CFTC Confirms Delay of Initial Margin Phase 6 Implementation to 2022

November 11, 2020

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.

Background

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.

Seward & Kissel has established a COVID-19 Resource Center on our web site to access all relevant alerts that we distribute.

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1 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants; Final Rule, 85 Fed. Reg. 71246 (November 9, 2020), available at https://www.federalregister.gov/documents/2020/11/09/2020-23473/margin-requirements-for-uncleared-swaps-for-swap-dealers-and-major-swap-participants.

2 On May 28, 2020, the CFTC adopted an interim final rule delaying the compliance date for Phase 5 entities until September 1, 2021, but chose at that time not to extend the compliance date for Phase 6 entities. See Interim Final Rule: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants 85 Fed. Reg. 41346, July 10, 2020, available at https://www.cftc.gov/sites/default/files/2020/07/2020-12033a.pdf.

3 The five Prudential Regulators are the Office of the Comptroller of the Currency; the Board of Governors of the Federal Reserve System; the Federal Deposit Insurance Corporation; the Farm Credit Administration; and the Federal Housing Finance Agency.

4 For the CFTC, see Margin Requirements for Covered Uncleared Swaps for Swap Dealers and Major Swap Participants; Final Rule, 81 Fed. Reg. 636 (January 6, 2016), available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2015-32320a.pdf.; for the Prudential Regulators, see Margin and Capital Requirements for Covered Swap Entities; Final Rule, 80 Fed. Reg. 74840 (November 30, 2015), available at http://www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.pdf.

5 Under current UMR: a firm will be in-scope for Phase 5 if it has AANA in excess of $50 billion as determined over each business day in March, April and May 2021; a firm will be in-scope for Phase 6 if it has “material swaps exposure”, meaning an AANA in excess of $8 billion as determined over each business day in June, July and August of 2021. Note that the Phase 6 material swaps exposure determination rule is in the process of being amended, per new proposed rules approved by the CFTC on August 14, 2020. See infra note 9.

6 On April 3, 2020, the Basel Committee on Banking Supervision and the Board of the International Organization of Securities Commissions (“BCBS/IOSCO”) announced a one-year postponement of the Phase 5 and Phase 6 implementation deadlines to account for the COVID-19 pandemic. See Basel Committee and IOSCO announce deferral of final implementation phases of the margin requirements for non-centrally cleared derivatives, available at https://www.bis.org/press/p200403a.htm.

7 See supra note 2.

8 See generally BCBS/IOSCO, Margin requirements for non-centrally cleared derivatives (July 2019), https://www.bis.org/bcbs/publ/d475.pdf.

9 See generally CFTC Unanimously Approves Proposals Amending Margin Requirements for Swap Dealers and Major Swap Participants (August 14, 2020), https://www.cftc.gov/PressRoom/PressReleases/8219-20.


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