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April 01, 2019

CFTC is adopting, and invites comments on, an interim final rule amending (in the context of a no-deal Brexit) the margin requirements for uncleared swaps for swap dealers and major swap participants for which there is no prudential regulator (CFTC margin rule). Although the interim final rule will be effective on April 01, 2019, CFTC will be accepting comments on the rule until May 31, 2019. CFTC also proposed to revise information collection titled "Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants" (OMB control number 3038-0088), for which the comments must be submitted on or before May 01, 2019.

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the amendments to the uncleared swap solely for transferring the uncleared swap to an Eligible Transferee once UK has withdrawn from EU.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 

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

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