The CFTC unanimously adopted final rules amending uncleared margin requirements to, among other things: (i) amend the period for the calculation of the "average aggregate notional amount" for purposes of scoping firms subject to initial margin requirements, and (ii) modify the application of minimum transfer amounts ("MTAs") with respect to separately managed accounts.
Each rule will go into effect 30 days after its publication in the Federal Register.
Amendments to the AANA Calculation
As previously covered, the final rule amends the definition of "material swap exposure" ("MSE") in CFTC Rule 23.151 ("Definitions Applicable to Margin Requirements") to revise the calculation period for the average aggregate notional amount ("AANA"). The final rule (i) establishes September 1 of each year as the date for determining MSE with respect to the initial margin compliance schedule, and (ii) requires that the AANA calculation look to month-end activities over the period from March to April of the reference year. The current rule provides for June to August of the prior year and looks to daily amounts rather than the month-end. To address risks raised by the change to month-end AANA averaging, the CFTC revised the proposed rule to include anti-evasion language "prohibiting activities not carried out in the ordinary course of business and willfully designed to evade the month-end AANA calculation." The CFTC indicated that these amendments to the margin requirements were intended, as a whole, to align with the BCBS/IOSCO margin framework and certain recommendations made by a subcommittee of the CFTC Global Markets Advisory Committee (or "GMAC").
In addition, the final rule amends Rule 23.154(a) ("Calculation of Initial Margin"). Under the amended rule, a nonbank swap dealer ("SD") or nonbank major swap participant ("MSP") that enters into swaps with another CFTC-registered SD or MSP will be able to use risk-based initial margin ("IM") model calculations of the other SD or MSP for the purposes of determining IM requirements solely with respect to swaps entered into in order to hedge risk incurred on customer-facing swaps. This amendment follows the approach taken in CFTC No-Action Letter 19-29.
Amendments to the Minimum Transfer Amount
The final rule, which adopts the proposed amendments without change, makes two core sets of revisions as to how the minimum transfer amounts are handled under CFTC regulations. First, the rule amends the definition of "minimum transfer amount" in Rule 23.151 ("Definitions Applicable to Margin Requirements") and adds a definition of the term "separately managed account" ("SMA") to allow nonbank SDs and nonbank MSPs to apply an MTA of up to $50,000 to each SMA owned by a counterparty with whom such entities enter into uncleared swaps. This amendment is largely consistent with no-action relief provided by the CFTC in Letter 17-12.
Second, the final rule amends the margin documentation requirements in Rule 23.158 ("Margin Documentation") to explicitly permit separate MTAs across initial and variation margin with each counterparty to determine whether collateral must be posted or collected with such counterparty under CFTC Rules 23.152 ("Collection and Posting of Initial Margin") and 23.153 ("Collection and Posting of Variation Margin"). The combined total must be below the overall amount: $500,000. This amendment is largely consistent with no-action relief provided by the CFTC in Letter 19-25.
CFTC Commissioner Statements
Regarding the amendments to the margin requirements for uncleared swaps, CFTC Commissioners Brian Quintenz and Dawn Stump praised the efforts of the CFTC to harmonize its regulations with its international counterparts. Commissioner Quintenz disagreed with the CFTC's reliance on notional value, criticizing it as "useless, biased and arbitrary." CFTC Commissioner Dan Berkovitz stated that the amendments may aid in the promotion of liquidity and competition in swaps markets through an increase in options for covered swap entity end-users.
Regarding the amendments to the minimum transfer amount, Commissioner Stump stated that the final rule furthers the objectives of (i) updating the CFTC's rules to make them more "workable" for those who must comply with them, (ii) codifying staff-issued relief and (iii) "harmonizing" margin regulations with those of the CFTC's international counterparts. Commissioner Berkovitz commended the rule for providing targeted relief and being "unlikely to present systemic risks."
Commentary - Nihal Patel
These are sensible rule changes. Perhaps the biggest question raised by the final rules is whether the bank regulators will take steps to align their "AANA" counting requirements with the CFTC and many other non-U.S. regulators.
Primary Sources
4 CFTC Statement, Dan M. Berkovitz: Statement regarding Rules Related to Margin for Uncleared Swaps
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