Update to January 23, 2017 Memorandum Entitled “Responding to New Derivative Documentation Requests from Dealers”

February 28, 2017

As discussed in our January 23, 2017 Memorandum Entitled “Responding to New Derivative Documentation Requests from Dealers,” new variation margin rules for certain uncleared swaps and security based swaps become effective on March 1, 2017. On February 13, 2017, the Commodity Futures Trading Commission (“CFTC”) recognized the massive scale of work required by these rules, including the difficulty of amending credit support documentation and implementing operational systems changes, and granted time limited no-action relief to swap dealers not regulated by US federal banking regulators (the “Prudential Regulators”). Specifically, the CFTC will not recommend enforcement against a swap dealer not regulated by a Prudential Regulator for failing to comply with the March 1, 2017 date if the swap dealer is using its best efforts to bring its trading relationships into compliance by no later than September 1, 2017. In other words, the CFTC has not extended the compliance date but instead has granted a grace period, provided that the swap dealers continue to work at getting the relevant documentation in place.

On February 23, 2017, the Prudential Regulators issued a statement regarding the March 1, 2017 compliance date, indicating they would apply a risk-based approach to assessing compliance with the variation margin rules. Notably, the Prudential Regulators expect swap dealers to comply with the March 1, 2017 deadline where a counterparty presents “significant credit and market risk exposures,” but did not provide any guidance as how to make this assessment. As to other counterparties, the swap dealers are expected to make good faith efforts to document these arrangements promptly and are expected to be in full compliance by September 1, 2017.

The European regulators similarly have not postponed the March 1, 2017 effective date for the European variation margin requirements. Although the European regulatory authorities lack formal power to disapply European Union laws, they have recognized the administrative and operational challenges raised by the new rules and have stated they will also take a risk based approach to enforcement. They have not set a hard deadline other than March 1, 2017 for compliance with the variation margin requirements.

In light of the foregoing, we recommend that you continue to review and respond promptly to requests to amend your credit support documentation in order to avoid any suspension of trading. If you have any questions regarding the foregoing, please contact Craig Hickernell (212-574-1399), Lauri Goodwyn (212-574-1249), or Daniel Bresler (212-574-1203), or an attorney in the Investment Management Group at Seward & Kissel LLP.