End-User Exception to Mandatory Swap Clearing: Tests and Election

A commercial business can avoid mandatory central clearing of a swap by electing the end-user exception to mandatory swap clearing, which the Commodity Exchange Act grants when three conditions are met: the company is not a financial entity, the swap hedges or reduces commercial risk, and the company reports to a registered swap data repository how it generally meets the financial obligations of the uncleared trade.¹ SEC-reporting issuers add a fourth step: an appropriate board committee has to approve the decision to use uncleared swaps.

When the Exception Actually Matters

The exception only comes into play for swap classes the CFTC has designated as subject to mandatory clearing. Everything else is already outside the clearing mandate, and no election is needed.

Two categories are currently covered. On the interest rate side, mandatory clearing applies to fixed-to-floating swaps, basis swaps, forward rate agreements, and overnight index swaps in a range of currencies including the U.S. dollar, euro, British pound, and Japanese yen. On the credit side, it covers the North American untranched CDS indices (CDX.NA.IG and CDX.NA.HY) and the European untranched CDS indices (iTraxx Europe, iTraxx Europe Crossover, and iTraxx Europe HiVol).² If your swap is not on that list, you don’t need the exception at all.

The Non-Financial Entity Test

The statute defines qualification in the negative: you qualify if you are not a “financial entity.” That category includes swap dealers, major swap participants, security-based swap dealers, major security-based swap participants, commodity pools, private funds, employee benefit plans, and anyone predominantly engaged in banking or financial activities.¹ Fall into one of those buckets and the exception is unavailable.

For a manufacturer hedging raw material costs, an airline locking in fuel prices, or a retailer managing foreign currency exposure from overseas suppliers, this is a clean fit. The harder cases are companies that finance the sales of their own products. The statute includes a specific carve-out for captive finance subsidiaries: if the entity’s primary business is providing financing to support sales or leases of products made by its parent or affiliated company, and at least 90 percent of its derivatives hedge interest rate and foreign currency risks tied to that financing, it is not treated as a financial entity.¹

Small Banks, Farm Credit Institutions, and Credit Unions

Some entities that technically look financial still qualify for relief. Banks, savings associations, farm credit system institutions, and credit unions with total assets of $10 billion or less are exempt from the financial entity definition and may elect the end-user exception if they also meet the hedging and reporting conditions.³ The asset test looks to the last day of the institution’s most recent fiscal year, so a mid-year crossing doesn’t immediately disqualify the institution, though community banks close to the line should watch their year-end balance sheet closely.

Cooperatives

Cooperatives organized under federal or state law can qualify for their own clearing exemption if they are classified as financial entities only because they are predominantly engaged in financial activities, rather than because they are swap dealers, commodity pools, or another specifically listed financial entity. Every member must itself be a non-financial entity or a small financial institution under the $10 billion threshold, and the cooperative’s swaps must either originate loans for its members or hedge commercial risk connected to those loans.⁴

The Hedging or Commercial Risk Requirement

Being non-financial is necessary, not sufficient. The swap itself must hedge or reduce commercial risk, not function as a speculative bet. The CFTC’s regulation frames this in functional terms: the swap has to be economically appropriate to reducing risks that arise from your business operations.⁵

Those business risks can take several forms. Changes in the value of things you own, produce, or sell. Changes in the value of debts you owe or expect to incur. Changes in the cost of services you provide or purchase. And interest rate, currency, or foreign exchange fluctuations tied to any of the above. A swap also qualifies if it meets the definition of bona fide hedging for position-limit purposes, or if it qualifies for hedge accounting under FASB Topic 815 or GASB Statement 53.⁶

Two bright-line disqualifications apply. The swap cannot be used for speculation, investing, or trading. And the swap cannot hedge the risk of another swap or security-based swap position unless that other position is itself a legitimate commercial hedge.⁶ The second rule blocks layered derivative structures where each new position claims to hedge the last. The chain has to trace back to a real business exposure.

This is where most compliance problems live. A company has to be able to connect each swap to a specific, identifiable commercial risk. If auditors or regulators cannot draw that line from the swap to the underlying business exposure, the election falls apart. Contemporaneous documentation of the risk being hedged and the economic rationale for the swap’s structure is the single best protection.

Reporting How You Will Pay

The third statutory condition is a disclosure requirement. Because no clearinghouse stands between the parties on an uncleared swap, each side carries the full credit risk of the other, and the CFTC wants to know how the end-user plans to meet its obligations.¹ The regulation lists the possibilities the reporting party can select: a written credit support agreement, pledged or segregated assets, a third-party guarantee, the company’s own available financial resources, or another arrangement.⁵

Board Committee Approval for SEC Filers

Companies that file reports with the SEC face an added governance step. Under Section 2(j) of the Commodity Exchange Act, an SEC-reporting issuer may elect the end-user exception only if an appropriate committee of its board of directors has reviewed and approved the decision to enter into uncleared swaps.⁷ The CFTC has interpreted this to allow a general, blanket approval rather than trade-by-trade sign-off. SEC filers must also provide their Central Index Key number and confirm the committee’s approval when they submit exception data.

Non-SEC filers are not subject to Section 2(j), but a documented board or committee approval is still worth having. If the CFTC ever questions the election, a governance record shows the exception was treated as a considered decision rather than a default posture.

How to Report the Election

The election is not a one-time filing that covers all future trades. Each swap has to be reported to a registered swap data repository, either at execution or through an annual filing that stands in for the per-trade detail.⁵

Under transaction-by-transaction reporting, the reporting counterparty includes the exception data in the swap creation data sent to the repository at execution. That data identifies the electing counterparty, confirms the swap hedges commercial risk, and states the method used to meet the financial obligations of the trade.

Many companies prefer the annual route. CFTC Form TO certifies eligibility, hedging status, and financial obligation information for the year, and is due by March 1 for the prior calendar year. When Form TO is on file, individual trade reports only need to carry the notice of election and the counterparty’s identity; the rest is covered by the annual certification.⁵

Records of swap transactions, including exception elections, must be retained for at least five years after the swap terminates, matures, or expires. That covers the underlying hedging analysis, board approvals, Form TO filings, and correspondence with the repository.⁸

A Note on Affiliate and Treasury Structures

Corporate groups that centralize swap activity through a treasury subsidiary sit outside the basic end-user exception and rely on separate regulatory paths: the inter-affiliate exemption at 17 CFR 50.52 for swaps between affiliates, and the treasury affiliate exception at 7 U.S.C. § 2(h)(7)(D) for external-facing hedges the treasury unit places on behalf of non-financial affiliates.⁹¹ Both routes have their own ownership, risk-management, documentation, and reporting conditions, and neither is a substitute for the ordinary end-user analysis when the operating company itself is on the trade.

What Happens If You Elect Improperly

An improperly claimed exception is not a gray area. If any of the three statutory conditions is missing, the swap should have been cleared, which exposes the company to CFTC enforcement for violating the clearing requirement and separately for inaccurate swap data reporting.

The Commission’s remedial toolkit is broad. In a 2025 enforcement initiative addressing compliance failures that included reporting and recordkeeping violations, the CFTC assessed civil monetary penalties and required firms to adopt remediation plans, submit progress reports, retain independent compliance consultants, and conduct internal audits of their compliance programs, with cease-and-desist obligations attached.¹⁰ Those actions involved large financial institutions, but the same authority reaches commercial end-users who misuse the exception.

Counterparty consequences follow too. Dealer documentation often includes representations that the end-user’s election is valid, and a breach of that representation can trigger termination events and close-out netting across the whole portfolio with that dealer.

Keeping the Election in Good Standing

The exception is designed to be accessible for legitimate commercial hedgers, but it rewards ongoing attention. Companies that treat it as a set-and-forget election tend to run into trouble at dealer onboarding or during a CFTC examination.

Maintain a written hedging policy that identifies the risks the company hedges, the permitted instruments, and notional limits. Tie each swap to a specific business risk at execution.
Secure board or committee approval. SEC filers are required to. Others should have it anyway, and should review it annually.
Pick a reporting method and stay consistent. If you file Form TO, calendar the March 1 deadline and refresh the filing when material facts change. If you report per trade, make sure operations captures every required field.
Monitor entity status. Acquisitions, new subsidiaries, moves into financing lines, or crossing the $10 billion asset threshold can all change eligibility.
Keep records for at least five years after termination, including confirmations, hedging rationale memos, board minutes, Form TO filings, and repository correspondence.⁸

1
Office of the Law Revision Counsel. 7 USC 2 – Jurisdiction of Commission
2
eCFR. 17 CFR Part 50 – Clearing Requirement and Related Rules – Section 50.4
3
eCFR. 17 CFR 50.53 – Banks, Savings Associations, Farm Credit System Institutions, and Credit Unions Exempt From the Clearing Requirement
4
GovInfo. 17 CFR 50.51 – Exempt Cooperatives
5
eCFR. 17 CFR 50.50 – Non-Financial End-User Exception to the Clearing Requirement
6
eCFR. 17 CFR 50.50 – Non-Financial End-User Exception to the Clearing Requirement – Section: Hedging or Mitigating Commercial Risk
7
Federal Register. End-User Exception to the Clearing Requirement for Swaps
8
eCFR. 17 CFR Part 1 – Recordkeeping – Section 1.31
9
eCFR. 17 CFR 50.52 – Affiliated Entities Exempt From the Clearing Requirement
10
Commodity Futures Trading Commission. Acting Chairman Pham Announces Successful Completion of Enforcement Sprint