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President Obama Signs Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), Including Dodd-Frank Swaps Margin Exemption for End Users
Practical Law Legal Update 0-595-4385 (Approx. 4 pages)
President Obama Signs Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), Including Dodd-Frank Swaps Margin Exemption for End Users
by Practical Law Finance
| Published on 13 Jan 2015 • USA (National/Federal) |
President Obama signed into law a federal terrorism insurance bill that includes an unrelated provision granting non-financial commercial end users of derivatives a full exemption from uncleared swap margin requirements introduced under Title VII of the Dodd-Frank Act.
On January 12, 2015, President Obama signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) that includes an unrelated provision exempting ranchers, energy businesses and other nonfinancial end users of derivatives from uncleared swap margin requirements under Title VII of the Dodd-Frank Act. However, existing rulemaking in this area does not require swap dealers and other large swap entities to which these rules apply to collect uncleared swap margin collateral from nonfinancial commercial end user counterparties. The measure therefore has little practical effect.
TRIPRA adds a paragraph titled "applicability with respect to counterparties" to the end of:
- Section 4s(e) of the Commodity Exchange Act (CEA) (7 U.S.C. 6s(e)), as added by Section 731 of the Dodd-Frank Act. Section 4s(e) is amended to exempt from the margin rules of the prudential bank regulators and the CFTC, swaps entered into by swap dealers (SDs) and major swap participants (MSPs) that are not cleared by a registered derivatives clearing organization (DCO), where one of the counterparties to the swap:
- qualifies for the Dodd-Frank commercial end-user swap-clearing exception under CEA Section 2(h)(7)(A) or 2(h)(7)(D) (see Practice Note, The Dodd-Frank Act: The Commercial End-user Exception to the Mandatory Swap Clearing Requirement);
- is eligible for a public interest exemption from swap clearing requirements for certain cooperative entities; or
- satisfies specified criteria governing treatment of affiliates in connection with clearing requirements.
- Section 15F(e) of the Securities Exchange Act (Exchange Act) (15 U.S.C. 78o–10(e)), as added by Section 764(a) of the Dodd-Frank Act. Section 15F(e) was amended to exempt, from the margin rules of the prudential bank regulators and the SEC, security-based swaps (SBS) entered into by security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs) that are not cleared by a registered DCO, where one of the counterparties to the SBS:
- qualifies for a specified exception from clearing requirements, including the Dodd-Frank commercial end-user SBS clearing exception under Exchange Act Section 3C(g)(1) or 3C(g)(4) (see Legal Update, SEC Proposes Corollary End-user Exemption from Mandatory Swap Clearing under Dodd-Frank); or
- satisfies certain criteria governing the treatment of affiliates.
However re-proposed rules issued by US bank regulators (bank margin rules) in September 2014, scheduled to take effect in December 2015, already permit covered swap entities, or CSEs (primarily SDs and SBSDs that are subject to regulation by US prudential bank regulators), to collect margin collateral for uncleared swaps as determined appropriate by the CSE (see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps). This is also the case under:
- Re-proposed CFTC margin rules for uncleared swaps, also proposed in September 2014 and scheduled to take effect in December 2015 (see Legal Update, CFTC Re-proposes Corollary Dodd-Frank Margin Rules for Uncleared Swaps).
- Proposed SEC margin and capital rules for uncleared SBS (see Legal Update, Capital and Margin Rules for Security-based Swap Dealers and Major Security-based Swap Participants Proposed by SEC). Though note that the SEC rules require SBSDs to take a capital charge for uncleared SBS with commercial end users.
It is important to remember that SD, MSP, SBSD and MSBSP counterparties are permitted under these rules to negotiate margin collateral requirements for their uncleared swaps with commercial end user counterparties -- and they will continue to do so. The amendment clarifies that they may not be required to do so under the rules. As a result, negotiation of the ISDA Credit Support Annex (CSA), which governs margin for most uncleared transactions, where one of the parties is a nonfinancial commercial end user, will be unaffected by the margin rules and unaffected by the congressional amendment.
Republican lawmakers inserted the provision into a bill that was otherwise non-controversial and likely to pass with bipartisan support. An amendment to the bill suggested by Senator Elizabeth Warren would have eliminated this language. However, the amendment did not receive enough votes for approval and the language was included in the legislation. This tactic was also recently used when a federal omnibus spending bill that was signed into law included a provision that amended Section 716 of the Dodd-Frank Act, the Swaps Pushout Rule (see Legal Update, Dodd-Frank Swaps Pushout Rule Substantially Repealed).