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From Securities Regulation Daily, May 18, 2018

CFTC proposes to align uncleared swaps margin rule with banking regulators

By Lene Powell, J.D.

The CFTC proposed to amend a rule regarding margin for uncleared swaps to ensure that market participants remain able to net margin amounts despite a possible conflict with banking regulations. The proposal would amend the definition of "eligible master netting agreement" so that netting agreements are not excluded based solely on the agreements’ compliance with banking rules that impose restrictions on certain contracts (Qualified Financial Contracts or QFCs). The comment period will be open for 60 days following publication in the Federal Register.

"By reducing regulatory burdens for those who use our derivatives markets, that eliminates unnecessary red tape that hinders job creation, economic growth and innovation. We must enable U.S. job creators to remain competitive globally and this proposed rule seeks to assist with that effort," said CFTC Chairman J. Christopher Giancarlo.

Conflict with banking rules. The CFTC rules for uncleared swaps margin apply to swap dealers and major swap participants for which there are no prudential regulators ("covered swaps entities" or CSEs). Subject to certain limitations, CSEs may calculate margin on an aggregate net basis across uncleared swaps that are executed under the same eligible master netting agreement (EMNA). Legacy swaps are not required to meet margin requirements under CFTC margin rules, but if any non-legacy swaps are included in a portfolio, then the entire portfolio must meet margin requirements.

To provide for more orderly bankruptcy resolutions, in late 2017 the Board of Governors of the Federal Reserve System ("Board"), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (together, "Prudential Regulators") adopted rules that impose restrictions on "qualified financial contracts", which include certain uncleared swaps and uncleared security-based swaps and other financial contracts ("QFC rules"). The restrictions relate to default rights, transfer, and termination in the event of bankruptcy.

The current EMNA definition does not explicitly recognize certain restrictions on the exercise of a CSE’s cross-default rights required under the QFC Rules. Therefore, a pre-existing EMNA that is amended in order to become compliant with the QFC Rules, or a new master netting agreement that conforms to the QFC Rules, will not meet the current definition of EMNA. This disadvantages CSEs, because a CSE that is a counter party under a master netting agreement that does not meet the definition of EMNA would have to measure its exposures from covered swaps on a gross basis, rather than aggregate net basis.

Proposed amendment. To eliminate this disadvantage, the CFTC proposes to add a new paragraph (2)(ii) to the definition of "eligible master netting agreement" in Commission regulation 23.151 and make other minor related changes to that definition such that a master netting agreement may be an EMNA even though the agreement contains certain provisions regarding default and termination that are contrary to EMNA but compliant with the QFC rules. The proposal would also add a new paragraph (d) to the end of Commission regulation 23.161 relating to legacy swaps.

The proposed amendments are consistent with proposed amendments to the Prudential Margin Rule that the Prudential Regulators jointly published in the Federal Register on February 21, 2018. According to the CFTC, the proposed amendments further the Commission’s efforts to harmonize its margin regime with the Prudential Regulators’ margin regime and is responsive to suggestions received as part of the Commission’s Project KISS (Keep It Simple, Stupid) initiative.

MainStory: TopStory CommodityFutures Derivatives ExchangesMarketRegulation FinancialIntermediaries Swaps

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