On February 23, 2017, US prudential banking regulators issued guidance that provides relief until September 1, 2017 from the upcoming March 1, 2017 compliance deadline for Dodd-Frank variation margin (VM) rules for uncleared swaps entered into by swap dealers (SDs), security-based swap dealers (SBSDs), major swap participants (MSPs), and major security-based swap dealers (MSBSPs) subject to oversight by US prudential bank regulators (collectively covered swap entities, or CSEs).

This follows analogous relief issued from CFTC margin rules last week for SDs not subject to prudential regulation (see Legal Update, CFTC Delays Variation Margin Compliance for Uncleared Swaps Until September 2017).

The US federal prudential banking regulators include the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, prudential regulators).

The prudential VM rules are subject to a two-part phase-in schedule (see Practice Note, The Dodd-Frank Act: Margin Posting and Collection Rules for Uncleared Swaps: Compliance Dates for Variation Margin Requirements). The first phase covered all uncleared swap transactions in which the combined average aggregate notional amount (AANA) of non-centrally cleared derivative transactions between the parties to the transaction and their affiliates exceeds $3 trillion.

Parties were required to begin posting and collecting VM (as well as initial margin) for these transactions on September 1, 2016. The second phase requires parties to begin posting and collecting VM for the remaining uncleared swaps that were not covered under the first phase. The second phase was set to begin on March 1 (March 1 VM requirements).

In an effort to preserve the commitment to the implementation schedule, the March 1 deadline remains technically in effect. However, the guidance offers conditional leeway during initial examinations of regulated entities for compliance.

The guidance offers the following principles for regulators to take into consideration when conducting initial examinations for compliance with the VM requirements:

Because of these new margin rules, SDs must amend their existing ISDA credit support annexes (CSAs) or enter into new CSAs with their counterparties that reflect the VM requirements. ISDA has developed global margin compliance documentation, as well as other important compliance tools to assist market participants with this process (for details, see Practice Note, The New ISDA® Credit Support Annexes and Global Margin Compliance for Uncleared Swaps).

The March 1, 2017 deadline aligned with VM deadlines under the CFTC margin rules and rules in other jurisdictions. However, with market participants scrambling to renegotiate their CSAs to conform their collateral arrangements to the new rules ahead of the upcoming deadline, industry groups including ISDA and SIFMA requested that both US and non-US regulators provide additional time for the market to come into compliance. Recent reports have suggested that only around 5% of the required documentation has been renegotiated.