CFTC Extends Comment Period on Uncleared Swap Margin Rules for Swap Dealers and MSPs | Practical Law

CFTC Extends Comment Period on Uncleared Swap Margin Rules for Swap Dealers and MSPs | Practical Law

The CFTC extended to September 14, 2012 the comment period for its proposed rules on margin collateral requirements relating to the uncleared swaps of swap dealers and major swap participants.

CFTC Extends Comment Period on Uncleared Swap Margin Rules for Swap Dealers and MSPs

Practical Law Legal Update 7-520-4376 (Approx. 3 pages)

CFTC Extends Comment Period on Uncleared Swap Margin Rules for Swap Dealers and MSPs

by PLC Finance
Published on 18 Jul 2012 • USA (National/Federal)
The CFTC extended to September 14, 2012 the comment period for its proposed rules on margin collateral requirements relating to the uncleared swaps of swap dealers and major swap participants.
The CFTC has extended to September 14, 2012 the comment period for all aspects of its proposed rules on margin collateral requirements for the uncleared swaps of swap dealers (SDs) and major swap participants (MSPs), which were originally published in the Federal Register on April 28, 2011. The CFTC authorized the extension to give interested parties an opportunity to comment on the rules in light of a consultative paper on uncleared swap margin collateral matters that was jointly published on July 6 by the Basel Committee on Banking Supervision (BCBS) and IOSCO.
The BCBS-IOSCO paper addresses a number of topics, including:
  • The instruments subject to margin requirements.
  • The market participants subject to margin requirements.
  • Eligible collateral.
  • Treatment of provided margin.
  • Treatment of inter-affiliate transactions.
  • Treatment of cross-border transactions.
While the proposed CFTC rules and the joint BCBS-IOSCO paper largely complement one another, they do contain certain key differences, including:
  • Proposed CFTC rules would only require SDs and MSPs to collect initial and variation margin from their swap counterparties (including other SDs and MSPs in so-called "inter-dealer" trades), but the rules do not require SDs and MSPs to post collateral to their non-SD/non-MSP swap counterparties. The BCBS-IOSCO paper endorses a bilateral exchange of initial and variation margin collateralizing all derivatives, including uncleared swaps, with set minimum collateral amounts for all derivatives.
  • While the proposed CFTC rules would apply Dodd-Frank margin requirements to any SD entering into a transaction with a US-based SD, the BCBS-IOSCO paper suggests these entities should be subject to the margin requirements of their host country's regulatory regime if it is consistent with BCBS-IOSCO standards.
  • Margin rules proposed by bank regulators for swaps entered into by banks (called covered swap entities or CSEs) are at odds with the IOSCO paper because they do not require segregation of non-dealer-to-dealer collateral (that is, margin collateral posted to cover transactions in which one party is neither an SD or MSP) (see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules: Segregation of Uncleared Swap Margin Collateral Posted by Certain Swap Dealers and MSPs to One Another). However, proposed CFTC rules do require segregation of all collateral posted with all SDs/MSPs that are not CSEs. This approach is consistent with the IOSCO/BCBS proposal.
    It is noteworthy that the comment period has not been re-opened on the CSE proposal, which would apply more broadly than the proposed CFTC rules (which cover only non-CSEs). This is because most SDs, major banks and broker-dealers in the US will be CSEs. Because most swaps in the US are entered into with CSEs, most US swaps will ultimately be subject to the CSE rules, rather than the CFTC rules. Further, optional (as opposed to mandatory) segregation of collateral posted by non-SDs/non-MSPs is specified in Title VII itself (see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules: Title VII Rules on Segregation of Uncleared Swap Margin Collateral). It does not appear that there is a forum for this to be re-examined.
IOSCO and the BCBS plan to carry out a quantitative impact study during the comment period to consider the potential impact of derivatives margin requirements on financial markets and the broader financial system. They will weigh the potential benefits of heightened margin requirements against the liquidity impact arising from the need for derivatives counterparties to provide liquid, high-quality collateral when meeting margin requirements.
As part of the international effort to implement consistent global standards for derivatives margin collateral requirements for uncleared derivatives, the CFTC will consider the final policy recommendations of the BCBS-IOSCO paper when adopting its final Dodd-Frank swap margin collateral rules. Comments to the BCBS-IOSCO paper are due by September 28, 2012.
For more information on margin collateral requirements under the Dodd-Frank Act, see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules.