U.S. prudential regulators adopted an interim final rule to add certain Brexit-related exceptions from swaps margin requirements.

According to the prudential regulators (i.e., the Federal Reserve Board, Office of the Comptroller of the Currency, FDIC, Farm Credit Administration, and the Federal Housing Finance Agency), the new provision is intended to preserve the status quo for "legacy" swaps in the event of a "no-deal" Brexit. The new rule provides that certain swaps will not lose their "legacy" status (i.e., excluded from the scope of margin rules) as a result of changes made in response to a no-deal Brexit.

The regulators further noted that the rule is "intended to be flexible" as to both the nature of the relevant entity in the United Kingdom from which swaps may be transferred (e.g., branch versus separate establishment) and as to whether the relevant swap dealer covered by the rule is the transferring party or the remaining party to the swap. The rule specifically carves out from the new exception any amendments that also modify the payment amount calculation methods, the maturity date or the notional amount of the swap.

The interim final rule will be effective upon publication in the Federal Register. However, the agencies are accepting comments on the rule for 30 days following publication in the Federal Register.

Commentary / Nihal Patel

How to determine what kinds of amendments or modifications to swaps cause them to lose their "grandfather" or "legacy" status under the U.S. margin rules is an impossible question. As previously discussed, the regulators have declined to provide the needed clarity. This is now the second time (the first was Qualified Financial Contract stay-related changes) prudential regulators have amended the swap margin rules to provide that particular changes (that are almost entirely driven by government actions) do not take away legacy status.

It is hard not to see this exercise as waste of time and resources both for industry and government. A more reasonable approach to legacy swap amendments may have avoided the need for these rule changes. The point is particularly notable when the changes are needed as a result of action (or inaction) of other governmental bodies.

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