On September 3, 2014, the Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Farm Credit Administration and the Federal Housing Finance Agency released re-proposed rules under Title VII of the Dodd-Frank Act on minimum requirements for the exchange of initial margin and variation margin collateral between banks and their counterparties in connection with non-cleared swaps and non-cleared security based swaps (SBS) entered into between them.

This proposed rule builds on the joint margin collateral collection proposal (initial proposal) released by US bank regulators in April 2011 (see Legal Update, Regulators Propose Conflicting Rules on Uncleared Swap Margin Requirements) and incorporates the final framework for margin requirements on uncleared derivatives that the Basel Committee adopted in September 2013 (see Legal Update, Final Global Margin Rules for Uncleared Derivatives Released by International Regulators). The re-proposed rules impose a requirement that banks and BHCs ("covered swap entities" or "CSEs") that engage in derivatives trades with one another or with large financial end users that have significant swaps exposure of more than $3 billion must calculate initial margin levels by using either:

In either case, the amount of initial margin collateral required to be posted under a transaction would vary depending on the relative risk of the counterparty and of the uncleared swap or uncleared SBS. The new definition of "large financial end users" is stricter than in the original proposal.

Additionally, the proposed rule expands the types of eligible collateral that are eligible that may be posted as initial margin (see page 189 of re-proposed rules).

Unlike the initial proposal, the revised proposal requires two-way collateral posting. That is, the CSE bank must post margin to its uncleared swap counterparty rather than merely collecting margin collateral from its counterparty. Since uncleared swaps are generally less liquid than cleared swaps, the proposed rule requires that posted initial margin cover a 10-day close-out period rather than the five-day period required for cleared swaps. This aspect of the proposed rule could increase the cost of uncleared swaps.

The proposed margin requirements would apply to uncleared swaps and uncleared SBS prospectively, after the passage of applicable compliance dates, to be determined under final rules. Covered swap entities can decide whether or not to collect specific or minimum amounts of initial margin or variation margin from nonfinancial end users.

It is noteworthy that the revised proposal, like the original proposal, would require banks to post initial margin collateral to one another in connection with uncleared swaps between them, which has not traditionally been market practice. Opponents of the original uncleared bank swap margin proposal estimated that such a rule could tie up several hundred billion of bank capital in margin collateral accounts. In a July 6, 2011 joint comment letter to regulators on the joint margin proposal, ISDA and SIFMA cite a study by the OCC which estimates that $2 trillion in new margin collateral would have to be set aside under the joint margin proposal.

The final version of these rules is likely to define the parameters within which the following matters may be negotiated under an ISDA Credit Support Annex (CSA):

For an explanation of these concepts, see Practice Note, The ISDA Master Agreement: Negotiating the ISDA Credit Support Annex (CSA).

The agencies request public comment on the proposed rule on or before November 24, 2014.