CFTC finalizes margin requirements
The Commodity Futures Trading Commission on Dec. 16 approved a final rule setting margin requirements for uncleared swap transactions. The final rule will be phased in beginning with initial margin requirements taking effect between September 2016 and September 2020, depending on the size of the participants. The rule also requires daily variation margin for trades among swap dealers, major swap dealers and financial end-users that have more than $8 billion in gross notional exposure. The rule applies to companies that are registered with the CFTC as swap dealers or major swap participants but are not subject to regulation by prudential regulators such as the Federal Reserve, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation. Those regulators in October approved similar requirements for the companies under their supervision.
The CFTC rule was approved by a vote of 2-1, with Chairman Tim Massad and Commissioner Chris Giancarlo voting in favor and Commissioner Sharon Bowen voting against. Bowen explained that she opposed a provision in the rule that exempts swap transactions between affiliated companies from initial margin requirements. She noted that this provision is not consistent with margin rules set by prudential bank regulators as well as international standards and warned that it could become a "loophole" in the protections against a swap dealer default.
Massad defended the exemption as a "sensible" approach to the risk posed by these trades and explained that the final rule contains an "anti-evasion standard" to prevent inter-affiliate transactions from being used to avoid the margin requirements. "Inter-affiliate transactions are not outward-facing and thus do not increase the overall risk exposure of the consolidated enterprise to third parties," he said. "Imposing the same third-party transaction standards on these internal activities of consolidated entities is likely to significantly increase costs to end-users without any commensurate benefit."
CFTC Commissioner Sharon Bowen on Margin for Uncleared Swaps from MarketVoice on Vimeo.
