On July 1, 2020, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (together, the “agencies”) published a final rule adopting amendments to the agencies’ regulations imposing margin requirements on swap dealers and security-based swap dealers (“covered swap entities”). On the same date, the agencies also published an interim final rule prompted by the COVID-19 crisis, postponing certain initial margin implementation deadlines.
The Board of Governors of the Federal Reserve System (Board), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) adopted rules (together, the QFC Stay Rules) in 2017 requiring amendments to certain qualified financial contracts (QFCs). The compliance dates for these rules depend on the type of QFC counterparty facing a “covered entity” (as defined below), and are being phased in beginning on January 1, 2019 and ending on January 1, 2020. Notwithstanding this compliance phase-in, dealers subject to the QFC Stay Rules have been requesting that all of their counterparties, including end users, take action to facilitate compliance as though the initial compliance date, January 1, 2019, applied to all types of QFC counterparties. This article is intended to help buy-side participants navigate the compliance process, with emphasis on describing (i) the various types of contracts that constitute “covered” QFCs subject to the rules and (ii) the various alternative methods for compliance.
In recent years, the U.S. Commodity Futures Trading Commission (CFTC) has devoted significant resources to addressing how the requirements of the Commodity Exchange Act (CEA) and the regulations thereunder apply to transactions involving Bitcoin and other virtual currencies. The CFTC has not adopted any rules specific to virtual currencies, but rather has made clear that derivatives contracts based on a virtual currency are subject generally to the same CFTC regulations that apply to other types of derivatives contracts that have traditionally been within the CFTC’s jurisdiction. Additionally, the CFTC has noted that derivatives contracts are susceptible to automation through smart contracts and distributed ledger technology (DLT) and “[e]xisting law and regulation apply equally regardless what form a contract takes . . . [even to] contracts [or parts of contracts] that are written in code[.]”
On April 26, Commodity Futures Trading Commission (“CFTC”) Chairman Giancarlo and the CFTC Chief Economist published a white paper titled “Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps” (the “White Paper”). At the International Swaps and Derivatives Association, Inc. (“ISDA”) annual meeting where the White Paper was initially presented, Chairman Giancarlo described the White Paper as “economy-focused” and stated that regulatory role of the CFTC is focused on “what’s in the best interest of markets.”
On August 28, amendments recently adopted by the Commodity Futures Trading Commission (“CFTC”) to recordkeeping obligations under CFTC Rule 1.31 are scheduled to become effective. The CFTC periodically updates this rule to take into account technological advances and modernize requirements for persons subject to recordkeeping obligations under the U.S. Commodity Exchange Act or the CFTC’s rules, known as “records entities.” In proposing these amendments earlier this year, the CFTC acknowledged that recordkeeping has “evolved significantly” since its last overhaul of Rule 1.31 in 1999. READ MORE
Cleared derivatives are generally characterized as being either “collateralized-to-market” (“CTM”) or “settled-to-market” (“STM”) in connection with the mitigation of counterparty credit risk resulting from movements in mark-to-market value. Under the CTM approach, transfers of variation margin are characterized as daily “collateral” transfers, with the transferring party having a right to reclaim the collateral (a financial asset) and the receiving party having the obligation to return the collateral (a financial liability), as well as a legal right to liquidate the collateral in the event of a close-out.
Under the STM approach, variation margin reflects daily “gain” to the receiving party that is actually settled. Despite the settlement of the gain on a daily basis, the derivative’s underlying economic terms remain the same (in other words, there is no amendment or recouponing of the trade). However, unlike the CTM approach, variation margin transferred is not regarded as pledged collateral securing obligations between the parties. Rather, variation margin is deemed to “settle outstanding exposure” between them (with no right to reclaim or obligation to return the variation margin) and, after that settlement, the mark-to-market between the parties resets to zero. READ MORE
Beginning on December 15, 2017, amendments approved by the Securities and Exchange Commission (“SEC”) last year to FINRA Rule 4210 will require U.S. registered broker-dealers to collect (but not post) daily variation margin and, in some cases, initial margin, from their customers on specified transactions.
These new margin requirements apply to “Covered Agency Transactions,” which include: (i) “to-be-announced” (or “TBA”) transactions on mortgage-backed securities (“MBS”) and specified pool transactions for which the settlement date is more than one business day after the trade date; and (ii) U.S. agency collateralized mortgage obligations for which the settlement date is more than three business days after the trade date. TBA transactions account for the vast majority of trading in the sizable agency MBS market. READ MORE
On April 18, 2017, the Commodity Futures Trading Commission (“CFTC”) issued a no-action letter extending until November 7, 2017 the relief provided under CFTC Letter No. 17-05 (“Letter 17-05”), which was scheduled to expire on May 8, 2017. Letter 17-05 provides relief from certain CFTC margin requirements to certain swap dealers (“SDs”) in connection with swaps subject to the margin requirements under the European Market Infrastructure Regulation (“EMIR”). READ MORE
From the time Regulation AT was initially proposed by the Commodity Futures Trading Commission (“CFTC”) over a year ago, the CFTC has solicited and considered numerous comment letters, held a public roundtable, supplemented the proposed regulation, and, on January 23, 2017, extended the comment period for that supplemental proposal. However, although the substance of the regulation has evolved in certain respects, its future remains uncertain. READ MORE
On January 12, the Commodity Futures Trading Commission (“CFTC”) unanimously approved the proposal of numerous amendments to CFTC Regulation 1.31, the regulation that sets forth the recordkeeping requirements for records required to be kept under the U.S. Commodity Exchange Act (the “Act”) and the CFTC’s regulations, including with respect to swaps. The proposed amendments are largely intended to modernize and make technology-neutral the form and manner in which regulatory records are kept.
The last major revision of Regulation 1.31 was made in 1999, when records were largely kept in paper form and before the prevalence of advanced electronic information systems.  Through the proposed amendments, the CFTC intends to update, reorganize and, effectively, re-write Regulation 1.31, while maintaining its ability to examine and inspect required records. READ MORE