CFTC Proposed Rule: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, September 2014

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Gavel.png RE-PROPOSED RULE: This page is a re-proposal of the CFTC's Margin and Capital Requirements Regulation. Approved September 17, 2014. The final rule was approved December 16, 2015.
Dodd-Frank Timeline, Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, CFTC
Original Proposal Re-proposal Approved Final Rule Approved
May 12, 2011 September 17, 2014 December 16, 2015

On September 17, 2014, the CFTC approved a proposed rulemaking that would require swap dealers, major swap participants and "financial end users" to exchange two way (posting and collecting) initial ("IM") and daily variation margin ("VM"). Commercial ("non-financial") end users would be exempt. The rule appeared in the Federal Register on October 3, 2014. The dealine for public comments is December 2, 2014. Comments may be filed on the CFTC web site HERE.

After the proposed rule enters the Federal Register, there will be a 60-day comment period. Under the proposed rule, IM requirements would be phased-in starting Dec 1, 2015 and ending Dec 1, 2019 from the largest participants to smaller ones. VM requirements would be effective Dec 1, 2015.


Background

The Dodd-Frank Act includes a mandate for the CFTC to create specific rules for swap dealers and major swap participants, including the setting of policies for margin requirements for uncleared swaps. These rules would only apply to swap dealers (SDs) and major swap participants (MSPs) not subject to oversight by prudential regulators, such as the U.S. Department of the Treasury, the FDIC and the Federal Reserve.

On April 12, 2011, the Commodity Futures Trading Commission (CFTC) held its thirteenth in the series of open meetings to consider the issuance of proposed rulemakings under the Dodd-Frank Act. One of the agenda items was a proposed rule regarding margin requirements for uncleared swaps.[1] Margin and capital rules for SDs and MSPs subject to such oversight by prudential regulators can be found in a separate proposal from April 12, 2011.

These rules were subsequently re-proposed in 2014 to reflect other new initiatives, such as the final CFTC/SEC rules on entity and product definitions and the Basel Committee on Banking Supervision/IOSCO/BIS September 2013 framework, Margin requirements for non-centrally cleared derivatives. (View the rules proposed by the five prudential regulators in September 2014).

The Proposal

The CFTC rules cover SD/MSPs that are not "covered swap entities," meaning those participants who fall under the jurisdiction of the Prudential Regulators and their margin rules for uncleared swaps. Financial end users have a de minimis exemption set at $3 billion in gross notional exposure.

Margin calculation may be based on models or a standardized table, but must use a 99% confidence level over 10-day liquidation time. Risk-based models, if used, must be approved by the commission, and the commission may rescind its approval if it determines that the model no longer complies.

Initial Margin

Asset class Initial margin requirement (% of notional exposure)
Credit: 0-2 year duration 2
Credit: 2-5 year duration 5
Credit: 5+ year duration 10
Commodity 15
Equity 15
Foreign Exchange/Currency 6
Cross Currency Swaps: 0-2 year duration 1
Cross Currency Swaps: 2-5 year duration 2
Cross Currency Swaps: 5+ year duration 4
Interest Rate: 0-2 year duration 1
Interest Rate: 2-5 year duration 2
Interest Rate: 5+ year duration 4
Other 15

For multiple uncleared swaps subject to an eligible master netting agreement, the initial margin amount under the standardized table shall be computed using the formula:

Initial Margin = 0.4 x Gross Initial Margin + 0.6 x Net-to-Gross Ratio x Gross Initial Margin

IM may be in the form of cash, sovereign debt, government-sponsored debt, investment grade debt including corporate and municipal bonds, equities, and gold, and must be held at an independent custodian. Rehypothecation is not permitted.


Variation Margin

VM shall be calculated each business day and must rely, as much as practicable, on "recently-executed transactions, valuations provided by independent third parties, or other objective criteria." Alternative calculation measures must be in place in the event of a failure of any input required for valuation. For risk management purposes, "hypothetical" VM requirement must be calculated each day for which the counterparty is an exempt entity such as a non-financial end user.

VM is required to be paid in cash.

Related Documents: Fact Sheet, Q&A, Federal Register Entry


References

  1. Open Meeting on Thirteenth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on April 15, 2011.

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