US Agencies (Farm Credit Administration, FDIC, FED, FHFA, and OCC) announced a proposal to change the swap margin rules to facilitate the implementation of prudent risk management strategies at certain banks and swap entities. Furthermore, to aid in the transition away from LIBOR, the agencies proposed to allow certain technical amendments to legacy swaps without altering their status under the swap margin rules. For smaller counterparties, the proposal would provide clarification on documentation requirements and implementation relief. In addition, the proposal would extend the effective date by one year to September 01, 2021, for smaller counterparties to meet initial margin requirements. Comments on the proposal will be accepted until December 09, 2019.
The swap margin rule would no longer require swap entities to hold initial margin for uncleared swaps with affiliates. However, inter-affiliate transactions would still be subject to variation margin requirements. Swap entities regulated by FDIC, FED, and OCC also would be subject to requirements under sections 23A and 23B of the Federal Reserve Act. The proposed rule would:
- Permit swaps entered into prior to an applicable compliance date (legacy swaps) to retain their legacy status in the event that they are amended to replace an interbank offered rate (IBOR) or other discontinued rate
- Repeal the inter-affiliate initial margin provisions
- Introduce an additional compliance date for initial margin requirements
- Clarify the point in time at which trading documentation must be in place
- Permit legacy swaps to retain their legacy status in the event that they are amended due to technical amendments, notional reductions, or portfolio compression exercises
- Make technical changes to relocate the provision addressing amendments to legacy swaps that are made to comply with the Qualified Financial Contract Rules
The Federal Reserve Board continues to work on proposed amendments to Regulation W that would, among other things, clarify the treatment of bank-affiliate derivatives under sections 23A and 23B. Inter-affiliate swaps are typically used for internal risk management purposes, by transferring risk to a centralized risk management function within the firm. The proposal would give firms additional flexibility to allocate collateral internally, supporting prudent risk management strategies that support safety and soundness. The proposal would not change the capital standards for swap entities supervised by the five US Agencies.
In a statement, the FED Governor Lael Brainard said she supports the proposed changes permitting certain amendments to legacy swaps, initial phase-in dates, and documentation requirements. However, she has concerns that eliminating the inter-affiliate initial margin requirement without the necessary changes to strengthen Regulation W could again expose banks and the financial system to risk from the buildup of risky derivatives. During the crisis, the buildup of uncleared swap positions exposed covered swap entities, including banks, to losses and put the broader financial system at risk. In response, pursuant to the requirements of the Dodd-Frank Act, the federal banking agencies adopted a final swap margin rule in 2015 that requires prudent margining practices between covered swap entities, including banks, and their counterparties. These margin requirements are important to protect the safety and soundness of banks that are covered swap entities in the event of a counterparty default and to guard against broader risks to financial stability.
Ms. Brainard said this proposal eliminates these safeguards entirely without proposing compensating adjustments. It does so on the basis of "supervisory experience" since the final rule was implemented. She said, "I supported the 2015 final rule and do not see compelling reasons to reverse it by eliminating these safeguards." Earlier, in September 2019, Martin J. Gruenberg, a member of the FDIC Board of Directors, had said in a statement that he will vote against this proposal, as "this would remove an important prudential protection from the bank and expose the bank to one of the most significant risks identified in the financial crisis."
Comment Due Date: December 09, 2019
Keywords: Americas, US, Banking, Securities, Swap Margin Rule, Interest Rate Benchmarks, Margin Requirements, LIBOR, Derivatives, Initial Margin, Proportionality, Legacy Swaps, US Agencies
Previous ArticleDubai FSA and CSSF Sign Financial Innovation Agreement
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).
EBA updated the list of other systemically important institutions (O-SIIs) in EU.
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.
UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.
PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.
MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.
EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.
OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.
ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.