On November 19, 2018, the CFTC approved a final rule to amend its uncleared swap margin rules (CFTC margin rules) to align with final rules for qualified financial contracts (QFCs) issued by US prudential regulators in 2017 (QFC rules) (see Legal Update, FDIC Issues New Master Netting Definition and Proposes Limits on Qualified Financial Contracts (QFCs) of Certain G-SIBs). The CFTC has adopted the rule as proposed in May 2018 (see Legal Update, CFTC Amends Swap Margin Rules to Conform to Prudential Margin Amendments on QFC Netting).

These amendments are consistent with changes adopted by US prudential regulators to the analogous prudential margin rules for uncleared swaps entered into by banks subject to regulation by US prudential bank regulators (see Legal Update, US Prudential Regulators Amend Swap Margin Rules to Conform to Rules on QFC Netting).

The final rule includes amendments to ensure that master netting agreements are not excluded from the definition of "eligible master netting agreement" (EMNA) under the CFTC margin rules, and therefore:

The QFC rules amended the definition of QMNA in the federal prudential capital and liquidity rules to ensure that a covered QFC is not prevented from being part of a QMNA solely because the covered QFC conforms to the new requirements in the QFC rules. The prior QMNA definition did not recognize some of the new close-out restrictions imposed on covered QFCs under the QFC rules.

The QFC rules amend the definition of QMNA to allow a MNA to meet the definition of QMNA even if it limits the financial institution's right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of default of a counterparty that is a covered QFC entity to the extent necessary for the covered QFC entity to comply fully with the QFC rules.

Under both the prudential and CFTC margin rules, netting is only permitted for covered swaps provided they are subject to a qualifying EMNA. Without explicit recognition of certain restrictions on the exercise of cross-default rights imposed on covered QFC entities by the QFC rules, a failed institution would have been required to calculate its capital and liquidity requirements on a gross basis rather than on a net basis which would result in higher capital and liquidity charges. The amendments to the definition therefore effectively lower uncleared-swap-related capital and liquidity requirements for financial institutions subject to the CFTC margin collection rules.

The final rule will be effective on December 26, 2018.