Investment Operations

CFTC Proposes Amending Swap Margin Requirements, but Operational Questions Remain

The Commodity Futures Trading Commission announced Friday that it had unanimously approved two proposals amending certain margin requirements for swap dealers (SDs) and major swap participants (MSPs). The Division of Swap Dealer and Intermediary Oversight delivered a staff presentation on the proposed rulemakings during the Open Meeting held on July 22, 2020. Both proposed rules have a 30-day comment period following publication in the Federal Register.

Amendment to Align with the BCBS/IOSCO Framework; Amendment Concerning the Calculation of Initial Margin

The first proposal would align aspects of the CFTC’s uncleared swap margin requirements (CFTC Margin Rule) with the Basel Committee on Banking Supervision and the International Organization of Securities Commissions’ margin requirements for non-cleared derivatives (BCBS/IOSCO Framework). The proposal would also allow SDs and MSPs to rely on certain counterparties’ calculation of initial margin. 

Consistent with the BCBS/IOSCO Framework, this proposal would revise the method for determining whether an entity comes within the scope of the initial margin requirements under the CFTC Margin Rule beginning in the last phase of the phased compliance schedule, which is scheduled to begin on September 1, 2021, and the timing for compliance with the initial margin requirements after the end of the phased compliance schedule.

The proposal would also allow SDs and MSPs that are subject to the CFTC Margin Rule (covered swap entities) to use the risk-based model calculation of initial margin of a counterparty that is a CFTC-registered SD or MSP. In such circumstances, the covered swap entity would be able to rely on the calculation of its counterparty to determine the amount of initial margin to be collected from such counterparty and to determine whether the initial margin threshold amount has been exceeded such that documentation concerning the collection, posting, and custody of initial margin would be required.

Amendments Concerning the Application of Minimum Transfer Amount

The second proposal would amend the CFTC Margin Rule to permit the application of separate minimum transfer amounts for initial and variation margin, and the application of a minimum transfer amount of up to $50,000 for separately managed accounts.

Although the vote was unanimous, at least one Commissioner had some concerns. Certain “operational and other benefits justify publishing the MSE and Initial Margin Proposal and the MTA Proposal in the Federal Register for public comment,” said Commissioner Dan Berkovitz. “However, I am concerned that specific aspects of each of these proposed rules could weaken the Margin Rule and increase risk by creating a potentially larger pool of uncollateralized, uncleared swaps exposure.  My support for finalizing these proposals will depend on how the potential increased risks are addressed,” he cautioned.