Prudential Regulators And CFTC Re-Propose Margin Requirement Rules For Uncleared Swaps

The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (collectively, the "Prudential Regulators") published proposed rules for public comment in the Federal Register on September 24, 2014, regarding margin requirements for uncleared swaps and security-based swaps applicable to entities subject to their jurisdiction (e.g., registered swap dealers and major swap participants that are U.S. or foreign banks). The proposal is available here. The Commodity Futures Trading Commission ("CFTC") followed suit, publishing its proposed margin rules for uncleared swaps entered into by entities subject to its jurisdiction (e.g., registered swap dealers and major swap participants that are not U.S. or foreign banks) on October 3, 2014. The CFTC's proposal is available here. The comment periods for the two rulemaking proposals close on November 24, 2014 and December 2, 2014, respectively.

OVERVIEW OF PROPOSED MARGIN RULES

Both proposals are re-proposals of margin rules that the Prudential Regulators and the CFTC previously proposed in 2011. The re-proposals were made in response to comments received and the publication of the Final Policy Framework for Margin Requirements for Non-centrally Cleared Derivatives, published in September 2013 by the Basel Committee on Banking Supervision and the Board of the International Organization of Securities Commissions ("BCBS / IOSCO Final Policy Framework"), available here. In general, the re-proposals would:

• Not impose margin requirements for uncleared swaps with non-financial end users;
• Require payment and collection of initial margin from financial end users with "material swaps exposure" and variation margin from all financial end users;
• Establish a compliance deadline of December 1, 2015 for variation margin and a phased compliance schedule for initial margin, extending from December 1, 2015 to December 1, 2019, depending upon uncleared swaps exposure;
• Detail eligible collateral to meet margin requirements: a list of items for initial margin with applicable haircuts and cash for variation margin;
• Include a threshold for initial margin under which it would not have to be collected;
• Require segregation of initial margin at a third-party custodian not affiliated with the transaction counterparties and prohibit re-hypothecation of initial margin;
• Not provide for an exemption from the margin requirement for uncleared swaps between affiliates; and
• Not apply to transactions entered into before the effective date, except that transactions subject to a master netting agreement applicable to pre-effective date transactions would be subject to the margin requirements.

While the re-proposals of the Prudential Regulators and the CFTC are substantially similar, there are a few differences between them. In addition, the Prudential Regulators' and CFTC's proposals diverge from the BCBS / IOSCO Final Policy Framework in a few significant ways. The table below provides a detailed comparison of the two U.S. regulatory proposals, along with the BCBS / IOSCO Final Policy Framework.

Not included in the table are two topics that were not concretely addressed in the CFTC's proposal, but which should be mentioned. These topics are extraterritorial application of the uncleared margin rules and capital requirements, which we briefly summarize:

EXTRATERRITORIAL APPLICATION OF PROPOSALS

With regard to extraterritorial application of the proposed rules, in general under the Prudential Regulators' proposal, the Prudential Regulators would not assert authority over trades between a non-U.S. swap dealer or major swap participant that is not guaranteed by a U.S. person and either a (i) non-U.S. swap dealer/major swap participant that is not guaranteed by a U.S. person or (ii) a non-U.S. person that is not guaranteed by a U.S. person. Unlike the Prudential Regulators' re-proposal, the CFTC's re-proposal does not include a proposed rule for how margin requirements for uncleared swaps would apply outside the U.S. Instead, the CFTC's re-proposal includes an advance notice of proposed rulemaking that offers three alternative approaches for public comment, including:

• Application of the rules in accordance with the Prudential Regulators' re-proposal;
• Application of the rules in accordance with the CFTC's Cross-Border Guidance applicable to Transaction-Level requirements; and
• Application of the rules in a form similar to the "Entity-Level requirements" in the CFTC's Cross-Border Guidance.

CAPITAL REQUIREMENTS

Concerning capital, while the Prudential Regulators' proposal includes a regulation regarding capital requirements (basically requiring compliance with any existing regulatory capital regime for entities subject to their jurisdiction), the CFTC's proposal does not address capital requirements. The CFTC has indicated that it will publish a re-proposal for capital requirements separately.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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