FCA Says LIBOR Transition Won't Subject Legacy Swaps to Margin Rules
According to reports, the UK Financial Conduct Authority ("FCA") does not believe that moving a legacy swap contract from LIBOR to an alternative reference rate would represent a material amendment to the contract, and thus would not "trigger application of margin requirements."
A material amendment to a contract could cause it to be classified as a new trade, which would require a firm to adhere to both initial and variation margin requirements. The FCA's reported assessment - that altering the reference rate will not represent a material amendment - resolves uncertainty around whether legacy swap contracts will be subjected to the new European Market Infrastructure Regulation margin requirements.
As highlighted by Risk.net, the FCA intends to "discuss with other relevant authorities how clarification on this point can be provided."
Commentary
An official FCA statement that a change in index rate does not represent a material amendment to swap terms, requiring the collection of margin, would be a helpful step toward removing unnecessary confusion and economic consequences of the transition away from LIBOR.