FDIC Approves Proposal to Amend Swap Margin Rule
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
Previous ArticleJoachim Wuermeling of Bundesbank Speaks on International Cooperation
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
DNB Publishes Multiple Reporting Updates for Banks
DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.
NBB Sets Out Climate Risk Expectations, Issues Reporting Updates
The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting
EBA Updates Address Securitization Standards and DGS Guidelines
The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.
FSB Publishes Letter to G20, Sets Out Work Priorities for 2023
The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023