Prudential Regulators Proposed Rule: Margin and Capital Requirements, April 2011

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Gavel.png RE-PROPOSED RULE: This page refers to the 2011 proposed rulemaking on Margin and Capital Requirements for Covered Swap Entities. For a summary of the 2014 Re-proposed Rule, click here.
Dodd-Frank Timeline, Margin and Capital Requirements for Covered Swap Entities
Proposal Date Re-proposed Rule Issue Comment Deadline
April 12, 2011 September 4, 2014 60 days after Federal Register

One of the mandates of Title I of the Dodd-Frank Act is that the appropriate regulators develop a framework for swap dealers and major swap participants, which include the setting of margin and capital requirements. Entities under the jurisdiction of a prudential regulator such as the FDIC are required to follow its rules. All other swaps are under the jurisdiction of the CFTC, with the exception of security-based swaps, which fall under SEC jurisdiction. For more information, see the summary table of swaps definitions.[1]

On April 12, 2011, five U.S. regulatory agencies ("Prudential Regulators") issued a joint rule proposal regarding the establishment of minimum margin and capital requirements for covered swap entities - registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants for which one of the Agencies is the prudential regulator. The agencies consist of:

Under the proposal, covered swap entities whose commercial activity is regulated by one of the above agencies would be required to comply. Swaps transactions entered into by an entity not covered by a prudential regulator would be subject to CFTC and SEC regulations regarding swap dealers and major swap participants.

The comment period,which originally ended July 11, 2011, was reopened to November 26, 2012, to allow interested persons more time to analyze the issues and prepare their comments in light of the consultative document on margin requirements for noncentrally-cleared derivatives recently published for comment by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions.

The Proposal

The proposed rule applies to the largest and most active participants in the OTC derivatives market that have been designated by the Commodity Futures Trading Commission (CFTC) or the Securities Exchange Commission (SEC). These are referred to as "covered swap entities." Highlights of the proposal, according to the FDIC press release:

  • "Covered swap entities would be required to collect initial margin and variation margin from other covered swap entities.
  • The amount of margin that would be required to be collected by covered swap entities from other counterparties would vary based on the relative risk of the counterparty and the swap.
  • Commercial end users of derivatives would not be required to post margin unless their activity exceeds the risk limits of the entity with which they are transacting.
  • Low-risk financial end users, including most community banks, would not be required to post margin unless their activity exceeds substantial thresholds or the risk limits of the entity with which they are transacting.
  • The proposal establishes minimum quality standards for acceptable margin collateral. It also establishes minimum safekeeping standards for collateral posted by covered swap entities to assure that collateral is available to support the trades and not housed in a jurisdiction where it is not available if defaults occur.
  • Only new trades entered into after the proposed effective date, six months after finalization, would be subject to the proposed requirements."[3]

The entire proposal as it appeared in the Federal Register can be found below.

  1. Agencies Reopen Comment Period on Swap Margin and Capital Proposed Rulemaking. Federal Reserve. Retrieved on September 26, 2012.
  2. Margin and Capital Requirements for Covered Swap Entities. FDIC. Retrieved on May 10, 2011.
  3. Financial Institution Letter: Margin and Capital Requirements for Covered Swap Entities. FDIC. Retrieved on May 10, 2011.

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