On January 18, 2017, acting CFTC Chairman Christopher Giancarlo announced that the CFTC will begin to take steps over the next few weeks to "ease" the looming March 1, 2017 deadline for compliance with its Dodd-Frank variation margin (VM) rules that require financial counterparties to collateralize mark-to-market exposure under over-the-counter (OTC) derivatives that are not centrally cleared by a registered clearinghouse.

Firms globally have been scrambling for months to renegotiate their swap collateral documentation ahead of the deadline and ISDA has released new documentation designed to facilitate compliance with these and analogous rules in other jurisdictions (see Practice Note, The New ISDA® Credit Support Annexes and Global Margin Compliance for Uncleared Swaps). The largest firms (those with a notional amount of outstanding covered swaps in excess of $3 trillion) have been subject to VM requirements since September 1, 2016.

The VM requirements, established under Section 731 of the Dodd-Frank Act (7 U.S.C § 6s(e)), are part of a larger global regulatory framework published in September 2013 by the BCBS and IOSCO Working Group on Margin Requirements or WGMR (see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps: Final BCBS/IOSCO Guidelines on Uncleared Swap Margin Collateral).

In the US, there are two sets of margin rules – the CFTC margin rules and the prudential margin rules (see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules). The CFTC margin rules cover swaps to which there is at least one US counterparty to which the US prudential margin rules do not apply (see Practice Note, The Dodd-Frank Act: Cross-Border Application of Swaps Rules: CFTC Rules on Cross-Border Application of Margin Rules for Uncleared Swaps). The CFTC rules cover roughly half of all US uncleared swaps – generally swaps entered into by non-bank dealers – and the prudential rules cover the other half. It remains to be seen whether the US prudential regulators will follow suit and delay their VM deadline as well.

The global March 1, 2017 deadline was intended to expand the VM requirements to all covered swap entities (which include swaps dealers, major swap participants, security-based swap dealers, and major security-based swap participants covered by the rules) and align with the VM deadlines under the US prudential margin rules and margin rules in other jurisdictions including the EU and Japan. This announcement throws that alignment into question. It is not clear whether the US prudential regulators intend to follow suit in order to preserve alignment of compliance deadlines among US rules.

EU regulators recently rushed to complete EMIR VM rules to meet the global March 1 date and align compliance among jurisdictions (see Legal Update, EU Sets March 1, 2017 Deadline for Swap Variation Margin Compliance Under EMIR Aligning with Other Jurisdictions) after missing the initial September 1, 2016 phase-in for initial margin rules applicable to the largest swap traders (see Legal Update, EU Delays Margin Rules for Uncleared Swaps).

Regulators in Singapore, Hong Kong, and Australia announced that they will allow a six-month phase-in for VM rules to allow for a smooth transition. These timeline differences in the global derivatives market create disparities that add to both the cost and complexity of compliance.

Acting CFTC Chairman Giancarlo cited concerns that smaller firms, including US pension and retirement funds, would be unable to meet the March 1 deadline and would therefore be required to stop hedging their portfolios as of that date, at a time of rapid changes in global financial rates and asset values.

Giancarlo's announcement is particularly surprising, considering the scramble EU regulators underwent at the end of 2016 to ensure a March 1 alignment with their VM rules. It is a decidedly anti-globalist action, which could become a theme under the regulatory regime of the incoming administration.

Giancarlo stated that he intends to look at solutions over the weeks to come in order to soften the transition in a "responsible manner." He also stated that the CFTC "will have more to say about this in the weeks to come."