CFTC Staff Grants Temporary Margin Relief To EMIR-Regulated Swap Dealers

The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") granted time-limited no-action relief to swap dealers ("SDs") that are subject to both U.S. and European margin requirements for uncleared swaps.

The relief permits an SD that is required to (and does) comply with uncleared swap margin requirements under EMIR not to be expected to comply with analogous CFTC requirements that are eligible for substituted compliance under the CFTC final margin cross-border rule. The relief will be provided from February 4, 2017 through May 7, 2017.

Commentary / Nihal Patel

Any relief from the forthcoming margin deadlines should be welcomed by an industry that is facing an immense challenge. However, this letter is unlikely to quell further calls for a delay, given its relatively limited scope.

• Currently, this is the only relief granted by U.S. regulators. In other words, non-U.S. firms that are regulated by a "prudential regulator" (generally speaking, non-U.S. banks) are unable to rely on this letter.
• The relief in the letter extends only insofar as substituted compliance could apply under the CFTC rules. As noted in previous coverage, this generally will be available to (i) U.S.-based/guaranteed SDs only with regard to their posting of initial margin to non-U.S. counterparties, and (ii) non-U.S. SDs, except with regard to their posting of initial margin to U.S.-based/guaranteed SDs.
• The letter seems intended primarily to benefit U.S.-based/guaranteed SDs who can rely on the letter to post margin to counterparties only in compliance with EMIR requirements, rather than posting in accordance with CFTC and EMIR requirements. See CFTC Regulation 23.160(b)(1)(ii). The letter would not impact U.S.-based/guaranteed SDs' requirement to collect margin in accordance with CFTC rules.
• Until March 1, 2017, the rule will be relevant only for firms that were subject to the September 1, 2016 initial margin deadline in the United States (i.e., firms that are complying with the CFTC requirements already), since transactions between two entities that are not U.S.-based/guaranteed are fully excluded from the CFTC requirements. For these entities (and their trading partners), the relief will have an impact only regarding relatively minor differences between the CFTC and EMIR rules.

Following March 1, 2017, the letter will allow EMIR-only compliance for relevant non-U.S. SDs in their transactions with counterparties that are subject to the variation margin "big bang." However, given that (1) firms are trying to put documentation in place for March 1 already, and (2) the relief is time-limited, a dually regulated SD would gain little from relying on the letter.

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