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CFTC Clarifies Uncleared Swap Margin Rules

The Commodity Futures Trading Commission (CFTC) has issued an advisory noting that under its uncleared swap margin rules, the documentation of initial margin will not be required until the initial margin threshold amount exceeds $50 million.

The CFTC says that this advisory was issued in furtherance of the March 2019 statement by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) concerning initial margin implementation.

In this statement, the two organisations noted that the framework for margin requirements for non-centrally cleared derivatives would require a number of large entities to post initial margin for the first time in 2019 and 2020, something that might involve additional documentation, custodial and operational arrangements.

Matthew Kulkin, CFTC

“The Basel Committee and IOSCO note that the framework does not specify documentation, custodial or operational requirements if the bilateral initial margin amount does not exceed the framework’s €50 million initial margin threshold. It is expected, however, that covered entities will act diligently when their exposures approach the threshold to ensure that the relevant arrangements needed are in place if the threshold is exceeded,” the organisations add in the statement.

Hence, Matthew Kulkin, a director in the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO), comments today: “This Advisory makes clear to CFTC registrants that documentation requirements will not apply until the firms exceed the $50 million initial margin threshold. The documentation requirements may impose a heavy burden on Phase 5 entities coming into scope in September 2020, and we believe the CFTC staff clarification is appropriate in light of the BCBS-IOSCO March 2019 statement.”

The Advisory also clarifies that while no specific initial margin documentation is required prior to reaching the $50 million threshold, DSIO expects that CFTC-regulated swap dealers will have appropriate risk management systems in place to calculate and monitor initial margin amounts and will act diligently as the amounts approach the $50 million threshold to ensure compliance with the documentation requirements.

Galen Stops

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