Banking Regulators Propose Margin and Capital Requirements for Covered Swap Entities

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On April 12, federal banking regulators (Agencies) proposed regulations, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring certain large participants in the OTC swaps market (“covered swaps entities”) to collect margin from other covered swaps entities. This proposed regulations would impose initial margin and variation margin requirements on covered swaps entities for uncleared swaps. This would require covered swaps entities to calculate and collect initial margin and variation margin from all swap counterparties. The amount of margin that would be required would vary based on the relative risk of the counterparty and the swap. The proposed regulations would also impose existing regulatory capital rules on covered swaps entities. These initial margin, variation margin and capital standards are intended, according to the Agencies, to offset the risk to swap entities and the financial system arising from the use of swaps that are not cleared.

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