CFTC’s No Action Letter Provides Relief from Required Clearing

The CFTC’s Division of Clearing and Risk issued a no-action letter that provides relief from required clearing for a limited set of “stub swaps.” These are swaps that remain after the partial novation or partial termination of an original swap that was not required to be cleared because it was executed prior to an applicable compliance date for required clearing.

According to a press release issued by the CFTC, the Division does not plan to recommend that the Commission take enforcement action against any person for failing to clear stub swaps, that may have resulted from partial novations or partial terminations. This is provided that the original swaps were executed prior to the date on which the counterparties were obligated to comply with the clearing requirement. Both original swaps, stub swaps, and the related partial novations and terminations are required to meet specific conditions specified in the letter.

No-Action Relief

The Division’s letter states that the no-action relief is subject to the following conditions:

  • The original swap must not have been cleared
  • The original swap was executed prior to an applicable compliance date for required clearing
  • The partial novation or termination may reduce only the notional amount of the original swap, provided that all other terms of the stub swap remain unchanged
  • Records relating to the original swap are amended solely to reflect the reduced notional amount of the swap

Regarding partial novations, the relief is also subject to the condition that the novated swap is submitted for clearing as illustrated by section 2(h)(1)(A) of the CEA. This is provided that the swap is entered into after an applicable compliance date, and within one of the classes of swaps determined by the Commission to be required to be cleared.

The relief also remains limited to partial novations and partial terminations, but does not apply to circumstances where the original counterparties enter into and book a new swap that fully, or partially, offsets the risk of an existing or uncleared swap.




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