On November 24, the Commodity Futures Trading Commission’s (CFTC) Division of Clearing and Risk (DCR) issued a no-action letter to expand previously issued relief, that is available to “treasury affiliates,” from the mandatory clearing requirement. “Treasury affiliate” refers to those entities within a corporate group that (1) undertake hedging activities on behalf of their affiliates, or (2) act in a wider capacity as treasury centers that provide financial services for all or most of their affiliates, including daily cash management, debt administration, and risk hedging and mitigation.
Many non-financial companies employ treasury affiliates for the purpose of concentrating expertise and reducing redundancy within their corporate groups. Often, a treasury affiliate will serve as the primary external market-facing entity for its entire corporate group. Treasury affiliates allow for (1) aggregation of risks within a corporate group, which can be offset with one single swap transaction rather than multiple swap transactions between each affiliate and third-party swap dealers, and (2) netting of affiliate exposures prior to entry into third-party swap dealer transactions.
Treasury affiliates are predominantly engaged in activities that are financial in nature and, therefore, many are considered “financial entities” for purposes of the Commodity Exchange Act (CEA), as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).1 Generally, financial entities are ineligible for an exception from mandatory clearing that is available to end-users.2 The rationale for affording relief to treasury affiliates from the clearing requirement (although they are financial entities) is that treasury affiliates act on behalf of affiliates that themselves would be eligible for the end-user exception from mandatory clearing. Thus, the relief from clearing afforded by the DCR is predicated on a treasury affiliate meeting certain conditions that are designed to ensure that a treasury affiliate engages in swaps to hedge or mitigate the commercial risk of its non-financial affiliates.3
CFTC Letter 14-144 expands and supersedes the previously issued no-action relief, CFTC Letter 13-22, so that treasury affiliates that were previously unable to avail themselves of the relief from clearing may now do so. The CFTC deemed it appropriate to expand the relief afforded in CFTC Letter 13-22 after receiving input from affected market participants. The attached table summarizes the criteria for the previously issued relief and how such relief has been expanded by CFTC Letter 14-144. One of the most notable changes to the prior relief made by CFTC Letter 14-144 is the removal of the condition that a treasury affiliate’s swap obligations be guaranteed by the treasury affiliate’s parent; the DCR makes clear that this removal recognizes the fact that the financial support afforded to treasury affiliates by their ultimate parents can take various forms.