Reed Smith Client Alerts

On July 9, 2019, the CFTC issued new guidance relieving swap dealers that are subject to the CFTC’s initial margin requirements for uncleared OTC swaps from complying with documentation requirements governing the posting, collection, and custody of initial margin until the amount exceeds the $50 million threshold. Subsequently, on July 21, 2019, the Securities and Exchange Commission (SEC) published its final rules on margin requirements for non-bank security-based swap dealers, and on July 23, 2019, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) published a statement that proposes a one-year delay for the implementation of Phase Five of the margin rules.  This Client Alert discusses the status of initial margin requirements in the United States and the effects of the recently proposed relief.

Authors: Peter Y. Malyshev Ilene K. Froom Christine Parker Justin J. Mirabal Le-el Sinai Joseph M. Motto

The Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission (CFTC) issued new and long-anticipated guidance on July 9, 2019. The guidance relieves swap dealers (SD) that are subject to the CFTC’s initial margin (IM) requirements for uncleared over the counter (OTC) swaps (collectively, the Margin Rules)1 from complying with documentation requirements governing the posting, collection, and custody of IM until the IM amount exceeds $50 million.2

DSIO’s advisory came shortly after then-CFTC chairman J. Christopher Giancarlo urged U.S. and global financial regulators to “mak[e] the relatively modest adjustment of clarifying that an entity need not have in place systems and documentation to exchange initial margin on uncleared swaps with a given counterparty if the calculated bilateral initial margin amount with that counterparty is less than $50 million.”3

Subsequently, in response to market pressure, on July 23, 2019, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) published a statement that presents the final policy framework that establishes minimum standards for margin requirements for non-centrally cleared derivatives. This statement specifies a one-year delay for the implementation of phase five (as defined below) of the Margin Rules. The BCBS/IOSCO statement presents a framework but it is not binding law.

Separately, the Securities and Exchange Commission (SEC) on July 21, 2019, adopted their final rule (SEC Margin Rules)4 on capital and margin for non-bank security-based swap dealers (SBSD) which rule was substantially revised from its previous proposed version and now closely tracks the provisions of the Margin Rules.  Compliance with the SEC Margin Rules, however, will only be due 18 months after the effectiveness of SEC’s record keeping and reporting requirements for SBSD or the SEC’s cross-border rules.