CFTC Issues Advisory Clarifying Documentation and Other Requirements for Covered Swaps with Counterparties Below $50 Million Phase Five Initial Margin Threshold | Practical Law

CFTC Issues Advisory Clarifying Documentation and Other Requirements for Covered Swaps with Counterparties Below $50 Million Phase Five Initial Margin Threshold | Practical Law

The CFTC issued an advisory clarifying that documentation governing the posting, collection, and custody of initial margin (IM) for uncleared derivatives under CFTC rules is not required to be completed until a party is required to post IM in an amount that exceeds the $50 million threshold for posting under the rules. The advisory was issued to clarify application of a recent BCBS/IOSCO statement on this matter to the CFTC margin rules.

CFTC Issues Advisory Clarifying Documentation and Other Requirements for Covered Swaps with Counterparties Below $50 Million Phase Five Initial Margin Threshold

by Practical Law Finance
Published on 10 Jul 2019 • USA (National/Federal)
The CFTC issued an advisory clarifying that documentation governing the posting, collection, and custody of initial margin (IM) for uncleared derivatives under CFTC rules is not required to be completed until a party is required to post IM in an amount that exceeds the $50 million threshold for posting under the rules. The advisory was issued to clarify application of a recent BCBS/IOSCO statement on this matter to the CFTC margin rules.
On July 9, 2019, the CFTC's Division of Swap Dealer and Intermediary Oversight (DSIO) issued Advisory Letter 19-16 (advisory) which clarifies that documentation governing the posting, collection, and custody of initial margin (IM) for uncleared derivatives under CFTC rules (IM documentation) is not required to be completed until a party is required to post IM in an amount that exceeds the $50 million threshold for posting under the rules.
Specifically, the advisory clarifies that IM documentation, typically an ISDA® Credit Support Annex (CSA), is not required until the amount of IM exchangeable between a swap dealer (SD) that is subject to the CFTC margin rules (a covered swap entity or CSEs) and a counterparty, on a counterparty-by-counterparty basis, exceeds the IM threshold amount of $50 million. The CFTC notes that it expects that CSEs will closely monitor as the amount of IM that would be due under the transaction approaches the $50 million IM threshold and take appropriate steps to ensure that the required IM documentation is in place at such time as the threshold is reached.
The CFTC has issued the letter to clarify the application to the CFTC margin rules of the March 5, 2019 statement by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) (see Legal Update, BCBS and IOSCO Margin Guidance: Legacy Swaps Amended Solely for Benchmarks May Be Exempt from Margin Requirements). According to the BCBS/IOSCO statement, the framework does not specify documentation, custodial, or operational requirements if the bilateral IM amount does not exceed the framework's €50 million IM threshold. However, covered entities are expected to act diligently when their exposures approach the threshold to ensure that the relevant arrangements needed are in place if the threshold is exceeded.
The advisory applies only to CSEs. Therefore, the advisory is not applicable to non-SD counterparties and does not address any obligation of such counterparties. The advisory is also not applicable to parties that are not subject to the CFTC margin rules but to the US prudential margin rules or rules of another jurisdiction.
The advisory details the requirements for CSEs under the CFTC margin rules, including the corresponding CFTC regulation, with respect to counterparties approaching the $50 million threshold.
For details on the CFTC margin rules and the prudential margin rules for uncleared swaps, see Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps.
For information on compliance with global margin rules for non-cleared derivatives, see Practice Note, The New ISDA® Credit Support Annexes and Global Margin Compliance for Uncleared Swaps.