How did we get here

Last year on October 22 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 (the Joint Final Rules). 

Following this, the Federal Reserve Board and the Federal Housing Finance Agency (together with the FDIC, the OCC and the FCA, the Prudential Regulators) adopted the Joint Final Rules on October 30. 

Finally, the Commodity Futures Trading Commission (CFTC, and together with the Prudential Regulators, the Regulators) also adopted final rules onMargin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (the CFTC Final Rules, and together with the Joint Final Rules, the Final Rules) on December 16.

What would change

The Final Rules, once fully implemented, may greatly impact 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. 

It may increase the costs of such hedging activities, in part, because the margin requirements will be imposed on transactions that were generally unregulated prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).  In addition, such 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 in order to bring their derivatives relationship in line with the Final Rules. 

Banks may also ask their counterparties to adhere to ISDA protocols for purposes of compliance with the Final Rules, which protocols are expected to be used to amend multiple CSAs with multiple banks in lieu of entering into individual bilateral amendments with each bank.

When would the Final Rules come into force

The Final Rules will be effective on April 1, 2016 with staggered compliance dates beginning on September 1, 2016 and ending September 1, 2020.