On October 31, the Commodity Futures Trading Commission’s Office of the Chief Economist issued a report on “Phase 5” of the uncleared margin rules (UMR). The purpose of the report is to provide a guide to regulators in their responses to requests for relief from various industry representatives.

The UMR mandate that registered swap dealers exchange initial margin (IM) on trades with other swap dealers and financial end-users. The rules have been phased in, beginning with those entities having the highest aggregate daily average of notional amount swaps (AANA) over June, July and August of the previous year. With the exception of swaps with commercial end-users, all swaps are counted towards AANA, including swaps that are exempt from IM. The last two phases, “Phase 4” and “Phase 5,” are scheduled to take effect September 1 of 2019 and 2020, respectively. Phase 5 will capture entities with AANA between $8 billion and $750 billion.

Although Phases 1 through 4 are anticipated to capture just over 40 entities, Phase 5 could bring an additional 700 entities into the scope of the UMR. In light of the strain that this large increase in covered entities would place on their resources, industry representatives have requested various forms of relief from the regulators, noting, among other things, that in light of the comparatively small size of their swaps positions, the Phase 5 entities would pose little systemic risk. One of these requests, from a group of trade associations, has been sent to several regulators and seeks to have the Phase 5 threshold increased from $8 billion to $100 billion.

The report provides regulators with empirical data to guide their decision making, while reviewing these requests for relief, but makes no recommendations based upon its findings.

The Report is available here.

The request for relief is available here.