Corporate Governance Will Play an Important Role in Swaps

The Commodity Exchange Act (CEA), as amended by the Dodd-Frank Act, provides that it will be unlawful for any person to engage in a swap unless that person submits such swap for clearing to a derivatives clearing organization, provided the swap is required to be cleared.  The CEA delegates the authority to determine which swaps are required to be cleared to the Commodity Futures Trading Commission (CFTC).  The CFTC has determined that, starting on September 9, 2013, an entity will not be able to engage in certain classes of credit default swaps and interest rate swaps unless the entity submits the swaps for clearing.  However, this clearing requirement does not apply if one of the counterparties to the swap qualifies for and elects to rely on the “end-user exception.”

An entity will be eligible to claim the end-user exception if the entity:

  • is not a financial entity[1];
  • is using swaps to hedge or mitigate commercial risk; and
  • provides certain information to the CFTC or a swap data repository.

In addition, if the party electing this exception is a public company, then to qualify, the company’s board or an appropriate committee[2] of the board needs to review and approve the decision to enter into swaps that are exempt from the clearing requirements under the end-user exception.  This approval can be done either on a general basis or on a swap-by-swap basis.  The board or committee approval should specifically state that the board or committee, as applicable, has approved the decision to enter into swaps that are not being cleared and are not executed on a designated contract market or swap execution facility and that the company will rely on the end-user exception. 

The CFTC also expects public company boards to set appropriate policies governing the company’s use of swaps subject to the end-user exception and to review those policies at least annually and, as appropriate, more often upon a triggering event (e.g., implementing a new hedging strategy that was not contemplated in the original board approval).

Public companies that intend to rely on the end-user exception should, prior to September 9, 2013, adopt (i) appropriate board or committee approvals, and (ii) policies regarding the company’s use of swaps.


[1] The CFTC exempts from the definition of ‘‘financial entity’’ an entity that: (i) is organized as a bank or a savings association, among others, and the deposits of which are insured by the Federal Deposit Insurance Corporation; and (ii) has total assets of $10 billion or less on the last day of such entity’s most recent fiscal year.

[2] If a company intends to delegate this responsibility to a committee, the committee should be specifically authorized, either by charter amendment or board resolution, to review and approve the company’s decision to enter into swaps, including swaps subject to the end-user exception.

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