US Agencies Finalize Amendments to Swap Margin Rule

The swap margin rule, as adopted in 2015, takes effect under a phased compliance schedule spanning from 2016 through 2020 and the entities 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 swap margin rule’s requirements until they expire according to their terms. The final rule addresses comments received in response to the agencies’ publication of the interim final rule that would preserve the status of legacy swaps meeting certain criteria if the United Kingdom withdraws from the European Union (Brexit) without a negotiated settlement agreement. In addition, the final rule:

• Permits 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
• Modifies initial margin requirements for non-cleared swaps between affiliates
• Introduces an additional compliance date for initial margin requirements
• Clarifies the point in time at which trading documentation must be in place
• Permits legacy swaps to retain their legacy status in the event that they are amended due to technical amendments, notional reductions, or portfolio compression exercises
• Makes technical changes to relocate the provision addressing amendments to legacy swaps that are made to comply with the Qualified Financial Contract Rules

Under the final rule, entities that are part of the same banking organization generally will no longer be required to hold a specific amount of initial margin for uncleared swaps with each other, known as inter-affiliate swaps. Inter-affiliate swaps are typically used for internal risk management purposes by transferring risk to a centralized risk management function within the firm. Inter-affiliate swaps will remain subject to variation margin requirements while initial margin will still be required if a depository institution's total exposure to all affiliates exceeds 15% of its tier 1 capital. The final rule will give firms additional flexibility to allocate collateral internally and support prudent risk management and safety and soundness. To help transition from LIBOR to alternative reference rates, the final rule allows swap entities to amend legacy swaps to replace the reference to LIBOR or other reference rates that are expected to end without triggering margin exchange requirements. The final rule also clarifies that swap entities may conduct risk-reducing portfolio compression or make certain other non-substantive amendments to their legacy swap portfolios without altering their legacy status. 

Under the swap margin rule, as amended, initial margin requirements will take effect under a phased compliance schedule spanning from 2016 through 2020 and the Agencies have extended the phase-in period to 2021. Due to the COVID-19 pandemic, the Agencies are extending by one year the phases 5 and 6 implementation deadlines for initial margin requirements from September 01, 2020 to September 01, 2021 (for phase 5) and from September 01, 2021 to September 01, 2022 (for phase 6). The Agencies’ objective is to give covered swap entities additional time to meet their initial margin requirements under the rule so as not to hamper any efforts underway to address exigent circumstances caused by the COVID 19 pandemic.

Related Links

• Press Release
• Final Rule
• Interim Final Rule
• FED Memo (PDF)
• Statement of Randal Quarles
• Statement of Governor Lael Brainard

Comment Due Date: August 31, 2020  (Interim Final Rule)

Effective Date: August 31, 2020 (Final Rule); September 01, 2020 (Interim Final Rule)

Keywords: Americas, US, Banking, Securities, Swap Margin Rule, Legacy Swaps, Margin Requirements, Initial Margin, Derivatives, Interest Rate Benchmarks, LIBOR, COVID-19, US Agencies