Context: In 2013, section 723 of The Dodd-Frank Act went into effect, which required all commercial end users of swaps to submit the swap to a derivatives clearing organization. A so-called “end-user exception” allows parties to claim exemption from the clearing mandate and continue executing uncleared swaps with their dealer counterparties if one of them:
- Is not a financial entity.
- Is using the swap to hedge or mitigate commercial risk.
- Provides certain information to the CFTC, including how it generally meets its financial obligations associated with entering into non-cleared swaps.
Member question: “We’re looking into our annual application of the Dodd-Frank end-user exception. Curious to know which other corporates are using the end-user exception. For those that are not and are reporting trades, what drove that decision and how heavy of a lift is it? Appreciate any perspectives you have on this!”
Peer answer: “We have elected the DF EUE. The CFTC has not issued a clearing mandate for FX instruments as many initially feared, but there is still a clearing mandate for various IRS and CDS products. We seek BOD (board of directors) renewal annually to provide us the option to trade these instruments bilaterally without clearing, should the need arise.”
Expert opinion: NeuGroup Insights reached out to derivatives expert Amol Dhargalkar, global head of corporates at Chatham Financial. He said that its clients mostly do opt to use the end-user exception.
- “Well over 95% of our corporate clients are using the end-user exception,” he said. “The only ones that aren’t are those who didn’t really qualify for it because they are a financial institution of some sort per the definitions.”
- Other analysis: “While we have a few clients that have collateralized their trades, that’s often been out of necessity rather than choice. I know that some large corporates do trade on a cleared basis, though that tends to be those companies who have significant excess cash on their balance sheets.”