The federal agencies along with the Farm Credit Administration and the Federal Housing Finance Agency are seeking public comment on a proposed rule that would establish margin requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (referred to as “swap entities”) as required by the Dodd-Frank Act. The proposed rule released on September 3 would establish minimum requirements for the exchange of initial and variation margin between the swap participants subject to the rule, including banks that are swap entities, and their counterparties to non-cleared swaps and non-cleared security-based swaps. The proposed swap margin rule would distinguish among four separate types of swap counterparties: counterparties that are themselves swap entities; counterparties that are financial end users with a material swaps exposure; counterparties that are financial end users without a material swaps exposure; and other counterparties, including nonfinancial end users, sovereigns, and multilateral development banks. The swap margin requirements would vary between these types of swap counterparties. The proposed rule’s initial and variation margin requirements generally would apply to the posting, as well as the collection, of minimum initial and variation margin amounts by a swap entity from and to its counterparties. Comments on the proposed rule are due by November 24, 2014.
Nutter Notes: According to the agencies, the proposed swap margin rule builds on a proposed rule originally released in April 2011 and includes some modifications that were made in light of public comments, such as an expansion of the types of collateral eligible to be posted as initial margin. The proposed margin requirements would apply to non-cleared swaps and non-cleared security-based swaps entered into after the proposed rule’s applicable compliance dates. The amount of margin that would be required under the proposed rule would vary based on the relative risk of the counterparty and of the non-cleared swap or non-cleared security-based swap. The proposed rule does not require a swap entity to collect specific or minimum amounts of initial margin or variation margin from nonfinancial end users, but leaves that decision to the swap entity consistent with its overall credit risk management policies and procedures. The agencies said that the proposal seeks to promote global consistency by generally following the final framework for margin requirements on non-cleared derivatives that the Basel Committee on Banking Supervision and the International Organization of Securities Commissions adopted in September 2013.