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

Market Oversight

CFTC Letter No 14-26

No-Action 

March 6, 2014

Division of Market Oversight

Time-Limited No-Action Relief from the Commodity Exchange Act Section 2(h)(8) for

Swaps Executed Between Certain Affiliated Entities Not Electing Commission

Regulation § 50.52

Dear Mr. Pickel:

This letter responds to a request received from the International Swaps and Derivatives 

Association (“ISDA”), dated February 19, 2014, to the Division of Market Oversight (the 

“Division”) of the Commodity Futures Trading Commission (the “Commission”). Among other 

requests,

1

ISDA seeks no-action relief from the trade execution requirement in Commodity 

Exchange Act (“CEA”) section 2(h)(8) on behalf of members and other market participants that 

engage in “inter-affiliate”2swaps. 

Background

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

“Dodd-Frank Act”)3amended the CEA to establish a comprehensive new regulatory framework 

for swaps. Among other things, CEA section 2(h)(8) requires that transactions involving swaps 

subject to the CEA section 2(h)(1) clearing requirement be executed on a designated contract 

market (“DCM”) or swap execution facility (“SEF”), unless no DCM or SEF makes such swaps 

available to trade or such swaps qualify for the clearing exception under CEA section 2(h)(7)

(the “trade execution requirement”).

4

 

 

1

ISDA requested the Commission to establish an exemption for “inter-affiliate” swaps from the trade execution 

requirement pursuant to the Commission’s exemptive authority under CEA section 4(c), or in the alternative, to 

provide equivalent no-action relief. ISDA also requested the Commission to extend the time-limited alternative 

compliance frameworks, set forth in § 50.52(b)(4)(ii)-(iii) of the Commission’s regulations, that are available to 

certain eligible affiliate counterparties that elect the inter-affiliate exemption from the clearing requirement, or

in the alternative, to provide equivalent no-action relief. In this letter, the Division will only address the 

request for relief from the trade execution requirement set forth under CEA section 2(h)(8). This letter does not 

address the requests related to the clearing requirement set forth under CEA section 2(h)(1) and part 50 of the 

Commission’s regulations. 

2 The relief stated herein applies only to entities that meet the definition of “eligible affiliate counterparty” in § 

50.52(a)(1)-(2) of the Commission’s regulations. See infra note 7 and accompanying text. 

3

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

4

7 U.S.C. § 2(h)(8).
Page 2

All transactions involving swaps that are subject to the trade execution requirement must 

be executed on or pursuant to the rules of a DCM or a SEF. On a SEF, such swaps must be 

executed in accordance with the execution methods prescribed by § 37.9(a)(2) of the 

Commission’s regulations. Swaps that are subject to the trade execution requirement and traded 

on a SEF are defined as Required Transactions by § 37.9(a)(1). Under § 37.9(a)(2), Required 

Transactions that are not block trades, as defined under § 43.2 of the Commission’s regulations,

must be executed on a SEF by either (1) an Order Book, as defined in § 37.3(a)(3); or (2) a 

Request for Quote System (“RFQ”), as defined in § 37.9(a)(3), that operates in conjunction with 

an Order Book. On a DCM, such swaps must be executed pursuant to subpart J of part 38 of the 

Commission’s regulations, which implements DCM Core Principle 9 under section 5(d)(9) of the 

CEA.5

The Commission previously determined that swaps entered into by eligible affiliate 

counterparties that elect and comply with the provisions of the inter-affiliate exemption from the

clearing requirement under § 50.52 of the Commission’s regulations would not be subject to the 

trade execution requirement.

6

 Section 50.52(a) of the Commission’s regulations defines eligible 

affiliate counterparties to be related entities, in which (1) one counterparty, directly or indirectly, 

holds a majority ownership interest in the other counterparty, and the counterparty that holds 

such majority interest reports its financial statements on a consolidated basis under Generally 

Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), 

and the statements include the financial results of the majority-owned counterparty; or (2) a third 

party, directly or indirectly, holds a majority ownership interest in both counterparties, and the 

third party reports its financial statements on a consolidated basis under GAAP and IFRS, and 

the statements include the financial results of both counterparties.7 

Requested Relief

ISDA seeks relief from the trade execution requirement for inter-affiliate swap 

transactions that are subject to the clearing requirement. ISDA asserts that applying the trade 

execution requirement to inter-affiliate swap transactions, even those that must be cleared,

conflicts with the reasons that affiliates execute such transactions and will impose unnecessary 

costs and inefficiencies without any related benefits. ISDA states, for example, that affiliates 

execute swap transactions that often are not intended to be arm’s-length, but instead are intended 

to manage risk between the affiliates. ISDA asserts, accordingly, that requiring such transactions 

 

5

7 U.S.C. § 7(d).

6

78 Fed. Reg. 33606 n.1. Sections 50.52(b) through (d) of the Commission’s regulations establish the 

conditions, including reporting requirements, centralized risk management requirements, documentation 

requirements, and outward-facing swap clearing requirements that eligible affiliate counterparties must satisfy 

to elect the inter-affiliate exemption from required clearing. 17 C.F.R. § 50.52(b)-(d).

7

17 C.F.R. § 50.52(a)(1)(i)-(ii). 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.” 17 C.F.R. § 50.52(a)(2)(i).
Page 3

to be executed on a SEF or DCM would not promote the pre-trade price transparency and price 

discovery goals associated with the trade execution requirement because affiliate counterparties 

are not primarily concerned with obtaining fully competitive pricing.8 ISDA also notes that 

certain required execution methods—as prescribed by § 37.9 and subpart J of part 38 of the 

Commission’s regulations—would not accommodate swap transactions between affiliates. For 

example, ISDA states that executing such a transaction through an Order Book would not assure 

that the affiliates’ quotes will be matched with one another as intended. Accordingly, ISDA 

states that non-time-limited no-action relief from the trade execution requirement for interaffiliate transactions is needed to preserve the purposes for executing such transactions and to 

avoid imposing unnecessary challenges. 

Discussion

The Division acknowledges ISDA’s stated purposes for executing inter-affiliate 

transactions and its concerns regarding how eligible affiliate counterparties could execute swap 

transactions with one another in a manner compliant with the trade execution requirement, e.g., 

through an Order Book, absent election of the inter-affiliate exemption from required clearing.

Pursuant to § 37.9, affiliates that do not meet the conditions of the inter-affiliate exemption from 

required clearing, that wish to use a SEF to execute an inter-affiliate swap transaction involving a 

swap subject to the trade execution requirement, would be able to do so only through required 

methods of execution, i.e., an Order Book or RFQ System. Similarly, affiliates that are unable to 

meet the conditions of the inter-affiliate exemption from required clearing, that wish to execute 

an inter-affiliate transaction on a DCM, would be subject to the general requirement of CEA 

section 5(d)(9). The Division, however, is also mindful of the mandate under the Dodd-Frank

Act and the intent of the Commission’s implementing regulations to promote pre-trade price

transparency in the swaps market. 

The Division also acknowledges the policy goals of the conditions of the inter-affiliate 

exemption from required clearing.

8

 Further, the Division notes that all of the potential affiliate

counterparties eligible for the relief from the trade execution requirement contained in this letter 

are eligible to use § 50.52 of the Commission’s regulations, should they elect to comply with the 

conditions of § 50.52. As noted above, swaps entered into by eligible affiliate counterparties that 

elect and comply with the conditions, among other things, of the inter-affiliate exemption would

not be subject to the trade execution requirement.

Nevertheless, to balance the goals described above, the Division will provide temporary 

relief from the trade execution requirement to eligible affiliate counterparties, as defined in §

50.52(a) of the Commission’s regulations, that do not elect the inter-affiliate exemption from 

required clearing. During this period of relief, the Division will continue to evaluate, based on 

ongoing observations of inter-affiliate market activity occurring both on and off of SEFs and 

DCMs, whether such swap transactions should be subject to the trade execution requirement. In 

 

8

See, e.g., 7 U.S.C. § 7b-3(e) (stating that the goal of establishing SEFs is to, among other things, “promote pretrade price transparency in the swaps market.”); 7 U.S.C. § 7(d)(9)(A) (requiring DCMs to provide a 

mechanism for executing transactions that “protects the price discovery process of trading. . . .”)
Page 4

particular, the Division will assess whether applying the trade execution requirement to interaffiliate swap transactions would promote pre-trade price transparency in the swaps market.

Moreover, the Division will continue to consider the implications of this relief on the policy 

goals of the conditions of the inter-affiliate exemption from required clearing. 

Time-Limited No-Action Relief for Eligible Affiliate Counterparties from the Trade 

Execution Requirement

For the reasons described above, the Division will grant time-limited no-action relief

from the requirements of CEA section 2(h)(8) to eligible affiliate counterparties, as defined in § 

50.52(a) of the Commission’s regulations, that transact swap transactions with one another that 

involve a swap subject to the trade execution requirement, until 11:59 p.m. (eastern time)

December 31, 2014. The Division will grant the above time-limited no-action relief, and will not 

recommend that the Commission take enforcement action against any eligible affiliate

counterparty that executes a swap transaction with another eligible affiliate counterparty without 

complying with CEA section 2(h)(8). 

Market participants should be aware that the no-action positions taken herein do not 

excuse affected persons from compliance with any other applicable requirements of the CEA or 

the Commission’s regulations thereunder, in particular, the applicable swap reporting 

requirements and clearing requirements, including the requirements and conditions for eligible 

affiliate counterparties not to clear a swap pursuant to § 50.52 of the Commission’s regulations

or the requirements to clear a swap pursuant to §50.2 and §50.4 of the Commission’s 

regulations.

9

This letter, and the no-action positions taken herein, represent the views of the 

Division only, and do not necessarily represent the positions or views of the Commission or of 

any other division or office of the Commission’s staff. 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.

 

9 The applicable swap reporting requirements are set forth under parts 43, 45, and 50 of the Commission’s 

regulations. The applicable clearing requirements are set forth under CEA section 2(h)(1) and part 50 of the 

Commission’s regulations. Eligible affiliate counterparties that wish to avail themselves of the inter-affiliate 

clearing exemption must fulfill additional conditions and requirements set forth in § 50.52(b)-(d) of the 

Commission’s regulations.
Page 5

If you have any questions concerning this correspondence, please contact Nancy 

Markowitz, Deputy Director, Division of Market Oversight, at (202) 418-5453 or 

nmarkowitz@cftc.gov, or Nhan Nguyen, Special Counsel, Division of Market Oversight, at 

(202) 418-5932 or nnguyen@cftc.gov.

Sincerely,

Vincent A. McGonagle

Director

Division of Market Oversight