Public Statements & Remarks

Statement of Commissioner Dan M. Berkovitz on Final Rule to Make Permanent Certain Anti-Evasion Measures for Inter-Affiliate Swaps

June 25, 2020

I support today’s final rule making permanent the alternative compliance frameworks for certain swaps involving the foreign affiliates of U.S. firms and their non-U.S. counterparties.  The final rule upholds the Dodd-Frank Act’s clearing mandate, deters evasion, and protects against systemic risk from swaps executed overseas by foreign affiliates.  The final rule, which adopts the rule as proposed, [1] codifies existing practice and addresses anti-evasion provisions governing inter-affiliate swaps that the Commission first issued in 2013 and later extended through staff no-action letters.

Commission regulations provide a limited, conditional “Inter-Affiliate Exemption” from clearing for swaps between certain affiliate counterparties, including U.S. firms and their foreign affiliates.  Notably, the Inter-Affiliate Exemption includes an important “Outward-Facing Swaps Condition” to prevent U.S. firms from routing swaps through foreign affiliates to evade the Commission’s clearing requirement.[2]  The Outward-Facing Swaps Condition allows outward-facing swaps to be cleared pursuant to a comparable and comprehensive foreign clearing regime.

Where the Commission has not made a comparability determination, the alternative compliance frameworks permit the foreign affiliate to exchange full, daily variation margin for the swap with its U.S. affiliate or its non-U.S. counterparty, rather than clearing the outward-facing swap.  The alternative compliance frameworks preserve the competitiveness of the foreign affiliates of U.S. firms without importing significant risks into the U.S.  Today’s final rule makes the alternative compliance frameworks permanent, with certain modifications.[3]

I support the final rule’s emphasis on clearing, anti-evasion, and systemic risk.  The final rule also expands the jurisdictions subject to one of the alternative compliance frameworks to include additional jurisdictions that have adopted and implemented their respective domestic clearing mandates.  By extending and making permanent the alternative compliance frameworks, the final rule addresses the lack of comparability determinations for foreign clearing regimes, while ensuring the continued operation of anti-evasion and anti-systemic risk provisions in the Commission’s rules.

I thank staff of the Division of Clearing and Risk for their work on this final rule and for their effective cooperation with my office.

[1] Exemption From the Swap Clearing Requirement for Certain Affiliated Entities – Alternative Compliance Frameworks for Anti-Evasionary Measures, 84 FR 70446 (Dec. 23, 2019).

[2] The Outward-Facing Swaps Condition requires the foreign affiliates of U.S. firms to clear their outward-facing swaps if such swaps are subject to the Commission’s clearing requirement and entered into with unaffiliated counterparties in foreign jurisdictions.  

[3] The original alternative compliance frameworks expired in 2014, but have been repeatedly extended through no-action letters.