CFTC Split Over Inter-Affiliate Clearing Exemptions
The US Commodity Trading Futures Commission (CFTC) has proposed clearing exemptions for inter-affiliate trading of swaps under Title VII of the Dodd-Frank Act, but has sought public consultation to amend an internal split.
Under the proposal, the trading of swap contracts inter-affiliate, that is, within the same corporate group, would be exempt from the clearing requirements due to come into force with the establishment of Swap Execution Facilities (SEFs) this year. However, the proposal states that the trades must be documented and reported as normal, with variation margin payments included.
CFTC chairman Gary Gensler supported the move, saying that the rules fell in line with what European regulators were proposing under the European Market Infrastructure Regulation (EMIR).
"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," he said in a statement. "Transactions between affiliates, however, are of a different nature than transactions between nonaffiliated parties. Though transactions between affiliates pose risk, much of the risk relates to their affiliates rather than external parties."
Dissent
However, commissioners Jill Sommers and Scott O'Malia opposed aspects of the proposed rules, saying that the payment of variation margins inter-affiliate placed unnecessary financial and administrative burdens on firms.
Variation margins are typically intra-day payments made by clearing members to the house, in order to provide a capital cushion against significant devaluations of risky positions.
"We believe it is entirely appropriate that the Commission exempt inter-affiliate swaps from the clearing mandate," they said. "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."
Variation margins are typically intra-day payments made by clearing members to the house, in order to provide a capital cushion against significant devaluations of risky positions. The commissioners also disagreed with Gensler's assertion of compatibility with European regulation.
"The variation margin requirement is also largely inconsistent with the requirements included in EMIR. 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."
Although the proposal was passed by a seratim vote of three to two, it will be open for comment from 30 days after publication in the Federal Register. Ongoing reforms of the swaps market will institute centralized clearing of standard derivatives contracts as defined by the CFTC, and their trading on electronic platforms known as SEFs in the interests of reducing systemic risk.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@waterstechnology.com or view our subscription options here: https://subscriptions.waterstechnology.com/subscribe
You are currently unable to print this content. Please contact info@waterstechnology.com to find out more.
You are currently unable to copy this content. Please contact info@waterstechnology.com to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@waterstechnology.com
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@waterstechnology.com
More on Trading Tech
Navigating the MarketAxess ICE storm
The Waters Wrap: Most of the discussion surrounding ICE’s MarketAxess buy has focused more on benefits for the front office than the data possibilities.
On vibe coding, no/low-code dev, and some potential misconceptions
The Waters Wrap: Is no-code/low-code even a thing anymore? Not really. But the companies that championed those terms just a few years ago tell Anthony they aren’t going anywhere.
SEC gunning to take over CAT in 2027
Chairman Atkins has plans for the SEC to run the Consolidated Audit Trail directly. Industry participants are split on the idea.
Rapid-fire repo raises hopes of cheaper, faster trading
Tokenized Treasuries piloted by DTCC could squash settlement cycles and enable 24/7 repo.
Stopgaps and fail-safes: How trading vendors guard against rogue AI agents
TradeStation’s newest trading tool, Titan-X, uses agentic tools to help plan, execute, and collect data on trades.
A tidal wave of token costs threatens landfall
Budgeting for AI was never “easy,” but as financial firms rely more heavily on agents, soaring token usage is forcing them to rethink the economics of modern enterprise AI.
Is this tokenization’s golden opportunity?
The Waters Wrap: More initiatives around tokenizing assets are coming to fruition. Nyela asks: Is the market ready?
EuroCTP wins again, Fanatics teams up with BGC, Clarity Act’s uncertain future, and more
The Waters Cooler: A recap of the major tech and data news from the past week in the capital markets.