Public Statements & Remarks

Statement of Support by Chairman Gary Gensler: Clearing Exemption for Swaps Between Certain Affiliated Entities

April 1, 2013

I support the final rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Since the late 19th century, clearinghouses have lowered risk for the public and fostered competition in the futures market. Clearing also has democratized the market by fostering access for farmers, ranchers, merchants and other participants.

The Commission approved the first clearing requirement for swaps last November, following through on the U.S. commitment at the 2009 G-20 meeting that standardized swaps be cleared by the end of 2012. Following Congress' direction, end-users are not required to bring swaps into central clearing.

A key milestone was reached on March 11 with the requirement that swap dealers and the largest hedge funds begin clearing the vast majority of interest rate and credit default index swaps. Compliance will continue to be phased in throughout this year. Other financial entities begin clearing June 10. Accounts managed by third party investment managers and ERISA pension plans have until September 9.

The final rule allows for an exemption from clearing for swaps between affiliates under the following limitations:

  • First, the exemption covers swaps between majority-owned affiliates whose financial statements are reported on a consolidated basis.
  • Second, the rule requires documentation of such exempted swaps, centralized risk management, and reporting requirements for such swaps.
  • Third, the exemption requires that each swap entered into by the affiliated counterparties with unaffiliated counterparties must be cleared. This approach largely aligns with the Europeans' approach to an exemption for inter-affiliate clearing.

In order to promote international harmonization regarding mandatory clearing, the final rulemaking provides for two time-limited alternative compliance frameworks for swaps entered into with unaffiliated counterparties in jurisdictions outside of the United States.

With regard to affiliated counterparties located in the European Union, Japan and Singapore - jurisdictions that have adopted swap clearing regimes and are currently in the process of implementation - the Commission is phasing compliance with the requirement to clear swaps with unaffiliated counterparties until March 11, 2014. During the phase-in period affiliated counterparties located in these jurisdictions will be able to pay and collect variation margin in lieu of clearing. Affiliated counterparties that are located in these jurisdictions (that are not affiliated with swap dealers or major swap participants) will not have to pay or collect such variation margin during the phase-in period, provided they are not directly or indirectly majority-owned by a financial entity.

With regard to affiliated counterparties located in other foreign jurisdictions, the Commission is phasing compliance with the requirement to clear swaps with unaffiliated counterparties until March 11, 2014. Until that date, an affiliated counterparty located outside the United States, the European Union, Japan and Singapore does not have to clear its swaps with unaffiliated counterparties so long as the aggregate notional value of such swaps does not exceed five percent of the notional value of all swaps entered into by the affiliated counterparty located in the United States.

This phasing in of the inter-affiliate exemption provides a transition period for foreign jurisdictions to implement comparable and comprehensive clearing regimes.

Last Updated: April 2, 2013