United States: The Federal Reserve And OCC Guidance Regarding Initial Examinations For Compliance With Variation Margin Rules For Non-Cleared Swaps And Security-Based Swaps

Last week the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the Office of the Comptroller of the Currency (the "OCC" and, collectively with the Federal Reserve, the "Banking Agencies") released guidance (the "Examination Guidance")1 on the examinations of swap entities subject to their regulation (the "Fed/OCC Swap Entities") with respect to rules requiring such entities to exchange margin with their counterparties to non-cleared swaps and security-based swaps (the "Margin Rules").2 The Examination Guidance signals that, with respect to variation margin,3 the Banking Agencies will not immediately seek to enforce strict compliance with the Margin Rules, which are scheduled to go into effect on March 1, 2017, in relation to variation margin requirements for non-cleared transactions between swap dealers and counterparties including financial end users.4 Instead, the Examination Guidance states the Banking Agencies' expectation that the Fed/OCC Swap Entities will prioritize their compliance efforts, achieving full compliance by March 1 in relation to those counterparties whose transactions pose significant credit or market risks.

The Examination Guidance will likely have a significant effect on the manner in which the Fed/OCC Swap Entities implement their plans to comply with the Margin Rules and, in turn, on their counterparties, including financial end users.5 Together with a no-action letter6 issued earlier this month by the Commodity Futures Trading Commission ("CFTC") regarding its margin rules for dealers that are not subject to regulation by the Federal Reserve or OCC, the Examination Guidance provides much needed relief not only to swap dealers but also to their smaller counterparties, many of which are not expected to be fully prepared to comply with variation margin requirements by March 1.

Indeed, the March 1 deadline for variation margin has been a source of considerable controversy, with numerous market participants and industry groups, including the International Swaps and Derivatives Association ("ISDA"), warning that lack of preparation was widespread and the deadline was not realistic without significant market disruptions.7 By their terms, the Margin Rules require Fed/OCC Swap Entities and their financial end user counterparties by March 1 to exchange variation margin on terms that in many cases differ from the parties' current arrangements for the exchange of collateral. In particular, by their terms the Margin Rules require the exchange of margin on a zero-threshold basis and with a prescribed minimum transfer amount, specified types of collateral and same-day transfer of collateral in many cases. Further, the market has seen confusion regarding the forms that amendments of existing contractual arrangements should take, with different parties taking different approaches to new ISDA documentation and to their arrangements for legacy transactions predating the effectiveness of the Margin Rules.

The Examination Guidance states that swap dealers should prioritize their efforts according to the size and risk inherent in the credit and market risk exposures presented by each counterparty. By March 1, swap dealers are expected to be in full compliance with respect to other swap dealers and financial end users that present significant exposures. For other counterparties, swap dealers must make good faith efforts to comply with variation margin requirements in a timely manner, and in no case later than September 1, 2017.8

In view of the substantial changes necessary for swap dealers to achieve full effective compliance, the Examination Guidance states that during initial examinations for compliance with the variation margin requirements, Federal Reserve and OCC examiners should evaluate a swap dealer's management systems and program to come into compliance. Swap dealers are expected to have governance processes that assess and manage current and potential future credit exposure to counterparties to non-cleared swaps, as well as any other market risk arising from such transactions. Examiners will consider swap dealers' implementation plans, including actions taken to update documentation, policies, procedures, and processes, as well as training of appropriate staff and handling of early technical problems or other implementation challenges.9

Footnotes

1. Cleared Swaps and Non-Cleared Security Based Swaps (Feb. 22, 2017); Office of the Comptroller of the Currency, OCC Bulletin 2017-12, Initial Examinations for Compliance With Final Rule Establishing Margin Requirements for Non-Cleared Swaps and Non-Cleared Security-Based Swaps (Feb. 23, 2017).

2 Margin and Capital Requirements for Covered Swap Entities, 80 Fed. Reg. 74839 (Nov. 20, 2015). The prudential banking regulators that issued the Margin Rules included not only the Federal Reserve System and the OCC but also the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Federal Housing Finance Agency. However, many if not all of the registered swap dealers that are subject to prudential regulation are regulated by the OCC or the Federal Reserve.

3 Variation margin is intended to represent the mark-to-market value of a swap or the cumulative mark-to-market value of a set of swaps. It differs from initial margin, which is intended to provide an additional buffer for market movements during the period of time when a swap or set of swaps is being closed out. See Margin Rules.

4 The Margin Rules went into effect on September 1, 2016, with respect to both variation margin and initial margin for certain large dealing entities that, with their affiliates, had average daily notional amounts of relevant swaps and security-based swaps exceeding $3 trillion. The Margin Rules provide that March 1, 2017, is the compliance date for variation margin for transactions between Fed/OCC Swap Entities and their other counterparties in non-cleared swaps or security-based swaps whose transactions are subject to the Margin Rules. See Margin Rules, 80 Fed. Reg. at 74898-99.

5 The Margin Rules' definition of "financial end user" includes many types of entities that typically engage in financial activities and are not regulated as swap entities. These include, among others, a wide variety of banks and bank-like institutions, both domestic and foreign; certain entities that are state-licensed or registered as credit or lending entities or as money services businesses; a securities holding company, broker or dealer, investment adviser or registered investment company; a private fund and certain investment company-like entities; a commodity pool, a commodity pool operator, a commodity trading advisor, or futures commission merchant; many employee benefit plans; an insurance company; an entity that is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial assets; a foreign entity that would constitute a financial end user if it were organized under the laws of the United States or any State thereof; and any other entity that a relevant regulator determines should be treated as a financial end user. The "financial end user" definition expressly excludes from its scope, among other things, sovereign entities and multilateral

development banks. Margin Rules, 80 Fed. Reg. at 74900-901.

6 2017). See also Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed. Reg. 635 (Jan. 6, 2016).

7 See, e.g., "Uncleared Swap Margin Requirements – Request for Forbearance from March 1, 2017 Variation Margin Implementation" a letter from numerous industry groups to numerous regulatory agencies in the G-20 group of countries (Feb. 7. 2017), available as a link from http://isda.derivativiews.org/.

8 See Examination Guidance.

9 See Examination Guidance.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Cadwalader, Wickersham & Taft LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions