CFTC Adopts Final Margin Rules for Uncleared Swaps
The CFTC has approved a final rule on margin requirements for uncleared swaps for swap dealers (SDs) and major swap participants (MSPs). The new regulation addresses margin requirements for uncleared swaps entered into by SDs or MSPs that are not subject to regulation by the prudential regulators — Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration or the Federal Housing Finance Agency. The entities subject to the rules are referred to as covered swap entities (CSEs).
The rules impose margin requirements on (i) trades between CSEs and SDs or MSPs and (ii) trades between CSEs and financial end users. The rules do not impose margin requirements on commercial end users.
Initial Margin (IM)–The rules require daily two-way margin (posting and collecting) for all trades between CSEs and SD/MSPs. The rules also require daily two-way margin for all trades between CSEs and financial end users that have over $8 billion in gross notional exposure in uncleared swaps.
The rules permit the calculation of IM to be based on models or a standardized table. Models are required to use a 99% confidence level over 10-day liquidation time. The rules permit a $50 million threshold below which IM need not be collected.
The rules permit IM to include cash, sovereign debt, government-sponsored debt, investment grade debt including corporate bonds, equities, gold, and shares of certain funds with appropriate haircuts.
IM requirements are phased-in starting September 1, 2016 and ending September 1, 2020 from the largest participants to smaller ones.
Variation Margin(VM)–The rules require daily cash payment for all trades between CSEs and SD/MSPs. The rules also require daily posting for all trades between SD/MSPs and financial end users.
Calculation of VM requires the use of methods and inputs that rely on recent trades or third-party valuations.
The rules require VM to be in cash for all trades between CSEs and SD/MSPs. The rules permit VM of the same nature as permitted IM for all trades between SD/MSPs and financial end users.
VM requirements are effective September 1, 2016 for the largest participants and March 1, 2017 for the rest.
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