~ ~ Prudential Richard A. Miller 

May 2, 2011 

VIA E-MAIL 

Mr. David A. Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

Vice President and Corporate Counsel 

Financial Management Law 

The Prudential Insurance Company of America 

Two Gateway Center. 5th Floor. Newark NJ 07102 

Tel973 802·5901 973 367-5135 

richard.a.miller@prudential.com 

Re: CFTC Legal Authority over Interaffiliate Transactions 

Dear Mr. Stawick, 

We have previously submitted comment letters on the issue of affiliate transactions, in which we 

recommended that such transactions not be subject to the execution and clearing requirements 

under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and the 

related rules to be promulgated by the Commodity Futures Trading Commission (the "CFTC'') 

("PFI Comment Letters"). 1 As noted in the PFI Comment Letters, many business enterprises use 

one affiliate to directly face the market as a "conduit" to hedge the net commercial and financial 

risk of the various operating affiliates within the larger corporate group. The use of a single 

conduit for the various affiliates within a larger corporate group diminishes the demands on the 

group's financial liquidity, operational assets and management resources, as affiliates do not 

have to establish independent relationships and unique infrastructure to face the market. We 

believe that transactions between affiliates do not present the issues and risks that give rise to a 

need for swap dealer registration or the application of the other requirements applicable to swaps 

(particularly the mandatory execution and clearing requirements), and were not intended by 

Congress to be encompassed within the relevant provisions of Dodd-Frank. 

We understand that the staff of the CFTC is concerned that that CFTC does not have the legal 

authority to provide relief from the execution and clearing requirements of Dodd-Frank with 

respect to interaffiliate transactions. However, as discussed below, we believe that the CFTC has 

the legal authority to address this issue in a manner consistent with the language, as well as the 

purposes and intent, of Dodd-Frank and we urge the Commission to utilize this authority to 

ensure that transactions between affiliates are excluded from the various requirements. 

Comment Letter, from Richard A. Miller, Vice President and Corporate Counsel, 

Financial Management Law, the Prudential Insurance Company of America, dated 

September 17, 2010; and Comment Letter, from Richard. A. Miller, Corporate Counsel, 

Financial Management Law, the Prudential Insurance Company of America, dated 

February 17, 2011. 
Mr. David A. Stawick, Secretary 

Commodity Futures Trading Commission 

May 2, 2011 

Page2 

I. Interaffiliate transactions are not "swaps" under Dodd-Frank. 

The CFTC has the clear authority under Section 721 of Dodd-Frank to provide further detail or 

guidance on the meaning and application of the term "swap," as defined under Dodd-Frank, and, 

under Section 723 of Dodd-Frank, to identify those swaps or categories of swaps that are subject 

to the execution and clearing requirements of Dodd-Frank. Pursuant to the CFTC's authority 

under Section 721, the CFTC can define the term "swap" to include or exclude specified 

categories of derivative products. In addition, however, the CFTC could, by regulation or 

interpretation, define the term "swap" to exclude transactions between two wholly-owned 

subsidiaries of the same parent company. In particular, because such transactions are effected 

between the same "person," there is no change in beneficial ownership of the rights and 

obligations under the "swap," and, consequently, there is no bona fide swap transaction. The 

CFTC could therefore conclude that a transaction between affiliates cannot be encompassed 

within the Dodd-Frank definition of a "swap" because only one "person" or "party" is involved 

in the transaction. 

In this regard, the statutory language of Section 1a(47)(A)(iii) of the Commodity Exchange Act, 

as amended by Dodd-Frank (the "CEA"), refers to a swap as an agreement, contract, or 

transaction that provides for the exchange of payments" ... between the parties to the 

transaction." In past practice, the CFTC has interpreted the term "parties" to mean entities that 

have different beneficial ownership or are under separate control.2 Conversely, the CFTC has 

stated that commonly owned and controlled affiliates are "a single entity" or the "same person" 

for purposes of compliance with Commission regulations.

3 Therefore, given that an interaffiliate 

transaction between two wholly owned and controlled entities occurs between the same "person" 

and there is no change in beneficial ownership in such a transaction, interaffiliate transaction do 

not meet the statutory definition of a "swap•• under Dodd-Frank. 

2 

3 

In guidance to designated contract markets, the CFTC has stated Exchange-for-Physical 

("EFP") transactions must be bona fide transactions and that for an EFP to be bona fide, 

it must have "separate parties to the EFP, where the accounts involved have different 

beneficial ownership or are under separate control." CME, CBOT, NYMEX & COMEX, 

Rule 538 - ("Exchange for Related Positions"), June 11 , 2010 Advisory Number CME 

Group RA 1 006-5. 

"The Commission staff historically has considered commonly owned and controlled 

entities to be a single entity or the "same person" for purposes of compliance with 

Commission regulation 1.3(z)." CFTC Letter Interpretation, Re: Request for 

Confirmation of Interpretations Regarding "'Bona Fide Hedging" and "Exchanges of 

Futures for Product" (available May 9, 1994). 

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Mr. David A. Stawick, Secretary 

Commodity Futures Trading Commission 

May 2, 2011 

Page 3 

We also note that the CFTC has previously questioned whether it would be appropriate to 

consider swap transactions between affiliates for the purpose of determining whether a particular 

legal person is a swap dealer, as the economic reality of such swaps would simply represent an 

allocation of risk within a corporate group. 

4 It would be anomalous for the CFTC now to declare 

that interaffiliate transactions should nevertheless be a treated as "swaps," requiring such 

transactions to be subject to execution and clearing requirements, as well as margin and capital 

requirements. Such a result would also create unnecessary confusion and legal uncertainty and, 

as discussed below, subject market participants to unnecessary cost and burden while not 

furthering the purposes of Dodd-Frank. 

11. Interaffiliate transactions should not be subject to the execution or clearing requirement. 

Section 2(h)(2){A){i) of the CEA gives the CFTC the authority to determine which swaps or 

group, category, type, or class of swap should be required to be cleared. We respectfully urge 

the CFTC to use this authority to determine that swaps between wholly owned affiliates are a 

category of swaps that are not required to be executed or cleared under Dodd-Frank. For the 

reasons noted above, such an outcome would be consistent with Dodd-Frank, as Section 

2(h)(l)(A) of the CEA, makes it unlawful for any "person" to engage in swaps, unless the swaps 

are cleared. As discussed above, transactions between affiliates are not swaps between 

"persons," as the CFTC has long considered interaffiliate transactions to be between the same 

"person" for the purposes of CFTC regulations. Therefore, transactions between the same 

"person" should not be included in the category of swaps that are required to be cleared. 

Such an outcome would be consistent with Congressional intent, as the Chairman of the Senate 

Agriculture Committee and one of the primary authors ofTitle VII of Dodd-Frank stated "While 

most large financial entities are not eligible to use the end user exemption for standardized swaps 

entered into with third parties, it would be appropriate for the SEC and CFTC to exempt from 

mandatory clearing and trading inter-affiliate swap transactions between wholly-owned affiliates 

of a financial entity."5 

Furthermore, a requirement that transactions between affiliates be subject to the execution and 

clearing requirements is unnecessary and inconsistent with the purposes of Dodd-Frank. First, 

competitive execution and centralized clearing are unnecessary in the context of transactions 

between affiliates, which do not need to be protected against risks of unfair or off-market pricing 

or direct bilateral credit risk. Indeed, even if the transactions are cleared, affiliates cannot be 

protected from each other's credit risk because commonly owned affiliates are all subject to the 

4 

5 

Further Definition of "Swap Dealer, "Security-Based Swap Dealer," "Major Swap 

Participant," "Major Security-Based Swap Participant" and "Eligible Contract 

Participant', 75 Fed. Reg. 80174,80183 (Dec. 21, 2010). 

Cong. Record, July 15,2010, S5921. 

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Mr. David A. Stawick, Secretary 

Commodity Futures Trading Commission 

May 2, 2011 

Page4 

parent company's credit risk. Moreover, including transactions between affiliates in centrally 

executed markets and clearing houses will potentially mislead the market, by sending an 

inaccurate signal of the actual level of activity in the relevant market. 

Finally, a determination that interaffiliate transactions are not suitable for clearing and are not 

required to be cleared would be consistent with the position taken by European regulators. 

Specifically, the proposed regulation of derivative transactions by the European Parliament 

explicitly carves out interaffiliate transactions from the clearing requirements for financial and 

non-financial counterparties.6 Section 752 of Dodd-Frank requires the CFTC to consult and 

coordinate with international regulators on the regulation of swaps, and exempting interaffiliate 

from the clearing requirements would be consistent with the treatment of interaffiliate 

transactions by European regulators. 

We understand that the CFTC may be concerned that excluding affiliate transactions from the 

requirements of Dodd-Frank might allow some entities to use such transactions as a means of 

circumventing these requirements. In our view, however, it would be extremely difficult, if not 

impossible, to use affiliate transactions for this purpose, given that the transactions would need to 

be between wholly-owned subsidiaries of the same parent company. In any event, even if an 

entity attempted to circumvent the requirements in this manner, Section 2(h)(4)(A) of the CEA 

gives the CFTC specific anti-evasion authority, which could be used in such instances. 

We appreciate the opportunity to provide our comments to the CFTC on these issues and look 

forward to discussing these issues with the CFTC. Any questions about this letter may be 

directed to me at (973) 802-5901. 

6 

Sincerely, 

Richard A. Miller 

Proposal for a Regulation of the European Parliament and the Council on derivative 

transactions, central counterparties and trade repositories, Title II, ArtJ, 201 0/0250/COD 

{Aprilll, 2011). 

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