Federal Register: Prudential Regulators Finalize Hedging Exemption for Swaps Margin Requirements

Commentary by Nihal Patel

Five federal agencies ("prudential regulators") finalized an interim final rule that exempts from their respective margin requirements certain uncleared swap and security-based swap transactions by (i) commercial end users, small banks, savings associations, Farm Credit System institutions and credit unions with $10 billion or less in total assets, and (ii) certain treasury affiliates, certain financial cooperatives and captive finance companies. The interim final rule was adopted on November 30, 2015.

The final rule implements a statutory mandate in Title III of the Terrorism Risk Insurance Program Reauthorization Act of 2015. It was published in the Federal Register and will become effective on October 1, 2016.

Commentary

This rulemaking finalizes, but does not change, an interim final rule that the prudential regulators adopted last year along with their uncleared swap margin requirements. Generally, the rule allows entities that rely on an exception from mandatory clearing to be excepted from regulatory margin requirements for uncleared swaps. Although the final rule contains no changes to the interim final rule, notable comments appear in the accompanying discussion:

  • For transactions in which the final rule may apply but the requirements for an exemption for clearing are not applicable (i.e., all security-based swaps and swaps not subject to a mandatory clearing determination), the prudential regulators indicated that covered swap entities are expected to "take appropriate steps to establish a reasonable belief" that the counterparty is eligible for the relevant exemption and is using the transaction for hedging purposes.
  • Small banks (and similar entities) that receive statutory exceptions requiring regulatory determinations are not able to rely on the exception in the final rules with respect to security-based swaps unless the SEC determines that they can rely on the statutory exception. (The CFTC has made that determination already with respect to swaps.)
  • The prudential regulators concluded that the changes to the statutory exception for "treasury affiliates" in the Consolidated Appropriations Act of 2016 did not require the final rule to be changed, though the regulators noted that market participants will have to comply with the new statutory requirements.

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