Enter to open, tab to navigate, enter to select
CFTC Adopts Margin Amendments to Material Swaps Exposure (MSE) Measurement Dates and Minimum Transfer Amounts (MTAs)
Practical Law Legal Update w-028-7696 (Approx. 6 pages)
CFTC Adopts Margin Amendments to Material Swaps Exposure (MSE) Measurement Dates and Minimum Transfer Amounts (MTAs)
by Practical Law Finance
| Published on 10 Dec 2020 • USA (National/Federal) |
The CFTC adopted amendments to the definition of "material swap exposure" under CFTC margin rules for uncleared swaps in order to align certain measurement dates and initial margin (IM) calculations with global BCBS/IOSCO rules. The amendments also permit use of counterparty IM calculations and address issues relating to uncleared swap margin minimum transfer amounts (MTAs).
On December 8, 2020, the CFTC adopted final rules amending its margin rules (CFTC margin rules) for the uncleared swaps of swap dealers (SDs) and major swap participants (MSPs) that are not subject to regulation by US prudential regulators (collectively referred to as covered swap entities or CSEs). The amendments:
- Apply a minimum transfer amount (MTA) of $50,000 for each separately managed account (SMA) and permit separate MTAs for IM and VM (see Amendments to Minimum Transfer Amount (MTA)).
- Change the period for calculating the average aggregate notional amount (AANA) of uncleared swaps and other financial products for determining material swaps exposure (MSE) from June, July, and August of the prior year, to March, April, and May of the current year, and requiring the averaging of month-end AANA instead of daily AANA over the three-month calculation period (see Realignment of Material Swaps Exposure (MSE) IM Calculation Period). The final rule also establishes September 1 of each year as the date for determining MSE after the end of the phased compliance schedule for IM (see Replacing Daily Average AANA with Month-End AANA).
- Allow SDs and MSPs subject to the rule to use the risk-based model calculation of IM of a counterparty that is a CFTC-registered SD or MSP to determine the amount of IM to be collected from the counterparty and to determine whether the IM threshold amount for the exchange of IM has been exceeded such that documentation concerning the collection, posting, and custody of IM would be required (see Use of Counterparty IM Calculations).
Amendments to Minimum Transfer Amount (MTA)
The final MTA rules:
- Amend the definition of MTA in CFTC Regulation 23.151 to permit a CSE to apply an MTA of up to $50,000 to each separately managed account (SMA) owned by a counterparty with which the CSE enters into uncleared swaps. With this amendment, the CFTC codifies the relief granted in CFTC No-Action Letter 17-12 (see Legal Update, CFTC Issues Relief to Swap Dealers From Compliance with Minimum Transfer Amount (MTA) Requirements for Uncleared Swap Margin Under Certain Conditions).
- Permit the application of separate minimum transfer amounts (MTAs) for initial margin (IM) and variation margin (VM). With this amendment, the CFTC codifies the relief granted in CFTC No-Action Letter 19-25 (see Legal Update, CFTC Issues No-Action Relief Regarding Uncleared Swap Margin Minimum Transfer Amounts (MTAs) for Swap Dealers and Major Swap Participants) and revises the margin documentation requirements outlined in CFTC Regulation 23.158(a) in recognition that, consistent with No-Action Letter 19-25, a CSE may apply separate MTAs for IM and VM with each counterparty, provided that:
- the MTAs corresponding to IM and VM are specified in the margin documentation required by CTC Regulation 23.158; and
- the MTAs set out for IM and VM for a counterparty, on a combined basis, do not exceed the MTA specified in CFTC Regulation 23.151 ($500,000) for purposes of determining whether IM and VM must be exchanged under CFTC Regulations 23.152(b)(2) and 23.153(c).
The final MTA rule becomes effective on February 24, 2021.
Amendments to Material Swaps Exposure (MSE) Definition and IM Calculation Dates
The CFTC adopted a final rule making the following amendments to the MSE definition and to IM calculation dates and periods for purposes of the CFTC margin rules. This final rule is effective on February 4, 2021.
Realignment of Material Swaps Exposure (MSE) IM Calculation Period
The rule amends the definition of "material swaps exposure" (MSE) in CFTC Regulation 23.151 by replacing "June, July and August of the previous calendar year" with "March, April and May of that year." The result of this change is that the period for calculating average aggregate notional amount (AANA) for determining whether a financial end user (FEU) has MSE is March, April, and May of the year MSE is calculated for determining whether the CFTC IM requirements apply. (The CFTC notes that the calculation of MSE is precipitated by CFTC Regulation 23.161(a)(7), which requires a CSE to exchange IM with a counterparty that is an FEU with MSE beginning on September 1, 2021, and thereafter.)
The final rule further amends the MSE definition to set “September 1 of any year” as the determination date for MSE. Under the existing rule, the MSE for an FEU must be determined beginning on September 1, 2021, and subsequently, after the last phase of compliance, on January 1 of each year. The amendment changes the date of determination of MSE, applicable after the last compliance phase, from January 1 to September 1.
Because MSE triggers the applicability of the IM requirements for an FEU, requiring the CSE to post and collect IM with the FEU counterparty, the amendment effectively sets the timing for compliance with the IM requirements at September 1 after the last phase of compliance with respect to uncleared swaps entered into by a CSE and an FEU with MSE.
These amendments have the effect of reducing the time frame that FEUs and their CSE counterparties have to prepare for compliance with the IM requirements. Under the amendment, for the last phase of compliance in 2021, the CSE and FEU have only three months, as opposed to 12 under the current rules, because MSE will be determined using the AANA for the March, April, and May period of that year (2021), as opposed to the June, July, and August period of 2020, under the prior rule.
Also, under the final rule, the date for determining MSE for an FEU is September 1 of each year, and the AANA calculation period for determining whether an FEU has MSE is March, April, and May of such year. As a result, under the amendment, an FEU with MSE and its CSE counterparty have three months to prepare in advance of compliance with the IM requirements, whereas under the current rule, such parties have four months because MSE must be determined on January 1 based on the AANA for June, July, and August of the prior year.
This amendment has the greatest impact on Phase Six entities, coming into scope in the last phase of compliance, compared to those entities subject to compliance after the end of the last compliance phase. Nevertheless, the GMAC margin subcommittee report supported these changes because they:
- Align the CFTC requirements with the BCBS/IOSCO framework.
- Eliminate the need to maintain separate schedules and processes for the computation of AANA and reduce the burden and cost of compliance with the IM requirements.
- Eliminate a disjunction that risks calculation errors and may hinder compliance with the IM requirements.
MSE: Replacing Daily Average AANA with Month-End AANA
The final rule replaces the requirement to use daily average AANA during the three-month calculation period for determining MSE (daily AANA calculation method) with the use of average month-end AANA during the three-month calculation period (month-end AANA calculation method). In adopting the CFTC margin rules, the CFTC acknowledged that the use of the month-end AANA calculation method would be consistent with BCBS/IOSCO.
Use of Counterparty IM Calculations
The final rule also permits CSEs to use the risk-based model IM calculation of a counterparty that is a CFTC-registered SD or MSP, as permitted by the CFTC under No-Action Letter 19-29 (Cargill letter), subject to the following conditions, consistent with the Cargill letter:
- The applicable model must meet the criteria specified in CFTC Regulation 23.154(b), which requires the approval of the use of the model by either the CFTC or the NFA, or that it be approved by a prudential regulator.
- The CSE may use the risk-based model IM calculation of a swap entity counterparty only if the uncleared swaps for which IM is calculated are entered into for the purpose of hedging the CSE's own risk. In this context, the risk to be hedged must be the risk that the CSE incurs when entering into swaps with non-swap entity counterparties.
For further details on the Cargill letter, see Legal Update, CFTC Issues No-Action Relief Permitting Swap Dealer to Use Certain Counterparty Initial Margin (IM) Models for IM Calculations.