Margin and Capital Requirements Regulation

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Dodd-Frank Timeline, Margin and Capital Requirements for Covered Swap Entities
Re-proposed Rule Issue Final Rule Issue Effective Date
September 24, 2014 October 22, 2015 April 1, 2016
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

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. When the act was passed in 2010, the mandate called for a one-year implementation timeline. In 2015, the Prudential Regulators, as well as the CFTC, issued final rules. See below for a summary of margin and capital rulemakings.

CFTC Final Rule: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

On December 16, 2015, the CFTC approved a final rulemaking requiring 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 rules apply to entities not covered by Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration’ or the Federal Housing Finance Agency (collectively the Prudential Regulators). The CFTC rules are mirrored after those adopted by the Prudential Regulators in October 2015.

The rulemaking passed 2-1. Chairman Tim Massad and Commissioner J. Christopher Giancarlo voted in favor of the rule. Commissioner Sharon Bowen voted against the rule.

The rules became effective April 1, 2016. The rules will be phased-in starting September 1, 2016 and ending September 1, 2020 from the largest participants to smaller ones. VM requirements would be effective September 1, 2016 for the largest participants and March 1, 2017 for the rest.

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Prudential Regulators Final Rule: Margin and Capital Requirements for Covered Swap Entities

On October 22, 2015, five U.S. regulatory agencies ("Prudential Regulators") issued a joint final rule 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 rule, 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 effective date for the rule is April 1, 2016. The final rule will phase in the variation margin requirements between September 1, 2016, and March 1, 2017. The initial margin requirements will phase in over four years, beginning on September 1, 2016.

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SEC Proposed Margin, Capital and Segregation Requirements, October 2012

On October 17, 2012, the Securities and Exchange Commission issued a proposed rulemaking regarding margin, collateral and segregation requirements for security-based swap dealers and major swap participants.[2] The proposed rules will determine how much capital dealers in security-based swaps need to hold; when and how these dealers need to collect collateral, or margin, to protect against losses from counterparties; and how these dealers segregate and protect funds and securities held for customers.

The rule appeared in the Federal Register on November 23, 2012. The initial deadline for public comment was January 22, 2013, but was subsequently extended until February 22, 2013.

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CFTC Proposed Capital Requirements for Swap Dealers and Major Swap Participants, April 2011

At its April 27, 2011 open meeting, the Commodity Futures Trading Commission (CFTC) approved a rule proposal regarding capital requirements for swap dealers and major swap participants.[3] The proposal would apply different requirements of an SD/MSP that is also registered as a futures commission merchant (FCM).

The proposal also addresses reporting requirements, which mirror those of derivatives clearing organizations.

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CFTC Proposed Margin Requirements for Swap Dealers and Major Swap Participants, April 2011

At its April 12, 2011 open meeting, the CFTC approved a rule proposal that established margin requirements for uncleared swap transactions for SD-MSPs. Under the CFTC Proposal, margin requirements will vary depending upon the counterparty of the SD/MSP. Also:

  • The rules would not impose margin requirements on commercial end users, defined under the proposed rules as non-financial entities.
  • For trades between two SD/MSPs, each party must collect and pay initial and variation margin.
  • For trades between a SD/MSP and a financial entity, the SD/MSP must collect, but not pay, margin.
  • For trades with a non-financial entity ("commercial end-user"), no margin is required, but rather a counterparty credit agreement must be arranged and abided by.
  • Calculation of margin would entail the use of a margin model from a derivatives clearing organization (DCO), prudential regulator, or other model approved by the commission.
  • Margin must be posted in the form of an approved asset class, and would be required to be held at a third-party custodian.
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References

  1. Margin and Capital Requirements for Covered Swap Entities. FDIC. Retrieved on May 10, 2011.
  2. SEC Proposes Rules for Security-Based Swap Dealers and Major Security-Based Swap Participants. SEC. Retrieved on October 17, 2012.
  3. Open Meeting on Fourteenth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on April 28, 2011.

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