By Brad Rosen, J.D.
The CFTC has approved a final rule to amend its uncleared swap margin requirements (CFTC Margin Rule) to clarify that master netting agreements are not excluded from the definition of “eligible master netting agreement,” thereby harmonizing CFTC requirements with those of other regulatory bodies as well as providing further regulatory certainty to market participants.
Alignment with Prudential Regulators. The final rule, which grew out of the Commission’s Project KISS initiative, is aligned with certain rules related to qualified financial contracts (QFC Rules) adopted by the Board of Governors of the Federal Reserve System (FRS), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). As a result of the Project KISS initiative, the Commission received suggestions to harmonize its uncleared swap margin rule with that of the aforementioned Prudential Regulators, as well as the Farm Credit Administration and Federal Housing Finance Agency.
Master netting agreements will not be excluded under the margin rule. According to the CFTC’s release, the rule amendments ensure that master netting agreements are not excluded from the definition of “eligible master netting agreement” under the CFTC Margin Rule based solely on such agreements’ compliance with the QFC Rules. They also ensure that any legacy uncleared swap that is not subject to the CFTC Margin Rule would not become so subject if it is amended solely to comply with the QFC Rules.
CFTC role and authority. The CFTC is required to establish margin requirements for uncleared swaps for all CFTC registered swap dealers (SD) and major swap participants (MSP) for which there is not a Prudential Regulator. A Prudential Regulator imposes similar margin requirements on SDs and MSPs for which there is a Prudential Regulator with respect to its prudential margin rule.
The CFTC Margin Rule was issued in January 2016 and establishes minimum requirements for SDs and MSPs to collect and post initial and variation margin for certain swaps that are not cleared by a registered derivatives clearing organization or a derivatives clearing organization that the CFTC has exempted from registration. The CFTC Margin Rule is designed to help ensure the safety and soundness of SDs and MSPs while being appropriate for the risk associated with the uncleared swaps.
Chairman Giancarlo weighs in. Chairman J. Christopher Giancarlo had this to say about the final rule: “Through the Commission’s Project KISS initiative, the Commission received suggestions to harmonize its uncleared swap margin rule with that of the Prudential Regulators. In response, this final rule does so and provides market certainty, specifically with respect to amending the CFTC’s definition of “eligible master netting agreement” and amending the CFTC Margin Rule.”
The final rule amendments will be effective 30 days after publication in the Federal Register.