On May 4, 2015, the U.S. Commodity Futures Trading Commission (the “CFTC”) published a letter providing clarification of an issue that has been of acute interest to the auto and equipment securitization industry.

Section 2(h)(7)(A) of the Commodity Exchange Act (“CEA”) permits certain qualifying entities to elect not to clear a swap that is otherwise subject to a Clearing Determination (the “End-User Exception”). The End-User Exception is limited to entities that (i) are not “financial entities” (as defined in Section 2(h)(7)(C)(i) of the CEA), (ii) use the swap to hedge or mitigate commercial risk, and (iii) report certain information to the CFTC about the swap and its counterparties.

Significantly, captive finance companies were specifically excluded from the definition of financial entity. In order to qualify as a captive finance company under Section 2(h)(7)(C)(iii) of the CEA, an entity must meet the following criteria:

  1. The entity’s primary business is providing financing;
  2. the entity uses derivatives for the purpose of hedging underlying commercial risks related to interest rate or foreign currency exposures;
  3. 90% or more of which arise from financing that facilitates the purchase or lease of products; and
  4. 90% or more of which are manufactured by the parent company or another subsidiary of the parent company.

In securitization transactions, some uncertainty remained as to whether a securitization special purpose vehicle’s (“SPV”) “primary business is providing financing”.

In yesterday’s action, the CFTC determined that when an SPV is wholly-owned by, and consolidated with, a captive finance entity, as defined in Section 2(h)(7)(C)(iii) of the CEA, the SPV itself qualifies as a captive finance company and, therefore, is eligible to elect the end-user exception from clearing.

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