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US Prudential Regulators Amend Swap Margin Rules to Conform to Rules on QFC Netting
Practical Law Legal Update w-016-7527 (Approx. 4 pages)
US Prudential Regulators Amend Swap Margin Rules to Conform to Rules on QFC Netting
by Practical Law Finance
| Published on 19 Oct 2018 • USA (National/Federal) |
US prudential regulators approved final amendments to the prudential margin collection rules for uncleared swaps to conform with final rules imposing restrictions on netting of qualified financial contracts (QFCs). The amendments effectively lower certain bank swap-related capital and liquidity requirements.
On September 21, 2018, the Board of Governors of the Federal Reserve System, COC, FDIC, FCA, and FHFA (collectively, US prudential regulators) announced adoption of final amendments to the prudential margin collection rules for uncleared swaps (prudential margin rules) to conform certain netting definitions with final rules for qualified financial contracts (QFCs) issued in 2017 (QFC rules).
The amendments effectively lower certain bank swap-related capital and liquidity requirements.
The final amendments ensure that master netting agreements are not excluded from the definition of “eligible master netting agreement” under the prudential 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 prudential margin rules with the amended definition of "qualifying master netting agreement" (QMNA) under the QFC rules. Under the 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 prudential margin rules) do not become subject to the prudential 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 banking organization’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.
On May 17, 2018, the CFTC proposed analogous amendments to the CFTC margin collection rules for uncleared swaps (see CFTC Amends Swap Margin Rules to Conform to Prudential Margin Amendments on QFC Netting). Under both the prudential and CFTC margin rules, netting is only permitted for covered swaps that 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 banks subject to the prudential margin collection rules.
The amendments take effect on November 9, 2018.