On June 4, 2013, the Staff of the Commodity Futures Trading Commission (“CFTC”) issued a No-Action Letter that effectively extends the “end-user exception” under the Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) to encompass swaps entered by corporate treasury units with external counterparties, when those swaps are entered for the purpose of hedging the commercial risks of the treasury unit’s non-financial affiliates and are related to intercompany swaps with such affiliates (“No-Action Letter”). The CFTC’s action addresses concerns regarding the availability of the end-user exception with respect to external swaps that corporate treasury units enter not merely as agents for their affiliates, but rather as principals acting on their own behalf for the purpose of offsetting risk acquired through internal swaps with end-user affiliates. The No-Action Letter generally permits corporate treasury units entering so-called “back-to-back” swaps1 to elect the end-user exception for the external leg of the swap, provided that the internal leg qualifies for the end-user exception and subject to other conditions set forth in the No-Action Letter. Given the widespread use of back-to-back swaps in a variety of large and complex businesses, the No-Action Letter addresses an area of serious concern that had threatened either to restrict the availability of the end-user exception or to necessitate wholesale changes in the way that many large corporations structure their internal and external risk management.


In July 2012, the CFTC issued the final regulations implementing the end-user exception to the general Dodd-Frank requirement that swaps in certain classifications (as determined by the CFTC) be cleared through a registered derivatives clearing organization. In general, the end-user rule allows a person that is not a “financial entity” to avoid the clearing requirement with respect to swaps entered for the purpose of hedging or mitigating commercial risk, subject to specified conditions.2 Under the Dodd-Frank Act, the term “financial entity” includes, among others, any “person predominantly engaged in activities that are . . . financial in nature,”3 a broad definition that would appear to capture many corporate treasury units.4 Congress recognized in the Dodd-Frank Act that many large business organizations manage their financial risk by charging a single corporate unit -- the treasury unit -- with responsibility for entering swaps with external counterparties to hedge operational risks of non-financial affiliates. Under such arrangements, the treasury unit, rather than the business operating unit, enters the swap with the external counterparty. But if the treasury unit falls within the definition of “financial entity,” it could be disqualified from electing the end-user exception for these external swaps, despite their hedging purpose.

In order to avoid this result, Congress provided in the Dodd-Frank Act that a corporate unit (such as a treasury unit) that falls within the definition of “financial entity” may nevertheless be eligible to elect the end-user exception, but “only if the [financial entity] affiliate, [is] acting on behalf of the [non-financial affiliate] and as an agent.”5 In its end-user exception release, the CFTC recognized that the quoted statutory language does not cover the situation in which a treasury unit enters back-to-back swaps, because in that circumstance the treasury unit is not acting as an agent on behalf of an affiliate, but rather as principal.6 Nevertheless, the CFTC did not issue any no-action or exemptive relief to cover the back-to-back swap scenario until its Division of Clearing and Risk issued the No-Action Letter on June 4, 2013.7

Criteria for No-Action Relief

In granting relief from the general Dodd-Frank clearing requirement to many external swaps entered by corporate treasury units, the No-Action Letter imposes a number of conditions on the attributes and activities of the electing entity, as well as the nature of the swap, and it imposes certain reporting requirements on the treasury unit electing the exception. These conditions and requirements are summarized below.

Treasury Units

In order to qualify for the no-action relief, a corporate treasury unit must:

  1. Be wholly and directly owned by a non-financial entity, whose ultimate parent is also a non-financial entity that owns other subsidiaries, the majority of which qualify for the end-user exception;
  2. Not be an entity designated as a “financial entity” under Section 2(h)(7)(C)(i)(I)-(VII) of the Commodity Exchange Act (“CEA”),8 nor be affiliated with an entity specified under Section 2(h)(7)(D)(ii) of the CEA9 ;
  3. Constitute a “financial entity” under Section 2(h)(7)(C)(i)(VIII) of the CEA solely as a result of its acting as a principal to swaps with, or on behalf of, its related affiliates, or through providing them with other financial services;
  4. Not engage in swaps other than for the purpose of hedging or mitigating the commercial risk of one or multiple affiliates;
  5. Not engage in swaps with, or on behalf of, any affiliate that is a “financial entity” or that engages in swaps with an affiliate that is a “financial entity.”

Exempt Swaps

Under the No-Action Letter, the clearing exemption is limited to swaps:

  1. Made solely for the purpose of hedging or mitigating commercial risk10 acquired from one or multiple affiliates via intercompany swaps;
  2. Subject to a centralized risk management program;
  3. Guaranteed by the eligible treasury unit’s non-financial parent, another entity wholly owned by or wholly owning its non-financial parent, or the affiliates for which the swap hedges or mitigates commercial risk.

Reporting Requirements

Reporting obligations under the No-Action letter are substantially similar to those previously promulgated for the general end-user exception, including the option to submit a yearly report to a swap data repository rather than report the required information on a swap-by-swap basis.11

A copy of the No-Action Letter can be found here.