FDIC approved what would be a joint proposal by the US Agencies (FCA, FDIC, FED, FHFA, and OCC) to amend regulations that require swap dealers and security-based swap dealers under the agencies’ respective jurisdictions to exchange margin with their counterparties for swaps that are not centrally cleared (Swap Margin Rule). 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, and introduce an additional compliance date for initial margin requirements. The comment period for this consultation would be 30 days after its publication in the Federal Register.
FDIC also published a fact sheet on the proposed rule and statements by Jelena McWilliams, the FDIC Chair, and Martin J. Gruenberg, a Member of FDIC Board of Directors. In his statement, Mr. Gruenberg states 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." The Swap Margin Rule, as adopted in 2015, takes effect under a phased compliance schedule spanning from 2016 through 2020 and the dealers covered by the rule continue to hold swaps in their portfolios that were entered into before the effective dates of the rule. Such swaps are grandfathered from the requirements of the Swap Margin Rule until they expire.
The proposed rule would permit legacy swaps to retain their legacy status in the event that they are amended due to technical amendments, notional reductions, or portfolio compression exercise. Furthermore, the proposed rule addresses the transition as it relates to derivative contracts by ensuring that legacy derivatives will maintain their legacy status under the swap margin rule if amendments are made to contracts in the context of the LIBOR transition. The following are the key proposed changes to the Swap Margin Rule:
- Provide relief by allowing legacy swaps to be amended to replace the existing interest rate provisions based on certain interbank offered rates (IBORs) and other interest rate benchmarks. The proposal would apply to IBOR benchmarks and other interest rate benchmarks that are reasonably expected to be discontinued or are reasonably determined to have lost their relevance as reliable benchmarks due to a significant impairment, without such swaps losing their legacy status.
- Amend the requirements for inter-affiliate swaps. The proposal would repeal the requirement for a covered swap entity to collect initial margin from its affiliates, but would retain the requirement that variation margin be exchanged for affiliate transactions.
- Add an additional initial margin compliance period for certain smaller counterparties and clarify the existing trading documentation requirements in the Swap Margin Rule.
- Amend the Swap Margin Rule to permit amendments caused by certain routine life-cycle activities that covered swap entities may conduct for legacy swaps, such as notional amount reductions and portfolio compression exercises, without triggering margin requirements.
- Proposed Rule (PDF)
- Fact Sheet (PDF)
- Statement by Jelena McWilliams (PDF)
- Statement by Martin J. Gruenberg (PDF)
Comment Due Date: FR+30 days
Keywords: Americas, US, Banking, Securities, Swap Margin Rule, Capital Requirements, IBORs, Interest Rate Benchmarks, Margin Requirements, LIBOR, Derivatives, FDIC, US Agencies
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