The House of Representatives in a voice vote December 2, 2014 approved a bill granting corporate swap end-users’ treasury centers an exemption from clearing requirements, a step toward statutorily accomplishing a similar goal to the no-action relief provided by the Commodity Futures Trading Commission (CFTC) staff the Wednesday before.
Treasury centers have become increasingly critical cash management tools for corporates and are generally recognized to increase efficiencies and reduce hedging costs as well as risk. Under Dodd-Frank Act language, however, treasury centers were deemed financial entities and thus required to clear their swap activity.
The CFTC granted initial no-action relief in June 2013, as clearing requirements became effective for financial companies.
“The CFTC recognized the problem for corporates in the statutory language and pushed no-action relief through rather quickly, without the opportunity for public comment,” said Jeffrey Steiner, counsel at Gibson Dunn & Crutcher. “There were several conditions to receive no-action relief, and a lot of companies concluded they couldn’t meet one or more of them.”
The CFTC’s most recent action addresses many of those issues, opening the relief up to a broader swathe of companies. The House bill would implement that relief on a more permanent, statutory basis, amending Dodd-Frank. However, a vote in the Senate hadn’t been scheduled as of December 3, and it is unclear whether it would address the bill this year.
The recent regulatory action describes seven areas of relief. One condition to take advantage of the clearing exemption in the earlier version required the nonfinancial entities in a corporate group to outnumber the financial entities. Mr. Steiner said the condition had little to do with a company’s risk exposure, and that companies’ financial entities, typically set up to support some type of financing, could outnumber business units, “even if the financial aspect is very small.” Consequently, that condition has been eliminated.
The earlier version also required treasury centers to enter into actual swaps with affiliates in order to transfer risk. Mr. Steiner said treasury centers often do that, but in some circumstances, such as with affiliates across the globe hedging foreign exchange (FX) risk, a treasury center may instead make book entries of the affiliates’ FX exposures.
“Rather than entering into transactions between them, the company would view exposures holistically and centralize that risk in the treasury center before entering into a hedging transaction, instead of entering into swaps with each of the affiliates,” Mr. Steiner said.
Market participants had also expressed concern to CFTC staff about the first no-action relief’s fifth condition, which required payment obligations of treasury centers on the exempted swap to be guaranteed by the non-financial parent or similar entity. They noted that corporate parents can use other types of support arrangements, including keepwell agreements, letters of credit, and revolving credit facilities, none of which satisfy the requirements of the earlier no-action relief, require those swaps to be cleared.
“As a result, the division is removing the condition to accommodate the additional support arrangements that may exist with regard to the eligible treasury affiliate’s payment obligations,” the CFTC’s no-action letter says.