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Prudential Banking Agencies Propose Modifications to Swap Prudential Margin Rules to Accommodate Revised Global Initial Margin (IM) Phase-In Timeline, Remove Inter-Affiliate IM Requirement, and Exempt Swaps Amended for LIBOR Replacement
by Practical Law Finance
| Published on 18 Sep 2019 • USA (National/Federal) |
US prudential bank regulators issued a proposed rule that would amend the prudential margin collection rules for uncleared swaps to accommodate the revised BCBS-IOSCO global initial margin (IM) implementation timeline, as well as to exempt inter-affiliate swaps and legacy swaps amended for LIBOR replacement from the IM requirement.
On September 17, 2019, the Federal Deposit Insurance Corporation (FDIC) issued a proposed rule, to be issued jointly with the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Farm Credit Administration, and the Federal Housing Finance Agency (FHA) (collectively, the agencies), that would amend the prudential margin rules issued pursuant to Sections 731 and 764 of the Dodd-Frank Act to:
- Modify the schedule for the final phases of initial margin (IM) compliance, adding a new September 1, 2021 Phase Six compliance date, in accordance with the revised BCBS-IOSCO global IM implementation timeline, for application of the prudential IM rules to certain smaller counterparties with average daily aggregate notional amounts (AANA) of uncleared swaps between $8 billion and $50 billion (see Legal Update, BCBS and IOSCO Extend Final Global Margin Implementation Deadline for Non-Centrally Cleared Derivatives to September 1, 2021). The amendment also expressly clarifies that "a covered swap entity is not required to execute [IM] trading documentation with a counterparty prior to the time it is required to collect or post [IM] margin[.]"
- Exempt covered swap entities from collecting IM from their affiliates, aligning the prudential margin rules with the CFTC margin rules on this point, although the CFTC margin rules also impose conditions and limitations on this exemption (17 C.F.R. § 23.159(a) and (b)). The FDIC is therefore requesting comment on what, if any, additional conditions or limitations should apply in the case of the prudential margin rules. Affiliates must continue to exchange variation margin (VM).
- Allow legacy swaps to be amended in order to replace an interbank offered rate (IBOR) such as LIBOR without losing legacy status, due to the uncertainty surrounding the future of LIBOR and its potential discontinuation at the end of 2021 (see Legal Update, ISDA® Amendment Allows Replacement of Discontinued Rates in Financial Contracts).
- Permit amendments caused by certain legacy swap life-cycle activities without triggering application of the prudential margin requirements.
Note that these rules would only apply to swaps entered into by parties subject to the prudential margin rules, though the CFTC is expected to follow suit and extend similar relief regarding the phase-in timeline and LIBOR amendment to the rest of the market. Public comment on the proposal must be received by December 9, 2019.
For more information on the margin requirements for non-centrally cleared derivatives (uncleared swaps) in the US, see Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps.
Note that the prudential margin rules were amended on September 21, 2018 to conform certain netting definitions with final rules for qualified financial contracts (QFCs) issued in 2017 (see Legal Update, US Prudential Regulators Amend Swap Margin Rules to Conform to Rules on QFC Netting).
They were again amended on March 15, 2019 to allow qualified swaps to be transferred from UK entities to European Union (EU) or US affiliates on the event of a no-deal Brexit without triggering application of the prudential margin rules (see Legal Update, Federal Bank Regulators Exempt Brexit-Related Legacy Swap Transfers from Prudential Margin Rules).
Update: On October 28, 2019, the agencies published a press release announcing the joint issuance of the proposed rule. On October 16, 2019, the CFTC issued a corresponding proposed rule to modify the final phases of IM compliance under the corresponding CFTC uncleared swap margin rules (see Legal Update, CFTC Proposes to Accommodate Revised Global Initial Margin (IM) Phase-In Timeline).
Update: The comment period has been extended to January 23, 2020.