The Commodity Futures Trading Commission today held an open meeting to consider two rulemakings. This was the first public meeting held by Tim Massad, the new CFTC chairman. In his opening statement, Massad stressed that both rulemakings are designed to "minimize the burden" on commercial hedgers and make sure that the CFTC's regulatory scheme "recognizes the needs and concerns of commercial end-users who depend on the derivatives markets to hedge normal business risks."
Proposed rule for margin requirements on uncleared swaps
Vote: 4-0
The CFTC unanimously approved a proposed rule that would establish initial and variation margin requirements on uncleared swaps. The proposed rule is "very similar" to the proposals issued last week by the Federal Reserve and other U.S. banking regulators and generally tracks the standards recommended last September by international regulators through IOSCO and the Basel Committee, according to CFTC staff. The CFTC's version of this rule will apply to swap dealers and major swap participants that are not subject to the oversight of other regulators such as the Federal Reserve.
Under the proposed timetable for implementation, initial margin requirements would be phased in starting Dec. 1, 2015 for the largest market participants and ending Dec. 1, 2019 for the smallest. Variation margin requirements would be effective Dec. 1, 2015. The rules would permit collateral for initial margin to include cash, sovereign debt, government-sponsored debt, investment grade debt, including corporate and municipal bonds, equities, and gold. Variation margin, on the other hand, would be limited to cash.
The proposed requirements only apply to trades among swap dealers and other financial entities and do not apply to commercial end-users. The proposal includes a carve-out for financial entities that have less than $3 billion of gross notional exposure in uncleared swaps, which is a significantly lower level than what was recommended by the IOSCO/Basel Committee. This threshold calculation would be calculated at the consolidated corporate group level, rather than at an entity level, and would include physically settled foreign exchange swaps and forwards, even though these products are not subject to the proposed margin requirements.
Final rule for utility swaps
Vote: 4-0
The CFTC unanimously approved a final rule aimed at preserving the ability of natural gas and electricity utilities to enter into swaps transactions to hedge their risks. CFTC staff explained during the open meeting that the rule responds to concerns raised by utilities that the number of counterparties willing to enter into swaps with them has been reduced because some of these counterparties do not want to exceed the CFTC'sde minimis threshold for swaps with municipal utilities, federal agencies and other governmental "special entities," which would require them to register as swap dealers. That threshold is set at $25 million, much lower than the $8 billion threshold that applies to swaps dealing generally. The final rule permits a firm to exclude trades with "utility special entities" in calculating whether its trading exceeds the $25 million special entityde minimis threshold.
CFTC Chairman Massad said this rule is an example of the "fine-tuning" process needed for the regulatory framework established by Dodd-Frank. The final rule puts into a more permanent form the relief previously granted in a series of no-action letters that provided temporary relief.
