CFTC Issues Relief to Swap Dealers From Compliance with Minimum Transfer Amount (MTA) Requirements for Uncleared Swap Margin Under Certain Conditions | Practical Law

CFTC Issues Relief to Swap Dealers From Compliance with Minimum Transfer Amount (MTA) Requirements for Uncleared Swap Margin Under Certain Conditions | Practical Law

The CFTC has issued relief to swap dealers from compliance with minimum transfer amount (MTA) restrictions under Dodd-Frank margin rules for uncleared swaps that are entered into with asset management firms that manage separately managed accounts (SMAs).

CFTC Issues Relief to Swap Dealers From Compliance with Minimum Transfer Amount (MTA) Requirements for Uncleared Swap Margin Under Certain Conditions

by Practical Law Finance
Published on 23 Feb 2017 • USA (National/Federal)
The CFTC has issued relief to swap dealers from compliance with minimum transfer amount (MTA) restrictions under Dodd-Frank margin rules for uncleared swaps that are entered into with asset management firms that manage separately managed accounts (SMAs).
On February 13, 2017, the CFTC issued No-Action Letter 17-12 (No-Action 17-12), which provides relief to swap dealers (SDs) from compliance with minimum transfer amount (MTA) restrictions set out in CFTC Regulation 23.152(b)(3) or 23.153(c) in connection with initial margin (IM) and variation margin (VM) for uncleared swaps that are entered into with asset management firms that manage separately managed accounts (SMAs).
MTA is an amount of exposure that a party to a transaction (for example, Party A) may accumulate to its counterparty (Party B) before Party A must post collateral with Party B to cover some or all of the exposure. MTA is essentially an exemption from posting de minimis collateral amounts. Under the final CFTC uncleared margin rules, MTA may not exceed $500,000 per counterparty. For more information on MTAs, see Practice Notes, The ISDA Master Agreement, Negotiating the ISDA Credit Support Annex (CSA) and The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps.
Note that, under the rules, MTA is calculated at the fund or entity level as opposed to the account level. However, under No-Action 17-12, SDs will be able to treat each account in an SMA as a separate counterparty for purposes of MTA requirements, despite the fact that the SMAs might be managed or owned by the same entity.
Each SMA typically has its own ISDA master agreement resulting in collateral movements of IM and VM not being netted across SMAs that belong to a particular owner (this separation allows for customized investment strategies for each SMA). Industry groups raised concerns that asset managers would be unable to calculate MTA across all the SMAs of a single owner.
No-Action 17-12 offers relief to SDs from compliance with MTA restrictions found in CFTC regulations covering IM and VM (CFTC Regulations 23.152(b)(3) or 23.153(c), respectively) under the following conditions:
  • The asset manager acting on behalf of an SMA owned by the legal entity enters into the swap with a SD pursuant to authority granted under an investment management agreement (IMA).
  • The swap is subject to a master netting agreement that does not permit the aggregation of netting of IM or VM across SMAs owned by the legal entity that has outstanding swaps with the SD.
  • The SD sets an MTA of no greater than $50,000 for IM and VM collection and posting obligations.
Note that this relief applies only to entities subject to CFTC uncleared margin rules, which includes many SDs that are broker-dealers. SDs that are subject to the US prudential margin rules, including most banking entities, have not been granted similar relief.
The relief granted by No-Action 17-12 is effective immediately and indefinitely, as it does not include a sunset provision.
For details on both the CFTC and prudential margin rules for uncleared swaps, see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps.