CFTC Approves Final Cooperative Swap Clearing Exemption Rule and Issues Time-Limited No-Action Relied
On Tuesday, August 13, 2013, the Commodity Futures Trading Commission (the “CFTC”) issued a final rule to exempt swaps entered into by qualified cooperatives from the clearing requirement under Section 2(h)(1)(A) of the Commodity Exchange Act (the “CEA”) and part 50 of the CFTC’s regulations, subject to certain conditions. Generally the CEA, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), requires clearing of certain swaps unless one of the counterparties can elect an exception, exemption, or other relief from the clearing requirement. The CFTC is adopting these final rules pursuant to Section 4(c) of the CEA, which grants the CFTC general exemptive authority.
The final rule permits a qualifying cooperative to elect not to clear a swap subject to the clearing requirement, provided that the cooperative’s members are either non-financial entities or other cooperatives whose members are non-financial entities. In addition, the swap must be entered into in connection with originating loans to cooperative members, or to hedge or mitigate commercial risk related to loans to, or swaps with, members. The final rule also requires the reporting counterparty to report to a swap data repository or, if none is available, to the CFTC, the election of the cooperative exemption, as well as certain other information, similar to the information required by the election of the end-user exception or the inter-affiliate exemption.
Concurrent with the issuance of the final rule, the CFTC’s Division of Clearing and Risk announced the issuance of a time-limited, no-action letter granting relief from required clearing for certain swaps entered into by qualifying cooperatives prior to the effective date of the final rule.
CFTC Proposes International Alignment Rules for Derivatives Clearing Organization
On Tuesday, August 13, 2013, the CFTC proposed amendments to its regulations to establish additional standards for compliance with the derivatives clearing organization (“DCOs”) core principles set forth in Section 5b(c)(2) of the CEA for systemically important DCOs, as well as DCOs that elect to opt-in to the systemically important DCO regulatory requirements. Under the proposed amendments, such DCOs would still be required to comply with the requirements applicable to all DCOs, which are set forth in the CFTC's DCO regulations on compliance with core principles, to the extent those requirements are not inconsistent with the requirements of the proposed amendments.
The additional requirements contained in the proposed amendments include procedural requirements for opting in to the regulatory regime as well as substantive requirements relating to governance, financial resources, system safeguards, special default rules and procedures for uncovered losses or shortfalls, risk management, additional disclosure requirements, efficiency, and recovery and wind-down procedures. These additional requirements would also be consistent with the Principles for Financial Market Infrastructures published by the Committee on Payment and Settlement Systems and the Board of the International Organization of Securities Commissions. In addition, the CFTC is proposing certain delegation provisions and certain technical clarifications.
Agencies Revise Proposed Risk Retention Rule
On Tuesday, August 28, 2013, the Federal Reserve Board (the “FRB”), the Federal Deposit Insurance Corporation (the “FDIC”), the Federal Housing Finance Agency, the Department of Housing and Urban Development, the Office of the Comptroller of the Currency (the “OCC”) and the Securities and Exchange Commission (the “SEC”) issued a notice revising a previously proposed rule requiring sponsors of securitization transactions to retain risk in those transactions. The new proposal revises a proposed rule the agencies issued in 2011 to implement the risk retention requirement of section 15G of the Securities Exchange Act of 1934, as added by Section 941 of the Dodd-Frank Act.
The new proposed rule would provide asset-backed securities sponsors with several options to satisfy the risk retention requirements. The original proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision. The agencies are now proposing that risk retention generally be based on fair value measurements without a premium capture provision.
As required by the Dodd-Frank Act, the proposal would define "qualified residential mortgage" (“QRM”) and exempt securitizations of QRMs from risk retention. The new proposal would define QRMs to have the same meaning as the term qualified mortgages as defined by the Consumer Financial Protection Bureau. The new proposal also requests comment on an alternative definition of QRM that would include certain underwriting standards in addition to the qualified mortgage criteria.
Similar to the original proposal, under the new proposal, securitizations of commercial loans, commercial mortgages, or automobile loans of low credit risk would not be subject to risk retention. Further, the rule would recognize the full guarantee on payments of principal and interest provided by Fannie Mae and Freddie Mac for their residential mortgage-backed securities as meeting the risk retention requirements while Fannie Mae and Freddie Mac are in conservatorship or receivership and have capital support from the U.S. government. This provision also is unchanged from the original proposal.
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