CFTC Final Rule: Protection of Counterparties to Uncleared Swaps; Treatment of Securities in a Portfolio Margining Account in a Commodity Broker Bankruptcy

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Gavel.png FINAL RULE: Entered Federal Register November 6, 2013. Effective date January 6, 2014.
Dodd-Frank Timeline, Protection of Collateral of Counterparties to Uncleared Swaps
Proposal Date Final Rule Issue Effective Date
December 3, 2010 November 6, 2013 January 6, 2014

On October 30, 2013, the CFTC met to consider final rules on enhanced customer protections and the treatment of uncleared swaps. The uncleared swaps rules were approved in seriatim. The rule entered the Federal Register on November 6, 2013 and its effective date was January 6, 2014.


Section 713(c) of the Dodd-Frank Act requires the CFTC to clarify the legal status, in the event of a commodity broker bankruptcy, of:

  • securities in a portfolio margining account held as a futures account, and
  • an owner of such account.

On November 19, 2010, the commission approved a proposal regarding the protection of collateral for uncleared swaps.<ref>Open Meeting on Fifth Series of Proposed Rules under the Dodd-Frank Act. CFTC. Retrieved on March 10, 2011.</ref> Among the provisions of the proposal:

  • (SDs) and (MSPs) must notify their counterparties that such counterparties have "a right to require that any initial margin which they post to guarantee uncleared swaps be segregated at an independent custodian;"
  • The custodian must be an "independent third party;"
  • There must be in place a signed custody agreement;
  • Such segregated funds may be invested according to existing CFTC rules governing futures customers; and
  • Final rule will reflect new rules regarding, among other things, protection of funds before and after commodity broker bankruptcies.

Summary of the Final Rule[edit]

  • Definitions: Initial Margin means money, securities, or property posted by a party to a swap as performance bond to cover potential future exposures arising from changes in the market value of the position. Variation Margin means a payment made by or collateral posted by a party to a swap to cover the current exposure arising from changes in the market value of the position since the trade was executed or the previous time the position was marked to market.
  • Prior to the execution of each swap transaction that is NOT submitted for clearing, a swap dealer or major swap participant shall:
    • Notify each counterparty that it has the right to require segregation of any initial margin;
    • Identify one or more custodians, one of which must be independent of the SD/MSP, that may be a suitable depository; and
    • Provide information as to the price of segregation for each customer.
  • Segregated margin must be held at an independent custodian, and may only be withdrawn or turned over with the consent of both the SD/MSP and the counterparty.
  • If a counterparty chooses segregation for its funds, those funds will not be tied up in the bankruptcy of its swap dealer.<ref>Protection of Counterparties to Uncleared Swaps; Treatment of Securities in a Portfolio Margining Account in a Commodity Broker Bankruptcy. CFTC. Retrieved on April 7, 2014.</ref>

ISDA CFTC IM Segregation Right Notice, March 2014[edit]

On March 27, 2014, the International Swaps and Derivatives Association published a notice and "frequently asked questions" document to assist counterparties of their right to request segregation of margin (other than variation margin) for uncleared swap transactions.<ref>Collateral. ISDA. Retrieved on April 7, 2014.</ref>

The form and FAQ are embedded below.

Related Documents: Federal Register Entry, ISDA Segregation Notice and Frequently Asked Questions[edit]


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