Margin Rules for Uncleared Swaps: What You Need to Know in 2015
In September 2014, the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and other agencies proposed new rules on margin requirements for certain market participants entering into uncleared swaps and security-based swaps. These re-proposed U.S. rules for uncleared trades would apply to dealers and major participants who are regulated by a Prudential Regulator.
This CLE course offers participants an overview of the latest trends and best practices with respect to the Prudential Regulator’s Proposed Margin Rules for Uncleared Swaps as well as comparisons to rules proposed by the CFTC regarding margin for uncleared swaps that will apply to entities not otherwise subject to the Prudential Regulator’s rules. A panel of thought leaders and practitioners assembled by The Knowledge Group will help firms better understand how to advise clients about application of the new rules in their businesses.
Key topics include:
- Margin Rules for Uncleared Swaps - An Overview
- Covered Swap Entities
- Margin Requirements for Market Participants
- Posting and Collection of Initial Margin (IM) Requirements
- Requirements Under Variation Margin (VM)
- Section 4(k) of the Bank Holding Company Act
- Margining Practices for Non-cleared Derivative Transactions
- Calculating Initial and Variation Margin
Ross Pazzol, Partner
Katten Muchin Rosenman LLP
Jack I. Habert, Of Counsel
Willkie Farr & Gallagher LLP
Outline Margin for Uncleared Swaps
- Cleared swaps are subject to rules of clearing house and clearing member has discretion to require more margin. No discretion in whether to collect as in past where banks may have not collected margin for highly rated or preferred clients.
- .Applicable to Covered Swap Entities – whether registered or not
- Who are they
- Prudential regulator rules more important than cftc/sec bc will apply to most banks and swap dealers.
- Def Non-cleared Swap – maybe discussion of clearing and CFTC and SEC making dterminations, what subject to clearing and what not and more to come.
- Establishes minimum initial and variation margin requirements
- Counterparties that are swap entities
- Coutnerparties that are financial end users with material swaps exposure
- Counterparties that are financial end users without material swaps exposure
- Other counterparties including commercial end users.
- Note. Concern from funds re only use of cash
- Excludes non-financial end users and other entities.
- Minimum transfer amounts
- Types of eligible collateral
- Segregation of Collateral
- Cross Border Application
- Staggered Compliance Dates
Julian E. Hammar, Of Counsel
Morrison & Foerster LLP
Key Differences between CFTC, U.S. Prudential Regulators’ Uncleared Swaps Margin Proposed Rules and Basel Committee/IOSCO Policy Framework
- Material swaps exposure:
- $3 billion average daily aggregate notional amount of uncleared for 3 month period under CFTC/Prudential Regulators’ proposals vs. 8 billion euros (approx.. $11 billion) under BCBS/IOSCO
- Impacts when initial margin must be collected
- Collection at a much lower level under U.S. regulator proposals could place U.S. firms at a competitive disadvantage
- U.S. swaps exposure based on CFTC data; possible that BCBS/IOSCO will revise downward
- Initial margin segregation:
- Required with a 3d party custodian and no re-hypothecation under CFTC/Prudential Regulators’ proposals vs. at customer’s option (for segregation) and consent (for re-hypothecation) under BCBS/IOSCO
- U.S. approach more restrictive than BCBS/IOSCO
- Commercial End Users:
- No requirement under CFTC’s proposal
- Prudential Regulators’ proposal essentially the same as CFTC
- BCBS/IOSCO does apply to systemically important non-financial firms
- Treatment of FX Swaps and FX Forwards:
- No margin requirement under CFTC’s proposal;
- Entities subject to regulation by a Prudential Regulator may be required to pay and collect variation margin under Prudential Regulator supervisory guidance
- Variation margin required under BCBS/IOSCO
- Could place entities subject to Prudential Regulator supervision at a competitive disadvantage to entities subject to CFTC regulation
- Interaffiliate swaps:
- No exemption under CFTC and Prudential Regulatory proposals vs. decision left to national supervisors under BCBS/IOSCO framework
- If national supervisors outside the U.S. provide an exemption, could place U.S. entities at a competitive disadvantage
- Could potentially undermine CFTC’s inter-affiliate exemption from mandatory clearing
- Forms of margin:
- Cash only for variation margin and certain enumerated types of instruments for initial margin under CFTC and Prudential Regulators proposal vs. no distinction between variation and initial margin under BCBS/IOSCO framework (enumerated types of instruments)
- Margin for swaps entered into before compliance dates:
- Generally only applies to swaps entered into after applicable compliance date, but swaps entered into before the applicable compliance date covered by an eligible master netting agreement that covers swaps entered into on or after the compliance date must comply with requirements if margin calculated on an aggregate basis under CFTC/Prudential Regulator proposals
Who Should Attend:
- Bank Regulation Lawyers and Advisers
- Swap Provider Counterparties
- Banking Regulators
- Commercial End User
- Financial Advisers
- Finance Professionals
- Private and Public Companies
- Other Related/Interested Professionals and Organizations
Julian Hammar is an Of Counsel in the Washington, DC office of Morrison & Foerster LLP and practices in the firm’s financial services, derivatives and commodities and energy regulation practice groups. He advises clients with respect to all aspects of compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and CFTC regulations. Prior to joining Morrison & Foerster LLP, Mr. Hammar served as a special counsel at an Am Law 50 firm and an Assistant General Counsel at the Commodity Futures Trading Commission (“CFTC”), Office of the General Counsel. During his thirteen years at the CFTC, Mr. Hammar drafted regulations to further define key terms including “swap,” “security-based swap,” and “security-based swap agreement,” under the Dodd-Frank Act. He also assisted in drafting other Dodd-Frank Act regulations, including the Entity Definitions (rules to further define such terms as “swap dealer,” “major swap participant,” and “eligible contract participant”), commodity options, and the Volcker Rule. In addition to rulemaking, Mr. Hammar was a member of the CFTC’s legislative drafting team that drafted the derivatives title of the Administration’s legislative proposal for derivatives regulation that eventually was enacted into law as Title VII of the Dodd Frank Act.
Julian Hammar is an Of Counsel in the Washington, DC office of Morrison & Foerster LLP and practices in the …
Jack I. Habert is of counsel in the Corporate and Financial Services Department of Willkie Farr & Gallagher LLP in New York. Mr. Habert specializes in negotiating and documenting structured finance transactions and complex derivatives transactions and in the regulatory analysis of securities, commodities and insolvency issues relating to such transactions. He advises several major financial institutions, investment advisers, mutual funds, hedge funds and other corporate entities as either providers of or end users of such financing and derivatives transactions.
In September 2010 Mr. Habert accepted an opportunity as an attorney fellow at the Securities and Exchange Commission in the Division of Trading and Markets. From September 2010 through January 2012 he advised and assisted the SEC with drafting rules implementing various provisions of the Dodd-Frank Wall Street Reform Act, including joint rules with the CFTC relating to the definitions of swap and security-based swap, swap and security-based swap dealers, and major swap and security-based swap participants, and SEC rules relating to business conduct standards, the new platforms for trading, clearing and reporting security-based swaps and conflicts of interest in asset-backed securities.
Jack I. Habert is of counsel in the Corporate and Financial Services Department of Willkie Farr & Gallagher LLP in …
Ross Pazzol focuses his practice on financial services matters, with an emphasis on the trading and clearing of financial instruments. Mr. Pazzol’s clients include exchanges and other trading platforms, banks, broker-dealers, futures commission merchants, swap dealers and commercial participants in the exchange-traded and over-the-counter markets. Mr. Pazzol also represents hedge funds and commodity pools with respect to their regulatory and transactional matters.
Ross Pazzol focuses his practice on financial services matters, with an emphasis on the trading and clearing of financial instruments. …
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About Morrison & Foerster LLP
Morrison & Foerster is a global firm with more than 1,000 lawyers in 17 offices in key technology and financial centers in the United States, Europe and Asia. Our integrated Derivatives and Commodities Regulatory practice offers clients a comprehensive approach to address the entangled regulatory universe. Assisting clients with regulatory compliance and registration is a core focus for the diverse team of expert lawyers in the practice, including practitioners with expertise in all segments of the U.S. bank regulatory regime, the Commodity Exchange Act and related CFTC practice and FERC regulation and compliance.
About Willkie Farr & Gallagher LLP
Willkie Farr & Gallagher LLP is a leading international law firm that provides comprehensive legal services. Founded in 1888, the firm has approximately 550 lawyers based in key financial centers in the U.S. and Europe.
About Katten Muchin Rosenman LLP
Katten is a full-service law firm with more than 650 attorneys in locations across the United States and in London and Shanghai. Clients seeking sophisticated, high-value legal services turn to us for counsel locally, nationally and internationally. The firm’s core areas of practice are corporate, financial services, insolvency and restructuring, litigation, real estate, environmental, commercial finance, intellectual property, and trusts and estates. Katten represents public and private companies in numerous industries, including a third of the Fortune 100, as well as a number of government and nonprofit organizations and individuals.