New Margin Requirements
The Board of Directors of the Federal Deposit Insurance Corporation approved a final rule to establish margin requirements for swaps that are not cleared through a clearinghouse. This action is a joint final rule with the Office of the Comptroller of the Currency, the Federal Reserve Board, the Farm Credit Administration, and the Federal Housing Finance Agency and will apply to entities supervised by these agencies that register with the Commodity Futures Trading Commission or Securities and Exchange Commission as a dealer or major participant in swaps.
The Dodd-Frank Act required the agencies to impose margin requirements to help ensure the safety and soundness of swap dealers in light of the risk to the financial system associated with non-cleared swaps activity. The final rule takes into account the risk posed by a swap dealer’s counterparties in establishing the minimum amount of initial and variation margin that the covered swap entity must exchange with such counterparties.
The rule does not apply to swaps of financial institutions with $10 billion or less in total assets that enter into swaps for hedging purposes. This exception tracks similar exceptions that are available to these small institutions from the requirement to clear standardized swaps through a clearinghouse.
End User Exemption
In connection with adopting the new margin requirements, the FDIC also adopted an interim final rule to exempt commercial end-users and small banks. The interim final rule implements the Terrorism Risk Insurance Program Reauthorization Act of 2015, or TRIPRA, which President Obama signed into law on January 12, 2015. Title III of TRIPRA, the “Business Risk Mitigation and Price Stabilization Act of 2015,” amends the statutory provisions added by the Dodd-Frank Act relating to margin requirements for non-cleared swaps and non-cleared security-based swaps. Specifically, section 302 of TRIPRA’s Title III amends sections 731 and 764 of the Dodd-Frank Act to provide that the initial and variation margin requirements do not apply to certain transactions of specified counterparties that would qualify for an exemption or exception from clearing, as explained more fully below. Non-cleared swaps and non-cleared security-based swaps that are exempt under section 302 of TRIPRA will not be subject to the rules implementing margin requirements. In section 303 of TRIPRA, Congress required that the Agencies implement the provisions of Title III by promulgating an interim final rule and seeking public comment on the interim final rule.
The effect of the interim final rule is to grant an exception from the margin requirements of the joint final rule for non-cleared swaps meeting certain criteria that covered swap entities enter into with certain “other counterparties” and certain financial end users. This interim final rule adopts the statutory exemptions and exceptions as required under TRIPRA. TRIPRA provides that the initial and variation margin requirements do not apply to the noncleared swaps and non-cleared security-based swaps of three categories of counterparties. In particular, section 302 of TRIPRA amends sections 731 and 764 so that initial and variation margin requirements will not apply to a swap or security-based swap in which a counterparty (to a covered swap entity):
- A non-financial entity (including small financial institution and a captive finance company) that qualifies for the clearing exception under section 2(h)(7)(A) of the Commodity Exchange Act or section 3C(g)(1) of the Securities Exchange Act;
- A cooperative entity that qualifies for an exemption from the clearing requirements issued under section 4(c)(1) of the Commodity Exchange Act; or
- A treasury affiliate acting as agent that satisfies the criteria for an exception from clearing in section 2(h)(7)(D) of the Commodity Exchange Act or section 3C(g)(4) of the Securities Exchange Act.