The Commodity Futures Trading Commission KISS initiative has finally produced some substantive results for swap dealers in the form of proposed amendments to Subpart L of the CFTC’s regulations (“Segregation of Assets in Uncleared Swap Transactions”) that were issued for comment on July 24. Subpart L (which encompasses CFTC Regulations 23.700-704) has been problematic for swap dealers since it was adopted early in 2014 because of the compliance challenges created by the extremely complicated and prescriptive nature of these provisions.
The purpose of Subpart L is to implement Section 4s(l) of the Commodity Exchange Act (CEA). That provision was added to the CEA by the Dodd–Frank Wall Street Reform and Consumer Protection Act, requiring a swap dealer to notify each counterparty that the counterparty has a “right” to require segregation at an independent custodian of initial margin it is required to post to the swap dealer. The proposed amendments eliminate most (but not all) of the most cumbersome requirements of Subpart L by (1) making the notice a one-time requirement; (2) eliminating the mandated hierarchy for identifying an appropriate recipient of the notice; and (3) allowing the parties to negotiate the terms of segregation, including the way in which the segregated margin will be invested. The requirement that the swap dealer must give a quarterly report to any counterparty that does not elect segregation remains unchanged (because it comes from the CEA provision and not a CFTC rule), but the amendments clarify that the reports are due in arrears no later than the 15 business day after the end of the relevant quarter.
According to the CFTC, the proposed amendments are intended to (1) reduce unnecessary burdens on market participants; (2) facilitate more efficient swap execution; and (3) encourage more segregation by allowing parties more flexibility in setting the terms of their segregation arrangements.
The proposed amendments are available here.