Margin and Capital Requirements for Swap Entities

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) established a comprehensive regulatory framework for derivatives, which are generally characterized as swaps and security-based swaps. Sections 731 and 764 of the DFA require the registration and regulation of certain “swap entities”. For certain types of swap entities that are prudentially regulated by one of the Agencies ("covered swap entities"), sections 731 and 764 of the DFA require the Agencies to jointly adopt rules for swap entities under their respective jurisdictions imposing capital requirements and initial and variation margin requirements on all non-cleared swaps. The swaps-related provisions are intended to reduce risk, increase transparency, promote market integrity within the financial system, and, in particular, address a number of weaknesses in the regulation and structure of the swaps markets that were revealed during the financial crisis. The opacity of swap transactions among dealers and between dealers and their counterparties created uncertainty about whether market participants were significantly exposed to the risk of a default by a swap counterparty. The OCC, Board, FDIC, FCA, and FHFA (the Agencies) issued an interim final rule (Brexit Interim Final Rule) that addresses a potential impact of the scenario in which the United Kingdom (U.K.) exits from the European Union (E.U.) without a negotiated withdrawal agreement allowing financial services firms located in the U.K. to continue providing full-scope financial services in the E.U. The Brexit Interim Final Rule includes a new information collection requirement for transfers initiated by a covered swap entity’s counterparty. For those transfers, the counterparty must make a representation to the covered swap entity that the counterparty performed the transfer in compliance with the requirements of the rule. The Agencies are adopting a final rule that amends the agencies’ regulations requiring swap dealers and security-based swap dealers under the agencies’ respective jurisdictions to exchange margin with their counterparties for swaps that are not centrally cleared (Swap Margin Rule). The Swap Margin Rule as adopted in 2015 takes effect under a phased compliance schedule spanning from 2016 through 2020, and the entities covered by the rule continue to hold swaps in their portfolios that were entered into before the effective dates of the rule. Such swaps are grandfathered from the Swap Margin Rule’s requirements until they expire according to their terms. The final rule permits swaps entered into prior to an applicable compliance date (legacy swaps) to retain their legacy status in the event that they are amended to replace an interbank offered rate (IBOR) or other discontinued rate, modifies initial margin requirements for non-cleared swaps between affiliates, introduces an additional compliance date for initial margin requirements, clarifies the point in time at which trading documentation must be in place, permits legacy swaps to retain their legacy status in the event that they are amended due to technical amendments, notional reductions, or portfolio compression exercises, and makes technical changes to relocate the provision addressing amendments to legacy swaps that are made to comply with the Qualified Financial Contract Rules, as defined in the Supplementary Information section. In addition, the final rule addresses comments received in response to the agencies’ publication of the interim final rule that would preserve the status of legacy swaps meeting certain criteria if the United Kingdom withdraws from the European Union (hereafter ‘‘Brexit) without a negotiated settlement agreement.

The latest form for Margin and Capital Requirements for Swap Entities expires 2023-09-30 and can be found here.

§ 349.1(d)(1), (d)(2) Meeting criteria for exemption

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