In an interpretive letter published on May 4, the Commodity Futures Trading Commission’s Division of Clearing and Risk (Division) confirmed that a securitization special purpose vehicle (SPV) that is wholly owned by, and consolidated with, a finance company that meets the criteria set out in the “captive finance company exception” found in Section 2(h)(7)(C)(iii) of the Commodity Exchange Act (CEA), may elect the End-User Exception from a clearing requirement determination issued under Section 2(h) of the CEA. The Division’s letter responds to an inquiry of Ford Motor Credit Company LLC (Ford Credit), which sought confirmation that its securitization SPVs satisfy the first element of Section 2(h)(7)(C)(iii) of the CEA, i.e., that the entity’s “primary business” is “providing financing.”
Ford Credit, a wholly owned subsidiary of Ford Motor Company (Ford), provides financing for the purchase and lease of Ford-manufactured vehicles. Ford Credit finances a number of its receivables through securitization transactions where it sells pools of its receivables to wholly owned SPVs. Each SPV’s sole purpose is to facilitate the securitization. The SPV sells debt securities and the SPV’s trustee pays interest on debt securities to investors. If the SPV issues floating-rate debt obligations, the SPV will enter into an interest rate swap with a swap dealer to mitigate its interest rate exposure between the cash flow from the SPV’s receivables, which are fixed-rate obligations, and the interest due on the debt securities, which are floating-rate obligations.
The End-User Exception generally is not available to a “Financial Entity.” However, Section 2(h)(7)(C)(iii) of the CEA permits a finance company to elect the End-User Exception if it meets a four-prong test: (1) the company’s primary business is providing financing; (2) the company uses derivatives for the purpose of hedging underlying commercial risks related to interest rate and foreign currency exposures; (3) 90 percent or more of the interest rate and currency exposures for which the entity is using derivatives to hedge the related underlying commercial risks arise from financing that facilitates the purchase or lease of products; and (4) 90 percent or more of the products, the purchase or sale of which are being facilitated by the financing, are manufactured by the parent company or another subsidiary of the parent company.
Because (1) Ford Credit qualifies for the captive finance company exception, (2) Ford Credit’s securitization SPVs are wholly owned by Ford Credit, (3) its SPVs’ financial statements are consolidated with Ford Credit’s, and (4) its SPVs’ sole activity is facilitating financing undertaken by Ford Credit, the Division determined that Ford Credit’s securitization SPVs are primarily involved in “providing financing” and, therefore, satisfy the first element of Section 2(h)(7)(C)(iii) of the CEA. Consequently, Ford Credit’s securitization SPVs also are treated as captive finance companies and are eligible to elect the End-User Exception of the CEA. The Division further noted that its determination covers any similarly situated securitization SPV that is wholly owned by, and consolidated with, a captive finance company.
CFTC Letter No. 15-27 is available here.
Katten Muchin Rosenman LLP advised Ford Credit in connection with its interpretive request to the CFTC.