On April 29, Commodity Futures Trading Commission Chairman Chris Giancarlo sent a letter to Randy Quarles, the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, in which he proposed that the US regulators responsible for the administering the margin rules for uncleared swaps should collaborate in providing some relief to non-dealer swap market participants who may become subject to initial margin requirements in 2020. The specific relief would be the issuance of the same guidance issued by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) in March (for more information, see the March 8, 2019 edition of Corporate & Financial Weekly Digest), which stated that in-scope parties do not have to put in place compliant documentation and custodial relationships if there is no expectation that the exposure associated with their swaps will actually exceed the regulatory threshold for posting initial margin ($50 million for the United States).

The need for this relief is a result of the phase-in level for initial margin requirements dropping to zero in 2020. That change is likely to bring many financial end-user swap parties (“Phase 5 Parties”) into scope for initial margin because they trade with swap dealers and have material swaps exposure of $8 billion or more. The proposed guidance would simplify life for any Phase 5 Party that has a relatively low risk swap portfolio and save such parties from having to negotiate new initial margin and custody documents. The guidance would have no effect on Phase 5 Parties that do expect to have more than $50 million in aggregate swap exposure for initial margin purposes. A Phase 5 Party that benefits from such relief would have to monitor its exposures carefully, however, and be ready to satisfy all applicable requirements if it ever exceeds the posting threshold.

Since the Federal Reserve is only one of the five banking regulators responsible for the margin rules applicable to swap dealers that are subject to prudential regulation (i.e., bank swap dealers), this proposal can only come to fruition if it is also agreed to by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Federal Housing Finance Agency.

The letter is available here.