On September 3, the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Housing Finance Agency and Farm Credit Administration (collectively, Agencies) proposed rules that would establish margin requirements for certain market participants that enter into uncleared swaps and security-based swaps. The proposed rules are consistent with the international framework for margining derivative transactions that is set out in a paper published in September 2013 by the International Organization of Securities Commissions and the Bank for International Settlements. In general, the persons covered by this proposal include swap dealers, major swap participants, security-based swap dealers, major security-based swap participants (all of the foregoing, Covered Swap Entities) and financial end users. The proposal does not create mandatory margin requirements for uncleared derivatives for any other types of counterparties, but Covered Swap Entities may impose such requirements contractually on their counterparties (as is the current market practice). Under the proposal, uncleared swaps between Covered Swap Entities and between Covered Swap Entities and financial end users that have material swaps exposure would be subject to mandatory two-way initial margin requirements. (“Material swaps exposure” is defined as more than $3 billion notional in uncleared swaps and FX forwards as a daily average during June, July and August in any year.) The amount of initial margin required to be posted would be based either on the amounts required under the proposal or on amounts determined by an internal margin model utilized by a Covered Swap Entity that has previously been approved by the relevant Agency. However, a Covered Swap Entity would be permitted to adopt an initial aggregate margin threshold of $65 million which must be applied to all the uncleared swaps executed by the Covered Swap Entity and its affiliates with the counterparty and its affiliates (with affiliation being measured by 25 percent ownership). The proposal also specifies the types of collateral that may be posted as initial margin (generally, cash, government securities, liquid debt, equity securities and gold) and sets forth prescribed haircuts for these assets. All initial margin posted must be segregated and held by an independent custodian and may not be rehypothecated.  

The proposal also would impose variation margin requirements on uncleared swaps that are effected between Covered Swap Entities and between Covered Swap Entities and financial end users without regard to the swaps exposure of such financial end users. Variation margin would be required to be exchanged on a daily basis, subject to a combined minimum transfer amount of $650,000 for initial and variation margin. The only collateral that could be used for variation margin is cash in any of 11 major currencies. Variation margin is not subject to segregation and may be held and, if permitted by contract, rehypothecated by the relevant secured party. 

Under the proposal, the variation margin requirement would become effective on December 1, 2015, while the initial margin requirement would be phased in over a four-year period commencing on that date. As a practical matter, the initial margin rule will not come into effect until December 1, 2019 for entities that have less than $1 trillion in notional amount of uncleared derivatives and foreign exchange forwards (measured on a consolidated basis each year for all affiliated companies in a group by the daily average of their transactions during June, July and August). 

The Commodity Futures Trading Commission and the Securities and Exchange Commission are required to enact margin rules for Covered Swap Entities that are not subject to regulation by the Agencies. They have not yet done so, but it is expected that their margin rules will be quite similar.  

Comments on the proposed rules must be submitted no later than 60 days after publication in the Federal Register. 

The joint press release announcing the proposed rules is available here. 

The Federal Register notice is available here.