Statement of Concurrence by Commissioner Rostin Behnam

Amendments to the Exemption from the Swap Clearing Requirement for Certain Affiliated Entities

December 10, 2019

I respectfully concur with the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) decision today to issue proposed amendments to the exemption from the swap clearing requirement for certain affiliated entities.  The original inter-affiliate exemption rule was issued by the Commission in 2013.[1]  Today’s proposal reminds us both of how forward thinking the Commission was in implementing the Dodd-Frank Act and the goals envisioned at the 2009 G20 Pittsburgh Summit, and of how we need to be thoughtful and willing to update our rule set when reality differs from what we envisioned.

The impetus for today’s proposal boils down to this.  In some respects, the world hasn’t turned out quite the way the Commission envisioned.  When the Commission promulgated the inter-affiliate exemption rule in 2013, the perhaps overly hopeful expectation was that other jurisdictions would quickly follow our lead and adopt swap clearing requirements in short order.  While a number of jurisdictions now have clearing mandates for certain swaps, some non-U.S. jurisdictions are still in the process of adopting clearing regimes, and some non-U.S. jurisdictions vary significantly from the Commission’s clearing requirement.  While the expectation in 2013 was that the Commission would issue comparability determinations for non-U.S. jurisdictions with respect to the clearing requirement, to date the Commission has not issued any comparability determinations.

Because the Commission in 2013 expected the world to quickly follow with clearing mandates, it established a temporary Alternative Compliance Framework for compliance with the Outward-Facing Swaps Condition of the Inter-Affiliate Exemption.[2]  Since that temporary Alternative Compliance Framework expired in 2014, the Division of Clearing and Risk staff has issued a series of no-action letters extending the Alternative Compliance Framework to provide more time for global harmonization.[3]  Today, because the global regulatory landscape has not turned out quite like we expected, the Commission proposes to codify and make permanent the Alternative Compliance Framework.

While I support today’s proposal and believe that it represents the best path forward to provide legal certainty to market participants regarding the Outward-Facing Swaps Condition of the Inter-Affiliate Exemption, there is one significant aspect of the proposal that gives me pause.  In the preamble to the 2013 rule, the Commission stated that the Alternative Compliance Framework provided for the Outward-Facing Swaps Condition is “not equivalent to clearing and would not mitigate potential losses between swap counterparties in the same manner that clearing would.”[4]  We reiterate this in today’s preamble, stating that “[a]lthough paying and collecting variation margin daily does not mitigate counterparty credit risk to the same extent that central clearing does, the Commission believes, as stated in the 2013 adopting release for the Inter-Affiliate Exemption, that variation margin is an essential risk management tool.”  Despite clearly stating that variation margin does not mitigate counterparty credit risk to the same extent as central clearing, we nonetheless are proposing to exempt certain transactions from central clearing under the theory that variation margin mitigates counterparty credit risk.  This may be the right result, but I want to be absolutely certain that we are not injecting unnecessary risk into the system by exempting these transactions from central clearing in the name of focusing on the easiest, cheapest risk management tool.  I encourage interested parties to comment on whether the alternative compliance framework that we propose to codify effectively mitigates counterparty credit risk, and the differences in risk mitigation between the alternative compliance framework and central clearing.

In part, I am comfortable with the proposal because the existing rule provides the Commission with the ability to monitor how the exemption is working.  Under Regulation 50.52(c)-(d), the election of the Inter-Affiliate Exemption, as well as how the requirements of the exemption are met, must be reported to a Commission-registered swap data repository.[5]  Accordingly, the Commission will have a window into which entities elect the exemption, how many swaps are exempted, and how the requirements of the exemption are met.  In addition, the Commission retains its special call, anti-fraud, and anti-evasion authorities, which should enable it to discharge its regulatory responsibilities under the CEA.  I believe that the Commission should closely monitor SDR data regarding the Inter-Affiliate Exemption going forward in order to be certain that the exemption is not being used to evade central clearing, and to ensure that the exemption is not adding unnecessary and preventable risk to the system.

I thank staff for their thoughtful responses to my questions, and for making edits that reflected comments and suggestions made by me and my staff.