The Commodity Futures Trading Commission (CFTC) on January 25, 2021 published its final rule1 (Final Rule) relating to how the minimum transfer amount (MTA) under the CFTC uncleared swap margin rules2 (CFTC Margin Rules) may be allocated among separately managed accounts (SMAs), and confirming that the MTA may be applied separately for initial margin (IM) and variation margin (VM). The Final Rule is effective February 24, 2021.
The Final Rule addresses long-standing issues with the application of the MTA that had been raised by the Securities Industry and Financial Market Association’s Asset Management Group and the International Swaps and Derivatives Association, and largely tracks no-action relief3 that had been provided by the CFTC to mitigate these concerns during the implementation period for the CFTC Margin Rules.
MTA allocation and SMAs
The CFTC has amended the definition of minimum transfer amount in Regulation 23.151 (Definitions applicable to margin requirements) to include a new limit of $50,000 that is applicable to each SMA owned by a single counterparty. This MTA may be applied to all SMAs owned by a single counterparty, even if the aggregate of those MTAs exceeds the $500,000 limit that otherwise applies to a single counterparty.
The amendments to Regulation 23.151 also include a definition of separately managed account that incorporates the requirements that had been set forth in Letter 17-12. These requirements are summarized here:
- The SMA is managed by an asset manager or investment manager pursuant to an investment management agreement under which the counterparty has granted the manager authority with respect to a specified amount of the counterparty’s assets, including authority to enter into swaps on behalf of the account; and
- Each SMA is subject to its own “master netting agreement” (e.g., ISDA Master Agreement and related Credit Support Annex), such that there is no netting of either VM or IM across SMAs for that counterparty.
Prior to the issuance of Letter 17-12, swap dealers and asset managers were struggling to determine how to allocate the $500,000 MTA limit among SMAs that were being managed by separate asset managers, leading to significant compliance concerns. These amendments to Regulation 23.151 will provide formal operational relief to swap dealers, asset managers and institutional investors who are involved in trading swaps via SMAs.
Separate Application of MTA for VM and IM
The CFTC’s final rule also amends Regulation 23.158 (Margin documentation) to allow separate MTAs to be specified for VM and IM, provided the aggregate MTA for both VM and IM does not exceed the applicable MTA limit specified in Regulation 23.151. The final rule includes conforming amendments to Regulations 23.152 (Collection and posting of initial margin) and 23.153 (Collection and posting of variation margin) to refer specifically to the limits specified in (amended) Regulation 23.151, thus clarifying that this allowance applies to both the generally applicable $500,000 MTA limit and the $50,000 MTA limit for SMAs.
These amendments formalize the temporary relief that had been provided by Letter 19-25 to address a technical issue that had arisen as a consequence of the separate margin flows and distinct documentation required for each of VM and IM. Because of these separate margin flows, it makes sense to separately agree on the MTA for VM and IM so as to clarify the operational processes for each. However, this practice was arguably inconsistent with the CFTC Margin Rules and, until the issuance of Letter 19-25, created potential compliance concerns.
Prudential Regulators – no news yet
The Prudential Regulator uncleared swap margin rules4 are very similar to the CFTC Margin Rules, including with respect to provisions regarding MTA, and it would seem appropriate for the Prudential Regulators to amend their rules to be consistent with the CFTC’s amendments. However, there has been no indication – yet – that the Prudential Regulators are considering such amendments. We will continue to monitor developments and keep our clients apprised.
Seward & Kissel’s Derivatives Practice
Seward & Kissel’s Derivatives practice is internationally recognized for its depth of expertise and broad market coverage. Our attorneys advise some of the world’s most prominent asset managers and hedge funds, as well as other end-users such as funds of funds and mutual funds, emerging managers, institutional investors and corporates with respect to complex derivatives and structured products transactions, derivatives regulation and compliance and trading relationship documentation (such ISDA Master Agreements and prime brokerage arrangements).
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