On December 16, 2015, the CFTC approved a final rule and an interim final rule imposing margin requirements for uncleared swaps entered into by covered swap entities (i.e., swap dealers and major swap participants that are not subject to regulation by any of the various US prudential regulators) with financial entities. The rules are substantially similar to those adopted by the US prudential regulators in October 2015, except with respect to certain inter-affiliate transactions, and are generally in line with international standards issued in 2013 by the Basel Committee and IOSCO.
The rules do not apply to commercial end users, but do impose margin requirements on: (i) trades between covered swap entities and swap dealers or major swap participants; and (ii) trades between covered swap entities and certain financial end users. With respect to initial margin, the rules require two-way initial margin for all trades between covered swap entities and swap dealers or major swap participants and trades between covered swap entities and financial end users that have over $8 billion in gross notional exposure in uncleared swaps.
With regard to variation margin, the rules require daily cash payment of variation margin for all trades between covered swap entities and swap dealers or major swap participants and daily posting of variation margin for all trades between swap dealers or major swap participants and financial end users. In contrast to initial margin, the gross notional threshold would not apply for variation margin so financial end users with gross notional exposure below the $8 billion threshold would also be required to exchange variation margin.
Notably, the rules generally exempt inter-affiliate swaps from initial margin requirements except under certain circumstances, but would still require the exchange of variation margin among affiliates. Initial margin requirements will be phased in starting September 1, 2016, and ending September 1, 2020, from the largest participants to smaller ones, whereas variation margin requirements will be effective September 1, 2016, for the largest participants and March 1, 2017, for the rest.
The final rule is available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister121615.pdf and the CFTC fact sheet regarding the final rule is available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/uncleardmargin_factsheet121615.pdf.
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