The CFTC’s No-Action Letter Relating to Eligible Contract Participants and Swap Guarantee Arrangements

The CFTC’s No-Action Letter Relating to Eligible Contract Participants and Swap Guarantee Arrangements

In a no-action letter issued on October 12, 2012 (the "No-Action Letter"), the Office of the General Counsel ("OGC") of the Commodity Futures Trading Commission (the "CFTC") clarified a number of matters relating to the parties and guarantors that will qualify for treatment as "Eligible Contract Participants" under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Dodd-Frank both amended the definition of "Eligible Contract Participant" (hereinafter, "ECP") contained in the CEA and made it unlawful for a party that is not an ECP to enter into a swap except on, or subject to the rules of, a designated contract market (a "DCM"). The No-Action Letter, one of more than a dozen interpretive letters that the CFTC issued last week, should significantly aid market participants in understanding which counterparties and which guarantee arrangements are permissible under Dodd-Frank.

In the No-Action Letter, as set out in greater detail in Part I below, the OGC gives interpretive guidance that:

  • a non-ECP generally may not be jointly and severally liable for obligations under a swap;
  • a guarantor of obligations under a swap must generally be an ECP; and
  • cash proceeds from a loan may count as assets for purposes of determining whether an entity's "total assets" meet the $10 million threshold for such entity to constitute an ECP under CEA § 1a(18)(A)(v)(I).

In addition, as detailed in Part II below, the OGC provides no-action relief with respect to:

  • certain ECP guarantee arrangements relating to small businesses;
  • so-called "anticipatory ECPs," entities anticipating the receipt of loan proceeds that will enable them to qualify as ECPs; and
  • the nature of the "amounts invested on a discretionary basis" that an individual must have in order to qualify as an ECP under CEA § 1a(18)(A)(xi).

Finally, the No-Action Letter grants temporary relief relating to certain situations in which a counterparty or a guarantor fails to qualify as an ECP, as set out in Part III below.

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Attachment: 121018-CFTC-No-Action-Letter-Relating-Eligible-Contract-Participants.pdf