On May 24, the Commodity Futures Trading Commission adopted by a 2-1 vote a final rule that specifies how the CFTC’s margin rules for uncleared swaps (adopted late last year and published on January 6, 2016) (the “Margin Rules”) apply to swaps involving counterparties from jurisdictions other than the United States. In general, the CFTC requires full compliance with the US Margin Rules for transactions between swap dealers and US persons and allows substituted compliance (i.e., compliance with the “comparable” laws of another jurisdiction) for some trades involving non-US swap dealers. It also excludes from the Margin Rules swaps between non-US swap dealers and other non-US persons, so long as neither counterparty is guaranteed by, or a subsidiary of, a US person.
The final rule is significantly different from the cross-border margin rule originally proposed by the CFTC because the CFTC decided to conform its approach to international swaps to the approach taken by the US prudential regulators in their margin rules for non-cleared swaps that apply to bank swap dealers. That decision was driven by the demographics of the swap dealer population. Currently, there are 106 swap dealers that are provisionally registered with the CFTC. Of those 106 swap dealers, an estimated 54 are subject to the CFTC’s Margin Rules, with the remaining 52 entities falling within the scope of the margin rules adopted by the prudential regulators. Of the 54 dealers subject to the CFTC’s margin requirements, approximately 33 are affiliated with a prudentially-regulated swap dealer. The CFTC recognized under those circumstances that “substantial differences between the Commission’s and prudential regulators’ cross-border regulations could lead to competitive disparities between affiliates within the same corporate structure, leading to market inefficiencies and incentives to restructure their businesses in order to avoid the more stringent cross-border margin framework.”
The final rule is available here.
Note that the copy of the final rule includes a convenient Table showing the regulatory outcomes for various combinations of parties under the Margin Rules. This copy states that Table A will not be included in the final version of the rule when it is published in the Federal Register.