The CFTC adopted final rules (the "Cross-Border Margin Rules")1 regarding the application of the CFTC margin requirements for uncleared swaps in the context of cross-border transactions (the "Final Rules"). The Final Rules were published in the Federal Register. The CFTC's adoption of margin requirements for uncleared swaps ("Final Margin Rules"), were published in January 2016. See 81 FR 636 (Jan. 6, 2016). A Cadwalader memorandum summarizing the Margin Rules is available here. The CFTC margin requirements for uncleared swaps would apply only to those swap dealers that do not have "prudential regulators," as that term is defined in Commodity Exchange Act § 1a(39) (i.e., the CFTC generally has jurisdiction in this regard over non-bank swap dealers).

The Cross-Border Margin Rules are largely similar to the proposed rules, with the exception of the few notable changes that are discussed below. In addition, the CFTC indicated, the approach taken in the Cross-Border Margin Rules is intended to be aligned with that which was taken by the prudential regulators in their final margin rules. See 80 FR 74840 (Nov. 30, 2015). A Cadwalader memorandum summarizing the prudential regulators' rules is available here.

Overview of the Cross-Border Margin Rules

Regulated Entities. In determining whether the CFTC margin requirements applied to a swap, the Cross-Border Margin Rules would divide regulated entities into four categories: (i) U.S. swap dealers, (ii) non-U.S. swap dealers guaranteed by U.S. persons ("U.S.-Guaranteed SDs"), (iii) non-U.S. swap dealers that are consolidated subsidiaries of U.S. "ultimate parent entities" ("foreign consolidated subsidiaries" or "FCSs"), and (iv) non-U.S. swap dealers that do not fall into the second or third category ("Fully Non-U.S. SDs").2 These distinctions are shown in the table that appears below.

Definitions versus Cross-Border Guidance. Like the proposal, the Cross-Border Margin Rules do not rely on the definitions of "U.S. person" and "guarantee" that were used in its cross-border guidance that applies to other swap regulations. See 78 FR 45292 (July 26, 2013). Those terms remain largely as proposed (a previous Cabinet news item on the original proposal is available here). However, the CFTC added an anti-evasion provision to the guarantee analysis. Under the Cross-Border Margin Rules, the definition of "guarantee" includes an arrangement by which a guarantor has a right to receive or otherwise collect payments from another guarantor that are involved in the relevant swap obligations. See pp. 27-29 of the adopting release for a discussion of the "guarantee" definition.

Substituted Compliance Process. The Cross-Border Margin Rules adopted the approach to comparability determinations as outlined in the proposal, but added the adopting release to pp. 68-73. (A previous Cabinet news item summarizing the proposed – and now adopted – substituted compliance approach is available here.)

Type of Swap Dealer

Margin Requirements

U.S. Swap Dealers and U.S.-Guaranteed SDs

They are subject to all CFTC requirements, except where substituted compliance may apply with respect to the posting of initial margin to a non-U.S. person.

Fully Non-U.S. SDs

Requirements do not apply to transactions with non-U.S. persons (other than FCSs, U.S. branches of Non-U.S. swap dealers and entities guaranteed by U.S. persons) (the "Exclusion"). The Exclusion is not available if (i) there is no comparability determination for initial margin collection for the relevant swap and (ii) the Non-U.S. SD enters into a swap with an affiliate to transfer risk to a U.S. Swap Dealer or U.S.-Guaranteed SD.

Substituted compliance is available generally if the counterparty is not a U.S. swap dealer or a U.S.-Guaranteed SD (i.e., including with respect to U.S. persons generally).

Regarding transactions with U.S. swap dealers and U.S.-Guaranteed SDs, substituted compliance is available solely for initial margin collection if the counterparty is a U.S. swap dealer or a U.S.-Guaranteed SD.

FCSs and U.S. branches of Fully Non-U.S. SDs

Same as above, except that the Exclusion is not available (i.e., CFTC or substituted compliance margin requirements apply even when trading with fully non-U.S. counterparties).

Non-Segregation and Non-Netting Jurisdictions

The CFTC added two new sections to the final rules: one for transactions in jurisdictions in which it would be legally or operationally impracticable to comply with the initial margin segregation requirement in the Final Margin Rules, and another for transactions in jurisdictions in which netting may not be available.

Subject to a number of conditions, the segregation provision would excuse FCSs and non-U.S. branches of U.S. swap dealers from compliance with the initial margin posting and segregation requirements that address non-U.S. persons where it would be legally or operationally impracticable to do so. The provision is limited to a 5% notional test that applies separately to four risk categories of swaps.

The netting provision is substantially similar to a rule adopted by the prudential regulators. It would allow certain swap dealers to engage in transactions in which relevant netting arrangements would be unavailable, provided that the dealer collected margin on a gross basis (but still could post margin on a net basis).

The final rules will become effective on August 1, 2016.

Footnotes

1 The version of the Cross-Border Margin Rules that preceded the version published in the Federal Register is available here.

2 Although the margin rules would apply equally to "major swap participants," we refer only to swap dealers here for ease of reference.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.