CFTC Adopts Interim Rule on Margin Requirements for Uncleared Swaps

The interim final rule amends CFTC regulation 23.161 to provide that in a no-deal Brexit, subject to certain conditions, a legacy swap may be transferred and amended without revising the date (swap date) used for determining whether such uncleared swap was entered into prior to the applicable compliance date under the CFTC margin rule. The interim final rule is designed to allow an uncleared swap to retain its legacy status under CFTC margin rule or Prudential Margin Rule when so transferred.

To be effective, CFTC believes the interim final rule must cover all the scenarios that would trigger the need for a covered swap entity or its counterparty to participate in amending an uncleared swap to relocate the swap in preparation for, or in response to, a no-deal Brexit. However, to benefit from the treatment of this amendment, the financial entity must arrange to make the amendments to the uncleared swap solely for transferring the uncleared swap to an Eligible Transferee once UK has withdrawn from EU. This purpose test also contains a requirement that the transfer be made in connection with the entity's planning for the possibility of a no-deal Brexit or the entity's response to such event.

The interim final rule is designed to permit only such amendments as financial entities find necessary to relocate uncleared swap portfolios under the purpose test. These changes may be carried out using any of the methods typically employed for effecting uncleared swap transfers, including industry protocols, contractual amendments, or contractual tear-up and replacement. However, CFTC does not believe the relief being provided for relocation purposes should be expansively applied to encompass economic changes to a legacy swap. Accordingly, the benefits of this interim final rule are unavailable if the amendments to an uncleared swap modify the payment amount calculation methods, the maturity date, or the notional amount of the uncleared swap.

CFTC also seeks to establish a reasonable period of time for the necessary work to achieve the transfers to be performed. The interim final rule permits transfers for a period of one year after UK withdrawal. The one-year period commences when the law of EU ceases to apply in UK, pursuant to Article 50(3) of the Treaty on EU, without conclusion of a Withdrawal Agreement between the UK and EU. If the present withdrawal date is extended and withdrawal later occurs at the end of that extension without a Withdrawal Agreement, the interim final rule's one-year period would begin at that time. CFTC contemplates that, if the withdrawal date is extended, financial entities may negotiate and document their desired transfers during the intervening period, under terms that delay consummation of any transfer until withdrawal takes place without an agreement and the interim final rule's substantive provisions are thereby triggered.

Related Links 

• Interim Final Rule
• Notice on Information Collection

Comment Due Date: May 01, 2019 (Information Collection); May 31, 2019 (Interim Final Rule)

Effective Date: April 01, 2019

Keywords: Americas, Europe, UK, EU, US, Banking, Securities, Legacy Swaps, No-Deal Brexit, Margin Requirements, Brexit, Swap Margin Rule, CFTC