International paper prompts CFTC to reopen comments on margin requirement rule

The proposed rule would establish initial and variation margin requirements for uncleared swaps

The Commodities Futures Trading Commission announced Friday that it will reopen the public comment period on a proposed rule that would establish initial and variation margin requirements for uncleared swaps. The agency made the decision following the publication of a July 6 consultative paper by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions.

Entered into the Federal Record last April, the proposed rule would require swap dealers to pay and collect initial and variation margin for each trade involving another swap dealer or major swap participant. For trades between SDs and financial entities, the rule mandates that the dealer collect—but not pay—margin for each trade. (The regulations would not apply to non-financial end-users hedging commercial risk.) The initial comment period closed on July 11, 2011.

The Basel/IOSC paper states that all financial firms and "systemically-importnat non-financial entities" should exchange initial and variation margin in transactions involving uncleared derivatives. It proposes to establish a standardized initial margin requirement of between two and 15 percent of notional exposure, depending on asset class.

In an attempt to reduce risk while preserving market liquidity, the two organizations recommend the use of an initial margin threshold, which would idenitfy an amount under which a firm could opt not to collect initial margin. Additionally, the paper provides a list of collateral assets that are "highly liquid and...able to hold their value in a time of financail stress," including cash, gold, high quality government securites and equities.

In a statement, CFTC Chairman Gary Gensler supported the agency’s decision to reopen comments, citing the need to “harmonize” international efforts to regulate swaps. “I think it is essential that we align these requirements globally, particularly between the major market jurisdictions,” Gensler said. “The international approach to margin requirements in the consultative paper…released today is consistent with the approach the CFTC laid out in its margin proposal last year. It would lower the risk of financial entities, promote clearing and help avoid regulatory arbitrage.”

Public comments may be submitted until Sept. 14 on the CFTC’s website.

Read the consultative paper here.

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