CFTC No Action Letter - Swap Clearing and Bank Holding Companies

Published January 18, 2016  /  In Community Banks and interest rate swaps

On January 8th, 2016 the CFTC issued a No Action Letter extending the swap clearing exemption to Bank Holding Companies (“BHCs”) and Savings and Loan Holding Companies (“SLHCs”) with total assets of less than $10 billion.
The CFTC stated that in response to representations from the ABA they would not recommend the Commission take enforcement action against BHCs or SLHCs for failing to comply with swap clearing requirements.  Conditions to the exemption are as follows:
(1) has no more than $10 billion in consolidated assets, meaning that the aggregate value of the assets of all of the BHC’s or SLHC’s subsidiaries on the last day of each subsidiary’s most recent fiscal year, do not exceed $10 billion; and 
(2) complies with the same conditions that a bank or savings association must comply with under regulation 50.50 in order to elect not to clear a swap subject to the Commission’s clearing requirement.
BHCs and SLHCs can now benefit from the same waiver afforded to banks and other financial institutions with less than $10 billion in assets and so avoid the cost prohibitive burden of swap clearing requirements.  For the full text of the No Action Letter go to
Trust Preferred Securities and Holding Company debt indexed to LIBOR
The CFTC action makes it possible for BHC’s and SLHCs to once again consider hedging their LIBOR indexed Trust Preferred Securities and other LIBOR index floating rate debt.  After the Fed ended its zero rates policy Holding Companies have already seen an increase in their borrowing costs, and though Fed governors forecast 4 rate moves in 2016, the swap curve has priced in only 2 rate hikes.  If the Fed is right, the CFTC action gives Holding Companies a timely opportunity to take advantage of underpricing in the swap market.
Hedge Accounting
Part of the CFTC’s rationale for the No Action Letter was to allow BHCs and SLHCs the opportunity to enter into swaps and take advantage of hedge accounting rules.  Trust Preferred Securities and other LIBOR based liabilities very closely meet the requirements for Cash Flow Hedge Accounting and as a result allow Holding Companies to structure highly effective hedges with simplified reporting requirements that do not impact income.  Provident Risk Management has helped many banks structure and manage hedge accounting reporting for Cash Flow Hedges on Trust Preferred Securities (all hedges executed pre Dodd Frank).  To date all have demonstrated 100% effectiveness.