CFTC Issues No-Action Relief from Uncleared Swaps Margin Rules for Certain Amendments to Legacy Swaps | Practical Law

CFTC Issues No-Action Relief from Uncleared Swaps Margin Rules for Certain Amendments to Legacy Swaps | Practical Law

The CFTC issued No-Action Letter No. 19-13, which permits certain amendments to a legacy swap without triggering the application of uncleared swaps margin rules to the legacy swap.

CFTC Issues No-Action Relief from Uncleared Swaps Margin Rules for Certain Amendments to Legacy Swaps

by Practical Law Finance
Published on 12 Jun 2019 • USA (National/Federal)
The CFTC issued No-Action Letter No. 19-13, which permits certain amendments to a legacy swap without triggering the application of uncleared swaps margin rules to the legacy swap.
On June 6, 2019, the CFTC issued CFTC Letter No. 19-13 (No-Action 19-13), which permits certain amendments to a legacy swap without triggering the application of uncleared swaps margin rules to the legacy swap.
Legacy swaps are swaps executed prior to the applicable compliance dates under CFTC Regulation 23.161 for rules requiring the collection and exchange of initial margin (IM) and variation margin (VM) to collateralize exposure under uncleared swaps. Though the CFTC margin rules generally do not apply to legacy swaps, a legacy swap that is amended or novated on or after the applicable compliance date could become subject to the CFTC margin rules (see Practice Note, The Dodd-Frank Act: Margin Collection and Exchange Rules for Uncleared Swaps: Final CFTC Margin Rules).
No-Action 19-13 provides relief for the following types of amendments to legacy swaps, subject to certain conditions:
  • Legacy swaps that are amended in an immaterial manner. Amendments to legacy swaps that do not amend any terms that would affect the economic obligations of the parties to the swap or the valuation of the swap are included in this exception.
  • A swap resulting from the exercise of a swaption that is a legacy swap. The CFTC agreed with ISDA's argument that since the terms of the swap that result from a legacy swaption were set prior to the compliance date for the requirements of the CFTC margin rules, the new swap should also be treated as a legacy swap if all the terms of the swap were established upon execution of the swaption.
  • The remaining portion of a swap following the partial termination or novation of a legacy swap. When original counterparties to a swap either partially terminate or partially novate a swap, the remaining portion of the swap between the original counterparties is called the stub and is governed by the terms of the original swap aside from the reduction in notional amount. These partially terminated or partially novated legacy swaps will be treated as legacy swaps if:
    • the records of the legacy swap that exist in the trading and/or recordkeeping systems of the swap dealer (SD) party to the swap are amended solely to reflect the reduced notional amount of the legacy swap;
    • the stated portion of the legacy swap that is terminated or novated by the SD is fully terminated between the SD and its original counterparty, apart from the stub; and
    • all other material terms of the stub remain the same as the terms of the legacy swap.
  • New swaps resulting from a multilateral compression exercise consisting solely of compression of legacy swaps, subject to the following conditions:
    • the multilateral portfolio compression exercise generating the amended and replacement swaps must be considered a multilateral portfolio compression exercise as defined in CFTC Regulation 23.500(h) and must involve more than two market participants;
    • all swaps submitted by market participants as part of the multilateral portfolio compression exercise must be legacy swaps;
    • the amended and replacement swaps generated by the multilateral portfolio compression exercise must be generated in accordance with a multilateral portfolio compression service provider's established rules and parameters and must be entered into between the same counterparties to the legacy swaps, have the same material terms as the legacy swaps (with the exception of reduction to notional amount), and be entered into for the sole purpose of reducing operational or counterparty credit risk; and
    • once the legacy swaps have been selected and submitted by market participants as part of the multilateral portfolio compression exercise, participants may not specify which swaps may be amended or replaced.
The relief was granted in response to a request from ISDA on behalf of its members that are CFTC-registered SDs subject to the CFTC margin requirements for uncleared swaps.
Note the relief does not apply to SDs and other parties that are subject to the margin rules for uncleared swaps promulgated by US prudential bank regulators (prudential margin rules) (see Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps).