Eugene Grygo is chief content officer for FTF.
Just in time for the winter holidays, the CFTC approved a final rule to tighten its uncleared swap margin requirements, known as the CFTC Margin Rule, and the changes made an appearance in the Federal Register, Vol. 83, no. 227, Monday, Nov. 26, 2018. Essentially, the changes will take effect by the end of this year.
By finalizing this step, the CFTC will be in closer alignment with the qualified financial contract (QFC) rules supported by the Board of Governors of the Federal Reserve System (FRS), the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC).
In fact, the OCC worked closely with the Federal Reserve and the FDIC “to ensure that the requirements of this final rule are substantively identical to those contained in final rules issued by the board on September 12, 2017, and the FDIC on October 30, 2017,” reports the CFTC.
Tighter harmonies will mean tighter QFC restrictions that are intended to “enhance the resilience and the safety and soundness of federally chartered and licensed financial institutions,” according to the CFTC. “The final rule addresses concerns relating to the exercise of default rights of certain financial contracts that could interfere with the orderly resolution of certain systemically important financial firms.”
In somewhat clearer English, the final CFTC rule requires a covered financial services firm to make certain that covered QFC efforts “contain a contractual stay-and-transfer provision analogous to the statutory stay-and-transfer provision imposed under Title II of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank Act) and in the Federal Deposit Insurance Act,” say CFTC officials.
The amended rule encompasses limits upon the “exercise of default rights based on the insolvency of an affiliate of the covered bank,” according to the CFTC. “In addition, this final rule makes conforming amendments to the OCC’s capital adequacy standards in [regulatory capital rule] 12 CFR 3 and the liquidity risk measurement standards in 12 CFR 50.”
Without diving down too deep into a rabbit hole of legalese, the amendments also:
- Make certain that master netting agreements are included in “the definition of ‘eligible master netting agreement’ under the CFTC Margin Rule based solely on such agreements’ compliance with the QFC Rules;”
- Ensure that a “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;”
- And 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 (i.e. the FRS, FDIC, OCC, Farm Credit Administration, and Federal Housing Finance Agency). The Prudential Regulators impose similar margin requirements on SDs and MSPs for which there is a Prudential Regulator in their margin rule (Prudential Margin Rule).”
The CFTC Margin Rule has been in place since January 2016 to set up 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,” according to the CFTC. The 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.”
CFTC Chairman J. Christopher Giancarlo reports in a prepared statement that the amended rule satisfies the request for harmonization. The revamped rule also “provides market certainty, specifically with respect to amending the CFTC’s definition of ‘eligible master netting agreement’ (EMNA) and amending the CFTC Margin Rule such that any legacy swap will not become subject to the CFTC Margin Rule if it is amended solely to comply with changes adopted by the Prudential Regulators in 2017.”
While this is a major step forward, the chairman acknowledges that there is work ahead for some legacy swaps.
“The Commission recognizes that the CFTC Margin Rule does not provide relief for legacy swaps that might need to be amended to meet regulatory changes or requirements, and is committed to considering other meritorious requests for relief,” Giancarlo says.
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