CFTC Amends Swap Margin Rules to Conform to Prudential Margin Amendments on QFC Netting | Practical Law

CFTC Amends Swap Margin Rules to Conform to Prudential Margin Amendments on QFC Netting | Practical Law

The CFTC proposed amendments that would revise CFTC uncleared swap margin collection rules to reflect netting-related amendments to the analogous prudential margin rules, which harmonized certain netting definitions with final rules for qualified financial contracts (QFCs). The amendments effectively lower certain swap-related capital and liquidity requirements for non-prudentially regulated financial institutions.

CFTC Amends Swap Margin Rules to Conform to Prudential Margin Amendments on QFC Netting

by Practical Law Finance
Published on 24 May 2018 • USA (National/Federal)
The CFTC proposed amendments that would revise CFTC uncleared swap margin collection rules to reflect netting-related amendments to the analogous prudential margin rules, which harmonized certain netting definitions with final rules for qualified financial contracts (QFCs). The amendments effectively lower certain swap-related capital and liquidity requirements for non-prudentially regulated financial institutions.
On May 17, 2018, the CFTC proposed amendments that would revise CFTC uncleared swap margin collection rules (CFTC margin rules) to reflect netting-related amendments to the analogous prudential margin rules, which harmonized certain netting definitions with final rules for qualified financial contracts (QFCs) issued by US prudential regulators in 2017 (QFC rules).
The amendments effectively lower certain swap-related capital and liquidity requirements for non-prudentially regulated financial institutions.
The proposed CFTC amendments would ensure that master netting agreements are not excluded from the definition of “eligible master netting agreement” under the CFTC margin rules based solely on compliance of such agreement with the QFC rules and would:
  • Harmonize the definition of “eligible master netting agreement” (EMNA) in the CFTC margin rules with the amended definition of "qualifying master netting agreement" (QMNA) under the QFC rules. Under the proposed amendment, an agreement would not cease to be an EMNA if it includes restrictions on close-out netting required to comply with the QFC rules.
  • Clarify that legacy swaps (swaps entered into before the compliance dates for the CFTC margin rules) do not become subject to the CFTC margin rules if amended solely to comply with the requirements under the QFC rules.
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 proposed amendments were published in the Federal Register on May 23, 2018. Public comment on the proposed amendments is due on or before July 23, 2018.