The CFTC has issued no-action relief for Swap Dealers that are subject to, and in compliance with, the EU margin rules but fail to comply with certain provisions of the CFTC’s margin rules for the period from February 4, 2017 through May 7, 2017 (inclusive).

This no-action relief will prevent disruption to the market during the ongoing comparability review process being undertaken by the CFTC and other US agencies with respect to the EU Margin Rules.

Background

On December 16, 2015, the Commodity Futures Trading Commission (the "CFTC") released final rules and accompanying interpretive guidance setting forth the CFTC's initial and variation margin requirements applicable to uncleared swaps ("CFTC Final Margin Rules").[1] Subsequently, on May 24, 2016, the CFTC released final rules and accompanying interpretative guidance setting forth the application of the CFTC Final Margin Rules to cross-border swap transactions (the "CFTC Final Cross-Border Margin Rules").[2] The CFTC Final Margin Rules apply to Swap Dealers and Major Swap Participants that are not prudentially regulated, while those that are prudentially regulated are subject to the final margin rules for uncleared swaps of the Prudential Regulators ("PR Final Margin Rules"). For information on the CFTC Final Margin Rules and the PR Final Margin Rules (including the cross-border rules of the PR Margin Rules), please see our client alert available here. For information on the CFTC Final Cross-Border Margin Rules, please see our client alert available here.

Compliance with the CFTC Final Margin Rules began on September 1, 2016 for a limited number of Swap Dealers. Compliance with the initial margin requirements for the rest of the market will be phased-in between now and September 1, 2020, following which all Swap Dealers and Major Swap Participants will be required to comply. Importantly, however, the variation margin requirements will apply to all Swap Dealers and Major Swap Participants from March 1, 2017.

Pursuant to the CFTC Final Cross-Border Margin Rules, Swap Dealers and Major Swap Participants that enter into cross-border swaps may be permitted, in certain circumstances, to satisfy some or all of the requirements of the CFTC Final Margin Rules by complying with another jurisdiction’s margin regime where that regime is subject of a substituted compliance determination of the CFTC. However, if a determination has not been issued with respect to a foreign margin regime, then Swap Dealers and Major Swap Participants that operate on a cross-border basis may need to comply with both the CFTC Final Margin Rules and any such applicable foreign margin regime.

Relief for Swap Dealers Complying with the EU Margin Rules

Starting February 4, 2017, a phase-in of the initial and variation margin requirements of the EU Margin Rules[3] will commence. As a result, in the absence of a substituted compliance determination by the CFTC, Swap Dealers that operate in the EU may be required to comply with both the CFTC Final Margin Rules and the EU Margin Rules. The majority of these are likely to be US Swap Dealers and foreign Swap Dealers that are guaranteed by or consolidated subsidiaries of US entities. The CFTC's Division of Swap Dealer and Intermediary Oversight ("DSIO") acknowledged this issue in CFTC No-Action Letter 17-05 and set-out no-action relief.

Under the no-action relief, the DSIO stated that, in the absence of any substituted compliance determination for the EU Margin Rules, it will not recommend enforcement action against a Swap Dealer that is subject to, and in compliance with, the EU Margin Rules but fails to comply with those provisions of the CFTC Final Margin Rules that would be eligible for substituted compliance upon a determination by the CFTC that the EU Margin Rules are comparable to the CFTC Final Margin Rules. This no-action relief is time-limited and only applies for the period from February 4, 2017 through May 7, 2017 (inclusive). The CFTC noted that Swap Dealers should not presume that the CFTC's ultimate substituted compliance determination with respect to the EU Margin Rules will be comparable to the no-action relief.

Please note that this no-action relief only applies to Swap Dealers that are subject to the CFTC Final Margin Rules. It does not apply to Major Swap Participants subject to the CFTC Final Margin Rules, or Swap Dealers, Major Swap Participants, Security-Based Swap Dealers or Major Security-Based Swap Participants subject to the PR Final Margin Rules.