December 12, 2019

Trade Groups React to Proposed Amendments on Swap Margin Rules

Several industry associations provided comments on a U.S. prudential regulators' proposal to amend swap margin rules.

As previously covered, the amendments were proposed by the FDIC, Federal Reserve Board ("FRB"), Farm Credit Administration, Federal Housing Finance Agency and OCC (collectively, the "Prudential Regulators") and 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.

Selected comments are noted below.

Alternative Reference Rates Committee ("ARRC")

The ARRC expressed "strong[] support" for the proposal. The ARRC supported (i) providing a non-exhaustive list of IBORs to be replaced, (ii) covering amendments for replacing other discontinued rates or rates that have lost relevance as a reliable benchmark, (iii) contemplating that more than one amendment could be necessary, (iv) allowing contemporaneous spread adjustments and technical changes, and (v) permitting certain portfolio compression exercises. The ARRC further recommended that the Prudential Regulators not impose an end date by which amendments must be completed. The ARRC also suggested that the Prudential Regulators modify the proposal to (i) permit circumstances in which parties enter into new swaps to offset existing "legacy" swaps, (ii) permit modifications to the term and notional amount of a swap where directly related to benchmark transition, (iii) provide relief for non-interest rate references and (iv) align relief for non-material amendments to relief granted by the CFTC in Letter 19-13.


ISDA recommended that the Prudential Regulators consider:

  • revising the IBOR relief to (i) clarify that relief from margin requirements would only be applicable to swaps entered to effectuate the transition away from LIBOR, (ii) not specify an exact date by which IBOR-related amendments must be finalized, (iii) allow changes in maturity or the total effective notional amount regarding the transition away from LIBOR and (iv) extend the proposed relief to include implementation of fallbacks in all derivatives;

  • aligning the "material swaps exposure" (or "MSE") calculation period to March, April and May for Phase 6, consistent with the BCBS-IOSCO framework and other jurisdictions' rules; and

  • aligning relief for non-material amendments with relief granted by the CFTC in Letter 19-13 (see previous coverage).

Joint Trade Group Letter

In a joint comment letter, several trade groups (including the American Bankers Association, Institute of International Bankers and SIFMA) generally supported the Proposal, while also urging the prudential regulators to re-engage with regulators in non-U.S. jurisdictions and consider making substituted compliance determinations.


MFA supported the Proposal, but further urged the Prudential Regulators to (1) expand the use of money market funds that are eligible collateral, (2) provide a six-month grace period after the initial margin ("IM") threshold is crossed before margin must be exchanged, (3) authorize annual testing and monitoring of the IM threshold for separately managed accounts, (4) work to create flexible standards for allocating IM thresholds across separately managed accounts using multiple advisers, and (5) excluding physically settled FX swaps and forwards from aggregate average notional amount (or "AANA") calculations.

Structured Finance Association

The Structured Finance Association wrote to express general support for the Prudential Regulators' relief relating to benchmark transition and urged the regulators to continue to allow transition to happen "with as little disruption as possible."

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