On January 13, President Obama signed legislation that aligns the rules relating to swap clearing and mandatory margin for uncleared swaps so that any entity that qualifies for an exemption from clearing its swaps also is exempt from any rules requiring mandatory margin for the resulting over-the-counter transaction. The Business Risk Mitigation and Price Stabilization Act of 2015, which was embedded as Title III of the Terrorism Risk Insurance Program Reauthorization Act of 2015, amends both the Commodity Exchange Act (CEA) and the Securities Exchange Act of 1934 to achieve this result for both swaps and security-based swaps.

The margin rules for non-cleared swaps re-proposed last autumn by the banking regulators and the Commodity Futures Trading Commission already generally exempted non-cleared swaps executed by non-financial end users from mandatory margin, but the new law increases the legal certainty of that result and, more importantly, extends the exemption to non-cleared swaps involving: (1) cooperatives that are exempted from clearing by action of the CFTC; (2) captive finance companies; (3) financial affiliates of non-financial end users exempt from clearing under CEA Section 2(h)(7)(D); and (4) small financial institutions with total assets of $10 billion or less (which can be exempt from swap clearing under CEA Section 2(h)(7)(A) because they are exempt from the definition of “financial entity” under CFTC Regulation 50.50(d)).

However, nothing in this legislation affects the traditional commercial right of a swap dealer to require collateral from a counterparty as a condition to executing swaps in order to manage the credit risk of the transactions.

Click here to read the text of the new law.