Banking Regulators Reopen Comment Period on Swap Margin and Capital Proposed Rulemaking (FRB, FDIC, OCC, FCA, and FHFA Joint Release - Fed. Reg. Version) (with Lofchie Comment)

The banking regulators (the "Agencies") have reopened the comment period for the "Proposed Margin Rule" published in the Federal Register on May 11, 2011 (76 FR 27564). The rule is intended to establish minimum margin and capital requirements for uncleared swaps and security-based swaps entered into by SDs, MSPs, security-based swap dealers, and major security-based swap participants, in each case subject to the requirements of the Prudential (banking) regulators rather than the CFTC. The release indicates that the comment period has been extended as a result of the consultative document on margin requirements for non-centrally-cleared derivatives published for comment recently by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO).

In the attached release, the Agencies stated they have been consistently concerned that applying U.S. margin requirements to transactions involving foreign swap entities or foreign counterparties could subject those transactions to multiple, and potentially conflicting, margin requirements established by U.S. and foreign regulators and could raise questions of competitive equality among U.S. and foreign firms. The Agencies then go on to say that IOSCO's study of margin requirements for derivatives addresses a number of relevant topics including: (i) the instruments that would be subject to margin requirements; (ii) the market participants that would be subject to margin requirements; (iii) initial margin and variation margin methodology; (iv) eligible collateral; (v) treatment of the provided margin; (vi) treatment of inter-affiliate transactions; and (vii) treatment of cross-border transactions. In light of the foregoing, the banking regulators have determined to reopen the issue of margin requirements.

Comments Due: November 26, 2012.

Cross-Reference(s): Dodd-Frank Sections 731 (Registration and regulation of swap dealers and major swap participants) and 764 (Registration and regulation of security-based swap dealers and major security-based swap participants).

Lofchie Comment: As the attached document states, "the Dodd-Frank Act requires the CFTC, SEC, and the Agencies to establish and maintain, to the maximum extent practicable, capital and margin requirements that are comparable, and to consult with each other . . . regarding these requirements. . . . Staff of the Agencies consulted with staff of the CFTC and SEC in developing the proposed rule." This raises the question of what the CFTC intends. As I have previously observed, the CFTC's proposed rules have been objected to fiercely by non-U.S. regulators, even to the point of such regulators essentially threatening a trade war, or at least retaliation against U.S. banks. It was unclear to me how the CFTC could proceed on its current course in light of such strong opposition from its fellow regulators. Then, earlier this week, CFTC Commissioner O'Malia criticized the CFTC's rule-making process as resulting in "regulatory inconsistencies, blatant mistakes, uncertainty and unexpected outcomes." To add to the general uncertainty, the Treasury Department still has not determined which currency trades are "swaps." To make matters even more confusing, not all of the issues raised by IOSCO are really "margin" or even "cross-border" issues. The question of the "instruments that would be subject to margin requirements" goes to the definition of the term "swap," another area where I continue to believe that regulatory reassessment is required. I would strongly urge both U.S. and non-U.S. firms to comment on the Agencies' proposed rules, and those firms that will be subject to the comparable rules of the CFTC to comment as well.

View release in full here: 77 FR 60057 Additional Materials: Joint Press Release.See also: CFTC Extension of Comment Period on their Proposed Margin Rule and CFTC Chairman Gary Gensler's Statement of Support.