Statement of Commissioner Dan M. Berkovitz on Proposed Rule to Make Permanent Certain Anti-Evasion Measures for Inter-Affiliate Swaps
December 10, 2019
I support the proposed rule to make permanent the alternative compliance frameworks for certain swaps between the foreign affiliates of U.S. firms and their non-U.S. counterparties.[1] The proposed rule would make permanent, with modifications, anti-evasion provisions for inter-affiliate swaps that the Commission originally adopted in 2013, and then extended through staff no-action letters that remain in effect today. The no-action letters require U.S. firms and their foreign affiliates to exchange variation margin in connection with swaps entered into by the foreign affiliate with non-U.S. counterparties, where such swaps are subject to the Commission’s clearing requirement and there is no comparable and comprehensive clearing regime in the foreign jurisdiction. The proposed rule upholds the Dodd-Frank Act’s clearing mandate, deters evasion, and helps to protect against systemic risk to the U.S. from swaps executed overseas by foreign affiliates.
The Commission’s rules provide a limited, conditional exemption from clearing for swaps between certain affiliate counterparties, including U.S. firms and their foreign affiliates (“Inter-Affiliate Exemption”).[2] At the same time, through both regulation and no-action relief, the Commission has implemented measures designed to prevent U.S. firms from routing swaps through their foreign affiliates to evade the Commission’s clearing requirement for such swaps. These anti-evasion provisions condition the Inter-Affiliate Exemption such that foreign affiliates of U.S. firms must clear their outward-facing swaps if such swaps are: (1) subject to the Commission’s clearing requirement and (2) entered into with unaffiliated counterparties in foreign jurisdictions (“Outward-Facing Swaps Condition”). The Outward-Facing Swaps Condition allows outward-facing swaps to be cleared pursuant to a comparable and comprehensive foreign clearing regime, if available.
In jurisdictions 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 permit the foreign affiliate to enter into swaps with non-U.S. counterparties in foreign jurisdictions under the same terms and conditions as other non-U.S. persons in those jurisdictions. They preserve the competitiveness of the foreign affiliates of U.S. firms without presenting significant risks to the U.S. affiliate or importing significant risks into the U.S. Today’s proposed rule would make the alternative compliance frameworks permanent, with certain modifications.[3]
I support the proposed rule’s emphasis on clearing, anti-evasion, and systemic risk by preserving the Outward-Facing Swaps Condition and making permanent the alternative compliance frameworks. The proposed rule would also expand the jurisdictions subject to one of the alternative compliance frameworks to include additional jurisdictions that have adopted and implemented their respective domestic clearing mandates.[4] By extending and making permanent the alternative compliance frameworks, the proposed rule would address 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.
The proposed rule seeks public comment on whether the alternative compliance frameworks are sufficient to address potential systemic risk to the U.S. and whether they may produce a permanent residual class of swaps that are not cleared but instead result in the exchange of variation margin between eligible affiliate counterparties (and the risks associated with those swaps). I look forward to public comments on these questions and other aspects of the proposal.
[1] See 7 U.S.C. 2(h)(1), which provides that if the Commission requires a swap to be cleared, then it shall be unlawful for a person to enter into such swap unless it is submitted to a registered derivatives clearing organization (“DCO”) or to a DCO that is exempt from registration. Part 50 of the Commission’s regulations sets forth the classes of swaps required to be cleared, as well as certain conditional exemptions to the clearing requirement, including the exemption and conditions under consideration in this proposal.
[2] The Commission has previously found that “inter-affiliate transactions provide an important risk management role within corporate groups” and that they may be beneficial to the group as a whole if properly risk managed. See Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, 21754 (Apr. 11, 2013).
[3] The original alternative compliance frameworks expired in 2014, but have been repeatedly extended through no-action letters that expire in December 2020.
[4] The proposed alternative compliance frameworks consist of two distinct but similar sets of requirements. Both would require the exchange of full, daily variation margin. However, the first framework, in proposed § 50.52(b)(4)(ii) would apply to eight enumerated jurisdictions that have adopted domestic clearing mandates. The second framework, in proposed § 50.52(b)(4)(iii), would apply in all other jurisdictions. Swaps in this second framework would be limited to the “five percent test,” which limits the uncleared swaps activity that a U.S. eligible affiliate counterparty can transact with its affiliates in non-enumerated jurisdictions. The five percent test was also present in the alternative compliance frameworks when they were adopted in 2013.