The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") clarified that "Phase Five" initial margin ("IM") documentation requirements will not apply to trading relationships where initial margin requirements have not gone above the $50 million threshold. As previously covered, CFTC Chair J. Christopher Giancarlo urgedU.S. regulators (including banking regulators) to provide relief of this nature.
The advisory states that, while no specific documentation is required, it is expected that swap dealers will have required documentation in place when the threshold is reached. The advisory provides the following additional guidance on relevant requirements:
Noting that Rule 23.504 ("Swap Trading Relationship Documentation") requires appropriate steps to ensure timely execution of IM documentation as required by the CFTC margin rules, the advisory states that if a swap dealer opts to post IM below the threshold it must require that the collateral be held at an independent custodian in accordance with CFTC Rule 23.157(c) ("Custodial arrangements").
Under CFTC risk management requirements of Rule 23.600 ("Risk Management Program for Swap Dealers and Major Swap Participants"), swap dealers must "act diligently" as IM requirements approach the threshold to ensure compliance and have required documentation in place.
In light of these requirements and requirements under CFTC Rules 23.504 and 23.158 ("Margin Documentation"), DSIO states that it believes that the rules require execution of IM documentation when collection or posting is actually required - i.e., when the threshold is reached.
The Managed Funds Association asked U.S. prudential regulators to address the regulatory burden and "trading disruptions" caused by "Phase Five" of the implementation of swaps initial margin requirements.
ISDA advised firms on how to prepare for the implementation of initial margin "Phase Five."
ISDA CEO Scott O'Malia encouraged regulators and policymakers to reduce certain "burdensome" requirements that will be enacted on the forthcoming implementation of initial margin "Phase Five."
CFTC Chair J. Christopher Giancarlo urged U.S. regulators to clarify obligations for dealers to exchange initial margin where requirements are below the $50 million threshold amount specified in the rules.