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Prudential Bank Regulators Adopt Swap Margin Amendments, Including Limited Inter-Affiliate IM Exemption and Extension of IM Implementation Phases Five and Six
Practical Law Legal Update w-026-3305 (Approx. 5 pages)
Prudential Bank Regulators Adopt Swap Margin Amendments, Including Limited Inter-Affiliate IM Exemption and Extension of IM Implementation Phases Five and Six
by Practical Law Finance
| Published on 04 Jul 2020 • USA (National/Federal) |
Federal banking agencies adopted a final rule and an interim final rule making important amendments and clarifications to the prudential margin collection rules for swap dealers and MSPs, including a limited inter-affiliate initial margin (IM) exemption, and delay of prudential IM Phase Five to September 1, 2021 and Phase Six to September 1, 2022.
On June 19, 2020, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (the Federal Reserve), the Farm Credit Administration (FCA), and the Federal Housing Finance Agency (FHFA) (collectively, the agencies) adopted a final rule and an interim final rule (IFR) modifying the prudential swap margin rules (prudential margin rules) for swap dealers (SDs) and security-based swap dealers (SBSDs), major swap participants (MSP), and major security based swap participants (MSBSP) by the agencies (collectively, covered swap entities or CSEs). These modifications:
- Provide CSEs additional time, under the IFR, to comply with the Phases Five and Six IM implementation deadlines for the prudential margin rules by delaying the effective date of Phase Five from September 1, 2020 to September 1, 2021 and of Phase Six from September 1, 2021 to September 1, 2022. For further details on Phases Five and Six, see Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps: Compliance Dates for Prudential and CFTC Initial Margin (IM) Requirements.
- Provide a limited exemption to initial margin (IM) requirements for uncleared swaps between CSEs and their affiliates. For details on the changes, see Changes to Prudential Margin Rules for Uncleared Swaps Between CSEs and Affiliates.
- Permit swaps entered into prior to an applicable compliance date (legacy swaps) to retain their legacy status in the event that they are amended to replace an interbank offered rate (IBOR), such as LIBOR, or other discontinued rate.
- Clarify that swap trading documentation must be in place at the time when IM is required to be exchanged.
- Permit legacy swaps to retain their legacy status in the event that they are amended due to technical amendments, notional reductions, or portfolio compression exercises.
- Make technical changes to relocate the provision within the rule addressing amendments to legacy swaps that are made to comply with final rules for qualified financial contract issued by prudential regulators in 2017 (QFC rules).
Changes to Prudential Margin Rules for Uncleared Swaps Between CSEs and Affiliates
The prudential margin rules have been amended to create an exemption from IM requirements for non-cleared swaps between a CSE and its affiliates. However, affiliates must continue to exchange variation margin (VM). The agencies have also included two revisions, which are effective August 31, 2020:
- The agencies have set a threshold on the aggregate amount of non-cleared swaps that a CSE may recognize under the inter-affiliate IM exemption at 15% percent of the CSE's tier 1 capital. CSEs are required to collect IM from affiliates after, and for as long as, the 15% tier 1 capital threshold is met. The agencies state that they are incorporating the 15% tier 1 threshold to maintain the safety and soundness of CSEs that are US insured depository institutions (IDIs).
- The agencies are also including an additional revision that is consistent with the prudential margin rule's current treatment of counterparties that are not subject to the quantitative requirement to exchange and segregate IM on a daily basis. By this revision, a CSE would be required to collect IM from an affiliate at such times and in such forms and such amounts (if any) that the CSE determines appropriately addresses the credit risk posed by the affiliate and the risks of its uncleared swaps with the affiliate.