ERISA-DOL Provides Advice On Cleared Swap Transactions Conducted Pursuant To The Dodd-Frank Act

In Advisory Opinion 2013-01A, the Department of Labor (the “DOL”) discusses the application of ERISA to certain “cleared swap” transactions conducted pursuant to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). While the facts and analysis are very complicated, here is what the DOL concluded.

1. A clearing member (a “Clearing Member”) is not a fiduciary under section 3(21)(A)(i) of ERISA when, upon default by a pension plan of its obligations under a cleared swap, the Clearing Member exercises various account liquidation rights that were negotiated between the Clearing Member and a plan fiduciary at the outset of a swap transaction.

2. The central clearing party to the swap (called the “CCP”) does not provide services to the plan involved in the swap, and will not be deemed to be a party in interest under section 3(14)(B) of ERISA with respect to the plan solely by reason of providing clearing services for the plan’s Clearing Member. Furthermore, because the rights and obligations under the swap agreement between the Clearing Member and its customer will be subject to various rules and regulations, any actions taken by the CCP pursuant to those rules and regulations with respect to plan customer accounts upon Clearing Member default would not make the CCP a fiduciary under section 3(21)(A)(i) of ERISA. However, due to a direct contractual agreement with the plan in the procurement of the clearance of swap transactions and other services, such as the collection and transmission, and/or receipt, of margin payments from the plan, the Clearing Member is providing services to the plan and as a result would be a party in interest with respect to the plan, under section 3(14)(B).

3. Since the Clearing Member is a party in interest, the exercise of the default rights by the Clearing Member, when the plan fails to meet its obligations under the swap arrangement, and the provision of other services by the Clearing Member result in certain “prohibited transactions” under section 406 of ERISA unless an exemption applies. Also the guarantee by the Clearing Member of the plan’s obligation to the CCP is treated as an “extension of credit”, and therefore could be a prohibited transaction under section 406(a)(1)(B) of ERISA. In certain cases, Prohibited Transaction Exemption (PTE) 84-14 (the “QPAM Exemption”) could provide exemptive relief for any such credit extension and other services by the Clearing Member.

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