The U.S. Commodity Futures Trading Commission (CFTC) today adopted a rule implementing a cross-border approach to the CFTC’s margin requirements for uncleared swaps (Final Rule). Published in January 2016, the CFTC’s margin rule applies to CFTC-registered swap dealers and major swap participants for which there is no Prudential Regulator (collectively, covered swap entities or CSEs). The Final Rule is closely aligned with the cross-border margin requirements already adopted by the Prudential Regulators. The Final Rule was adopted 2-1 via a seriatim vote with Commissioner J. Christopher Giancarlo dissenting.
The Final Rule generally requires CSEs to comply with the CFTC’s margin requirements for all uncleared swaps in cross-border transactions, with a limited exclusion for certain non-U.S. CSEs. The exclusion is not available to non-U.S. CSEs that are consolidated with a U.S. parent (Foreign Consolidated Subsidiaries).
In certain circumstances, the Final Rule would allow CSEs to comply with comparable margin requirements in a foreign jurisdiction as an alternative means of complying with the CFTC’s margin rule for uncleared swaps (substituted compliance) to the extent that the CFTC determines that the foreign jurisdiction’s requirements are comparable to the CFTC’s (comparability determination). For instance:
· U.S. CSEs and non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S. person (U.S. Guaranteed CSEs) are permitted to post initial margin for uncleared swaps with certain non-U.S. counterparties pursuant to comparable rules in the foreign jurisdiction.
· Non-U.S. CSEs that are not U.S. Guaranteed CSEs (including Foreign Consolidated Subsidiaries) are eligible for substituted compliance with respect to all of the CFTC’s margin requirements (except for swaps with U.S. CSEs and U.S. Guaranteed CSEs, as described above).
The Final Rule includes special provisions to accommodate swap activities in jurisdictions that do not have a legal framework to support custodial arrangements or that do not have netting arrangements that comply with the CFTC’s margin rule.
Finally, the Final Rule establishes a process for requesting comparability determinations, including eligibility and submission requirements, as well as the standard of review the CFTC would apply in assessing the comparability of a foreign jurisdiction’s margin requirements. In light of the impending September 1, 2016 compliance date for the CFTC’s margin rule, the CFTC encourages persons requesting a comparability determination to promptly submit their request.