In the last few months of 2015, U.S. regulators issued final margin rules that we expect will have far-reaching consequences for swap activity and documentation. On October 22, 2015, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Farm Credit Administration each approved the Joint Final Rules on Margin and Capital Requirements for Covered Swap Entities to establish margin requirements for uncleared swaps (joint final rules). The other two prudential regulators, the Board of Governors of the Federal Reserve System and the Federal Housing Finance Agency, adopted the joint final rules on October 30, 2015. Subsequently, on December 16, 2015, the Commodity Futures Trading Commission (CFTC) adopted final rules on Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (CFTC final rules).
The joint final rules apply to swaps and security-based swaps with CFTC-registered swap dealers and major swap participants that are regulated by one of the five prudential regulators, while the CFTC final rules apply to swaps with CFTC-registered swap dealers and major swap participants for which there is no prudential regulator. Once fully implemented, the joint final rules and the CFTC final rules (together, final rules) may greatly affect the ability of banks, insurance companies, hedge funds, mutual funds, asset managers, pension plans and securitization vehicles, among other types of entities, to hedge their assets and liabilities, and may increase the costs of such hedging activities, in part because the margin requirements will be imposed on transactions that were generally unregulated before the enactment of the Dodd-Frank Act in 2010.
The covered entities may need to negotiate revised collateral documentation, such as the Credit Support Annex (CSA) published by the International Swaps and Derivatives Association (ISDA), with their bank counterparties to bring their derivatives relationships into line with the final rules. Banks also may ask their counterparties to adhere to ISDA protocols for purposes of complying with the final rules. The protocols are expected to be used to amend multiple CSAs with multiple banks, thereby avoiding the need to enter into individual bilateral amendments with each bank.
The final rules will be effective on April 1, 2016, with staggered compliance dates beginning on September 1, 2016 and ending on September 1, 2020.