Prudential Regulators Propose Amendments to Swap Margin Rules

The Federal Reserve Board ("FRB"), Farm Credit Administration, Federal Housing Finance Agency and OCC (collectively, "the Agencies") proposed rule amendments governing margin requirements for uncleared swaps and security-based swaps. As previously covered, the FDIC approved the proposal in September.

The proposal would make five substantive changes to the margin rules: (i) removal of inter-affiliate initial margin, (ii) amendments to permit changes to "legacy" swaps relating to benchmarks, (iii) extension of the compliance period for initial margin, (iv) permission of non-material amendments to "legacy" transactions and (v) clarification regarding documentation requirements when initial margin is not exchanged due to the $50 million threshold.

In a published statement, FRB Governor Lael Brainard raised concerns over the proposed removal of inter-affiliate initial margin requirements. Ms. Brainard said that inter-affiliate derivatives transactions "represent a large share of uncleared swaps activity," and that the current rules recognize the different risks posed by those transactions versus third-party transactions. Ms. Brainard also criticized the proposal's reference to Regulation W ("Transactions between Member Banks and Their Affiliates"), saying that "while it is true that Regulation W could impose margining safeguards [on inter-affiliate swaps] . . . [it] has not yet been updated to reflect changes associated with the Dodd-Frank Act." According to Ms. Brainard, "there have been no discussions with policymakers on proposed amendments to Regulation W."