The US Commodity Futures Trading Commission (CFTC) today unanimously approved a proposed rule setting margin requirements for uncleared swaps, one of the last rules required by the 2010 Dodd-Frank Act.
The rule will require swap dealers and major swap participants to collect a 10-day initial margin for each of its uncleared swaps, meaning the swap dealer would need to collect enough capital to finance a 10-day effort to find a buyer for the swap should the counterparty default. This margin would not be collected from commercial end users, however. Financial end users would be subject to the margin rules if they hold more than $3bn in swaps at a given time. The rule would be phased in beginning on 1 December 2015 and end in 1 December 2019.
The US Federal Reserve, which regulates banks, proposed its own margin rule for swaps earlier this month. The Fed's rule also carved out an exemption for end users entering into swap contracts with banks. CFTC's rule would apply to nonbank swap dealers, including nonbanks affiliates of banks. CFTC chairman Timothy Massad said the proposed rule was developed with "substantial collaboration" with the Fed and other regulators.
Massad said CFTC's rules are "largely consistent" with standards set by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (Iosco) last year, and that the agency has "been in touch with overseas regulators as we developed out proposal."
But CFTC member Mark Wetjen warned that the agency should be prudent in its enforcement of the rules internationally because swap dealers and major swap participants are already required to hold capital to offset their exposures.
"The commission should be judicious when applying its margin rule abroad, knowing that covered swap entities are complying with US capital rules [or equivalent foreign rules] and will have collateralized their exposures with US firms," Wetjen said.
Since exchange operators Ice and CME Group moved their cleared energy swaps to their futures exchanges in October 2012, the cleared energy swap market has been limited. However, there remains a substantial market in uncleared bespoke energy swaps.
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