CFTC Issues Guidance on Uncleared Swap Margin Segregation for Swap Dealers under Dodd-Frank | Practical Law

CFTC Issues Guidance on Uncleared Swap Margin Segregation for Swap Dealers under Dodd-Frank | Practical Law

On October 31, 2014, the CFTC released Staff Letter 14-132, providing clarification on CFTC Regulations 23.701 and 23.704, which impose certain notice and reporting requirements on swap dealers and MSPs relating to their obligation to segregate initial margin posted by their uncleared-swap counterparties if requested by the counterparty. Compliance with these segregation rules, mandated under Title VII of the Dodd-Frank Act, was required by SDs and MSPs for certain swaps as of November 3, 2014.

CFTC Issues Guidance on Uncleared Swap Margin Segregation for Swap Dealers under Dodd-Frank

by Practical Law Finance
Published on 05 Nov 2014 • USA (National/Federal)
On October 31, 2014, the CFTC released Staff Letter 14-132, providing clarification on CFTC Regulations 23.701 and 23.704, which impose certain notice and reporting requirements on swap dealers and MSPs relating to their obligation to segregate initial margin posted by their uncleared-swap counterparties if requested by the counterparty. Compliance with these segregation rules, mandated under Title VII of the Dodd-Frank Act, was required by SDs and MSPs for certain swaps as of November 3, 2014.
On October 31, 2014, the CFTC released Staff Letter 14-132, providing clarification on CFTC Regulations 23.701 and 23.704, which impose certain notice and reporting requirements on swap dealers (SDs) and major swap participants (MSPs) relating to their obligation to segregate initial margin posted by their uncleared-swap counterparties if requested by the counterparty (see Legal Update, Final Rules on Segregation of Initial Margin for Uncleared Swaps Issued by CFTC). These rules also require SDs and MSPs to notify their uncleared-swap counterparties of their right to have this segregated initial margin held by an independent third-party custodian. Compliance with these segregation rules, mandated under Title VII of the Dodd-Frank Act, was required by SDs and MSPs for certain swaps as of November 3, 2014.
Section 724(c) of the Dodd-Frank Act added Section 4s(l) to the CEA, under which Regulation 23.701 and Regulation 23.704 were promulgated. Compliance with these rules for uncleared swap transactions entered into with "existing counterparties" (swaps entered into before January 6, 2014) was required no later than November 3, 2014. Compliance with the rules for swaps entered into with "new counterparties" (swaps entered into on or after January 6, 2014) was required no later than May 5, 2014.
Regulation 23.701 requires that, prior to the execution of an uncleared swap transaction, an SD or MSP must:
  • Notify its counterparty that the counterparty has the right to require segregation of any initial margin provided in connection with that transaction. This notice must be provided to an officer of the counterparty responsible for the management of collateral or, if no such officer is identified, to certain specified officers or the highest level decision-maker of the counterparty. This notice must be provided once every calendar year. (For a link to a sample notice published by ISDA that may be used to satisfy these annual notice requirements, see Legal Update, ISDA Releases Sample Initial Margin Segregation-Rights Notice and FAQs.)
  • Identify one or more acceptable independent custodians, at least one of which must be a creditworthy financial institution that is not an affiliate of the SD or MSP).
  • Provide certain information regarding the price of segregation for each identified custodian, to the extent that the SD or MSP has such information.
Regulation 23.701(d) requires that, prior to confirming the terms of any swap, the SD or MSP obtain from its counterparty confirmation of receipt of the above-referenced annual notice by the specified person and an election to require or not to require segregation. Under the regulation, the SD or MSP must maintain these counterparty confirmations and elections in its business records.
Under Regulation 23.704, the chief compliance officer (CCO) of each SD and MSP must report quarterly to each swap counterparty that does not choose to require segregation of initial margin on whether the SD's or MSP's back office procedures relating to margin and collateral were not in compliance with the swap agreement of the counterparty at any point during the previous calendar year.
Staff Letter 14-132 clarifies that:
  • The requirement under Regulation 23.701 that an SD or MSP provide annual notification to each counterparty to an uncleared swap transaction of that counterparty's right to elect to require segregation of initial margin continues to apply in any calendar year in which the SD or MSP enters into a new uncleared swap transaction with that counterparty. The SD or MSP is required to provide the annual notification, regardless of whether the counterparty previously made an election to require the SD or MSP to segregate the initial margin.
  • The annual notification and quarterly reporting requirements set out in Regulations 23.701 and 23.704 are not applicable if no initial margin is required to be posted by a counterparty or collected by an SD or MSP, whether by contract or regulation. (For a link to a sample notice published by ISDA that may be used to satisfy these quarterly notice requirements, see Legal Update, Sample Dodd-Frank Quarterly Initial Margin Notice for Swap Dealers Published by ISDA.)
  • An SD or MSP is not prohibited from relying on "negative consent" in complying with its obligations under CFTC Regulation 23.701(d) to obtain from its counterparty:
    • confirmation of the counterparty's receipt of the annual notice provided by the SD or MSP under Regulation 23.701; and
    • the counterparty's election to require or not require segregation.
For further details on these rules and the requirements for SDs under them, see Legal Update, ISDA Issues Advisory on Upcoming Margin Segregation Deadline for Swap Dealers.