Recently, the U.S. Commodity Futures Trading Commission (“CFTC”), the U.S. Prudential Regulators[1] and the European Supervisory Authorities (“ESAs”)[2] have offered limited relief from or guidance for relaxed enforcement of variation margin requirements for non-cleared swaps that take effect March 1, 2017.  This news follows reports that, despite all efforts, market participants are facing continued legal and operational challenges in implementing the requisite steps for timely compliance with the new margin regimes.  Still international regulators remain committed to moving non-cleared OTC derivatives to a collateralised model.

CFTC Time-Limited No-Action Relief

The CFTC’s final margin rules for non-cleared swaps were published in January 2016, and require swap dealers to collect and post variation margin with each counterparty that is a swap dealer, major swap participant or financial end user.[3]  The variation margin requirements are subject to phased-in compliance.  The first phase required compliance by September 1, 2016 by swap dealers with the largest notional amounts of non-cleared swaps.  On March 1, 2017, the second phase takes effect requiring compliance by swap dealers for all other counterparties.

With a recognition of the potential for market disruption due to non-compliance, on February 13, 2017, the CFTC issued time-limited no-action relief providing a grace period for registered swap dealers (for which there is no Prudential Regulator) to comply with the variation margin requirements.[4]  The original March 1, 2017 compliance date remains in place and the scope of transactions subject to variation margin remains unchanged, however the CFTC will not recommend enforcement against a swap dealer for failure to timely comply if (1) the reason for non-compliance is due to an inability to complete requisite credit support documentation or to implement requisite operational procedures, and (2) the swap dealer demonstrates a diligent, good-faith effort to achieve compliance as soon as possible.  The grace period expires September 1, 2017, and in the interim swap dealers must continue to honor existing credit support arrangements.

Prudential Regulator and ESA Regulatory Guidance

The Prudential Regulators, which regulate many U.S. financial institutions, published final margin rules for non-cleared swaps in November 2015[5] and the European Commission adopted its final legislation for non-cleared swaps margin under the European Markets Infrastructure Regulation (“EMIR”) in October 2016, which applies to many European financial institutions[6].  Both sets of rules have phased-in requirements for variation margin on non-cleared swaps similar to the CFTC rules and take effect March 1, 2017.

Following the CFTC’s lead, on February 23, 2017, the Board of Governors of the Federal Reserve System, the Office of Comptroller of the Currency and the ESAs issued guidance to swap dealers regarding compliance with their respective variation margin requirements for non-cleared swaps.[7]  The Federal Reserve System and the Office of Comptroller of the Currency are the only Prudential Regulators that regulate swap dealers, so the other Prudential Regulators have not issued similar statements.

The relief actions taken by the Prudential Regulators and ESAs are more limited in scope than those taken by the CFTC.  Under the CFTC relief, no enforcement recommendations will be made for non-compliance with non-cleared margin rules before September 1, 2017 provided that swap dealers comply with certain stated conditions.  The Prudential Regulators and ESAs lack authority to issue similar no-action relief to suspend enforcement and have instead offered guiding principles for examiners to implement a risk-based compliance review on a case-by-case basis.  Swap dealers are encouraged to focus their immediate efforts on counterparties with the greatest risk profiles with a diligent, good-faith effort to achieve compliance with other counterparties as soon as possible.  Under the Prudential Regulator guidance, there is no relief from the original March 1, 2017 compliance date for counterparties that pose “present significant exposures”.  Factors such as a swap dealer’s risk assessment systems, compliance systems, risk management processes, compliance implementation plans, and alternate arrangements for non-compliance will be weighed in enforcement decisions.  The Prudential Regulators suggest September 1, 2017 as an outside date for compliance but the ESAs guidance is not specific about the period for relaxed enforcement.  Similar to the CFTC rules, the original March 1, 2017 compliance date remains in place and the scope of transactions subject to variation margin remains unchanged.


If we can answer any questions about these developments or assist you with any other derivatives matters, please contact:

Nina Bianchi Skinner


[1] The Prudential Regulators include the Department of the Treasury, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Federal Housing Finance Agency.

[2] The European Supervisory Authorities include the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.

[3] See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).

[4] CFTC Letter No. 17-11 is available here.

[5] See Margin and Capital Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015).

[6] See Regulatory Technical Standards pursuant to Article 11 European Market Infrastructure Regulation (EU) No 648/2012 of the European Parliament and of the Council.

[7] The Board of Governors of the Federal Reserve System guidance is available here, the Office of Comptroller of the Currency guidance is available here, and the ESAs guidance is available here.

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