CFTC Approves Comparability Determination for Japan's Uncleared Swaps Margin Rules | Practical Law

CFTC Approves Comparability Determination for Japan's Uncleared Swaps Margin Rules | Practical Law

The CFTC approved a comparability determination permitting substituted compliance with Japan's uncleared swaps margin rules in place of CFTC rules, with one important exception for inter-affiliate swaps.

CFTC Approves Comparability Determination for Japan's Uncleared Swaps Margin Rules

Practical Law Legal Update w-003-4486 (Approx. 4 pages)

CFTC Approves Comparability Determination for Japan's Uncleared Swaps Margin Rules

by Practical Law Finance
Published on 15 Sep 2016 • USA (National/Federal)
The CFTC approved a comparability determination permitting substituted compliance with Japan's uncleared swaps margin rules in place of CFTC rules, with one important exception for inter-affiliate swaps.
On September 8, 2016, the CFTC approved a comparability determination which permits substituted compliance with Japan's uncleared swaps margin rules in place of CFTC rules, with one exception regarding margin for inter-affiliate swaps. This determination permits covered swap entities (CSEs) (including swap dealers (SDs) and major swap participants (MSPs)) that are subject to both the CFTC and Japan Financial Services Agency (JFSA) margin rules to comply with the final CFTC margin rules through substituted compliance with Japan's uncleared swaps margin rules.
The CFTC's final rules on cross-border application of margin requirements (cross-border rules), published in May 2016, allow for substituted compliance, which permits CSEs to comply with final CFTC margin rules for uncleared swaps by complying with comparable foreign margin requirements in jurisdictions where the CFTC has issued a comparability determination (see Practice Note, The Dodd-Frank Act: Cross-Border Application of Swaps Rules: Substituted Compliance with Foreign Regulations Sufficient in Certain Circumstances). CSEs include SDs and MSPs for which there is no prudential regulator.
The JFSA submitted a request for a comparability determination to the CFTC on June 17, 2016 and subsequently updated and supplemented the request on July 26, 2016 and August 18, 2016. The JFSA requested that the CFTC determine that Japan's margin requirements for uncleared swaps are comparable to those of the CFTC.
The CFTC made the following determinations of comparability between Japan's uncleared swap margin rules and the final CFTC margin rules:
  • The JFSA's statement of regulatory objectives and the CFTC's regulatory objectives are comparable.
  • The products subject to margin requirements in each jurisdiction are not identical, as the CFTC covers "uncleared swaps" and the JFSA covers "non-cleared OTC derivatives." Therefore, CSEs must determine whether a transaction is both an uncleared swap and a non-cleared OTC derivative in order to rely on the substituted compliance determination.
  • Entities subject to margin requirements are different in scope since the JFSA covers all types of financial institutions and the CFTC only covers CSEs. Therefore, CSEs can only rely on substituted compliance if they are subject to both the final margin rules and the JFSA margin requirements.
  • Methodologies for calculating the amounts of initial margin (IM) and variation margin (VM) are comparable.
  • Processes and standards for approving margin models between the JFSA and the regulatory approval required by the CFTC are comparable.
  • Timing and manner for collection or payment of IM and VM are comparable in outcome, despite apparent differences in certain respects.
  • Margin threshold levels or amounts are comparable.
  • Risk-management controls for the calculation of IM and VM are comparable.
  • Eligible collateral for IM and VM is comparable, while not identical.
  • Requirements for custodial arrangement, segregation, and rehypothecation are comparable in outcome, despite some differences.
  • Requirements for margin determination are comparable.
  • Cross-border application of JFSA's margin regime is comparable in outcome.
On these above points, substituted compliance with Japan's margin rules is permitted where applicable.
However, substituted compliance is not permitted with respect to margin for inter-affiliate swaps, since the CFTC found Japan's margin rules for uncleared inter-affiliate swaps and US inter-affiliate margin regulations not to be comparable. The final CFTC margin rules require collection and posting of VM for inter-affiliate swaps, and collection of IM under certain circumstances, whereas Japan's margin rules do not. CSEs must therefore follow the CFTC margin rules with respect to margin for inter-affiliate swaps.
For more information on the final CFTC margin rules, see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps: Final CFTC Margin Rules.
Note that many swaps entities are not covered by the CFTC uncleared margin rules, but rather are subject to the prudential margin rules (see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps: Final Prudential Margin Rules). This determination is not applicable to entities subject to the prudential margin rules.
For further detail on substituted compliance under CFTC rules, see Practice Note: The Dodd-Frank Act: Cross-Border Application of Swaps Rules.