Proposed Margin Requirements for Uncleared Swaps Could Significantly Increase the Costs Associated with Over-the-Counter Swap Transactions and May Apply to Some End-Users


Yesterday the Commodity Futures Trading Commission (CFTC) and certain Federal bank regulators issued proposed margin requirements for uncleared swaps, as required by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The margin requirements contained in the proposal issued by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Federal Housing Finance Agency (collectively referred to as the Prudential Regulators) will apply to those entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants1 under Title VII of the Dodd-Frank Act and that are currently regulated by one of the Prudential Regulators. The CFTC’s proposal, on the other hand, will apply to those swap dealers and major swap participants that are not currently regulated by a Prudential Regulator.

The Securities and Exchange Commission has not yet issued proposed margin requirements for security-based swap dealers and major security-based swap participants that are not currently regulated by a Prudential Regulator. A pre-publication copy of the joint proposal issued by the Prudential Regulators is available here. The CFTC has released a Fact Sheet and a Q&A addressing its proposed margin requirements, but not the full text of its proposal.

The Dodd-Frank Act requires many swaps that are currently executed in the over-the-counter market to be cleared through derivatives clearing organizations. However, for those swaps that will continue to be transacted in the over-the-counter market, the proposed margin requirements issued yesterday mark a significant departure from current practices. Specifically, with certain exceptions, including a limited exception for swaps entered into between non-financial end-users and non-bank swap dealers or major swap participants, market participants would be required to post both initial margin and variation margin to their swap dealer and major swap participant counterparties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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