Following bank regulators’ re-proposal of margin requirements for uncleared swaps by bank swap dealers (bank SDs) and bank major swap participants (bank MSPs), the CFTC has re-proposed its own very similar requirements for uncleared swaps by non-bank SDs and non-bank MSPs, referred to as “covered swap entities” or “CSEs”. The CFTC has not released the text of the proposed rule, which will be published in the Federal Register in the coming weeks, but summarizes the rules as follows.
AFFECTED MARKET PARTICIPANTS
Consistent with the CFTC’s initial April 2011 proposed margin rules, the new rules would not impose margin requirements on commercial end users. The rules would impose margin requirements on (i) trades between CSEs and SDs or MSPs; and (ii) trades between CSEs and financial end users.
INITIAL MARGIN (IM)
The rules would impose two-way (posting and collecting) IM requirements for all trades between CSEs and SDs/MSPs and between CSEs and financial end users that have over $3 billion in gross notional exposure in uncleared swaps. IM amounts would be calculated based on models or a standardized table, using a 99% confidence level over 10-day liquidation time, but the rules would permit a $65 million threshold below which IM need not be collected. The rules would permit IM to be posted in the form of cash, sovereign debt, government-sponsored debt, investment grade debt including corporate and municipal bonds, equities, and gold, all to be held at an independent custodian and not eligible for rehypothecation.
VARIATION MARGIN (VM)
The rules would require daily payment of VM for all trades between CSEs and SD/MSPs and between CSEs and financial end users. VM amounts would be calculated using methods and inputs that rely on recent trades or third-party valuations. The rules would require VM to be posted in the form of cash.
IMPLEMENTATION OF THE RULES
VM requirements would be effective December 1, 2015. IM requirements would be phased in starting December 1, 2015 and ending December 1, 2019 from the largest participants to smaller ones. The rules would apply only to uncleared swaps entered into after the rules’ effective date.