The Commodity Futures Trading Commission (CFTC) Thursday voted out a proposed rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement under the Dodd-Frank Wall Street Reform Act.

The proposed rule, which cleared the CFTC by a 3-2 seriatim vote, asks the public to comment on whether inter-affiliate swaps pose less counterparty risks than swaps transacted with third parties. The comment period will be open 30 days from publication of the proposed rule in the Federal Register.

The Commission said it is considering whether alternative methods of counterparty risk mitigation may be appropriate for swaps conducted between majority-owned affiliates of the same corporate group.

The Dodd-Frank bill, which was signed into law by President Obama in July 2010, laid the groundwork for the first-time regulation of the $3 trillion U.S. over-the-counter derivatives market or swaps market by the federal government (see Daily GPI, July 22, 2010). It requires swaps (with some exceptions) to be traded on regulated exchanges, much like stock, and to be cleared in clearinghouses in order to limit excessive speculation in markets.

The affiliate exemption proposed by the CFTC would be subject to several conditions. It would:

Commissioners Scott O'Malia and Jill Sommers issued a joint dissent to the CFTC decision. While "we believe it is entirely appropriate that the Commission exempt inter-affiliate swaps from the clearing mandate...this proposal inserts a requirement that most financial entities engaging in inter-affiliate swaps post variation margin to one another," they said. "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."

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