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CFTC Exempts Brexit-Related Legacy Swap Transfers from CFTC Margin Rules
Practical Law Legal Update w-019-6703 (Approx. 4 pages)
CFTC Exempts Brexit-Related Legacy Swap Transfers from CFTC Margin Rules
by Practical Law Finance
| Published on 28 Mar 2019 • USA (National/Federal) |
The CFTC adopted and requested public comment on an interim final rule (IFR) allowing qualified swaps to be transferred from UK entities to European Union (EU) or US affiliates in response to the possibility of a no-deal Brexit without triggering CFTC margin requirements for uncleared swaps.
On March 25, 2019, the CFTC adopted and requested public comment on an interim final rule (IFR) allowing qualified swaps to be transferred from UK entities to European Union (EU) or US affiliates in response to the possibility of the UK's non-negotiated withdrawal from the EU, knows as a no-deal Brexit, without triggering CFTC margin requirements for uncleared swaps (CFTC margin rules).
In the event of a no-deal Brexit, UK-based financial service firms that are swap dealers (SDs) and security-based swap dealers (SBSDs) subject to the CFTC margin rules that engage in swap dealing activities that are subject to the CFTC margin rules will not be authorized to provide full-scope financial services to swap counterparties in the EU. As a result, they may not be able to perform certain operations in relation to their legacy swaps with EU clients, and may therefore attempt to transfer their swaps to an appropriately authorized EU or US affiliate.
Similarly, financial entities may either face UK counterparties that request to transfer their swaps to an affiliate or other related establishment, or choose to engage in various reorganizations or consolidations of their 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 becomes subject to the CFTC margin rules. Because such Brexit-related swap transfers would require an amendment of the transferred swaps, absent the IFR, amended legacy swaps would lose their legacy status and could become a covered swap subject to initial margin (IM) and variation margin (VM) requirements under the CFTC margin rules (see Practice Note, The Dodd-Frank Act: Margin Collection and Exchange Rules for Uncleared Swaps: Final CFTC Margin Rules).
The IFR allows qualified swap transfers to occur in this context without triggering the application of the CFTC margin rules to legacy swaps entered into before the compliance dates for the CFTC margin rules, which are being phased in under a compliance schedule that began in September 2016 and will be completed in September 2020 (see Practice Note, The New ISDA® Credit Support Annexes and Global Margin Compliance for Uncleared Swaps).
The IFR provides that in the event of a no-deal Brexit, a legacy swap may be transferred and amended without revising the swap date as long as the transfer:
- Is made to an eligible transferee (either a margin affiliate, a branch, or other authorized form of establishment of the party).
- Satisfies the purpose test that the transfer is made to an eligible transferee in connection with the transferor's planning for, or in response to, a no-deal Brexit.
The IFR clarifies that parties are not able to renegotiate the economic terms of legacy swaps and still retain legacy status.
The CFTC IFR is consistent with analogous Brexit relief provided by US prudential bank regulators from the prudential margin rules (see Legal Update, Federal Bank Regulators Exempt Brexit-Related Legacy Swap Transfers from Prudential Margin Rules).
The IFR becomes effective on April 1, 2019 and permits transfers for a period of one year after a UK withdrawal. The one-year period commences at the point at which the law of the EU ceases to apply in the UK without a withdrawal agreement.
The CFTC requests public comment on the IFR by May 31, 2019 and specifically asks:
- For any additional clarification or additions to the IFR as to types of permissible amendments.
- For descriptions of circumstances where there may be financial entities that are unable to arrange a transfer of legacy swaps unless the transfer is to an entity that is not an eligible transferee and are thus not covered under the terms of the IFR.
- Whether any of the conditions should be modified in order to limit relief to amendments that are made in connection with planning for, or in the event of, a no-deal Brexit.