On March 31, 2015, the CFTC issued No-action Letter 15-21 (No-action 15-21) providing relief to swap dealers (SDs) and major swap participants (MSPs) from certain CFTC Dodd-Frank business conduct regulations when entering into one or more swaps with a structured finance special purpose vehicle (SPV) that replace swaps entered into with the SPV prior to the effectiveness of these rules (legacy SPV swaps), provided the replacement is due solely to a credit ratings downgrade of the SD or MSP counterparty to the legacy SPV swap, or other negative credit activity.

In most securitization transactions, an SPV issuer enters into one or more swaps with a swap provider, which is almost always an SD, to hedge certain types of risk associated with the transaction, including:

See Practice Note, Securitization: US Overview: Use of Derivatives in Securitization.

When an SPV transfers the above risks to the swap provider under one or more swaps, the SPV takes on the risks that the swap provider may not perform its obligations under the swap (the swap provider's credit risk), which could threaten payments to investors in the ABS issued in transaction, as well as to other transaction parties.

In order to minimize the impact of the swap provider's credit risk on the credit rating of the ABS issued by the SPV in the transaction, credit rating agencies issue so-called "de-linking criteria" that may require the inclusion of certain "rating agency condition (RAC)" provisions in the transaction's swap documentation that require a swap provider to take remedial action to insulate the SPV's obligation holders from the swap provider's credit risk in the event that the swap provider is put on a negative credit watch or suffers a credit downgrade (see Practice Note, Understanding the ISDA Master Agreement and Schedule: ABS Rating Agency Condition (RAC) Provisions).

RAC measures include, among others:

While these RAC measures do not affect the material economic terms of the legacy SPV swap, they could cause the swap to be considered a "new swap" or a "new transaction" for purposes of application of certain CFTC external business conduct standards (EBCS) and swap trading relationship documentation rules implemented under Title VII of the Dodd-Frank Act (see Practice Notes, The Dodd-Frank Act: Final External Business Conduct (EBC) Rules for Swap Dealers and MSPs and The Dodd-Frank Act: Final Internal Business Conduct (IBC) Rules on Documentation, Confirmation, Reconciliation and Compression for Swap Dealers and MSPs).

Since these regulations are applicable only to swaps entered into after each regulation's respective compliance date, the remedial measures could cause a legacy SPV swap that was not previously subject to these conduct rules to become subject to those regulations solely because of the remedial measures mandated by the SPV's swap documentation.

As a result of the relief provided under No-action 15-21, legacy SPV swaps that are replaced by "new transactions" solely as the result of remedial actions taken by the SD mandated by the SPV's swap documentation will not be subject to certain CFTC regulations, including:

The relief is available only if:

The relief is designed to bolster the continuity of the ABS markets in times of financial distress. Absent this relief, it would be more difficult to find parties willing to step in as replacement swap providers. Application of these rules has not historically been within the scope of the de-linking criteria of any of the major credit rating agencies.

This no-action letter does not include an expiration date.