On September 17, 2014, the CFTC issued corollary re-proposed rules under Title VII of the Dodd-Frank Act on margin collateral requirements for the uncleared non-security-based swaps of swap dealers (SDs) and major swap participants (MSPs) that are not covered by the recently re-proposed rules on margin requirements for uncleared swaps issued by federal prudential bank regulators (revised bank proposal) (see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps).

The CFTC rules would apply to swaps entered into by SDs and MSPs that are not regulated by the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration or the Federal Housing Finance Agency.

The CFTC consulted with these prudential regulators as well as with the SEC in developing the re-proposed rules, which were originally proposed in 2011. The re-proposed CFTC rules are very similar to the revised bank proposal and are intended to align with international standards issued in 2013 by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) (see Legal Update, Final Global Margin Rules for Uncleared Derivatives Released by International Regulators).

Section 4s(e)(2)(B) of the Commodity Exchange Act (CEA) directs the CFTC to impose margin requirements on covered swap entities (CSEs), which are SDs and MSPs for which there is no prudential regulator. The re-proposed CFTC rules would impose the exchange of initial margin and variation margin collateral on:

The re-proposed CFTC rules would impose a requirement to calculate initial margin levels by using either:

As under the revised bank proposal, initial margin would be required to be collected and posted for all trades between CSEs and SD/MSP banks or financial end users that have over $3 billion in gross notional exposure in uncleared swaps. The CFTC rules would also permit CSEs and their counterparties to establish margin thresholds of up to $65 million, as under the revised bank proposal.

The initial margin requirements would be phased in from December 1, 2015 until December 1, 2019 based on the notional swap size. Variation margin requirements would be effective as of December 1, 2015. The rules would only apply to uncleared swaps that are entered into after the effective dates of the regulation.

These rules would impact and set parameters for certain aspects of the negotiation of the ISDA Credit Support Annex executed in connection with an ISDA Master Agreement, the primary documentation used for uncleared swaps.

Note that the CFTC uncleared swap margin rules would be of somewhat limited application than the rules for uncleared bank swaps, as many swaps are entered into with entities subject to the revised bank proposal (see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps). The CFTC rules would therefore apply to nonbank broker-dealer SDs and other nonbank SDs.

Note that, in 2012, the SEC also released a proposal under Title VII covering margin collateral collection requirements for uncleared security-based swaps (SBS) that would apply to SBS not covered by the revised bank proposal. For more information, see Legal Update, Capital and Margin Rules for Security-based Swap Dealers and Major Security-based Swap Participants Proposed by SEC: Uncleared Security-based Swap Margin Requirements.

The CFTC issued a Q&A with further details on the revised CFTC proposal. Comments regarding the re-proposed rules must be received on or before December 2, 2014.