Multinational companies’ much-sought after relief from reporting inter-affiliate over-the-counter swaps arrived April 5, just a few days before that reporting was slated to begin.
The Commodity Futures Trading Commission’s no-action letter relieves the wholly- or majority-owned affiliates of large MNCs from having to report their intra-group swaps to a registered swap data repository (SDR). Such swaps are typically netted through a so-called treasury center that in turn hedges the outstanding risk with a market-facing swap, in an effort to increase efficiency and reduce costs.
“We believe this result will save corporate end-users substantial amounts of resources and money that would have been required to build and maintain systems for reporting inter-affiliate swaps to registered swap data repositories,” noted Marc Horwitz, a partner at DLA Piper.
The no-action letter grants relief under part 45 of the CFTC’s regulations, provided that “the swap is not executed on a trading facility, all outward-facing swaps with unaffiliated counterparties are reported to an SDR, and the affiliated counterparties retain records of the intra-group swaps.” Without the relief, companies were required to begin reporting inter-affiliate swaps April 10.
“The only downside is it took this long to get the relief, said Jiro Okochi, CEO and founder of Reval, which provides treasury and risk management software. He added that several of his firm’s customers had devoted significant resources to understand the technology and workflow, in order to set up the necessary reporting systems.
Mr. Okochi said companies had faced three choices to comply with the reporting requirement: forgo inter-affiliate swaps altogether, allow swap dealers to report on their behalf, or report the swaps. Forgoing hedges could increase earnings volatility, and dealers were unlikely to report inter-affiliate swaps without fully understanding the risk. Reporting the swaps, however, would require centralizing the data and monitoring it, managing the workflow and reporting out to the SDR, resulting in costs potentially outweighing the benefits of inter-affiliates swaps.
“Some very large and active multinationals may have had to figure it out, because of the efficiencies they gain from inter-affiliate swaps,” Mr. Okochi said. “But it would have been more costly.”
It’s mostly large multinational corporations that engage in inter-affiliate swaps. A poll Reval conducted during a December webinar on the issue found that one third of the 233 corporate respondents conducted internal foreign-exchange swaps.
The Dodd-Frank Act exempted corporate end users from having to clear their OTC swaps, including inter-affiliate swaps. However, end users are still awaiting the decision by U.S. banking regulators about whether their treasury centers will have to post margin for market facing swaps.
The CFTC published a second no-action letter April 5 that provides reporting relief to end users engaging in commodity options “otherwise qualifying for the Part 32 trade options exemption.” The corporate end user must provide a legal entity identifier for its trade-option counterparty and notify the CFTC if it transacts more than $1 billion in trade options annually.