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News

CFTC Grants Limited Reprieve from Variation Margin Requirements

The CFTC announced that it has granted no-action relief to provide for a “grace period” until September 1, 2017, during which swap dealers (SDs) subject to the Commission’s variation margin requirements can come into compliance with rules for the uncleared swaps of SDs without prudential regulators. Part of the relief involves CFTC Regulation 23.153, for which compliance is set to begin on March 1, 2017, but there is additional relief provided under CFTC Regulations 23.152(b)(3) and 23.153(c), as explained in a pair of letters from the Division of Swap Dealer and Intermediary Oversight (DSIO). The variation margin letter resulted from a request for “transitional relief” made by 14 SDs and other entities that use swaps to hedge commercial risk (CFTC Letter No. 17-11, February 13, 2017; CFTC Letter No. 17-12, February 13, 2017).

One factor driving the relief was the concern that end-users and SDs could not implement needed changes to credit support agreements in time for the March 1 start date. According to one of the letters, the lack of uniformity among these agreements would have made a firm compliance date difficult to implement and could have resulted in disruptions in markets for uncleared swaps.

Among the letter’s other requirements, SDs must use their “best efforts” to continue towards compliance with counterparties after March 1. The DSIO emphasized its understanding that the Commission is committed to the March 1 compliance date per the agreement reached among 26 global derivatives regulators.

The FAQ accompanying the DSIO’s variation margin letter characterized the relief as a “grace period,” not a “postpone[ment].” The FAQ also reiterated that another requirement for claiming the relief is that the SD is unable to comply despite its good faith efforts to meet the deadline. The Commission’s variation margin requirements are being phased in, and the FAQ explained that the relief provided from the March 1 compliance date has no effect on an earlier phase for which compliance began September 1, 2016.

Acting CFTC Chairman J. Christopher Giancarlo said that the CFTC is committed to the March 1 compliance date, but that practical realities associated with compliance could not be overlooked. According to Giancarlo, “It just foams the runway to ensure a safe landing.”

A separate letter addressing CFTC Regulations 23.152(b)(3) and 23.153(c) grants relief based on a request from the Securities Industry and Financial Markets Association’s Asset Management Group regarding SDs that enter into swaps with separately managed accounts. That relief also impacts the related issue of the minimum transfer amount.

The releases are No. 17-11 and No. 17-12.

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