On January 8, 2015, the U.S. Senate approved legislation, by a 93-4 vote, to reauthorize the Terrorism Risk Insurance Act (“TRIA”). The legislation, dubbed the Terrorism Risk Insurance Program Reauthorization Act of 2015 (the “TRIA Reauthorization Act”), was passed by the U.S. House of Representatives on January 7, 2015, also by a wide margin, in a vote of 416-5. Once signed into law, the TRIA Reauthorization Act would extend the Terrorism Insurance Program, which provides federal terrorism insurance to businesses suffering catastrophic losses above $200 million, for an additional six years.
Although completely unrelated to the reauthorization of TRIA, embedded within the TRIA Reauthorization Act is an exemption for certain entities from those provisions of the Commodity Exchange Act (“CEA”) that require swap dealers and major swap participants to collect margin from their over-the-counter (“OTC”) non-cleared swap transaction counterparties (the “Margin Requirements”).1 As market participants may be aware, the U.S. “Prudential Regulators”2 and the Commodity Futures Trading Commission (“CFTC”) proposed rules last year to implement the Margin Requirements, but such rules have yet to be adopted.
The TRIA Reauthorization Act amends Section 4s(e) of the Commodity Exchange Act to exempt the following from the Margin Requirements:
- Swaps for which a counterparty is a non-financial entity end-user that qualifies for the end-user exception from mandatory clearing;3
- Swaps for which a counterparty is a financial entity that is acting on behalf of, and as agent for, a non-financial entity end-user that qualifies for the end-user exception from mandatory clearing; and
- Swaps for which a counterparty is a cooperative entity that qualifies for an exemption from mandatory clearing.4
Although the amendment of Section 4s(e) of the CEA appears to be a win for end-users, it must be viewed in the context of the Proposed Margin Rules. Under the Proposed Margin Rules, non-financial entity end-users would not per se be required to post and collect initial and variation margin. Rather, the Proposed Margin Rules require swap dealers and major swap participants to perform a credit analysis to determine if the collection of initial and variation margin is merited, i.e., if the swap dealer or major swap participant believes that there is a credit risk associated with having an uncollateralized trade with a non-financial end-user. It seems unlikely that the exemption embedded in the TRIA Reauthorization Act would cause the Proposed Margin Rules to be amended in a way that would remove the requirement that a swap dealer or major swap participant perform a credit analysis to determine whether the collection of margin is necessary (in particular those swap dealers and major swap participants that are subject to the safety and soundness requirements of a Prudential Regulator). Moreover, from a practical perspective, it is likely that, even absent an affirmative regulatory requirement to collect margin, swap dealers and major swap participants may nevertheless require margin from certain end-users so as to offset the capital and liquidity requirements resulting from Basel III requirements.5 Thus, even with the exemption from the margin requirements afforded by the TRIA Reauthorization Act, it is likely that some end-users, from a commercial perspective, may have to post margin for their non-cleared swaps. For those end-users that are not required to post margin, the costs of engaging in OTC non-cleared swaps may increase.
It is worth noting that Senator Elizabeth Warren of Massachusetts advocated for the removal of the exemption from margin requirements contained in the TRIA Reauthorization Act because the exemption was unrelated to terrorism risk insurance and provided an unwarranted benefit to “Wall Street.” However, Senator Warren failed to garner sufficient support from her fellow Senators, perhaps because the exemption was more of a benefit to “Main Street” non-financial companies rather than “Wall Street.” The Senator’s proposed amendment failed by a vote of 31 to 66.6
It is anticipated that President Barack Obama will sign the TRIA Reauthorization Act into law. However, even if the President vetoes the bill, given the overwhelming support from Congress, it is likely that a presidential veto would be overridden.
It remains to be seen how regulators will implement the exemption from margin implemented by the TRIA Reauthorization Act (including how it is to be claimed). Once the TRIA Reauthorization Act is signed into law, the CFTC would be charged with implementing the exemption via the promulgation of an interim final rule, pursuant to which public comment must be sought before a final rule is issued. We will update you with any developments regarding the new exemption.