As part of a global regulatory initiative, the United States, European Union, Canada, Switzerland, Japan, Hong Kong, Singapore and Australia have all adopted, or are in the process of adopting, rules (Margin Rules) that impose mandatory variation margin requirements on non-cleared swaps and, in some cases, non-cleared security-based swaps and FX derivatives (collectively, “Covered Trades”). Starting March 1, any entity that is a financial end user (FEU) will only be able to execute a Covered Trade with a US swap dealer if it has amended its swap documentation to comply with the requirements applicable to the dealer under the Margin Rules.

An FEU includes:

  • banks, savings and loans and other similar entities;
  • credit or lending entities, such as finance companies and money lenders;
  • broker-dealers, investment companies and private funds;
  • commodity pools, commodity pool operators (CPOs), commodity trading advisors (CTAs) and futures commission merchants (FCMs);
  • ERISA plans;
  • insurance companies;
  • collective investment vehicles;
  • proprietary traders; and
  • foreign persons that would be any of the above if organized under US law.

What Does Each FEU Need to Do?

  1. Each FEU will need to amend its collateral documentation with each of its swap dealer counterparties by March 1. If you have not yet been contacted by all your swap dealer counterparties, you should reach out to them to start a variation margin dialogue.
  2. The amendment process starts with an exchange of information about the margin status of the FEU, which can be conveyed to counterparties via the Regulatory Margin Self-disclosure Letter published by ISDA, available here.
  3. Your current margin documentation can be amended using a bilateral amendment agreement provided by your swap dealer counterparty or by means of the 2016 Variation Margin Protocol published by ISDA. Information about the ISDA Variation Margin Protocol is available here.