CFTC DISSENTING COMMISSIONERS MAKE STATEMENT

FROM:  COMMODITY FUTURES TRADING COMMISSION
Joint Statement of Dissent by Commissioners Jill Sommers and Scott O’Malia
Clearing Exemption for Swaps Between Certain Affiliated Entities

　
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 Dodd-Frank 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.