QIR Role When the Parent Is a Swap Dealer
An airport authority wants to enter into a 15-year, $200 million notional interest rate swap to convert variable-rate debt to fixed. It asks your municipal advisory firm to serve as its qualified independent representative (QIR) and to 'line up' counterparties. Your firm's parent company includes a swap dealer, Skyline Derivatives, that has expressed interest in being a counterparty. The authority's swap policy requires at least three counterparty proposals and an independent evaluation of each proposal's risks. The authority is a special entity under CFTC rules. Your firm has no swap dealer registration.
1. Can your firm serve as QIR if Skyline may be a counterparty?
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No, not without a structural separation, and likely not at all. A QIR must be independent of the counterparty and must evaluate the swap and the counterparty's proposals. If Skyline is a counterparty, your firm's independence is compromised because of the affiliate relationship. The CFTC special-entity rules require the QIR to be independent and to make written representations; an affiliate of a competing counterparty cannot objectively evaluate Skyline's proposal. The firm should either decline the QIR role or ensure Skyline does not participate and the affiliate relationship is disclosed and consented to; the safer answer is to decline the QIR role for this transaction.
2. What disclosures and written representations are needed?
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The firm must disclose the affiliate relationship in writing to the Authority, explain that it is not independent as to Skyline, and obtain informed consent. As QIR, if it proceeded, it would need to represent in writing that it is independent, has the capacity and expertise, and will evaluate the transaction. It must also disclose compensation and any conflicts. But disclosure does not cure the independence defect if Skyline bids. The firm should recommend that the Authority use a separate QIR.
3. How should the firm handle counterparty selection?
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The firm can help the Authority identify counterparties using objective criteria such as credit ratings, collateral terms, and ISDA terms, but it must not favor Skyline. It should run a fair process, document the criteria, and have the Authority's counsel review. If the Authority wants three proposals, the firm should solicit at least three unaffiliated dealers and provide a side-by-side risk analysis. It should not negotiate on Skyline's behalf or share other bidders' terms.