CFTC Proposes Rule on Inter-Affiliate Clearing Exemption

The CFTC voted 3 to 2 yesterday to release a proposal that would allow swaps between financial firms with a common parent (“affiliate firms”) to be exempt from clearing requirements.

However, affiliate firms would still be required to post collateral for their trades. Under the proposal, affiliate firms would have to use variation margin, or collateral calls, based on adverse price movements.

This collateral requirement prompted the CFTC’s two Republican Commissioners to dissent.  “We believe this proposal may have the unintended consequence of imposing substantial costs on the economy and consumers,” Commissioner Jill Sommers and Scott O’Malia wrote in dissent. The two Commissioners expressed concerns that the provision would unnecessarily tie up capital while providing little to no safeguards.

Industry participants have long argued that swaps between affiliate firms serve only to reduce risk by allowing parent firms to hedge across businesses.

While the CFTC Republican Commissioners disagree with the proposal, key industry groups say the proposal has little effect on existing business standards. In a letter to the CFTC, the International Swaps and Derivatives Association said affiliate firms “routinely” impose variation margin on their trades and that the new proposal “should not be unduly disruptive.”

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