CFTC Finalizes Margin Rule Amendments Affecting Seeded Funds and Eligible Collateral for Uncleared Swaps

The U.S. Commodity Futures Trading Commission (the “CFTC”) has adopted final amendments to its margin requirements for uncleared swaps applicable to swap dealers and major swap participants that are not subject to prudential regulator margin rules (the “Margin Amendments”). ^[1] Among other changes, the Margin Amendments (i) create a limited initial-margin exception for certain seeded start-up investment vehicles, (ii) expand the availability of securities issued by certain money market and similar funds as eligible margin collateral and (iii) revise applicable collateral haircuts. The Margin Amendments will become effective on August 17, 2026.

For investment advisers, the seeded fund amendment is particularly relevant because it may reduce initial-margin requirements or related operational burdens for advisers launching new funds or strategies that use uncleared swaps during a seed period.

Background

On August 8, 2023, the CFTC proposed amendments to CFTC Regulations 23.151 and 23.156. ^[2] The proposal was intended, among other things, to address the margin requirements on certain collective investment vehicles that receive start-up capital from a sponsor entity and to eliminate a restriction on the use of securities issued by certain money market and similar funds as eligible margin collateral. The CFTC has now adopted the Margin Amendments, with changes that the CFTC stated are intended to enhance market efficiency, promote global harmonization and support responsible financial innovation while maintaining risk-management standards.

Summary

CFTC Regulation 23.156 (Forms of Margin) provides a list of eligible collateral that may be posted as initial margin. The list includes cash denominated in specified currencies, certain government and sovereign securities, certain publicly traded debt and equity securities, securities issued by money market and similar funds and gold. The Margin Amendments delete Regulation 23.156(a)(1)(ix)(C), which previously required that, for securities issued by money market and similar funds to qualify as eligible collateral, the underlying assets could not be transferred through securities lending, repurchase transactions or similar arrangements. As a result, securities issued by a broader range of money market and similar funds may qualify as eligible collateral.

CFTC Regulation 23.151 (Definitions Applicable to Margin Requirements) provides that “margin affiliates” generally include companies that are consolidated on a financial statement or that are consolidated with a third party. Margin affiliates are included when determining whether an entity has material swaps exposure and when calculating the initial margin threshold amount. The Margin Amendments revise the definition of “margin affiliate” to exclude certain “eligible seeded funds.” Eligible seeded funds that receive part or all of their start-up capital from a sponsor will not be treated as margin affiliates, and will not have margin affiliates, for purposes of determining material swaps exposure and the initial margin threshold amount for a period of up to three years, provided that, among other things, the fund is a separate legal entity managed pursuant to a written investment strategy and its obligations are not otherwise collateralized, guaranteed or supported by the sponsor. Eligible seeded funds will remain subject to applicable variation margin requirements. For investment advisers, the amendment may reduce the likelihood that a newly launched seeded fund will be brought within the initial margin framework solely because its swaps activity is aggregated with that of its sponsor and affiliated entities.

Conclusion

The Margin Amendments may be particularly relevant to investment advisers that launch seeded funds or manage funds that trade uncleared swaps with swap dealers subject to the CFTC margin rules. In practice, the amendments may affect whether and when initial margin is required for certain seeded funds, expand the types of money market and similar fund securities that may be used as eligible collateral and require advisers to revisit collateral schedules, swap documentation and launch planning for new seeded vehicles. We will continue to monitor further developments. If you have any questions regarding the Margin Amendments or would like assistance in assessing how these developments may affect your business, please contact an attorney in the Investment Management Group at Seward & Kissel LLP.