CFTC Grants Variation Margin Grace Period, Addresses Minimum Transfer Amounts For Managed Accounts

The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") granted conditional and time-limited no-action relief from: (1) variation margin ("VM") requirements for swaps that are subject to a March 1, 2017 compliance date, and (2) the minimum transfer amount requirement for separately managed accounts.

VM Requirements Delay

In response to a request from 14 trade groups (covered in a previous Cabinet article), CFTC Staff Letter 17-11 provides relief until September 1, 2017 from the March 1, 2017 compliance date for VM requirements, pursuant to CFTC Regulation 23.161. The relief is subject to the following conditions:

• the relevant swap dealer ("SD") has failed, despite "good-faith efforts," to complete relevant collateral documentation with counterparties or establish necessary operational processes to "settle" VM in accordance with the new margin requirements;
• the SD continues to use its best efforts to comply with the VM requirements; and
• where applicable, the SD continues to post and collect VM with relevant counterparties under the terms of existing arrangements.

The letter also provides that by September 1, 2017, an SD must comply with the VM requirements for all swaps entered into on or after March 1, 2017.

Minimum Transfer Amount Relief

In response to a request from SIFMA's Asset Management Group, DSIO granted relief in CFTC Staff Letter 17-12 to SDs from compliance with the minimum transfer amount requirements in CFTC Regulations 23.152(b)(3) and 23.153(c), subject to the following conditions:

• the relevant swaps are entered into by an asset manager acting for a separately-managed account under the terms of an investment management agreement;
• the relevant swaps are subject to a master netting agreement that does not permit netting of margin across other accounts of the same legal entity; and
• the SD applies a minimum transfer amount of no more than $50,000 (across regulatory initial margin and VM).

In a public statement concerning the VM compliance relief, Acting CFTC Chair J. Christopher Giancarlo said that the CFTC "remains committed to the March 1 date," but cannot ignore the reality that "as much as 90% of [financial end-user] customers are not ready to meet the new requirements. . . . " Mr. Giancarlo also stressed that this action does not change the scheduled "arrival" of the margin regulations, but instead "foams the runway to ensure a safe landing."

Commentary / Nihal Patel

Mr. Giancarlo's support for this type of delay comes as no surprise. (In his mid-January speech, Mr. Giancarlo called the March 1 deadline "unrealistic.") What remains to be seen is whether this CFTC action will be followed by similar actions from other relevant regulators – particularly from U.S. "prudential regulators" (e.g., the Fed, the Office of the Comptroller of the Currency and the FDIC) and regulators in Europe and Japan. As things stand, the CFTC action will have a limited impact on derivatives markets, since the vast majority of derivatives activities by registered swap dealers is conducted by entities that are (i) banks (i.e., prudentially regulated) and/or (ii) regulated in Europe/Japan.

Even if similar action is taken by other regulators, the relief may not be a panacea for all market participants. As the industry groups acknowledged in their relief request, "retrospective application of regulation VM terms would create challenges with respect to pricing and capital treatment of impacted transactions."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.