Frn

Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules
distance references; and retaining ILS at
current sites with installation of new
ILSs by military where needed in lieu of
LP and LPV.
*
*
*
*
*
Issued in Washington, DC, on August 14,
2012.
Lansine Toure,
Acting Manager, Navigation Programs.
[FR Doc. 2012–20464 Filed 8–20–12; 8:45 am]
BILLING CODE 4910–13–P

COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 39
RIN 3038–AD47

Clearing Exemption for Swaps
Between Certain Affiliated Entities
Commodity Futures Trading
Commission.
ACTION: Proposed rule.
AGENCY:

The Commodity Futures
Trading Commission (‘‘CFTC’’ or
‘‘Commission’’) is proposing a rule to
exempt swaps between certain affiliated
entities within a corporate group from
the clearing requirement (the ‘‘interaffiliate clearing exemption’’ or the
‘‘proposed exemption’’) under Section
2(h)(1)(A) of the Commodity Exchange
Act (‘‘CEA’’). The Commission also is
proposing rules that detail specific
conditions counterparties must satisfy
to elect the proposed inter-affiliate
clearing exemption, as well as reporting
requirements for affiliated entities that
avail themselves of the proposed
exemption. The Commission has
finalized a rule that addresses swaps
that are subject to the end-user
exception. Counterparties to interaffiliate swaps that qualify for the enduser exception would be able to elect to
not clear swaps pursuant to the end-user
exception or the proposed rule. The
proposed rule does not address swaps
that an affiliate enters into with a third
party that are related to inter-affiliate
swaps that are subject to the end-user
exception. The Commission intends
separately to propose a rule addressing
swaps between an affiliate and a third
party where the swaps are used to hedge
or mitigate commercial risk arising from
inter-affiliate swaps for which the enduser exception has been elected.
DATES: Comments must be received on
or before September 20, 2012.
ADDRESSES: You may submit comments,
identified by RIN number 3038–AD47,
by any of the following methods:
• The agency’s Web site, at: http://
comments.cftc.gov. Follow the

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SUMMARY:

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instructions for submitting comments
through the Web site.
• Mail: David A. Stawick, Secretary of
the Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW.,
Washington, DC 20581.
• Hand Delivery/Courier: Same as
mail above.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
Please submit your comments using
only one method.
All comments must be submitted in
English, or if not, accompanied by an
English translation. ‘‘Inter-affiliate
Clearing Exemption’’ must be in the
subject field of responses submitted via
email, and clearly indicated on written
submissions. Comments will be posted
as received to http://www.cftc.gov. You
should submit only information that
you wish to make available publicly. If
you wish the Commission to consider
information that is exempt from
disclosure under the Freedom of
Information Act, a petition for
confidential treatment of the exempt
information may be submitted according
to the established procedures in CFTC
regulation 145.9.1
Throughout this proposed
rulemaking, the Commission requests
comment in response to specific
questions. For convenience, the
Commission has numbered each of
these comment requests. The
Commission asks that, in submitting
responses to these requests, commenters
identify the specific number of each
request to which their comments are
responsive.
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse, or
remove any or all of a submission from
www.cftc.gov that it may deem to be
inappropriate for publication, such as
obscene language. All submissions that
have been redacted or removed that
contain comments on the merits of the
rulemaking will be retained in the
public comment file and will be
considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT:
Gloria Clement, Assistant General
Counsel, (202) 418–5122,
[email protected], Office of General
Counsel; Jonathan Lave, Associate
Director, Exchange & Data Repository,
(202) 418–5983, [email protected], and
1 17 CFR 145.9. Commission regulations may be
accessed through the Commission’s Web site,
http://www.cftc.gov.

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50425

Alexis Hall-Bugg, Attorney-Advisor,
(202) 418–6711, [email protected],
Division of Market Oversight; Warren
Gorlick, Supervisory Attorney-Advisor,
(202) 418–5195, [email protected], and
Anuradha Banerjee, Attorney-Advisor,
(202) 418–5661, [email protected],
Office of International Affairs; Theodore
Kneller, Attorney-Advisor, (202) 418–
5727, [email protected], Division of
Enforcement; Elizabeth Miller,
Attorney-Advisor, (202) 418–5985,
[email protected], Division of Swap
Dealer and Intermediary Oversight; Esen
Onur, Research Economist, (202) 418–
6146, [email protected], Office of the Chief
Economist; and Jolanta Sterbenz,
Counsel, (202) 418–6639,
[email protected], Office of General
Counsel, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581.
I. Background
A. Clearing Requirement for Swaps
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(‘‘Dodd-Frank Act’’ or ‘‘DFA’’).2 Title
VII of the Dodd-Frank Act amended the
CEA,3 and established a new regulatory
framework for swaps. The legislation
was enacted to reduce systemic risk,
increase transparency, and promote
market integrity within the financial
system by, among other things: (1)
Imposing clearing and trade execution
requirements on standardized derivative
products; (2) creating rigorous
recordkeeping and data reporting
regimes with respect to swaps,
including real-time public reporting;
and (3) enhancing the Commission’s
rulemaking and enforcement authorities
over all registered entities,
intermediaries, and swap counterparties
subject to the Commission’s oversight.
Section 723 of the Dodd-Frank Act
added section 2(h) to the CEA, which
establishes a clearing requirement for
swaps.4 The new section makes it
unlawful for any person to engage in a
swap, if the Commission determines
such swap is required to be cleared,
unless the person submits the swap for
clearing to a registered derivatives
clearing organization (‘‘DCO’’) (or a DCO
that is exempt from registration).5 The
2 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (July 21, 2010).
3 7 U.S.C. 1 et seq. (2006).
4 CEA section 2(h)(1)(A), 7 U.S.C. 2(h)(1)(A).
5 See CEA section 2(h)(1)(A), 7 U.S.C. 2(h)(1)(A).
The CEA’s clearing requirement states that, ‘‘[i]t
shall be unlawful for any person to engage in a
swap unless that person submits such swap for

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules

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CEA, however, permits exceptions and
exemptions to the clearing requirement.
A person may elect not to clear
certain swaps if such person qualifies
for an exception under CEA section
2(h)(7) and the Commission regulations
issued in connection therewith (the
‘‘end-user exception’’).6 To summarize
the principal components of the enduser exception, for a swap to qualify, a
counterparty to the swap electing the
exception must (i) not be a ‘‘financial
entity,’’ as defined in CEA section
2(h)(7)(C)(i) or qualify for an exemption
from that defined term under section
2(h)(7)(D),7 or through a Commissionissued exemption under CEA sections
2(h)(7)(C)(ii) 8 or 4(c) 9 and (ii) be using
the swap to hedge or mitigate
commercial risk. The Commission has
determined to exempt certain small
banks, savings associations, farm credit
institutions, and credit unions under
section 2(h)(7)(C)(ii) of the CEA from the
definition of ‘‘financial entity.’’10
Importantly, a counterparty to an
inter-affiliate swap that qualifies for
both the end-user exception and the
inter-affiliate exemption may elect not
to clear the inter-affiliate swap under
either the end-user exception or the
inter-affiliate exemption. As such, the
Commission believes that the rule
proposed in this rulemaking may not be
necessary for the vast majority of interaffiliate swaps involving a non-financial
entity or a small financial institution
because the end-user exception can be
elected for those swaps. Accordingly, it
is likely the proposed rule will be used
for inter-affiliate swaps between two
financial entities that do not qualify for
the end-user exception or for swaps
involving a non-financial entity that do
not qualify for the end-user exception
because the swaps do not hedge or
mitigate commercial risk.
clearing to a derivatives clearing organization that
is registered under this Act or a derivatives clearing
organization that is exempt from registration under
this Act if the swap is required to be cleared.’’
6 CEA section 2(h)(7)(A), 7 U.S.C. 2(h)(7)(A). CEA
section 2(h)(7)(A) provides an elective exception to
the clearing requirement to any counterparty to a
swap that is not a financial entity, is using the swap
to hedge or mitigate commercial risk, and notifies
the Commission how it generally meets the
financial conditions associated with entering into
non-cleared swaps. The Commission issued the
end-user exception in a rulemaking entitled, ‘‘EndUser Exception to the Clearing Requirement for
Swaps,’’ 77 FR 42560, July 19, 2012 (final).
7 CEA section 2(h)(7)(D), 7 U.S.C. 2(h)(7)(D).
8 CEA section 2(h)(7)(C)(ii), 7 U.S.C. 2(h)(7)(C)(ii)
(‘‘The Commission shall consider whether to
exempt small banks, savings associations, farm
credit system institutions, and credit unions
* * * ’’).
9 CEA section 4(c), 7 U.S.C. 6(c).
10 ‘‘End-User Exception to the Clearing
Requirement for Swaps,’’ 77 FR 42560, July 19,
2012 (see § 39.6(d)).

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Finally, CEA section 4(c)(1), described
in more detail below, grants the
Commission general exemptive
powers.11 Pursuant to that authority, the
Commission has proposed a rule that
would allow cooperatives meeting
certain conditions to elect not to submit
for clearing certain swaps subject to a
clearing requirement.12
B. Swaps Between Affiliated Entities
Except as provided with respect to
certain financing affiliates as noted
above, CEA section 2(h) does not
provide any specific exception to swaps
entered into by affiliates that are subject
to a clearing requirement (‘‘inter-affiliate
swaps’’).13 Inter-affiliate swaps that are
hedged by back-to-back or matching
book swaps entered into with third
parties may pose risks to the financial
system if the inter-affiliate swaps are not
properly risk managed thereby raising
the likelihood of default on the outward
facing swaps. Furthermore, there could
be systemic risk implications if an
affiliate used by the corporate group to
trade outward facing swaps (commonly
referred as centralized treasury or
conduit affiliates) has large positions
and defaulted on obligations arising
from inter-affiliate swaps if such swaps
are hedged with third-party swaps.14
Such a default could harm third-party
swap counterparties, and potentially,
financial markets as a whole, if the
treasury/conduit affiliate was unable to
satisfy third-party obligations as a
consequence of the default.
A number of commenters in a variety
of Commission rulemakings have
recommended that the Commission
adopt an exemption to the clearing
requirement for inter-affiliate swaps.15
11 Section 4(c)(1) of the CEA empowers the
Commission to exempt any transaction or class of
transactions, including swaps, from certain CEA
provisions, such as the clearing requirement.
12 ‘‘Clearing Exemption for Certain Swaps Entered
into by Cooperatives,’’ 77 FR 41940, July 17, 2012.
13 For the purposes of this proposed rulemaking,
‘‘inter-affiliate swaps’’ refers to swaps between
‘‘affiliates,’’ as that term is defined in proposed
§ 39.6(g)(1): ‘‘[c]ounterparties to a swap * * * may
elect not to clear a swap with an affiliate if one
party directly or indirectly holds a majority
ownership interest in the other, or if a third party
directly or indirectly holds a majority interest in
both, based on holding a majority of the equity
securities of an entity, or the right to receive upon
dissolution, or the contribution of, a majority of the
capital of a partnership.’’ See infra pt. II.B.1 for
further discussion.
14 There does not appear to be a common
definition of a ‘‘treasury affiliate’’ or a ‘‘conduit
affiliate.’’ For purposes of this proposed
rulemaking, a treasury/conduit affiliate (or
structure) is an affiliate that enters into interaffiliate swaps and enters into swaps with third
parties that are related to such inter-affiliate swaps
on a back-to-back or aggregate basis.
15 The Commission notes that comment letters to
other proposed rulemakings under Title VII of the

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Some commenters claimed that interaffiliate swaps offer significant benefits
with substantially less risk than swaps
between unaffiliated entities. They
contended that inter-affiliate swaps
enable a corporate group to aggregate its
risks on a global basis in one entity
through risk transfers between affiliates.
Commenters also described varying
structures through which corporate
groups entered into inter-affiliate swaps
and manage risks.
Prudential Financial, Inc. (‘‘PFI’’),
stated that it employs a ‘‘conduit’’
structure where separate legal entities
are commonly owned by PFI.16 Under
this structure, PFI uses one affiliate to
directly face the market as a ‘‘conduit’’
to hedge the net commercial and
financial risk of the various operating
affiliates within PFI. PFI contended that
the use of a conduit diminishes the
demands on PFI’s financial liquidity,
operational assets, and management
resources, because ‘‘affiliates within PFI
avoid having to establish independent
relationships and unique infrastructure
to face the market.’’ Moreover, PFI
explained that its conduit facilitates the
netting of its affiliates’ trades (e.g.,
where one affiliate hedges floating rates
while another hedges fixed rates). PFI
stated that this conduit structure
effectively reduces the overall risk of
PFI and its affiliates, and it allows PFI
to manage fewer outstanding positions
with external market participants.17
In a letter to Congress, the Coalition
for Derivatives End-Users (‘‘CDEU’’)
asserted that inter-affiliate swaps do not
create external counterparty exposure
and, therefore, pose none of the
systemic or other risks that the clearing
requirement is designed to protect
against.18 Thus, in CDEU’s view, the
Dodd-Frank Act are not part of the administrative
record for this rulemaking unless specifically cited
herein.
16 Prudential Financial, Inc. comment letter to the
proposed rulemaking, ‘‘Further Definition of ‘Swap
Dealer,’ ‘Security-Based Swap Dealer,’ ‘Major Swap
Participant,’ ‘Major Security-Based Swap
Participant’ and ‘Eligible Contract Participant,’ ’’ 75
FR 80147, Dec. 21, 2010.
17 J.P. Morgan commented that the most efficient
way to manage risk is often at one entity and on
a portfolio level. This way all the risk for the
corporate group resides in one entity. J.P. Morgan
maintained that this reduces market risk at each
legal entity and can reduce risk on a group level
because offsetting positions held by different
members of the group can be aggregated to mitigate
the overall risk of the portfolio. J.P. Morgan asserted
that portfolio risk management enables regulators to
more easily assess the net risk position on a group
level rather than piecing together data from separate
affiliates to reconstruct the actual risk profile of the
group. J.P. Morgan comment letter to the proposed
rulemaking, ‘‘Process for Review of Swaps for
Mandatory Clearing,’’ 75 FR 67277, Nov. 2, 2010.
18 Coalition for Derivatives End-Users comment
letter for H.R. 2682, H.R. 2779, and H.R. 2586 (Mar.
23, 2012).

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules
imposition of required clearing on interaffiliate swaps would not reduce
systemic risk. CDEU also commented
that a conduit or treasury structure is
beneficial because it centralizes trade
expertise and execution in a single or
limited number of entities. Finally,
CDEU claimed that a treasury or conduit
structure benefits affiliates because they
can enjoy their parents’ corporate credit
ratings and associated pricing benefits.
These comments suggest that swaps
entered into between corporate
affiliates, if properly risk-managed, may
be beneficial to the operation of the
corporate group as a whole. They
indicate that inter-affiliate swaps may
improve a corporate group’s risk
management internally and allow the
corporate group to use the most efficient
means to effectuate swaps with third
parties. While the Commission
recognizes these potential benefits of
inter-affiliate swaps, the Commission is
also taking into account the systemic
risk repercussions of inter-affiliate
swaps as it considers and proposes an
exemption to the CEA’s clearing
requirement applicable to those interaffiliate swaps.
II. Inter-Affiliate Clearing Exemption
Under CEA Section 4(c)(1)

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A. The Commission’s Section 4(c)(1)
Authority
Section 4(c)(1) of the CEA empowers
the Commission to ‘‘promote
responsible economic or financial
innovation and fair competition’’ by
exempting any transaction or class of
transactions, including swaps, from any
of the provisions of the CEA (subject to
exceptions not relevant here).19 In
enacting CEA section 4(c)(1), Congress
noted that the goal of the provision ‘‘is
to give the Commission a means of
providing certainty and stability to
existing and emerging markets so that
financial innovation and market
development can proceed in an effective
and competitive manner.’’ 20 Observant
19 Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1),
provides, in pertinent part, that:
In order to promote responsible economic or
financial innovation and fair competition, the
Commission by rule, regulation, or order, after
notice and opportunity for hearing, may (on its own
initiative or on application of any person * * * )
exempt any agreement, contract, or transaction (or
class thereof) that is otherwise subject to subsection
(a) of this section * * * either unconditionally or
on stated terms or conditions or for stated periods
and either retroactively or prospectively, or both,
from any of the requirements of subsection (a) of
this section, or from any other provision of this Act.
By issuing a proposed exemptive rule, the
Commission also is exercising its general
rulemaking authority under CEA section 8a(5), 7
U.S.C. 12a(5).
20 House Conf. Report No. 102–978, 1992
U.S.C.C.A.N. 3179, 3213 (‘‘4(c) Conf. Report’’).

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of that objective, the Commission has
determined preliminarily that it would
be appropriate to exempt inter-affiliate
swaps from the clearing requirement in
CEA section 2(h) under certain terms
and conditions. The proposed
exemption, however, would not extend
to swaps that affiliates entered into with
third parties.
The primary benefit of clearing is the
reduction of counterparty risk. The
Commission notes commenters’
assertions that there is less counterparty
risk associated with inter-affiliate swaps
than swaps with third parties to the
extent that affiliated counterparties
internalize each other’s counterparty
risk because they are members of the
same corporate group. This
internalization can be demonstrated by
the example of a swap entered into
between affiliates A and B that are
majority owned by the same person.21 If
affiliate A fails to perform, then affiliate
B would be harmed. However, affiliate
A also may be harmed if (1) B’s harm
adversely impacts the profits of A and
B’s corporate group 22 or (2) A’s failure
to perform drives the group into
bankruptcy, because, for instance, B has
entered into a swap with a third party
and B is unable to perform as a
consequence of A’s failure to perform.
The potential harm to A for failing to
perform is greater than the harm A
would experience if B was not a
majority-owned affiliate. Accordingly, A
internalizes B’s counterparty risk and A
has a greater economic incentive to
perform than if B were a third party.
The Commission does not believe
there is significantly reduced
counterparty risk with respect to swaps
between affiliates that are not majorityowned by the same person because
there is less economic feedback. If A is
a majority-owned affiliate and B is a
minority-owned affiliate, then any harm
that B experiences as a consequence of
A’s failure to perform is likely to have
a less adverse impact on the profits of
A’s corporate group than if B was a
majority-owned affiliate. In addition,
the Commission believes that B’s failure
to perform would be significantly less
likely to drive A’s corporate group into
bankruptcy than if B were majorityowned.
On the basis of reduced counterparty
risk, the Commission has determined
preliminarily that inter-affiliate swap
risk may not need to be mitigated

through clearing, but can be reduced
through other means. The Commission
also believes at the proposal stage that
exempting inter-affiliate swaps would
enable corporations to structure their
groups so that corporate risk is
concentrated in one entity—whether it
be at a treasury- or conduit-type
affiliate, or at the parent company.23
The Commission recognizes there may
be advantages for the corporate group
and regulators if risk is appropriately
managed and controlled on a
consolidated basis and at a single
affiliate. Based upon the comments
received, the Commission understands
that some corporate groups use this type
of structure.
The Commission, nevertheless,
believes that uncleared inter-affiliate
swaps could pose risk to corporate
groups and market participants,
generally. Uncleared inter-affiliate
swaps also may pose risk to other
market participants, and therefore the
financial system, if the treasury/conduit
affiliate enters into swaps with third
parties that are related on a back-to-back
or matched book basis with interaffiliate swaps. To continue the above
example, if A’s failure to perform (for
whatever reason) makes it impossible
for B to meet its third-party swap
obligations, then those third parties
would be harmed and risk could spread
into the marketplace. However, A’s risk
of nonperformance is less than it would
be if B were a third party to the extent
A internalizes B’s counterparty risk.
To address these concerns, the
Commission is proposing rules that
would exempt inter-affiliate swaps from
clearing if certain conditions are
satisfied. First, the proposed exemption
would be limited to swaps between
majority-owned affiliates whose
financial statements are reported on a
consolidated basis. Second, the
proposed rules would require the
following: Centralized risk management,
documentation of the swap agreement,
variation margin payments (for financial
entities), and satisfaction of reporting
requirements. In addition, the
exemption would be limited to swaps
between U.S. affiliates, and swaps
between a U.S. affiliate and a foreign
affiliate located in a jurisdiction with a
comparable and comprehensive clearing
regime or the non-United States
counterparty is otherwise required to
clear the swaps it enters into with third

21 The meaning of ‘‘majority-owned’’ is set forth
and discussed in part B1.
22 A’s corporate group is the group that contains
the person with a majority ownership interest of A.
Similarly, B’s corporate group is the group that
contains the person with a majority ownership
interest of B.

23 Treasury/conduit affiliates, for example, often
enter into swaps with third parties that hedge
aggregate inter-affiliate swap risk. The aggregation
is based on risk correlations. If those correlations
break down, then the treasury/conduit affiliate may
no longer be able to satisfy its third-party swap
obligations.

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules

parties in compliance with United
States law or does not enter into swaps
with third parties. Additionally, the
Commission notes that the proposed
exemption does not limit the
applicability of any CEA provision or
Commission regulation to any person or
transaction except as provided in the
proposed rulemaking. These conditions
will be discussed in further detail
below.
Request for Comments
Q1. The Commission requests
comment on whether it should exercise
its authority under CEA section 4(c).
Q2. Do inter-affiliate swaps pose risk
to the corporate group? If so, what risk
is posed? In particular, do inter-affiliate
swaps pose less risk to a corporate
group than swaps with third parties? If
so, why is that the case?
Q3. Do inter-affiliate swaps pose risk
to the third parties that have entered
into swaps that are related to the interaffiliate swaps? If so, what risk is posed?
Q4. Would the proposed exemption
promote responsible economic or
financial innovation and fair
competition?
Q5. Would the proposed exemption
promote the public interest?
Q6. Inter-affiliate swaps that do not
meet the conditions to the proposed
exemption would be subject to the
clearing requirement under CEA section
2(h)(1)(A) and, potentially, the trade
execution requirement under CEA
section 2(h)(8) as well. What would be
the costs and benefits of imposing the
trade execution requirement on these
inter-affiliate swaps? Should the
Commission exempt some or all interaffiliate swaps from the trade execution
requirement regardless of whether the
conditions to the proposed inter-affiliate
clearing exemption are met?
B. Proposed Regulations

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1. Proposed § 39.6(g)(1): Definition of
Affiliate Relationship
Under proposed § 39.6(g)(1), the interaffiliate clearing exemption would only
be available for swaps between majorityowned affiliates. As explained above,
the Commission believes there is
reduced counterparty risk with respect
to such swaps. Under the proposed rule,
affiliates would be majority-owned if
one affiliate directly or indirectly holds
a majority ownership interest in the
other affiliate, or if a third party directly
or indirectly holds a majority ownership
interest in both affiliates and the
financial statements of both affiliates are
reported on a consolidated basis. A
majority-ownership interest would be
based on holding a majority of the

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equity securities of an entity, or the
right to receive upon dissolution, or the
contribution of, a majority of the capital
of a partnership.24
The Commission is not proposing to
extend the exemption to affiliates that
are related on a minority-owned basis.
As explained above, the Commission
does not believe there is significantly
reduced counterparty risk with respect
to swaps between such affiliates. The
Commission also believes it is important
for the proposed inter-affiliate clearing
exemption to be harmonized with
foreign jurisdictions that have or are
developing comparable clearing regimes
consistent with the 2009 G–20 Leaders’
Statement.25 For example, the European
Parliament and Council of the European
Union have adopted the European
Market Infrastructure Regulation
(‘‘EMIR’’).26 Subject to the relevant
provisions, technical standards, and
regulations under EMIR, certain
derivatives transactions between parent
and subsidiary entities, could be exempt
from its general clearing requirement.

Q9. Should the Commission consider
an 80% ownership threshold based on
section 1504 of the Internal Revenue
Code, which establishes an 80% voting
and value test for an affiliate group.27 In
light of the potential benefits from
centralized risk management in an
affiliated group, would an 80%
threshold sufficiently reduce overall
risk to financial system

Request for Comments
Q7. The Commission requests
comments on all aspects of the
Commission’s proposed requirement
that the inter-affiliate clearing
exemption be available to majorityowned affiliates.
Q8a. Should the Commission consider
requiring a percentage of ownership
greater than majority ownership to
qualify for the inter-affiliate clearing
exemption?
Q8b. If so, what percentage should be
used and what are the benefits and
burdens of such ownership
requirements?
Q8b. Should the Commission require
a 100% ownership threshold for the
inter-affiliate clearing exemption?
Would a 100% ownership threshold
reduce counterparty risk and protect
minority owners better than the
proposed threshold. Are there other
means to lessen risk to minority owners,
such as consent?

Request for Comments
Q10. Would this requirement create
any operational issues?

24 The affiliate status required by proposed
§ 39.6(g)(1) to elect the proposed exemption is
based on and functionally equivalent to the
definition of majority-owned affiliates in recently
adopted CFTC regulation 1.3(ggg)(6)(i).
25 In 2009, the G20 Leaders declared that, ‘‘[a]ll
standardized OTC derivative contracts should be
traded on exchanges or electronic trading platforms,
where appropriate, and cleared through central
counterparties by end-2012 at the latest.’’ G20
Leaders’ Final Statement at Pittsburgh Summit:
Framework for Strong, Sustainable and Balanced
Growth (Sept. 29, 2009).
26 See Regulation (EU) No 648/2012 of the
European Parliament and of the Council on OTC
Derivatives, Central Counterparties and Trade
Repositories, 2012 O.J. (L 201) available at http://
eur-lex.europa.eu/LexUriServ/LexUriServ.do?
uri=OJ:L:2012:201:0001:0059:EN:PDF.

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2. Proposed § 39.6(g)(2)(i): Both
Counterparties Must Elect the InterAffiliate Clearing Exemption
The Commission believes that
affiliates within a corporate group may
make independent determinations on
whether to submit an inter-affiliate
swap for clearing. Ostensibly, each
affiliate may reach different conclusions
regarding the appropriateness of
clearing. Given this possibility,
proposed § 39.6(g)(2)(i) would require
that both counterparties elect the
proposed inter-affiliate clearing
exemption (each, an ‘‘electing
counterparty’’).

3. Proposed § 39.6(g)(2)(ii): Swap
Documentation
The Commission understands that
affiliates may enter into swaps with
27 The Internal Revenue Service allows a business
conglomerate to file consolidated tax returns if the
parent company and its subsidiaries meet a
relationship test that is outlined in 26 U.S.C.
1504(a)(2):
(a) Affiliated group defined for purposes of this
subtitle—
(1) In general. The term ‘‘affiliated group’’
means—
(A) 1 or more chains of corporations connected
through stock ownership with a common parent
corporation which is a corporation, but only if—
(B) (i) the common parent owns directly stock
meeting the requirements of paragraph (2) in at least
1 of the other corporations, and
(ii) stock meeting the requirements of paragraph
(2) in each of the includible corporations (except
the common parent) is owned directly by 1 or more
of the other includible corporations.
(2) 80-percent voting and value test The
ownership of stock of any corporation meets the
requirements of this paragraph if it—
(A) possesses at least 80 percent of the total
voting power of the stock of such corporation, and
(B) has a value equal to at least 80 percent of the
total value of the stock of such corporation.
(3) Stock not to include certain preferred stock
For purposes of this subsection, the term ‘‘stock’’
does not include any stock which—(A) is not
entitled to vote,
(B) is limited and preferred as to dividends and
does not participate in corporate growth to any
significant extent,
(C) has redemption and liquidation rights which
do not exceed the issue price of such stock (except
for a reasonable redemption or liquidation
premium), and
(D) is not convertible into another class of stock.

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules
each other with little documentation
about the terms and conditions of the
swaps. The Commission is concerned
that without proper documentation
affiliates would be unable to effectively
track and manage risks arising from
inter-affiliate swaps or offer sufficient
proof of claim in the event of
bankruptcy. This could create
challenges and uncertainty that could
adversely affect affiliates, third party
creditors, and potentially the financial
system. The Commission also is
concerned about transparency should
there be a need for an audit or
enforcement proceeding.
Proposed § 39.6(g)(2)(iii) would
address these concerns by requiring
affiliates to enter into swaps with a
swap trading relationship document.28
The proposed rule would require the
document to be in writing and to
include all terms governing the trading
relationship between the affiliates,
including, without limitation, terms
addressing payment obligations, netting
of payments, events of default or other
termination events, calculation and
netting of obligations upon termination,
transfer of rights and obligations,
governing law, valuation, and dispute
resolution procedures.29 The
Commission believes this requirement
would not be onerous because affiliates
should be able to use a master
agreement to document most of the
terms of their inter-affiliate swaps.

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Request for Comments
Q11. The Commission requests
comment as to the burden or cost of the
proposed rule requiring documentation
of inter-affiliate swaps.
Q12. The Commission also requests
comment as to whether its risk tracking
and management and proof-of-claim
concerns could be addressed by other
means of documentation.
Q13. The Commission requests
comment as to whether the Commission
should create a specific document
template. Should the industry do so?
28 For swap dealers and major swap participants,
these issues are addressed in the swap trading
relationship documentation rules proposed by the
Commission in § 23.504. See ‘‘Swap Trading
Relationship Documentation Requirements for
Swap Dealers and Major Swap Participants,’’ 76 FR
6715, Feb. 8, 2011. The proposed rule requires that
if one or more of the parties to the swap for which
the inter-affiliate exemption is elected is a swap
dealer or major swap participant, then that party
shall comply with § 23.504 for that swap. Swap
dealers and major swap participants that comply
with that provision would also satisfy the proposed
requirements.
29 The requirements of the swap trading
relationship document are informed by proposed
CFTC regulation 23.504(b)(1). See ‘‘Swap Trading
Relationship Documentation Requirements for
Swap Dealers and Major Swap Participants,’’ 76 FR
6715, Feb. 8, 2011.

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50429

4. Proposed § 39.6(g)(2)(iii): Centralized
Risk Management

evaluation, measurement and control
procedures. * * *’’ 34

Proposed § 39.6(g)(2)(iii) would
require inter-affiliate swaps to be subject
to a centralized risk management
program reasonably designed to monitor
and manage the risks associated with
the inter-affiliate swaps. As noted in
Part I.B. above, inter-affiliate swaps may
pose risk to third parties if risks are not
properly managed. Accordingly, to
encourage prudent risk management,
the proposed inter-affiliate clearing
exemption would be conditioned on a
corporate group’s evaluation,
measurement and control of such risks.
The Commission anticipates that the
program would be implemented and run
by the parent company or the treasury/
conduit affiliate, but the rule provides
flexibility to determine how best to
satisfy this requirement.30
The Commission understands that
some groups that use inter-affiliate
swaps, particularly large financial
entities, already have a centralized risk
management program.31 Indeed, several
commenters—e.g., SIFMA and ISDA—
supported centralized risk management
and claimed that centralized risk
management for inter-affiliate swaps
‘‘would be compromised’’ by a clearing
requirement.32 CDEU also commented
that inter-affiliate swaps are beneficial
because they allow swaps with third
parties to be traded at a treasury-type
structure which contains risk
management expertise.33 Based on
comments received, the Commission
believes that the proposed rule is in line
with industry practice. Proposed
§ 39.6(g)(2)(iii) also is in harmony with
similar requirements under EMIR,
which would require under certain
circumstances for both counterparties to
intra-group transactions to be ‘‘subject
to an appropriate centrali[z]ed risk

Request for Comments
Q14. The Commission requests
comments that explain how current
centralized risk management programs
operate.
Q15. The Commission requests
comment on whether it should
promulgate additional regulations that
set forth minimum standards for a
centralized risk management program. If
so, what should those standards be? Is
there a consistent industry practice
which could be observed?
Q16. Is the proposed rule in line with
industry practice?

30 The Commission has adopted risk management
rules for swap dealers and major swap participants
in § 23.600. See ‘‘Swap Dealer and Major Swap
Participant Recordkeeping, Reporting, and Duties
Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and
Chief Compliance Officer Rules for Swap Dealers,
Major Swap Participants, and Futures Commission
Merchants,’’ 77 FR 20128, 20173–75, April 3, 2012
(final rule). The rule requires that if one or more
of the parties to the swap for which the interaffiliate exemption is elected is a swap dealer or
major swap participant, then that party shall
comply with § 23.600 for that swap. Swap dealers
and major swap participants that comply with that
provision will also satisfy the proposed
requirements.
31 See, e.g., Letter from SIFMA and ISDA
submitted to the Commission on their own
initiative (May 14, 2012).
32 Id.
33 See 3/23/23 Letter from CDEU.

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5. Proposed § 39.6(g)(2)(iv): Variation
Margin
Proposed § 39.6(g)(2)(iv) would
require that variation margin be
collected for swaps between affiliates
that are financial entities, as defined in
CEA section 2(h)(7)(C), in compliance
with the proposed variation margin
requirements set forth in proposed
§ 39.6(g)(3).35 Variation margin is an
essential risk-management tool. A welldesigned variation margin system
protects both parties to a trade. It serves
both as a check on risk-taking that might
exceed a party’s financial capacity and
as a limitation on losses when there is
a failure. Variation margin entails
marking open positions to their current
market value each day and transferring
funds between the parties to reflect any
change in value since the previous time
the positions were marked.36 This
process prevents uncollateralized
exposures from accumulating over time
and thereby reduces the size of any loss
resulting from a default should one
occur. Required margining also might
cause parties to more carefully consider
the risks involved with swaps and
manage those risks more closely over
time. The Commission believes, at this
stage, that inter-affiliate swap risk may
be mitigated through variation margin
and notes that requiring variation
margin for inter-affiliate swaps is being
discussed by international regulators
working on harmonizing regulations
governing swap clearing.
The Commission understands that a
number of financial entities currently
34 See EMIR Article 3, paragraphs 1 and 2. EMIR
identifies factors necessary to establish a
transaction as an intra-group transaction.
35 Discussed in pt. II.B.8., below.
36 Variation margin is distinguished from initial
margin, which is intended to serve as a performance
bond against potential future losses. If a party
defaults, the other party may use initial margin to
cover most or all of any loss that may result
between the time the default occurs and when the
non-defaulting party replaces the open position.

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post variation margin for their interaffiliate swaps. According to SIFMA and
ISDA, ‘‘[t]he posting of variation margin
limiting the impact of market
movements upon the respective
positions of the affiliated parties now
occurs routinely in financial groups and
its imposition on affiliates who transact
directly with affiliated swap dealers
(SDs) or major swap participants (MSPs)
should not be unduly disruptive.’’ 37
The Commission has proposed rules
requiring certain financial entities to
pay and collect variation and initial
margin for uncleared swaps entered into
with other financial entities.38
The proposed requirement would not
apply to 100% commonly-owned and
commonly-guaranteed affiliates,
provided that the common guarantor is
also under 100% common ownership.
As discussed above, the risk of an interaffiliate swap may be mitigated through
the posting of variation margin. The
Commission believes that when the
economic interests of two affiliates are
both (i) fully aligned and (ii) a common
guarantor bears the ultimate risk
associated swaps entered into with a
third party, non-affiliated counterparty,
the posting of variation margin does not
substantially mitigate the risk of an
inter-affiliate swap. This exception is
intended to apply to swaps between two
wholly-owned subsidiaries of a common
parent or in instances where one
affiliate is wholly owned by the other.
The first of the conditions required to
claim the exception to the requirement
under proposed regulation 39.6(g)(2)(iv)
to post variation margin relates to
complete common ownership. When
two affiliates are owned by the same
owner or one is wholly owned by the
other, the underlying owners are the
same and the economic interests of the
two affiliates are aligned.39 In such
circumstances, the two affiliates are
subject to the control of a common
owner or common set of owners.40
37 See,

e.g., 5/14/12 Letter from SIFMA and ISDA.
Commission does not propose that
variation margin posted in respect of inter-affiliate
swaps be required to be held in a segregated
account or be otherwise unavailable for use and
rehypothecation by the counterparty holding such
variation margin.
39 In contrast, if two affiliates do not have the
same owners, the potential exists that the two
affiliates may have differing economic interests. See
also Copperweld v. Independence Tube—467 U.S.
752 (1984) at 771 (‘‘The coordinated activity of a
parent and its wholly owned subsidiary must be
viewed as that of a single enterprise for purposes
of § 1 of the Sherman Act. A parent and its wholly
owned subsidiary have a complete unity of interest.
Their objectives are common, not disparate, and
their general corporate objectives are guided or
determined not by two separate corporate
consciousnesses, but one.’’).
40 Under such circumstances, the two affiliates
are subject to common control, in actuality or

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A person would not be able to claim
100 percent ownership for the purposes
of this provision based on a contingent
right or obligation, by contract or
otherwise, to take ownership of the
equity interest in the affiliate by
purchase or otherwise.41 Conversely,
structures in which a person owns 100
percent of the equity but has an
obligation or right, by contract or
otherwise, to give up, by sale or
otherwise, all or a portion of that equity
interest would not meet the 100 percent
ownership test. Such contingent or
residual rights evidence a less than
complete responsibility for the affiliate,
including its swap obligations, that the
100 percent ownership and guaranty
provision is intended to require. Under
such circumstances, the interests of the
owner and the affiliate are not fully
aligned. The second condition requires
the existence of a common guarantor.
When two affiliates share a common
guarantor that is under the same
common ownership, the Commission
believes that the risk created by a swap
with a non-affiliated third party is
ultimately borne by the enterprise
(which is defined by an alignment of
economic interests). To provide an
example, assume that A and B are
guaranteed wholly-owned subsidiaries
of X. B enters into a swap with nonaffiliated third party T. B then enters
into a back-to-back swap (mirroring the
risk created in the swap with T) with A
(i.e., an inter-affiliate swap). In this
scenario, the risk associated with the
swap with T is effectively borne by X
and therefore ultimately borne by the
enterprise. In such circumstances
therefore the inter-affiliate swap does
not create new risks for the enterprise,
rather, it allocates the risk from one
wholly-owned subsidiary to another.
The posting of variation margin here
would not substantially mitigate the risk
of the inter-affiliate swap because the
inter-affiliate swap itself does not create
new risks for the enterprise.
Request for Comments
Q17a. The Commission requests
comment as to whether it should
promulgate regulations that set forth
minimum standards for variation
potentially—i.e., the common owner could assert
full control when one or both affiliates cease to act
in the common owner’s best interest.
41 For example, if a financial entity established a
trust, partnership, corporation or other type of
entity, and sells the equity interests therein to
investors, but retains the right to call, repurchase,
or otherwise take control of the equity interest, or
has a contingent obligation to call, repurchase or
otherwise take control of the equity interest, such
right or obligation would not be sufficient to
constitute ownership of the affiliate for purposes of
this provision.

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margin. If so, what should those
standards be?
Q17b. The Commission requests
comment as to whether it should
promulgate regulations that set forth
minimum standards for initial margin. If
so, what should those standards be?
Q17c. The Commission requests
comment as to whether it should
promulgate regulations that set forth
minimum standards for both initial and
variation margin for inter-affiliate
swaps. If so, what should those
standards be?
Q17d. The Commission’s proposed
rule ‘‘Margin Requirements for
Uncleared Swaps for Swap Dealers and
Major Swap Participants’’—17 CFR Part
23—would require initial and variation
margin for certain swaps that are not
cleared by a registered designated
clearing organization. Should interaffiliate swaps that are not subject to the
clearing requirement of CEA section
2(h)(1)(A) be subject to the margin
requirements as set out in proposed Part
23 or otherwise?
Q18. The Commission requests
comment on the costs and benefits of
requiring variation margin for interaffiliate swaps, both in general and
specifically, regarding corporate groups
that do not currently transfer variation
margin in respect of inter-affiliate
swaps.
Q19. The Commission requests
comment on whether 100% commonlyowned affiliates sharing a common
guarantor—that is, a guarantor that is
also 100% commonly owned—should
be exempt from the requirement to
transfer variation margin. Please explain
the impact on the corporate group, if
any, if the described affiliates are
required to transfer variation margin.
Q20a. Should any other categories of
entities or corporate groups, such as
non-swap dealers and non-major swap
participants, be exempt from the
variation margin requirement for their
inter-affiliate swaps? If so, which
categories and why?
Q20b. Should the Commission limit
the variation margin requirements to
those inter-affiliate swaps for which at
least one counterparty is a swap dealer,
major swap participant, or financial
entity, as defined in paragraph (g)(6) of
the proposed rule text, that is subject to
prudential regulation?
Q21. The Commission requests
comment as to whether it should
eliminate the proposed exemption’s
variation margin condition for swaps
between 100% owned affiliates.
Q22. The Commission requests
comment as to whether it should
eliminate the proposed exemption’s

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules
variation margin condition for swaps
between 80% owned affiliates.
Q23. The Commission requests
comment on whether all types of
financial entities identified in CEA
section 2(h)(7)(C) should be subject to
the variation margin requirement.
Should entities that are part of a
commercial corporate group and are
financial entities solely because of CEA
section 2(h)(7)(C)(i)(VIII) be excluded
from such requirement? Why?

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6. Proposed § 39.6(g)(2)(v): Both
Affiliates Must Be Located in the United
States or in a Country With a
Comparable and Comprehensive
Clearing Regime or the Non-United
States Counterparty Is Otherwise
Required To Clear Swaps With Third
Parties in Compliance With United
States Law or Does Not Enter Into
Swaps With Third Parties
The Commission is proposing to limit
the inter-affiliate clearing exemption to
inter-affiliate swaps between two U.S.based affiliates or swaps where one
affiliate is located abroad in a
jurisdiction with a comparable and
comprehensive clearing regime or the
non-United States counterparty is
otherwise required to clear swaps with
third parties in compliance with United
States law or does not enter into swaps
with third parties. The limitation in
§ 39.6(g)(2)(v) is designed to address the
Commission’s concerns about risk and
to deter evasion as directed by CEA
section 2(h)(4)(A).
Under section 2(h)(4)(A), the
Commission must prescribe rules
necessary to prevent evasion of the
clearing requirement.42 The
Commission is concerned that an interaffiliate clearing exemption could
enable entities to evade the clearing
requirement through trades, for
example, with affiliates that are located
in foreign jurisdictions that do not have
a comparable and comprehensive
clearing regime. Informed in part by
certain relevant intra-group transactions
provisions under EMIR,43 proposed
§ 39.6(g)(2)(v) would require that both
affiliates be U.S. persons or one of the
affiliates is a U.S. person and the other
affiliate is domiciled in a non-U.S.
jurisdiction with a comparable and
42 See CEA section 2(h)(4)(A), 7 U.S.C. 2(h)(4)(A).
Additionally, CEA section 6(e)(4)–(5) states that any
DCO, SD, or MSP may be subject to double civil
monetary penalties should they evade the clearing
requirement, among other things. The relevant CEA
sections state, ‘‘that knowingly or recklessly evades
or participates in or facilitates an evasion of the
requirements of section 2(h) shall be liable for a
civil monetary penalty twice the amount otherwise
available for a violation of section 2(h).’’ See CEA
section 6(e)(4)–(5), 7 U.S.C. 9a(4)–(5).
43 See, generally, EMIR Articles 3, 4, 11, 13.

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comprehensive regulatory regime for
swap clearing or the non-United States
counterparty is otherwise required to
clear swaps with third parties in
compliance with United States Law or
does not enter into swaps with third
parties.44
The Commission recognizes that there
may be a legitimate reason for an interaffiliate swap where one affiliate is
located in a country that does not have
a comparable clearing regime. However,
the Commission believes that financial
markets may be at risk if the foreign
affiliate enters into a related third-party
swap that would be subject to clearing
were it entered into in the United States,
but is not cleared. On balance, the
Commission believes that the risk of
evasion and the systemic risk associated
with uncleared swaps necessitates that
the exemption be limited to swaps
between affiliates located in the United
States or in foreign countries with
comparable clearing regimes or the nonUnited States counterparty is otherwise
required to clear swaps with third
parties in compliance with United
States law or does not enter into swaps
with third parties.
Request for Comments
Q24a. The Commission requests
comment on proposed § 39.6(g)(2)(v). Is
the proposed condition that both
affiliates must be located in the United
States or in a country with a comparable
and comprehensive clearing jurisdiction
or the non-United States counterparty is
otherwise required to clear swaps with
third parties or does not enter into
swaps with third parties a necessary and
appropriate means of reducing risk and
evasion concerns related to interaffiliate swaps? If not, how should these
concerns be addressed?
Q24b. Should the Commission limit
the inter-affiliate clearing exemption to
foreign affiliates that only enter into
inter-affiliate swaps if such foreign
affiliates are not located in a jurisdiction
with a comparable and comprehensive
clearing requirement or are otherwise
required to clear swaps with third
parties in compliance with United
States?
Q24c. Should the Commission limit
the inter-affiliate clearing exemption to
foreign affiliates that enter into swaps
with third parties on an occasional basis
44 For example, a counterparty located in a
country that does not have a comparable clearing
regime may be required to clear swaps with third
parties in compliance with United States law if it
meets the definition of a ‘‘conduit’’ as described in
the Commission’s proposed interpretive guidance
and policy statement entitled, ‘‘Cross-Border
Application of Certain Swaps Provisions of the
Commodity Exchange Act,’’ 77 FR 41214, July 12,
2012.

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50431

if such foreign affiliates are not located
in a jurisdiction with a comparable and
comprehensive clearing requirement or
are otherwise required to clear swaps
with third parties in compliance with
United States. What would constitute an
occasional basis? For example, would
once a year be an appropriate time
frame?
Q25. The Commission requests
comment on (1) the prevalence of crossborder inter-affiliate swaps and the
mechanics of moving swap-related risks
between U.S. and non-U.S. affiliates for
risk management and other purposes
(including an identification of such
purposes); (2) the risk implications of
cross-border inter-affiliate swaps for the
U.S. markets; and (3) specific means to
address the risk issues potentially
presented by cross-border inter-affiliate
swaps.
Q26. The Commission recently
adopted anti-evasion provisions relating
to cross-border swap activities in its
new rule 1.6.45 To what extent are the
risk issues potentially presented by
cross-border inter-affiliate swaps
addressed by the anti-evasion
provisions in rule 1.6?
Q27. The Commission also is
considering an alternative condition to
address evasion. That condition would
require non-U.S. affiliates to clear all
swap transactions with non-U.S.
persons, provided that such transactions
are related to inter-affiliate swaps which
would be subject to a clearing
requirement if entered into by two U.S.
persons.46 Should the Commission
adopt such a condition? Would such a
condition help enable the Commission
to ensure that the proposed interaffiliate clearing exemption is not
abused or used to evade the clearing
requirement? Are there any other means
to prevent evasion of the clearing
requirement or abuse of the proposed
inter-affiliate clearing exemption that
the Commission should adopt?
7. Proposed § 39.6(g)(2)(vi): Notification
to the Commission
As explained in more detail below,
the Commission has preliminarily
determined that it must receive certain
45 Rule 1.6 was included in the Commission’s
‘‘Product Definitions’’ rulemaking, which was
adopted jointly with the SEC. See ‘‘Further
Definition of ‘Swap,’ ‘Security-Based Swap,’ and
‘Security-Based Swap Agreement;’ Mixed Swaps;
Security-Based Swap Agreement Recordkeeping,’’
77 FR 39626 (July 23, 2012).
46 The Commission has proposed separately
interpretative guidance on certain entity-level and
transaction-level requirements imposed by Title VII
of Dodd-Frank for cross-border swaps. See Proposed
Interpretive Guidance and Policy Statement
entitled, ‘‘Cross-Border Application of Certain
Swaps Provisions of the Commodity Exchange
Act,’’ 77 FR 41214 (July 12, 2012).

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information to effectively regulate interaffiliate swaps. Proposed § 39.6(g)(2)(vi)
would require one of the counterparties
to an inter-affiliate swap to comply with
the reporting requirements set forth in
§ 39.6(g)(4.).
8. Proposed § 39.6(g)(3): Variation
Margin Requirements
Proposed § 39.6(g)(3) would set forth
the requirements for transferring
variation margin. Proposed
§ 39.6(g)(3)(i) would require that if both
counterparties to the swap are financial
entities, each counterparty shall pay and
collect variation margin for each interaffiliate swap for which the proposed
exemption is elected. Proposed
§ 39.6(g)(3)(ii) would require that the
swap trading relationship document set
forth and describe the methodology to
be used to calculate variation margin
with sufficient specificity to allow the
counterparties, the Commission, and
any appropriate prudential regulator to
calculate the margin requirement
independently. The Commission
believes that the proposed rule would
help ensure that affiliates have a written
methodology. The proposed rule also
would allow affiliates to manage their
risks more effectively throughout the
life of the swap and to avoid disputes
regarding issues such as valuation.47

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9. Proposed § 39.6(g)(4): Reporting
Requirements
Pursuant to CEA section 4r,48
uncleared swaps must be reported to a
Swap Data Repository (‘‘SDR’’), or to the
Commission if no repository will accept
such information, by one of the
counterparties (the ‘‘reporting
counterparty’’).49 In addition to any
general reporting requirements
applicable under other applicable rules
to a particular type of entity that is an
affiliate or to the inter-affiliate swap,
proposed § 39.6(g)(4) would implement
reporting requirements specifically for
uncleared inter-affiliate swaps.50
Proposed § 39.6(g)(4)(i) would require
the reporting counterparty to affirm that
47 For further discussion on the concept of
variation margin for uncleared swaps, see proposed
rulemaking, ‘‘Margin Requirements for Uncleared
Swaps for Swap Dealers and Major Swap
Participants,’’ 76 FR 27621, Feb. 12, 2011.
48 CEA section 4r; 7 U.S.C. 6r.
49 See CEA sections 2(a)(13) (reporting of swaps
to SDRs) and 4r (reporting alternatives for uncleared
swaps); 7 U.S.C. 2(a)(13) and 7 U.S.C. 6r.
50 See ‘‘Swap Data Recordkeeping and Reporting
Requirements,’’ 77 FR 2136, Jan. 13, 2012 (‘‘Swap
Data Recordkeeping and Reporting’’). Regulation
45.11 contemplates that this information may be
delivered to the Commission directly in limited
circumstances when a SDR is not available. 77 FR
at 2168. When permitted, such delivery would also
meet the proposed inter-affiliate clearing exemption
reporting requirement.

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both counterparties to the inter-affiliate
swap are electing not to clear the swap
and that both counterparties meet the
requirements in proposed § 39.6(g)(1)–
(2). Besides alerting the Commission of
the election, the information would help
ensure that each counterparty is aware
of, and satisfies the definitions and
conditions set forth in proposed
§ 39.6(g)(1)–(2).
Proposed § 39.6(g)(4)(ii)–(iii) would
require the reporting counterparty to
provide certain information, unless such
information had been provided in a
current annual filing pursuant to
proposed § 39.6(g)(5). Proposed
§ 39.6(g)(4)(ii) would require the
reporting counterparty to submit
information regarding how the financial
obligations of both counterparties are
generally satisfied with respect to
uncleared swaps. The information is
valuable because it would provide the
Commission a more complete view of
the risk characteristics of uncleared
swaps. The information also would
enhance the Commission’s efforts to
identify and reduce potential systemic
risk.
Proposed § 39.6(g)(4)(iii) would
implement CEA section 2(j) for purposes
of the inter-affiliate exemption.51 That
CEA section places a prerequisite on
issuers of securities registered under
section 12 of the Securities Exchange
Act of 1934 (‘‘Exchange Act’’) 52 or
required to file reports under Exchange
Act section 15(g) 53 (‘‘electing SEC
Filer’’) that elect exemptions from the
CEA’s clearing requirement under
section 2(h)(1)(A). CEA section 2(j)
requires that an appropriate committee
of the electing SEC Filer’s board or
governing body review and approve its
decision to enter into swaps subject to
the clearing exemption.
Proposed § 39.6(g)(4)(iii)(A) would
require an electing SEC Filer to notify
the Commission of its SEC Filer status
by submitting its SEC Central Index Key
number. This information would enable
the Commission to cross-reference
materials filed with the relevant SDR
with information in periodic reports and
51 7

U.S.C. 2(j), in pertinent part:
Exemptions from the requirements of subsection
(h)(1) to clear a swap and subsection (h)(8) to
execute a swap through a board of trade or swap
execution facility shall be available to a
counterparty that is an issuer of securities that are
registered under section 12 of the Securities
Exchange Act of 1934 (15 U.S.C. 78l) or that is
required to file reports pursuant to section 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78o)
only if an appropriate committee of the issuer’s
board or governing body has reviewed and
approved its decision to enter into swaps that are
subject to such exemptions.
52 15 U.S.C. 78l.
53 15 U.S.C. 78o.

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other materials filed by the electing SEC
Filer with the U.S. Securities and
Exchange Commission (‘‘SEC’’). In
addition, proposed § 39.6(g)(4)(iii)(B)
would require the counterparty to report
whether an appropriate committee of its
board of directors (or equivalent
governing body) has reviewed and
approved the decision to enter into the
inter-affiliate swaps that are exempt
from clearing.54 If both affiliates/
counterparties are electing SEC Filers,
both counterparties would have to
report the additional information in
proposed § 39.6(g)(4)(iii).
Finally, proposed § 39.16(g)(5) would
permit counterparties to provide the
information listed in proposed (g)(4)(ii)–
(iii) on an annual basis in anticipation
of electing the inter-affiliate clearing
exemption for one or more swaps. Any
such reporting under this paragraph
would be effective for inter-affiliate
swaps entered into within 365 days
following the date of such reporting.
During the 365-day period, the affiliate
would be required to amend the
information as necessary to reflect any
material changes to the reported
information. In addition, the
Commission anticipates that for most
corporate groups, affiliates would
submit identical annual reports.
Request for Comments
Q28. The Commission requests
comment on whether affiliates would
submit identical annual reports for most
corporate groups.
Q29a. The Commission requests
comment as to whether reporting
counterparties that would not report to
an SDR should be subject to swap-byswap reporting requirements? Should
the Commission allow such entities to
report all information on an annual
basis? Please provide any information as
to the number of reporting
counterparties that would be affected by
such a rule change.
Q29b. The Commission requests
comment as to whether different sized
entities should be subject to the
proposed reporting requirements or the
reporting requirements for affiliates that
elect the end-user exception, as
applicable. If different sized entities
should not be subject to such reporting
requirements, please explain why.
Alternatively, should the Commission
54 For example, a board resolution or an
amendment to a board committee’s charter could
expressly authorize such committee to review and
approve decisions of the electing person not to clear
the swap being reported. In turn, such board
committee could adopt policies and procedures to
review and approve decisions not to clear swaps,
on a periodic basis or subject to other conditions
determined to be satisfactory to the board
committee.

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules
allow phased compliance for different
sized entities?
III. Consideration of Costs and Benefits
A. Introduction
Section 15(a) of the CEA 55 requires
the Commission to consider the costs
and benefits of its actions before
promulgating a regulation under the
CEA or issuing certain orders. Section
15(a) further specifies that the costs and
benefits shall be evaluated in light of
five broad areas of market and public
concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
Commission considers the costs and
benefits resulting from its discretionary
determinations with respect to the
Section 15(a) factors.
Prior to the passage of the Dodd-Frank
Act, swaps were not required to be
cleared. In the wake of the financial
crisis of 2008, Congress adopted the
Dodd-Frank Act, which, among other
things, amends the CEA to impose a
clearing requirement for swaps.56 This
clearing requirement is designed to
reduce counterparty risk associated with
swaps and, in turn, mitigate the
potential systemic impact of such risk
and reduce the risk that such swaps
could cause or exacerbate instability in
the financial system.57 In amending the
CEA, however, the Dodd-Frank Act
preserved the Commission’s authority to
‘‘promote responsible economic or
financial innovation and fair
competition’’ by exempting any
transaction or class of transactions,
including swaps, from select provisions
of the CEA.58 For reasons explained
above,59 the Commission proposes to
exercise its authority under CEA section
55 7

U.S.C. 19(a).
Section 2(h)(1) of the CEA, 7 U.S.C. 2(h)(1).
57 When a bilateral swap is moved into clearing,
the clearinghouse becomes the counterparty to each
of the original participants in the swap. This
standardizes counterparty risk for the original swap
participants in that they each bear the same risk
attributable to facing the clearinghouse as
counterparty. In addition, clearing mitigates
counterparty risk to the extent that the
clearinghouse is a more creditworthy counterparty
relative to those that each participant in the trade
might have otherwise faced. Clearinghouses have
demonstrated resilience in the face of past market
stress. Most recently, they remained financially
sound and effectively settled positions in the midst
of turbulent events in 2007–2008 that threatened
the financial health and stability of many other
types of entities.
58 Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1). CEA
section 4(c)(1) is discussed in greater detail above
in part II.A.
59 See pt.II.A.

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56 See

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4(c)(1) to exempt inter-affiliate swaps—
that is, swaps between majority-owned
affiliates—from the Section 2(h)(1)(A)
clearing requirement.
In the discussion that follows, the
Commission considers the costs and
benefits of the proposed inter-affiliate
exemption to the public and market
participants generally. The Commission
also separately considers the costs and
benefits of the conditions placed on
affiliates that would elect the proposed
exemption: (1) Swap trading
relationship documentation, which
would require affiliates to document in
writing all terms governing the trading
relationship; (2) centralized risk
management and variation-margin
requirements, which would require
affiliates to subject the swap to
centralized risk management and to post
variation margin; and (3) reporting
requirements, which would require
counterparties to advise an SDR, or the
Commission if no SDR is available, that
both counterparties elect the interaffiliate clearing exemption and to
identify the types of collateral used to
meet financial obligations. In addition
to the foregoing reporting requirements,
counterparties that are issuers of
securities registered under Section 12 of
the Securities Exchange Act of 1934 or
those that are required to file reports
under Section 15(d) of that Act, would
be required to identify the SEC central
index key number and confirm that an
appropriate committee of board of
directors has approved of the affiliates’
decision not to clear a swap. The rule
also would permit affiliates to report
certain information on an annual basis,
rather than swap-by-swap.
Finally, the inter-affiliate clearing
exemption would require one of the
following four conditions be satisfied
for each affiliate: The affiliate is located
in the United States; the affiliate is
located in a jurisdiction with a
comparable and comprehensive clearing
requirement; the affiliate is required to
clear all swaps it enters into with nonaffiliated counterparties; or the affiliate
does not enter into swaps with nonaffiliated counterparties.
B. Proposed Baseline
The Commission’s proposed baseline
for consideration of the costs and
benefits of this proposed exemption are
the costs and benefits that the public
and market participants (including
potentially eligible affiliates) would
experience in the absence of this
regulatory action. In other words, the
proposed baseline is an alternative
situation in which the Commission
takes no action, meaning that
potentially eligible affiliates would be

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50433

required to comply with the clearing
requirement. More specifically, under
the CEA, as amended by the Dodd-Frank
Act, and Commission regulations
(finalized or future) inter-affiliate swaps
will be subject to a clearing requirement
and, depending on whether the affiliate
is an SD, MSP, or eligible contract
participant, a variety of record-keeping
and reporting requirements. In such a
scenario, the public and market
participants, including corporate
affiliates transacting swaps with each
other, would experience the costs and
benefits related to clearing and
complying with Commission regulations
under parts 23, 45, and 46.60 The
proposed exemption would alter these
costs and benefits. For example, among
other things, the public and market
participants would not experience the
full benefits related to clearing or
satisfying all the requirements under
parts 23, 45, and 46. At the same time,
affiliates electing the exemption would
likely incur lower costs for two reasons.
First, the cost of variation margin is
significantly less than the cost of
clearing.61 Second, the costs of
satisfying the reporting requirements
under the proposed exemption would
be less than the costs associated with
satisfying all of the requirements under
parts 23, 45, and 46.
The Commission also considers the
regulatory landscape as it existed before
the Dodd-Frank Act’s enactment.
Entities that transacted inter-affiliate
swaps within a corporate group were
neither subject to a clearing requirement
nor compelled to comply with
regulatory requirements, including
requirements to record and report interaffiliate swaps. Thus, measured against
a pre-Dodd-Frank Act reference point,
affiliates that avail themselves of the
proposed exemption would experience
incremental costs and benefits
occasioned by compliance with the
conditions for exercising the proposed
exemption.
60 See, e.g., costs and benefits discussion in the
following rulemakings: ‘‘Swap Dealer and Major
Swap Participant Recordkeeping, Reporting, and
Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and
Chief Compliance Officer Rules for Swap Dealers,
Major Swap Participants, and Futures Commission
Merchants,’’ 77 FR 20128, 20194, Apr. 3, 2012;
‘‘Business Conduct Standards for Swap Dealers and
Major Swap Participants with Counterparties,’’ 77
FR 9803, 9804, Feb. 17, 2012; ‘‘Swap Data Record
Keeping and Reporting Requirements,’’ 77 FR 2136,
2171, Jan. 13, 2012; ‘‘Opting Out of Segregation,’’
66 FR 20740, 20743, Apr. 25, 2001; ‘‘Swap Data
Recordingkeeping and Reporting Requirements:
Pre-Enactment and Transition Swaps,’’ 77 FR
35200, Jun. 12, 2012.
61 The cost of clearing includes posting initial and
variation margin.

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules

In the discussion that follows, where
reasonably feasible, the Commission
endeavors to estimate quantifiable
dollar costs. The benefits of the
proposed exemption, as well as certain
costs, however, are not presently
susceptible to meaningful
quantification. Where it is unable to
quantify, the Commission discusses
proposed costs and benefits in
qualitative terms.

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C. Costs
1. To Market Participants and the Public
As discussed above, inter-affiliate
swaps—though possessing a lesser
degree of counterparty risk than swaps
transacted between non-affiliated
counterparties—are not risk-free. As
evidenced in the 2008 financial crisis,
counterparty swap risk, transmitted
systemically, can exact a heavy cost on
market participants as well as the
public. Thus, unconditionally
exempting inter-affiliate swaps from the
clearing requirement would come with
a cost of increased risk that clearing is
intended to contain. This includes the
risk that the failure of one party to
perform under the terms of a swap
transaction would cause the
counterparty to be unable to perform
under the terms of swaps it had entered
into with other counterparties, thereby
causing a cascading series of nonperformance throughout the financial
system. Clearing both reduces this risk
of non-performance and promotes
confidence throughout the financial
system that the failure of one firm will
not lead to a systemic crisis, thereby
lessening the chance of such a crisis or
the need for the federal government to
intervene to prevent any such failures.
Accordingly, the Commission does not
propose an unconditional, blanket
exemption. Rather, the Commission
proposes an exemption with conditions
carefully tailored to offset the narrower,
counterparty-risk profile that interaffiliate swaps present relative to all
swaps generally. Based on the
expectation that for the subset of interaffiliate swaps covered by this proposed
exemption these conditions are capable
of closely approximating the risk
protections that clearing provides to
swaps more generally, the Commission
foresees no significant additional risk
cost from the proposed exemption.
2. To Potentially Eligible Entities
The proposed rule is exemptive and
would provide potentially eligible
affiliates with relief from the clearing
requirement and attendant Commission
regulations. As with any exemptive rule
or order, the proposed rule is

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permissive, meaning that potentially
eligible affiliates are not required to
elect it. Accordingly, the Commission
assumes that an entity would rely on the
proposed exemption only if the
anticipated benefits warrant the costs.
Here, the proposed inter-affiliate
clearing exemption identifies three
categories of conditions that an eligible
affiliate must satisfy to elect the
proposed exemption: documentation,
risk management, and reporting. The
Commission believes that a person
would have to incur costs to satisfy
these conditions. The Commission also
believes that an affiliate would elect the
exemption only if these costs are less
than the costs that an affiliate would
incur should it decide not to elect the
exemption.
Regarding the documentation
condition, the Commission believes that
affiliates electing the exemption (other
than SDs/MSPs satisfying the swap
documentation condition and riskmanagement conditions by satisfying
the requirements of regulations 23.504
and 23.600, respectively) would likely
incur costs to develop a standardized
document to comply with the proposed
§ 39.6(g)(2)(ii) requirement that all terms
governing the trading relationship be in
writing.62 The Commission estimates
that affiliates could pay a law firm for
up to 30 hours of work at $495 per hour
to modify an ISDA master agreement,
resulting in a one-time cost of $15,000,
and there may be additional costs
related to revising documentation to
address a particular swap. All salaries in
these calculations are taken from the
2011 SIFMA Report on Management
and Professional Earnings in the
Securities Industry. Annual wages were
converted to hourly wages assuming
1,800 work hours per year and then
multiplying by 5.35 to account for
bonuses, firm size, employee benefits
and overhead. Unless otherwise stated,
the remaining wage calculations used in
this proposed rule also are derived from
this source and modified in the same
manner. The Commission, however, is
unable to estimate such costs with
greater specificity because it is unable to
estimate the frequency of, and costs
associated with modifying a swap
agreement.
Affiliates also would incur costs
related to signing swap documents and
retaining copies. The Commission
believes that affiliates would incur less
62 For a discussion of the costs and benefits
incurred by swap dealers and major swap
participants that must satisfy requirements under
§ 23.504, see ‘‘Swap Trading Relationship
Documentation Requirements for Swap Dealers and
Major Swap Participants,’’ 76 FR 6715, 6724–25,
Feb. 8, 2011 (proposed rule).

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than $1,000 per year for such activities.
The Commission notes, however, that
these estimates may overstate the actual
costs because it expects that affiliates
within a corporate group would be able
to share legal-drafting and recordretention costs, as well as labor costs.
The second category of conditions
concerns risk management. Affiliates
electing the proposed exemption would
have to subject inter-affiliate swaps to
centralized risk management, which
would include variation margin.63 To
meet the centralized-risk-management
condition under § 39.16(g)(2)(iii), some
affiliates may have to create a risk
management system.64 To do so,
affiliates would have to purchase
equipment and software to adequately
evaluate and measure inter-affiliate
swap risk. The Commission believes
that such costs could be possibly as high
as $150,000. For example, these costs
might include purchasing a computer
network at approximately $20,000;
purchasing personal computers and
monitors for 15 staff members at
approximately $30,000; purchasing
software at approximately $20,000;
purchasing other office equipment, such
as printers, at approximately $5,000.
The total would amount to $75,000.
There also might be installation and
unexpected costs that could increase
up-front costs to approximately
$150,000. In addition to these start-up
costs, there could be ongoing costs. The
Commission estimates that centralized
risk management could require up to ten
full-time staff at an average salary of
$150,000 per year.65 Finally, a data
subscription for price and other market
data may have to be purchased at cost
of up to $100,000 per year.
Proposed § 39.6(g)(2)(iv) would
require counterparties to post variation
margin in compliance with proposed
§ 39.6(g)(3)’s documentation and other
63 For a discussion of the costs and benefits
incurred by swap dealers and major swap
participants that must satisfy requirements under
§ 23.600, see ‘‘Swap Dealer and Major Swap
Participant Recordkeeping, Reporting, and Duties
Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and
Chief Compliance Officer Rules for Swap Dealers,
Major Swap Participants, and Futures Commission
Merchants,’’ 77 FR 20128, 20173–75, April 3, 2012
(final rule).
64 As pointed out above, industry commenters
underscored the fact that many corporate groups
that currently use inter-affiliate swaps have
centralized-risk-management procedures in place.
65 This average annual salary is based on 15
senior credit risk analysts only. The Commission
appreciates that an affiliate would likely choose to
employ different positions as well, such as risk
management specialists at $130,000 per year, and
computer supervisors at $140,000. But for the
purposes of this estimate, the Commission has
assumed salaries at the high end for risk
management professionals.

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules
requirements. The Commission believes
that companies may have to hire
attorneys and financial analysts to
develop and document the variation
margin methodology to comply with
this rule, resulting in a one-time cost of
$29,000 per entity electing the proposed
exemption. This estimate assumes up to
100 hours of financial analyst time at an
average cost of $208 per hour, and up
to 20 hours of compliance attorney time
at an average cost of $390 per hour.
The Commission also believes that
affiliates would incur certain costs to
comply with the proposed
§ 39.16(g)(2)(iv) condition to post
variation margin. The Commission
anticipates that affiliates would have to
hire up to three people at an average
salary of $150,000 per year to estimate
the price of inter-affiliate swaps and to
manage variation margin payments
between affiliates. In addition, the
Commission expects that companies
would have to purchase equipment and
software to estimate the price of interaffiliate swaps and to subscribe to a data
service. However, the Commission
anticipates that such costs also would
be incurred to satisfy the centralized
risk management condition in proposed
§ 39.6(g)(2)(iii). Finally, affiliates would
have to incur the opportunity costs
associated with posting collateral to
cover variation margin.66
The third category of conditions
involves reporting requirements.
Proposed § 39.6(g)(4) would require
affiliates to report specific information
to an SDR or to the Commission if no
SDR would accept such information.
Proposed § 39.16(g)(4)(i) would require
notice reporting on a swap-by-swap
basis that two affiliates are electing the
exemption and that they both meet the
requirements in proposed § 39.6(g)(1)–
(2). The Commission believes that each
counterparty may spend 15 seconds to
two minutes per swap entering a notice
of election of the exemption into the
reporting system. The hourly wage for a
compliance attorney is $390, resulting
in a per transaction cost of $1.63-$13.00.
Affiliates would incur costs to satisfy
the conditions that the reporting party
(1) identify how the affiliates expect to
meet the financial obligations associated
with their uncleared swap as required
under proposed § 39.6(g)(4)(ii), and (2)
provide the information required under
proposed § 39.6(g)(4)(iii) if either
electing affiliate is an SEC Filer.
Affiliates may decide to report this
information on either a swap-by-swap or
66 The opportunity cost of posting collateral is the
highest return an affiliate would have earned by
investing that collateral instead of using it to cover
variation margin under similar conditions.

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annual basis, and the costs would vary
depending on the reporting frequency.
Regarding the financial information in
proposed § 39.6(g)(4)(ii)-(iii), the
Commission believes that it may take
the reporting counterparty up to 10
minutes to collect and submit the
information for the first transaction, and
one to five minutes to collect and
submit the information for subsequent
transactions with that same
counterparty. The hourly wage for a
compliance attorney is $390 resulting in
a cost of $65.00 for complying with
proposed § 39.6(g)(4)(ii)–(iii) for the first
inter-affiliate swap, and a cost range of
$6.50–$32.50 for complying with
proposed § 39.6(g)(4)(ii)–(iii) for
subsequent inter-affiliate swaps.
The Commission anticipates that
companies electing not to clear would
have established reporting systems to
comply with other Commission rules
regarding swap reporting. However, all
reporting counterparties likely would
need to modify their reporting systems
to accommodate the additional data
fields required by this rule. The
Commission estimates that those
modifications would create a one-time
programming expense of approximately
one to ten burden hours per affiliate.
The Commission estimates that the
hourly wage for a senior programmer is
$341, which means that the one-time,
per entity cost for modifying reporting
systems would likely be between $341
and $3,410.
An affiliate that does not function as
the reporting counterparty may need to
communicate information to the
reporting counterparty after the swap is
entered. That information could
include, among other things, whether
the affiliate has filed an annual report
pursuant to proposed § 39.6(g)(5) and
information to facilitate any due
diligence that the reporting counterparty
may conduct. These costs would likely
vary substantially depending on how
frequently the affiliate enters into
swaps, whether the affiliate undertakes
an annual filing, and the due diligence
that the reporting counterparty chooses
to conduct. The Commission estimates
that a non-reporting affiliate would
incur annually between five minutes
and ten hours of compliance attorney
time to communicate information to the
reporting counterparty. The hourly wage
for a compliance attorney is $390,
translating to an aggregate annual cost
for communicating information to the
reporting counterparty of between $33
to $3,900.
The Commission expects a proportion
of affiliates would choose to file an
annual report pursuant to proposed
§ 39.6(g)(5). The annual filing option

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50435

may be less costly than swap-by-swap
reporting. The Commission estimates
that it would take an average of 30 to 90
minutes to complete and submit this
filing. The average hourly wage for a
compliance attorney is $390, translating
to an aggregate annual cost for
submitting the annual report of between
$195 to $585.
The Commission anticipates that
SDRs and the Commission also would
bear costs associated with the proposed
reporting conditions. SDRs would be
required to add or edit reporting data
fields to accommodate information
reported by affiliates electing the interaffiliate clearing exemption.67 Similarly,
the Commission would need to create a
reporting system for affiliates electing
the exemption should there be no
available SDR.
Finally, the rule would impose a
limitation on those affiliates electing the
inter-affiliate clearing exemption.
Namely, the inter-affiliate clearing
exemption would require one of the
following four conditions be satisfied
for each affiliate: the affiliate is located
in the United States; the affiliate is
located in a jurisdiction with a
comparable and comprehensive clearing
requirement; the affiliate is required to
clear all swaps it enters into with nonaffiliated counterparties; or the affiliate
does not enter into swaps with nonaffiliated counterparties. This limitation
would impose no additional cost over
not providing the exemption. However,
as compared to the state of regulation
that existed pre-Dodd-Frank Act, this
condition would impose the costs of
clearing for those inter-affiliate swaps
that occur in countries without a
clearing regime comparable to the
United States.
D. Benefits
The CEA does not require the
Commission to issue an exemption to
the clearing requirement for interaffiliate swaps. Section 4(c)(1) of the
CEA, however, provides the
Commission with authority to exempt
certain entities and types of transactions
from CEA obligations. The statutory
section requires that the Commission
consider two objectives when it decides
to issue an exemption: (1) The
promotion of responsible economic or
financial innovation, and (2) the
promotion of fair competition.
The Commission believes there are
benefits to exempting swaps between
certain affiliated entities. For example,
67 See generally, ‘‘Swap Data Recordkeeping and
Reporting Requirements,’’ 77 FR 2137 at 2176–
2193, Jan. 13, 2012 (for costs and benefits incurred
by SDRs).

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as explained above,68 a number of
commenters stated that clearing swaps
through treasury or conduit affiliates
enables entities to more efficiently and
effectively manage corporate risk.
The Commission also is considering
the previously-discussed comments that
an exemption is appropriate because
inter-affiliate swaps pose reduced
counterparty risk relative to swaps with
third parties.69 The Commission
remarks that this proposition is more
likely to hold true provided that the
terms and conditions of the swaps are
the same. The Commission believes that
inter-affiliate swap risk may be
appropriately managed, in lieu of
clearing, through the proposed
conditions that affiliates would be
required to satisfy to elect the proposed
exemption. It has considered the
benefits of each of these conditions. The
Commission believes that the first
category—documentation of the swap
trading relationship between affiliates—
would benefit affiliates and the overall
financial system. Specifically, the
Commission believes that requiring
documentation of inter-affiliate swaps
in a swap confirmation would help
ensure that affiliates have proof of claim
in the event of bankruptcy. As
explained earlier, insufficient proof of
claim could create challenges and
uncertainty at bankruptcy that could
adversely affect affiliates and third party
creditors. Also, though not a
documentation condition, the proposed
exemption would require that the
affiliates would be able to elect this
exemption for their inter-affiliate swaps
if one of the following four conditions
is satisfied for each affiliate: The
affiliate is located in the United States;
the affiliate is located in a jurisdiction
with a comparable and comprehensive
clearing requirement; the affiliate is
required to clear all swaps it enters into
with non-affiliate counterparties; or the
affiliate does not enter into swaps with
non-affiliate counterparties. This
limitation should help mitigate systemic
risk attributable to affiliates who,
subsequent to conducting inter-affiliate
swaps, transact uncleared, market-facing
(i.e., not inter-affiliate) swaps in a
jurisdiction without a clearing regime
comparable to the United States.
The Commission recognizes that there
may be a legitimate reason for interaffiliate swaps where one affiliate is
located in a country that does not have
a comparable clearing regime or the
non-United States counterparty is
68 See pt. I.B. for in-depth discussion of relevant
comments regarding inter-affiliate swaps and the
advantages of such treasury or conduit structures.
69 See pt. II.A.

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otherwise required to clear swaps with
third parties. However, the Commission
believes that the corporate group and
financial markets may be at risk if the
foreign affiliate is free to enter into a
related, uncleared swap with a third
party that would be subject to clearing
were it entered into in the United States.
On balance, the Commission believes
that the risk associated with uncleared
swaps necessitates that the proposed
exemption be limited to swaps between
affiliates located in the United States or
in foreign countries with comparable
clearing regimes or the non-United
States counterparty is otherwise
required to clear swaps with third
parties or the affiliates do not enter into
swaps with third parties.
Centralized-risk management and
variation margin are also beneficial
conditions. The requirement that an
inter-affiliate swap be subject to
centralized-risk management is
beneficial because it is intimately
connected to the variation-margin
condition. Centralized-risk management
establishes appropriate measurements
and procedures so that affiliates can
mitigate the amount being concentrated
in a single treasury or conduit-type
affiliate. Moreover, the Commission
believes that proper risk management
benefits the public by reducing risk and
the losses related to defaults.
The requirement that affiliates post
variation margin should protect both
parties to a trade by ensuring that each
party to the swap has the financial
wherewithal to meet the obligations of
the swap. Variation margin also would
serve as a resource that could reduce
losses to a counterparty when there is a
default. Overall, the variation-margin
condition would benefit each affiliate
and the financial system, at large, by
increasing the security of affiliate
positions.
The final category of conditions,
reporting certain information about
inter-affiliate swaps, should enhance the
level of transparency associated with
inter-affiliate swaps activity, afford the
Commission new insights into the
practices of affiliates that engage in
inter-affiliate swaps, and help the
Commission and other appropriate
regulators identify emerging or potential
risks. In short, the overall benefit of
reporting would be a greater body of
information for the Commission to
analyze with the goal of identifying and
reducing systemic risk.
E. Costs and Benefits as Compared to
Alternatives
The Commission considered several
alternatives to the proposed rulemaking.
For instance, the Commission could

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have: (1) Chosen not to propose an interaffiliate clearing exemption; (2)
proposed an alternative definition of
affiliate; or (3) decided not to place
certain conditions on those electing the
inter-affiliate clearing exemption. The
Commission, however, has proposed
what it considers a measured
approach—in terms of the implicated
costs and benefits of the exemption—
given its current understanding of interaffiliate swaps.
First, the Commission considered not
exempting inter-affiliate swaps from the
clearing requirement. Without an
exemption, inter-affiliate swaps subject
to a clearing requirement would have to
be cleared. This alternative was not
favored by the Commission because the
Commission believes that there are
considerable benefits of exempting
inter-affiliate swaps from clearing to the
market, as discussed in detail above. In
addition, while the Commission does
not believe inter-affiliate swaps are
riskless, the Commission is considering
comments that inter-affiliate swaps pose
less risk than swaps with third parties
because of reduced counterparty risk
and therefore risk-reducing conditions
may be a satisfactory alternative to
clearing for these swaps. Commenters in
other rulemakings as discussed above
recognized implicitly risk concerns by
sharing that some corporate groups
manage inter-affiliate risk via
centralized risk management programs
that include variation-margin
calculations. Consequently, it would not
be prudent to exempt inter-affiliate
swaps categorically from the CEA’s
clearing requirement without conditions
that address inter-affiliate swap risk.
Second, the Commission also
considered ownership requirements of
greater than, and lesser than majority
ownership.70 Increasing the ownership
requirement would reduce the number
of affiliates that could benefit from the
exemption.71 At the same time, a higher
ownership threshold for affiliates could
help protect minority owners and
reduce counterparty risk and risk to
third parties who have entered into
swaps that are related to inter-affiliate
swaps.
Nevertheless, the Commission
believes that any benefit from an
ownership requirement of greater than
majority ownership, in the form of
reduced counterparty risk, would not be
70 See pt. II.B.1 for further discussion and other
requests for comment on this issue.
71 In the Paperwork Reduction Act, the
Commission points out that it does not possess
sufficient information to estimate the number of
affiliates, even majority-owned, that might avail
themselves of the proposed inter-affiliate clearing
exemption.

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substantial due to the risk mitigation
conditions such as centralized risk
management programs that are being
proposed with majority ownership. The
Commission welcomes comments as to
the costs and benefits of an increased
ownership requirement.
Similarly, the Commission considered
an ownership requirement of less than
majority ownership. While a reduction
in the ownership requirement would
allow more affiliates to benefit from the
exemption, it would also considerably
increase the counterparty risk in the
market. The Commission welcomes
comments as to the costs and benefits of
a decreased ownership requirement.
Finally, the Commission considered
not requiring each condition—i.e., swap
trading relationship documentation;
centralized risk management that
includes variation margin; or reporting.
In other words, the Commission could
have proposed an inter-affiliate clearing
exemption with fewer or no conditions.
Because there is no indication at this
stage that inter-affiliate swaps are
riskless, the Commission proposed
conditions. The Commission’s views on
the costs and benefits of each condition
are discussed above. The Commission
invites comments as to the costs and
benefit of each condition.

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F. Consideration of CEA Section 15(a)
Factors
1. Protection of Market Participants and
the Public
In deciding to propose the interaffiliate clearing exemption, the
Commission assessed how to protect
affiliated entities, third parties in the
swaps market, and the public. The
Commission sought to ensure that in the
absence of a clearing requirement the
risks presented by uncleared interaffiliate swaps would be minimized
should there be significant losses to one
affiliate counterparty or a default of one
of the affiliate counterparties. Toward
that end, the Commission proposed that
affiliates eligible to elect the proposed
exemption must execute swap trading
relationship documentation; post
variation margin as part of a centralizedrisk management process; and report
specific information to an SDR, or to the
Commission if no SDR would accept the
information. As explained in this costbenefit section, these conditions serve
multiple objectives that ultimately
protect market participants and the
public.
For instance, the documentation
requirement would reduce uncertainties
where affiliates incur significant swapsrelated losses or where there is a
defaulting affiliate. Because the

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documentation would be in writing, the
Commission expects that there would be
less contractual ambiguity should
disagreements between affiliates arise.
The proposed condition that an interaffiliate swap be subject to a centralized
risk management program reasonably
designed to monitor and manage risk
would help mitigate the risks associated
with inter-affiliate swaps. As noted
throughout this proposed rulemaking,
inter-affiliate swap risk could adversely
impact third parties who enter into
swaps that are related to an interaffiliate swap. In addition, if interaffiliate swap risk is not carefully
monitored, there could be greater
probability that an adverse financial
event could lead to bankruptcy, which
could harm market participants and the
public overall. Similarly, the proposed
condition that affiliated counterparties
post variation margin should help to
prevent unrealized losses from
accumulating over time and thereby
reduce both the chance of default and
the size of any default should one occur.
In turn, this should lessen the
likelihood and extent of harm to third
parties that enter into swaps that are
related to inter-affiliate swaps.
The proposed reporting obligations
would help the Commission monitor
compliance with the proposed interaffiliate clearing exemption. For
example, an affiliate that also is an SEC
Filer must receive a governing board’s
approval for electing the proposed
exemption. It cannot act independently.
In the Commission’s opinion, the
reporting conditions promote
accountability and transparency,
offering another public safeguard by
keeping the Commission informed.
2. Efficiency, Competitiveness, and
Financial Integrity of Futures Markets
Exempting swaps between majorityowned affiliates within a corporate
group from the clearing requirement
would promote efficiency by reducing
overall clearing costs for eligible
counterparties. The Commission is also
considering comments that the
proposed exemption would increase the
efficiency and financial integrity of
markets because it would enable
corporate groups to clear swaps through
their treasury or conduit affiliates. As
explained above,72 commenters in other
rulemakings have stated that clearing
swaps through treasury or conduit
affiliates enables affiliates and corporate
72 See pt. I.B. for in-depth discussion of relevant
comments regarding inter-affiliate swaps and the
advantages of such treasury or conduit structures.

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50437

groups to more efficiently and
effectively manage corporate risk.
Certain provisions of the proposed
rule, such as the requirements that interaffiliate swaps be subject to centralized
risk management, that affiliates post
variation margin, and that certain
information be reported, also would
discourage abuse of the exemption.
Together, these conditions would
promote the financial integrity of swap
markets and financial markets as a
whole.
3. Price Discovery
Under Commission regulation 43.2, a
‘‘publicly reportable swap transaction,’’
means, among other things, ‘‘any
executed swap that is an arm’s length
transaction between two parties that
results in a corresponding change in the
market risk position between the two
parties.’’ 73 The Commission does not
consider non-arms-length swaps as
contributing to price discovery in the
markets.74 Given that inter-affiliate
swaps as defined in this proposed
rulemaking are generally not arm’s
length transactions, the Commission
does not anticipate the proposed interaffiliate clearing exemption would have
any effect on price discovery.75
4. Sound Risk Management Practices
As a general rule, the Commission
believes that clearing swaps is a sound
risk management practice. But, in
proposing the inter-affiliate clearing
exemption, the Commission has
assessed the risks of inter-affiliate
swaps, and proposes that it can impose
alternative, sound risk-management
practices for these particular swaps in
the form of conditions. In other words,
a prudent use of the Commission’s
exemptive authority would include
proposing an exemption that requires
affiliates to manage risks
appropriately.76 In this case, the specific
73 17 CFR 43.2. See also ‘‘Real-Time Public
Reporting of Swap Transaction Data,’’ 77 FR 1182,
Jan. 9, 2012 (Real-Time Reporting).
74 Transactions that fall outside the definition of
‘‘publicly reportable swap transaction’’—that is,
they are not arms-length—‘‘do not serve the price
discovery objective of CEA section 2(a)(13)(B).’’
Real-Time Reporting, 77 FR at 1195. See also Id. at
1187 (discussion entitled ‘‘Swaps Between
Affiliates and Portfolio Compression Exercises’’).
75 The definition of ‘‘publicly reportable swap
transaction’’ identifies two examples of transactions
that fall outside definition, including ‘‘internal
swaps between one-hundred percent owned
subsidiaries of the same parent entity.’’ 17 CFR 43.2
(adopted by Real-Time Reporting, 77 FR at 1244).
The Commission remarks that the list of examples
is not exhaustive.
76 Furthermore, CEA section 8a(5) states that ‘‘in
the judgment of the Commission,’’ it is authorized
to make and promulgate rules ‘‘necessary to

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risk-management conditions include:
documentation of swap terms;
establishment of centralized risk
management, and the posting of
variation margin. The Commission also
believes that SEC Filer reporting is a
prudent practice. As detailed in this
preamble and the proposed rule text,77
SEC Filers are affiliates that meet certain
SEC-related qualifications, and their
governing boards or equivalent bodies
are directly responsible to shareholders
for the financial condition and
performance of the affiliate. The boards
also have access to information that
would give them a comprehensive
picture of the company’s financial
condition and risk management
strategies. Therefore, any oversight they
provide to the affiliate’s risk
management strategies would likely
encourage sound risk management
practices. In addition, the condition that
affiliates electing the inter-affiliate
clearing exemption must report their
boards’ knowledge of the election is a
sound risk management practice.

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5. Other Public Interest Considerations
The Commission believes that the
proposed exemptive rulemaking would
reduce the costs of transacting swaps
between majority-owned affiliates. At
the same time, the proposed rulemaking
would foster the financial integrity of
swap markets by mandating that certain
conditions be satisfied by affiliates
electing the inter-affiliate clearing
exemption. The Commission believes
that the financial savings by affiliates,
and, ultimately, corporate groups would
serve public-interest considerations. For
example, affiliates and corporate groups
could use the cost-savings to provide
new services or products for the public.
They could also pass-on some or all of
the cost-savings through prices they
charge the public for their services and
products.
G. Request for Public Comment on Costs
and Benefits
Q30. The Commission invites public
comment on its cost-benefit
considerations, including the
consideration of reasonable alternatives.
Q31. If the Commission were to
propose a clearing exemption limited to
100% owned affiliates, what costs and
benefits would affect market
participants and the public?
Q32. If the Commission were to
propose a clearing exemption with an
ownership requirement of greater or less
than majority ownership what costs and
effectuate any’’ CEA provisions or to accomplish
any CEA purpose. 7 U.S.C. 12a(5).
77 See pt. II.B.9 and proposed § 39.6(g)(4)(iii).

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benefits would affect market
participants and the public?
Q33. If the Commission were to issue
a proposed clearing exemption limited
to those affiliates that file consolidated
tax returns, what costs and benefits
would affect market participants and the
public?
Q34. Do inter-affiliate swaps affect
price discovery? To what extent would
the inter-affiliate clearing exemption
affect price discovery?
Q35. Besides variation margin, is
there a less costly risk-management tool
that would serve the same riskmanagement objectives as variation
margin?
Q36. Besides affiliates, SDRs, and the
Commission, are there any other entities
that might bear a direct cost as a result
of the proposed inter-affiliate clearing
exemption? If so, who and to what
extent?
Q37. Commenters are invited to
submit any data or other information
that they may have quantifying or
qualifying the costs and benefits of the
proposal with their comment letters.
Q38. Commenters are invited to
submit any data or other information
that they may have quantifying or
qualifying start-up and on-going costs
and benefits associated with
establishing a centralized risk
management program.
IV. Administrative Compliance
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that agencies consider
whether the proposed rules will have a
significant economic impact on a
substantial number of small entities
and, if so, provide a regulatory
flexibility analysis respecting the
impact.
Consistent with other Commission
rulemakings, the proposed rules will not
have a significant economic impact on
a substantial number of small entities.
The proposed rules would affect the
electing and reporting parties, which
could be SDs, MSPs, and Eligible
Contract Participants (‘‘ECPs’’). The
Commission has certified previously
that neither category involves small
entities for purposes of the RFA in other
Commission rulemakings, including
those implementing requirements of the
Dodd-Frank Act.78 The Commission is
78 For SDs and MSPs, see, e.g., ‘‘Swap Dealer and
Major Swap Participant Recordkeeping, Reporting,
and Duties Rules; Futures Commission Merchant
and Introducing Broker Conflicts of Interest Rules;
and Chief Compliance Officer Rules for Swap
Dealers, Major Swap Participants, and Futures
Commission Merchants,’’ 77 FR 20128, 20194, Apr.
3, 2012 (SDs and MSPs); ‘‘Business Conduct
Standards for Swap Dealers and Major Swap

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making a similar determination for
purposes of this proposal. Accordingly,
the Chairman, on behalf of the
Commission, hereby certifies, pursuant
to 5 U.S.C. 605(b), that the proposed
rules will not have a significant
economic impact on a substantial
number of small entities with respect to
SDs, MSPs, and ECPs.
The proposed rules also would affect
SDRs, which the Commission has
similarly determined not to be small
entities for purposes of the RFA.79 The
Commission is making the same
determination with respect to the
proposed rules. Accordingly, the
Chairman, on behalf of the Commission,
hereby certifies, pursuant to 5 U.S.C.
605(b), that the proposed regulation
would not have a significant economic
impact on a substantial number of small
entities with respect to SDRs.
Request for Comments
Q39. The Commission invites
comments on the impact of this
proposed regulation on small entities.
B. Paperwork Reduction Act
1. Overview
The Paperwork Reduction Act
(‘‘PRA’’) 80 imposes certain
requirements on Federal agencies in
connection with their conducting or
sponsoring any collection of
information as defined by the PRA. An
agency may not conduct or sponsor, and
a person is not required to respond to,
a collection of information unless it
displays a currently valid control
number issued by the Office of
Management and Budget (‘‘OMB’’).
Certain provisions of proposed § 39.6(g)
would result in new collection of
information requirements within the
meaning of the PRA. These new
reporting requirements are not currently
covered by any existing OMB control
number and OMB has not yet assigned
a control number for this new
collection. The Commission therefore is
submitting this proposal to the OMB for
review in accordance with 44 U.S.C.
3507(g) and 5 CFR 1320.11.
Participants with Counterparties,’’ 77 FR 9803,
9804, Feb. 17, 2012 (SDs and MSPs); ‘‘Policy
Statement and Establishment of Definitions of
‘Small Entities’ for Purposes of the Regulatory
Flexibility Act,’’ 47 FR 18618, Apr. 30, 1982
(MSPs). For ECPs, see, e.g., ‘‘Commodity Options,’’
77 FR 25320, 25334, Apr. 27, 2012; ‘‘Swap Data
Record Keeping and Reporting Requirements,’’ 77
FR 2136, 2171, Jan. 13, 2012; ‘‘Opting Out of
Segregation,’’ 66 FR 20740, 20743, Apr. 25, 2001.
79 See Swap Data Repositories, 75 FR 80898,
80926, Dec. 23, 2010; Registration of Swap Dealers
and Major Swap Participants, 75 FR 71379, 71385,
Nov. 23, 2010.
80 44 U.S.C. 3501 et seq.

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The title for this collection of
information is ‘‘Rule 39.6(g) Affiliate
Transaction Uncleared Swap
Notification.’’ If adopted, responses to
this collection of information would be
mandatory. The Commission will
protect proprietary information
according to the Freedom of Information
Act and 17 CFR part 145, ‘‘Commission
Records and Information.’’ In addition,
section 8(a)(1) of the CEA strictly
prohibits the Commission, unless
specifically authorized by the CEA, from
making public ‘‘data and information
that would separately disclose the
business transactions or market
positions of any person and trade
secrets or names of customers.’’ The
Commission is also required to protect
certain information contained in a
government system of records according
to the Privacy Act of 1974, 5 U.S.C.
552a.
2. Information Provided by Reporting
Entities
Proposed § 39.6(g) would set forth
certain reporting conditions that must
be satisfied for affiliates to elect the
inter-affiliate clearing exemption. As
described above, these conditions are
designed to address Commission
concerns regarding inter-affiliate swap
risk and to provide the Commission
with information necessary to regulate
swaps markets. In particular, the
reporting conditions in proposed
§ 39.6(g)(4) and the optional annual
report set forth in proposed § 39.6(g)(5)
would establish new collection of
information requirements within the
meaning of the PRA. Additionally,
affiliates may be required to update
their reporting systems for purposes of
complying with the proposed reporting
requirement, and non-reporting
affiliates electing the proposed
exemption may incur costs in
transmitting information to their
reporting counterparties.
The Commission has estimated the
time burden required for entities to
comply with the proposed
requirements.81 The Commission has
estimated quantifiable costs, including
one-time and annual costs per affiliate
and costs that are incurred on a swapby-swap basis. The dollar estimates are
offered as ranges with upper and lower
bounds, which is necessary to
accommodate uncertainty regarding the
estimates. The Commission notes that
the most likely outcome with respect to
each estimate is the average cost. With
that in mind, the Commission has
included tables that provide the average
81 See 5 CFR 1320.3(b) for the definition of the
term ‘‘burden.’’

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burden hour and average cost for each
of the PRA requirements in the
proposed exemption.
The total cost of the inter-affiliate
clearing exemption would depend on
the number of affiliates electing the
proposed exemption, as well as the
number of inter-affiliate swaps for
which affiliates would elect to use the
proposed exemption. To identify the
number of affiliates that could elect the
proposed exemption, the Commission is
relying upon the most recent data
collected by the U.S. Bureau of
Economic Analysis (‘‘BEA’’).82 The BEA
has determined that there are 2,347 U.S.
multinational parent companies
(‘‘MNCs’’),83 and 25,424 foreign
subsidiaries that are majority-owned by
such MNCs.84 Because the BEA does not
provide the number of majority-owned
U.S. subsidiaries, the Commission has
decided to double BEA’s foreignsubsidiary total to identify the number
of potential U.S. subsidiaries that might
elect the proposed inter-affiliate clearing
exemption. The result is that there are
an estimated 50,848 U.S. and foreign
subsidiaries [25,424 × 2], or
approximately 22 subsidiaries per MNC
[50,848 ÷ 2,347], that is, 11 U.S.
subsidiaries and 11 foreign subsidiaries.
This total number of U.S. and foreign
subsidiaries combined with the total
U.S. parent companies equals 53,195
[2,347 + 50,848] affiliates that might
elect the inter-affiliate clearing
exemption.
To obtain information on the average
number of inter-affiliate swaps, the
Commission surveyed five
corporations.85 Two corporations were
large financial companies and the other
three were manufacturing companies.
82 The BEA’s Web site is located at http://
www.bea.gov/. BEA’s most recent data on the
number of U.S. parent companies of multinational
corporations and their affiliates is listed in the
‘‘U.S. Direct Investment Abroad: Preliminary
Results from the 2009 Benchmark Survey,’’ located
at http://www.bea.gov/international/
usdia2009p.htm.
83 See Table I.A 2., ‘‘Selected Data for Foreign
Affiliates and U.S. Parents in All Industries,’’
located at http://www.bea.gov/international/pdf/
usdia_2009p/Group%20I%20tables.pdf . The BEA
defines a U.S. Parent of an MNC as a person that
is a resident in the United States and owns or
controls 10 percent or more of the voting securities,
or the equivalent, of a foreign business enterprise.
A Guide to BEA Statistics on U.S. Multinational
Companies, located at http://www.bea.gov/scb/pdf/
internat/usinvest/1995/0395iid.pdf.
84 See Table II.A 1., ‘‘Selected Data for Foreign
Affiliates in All Countries in Which Investment
Was Reported,’’ located at http://www.bea.gov/
international/pdf/usdia_2009p/
Group%20II%20tables.pdf. The BEA limited
foreign affiliates to those with total assets, sales, or
net income of more than $25 million.
85 The Commission is unable to provide
additional information regarding the survey because
information was submitted on a confidential basis.

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Recognizing that most MNCs are
manufacturers as opposed to financial
companies, the Commission decided to
take a weighted average of the sample
and assumed that 95% of MNCs are
manufacturers and 5% are financial
companies. Based on this weighted
average, the Commission estimates that
affiliates enter into 2,230 inter-affiliate
swaps annually on average.86
Using the figures above, namely 2,347
MNCs with 22 subsidiaries each and
each affiliate transacting an average of
2,230 swaps, the Commission has
estimated that there are approximately
64,768,399 inter-affiliate swaps entered
into annually. To make this calculation,
the Commission assumed that all U.S.
inter-affiliate swaps and most foreign
inter-affiliate swaps are with a single
U.S. treasury/conduit affiliate. The
Commission also assumed that 75% of
treasury/conduit affiliates would be
subsidiaries and would therefore be
subject to this rulemaking. The
remaining 25% of treasury/conduit
affiliates would be the parent MNC and
would not be the subject of this
rulemaking because in general such
swaps would qualify for the end-user
exception.87 Finally, the Commission
assumed that 50% of the inter-affiliate
swaps entered into by foreign affiliates
would be entered into with a U.S.
treasury/conduit affiliate while the
remaining swaps would be entered into
with foreign affiliates and would not be
86 Due to the small sample size and data
inconsistencies, this estimate may not provide a
complete representation of the affiliate corporate
structure or inter-affiliate swaps. For instance,
responses were not consistent in format (quarterly
figures versus six-month or annual figures) and also
provided data for different time periods in 2010 or
2011. To generate its estimates, the Commission
had to extrapolate this data by assuming that the
amount of inter-affiliate swaps transacted during
one quarter would be the same for the remaining
three quarters of the year, or that inter-affiliate swap
data from 2010 and 2011 are comparable and can
be combined for averaging purposes. The
Commission also notes that responses regarding the
number of inter-affiliate swap transactions varied
widely and a much larger sample size would be
required to generate a more accurate estimate. The
Commission requests comment on the typical
annual inter-affiliate swap activity within corporate
groups and the total number of affiliates that would
potentially elect the proposed inter-affiliate clearing
exemption.
87 As noted above, the Commission assumes that
95% of MNCs are commercial entities and 5% are
financial companies. Based on these numbers, the
Commission believes that most of the swaps
between affiliates are likely to qualify for the enduser exception because in most cases one of the
affiliates will be a manufacturer and the interaffiliate swap will hedge or mitigate the commercial
risk of that affiliate. The Commission, however,
does not have information as to how many interaffiliate swaps would qualify for the end-user
exception. Accordingly, the Commission has taken
a conservative approach and assumed that none of
the inter-affiliate swaps would qualify for the enduser exception.

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules

subject to this rulemaking. Table A
summarizes the Commission’s estimates
of the number of MNCs, subsidiaries,

affiliates, and annual inter-affiliate
swaps.

TABLE A—MNC, AFFILIATE, AND INTER-AFFILIATE SWAP ESTIMATES
Number of MNCs ...........................................................................................................................................................................
Number of Subsidiaries per MNC .................................................................................................................................................
Total Number of Subsidiaries ........................................................................................................................................................
Total Number of Affiliates Potentially Electing the Proposed Exemption .....................................................................................
Estimated Number of MNCs Subject to Proposed Reporting Requirements ...............................................................................
Estimated Number of Reporting MNCs that Would File Annual Reports 89 .................................................................................
Average Annual Number of Inter-Affiliate Swaps per Affiliate ......................................................................................................
Total Annual Number of Inter-Affiliate Swaps 90 ...........................................................................................................................

Request for Comments
Q40. As discussed above, the
Commission does not have information
as to how many inter-affiliate swaps
would qualify for the end-user
exception. The Commission invites
comments on whether most interaffiliate swaps would qualify for the
end-user exception because one of the
affiliates is a commercial entity and the
swap hedges or mitigates the
commercial risk of that affiliate. The
Commission also requests any
information that would help to quantify
the number of inter-affiliate swaps or
the share of inter-affiliate swaps that
would qualify for the end-user
exception.
a. Proposed § 39.6(g)(4) Reporting
Requirements
Proposed § 39.6(g)(4) would require
electing entities that are reporting
counterparties to notify the Commission

each time the inter-affiliate clearing
exemption is elected by delivering
specified information to a registered
SDR or, if no registered SDR is available,
the Commission. Except as noted below,
the notification would occur only once
at the beginning of the swap life cycle.
The reporting counterparty would
have to report the information required
in proposed § 39.6(g)(4)(i) for each
swap. It would also have to report the
information required in proposed
§§ 39.6(g)(4)(ii)–(iii) for each swap if no
annual report had been filed. To comply
with proposed § 39.6(g)(4)(i), each
reporting counterparty would be
required to check one box indicating
that both counterparties to the swap are
electing not to clear the swap. The
Commission expects that each reporting
counterparty would likely spend 15
seconds to two minutes per transaction
entering this information into the
reporting system. Regarding the
proposed §§ 39.6(g)(4)(ii)–(iii)

2,347
22 88
50,848
53,195
[50,848 + 2,347]
1,760
[2,347 × 75%]
1,584
[1,760 × 90%]
2,230
64,768,399

information, the Commission expects
that it would take the reporting
counterparty up to 10 minutes to collect
and submit the information for the first
transaction and one to five minutes to
collect and submit the information for
subsequent transactions with that same
counterparty. The Commission expects
a compliance attorney may be
responsible for the collection at $390
per hour, resulting in the following per
transaction costs to reporting
counterparties: A range of $1.63–$13.00
for proposed § 39.6(g)(4)(i); a cost of
$65.00 for complying with proposed
§§ 39.6(g)(4)(ii)–(iii) for the first interaffiliate swap; and range of $6.50–
$32.50 for complying with proposed
§§ 39.6(g)(4)(ii)–(iii) for subsequent
inter-affiliate swaps with the same
counterparty. Table B summarizes the
estimated average burden hours and
costs per reporting entity under
proposed § 39.6(g)(4), as follows:

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TABLE B—BURDEN AND COST ESTIMATES OF PROPOSED § 39.6(g)(4)
Proposed regulation/requirement description

Average burden hours per
transaction

Average cost
per transaction

Total average annual burden
hours

Total average annual cost

§ 39.6(g)(4)(i) ..........................

0.019 hours (1.14 minutes) ...

$7.41

1,230,600 [64,768,399 × .019]

First Transaction: 0.17 hours
(10 minutes).

65.00

648 [(50,848 × 75% × 10% ×
0.17]

$479,933,837 [64,768,399 ×
$7.41] 91
$247,884 [(50,848 × 75%) ×
10% × $65] 93

§§ 39.6(g)(4)(ii)–(iii) (costs incurred if no annual report
filed under § 39.6(g)(5) 92).

Subsequent Transactions:
0.05 hours (3 minutes).

19.50

323,651 [(64,768,399 ¥
50,848 × 75%) × 10% ×
.05]

$126,224,013 [(64,768,399 ¥
50,848 × 75%) × 10% ×
$19.50]94

88 Eleven of the 22 affiliates are assumed to be
U.S. affiliates.
89 The Commission assumed that at least 90% of
MNCs would elect to file annual reports, see further
discussion below.
90 The Total Annual Number of Inter-Affiliate
Swaps is the total number of inter-affiliate swaps
that MNCs, U.S. subsidiaries, and foreign
subsidiaries entered into that would be subject to
this rule. The total number of inter-affiliate swaps

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that MNC’s entered into that would be subject to
this rule is the number of MNCs (2,347) times the
number of swaps per MNC (2,230) times 75%, or
0.75 × 2,347 × 2,230. The total number of interaffiliate swaps that U.S. subsidiaries entered into
that would be subject to this rule is 10 × (0.75 ×
2,230 × 2,347). There are 11 U.S. subsidiaries per
MNC and each subsidiary enters into as many as
swaps as each MNC, on average. However, 1 of the
U.S. subsidiaries is the treasury/conduit affiliate
and it enters into swaps with every other affiliate,

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including foreign affiliates. To avoid double
counting, that subsidiary is removed from the
equation and the number of U.S. subsidiaries is 10.
Finally, the total number of inter-affiliate swaps
that foreign subsidiaries entered into that would be
subject to this rule is 0.5 × (11 × 0.75 × 2,230 ×
2,347). Each foreign subsidiary enters into as many
swaps as each U.S. subsidiary, but only 50% of
foreign subsidiary swaps would be subject to this
rule.

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules
b. Other Costs
i. Updating Reporting Procedures
The Commission believes that
companies subject to this rule would
have established reporting systems to
comply with other Commission rules
regarding swap reporting. However,
reporting counterparties may need to
modify their reporting systems in order
to accommodate the additional data
fields required by this rule. The
Commission estimates that those
modifications would create a one-time
expense of approximately one to ten
burden hours per reporting
counterparty. The Commission
estimates that the hourly wage for a
senior programmer is $341, which
means that the one-time, per entity cost
for modifying reporting systems to
comply with proposed § 39.6(g)(4)
would likely be between $341 and
$3,410.
ii. Burden on Non-Reporting Affiliates
An affiliate who does not function as
the reporting counterparty may need to

communicate information to the
reporting counterparty after the swap is
entered. That information could
include, among other things,
information to facilitate any due
diligence that the reporting counterparty
may conduct. These costs would likely
vary substantially depending on how
frequently the affiliate enters into swaps
and the due diligence that the reporting
counterparty chooses to conduct. The
Commission estimates that a nonreporting affiliate would incur a burden
of between five minutes and ten hours
annually. The hourly wage for a
compliance attorney is $390, which
means that the aggregate annual cost for
an electing counterparty communicating
information to the reporting
counterparty would likely be between
$33 and $3,900.
iii. Annual Reporting Under Proposed
§ 39.6(g)(5)
The Commission expects at least 90%
of MNCs would choose to file an annual
report pursuant to proposed § 39.6(g)(5).
This assumption is based on feedback in

comment letters submitted in response
to other proposed rulemakings, in
which commenters proposed an annual
reporting requirement in lieu of swapby-swap reporting. Additionally, the
Commission believes that there is an
economic incentive for corporate groups
to file an annual report because filing
annually is less costly and operationally
simpler than swap-by-swap reporting.
The Commission estimates that it would
take an average of 30 minutes to 90
minutes to complete and submit this
filing, resulting in 0.5 to 1.5 burden
hours per MNC that elects to file the
annual report. The average hourly wage
for a compliance attorney is $390,
which means that the aggregate annual
cost for submitting the annual report
would likely be approximately $195 to
$585. Table C summarizes the estimated
average burden hours and costs for
modifying the reporting system, for nonreporting affiliates to communicate
information to the reporting
counterparty after the swap is entered
into, and for providing the annual report
under proposed § 39.6(g)(5), as follows:

TABLE C—OTHER BURDENS AND COSTS TO REPORTING AND NON-REPORTING AFFILIATES
Average burden hours per
affiliate

Modifying Reporting System
(One-time cost).95
Burden on Non-Reporting Affiliates.
§ 39.6(g)(5) Annual Report .....

5.5 hours ................................

$1,875.50

5.04 hours ..............................

1,966.25

1 hour .....................................

390.00

Total average
annual burden
hours

192,205 [5.04 × 38,136]
1,584 [(1,760 × 90%) × 1] 98

The Commission estimates that the
proposed exemption could result in an
average total annual burden of 1,758,369
hours and average total annual costs of
$685,309,281.99 The burden and cost
estimates are approximately 1.8 minutes
and $10.48 per inter-affiliate swap.
Table D provides the total burden hours
and costs of the proposed exemption

Total ..................

91 To derive the annual burden hours and cost for
this row, the Commission calculated the following:
the average burden hours or cost per transaction
times total number of inter-affiliate swaps annually.
92 The Commission assumes that at least 90% of
corporations would elect to file an annual report to
supply the information required by proposed
§ 39.6(g)(4)(ii)–(iii) rather than report the
information on a swap-by-swap basis; 10% of
affiliates would report the required information on
a swap-by-swap basis.
93 To derive the annual burden hours and cost for
this row, the Commission calculated the following:
(A) The total number of subsidiaries (see Table A)
times 75% to determine the number of affiliates
involved in a first transaction subject to reporting;

(B) then multiplied that number—38,136—with
10% to determine the number of affiliates that
would report swap-by-swap, i.e., 3,813.6, and (C)
then multiplied that number by 0.16667, to obtain
the average burden hours to report, or $65, to obtain
the average cost to report.
94 To derive the annual burden hours and cost for
this row, the Commission calculated following: (A)
The total number of subsequent transactions, which
is the total number of transactions (64,768,399)
minus the total number of first time transactions
(0.75 × 50,848); (B) then multiplied that number—
64,730,263—by 10% to determine the number of
affiliates that would report swap-by-swap, i.e.,
6,473,26.3, and (C) then multiplied that number by

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Total average
annual cost

9,680 [5.5 × 1,760]

and breaks down the totals into burden
hours and costs per MNC, per affiliate,
and per inter-affiliate swap.

c. Total Burden Hours

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Average
cost per
affiliate

Proposed regulation/requirement description

$3,300,880 [$1,875.50 ×
1,760] 96
$74,984,910 [$1,966.25 ×
38,136] 97
$617,760 [$390 × 1,760 *
90%]

TABLE D—AVERAGE ANNUAL BURDEN
AND COST ESTIMATES OF THE PROPOSED EXEMPTION—Continued

TABLE D—AVERAGE ANNUAL BURDEN
AND COST ESTIMATES OF THE PROPOSED EXEMPTION
Burden
hours

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1,758,369

Fmt 4702

Sfmt 4702

Cost of
proposed
exemption

Burden
hours
Total Average
Annual per
MNC 100 .........

999

Cost of
proposed
exemption

389,380

685,309,281
0.05, to obtain the average burden hours to report,
or $19.50, to obtain the average cost to report.
95 The Commission assumes that there is only one
reporting counterparty at each MNC.
96 1,760 represents the 75% of 2,347 MNCs that
the Commission estimates would be reporting
parties.
97 38,136 represents 75% of 50,848, the total
number of affiliates potentially electing the
proposed exemption.
98 This calculation represents the total burden
hours for the estimated 90% of MNCs—1,584.2—
that would file annual reports.
99 These numbers are obtained by adding all of
the burden hours or costs in Tables B and C.

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules

TABLE D—AVERAGE ANNUAL BURDEN make a decision concerning the
AND COST ESTIMATES OF THE PRO- collection of information between 30
and 60 days after publication of this
POSED EXEMPTION—Continued
Cost of
proposed
exemption

Burden
hours
Total Average
Annual per Affiliate 101 .........
Total Average
per Inter-Affiliate Swap 102

V. Text of Proposed Rules
46

17,970

* 0.03

103 10.58

* (1.8 minutes).

3. Information Collection Comments

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The Commission invites public
comment on any aspect of the reporting
burdens discussed above. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (i)
Evaluate whether the proposed
collection of information is necessary
for the proper performance of the
functions of the Commission, including
whether the information will have
practical utility; (ii) evaluate the
accuracy of the Commission’s estimate
of the burden of the proposed collection
of information; (iii) determine whether
there are ways to enhance the quality,
utility, and clarity of the information to
be collected; and (iv) minimize the
burden of the collection of information
on those who are to respond, including
through the use of automated collection
techniques or other forms of information
technology.
Comments may be submitted directly
to the Office of Information and
Regulatory Affairs (‘‘OIRA’’) in OMB, by
fax at (202) 395–6566, or by email at
[email protected]. Please
provide the Commission with a copy of
submitted comments so that they can be
considered in connection with a final
rule. Refer to the ADDRESSES section of
this release for comment submission
instructions to the Commission. A copy
of the supporting statements for the
collections of information discussed
above may be obtained by visiting
www.RegInfo.gov. OMB is required to
100 Total Hours or Costs divided by 1,760 MNCs,
which is equal to 75% × 2,347.
101 Total Hours or Costs divided by 38,136
affiliates, which is equal to 75% × 50,848.
102 Total Hours or Costs per Affiliate divided by
64,768,399 inter-affiliate swaps.
103 The ‘‘Total Average per Inter-Affiliate Swap’’
of $10.58 is less than the average transaction costs
listed in Table B (i.e., $65 and $19.50) for two
reasons. First, $10.58 is the average cost for over 64
million inter-affiliate swaps. Second, the ‘‘average
total transaction costs’’ in Table B apply only to the
assumed ten percent (10%) of reporting
counterparties that might choose to report swap-byswap under §§ 39.6(g)(4)(ii)–(iii).

VerDate Mar<15>2010

release in the Federal Register.
Consequently, a comment to OMB is
most assured of being fully effective if
received by OMB (and the Commission)
within 30 days after publication.

15:17 Aug 20, 2012

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List of Subjects in 17 CFR Part 39
Business and industry, Clearing,
Cooperatives, Reporting requirements,
Swaps.
For the reasons stated in the
preamble, the Commission proposes to
amend 17 CFR part 39 as follows:
PART 39—DERIVATIVES CLEARING
ORGANIZATIONS
1. The authority citation for part 39 is
revised to read as follows:
Authority: 7 U.S.C. 2, 6, 12a, and 24a, 7a–
1 as amended by Pub. L. 111–203, 124 Stat.
1376 (2010).

2. In § 39.6, add paragraph (g) to read
as follows:
§ 39.6 Exceptions to the clearing
requirement.

*

*
*
*
*
(g) Exemption for swaps between
affiliates.
(1) Affiliate Status. Counterparties to
a swap may elect not to clear a swap
subject to the clearing requirement of
section 2(h)(1)(A) of the Act if one
counterparty directly or indirectly holds
a majority ownership interest in the
other, or if a third party directly or
indirectly holds a majority ownership
interest in both counterparties, and the
financial statements of both
counterparties are reported on a
consolidated basis (‘‘eligible affiliate
counterparties’’). A counterparty or
third party directly or indirectly holds
a majority ownership interest if it
directly or indirectly holds a majority of
the equity securities of an entity, or the
right to receive upon dissolution, or the
contribution of, a majority of the capital
of a partnership.
(2) Conditions. Eligible affiliate
counterparties to a swap may elect the
exemption described in paragraph (g)(1)
of this section if:
(i) Both counterparties elect not to
clear the swap;
(ii)(A) A swap dealer or major swap
participant that is an eligible affiliate
counterparty to the swap satisfies the
requirements of § 23.504; or (B) the
swap is, if neither eligible affiliate
counterparty is a swap dealer or major
swap participant, documented in a swap
trading relationship document that shall

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be in writing and shall include all terms
governing the trading relationship
between the affiliates, including,
without limitation, payment obligations,
netting of payments, events of default or
other termination events, calculation
and netting of obligations upon
termination, transfer of rights and
obligations, governing law, valuation,
and dispute resolution procedures;
(iii) The swap is subject to a
centralized risk management program
that is reasonably designed to monitor
and manage the risks associated with
the swap. If at least one of the eligible
affiliate counterparties is a swap dealer
or major swap participant, this
centralized risk management
requirement shall be satisfied by
complying with the requirements of
§ 23.600;
(iv) With the exception of 100%
commonly-owned and commonlyguaranteed affiliates where the common
guarantor is also 100% commonlyowned, for a swap for which both
counterparties are financial entities, as
defined in paragraph (g)(6), both parties
shall pay and collect variation margin
and comply with paragraph (g)(3) of this
section;
(v) Each counterparty either:
(A) Is located in the United States;
(B) Is located in a jurisdiction that has
a clearing requirement that is
comparable and comprehensive to the
clearing requirement in the United
States;
(C) Is required to clear swaps with
non-affiliated parties in compliance
with United States law; or
(D) Does not enter into swaps with
non-affiliated parties; and
(vi) The reporting counterparty for the
swap, as determined in accordance with
§ 45.8 of this chapter, complies with
paragraph (g)(4) of this section with
respect to each of the counterparties.
(3) Variation Margin. When both
counterparties are financial entities each
counterparty shall pay and collect any
variation margin as calculated pursuant
to paragraph (g)(3)(i) for each uncleared
swap for which the exemption
described in paragraph (1) is elected.
(i) The swap trading relationship
documentation required in paragraph
(g)(2)(ii) of this section must set forth
the methodology to be used to calculate
variation margin and describe it with
sufficient specificity to allow the
counterparties, the Commission, and
any appropriate prudential regulator to
calculate the margin requirement
independently.
(ii) Variation margin calculations and
payments shall start on the business day
after the swap is executed and continue

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Federal Register / Vol. 77, No. 162 / Tuesday, August 21, 2012 / Proposed Rules
each business day until the swap is
terminated.
(iii) Each counterparty shall pay the
entire variation margin amount as
calculated pursuant to paragraph
(g)(3)(i) when due.
(iv) The swap trading relationship
documentation required in paragraph
(g)(2)(ii) of this section shall specify for
each counterparty where margin assets
will be held and under what terms.
(4) Reporting Requirements. When the
exemption described in paragraph (g)(1)
of this section is elected, the reporting
counterparty shall provide or cause to
be provided the following information
to a registered swap data repository or,
if no registered swap data repository is
available to receive the information
from the reporting counterparty, to the
Commission, in the form and manner
specified by the Commission:
(i) Confirmation that both
counterparties to the swap are electing
not to clear the swap and that each of
the counterparties satisfies the
requirements in paragraphs (g)(1) and
(2) of this section applicable to it;
(ii) For each counterparty, how the
counterparty generally meets its
financial obligations associated with
entering into non-cleared swaps by
identifying one or more of the following
categories, as applicable:
(A) A written credit support
agreement;
(B) Pledged or segregated assets
(including posting or receiving margin
pursuant to a credit support agreement
or otherwise);
(C) A written guarantee from another
party;
(D) The counterparty’s available
financial resources; or
(E) Means other than those described
in subparagraphs (A), (B), (C) or (D); and
(iii) If a counterparty is an entity that
is an issuer of securities registered
under section 12 of, or is required to file
reports under section 15(d) of, the
Securities Exchange Act of 1934:
(A) The relevant SEC Central Index
Key number for that counterparty; and
(B) Acknowledgment that an
appropriate committee of the board of
directors (or equivalent body) of the
counterparty has reviewed and
approved the decision not to clear the
swap.
(5) Annual Reporting. An affiliate that
qualifies for the exemption described in
paragraph (g)(1) of this section may
report the information listed in
paragraphs (g)(4)(ii) and (iii) of this
section annually in anticipation of
electing the exemption for one or more
swaps. Any such reporting under this
paragraph will be effective for purposes
of paragraphs (g)(4)(ii) and (iii) of this

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section for 365 days following the date
of such reporting. During the 365-day
period, the affiliate shall amend the
report as necessary to reflect any
material changes to the information
reported.
Each reporting counterparty shall
have a reasonable basis to believe that
the eligible affiliate counterparties meet
the requirements for the exemption
under this § 39.6(g).
(6) Financial Entity. For purposes of
this § 39.6(g), the term ‘‘financial entity’’
shall have the meaning given such term
in section 2(h)(7)(C) of the Act.
Issued in Washington, DC, on August 15,
2012, by the Commission.
Sauntia Warfield,
Assistant Secretary of the Commission.

Appendices to Clearing Exemption for
Swaps Between Certain Affiliated
Entities—Commission Voting Summary
and Statements of Commissioners
Note: The following appendices will not
appear in the Code of Federal Regulations.

Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Chilton and Wetjen voted in
the affirmative; Commissioner Sommers and
O’Malia voted in the negative.

Appendix 2—Statement of Chairman
Gary Gensler
I support the proposed rules to exempt
swaps between certain affiliated entities
within a corporate group, known as interaffiliates, from the clearing requirement in
the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
One of the primary benefits of swaps
market reform is that standard swaps
between financial firms will move into
central clearing, which will significantly
lower the risks of the highly interconnected
financial system.
Transactions between affiliates, however,
pose less risk to the financial system because
the risks are internalized within the financial
institution.
The proposed rule would allow for an
exemption from clearing for swaps between
affiliates under the following limitations.
First, the proposed exemption would be
limited to swaps between majority-owned
affiliates whose financial statements are
reported on a consolidated basis.
Second, the proposed rules would require
centralized risk management, documentation
of the swap agreement, payment of variation
margin and completion of reporting
requirements.
Third, the exemption would be limited to
swaps between U.S. affiliates and swaps
between a U.S. affiliate and a foreign affiliate
located in a jurisdiction with a comparable
and comprehensive clearing regime.
This approach largely aligns with the
Europeans’ approach to an exemption for
inter-affiliate clearing.

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50443

I look forward to the public’s comments on
this proposal.

Appendix 2—Joint Statement of
Commissioners Jill Sommers and Scott
O’Malia
We respectfully dissent from the notice of
proposed rulemaking to exempt swaps
between certain affiliated entities from the
clearing requirement. While we wholly
support a clearing exemption for swaps
between affiliated entities within a corporate
group, we cannot support the proposal before
the Commission today because in certain
instances it imposes an unnecessary
requirement for variation margin on
corporate entities that engage in inter-affiliate
trades.
Inter-affiliate swaps enable a corporate
group to aggregate risk on a global basis in
one entity through risk transfers between
affiliates. Once aggregated, commercial risk
of various affiliates is netted, thereby
reducing overall commercial and financial
risk. This practice allows for more
comprehensive risk management within a
single corporate structure.
Another benefit to this practice is that it
allows one affiliate to face the market and
hedge the risk of various operating affiliates
within the group. Notably, inter-affiliate
swaps between majority owned affiliates do
not create external counterparty exposure
and therefore do not pose the systemic risks
that the clearing requirement is designed to
protect against. The practice actually reduces
risk and simply allows for more efficient
business management of the entire group.
We believe it is entirely appropriate that
the Commission exempt inter-affiliate swaps
from the clearing mandate. Unfortunately,
this proposal inserts a requirement that most
financial entities engaging in inter-affiliate
swaps post variation margin to one another.
It is not clear that this requirement will do
anything other than create administrative
burdens and operational risk while
unnecessarily tying up capital that could
otherwise be used for investment.
The variation margin requirement is also
largely inconsistent with the requirements
included in the European Market
Infrastructure Regulation. As we have both
made clear during the implementation
process, we believe coordination with our
global counterparts is critical to the success
of this new framework.
Finally, the legislative history on this issue
is clear. During the passage of the DoddFrank Act many Members’ statements
directly addressed the concerns regarding
inter-affiliate swaps. Additionally, Members
of the U.S. House of Representatives passed,
by an overwhelming bi-partisan majority, an
inter-affiliate swap exemption that does not
include a variation margin requirement.
We believe this proposal may have the
unintended consequence of imposing
substantial costs on the economy and
consumers. With this in mind, we welcome
comments from the public as to the costs and
benefits of the variation margin requirement
and hope that we incorporate those views in
adopting the final rule.
[FR Doc. 2012–20508 Filed 8–20–12; 8:45 am]
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