Cross-Border Swaps Regulation - Final Rule - Cross-Border Margin
|FINAL CFTC RULE: Adopted May 24, 2016.|
|Proposal Date||Final Rule Adopted||Compliance Date|
|June 29th, 2015||May 24, 2016||September 1, 2016|
The CFTC issued its final rule on cross-border margin on May 24, 2016. The rule seeks to apply the margin requirement to both U.S firms and their consolidated foreign subsidiaries as well as redress compliance issues in foreign jurisdictions.
The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that non-centrally cleared swaps be subject to margin requirements with the initial proposal com in 2011. In 2013 the CFTC issued it's guidance on cross-border swaps activity. Later in October of 2014, after the BIS and IOSCO Issued its recommendations, a re-proposed rule on margin requirements was issued. To deal with complications arising with foreign compliance and to prevent circumvention of margin requirements by firms using foreign branches, the CFTC issued a proposal and then this final rule.
The rule is a hybrid approach that is applied at the entity and transaction level. It requires that U.S. based and owned swap participants conform to U.S. posted margin requirements in dealing with non-U.S. counter parties (unless they are eligible for substitute compliance). So long as a U.S. person (either an actual person or company) is not guaranteeing the obligations of the uncleared swap nor is either of the swap participants owned by a U.S. based cleared swap entity it is not subject to this rule. However, consolidated foreign branches of covered swap entities that are ultimately controlled by a U.S. parent organization are subject to the rule. The rule also states that foreign swap participants that have a U.S. person guaranteeing the uncleared swap requires that it be treated a domestic uncleared swap. Not included are non-U.S. based cleared swap entities that are entering into uncleared swaps with non-U.S. counter-parties, so long as it does not involve its U.S. branch. Substituted compliance would available when the non-U.S. counter-party is subject to comparable margin requirements from a foreign prudential regulator (like the Prudential Regulation Authority). This would be subject to CFTC approval of foreign jurisdictions. <ref>Fact Sheet: Proposed Rule Regarding the Cross-Border Application of the Margin Requirements. CFTC. Retrieved on July 14, 2015.</ref> <ref>CFTC Proposes Rule on Margin Requirements for Uncleared Swaps in Cross-Border Transactions. National Law Review. Retrieved on July 14th, 2015.</ref>
The Rule:<ref>CFTC Issues Final Cross-Border Margin Rule. CFTC. Retrieved on July 26, 2016.</ref>
- Generally requires CSEs to comply with the CFTC’s margin requirements for all uncleared swaps in cross-border transactions, with a limited exclusion for certain non-U.S. CSEs. The exclusion is not available to non-U.S. CSEs that are consolidated with a U.S. parent (Foreign Consolidated Subsidiaries).
- In certain circumstances, the Final Rule would allow CSEs to comply with comparable margin requirements in a foreign jurisdiction as an alternative means of complying with the CFTC’s margin rule for uncleared swaps (substituted compliance) to the extent that the CFTC determines that the foreign jurisdiction’s requirements are comparable to the CFTC’s (comparability determination).
- Establishes a process for requesting comparability determinations, including eligibility and submission requirements, as well as the standard of review the CFTC would apply in assessing the comparability of a foreign jurisdiction’s margin requirements.