Margin Rules for Uncleared Swaps: What You Need to Know in 2015

Ross Pazzol, Partner
Katten Muchin Rosenman LLP

Jack I. Habert, Of Counsel
Willkie Farr & Gallagher LLP

Outline Margin for Uncleared Swaps

• Background
  • 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
• Documentation
• 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