On February 23, 2017, the CFTC issued No-Action Letter 17-13 (No-Action 17-13) providing limited relief through March 1, 2020 from compliance with final CFTC uncleared swap variation margin (VM) rules for swap dealers (SDs) subject to uncleared swap margin rules of the Financial Services Agency of Japan (JFSA).

No-Action 17-13 provides relief to SDs subject to JFSA margin rules from compliance with the requirement under CFTC Regulation 23.153 to post and collect VM from certain financial counterparties within one business day of swap execution (T+1), and on a daily basis thereafter.

In response to the concerns raised by SDs that are subject to both CFTC and JFSA margin rules, No-Action 17-13 provides conditional relief to SDs that are dual SD/JFSA covered entities for failure to comply with CFTC VM posting and collection requirements for uncleared swap transactions entered into with a Supervised Counterparty, that is, a counterparty subject to JFSA margin rules.

Relief under No-Action 17-13 is subject to the following conditions:

Note that analogous relief has not been provided by US prudential bank regulators with respect to prudential margin rules covering SDs that are banks. No-Action 17-13 therefore, applies only to SDs covered by the CFTC margin rules (and their counterparties). This includes many broker-dealers and other nonbank dealer parties, which constitutes about 50% of the market.

Margin rules in Japan are covered under the Financial Services Agency of Japan, Financial Instruments and Exchange Act (JFSA FIEA), JFSA guidance releases, and JFSA supervisory guidelines. Financial entities covered under the JFSA FIEA, which includes Financial Instruments Business Operators and Registered Financial Institutions (JFSA covered entities), are required to exchange VM as soon as practicable after an over-the-counter (OTC) derivative transaction is executed.

Where the transaction between the SD and the counterparty operating in Japan does not exceed established thresholds (from September 1, 2016 to March 1, 2016, JP Avg. Agg. Not. > ¥420 trillion, see Practice Note, The New ISDA® Credit Support Annexes and Global Margin Compliance for Uncleared Swaps), or where the counterparty is not a JSFA covered entity (referred to as a Supervised Counterparty in No-Action 17-13), the SD is not required to comply with JFSA margin posting and collection rules.

SDs entering into transactions with a Supervised Counterparty are, however, subject to JSFA supervisory guidelines which require that VM be exchanged "with sufficient frequency" as determined by the counterparties (as opposed to the "as soon as practicable" requirements under the JFSA FIEA).

As noted in No-Action 17-13, the CFTC has made comparability determinations with the JFSA FIEA but not with the JFSA supervisory guidelines, meaning that substituted compliance is not available to SDs for the JFSA supervisory guidelines (for more information on the cross-border application of swap rules, see Practice Note, The Dodd-Frank Act: Cross-Border Application of Swaps Rules).