On November 9, 2020, the CFTC published in the Federal Register its final rule extending the last implementation phase (Phase 6) of its initial margin requirements for uncleared swaps from September 1, 2021 to September 1, 2022.1 The final rule is effective as of December 9, 2020. This was a long-expected development, coming in the wake of the prior extension of the Phase 5 deadline to 2021 due to COVID-19.2 The just confirmed Phase 6 extension thus ensures that there will not be a crush of firms rushing to comply with the UMR initial margin requirements by September of next year. It is expected that the U.S. Prudential Regulators3 will follow the CFTC’s lead and confirm extension of their analogous implementation deadline.
The CFTC and the Prudential Regulators in 2015 adopted final rules4 (the “Uncleared Margin Rules” or “UMR”) that set forth requirements for variation margin and initial margin for swaps that are not cleared by a registered derivatives clearing organization or a registered clearing agency (referred to herein as “uncleared swaps”). As originally proposed under UMR, the implementation timeframe for the requirements relating to initial margin for uncleared swaps proceeded in five phases beginning in 2016 and concluding in 2020. To allay market concerns regarding compliance, original “Phase 5” was subsequently split into two separate phases with deadlines of September 1, 2020 (Phase 5) and September 1, 2021 (Phase 6), respectively. In this current iteration of UMR, Phase 5 applies to firms with an average aggregate notional amount (“AANA”) of uncleared swaps in excess of $50 billion, and Phase 6 applies to those firms with “material swaps exposure”, meaning those with an AANA in excess of $8 billion, in each case as determined over specified observation periods.5
The advent of the COVID-19 pandemic earlier this year led BCBS/IOSCO to announce a one-year postponement of Phases 5 and 6,6 which delay was endorsed by the EU and U.S. regulators. Thus, the CFTC on May 28, 2020 adopted a final rule postponing Phase 5 by one year, to September 1, 2021, but did not at that time postpone Phase 6.7 The CFTC’s final rule published on November 9, 2020 confirms the delay of Phase 6.
Further rulemaking expected
In a continuing effort to align the U.S. UMR regime with that of the EU and relevant BCBS/IOSCO standards,8 the Commissioners of the CFTC on August 14, 2020 approved further changes to UMR relating to uncleared swap initial margin.9 These amendments include modifications to the manner in which material swaps exposure is determined, the implementation date for initial margin requirements for 2023 and beyond, the calculation of initial margin, as well as how minimum transfer amounts may be allocated between variation margin and initial margin. We will provide a more detailed summary of these changes when the CFTC releases them in final form, which is expected in the near future.
If you have any further questions about the CFTC’s uncleared swap margin rules, or any other aspect of the U.S. swap regulations, please reach out to any of the members of our Derivatives practice group below, or contact your Seward & Kissel service provider.
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