The CFTC issued two separate proposals to amend the uncleared swap margin requirements. The first proposal makes changes related to initial margin ("IM"), including (i) the calculation period for determining whether IM requirements apply, and (ii) permitting certain swap dealers ("SDs") to rely on models used by SD counterparties for limited purposes. The second proposal would primarily codify prior no-action relief related to the application of rules on minimum transfer amounts ("MTA").

IM Proposal. The proposal would amend the definition of "material swap exposure" in CFTC Rule 23.151 ("Definitions applicable to margin requirements") to provide that the calculation would take place as of September 1 of a year, and would look to month-end activities over March to April of that year. (The current rule provides for June to August of the prior year and looks to daily amounts rather than month-end.) The CFTC indicated that these changes were intended to align with the Basel Committee on Banking Supervision/International Organization of Securities Commissions margin framework and certain recommendations made by a subcommittee of the CFTC Global Markets Advisory Committee ("GMAC").

In addition, the CFTC proposed amending Rule 23.154(a). Under the proposal, an SD that enters into swaps with another SD could use the models-based IM calculations of the other dealer for purposes of determining margin requirements solely in respect of swaps entered into in order to hedge risk incurred on transactions with non-SD counterparties. This amendment follows "along the lines of" CFTC Letter 19-29.

MTA Proposal. The proposal makes two core sets of changes to how the minimum transfer amounts are handled under the rules. First, Rule 23.158 ("Margin documentation") would be amended to explicitly permit separate MTAs across initial and variation margin (the combined total must be below the overall amount - $500,000 - which remains as before). This is intended to be consistent with the approach taken under CFTC Letter 19-25.

Second, the proposal would make amendments to Rules 23.151 and 23.152 ("Collection and posting of initial margin")that would permit separate MTAs of $50,000 for "separately managed accounts" ("SMAs"). The definition of SMA in the proposal focuses on the use of an investment manager and the absence of netting across swaps of the legal entity outside of the particular SMA. This is intended to be largely consistent with the approach taken under CFTC Letter 17-12.

Each proposal has a comment deadline of 30 days from publication in the Federal Register.

CFTC Commissioner Statements

Commissioner Dawn D. Stump encouraged the CFTC to consider further actions recommended by the GMAC margin subcommittee.

Commissioner Dan M. Berkovitz expressed concern about (1) the potential for "window dressing" with the average daily aggregate notional amount calculation now on a month-end, rather than daily, basis; and (2) the potential "collective impact" of the MTA-related changes to the systemic risk protections provided by the CFTC margin requirements.

Commentary

The proposed amendments by the CFTC are sensible. They also highlight two less sensible aspects of derivatives regulation. The first relates to the limits of coordination. The CFTC here makes changes that are intended to align their rules more closely with international accords, but which move their rules further away from other domestic regulators (i.e., the "prudential regulators"). Second, the reasoned approach to MTAs for separately managed accounts contrasts with the (at best) curious approach to margining of SMAs taken in the context of futures and cleared swaps.

Primary Sources

  1. CFTC Proposal: Amendments Concerning the Application of Minimum Transfer Amount
  2. CFTC Proposal: Amendments Regarding Alignment with the BCBS/IOSCO Framework and the Calculation of Initial Margin
  3. CFTC Statement, Dawn D. Stump: Statement of Commissioner Dawn D. Stump in Support of Proposed Margin Rulemakings Based on Recommendations of Global Markets Advisory Committee
  4. CFTC Statement, Dan Berkovitz: Regarding Notices of Proposed Rulemaking for Certain Matters Related to Margin for Uncleared Swaps

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