CFTC Approves Uncleared Swap Margin Comparability Determination for Australia and Amends Comparability Determination for Japan | Practical Law

CFTC Approves Uncleared Swap Margin Comparability Determination for Australia and Amends Comparability Determination for Japan | Practical Law

The CFTC issued an uncleared swap margin comparability determination for Australia and amended an existing uncleared swap margin comparability determination for Japan.

CFTC Approves Uncleared Swap Margin Comparability Determination for Australia and Amends Comparability Determination for Japan

by Practical Law Finance
Published on 03 Apr 2019 • USA (National/Federal)
The CFTC issued an uncleared swap margin comparability determination for Australia and amended an existing uncleared swap margin comparability determination for Japan.
In March 2019, the CFTC issued determinations with respect to CFTC margin rules for uncleared swaps (CFTC margin rules) for the uncleared swaps margin rules of the following jurisdictions:
The CFTC's final rules on the cross-border application of its swap margin requirements (cross-border margin rules), published in May 2016, allow for substituted compliance, which permits covered swap entities (CSEs) to comply with the CFTC margin rules by complying with comparable foreign margin requirements in jurisdictions where the CFTC has issued a comparability determination (see Practice Note, The Dodd-Frank Act: Cross-Border Application of Swaps Rules: Substituted Compliance with Foreign Regulations Sufficient in Certain Circumstances). CSEs include swap dealers (SDs) and major swap participants (MSPs) for which there is no prudential regulator.
For more information on the CFTC margin rules, see Practice Note, The Dodd-Frank Act: Margin Collection and Exchange Rules for Uncleared Swaps: Final CFTC Margin Rules.
For further detail on substituted compliance under CFTC cross-border rules, see Practice Note: The Dodd-Frank Act: Cross-Border Application of Swaps Rules.

Comparability Determination for Australia

The CFTC found that the margin requirements for uncleared swaps in Australia, governed under the Australian Prudential Regulation Authority (APRA), are comparable to requirements under the CFTC margin rules. Specifically, the CFTC made the following determinations:
  • The scope of entities subject to the APRA requirements is comparable to the scope of entities subject to the CFTC margin rules.
  • The treatment of inter-affiliate transactions under the APRA's margin requirements is comparable to the treatment of inter-affiliate transactions under the CFTC margin rules.
  • The methodologies for calculating the amounts of initial margin (IM) and variation margin (VM) under the APRA's margin requirements are comparable in outcome to those under the CFTC margin rules.
  • The requirements for submission of margin models to APRA are comparable to the regulatory approval requirements under the CFTC margin rules.
  • The requirements of APRA's rules with respect to the timing and manner of collection or payment of IM and VM are comparable to those under the CFTC margin rules.
  • The APRA's requirements for margin threshold levels are comparable in outcome to those required by the CFTC margin rules.
  • The APRA's requirements pertaining to risk-management controls for the calculation of IM and VM are comparable to the corresponding requirements under the CFTC margin rules.
  • Forms of eligible collateral for IM and VM are comparable to the CFTC margin rules.
  • The APRA's margin requirements with respect to custodial arrangements, segregation, and rehypothecation are comparable in outcome to the CFTC margin rules.
  • The APRA's requirements pertaining to margin documentation are comparable in outcome to those required by the CFTC margin rules.
  • The cross-border aspects of APRA's margin regime are comparable in outcome to those of the CFTC.
The CFTC also noted that because products subject to the APRA margin requirements are not identical to those subject to the CFTC margin rules, a CSE is responsible for determining whether a particular transaction is both an uncleared swap (as defined under the CFTC margin rules) and a non-centrally cleared derivative (as defined under the APRA margin rules) before relying on substituted compliance.
The CFTC issued a press release on the comparability determination for Australia.

Amended Comparability Determination for Japan

In September 2016, the CFTC approved a comparability determination permitting substituted compliance with the uncleared swap margin rules of the Japan Financial Services Agency (JFSA) in place of the CFTC margin rules, with an exception regarding margin for inter-affiliate swaps (see Legal Update, CFTC Approves Comparability Determination for Japan's Uncleared Swaps Margin Rules).
The amended JFSA margin comparability determination, entitled "Amendment to Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants," amends the 2016 Japan margin comparability determination by making a positive determination of comparability with respect to:
  • Entities subject to the margin requirements. The 2016 comparability determination found that the CFTC margin rules and the Japanese margin requirements were different in scope of entities subject to the rules. As a result, CSEs could only rely on substituted compliance if they were subject to both the CFTC margin rules and the JFSA margin requirements. The amended comparability determination permits a CSE under the JFSA margin requirements that is eligible for substituted compliance to comply with the CFTC margin rules by complying with only the JFSA margin requirements.
  • Inter-affiliate margin. The CFTC concluded that the treatment of inter-affiliate transactions under the CFTC margin rules and the treatment of inter-affiliate transactions under the JFSA's margin requirements are comparable in outcome, even though the CFTC margin rules require the exchange of VM for inter-affiliate swaps and the JFSA margin requirements do not require the posting or collecting of VM for inter-affiliate swaps.
With respect to inter-affiliate margin, the CFTC reasoned that since the JFSA has determined that the credit risk presented by inter-affiliate swaps can be managed by certain capital requirements and risk-management standards that have been found to be comparable to the CFTC's risk-management requirements, the margin rules are comparable when considered "in the broader context of the JFSA's prudential oversight of risk management and capital requirements" (see Practice Note, The Dodd-Frank Act: Cross-Border Application of Swaps Rules: CFTC Entity-Level Substituted Compliance Determinations).
In addition, the CFTC notes that CSEs under the JFSA margin requirements will not be able to "affirmatively transfer risk" to US entities since a CSE under the JFSA margin rules that enters into a swap with a margin affiliate that is a CSE and a US person will be required to exchange VM in accordance with the CFTC margin rules because the US CSE is required to do so.
All other findings from the 2016 comparability determination remain unchanged and in effect.
The CFTC issued a press release on the amended comparability determination for Japan.