clearing Requirement apply to ESM due 

to ESM’s public interest mission and ownership by sovereign nations. 

The Request Letter represents that ESM’s mission is to provide financial assistance to a 

European Union member state that is also a member of the Eurozone in the event that such 

country is unable to raise money in the capital markets. ESM may provide financial assistance 

by making a loan to a Eurozone member state, purchasing such country’s bonds, or recapitalizing 

a financial institution located in such country. To date, ESM, and its predecessor entity, the 

European Financial Stability Fund (established 2010), have disbursed 264.8 billion euros to five 

Eurozone member countries. ESM may decide to enter into interest rate swaps subject to the 

Clearing Requirement in order to hedge interest rate risk arising out of ESM’s borrowing or 

investment activities.

ESM was established in 2012 pursuant to an international treaty among the 17 European 

Union member states that were Eurozone members at that time.

10 Currently, all 19 Eurozone

member states are ESM members.

11 Each of these countries is an ESM shareholder and has paid 

in capital to ESM. There are no other shareholders. ESM is governed by a Board of Governors 

and a Board of Directors. Each of the 19 ESM member states appoints representatives to these 

governing bodies. The Board of Governors is chaired by the President of the “Eurogroup” (the 

finance ministers of the Eurozone countries). Currently, the President of the Eurogroup is the 

Minister of Finance of the Netherlands. The Request Letter represents that ESM, together with 

its income, property, and other assets, is exempt from taxation and that ESM’s property and 

assets are free from controls, expropriation, moratoria, regulations, or restrictions of any nature. 

The Request Letter represents further that ESM poses a credit risk comparable to the 

international financial institutions referenced in the final Federal Register release adopting the 

End-User Exception. Finally, according to the Request Letter, ESM is generally exempt from 

the European Market Infrastructure Regulation (“EMIR”), including the obligation to clear 

certain classes of derivatives. ESM is still subject to EMIR swap reporting requirements.

 

9 CFTC Letter 13-25 (June 10, 2013).

10 ESM website, available at:

https://www.esm.europa.eu. 

11 The current Eurozone members are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, 

Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Edward Ivey 

November 7, 2017 

Page 4 

In summary, the Request Letter asserts that the policy considerations on which the 

Commission relied to exclude international financial institutions from the Clearing Requirement, 

and on which the Division subsequently relied to grant no-action relief from the Clearing 

Requirement to CAF, apply to ESM. Like CAF and other international financial institutions, 

ESM provides financial assistance to certain member countries, serves the public interest, and is 

owned by sovereign nations each of which grants ESM legal privileges and immunities. 

Grant of No-Action Relief

Based on the facts described by the Request Letter, the Division will not recommend that 

the Commission take enforcement action against ESM for failure to comply with the Clearing 

Requirement. This letter does not, however, provide relief from other provisions of the CEA and 

Commission regulations, such as the recordkeeping and reporting requirements under parts 23 

and 45 of the Commission’s regulations, which would apply to a non-cleared swap entered into 

by ESM opposite a counterparty that is subject to the CEA and Commission regulations with 

regard to that transaction.

12

This letter represents the position of the Division only and does not necessarily represent 

the views of the Commission or those of any other division or office of the Commission. 

Because this position is based upon the representations contained in the Request Letter, it should 

be noted that any different, changed, or omitted material facts or circumstances may require a 

different conclusion or render this no-action letter void. Finally, as with all no-action letters, the 

Division retains the authority to condition further, modify, suspend, terminate, or otherwise 

restrict the terms of the no-action relief provided herein, in its discretion.

Should you have questions regarding this matter, please contact Peter A. Kals, Special 

Counsel, at (202) 418-5466. 

 Sincerely,

Brian A. Bussey 

Director

 

12 End-User Exception, 77 Fed. Reg. at 42,562.