The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") issued no-action relief regarding CFTC variation margin requirements ( CFTC Rule 23.153) for amended legacy swaps with rated securitizations.
As a general matter, an amendment or novation of a swap may cause that swap to be deemed to be a new swap executed at the time of the amendment or novation. This could cause the swap to be subject to margin requirements that went into effect after the initial swap was executed. As explained in CFTC Letter 17-52, the relief was requested in connection with mandatory amendments and novations of swaps with structured finance special purpose vehicles ("SPVs") that were initially entered into prior to March 1, 2017 ("Legacy SPV swaps").
As described in the letter, credit rating agencies have developed "Delinking Criteria" that allow the agencies to determine credit ratings for securitization SPVs based on quality of the underlying assets, with less reliance on the credit quality of the swap dealer ("SD") providing a swap. Specifically, agencies assign ratings with the assumption that an SD is easily replaceable in the event of a credit downgrade. In such a scenario, Legacy SPV swap documentation requires the SD to take certain remedial actions to amend the Legacy SPV swap or novate SD obligations to an acceptable entity. The request for relief noted that the parties responsible for taking remedial action are vested with limited discretionary authority, creating uncertainty that they could comply with new variation margin requirements. The letter also noted that credit rating agencies were preparing to downgrade existing deals due to these concerns.
The DSIO granted the requested relief provided that (i) variation margin requirements would apply to the SD solely as a result of the aforementioned remedial actions required in response to an SD credit downgrade and (ii) such remedial actions do not change the material economic terms of a Legacy SPV swap.
In CFTC Letter 15-21, the CFTC addressed similar issues that arise when existing SPVs are obligated to comply with certain swap dealer business conduct and documentation requirements. Cadwalader attorneys Ivan Loncar, Nihal Patel, and Neil Weidner authored a memorandum on the subject.
Commentary /Jeff Robins
This long overdue letter will be welcome to issuers and investors in some rated securitization deals. It is, however, only a partial cure. The market would have been better served had the known issue been covered in the initial margin rulemaking coordinated with the bank regulators. The fact that it was not continues to be problematic because most of the relevant swap dealers are likely to be subject to the bank regulators' margin rules rather than those of the CFTC. Relief from the bank regulators is still needed.
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