On December 16, the Commodity Futures Trading Commission adopted final rules that set margin requirements for swap dealers and major participants (collectively, Swap Entities) regulated by the CFTC with respect to swaps that are not cleared with a derivatives clearing organization or clearing agency. The final rules are generally consistent with the rules adopted on October 30 by the US prudential regulators (the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve, Office of the Comptroller of the Currency, Farm Credit Administration and Federal Housing Finance Agency) and the international standards for non-cleared swap margin published by the Basel Committee on Banking Supervision and the Board of the International Organization of Securities Commissions in September 2013. The CFTC’s margin rules will be implemented in phases starting on September 1, 2016. These margin rules are not intended to have retroactive effect and pre- and post-compliance date swaps can be treated separately even if they are documented under the same master agreement if they are separated into different netting portfolios.
Except as noted below, the substance of CFTC’s margin rules is virtually identical to that of the margin rules promulgated by the prudential regulators and are based on the regulatory categorization of the two counterparties. If the swap is between two Swap Entities or between a Swap Entity and a financial end user with “material swaps exposure,” there are mandatory initial margin (IM) and variation margin (VM) requirements. If the swap is between a Swap Entity and a financial end user that does not have a material swaps exposure, only VM applies. There are no mandatory margin requirements for any other pairs of counterparties, but swap dealers remain free to impose traditional contractual margin requirements as they see fit. When IM is mandatory, it must be segregated with a custodian that is not affiliated with the party receiving the IM and cannot be rehypothecated.
The differences between the CFTC’s margin rules and the rules of the prudential regulators are described below.
First, while transactions between a Swap Entity and its affiliates will be subject to mandatory variation margin requirements, a Swap Entity generally will not be required to collect initial margin from its affiliates if it has a centralized risk management system in place for managing the risks associated with these transactions. For transactions with foreign affiliates, a Swap Entity will be required to collect initial margin from such affiliate only if: (1) the affiliate is a financial end user; (2) the affiliate enters into swaps with third parties (directly or indirectly) under which the CFTC margin rules would apply if the affiliate were a Swap Entity; and (3) the affiliate is located in a jurisdiction that the CFTC has not found to be eligible for substituted margin compliance and does not collect initial margin from such third parties. Under these transactions, however, the Swap Entity or its foreign affiliate may be the custodian of such initial margin.
Second, the CFTC’s margin rule delegates to the National Futures Association the responsibility for approving internal risk models that may be used by Swap Entities to calculate initial margin requirements.
The text of the new final rules can be found here.