The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") granted no-action relief to swap dealers to permit certain amendments to "legacy swaps" without causing them to lose their legacy status under uncleared swaps margin requirements.
For purposes of the relief, DSIO considers a legacy swap to be one executed prior to the applicable compliance date, while noting that a swap could be "legacy" for initial margin ("IM") requirements but not for variation margin ("VM") requirements if it was executed following the applicable compliance date for VM but before the applicable compliance date for IM.
The relief in the letter applies to four categories of changes to "legacy" swaps:
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Immaterial amendments. DSIO cited the definition of "material terms" in the context of CFTC Rule 23.502 as a guidepost for what would be considered "material."
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Swaps resulting from the exercise of swaptions that are legacy swaps. In making this determination, DSIO cited a previous determination made by the CFTC in the context of clearing.
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Partial terminations and partial novations. In the case of novations, DSIO explained, the "stub" part of the swap with the remaining parties could rely on the relief, but the novated swap with a third party "may be subject to the [margin rules]."
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Multilateral compression of legacy swaps. DSIO noted that the CFTC Division of Clearing and Risk already provided relief from the clearing requirement for swaps resulting from compression exercises.
Commentary / Nihal Patel
The relief in this letter is limited and should never have been necessary. In adopting the swaps margin rules, the CFTC and prudential regulators took an unnecessarily restrictive view of what kind of change would make a "legacy" swap subject to margin requirements. Even in this relief, questions remain unanswered, such as whether amendments to comply with a regulatory push to amend contracts to move away from LIBOR and similar benchmarks would subject "legacy" contracts to margin requirements.
Despite the criticism, credit to the CFTC is due, as late is better than never. The prudential regulators should move quickly on an equivalent action.
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