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GMAC Considers Recommendations on Margin Requirements for Non-Cleared Swaps's picture
Commentary by Nihal Patel

The CFTC Global Markets Advisory Committee ("GMAC") considered Subcommittee recommendations for improving the scoping and implementation of initial margin requirements for uncleared swaps.

At the meeting, the GMAC Subcommittee on Margin Requirements for Non-Cleared Swaps introduced a report containing a series of recommendations for modifying initial margin ("IM") requirements for uncleared swaps. In addition to making the recommendations below, the Subcommittee urged the CFTC to promptly adopt the COVID-19-related one-year delay in implementation suggested by a Basel Committee on Banking Supervision and IOSCO ("BCBS-IOSCO") recommendation. (The CFTC announced an open meeting on May 28, 2020, at which it is expected to consider this extension.)

In the report, the Subcommittee highlighted the following:

  • Separately Managed Accounts ("SMAs"). While offering interpretations and relief as to how thresholds should apply to SMAs, the Subcommittee suggested that such entities should be permitted to continue trading in the event of an "inadvertent breach" of the threshold.
  • Money Market Funds. The Subcommittee called for eliminating existing restrictions on what types of money market funds can be eligible collateral (in particular, the bar on securities loan and repurchase activities).
  • "Seeded" Funds. The Subcommittee recommended excluding funds that are "temporarily seeded" by a non-guarantor parent entity from treatment as part of an affiliated group.
  • Threshold Calculations for Smaller Swap Dealers. The Subcommittee would permit smaller swap dealers that are not approved to use models to rely on IM amounts calculated by model-using dealers for purposes of determining whether the threshold triggering IM requirements has been crossed.
  • Grace Period. For phases 5 and 6 of implementation, the Subcommittee recommends a six-month grace period for compliance following the date on which the IM threshold has been crossed.
  • Compliance Periods. The Subcommittee recommends aligning the U.S. calculation methodology and timing for the U.S. post-phase-in calculation period with the BCBS-IOSCO framework.
  • Minimum Transfer Amounts. The Subcommittee recommends codifying existing no-action relief relating to the application of minimum transfer amounts. See CFTC Letters 17-12 and 19-25.
  • Deliverable Foreign Exchange. The Subcommittee recommends removing these products from the "counting" requirements for determining whether IM requirements apply.


A number of the recommendations in the report have been raised by industry participants over the past few years. Having them in one place and presented formally by a CFTC-sponsored working group requires additional consideration.

The recommendations are somewhat modest insofar as they do not request significant relief from the perspective of large dealers who provide a significant portion of the volume of uncleared swaps. In fact, all of the key initiatives seem largely intended to limit the scope of the rules as to various types of "buy-side" entities and smaller dealing entities.

Given the COVID-19 market events, this could have been a moment to question the need to require dealers to post large amounts of collateral to customers. In particular, it is clear that, as a credit matter, few customers negotiate dealer posting requirements in the absence of the regulatory requirement. Given a wide variety of other reasons (e.g., typically hedged and facilitating customers, substantial other relevant regulatory requirements such as Volcker, capital, and liquidity), and in light of the various steps taken to increase liquidity following COVID-19-related events, perhaps it might have been a good time to re-engage on this question. A reconsideration of this aspect of the rules might also be merited given the inconsistency in the United States even as to the same types of transactions. The approach to swaps IM taken by the SEC is notably distinct from the prudential regulators and the CFTC - i.e., no dealer IM posting requirement, no IM posting between financial market intermediaries.

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