Phase 5 firms have until September 2021 for their IM compliance deadline because of the challenges caused by the pandemic.
Citing the operational challenges of the COVID-19 pandemic, the CFTC extended the initial margin (IM) deadline for Phase 5 firms from September 2020 to September 2021, but sidestepped moving the IM deadline for Phase 6 firms.
Phase 5 firms now have another year to comply with the IM requirements for uncleared swaps under the regulatory reforms known as the Uncleared Margin Rules (UMR) for non-centrally cleared derivatives. Phase 5 consists of those entities with $50 billion to $750 billion of average aggregate notional amounts (AANAs), a measure that’s crucial to the calculation of IM.
IM is essential for firms that engage in derivative transactions that are not centrally cleared. Firms must comply with the tighter IM rules set by global regulators as they move toward UMR compliance.
The Phase 5 group was larger until last year when the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS/IOSCO) split off a segment of Phase 5 — those firms with gross AANA of non-centrally cleared derivatives ranging from $8 billion to $49.9 billion — and created the Phase 6 group.
The BCBS sets standards for the regulation of banks, serves as a forum for banking supervisory matters, and reports to the Group of Central Bank Governors and Heads of Supervision. IOSCO is an international policy forum for securities regulators.
The latest CFTC extension came via a rule change when the regulator unanimously approved on May 28 “an interim final rule [IFR] to grant an extension of the compliance schedule for initial margin requirements for uncleared swaps in response to operational challenges certain entities are facing due to the COVID-19 (coronavirus) pandemic,” according to the CFTC.
The IFR is consistent with the BCBS/IOSCO’s “recent revisions to the implementation schedule for margin requirements for non-centrally-cleared derivatives,” according to the CFTC. The revised BCBS/IOSCO deadlines were announced about a month ago, and the groups cited the problems caused by COVID-19 as the reason for the delays.
“The IFR will be effective when published in the Federal Register,” according to the CFTC. “Comments on the IFR are due 60 days after the date of publication in the Federal Register.”
Heath Tarbert
“Two months ago, the Commission voted to extend the compliance schedule for initial margin requirements for uncleared swaps for those entities with the smallest swaps portfolios,” says CFTC Chairman Heath Tarbert in prepared remarks about the May 28 vote. “This extension split Phase 5 of the schedule in two, creating a new Phase 6 composed of entities with swaps portfolios between $8 billion and $50 billion in average aggregate notional amount (AANA).”
At that time, the regulator deferred the compliance deadline for Phase 6 entities by one year but left the Phase 5 deadline in place. But, over the past two months, the pandemic-inspired market volatility, lockdowns, and the dispersion of staff to remote locations have dramatically changed realities for many firms.
As Tarbert notes, the timelines in March “did not factor in the most severe economic downturn the world has witnessed since the Great Depression.” The chairman said that issuing the new extension “is appropriate from both a substance and a process perspective.”
The current difficulties are requiring financial services firms “devote an inordinate amount of time and resources to day-to-day operational, business continuity, and risk-management efforts,” Tarbert says.
“Preparation for compliance with initial margin requirements requires procuring compliant documentation; setting up custodial arrangements; and establishing internal processes for the calculation, collection, and posting of initial margin, among other things. These steps are both time intensive and resource intensive,” Tarbert says. “Moreover, working from home has made it difficult to access required legal and operational documentation and communicate with counterparties.”
At its May 28 meeting, the regulator did not move again the IM deadline for Phase 6 firms even though the BCBS/IOSCO’s recent revisions recommended an extension to September 2022.
However, Tarbert indicated that the CFTC will consider its options.
“By contrast, because the Phase 6 compliance date is not until September 2021, the CFTC will address an extension for Phase 6 through the traditional notice-and-comment rulemaking process,” Tarbert says. “However, I recognize the importance of clarity and certainty for Phase 6 market participants. So, I expect we will issue a proposed rule in that regard in the very near term and proceed with that rulemaking as expeditiously as possible.”
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