CFTC Staff Issues Interpretation on Segregation of Independent Amounts for Uncleared Swap Transactions (CFTC Letter 14-132)
Commentary by Bob Zwirb
The CFTC Division of Swap Dealer and Intermediary Oversight issued an interpretation providing guidance as to the applicability of certain provisions of Commission Rules 23.701 ("Notification of Right to Segregation") and 23.704 ("Requirements for Non-Segregated Margin"). These regulations impose certain notification and reporting requirements on swap dealers ("SDs") and major swap participants ("MSPs") with involving margin posted by counterparties in uncleared swap transactions.
Responding to several inquiries regarding the applicability of the regulations, the interpretation clarifies to SDs and MSPs that:
- the requirement that an SD or MSP must provide annual notification to each counterparty to an uncleared swap transaction of such counterparty's right to elect to require segregation of initial margin continues to apply in any calendar year in which the SD or MSP enters into a new uncleared swap transaction with the counterparty. The SD or MSP is required to provide the annual notification whether or not the counterparty previously made an election to require the SD or MSP to segregate initial margin;
- the annual notification and quarterly reporting requirements set forth in Regulations 23.701 and 23.704 are not applicable if no initial margin is required to be posted by a counterparty or collected by an SD or MSP either by contract or regulation; and
- under certain conditions, an SD or MSP is not prohibited from relying on negative consent in complying with its obligations to obtain from its counterparty: (a) confirmation of the counterparty's receipt of the annual notice provided by the SD or MSP under Regulation 23.701, and (b) the counterparty's election to require or not require segregation.
See: CFTC Letter 14-132.
Commentary
Although segregation of counterparty margin is optional for uncleared swaps, it is subject to notification and reporting requirements that are fairly prescriptive, hence the inevitable need for further interpretation and guidance. Indeed, notwithstanding the elective nature of the basic requirement, it has generated a substantial number of inquiries, as the Division notes, regarding its applicability.
All this regulatory and compliance energy for something that is supposed to be, and ultimately is, a matter of contractual agreement between two private parties. Given that regulatory resources are ultimately finite, as are compliance resources at regulated firms, the question that must ultimately be asked is whether this is (remotely) a sensible use of those limited governmental and private resources.