Corporate Finance | Capital Markets, Investment Management, Financial Services, and Finance
On October 16, 2019, the Commodity Futures Trading Commission (CFTC) proposed rules that, if finalized, would delay by one year the date by which swap dealers must comply with the CFTC’s initial margin (IM) requirements in connection with uncleared swaps with certain smaller financial end users. Comments on the Proposed Rules are due by December 23, 2019.
Under the existing phase-in schedule for the CFTC’s margin rules for uncleared swaps, September 1, 2020 is the compliance date for IM requirements for swaps between swap dealers and financial end users that, combined with their relevant affiliates, have $0.75 trillion or less in average daily aggregate notional amount of uncleared swaps, uncleared security-based swaps, foreign exchange forwards and foreign exchange swaps. The Proposed Rules would divide such financial end users into two groups. For one group, consisting of financial end users with more than $50 billion (but $0.75 trillion or less) in average daily aggregate notional amount of such transactions, the compliance date would remain September 1, 2020. However, for a second group, consisting of financial end users with $50 billion or less (but more than $8 billion) in average daily aggregate notional amount of such transactions, the compliance date for IM requirements would be delayed by one year, until September 1, 2021.
The release accompanying the Proposed Rules states a number of reasons for the proposed delay of the phase-in schedule. The CFTC expresses concern that, because of the large number of counterparties currently in scope for IM requirements next year, such counterparties could face operational difficulties in connection with, among other things, the preparation of IM-related documentation and custodial arrangements. Delays in compliance could “lead to disruption in the markets, including the possibility that some counterparties could, for a time, be prohibited from entering into uncleared swaps and therefore be unable to use swaps to hedge their financial risk.” The CFTC further notes that its Proposed Rules are consistent with revisions in the international framework for margin adopted by the Basel Committee on Banking Supervision and the Board of the International Organization of Securities Commissions, and that the counterparties that would be subject to the one-year extension account for a relatively small amount of swap market activity.
The CFTC’s margin rules apply to those swap dealers for which there is no prudential banking regulator; margin rules of the prudential banking regulators apply to the swap dealers that are subject to their prudential supervision. On October 28, 2019, the five U.S. banking regulatory agencies that supervise swap dealers that are banks announced that they, too, would propose (among other things) a one-year delay in IM requirements for swaps with smaller financial end users.
 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 Fed. Reg. 56950 (Oct. 24, 2019) (the “Proposed Rules”), available here.
 The term “financial end user” is defined at length in CFTC Rule 23.151. Generally the CFTC margin rules apply to transactions either between two different swap dealers or between swap dealers and certain financial end users. By reason of the rules’ phase-in schedule, which commenced on September 1, 2016, swap dealers are generally already subject to IM requirements in connection with transactions with other swap dealers. The phase-in period for CFTC variation margin requirements ended in 2017.
 The CFTC’s IM requirements apply to swaps between swap dealers and only those financial end users with “material swaps exposure,” generally defined to mean an average daily aggregate notional amount of uncleared swaps, uncleared security-based swaps, foreign exchange forwards and foreign exchange swaps that exceeds $8 billion. Swap dealers are required to both collect IM from, and post IM with, such financial end users.
 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 Fed. Reg. at 56951.
 The relevant prudential regulators are the Board of Governors of the Federal Reserve System, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency and the Office of the Comptroller of the Currency.
 The joint press release of the prudential regulators announcing their intention to propose amendments to their margin rules is available here.
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