CFTC Eases Uncleared-Swap Margin Rules for Seeded Funds and Collateral

The CFTC adopted three rule amendments relating to the margining and collateral of uncleared swaps. The amendments relate to: (i) the requirement that startup seeded investment funds post collateral on swaps, (ii) the ability to post money-market funds as collateral to swaps, and (iii) the valuation of collateral.

First the CFTC noted that new investment funds that a sponsor starts with seed capital may be treated by accounting rules as part as the sponsor's corporate group, which triggers margining even though the fund has little swap activity. The amendment to Rule 23.151 (Definitions applicable to margin requirements) will allow a seeded fund to be treated as having no margin affiliates for up to three years after its trading inception date, provided that the fund: (i) is a separate legal entity, (ii) is managed independently under a written strategy, (iii) is not guaranteed by the sponsor, and (iv) has a written plan to reduce the sponsor's stake over the three years.

The second amendment is to Rule 23.156 (Forms of margin) and allows money-market funds to serve as collateral even if they enter into repurchase agreements or similar financing transactions. Third, the CFTC amended the haircut schedule in order to provide for haircuts for the money-market funds that are now permitted to be posted as collateral. The amendment to the haircut schedule adds a footnote for eligible redeemable securities in pooled investment funds applying a haircut of 0.5, 2.0, or 4.0 percent.

The CFTC stated these amendments will bring U.S. rules closer to those in such jurisdictions as the European Union, Canada, and Australia.