On December 6, 2019, the CFTC published No-Action Letter No. 19-25 (No-Action 19-25), permitting swap dealers (SDs) and major swap participants (MSPs) to maintain separate minimum transfer amounts (MTAs) for their initial margin (IM) and variation margin (VM) obligations on uncleared swap transactions, provided that the combined MTA per swap counterparty does not exceed $500,000.

Note this rule applies only to SDs and MSPs that are subject to the CFTC margin collection rules (and their swap counterparties), not the prudential margin collection rules (see Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps: Final CFTC Margin Rules).

The relief was issued in response to a request from ISDA® regarding National Futures Association (NFA) questioning of the use of separate MTAs during examinations of SDs.

CFTC Regulations 23.152 and 23.153 require SDs and MSPs to collect or post:

Under CFTC rules, SDs and MSPs are not required to post or collect IM or VM with a counterparty until the combined amount of IM or VM exceeds the MTA of $500,000 (see Practice Note, US Derivatives Regulation: Margin Collection and Exchange Requirements for Uncleared Swaps: Minimum Transfer Amount (MTA) Under the Final CFTC Margin Rules). In addition, CFTC regulations require that IM be segregated with an unaffiliated third party, but there are no segregation requirements for VM (see US Derivatives Regulation: Margin Collateral Rules: Segregation of Uncleared Swap IM Posted by SDs and MSPs to One Another).

According to ISDA in its request for relief, SDs and MSPs typically include separate MTAs for VM and IM in their credit support annexes (CSAs) due to the IM segregation requirements, which necessitate a separate workflow for the IM settlement process that is distinct from the VM settlement process. ISDA requested that SDs and MSPs be permitted to maintain separate MTAs for IM and VM, provided that on a combined basis, the MTAs do not exceed $500,000. ISDA noted in its request that the separate MTAs:

For details on the ISDA CSAs and compliance with global margin rules, see Practice Note, Global Margin Compliance for Uncleared Swaps.

Under No-Action 19-25, the CFTC grants the relief requested by ISDA. Accordingly, the CFTC will not recommend enforcement action against an SD or MSP that fails to combine IM and VM amounts in accordance with CFTC Regulations 23.152(b)(3) and 23.153(c), subject to the following conditions:

As an example of the last requirement, the CFTC explains that an SD and a counterparty may agree to a $300,000 IM MTA and a $200,000 VM MTA, which is acceptable since the combined amount does not exceed the $500,000 threshold. If, according to margin calculations, the SD would be required to post $200,000 of IM and $250,000 of VM, the SD would need to post the $250,000 of VM since that amount exceeded its $200,000 VM threshold, even though when combined with the $200,000 IM amount, it is still under the $500,000 threshold.

The relief will expire on the earlier of: