CFTC Extends Deadline for Swap Dealers to Comply with Collateral Segregation Requirement
The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") issued time-limited no-action relief to swap dealers ("SDs") that gives them an additional thirty days to comply with the collateral segregation requirement for initial margin under the CFTC's uncleared swap margin rules. The relief will expire on October 3, 2016.
Specifically, the CFTC provided relief from the custodial arrangement requirements under CFTC Rule 23.157, which requires an SD to ensure that an unaffiliated custodian is holding initial margin. In response to SDs' assessment that compliance cannot be met by September 1, 2016 without causing disruptions to the uncleared swap market, the CFTC will provide relief during the initial 30 days of implementation. According to the no-action letter, "any initial margin posted to, or collected from, a counterparty by an SD with respect to an uncleared swap will not be required to be held by a custodian that is not the SD, its counterparty, or a margin affiliate of the SD or its counterparty between September 1, 2016 and October 3, 2016."
The no-action relief is conditioned on the SD (i) collecting and posting initial margin ("IM") and variation margin in accordance with the rules (meaning that IM could be posted directly to a counterparty or collected directly by the SD), and (ii) holding IM in accordance with arrangements that have been documented as of September 1 (meaning that firms with arrangements already in place are not excused from the requirements).
CFTC Chair Timothy Massad issued a statement of support in which he noted that the extension should "help minimize the risk of problems due to any difficulty" in collecting and posting margin.
Commentary
Why the CFTC would limit this relief solely to the segregation requirement remains unclear. Custodial arrangements might be time-consuming to organize, but even where such arrangements are not in place, the relief requires firms to collect and post initial margin directly to one another. For most firms, this won't be as easy as flipping a switch. Documentation and operational considerations come into play even when firms send collateral back and forth without a middle man. Additionally, the relief will have limited impact in the absence of equivalent relief from the prudential regulators. For example, where a CFTC swap dealer trades with a prudentially regulated swap dealer, the latter still will be required to segregate IM collected from the former.
As mentioned back in May 2016, allowing little more than three months to launch a project like this was always an extraordinary expectation, regardless of what regulators might do in other jurisdictions. In addition, the relief vindicates yesterday's statement by CFTC Commissioner J. Christopher Giancarlo.
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