I am pleased to support our final rule codifying the alternative compliance framework for the Commission’s inter-affiliate swap clearing exemption, which has been in place via the CFTC’s staff no-action relief since 2014.  As I previously stated in connection with the proposed rule, codifying this relief is good policy and good government. [1]

From a policy perspective, the rule advances the goals of our swap clearing requirements by making anti-evasionary provisions of the inter-affiliate exemption workable for cross-border corporate groups.  Stepping back for a moment and looking at the bigger picture, our clearing and initial margin requirements are meant to address counterparty credit risk.  These measures generally are not appropriate for credit exposures between members of a single corporate group, where risk is managed internally on a centralized basis. [2]

However, the CFTC has long been concerned that U.S. entities may misuse the inter-affiliate exemption to evade the clearing requirements more generally.  For example, a U.S. entity may use back-to-back swaps to interpose a non-U.S. affiliate in the middle of the U.S. entity’s trade with a non-U.S. counterparty, where the non-U.S. affiliate and counterparty are in jurisdictions that do not have mandatory clearing regimes comparable to the Commission’s.  In this way, the U.S. entity could improperly circumvent the clearing obligations that would apply if it were trading directly with the non-U.S. counterparty (because it would be exempted from clearing the trade with its non-U.S. affiliate, and the non-U.S. affiliate’s back-to-back trade with the non-U.S. counterparty could fall outside U.S. clearing requirements).

This evasion concern was particularly acute in the early years of the CFTC’s clearing regime, when a number of other jurisdictions had yet to implement their own clearing requirements in accordance with the G20 commitments at the 2009 Pittsburgh Summit.  Moreover, section 2(h)(4)(A) of the Commodity Exchange Act requires us to prescribe rules to prevent evasion of the clearing requirement.  Accordingly, as an anti-evasionary measure, the Commission required members of a corporate group taking advantage of the inter-affiliate exemption to clear their outward-facing swaps if such swaps would be clearing-mandated under CFTC rules, regardless whether the parties to the outward-facing swap were in fact subject to such rules. [3]

The “clearing outward-facing swaps” condition to the inter-affiliate exemption is unworkable for many market participants, however, because of inter-jurisdictional mismatches in clearing requirements and infrastructures.  Accordingly, the CFTC’s staff no-action relief has extended the rule’s time-limited alternative compliance framework allowing affiliates to exchange variation margin in lieu of clearing outward-facing swaps. [4]

This alternative compliance option has allowed cross-border corporate groups to attain the risk-mitigating benefits of inter-affiliate swaps, [5] while complying with important anti-evasion measures in a way that is practicable for their global business.  Indeed, the CFTC staff’s review of recent swap data indicates that over 70 eligible affiliate counterparties located outside the United States rely on the alternative compliance framework under the available staff no-action relief.  By codifying this relief, we are providing the swaps market with clarity, certainty, and transparency—consistent with the CFTC’s mission, core values, and strategic objectives. [6]  I commend my fellow Commissioners and the CFTC’s staff for working to finalize the rule before us today, and I look forward to further efforts to advance these principles and goals in the near future.