July 22, 2014

Commodity Futures Trading Commission (CFTC) Grants Relief from Required Clearing for Swaps Resulting from Multilateral Portfolio Compression

On March 18, the Commodity Futures Trading Commission’s Division of Clearing and Risk granted no-action relief relating to the clearing requirement for swaps resulting from multilateral portfolio compression exercises (as defined in CFTC Regulation 23.500(h)).

The no-action relief provides that amended and replacement swaps that are generated as part of a multilateral portfolio compression exercise, where the original swap was not required to be cleared at the time of execution but is subsequently amended or replaced after the relevant clearing requirement compliance date (e.g., after March 11, 2013 for a swap between two swap dealers), are not required to be cleared if the following five conditions are met:

  1. The multilateral portfolio compression exercise generating the amended and replacement swaps meets the definition set forth in CFTC Regulation 23.500(h) and involves more than two market participants.
  2. The original swap(s) submitted as part of the multilateral portfolio compression exercise does not include any swap that has been cleared by a derivatives clearing organization.
  3. The original swap(s) submitted as part of the multilateral portfolio compression exercise does not include any swap that is required to be cleared under 2(h)(1)(A) of the Commodity Exchange Act and Part 50 of CFTC Regulations because it was executed on or after an applicable compliance date.
  4. Each amended swap or replacement swap generated by the multilateral portfolio compression exercise:

    a. is generated in accordance with a multilateral portfolio compression service provider’s established rules and parameters for multilateral portfolio compression exercises;

    b. is entered into between the same counterparties as the original swap(s) that is amended or terminated;

    c. with the exception of reducing the notional amount, has the same material terms as the original swap(s), as defined in Part 45 of CFTC Regulations, including the reference entity, the maximum maturity of the swap, and the average weighted maturity of the swap; and

    d. is entered into for the sole purpose of reducing operational or counterparty credit risk.

  5. Once the original swaps have been selected and submitted by market participants as part of the multilateral portfolio compression exercise, the multilateral portfolio compression methodology does not permit participants to specify which swaps may be amended or replaced.

Click here for the CFTC no-action letter.

©2014 Katten Muchin Rosenman LLP

About the Author

Kenneth M. Rosenzweig, Katten Muchin Law Firm, Financial Institutions

Kenneth M. Rosenzweig focuses his practice on financial services matters, with an emphasis on the trading and clearing of financial instruments. Ken represents derivatives clearing organizations, designated contract markets and swap execution facilities, in addition to futures commission merchants, banks and other commercial participants in the exchange-traded and over-the-counter derivatives markets.


About the Author

Kevin M. Foley, Finance Attorney, Katten Muchin law Firm

Kevin M. Foley has extensive experience in commodities law and advises a wide range of clients, both in the United States and abroad, on compliance with the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission (CFTC) affecting traditional exchange-traded products, as well as the over-the-counter markets involving swaps and other derivative instruments. His clients include futures commission merchants, derivatives clearing organizations, designated contract markets, foreign boards of trade and an industry trade association.

Staff Attorney

Tanja Samardzija concentrates her practice in financial services. Ms. Samardzija began her legal career as a litigator before embarking on a career in market regulation at the Chicago Board Options Exchange (CBOE). Ms. Samardzija’s work at the CBOE has familiarized her with a wide variety of regulatory matters including exchange and SEC investigations; compliance issues related to registrations, market making and options order handling; and risk management controls and supervisory procedures for brokers or dealers with market access. In addition to being thoroughly involved in...


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