Section 2(e) of the Commodity Exchange Act requires every swap counterparty to be an eligible contract participant ("ECP"). In CFTC OGC Letter No. 12-17, the CFTC Office of General Counsel stated that it interprets section 2(e) to require each guarantor of a swap to be an ECP. In other words, as a general rule, a non-ECP can not guarantee the obligations of a swap counterparty that is an ECP.
This interpretive position should be noted by all banks that offer interest rate swaps to borrowers as hedges, regardless of whether or not the bank is a swap dealer. And, for obvious reasons, it is also of interest to borrowers.
Inspired by the recent Valentine’s Day holiday, we offer our readers the following summary:
In these days post-Dodd-Frank,
It can be hard to be a bank.
Or even a borrower, friends you see,
With a swap that is guaranteed,
By someone other than an ECP.
Good day. Good poem? TSR