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CFTC Proposes Amendments to Swaps Margin Rules

nihal.patel@cwt.com's picture
Commentary by Nihal Patel

The CFTC voted to propose amending its uncleared swap margin regulations to (i) extend the implementation date of initial margin requirements for 2020 and 2021 and (ii) exempt certain transactions with the European Stability Mechanism from uncleared margin requirements.

Initial Margin "Phase Five" Implementation

The CFTC unanimously approved a proposal to extend the "Phase Five" implementation date of the swaps initial margin requirements for firms with an aggregate average notional amount of between $8 billion and $50 billion to September 1, 2021. The proposal follows a similar proposal by the U.S. prudential regulators, and each follows a BCBS-IOSCO statement (see here and here). The current proposal also would make technical corrections to other aspects of Regulations 23.161.

CFTC Commissioners Brian Quintenz and Dawn Stump, each of whom supported the proposal, also urged the CFTC to seek further regulatory harmonization with other uncleared swap margin regimes in the United States and overseas.

European Stability Mechanism Exemption

By a vote of four to one, the CFTC Commission approved a proposal to exempt uncleared swaps with the European Stability Mechanism ("ESM") from uncleared swap margin requirements by explicitly excepting the ESM from the definition of "financial end user." The proposal follows on existing CFTC staff no-action relief, which the CFTC staff withdrew and replaced with a new no-action letter that will expire on the earlier of (i) when the CFTC makes a final decision regarding the proposal or (ii) April 14, 2020. Separately, the CFTC staff also issued another new no-action letter updating a no-action position regarding mandatory clearing for swaps with the ESM.

Mr. Quintenz dissented from this proposal, saying that he would object to any proposed EU relief until EU authorities reaffirm the 2016 Central Counterparty ("CCP") equivalence determination between the CFTC and the European Commission. Mr. Quintenz criticized the dedication of "precious staff resources to provide legal certainty to an EU agency" when the five EU-authorized U.S. CCPs remain in a legal grey area following the proposed implementation of EMIR 2.2. As previously covered, Mr. Quintenz argued that the proposed EMIR 2.2. would "unilaterally abandon" the 2016 CCP equivalence determination. In contrast, CFTC Chair Heath Tarbert said that the CFTC "aims to lead by example" in demonstrating regulatory deference to ensure "well-regulated and efficient markets." However, Mr. Tarbert reminded international regulators that deference is a "two-way street" and urged them to join the CFTC in its mission to harmonize cross-border derivatives regulation.

Commentary

"Harmonization" is a continuing buzzword for regulators when it comes to various derivatives regulatory matters. But despite all the talk, whether due to process, personnel or policy, regulators seem insistent on leaving (at least) a little bit of difference in their rules. It is true that the CFTC matches the prudential regulators when it comes to the compliance schedule for initial margin. However, in these proposals, the CFTC does not (i) formalize previously issued staff relief on thresholds or immaterial amendments to align with a recent prudential regulator proposal or (ii) provide for exceptions for "legacy" swaps relating to benchmark reform.

Further, while it's important to push for the EU to take a reasonable path on central clearing, as Commissioner Quintenz argues, it is not obvious how that goal will be achieved by his objection to the codification of existing relief, nor is it obvious why the CFTC needed to make a separate proposal to formalize this staff relief. There are literally hundreds of CFTC staff letters that regulated entities rely upon every day to run their businesses. One need not look far: the CFTC has - very recently and as noted above - issued (fairly complex) relief for other aspects of its margin rules.

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