Time Limited No-Action Position For Failure To Collect And/Or Post Variation Margin
In Commodity Futures Trading Commission (“CFTC”) Letter No. 17-11, the Division of Swap Dealer and Intermediary Oversight (“DSIO”) of the CFTC, provided general relief from complying with Commission Regulation 23.153 (with a compliance date of March 1, 2017) until September 1, 2017. DSIO received requests for a transitional relief period for the March 1 requirements from virtually all swap dealers and entities that used swaps to hedge commercial risk. These entities included The Securities Industry and Financial Markets Association’s Asset Management Group, The Investment Adviser Association, The American Council of Life Insurers, and more.
Pursuant to Section 4s(e) of the Commodity Exchange Act (“CEA”), the CFTC is required to promulgate requirements for margin for uncleared swaps applicable to each swap dealer for which there is no “prudential regulator.” As part of this requirement the CFTC created Commission Regulation 23.153, “which requires swap dealers to collect and post variation margin with each counterparty that is a swap dealer, major swap participant, or financial end user.”
The dates for complying with the margin rule were staggered so that swap dealers would come into compliance over a four year period. The first phase affected swap dealers with the largest notional amounts of uncleared swaps and the compliance date for phase one was September 1, 2016.
The swap dealers and their respective trade groups stated they must execute new or amended credit support documentation to settle the variation margin in accordance with the requirements of Regulation 23.153 and, due to the complexity and variation required in these credit agreements, there was not a “one-size-fits all” agreement that works for all market participants. For this and other reasons swap dealers claimed they would not be able to implement the requirements of Regulation 23.153 by the March 1, 2017, deadline without causing substantial disruptions to the uncleared swap market.
The DSIO concluded that a limited delay would serve to preserve the CFTC’s March 1, 2017, implementation commitment, while helping to avoid disruption in the uncleared swap market. Thus, DSIO would not recommend an enforcement action against a swap dealer that does not comply with the requirements prior to September 1, 2017, subject to the following conditions:
1) the swap dealer does not comply with the March 1 requirements with respect to a particular counterparty solely because it has not, despite good faith efforts, completed necessary credit support documentation; 2) the swap dealer uses its best efforts to continue to implement compliance with the March 1 requirements without delay with each counterparty following March 1, 2017; 3) to the extent a swap dealer has existing variation margin arrangements with a counterparty, it must continue to post and collect variation margin with such counterparty in accordance with such arrangements until such time as the swap dealer is able to comply with the March 1 requirements; and 4) no later than September 1, 2017, the swap dealer complies with the March 1 requirements with respect to all swaps to which the March 1 requirements are applicable entered on or after March 1, 2017.
To rely on the protections of the no-action letter swap dealers are expected to make continual, consistent, and quantifiable progress toward compliance with the March 1 requirements.
The primary materials for this no action letter can be found here.