CFTC Proposes Swaps Margin Amendments Relating to Money Market Funds and "Seeded" Funds

The CFTC proposed amendments to uncleared swaps margin requirements to (i) expand the scope of money market funds that qualify as acceptable collateral and (ii) provide an exception from "affiliate" status for certain investment funds "seeded" primarily by entities in scope for the rules.

The proposal is based on recommendations made in 2020 by the Subcommittee on Margin Requirements for Non-Cleared Swaps of the Global Markets Advisory Committee (see previous coverage).

Money Market Funds. The proposal would revise CFTC Rule 23.156 ("Forms of Margin") to restate the requirements applicable for money-market funds to be eligible as collateral. The proposal would remove a previous requirement that disallowed money market funds that engaged in repurchase or securities lending transactions.

Seeded Funds. The proposal would carve out from the definition of "margin affiliate" in CFTC Rule 23.151 ("Definitions applicable to Margin Requirements") solely for purposes of calculating the fund's "material swaps exposure" for determining whether initial margin requirements apply, for a three-year period from which the fund's manager begins to make investments, "eligible seeded funds." The proposal would define an "eligible seeded fund" as a collective investment vehicle that receives a part or all of its start-up capital from a parent or affiliate that is in-scope for initial margin requirements under CFTC 23.152 ("Collection and posting of initial margin") that satisfies a number of conditions, including:

• as to the independence and discretion of the fund's asset manager;
• that the fund's strategy has a written plan for reducing the parent/affiliate's ownership interest and provides for divestiture targets over a three-year period from the first investments made by the fund;
• that the fund's obligations are not "collateralized, guaranteed, or otherwise supported, directly or indirectly by a parent or affiliate, other fund, or the fund's manager";
• that the fund has not received assets from another eligible seeded fund relying on the seeded fund exception; and
• that the fund is not a securitization vehicle.

Three Commissioners voted to support the proposal, with one dissenting and one "concurring." Chair Rostin Behnam said that the seeded fund proposal is consistent with the CFTC's "risk-based approach" to margin requirements, is appropriately calibrated to address operational challenges for start-up funds and is consistent with international frameworks. He supported the money market funds-related change while citing the GMAC report that only four MMFs currently meet the requirements. Commissioner Christy Goldsmith Romero dissented, stating that the majority of swap dealers are subject to prudential regulator margin rules and that the prudential regulators have not adopted the same definition. Ms. Goldsmith Romero urged commenters to address whether the money market fund proposal is consistent with principles of financial stability given the troubles certain money market funds had during 2008.