U.S. COMMODITY FUTURES TRADING COMMISSION 

Three Lafayette Centre
 

1155 21st Street NW, Washington, DC 20581
 

Telephone: (202) 418-5000
 

 

 

 

 

 

 

 

 

 

 

 

 

Division of Swap Dealer and 

Intermediary Oversight 

Eileen T. Flaherty 

Director 

CFTC Letter No. 17-34
 

No-Action
 

July 24, 2017
 

Division of Swap Dealer and Intermediary Oversight

Re:	 Commission Regulations 23.150-159, 161: No-Action Position with Respect to Uncleared Swaps with the European Stability Mechanism 

Ladies and Gentlemen: 

This letter is in response to a request for a no-action position received by the Division of 

Swap Dealer and Intermediary Oversight (“DSIO”) of the Commodity Futures Trading 

Commission (“Commission”) from the European Stability Mechanism (the “ESM”), 

which enters into swaps with swap dealers (“SDs”) that are registered with the Commission and subject to the Commission’s rules regarding margin requirements for uncleared swaps.1 Specifically, the ESM asked that DSIO provide relief for SDs from the 

Final Margin Rule (as defined below) when entering into uncleared swaps with the ESM. 

I. Regulatory Background 

Pursuant to section 4s(e) of the Commodity Exchange Act (“CEA”),2 the Commission is 

required to promulgate margin requirements for uncleared swaps applicable to each SD 

for which there is no Prudential Regulator.3 The Commission published the Final Mar1 The Commission’s margin requirements for uncleared swaps apply only to SDs and major swap participants for which there is not a prudential regulator. See 7 U.S.C. 6s(e)(1)(B). SDs and major swap participants for which there is a prudential regulator must meet the margin requirements for uncleared swaps 

established by the applicable prudential regulator. 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining 

the term “Prudential Regulator” to include the Board of Governors of the Federal Reserve System; the Office of the Comptroller of the Currency; the Federal Deposit Insurance Corporation; the Farm Credit Administration; and the Federal Housing Finance Agency). The Prudential Regulators published final margin requirements in November 2015. See Margin and Capital Requirements for Covered Swap Entities, 80 

FR 74840 (Nov. 30, 2015). 

2 7 U.S.C. § 1 et. seq. 

3 See 7 U.S.C. 6s(e)(1)(B). 
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gin Rule for such SDs in January 2016 (the “Final Margin Rule”).4 Among other 

things, the Final Margin Rule establishes initial and variation margin requirements for 

these SDs. However, the Final Margin Rule does not require such SDs to collect margin 

from, or post margin to, a counterparty that is neither a swap entity nor a financial end 

user.5 

DSIO has received a request from the ESM for a Commission staff no-action position 

pursuant to which SDs would not have to comply with the Final Margin Rule when entering into uncleared swaps with the ESM. 

Based on the representations made by the ESM, we understand the relevant facts to be 

as follows: 

1.	 The ESM was created following the euro area debt crisis by the Treaty Establishing the European Stability Mechanism made in 2012 among those countries within the European Union which use the euro as their currency (the “euro zone”). 

6 

The ESM is an intergovernmental international financial institution that provides 

financial assistance to euro area member states in or threatened by severe financial distress for national or regional development similar to the multilateral development banks listed in Commission regulation 23.151 (including, for example, 

the International Bank for Reconstruction and Development, the Asian Development Bank, and the European Investment Bank) (collectively, “Multilateral 

Development Banks”) which are excluded from the Final Margin Rule’s definition of financial end user.7 This assistance is granted to safeguard the financial 

stability of the euro zone as a whole and of its member states. Under the EuropeII.	 Summary of Request for No-Action Position

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 

636 (Jan. 6, 2016). The Final Margin Rule, which became effective April 1, 2016, is codified in part 23 of 

the Commission’s regulations. See §§ 23.150-159, 161. The Commission’s regulations are found in Chapter 

17 of the Code of Federal Regulations, 17 CFR 1 et. seq. 

5 “Swap entity” and “financial end user” are defined in Commission regulation 23.151. 17 CFR 23.151. 

6 See https://www.esm.europa.eu/sites/default/files/20150203_-_esm_treaty_-_en.pdf (last visited July 

7, 2017). 

7 See Commission regulation 23.151. 17 CFR 23.151. In addition to the specified Multilateral Development 

Banks in the regulation, the definition of Multilateral Development Bank includes any other entity that 

provides financing for national or regional development in which the U.S. government is a shareholder or 

contributing member or which the Commission determines poses comparable credit risk. 
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an Market Infrastructure Regulation,8 the ESM is expressly exempt from EMIR’s 

margin rules for OTC derivative contracts not cleared by a central counterparty.9 

2.	 To accomplish its policy goals, the ESM utilizes several financial assistance instruments, including loans in various forms which can be used for multiple purposes (e.g. budgetary needs, clearance of arrears, and recapitalization of financial 

institutions) and are offered only subject to bespoke specified conditions, including economic reforms. The ESM regularly enters the international capital markets to fund these loans. It intends to enter into uncleared swaps with SDs to 

hedge the interest rate and currency risks it faces as a result of entering into and 

funding these loans and to hedge interest rate and currency risks associated with 

the investment of its contributed capital. The ESM does not, and will not, enter 

into uncleared swaps for speculative purposes. 

3.	 With respect to its credit risk, as part of its emergency procedure, the ESM’s 

member states have irrevocably agreed to contribute a total of approximately 

€624 billion in additional capital should the ESM face financial distress. Further, 

the ESM is subject to limits on its lending and borrowing, and the ESM’s property, funding, and assets in its member states are immune from search, requisition, 

confiscation, expropriation, or any other form of seizure, taking, or foreclosure. 

In addition, to the extent necessary to carry out its activities, all property, funding, and assets of the ESM are free from restrictions, regulations, controls, and 

moratoria of any nature. The combined application of these rules and limits is effective in keeping the ESM’s total liabilities well below its available capital. As a 

result of its capital position, among other reasons, in June 2016 the ESM received 

favorable credit ratings from Fitch Ratings10 and Moody’s Investors Service.11 

III.	 DSIO No-Action Position 

Based on the foregoing, DSIO believes that no-action relief is warranted. Accordingly, 

DSIO will not recommend an enforcement action against an SD that is registered with 

8 Regulation (EU) No 648/2012 of the European Parliament and the Council of July 4, 2012 is more 

commonly known as the European Market Infrastructure Regulation or “EMIR.” 

9 See EMIR, Article 1(5). An OTC derivative is a derivative which is not executed on a regulated market or 

on a third-country market considered as equivalent to a regulated market. See EMIR, Article 2(7). While 

there may be differences between the definitions of “swap” and “uncleared swap” under the CEA and 

Commission regulations and the definition of “OTC derivative” and “non-centrally cleared OTC derivative” under EMIR, DSIO believes that such definitions largely cover the same products and instruments. 

10 See press release at https://www.fitchratings.com/site/pr/1005929 (last visited July 7, 2017). 

11 See press release at https://www.moodys.com/research/Moodys-European-Stability-Mechanismsratings-benefit-from-strong-shareholder-support--PR_351127 (last visited July 7, 2017). 
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the Commission and subject to the Final Margin Rule12 that does not comply with the 

Final Margin Rule solely in respect of uncleared swaps between such SD and the ESM. 

DSIO believes that this approach is appropriate as, like the Multilateral Development 

Banks which the Commission has excluded from the definition of financial end user, the 

ESM generally poses less systemic risk to the financial system as its activities generally 

have a different purpose in the financial system leading to a lower risk profile in addition to posing less counterparty risk to an SD. 

This letter, and the positions taken herein, represent the views of DSIO only and do not 

necessarily represent the positions or views of the Commission or of any other office or 

division of the Commission. The relief issued by this letter does not excuse persons relying on it from compliance with any other applicable requirements contained in the CEA 

or in the Commission regulations issued thereunder. Further, this letter and the positions taken herein are based upon the facts presented and representations made to 

DSIO. Any different, changed or omitted material facts or circumstances might render 

this letter void. This letter does not create or confer any rights or obligations on any person or persons subject to compliance with the CEA that bind the Commission or any of 

its other offices or division. As with all no-action letters, DSIO retains the authority to 

condition further, modify, suspend, terminate, or otherwise restrict the terms of the noaction relief provided herein, at its discretion. 

Should you have any questions, please contact me at (312) 596-0600 or Frank Fisanich, 

Chief Counsel, at (202) 418-5949. 

Very truly yours, 

Eileen T. Flaherty 

Director 

Division of Swap Dealer and Intermediary Oversight 

Cc:	 Regina Thoele, Compliance 

National Futures Association, Chicago 

Jamila A. Piracci, OTC Derivatives
 

National Futures Association, New York
 

12 See supra note 1.