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The CFTC’s Division of Clearing and Risk has issued a no-action letter that provides relief from required clearing for a limited set of “stub swaps” that remain after the partial novation or partial termination of an original swap that was not required to be cleared because it was executed prior to an applicable compliance date for required clearing.

The Division will not recommend that the Commission take enforcement action against any person for failing to clear stub swaps resulting from partial novations or partial terminations, provided that the original swaps were executed prior to the date on which the counterparties must begin complying with the clearing requirement. Both the original swaps and stub swaps, and the related partial novations and terminations, must meet certain conditions specified in the letter.

The no-action relief is subject to, among others, the following conditions:

  • the original swap must not have been cleared;
  • the original swap was executed prior to an applicable compliance date for required clearing;
  • the partial novation or termination may reduce only the notional amount of the original swap, with all other terms of the stub swap remaining unchanged; and
  • the records relating to the original swap are amended solely to reflect the reduced notional amount of the swap.

For partial novations, the relief is also subject to the condition that the novated swap (assuming it is entered into after an applicable compliance date and is within one of the classes of swaps determined by the Commission to be required to be cleared) is submitted for clearing pursuant to section 2(h)(1)(A) of the CEA and part 50 of the Commission’s regulations. This is consistent with the Commission’s statement in the clearing requirement final rulemaking that the clearing requirement applies to all new swaps, as well as changes in the ownership of a swap, including assignment, novation, exchange, transfer, or conveyance.

The relief is limited to partial novations and partial terminations and does not apply to circumstances where the original counterparties enter into and book a new swap that fully or partially offsets the risk of an existing uncleared swap and thereby achieve a similar economic result to a full termination, a partial novation, or a partial termination. All new swaps that are subject to required clearing under part 50 of the Commission’s regulations, including those that partially or fully offset the risk of original swaps, must be submitted for clearing, unless an exception or exemption under part 50 of the Commission’s regulations applies.

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