The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") granted time-limited no-action relief to Japanese-regulated swap dealers from the timing requirements relating to the posting and collection of variation margin.
The letter provides relief for swap dealers subject to uncleared swap margin regulations of the CFTC and the Financial Services Agency of Japan, upon the following conditions:
- the swap dealer posts or collects any variation margin amount on a T+3 basis (rather than T+1 as required by CFTC regulations);
- the swap dealer uses its best efforts to comply with the T+1 requirements for counterparty transactions; and
- the swap dealer complies with the T+1 requirement no later than March 1, 2020.
Commentary / Nihal Patel
As described in the letter, the relief is primarily intended to address the fact that transactions in Japanese Government Bonds ("JGBs") currently settle in 2-3 business days. However, by its terms, the relief is not limited to the posting of JGBs, but applies generally to the transfer timing requirements of the CFTC margin regulations.
The logic of the CFTC letter is curious when considering the CFTC rules as they apply to U.S. market participants. Many types of collateral eligible under the CFTC rules (including most bonds and equities) do not settle T+1. Yet when responding to U.S. market participants on this point when adopting final rules, the CFTC (and the Prudential Regulators) acknowledged that the rules required posting "so quickly" that market participants would need to take "precautionary steps" such as "pre-positioning" collateral or arranging for substitution of posted cash.
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