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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION 

AND REGULATION

SR 17-3

February 22, 2017

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE 

BANK AND TO FINANCIAL INSTITUTIONS SUBJECT TO THE INITIAL AND 

VARIATION MARGIN REQUIREMENTS FOR NON-CLEARED SWAPS AND 

NON-CLEARED SECURITY-BASED SWAPS 

SUBJECT: Initial Examinations for Compliance with Minimum Variation Margin 

Requirements for Non-Cleared Swaps and Non-Cleared Security Based Swaps 

Applicability: This guidance does not apply to community banks with $10 billion or less in total 

consolidated assets.

The Federal Reserve is providing guidance regarding initial examinations of Federal 

Reserve-supervised institutions for compliance with certain provisions of the interagency rule 

(the “final rule”) establishing initial and variation margin requirements for non-cleared swaps 

and non-cleared security-based swaps (collectively, “non-cleared swaps). Specifically, this 

guidance addresses the Federal Reserve’s expectations for compliance by Commodity Futures 

Trading Commission (CFTC)-registered swap dealers for which the Federal Reserve is the 

prudential regulator1 (referred to as a “covered swap entity”) with the minimum variation margin 

requirements that will become applicable on March 1, 2017. 

 1 Section 1a(39) of the Commodity Exchange Act defines the term ‘‘prudential regulator’’ for purposes of the 

margin requirements applicable to swap dealers, major swap participants, security-based swap dealers and major 

security-based swap participants. The Board is the prudential regulator for any swap entity that is (i) a statechartered bank that is a member of the Federal Reserve System, (ii) a state-chartered branch or agency of a foreign 

bank, (iii) a foreign bank which does not operate an insured branch, (iv) an organization operating under section 

25A of the Federal Reserve Act (an Edge corporation) or having an agreement with the Board under section 25 of

the Federal Reserve Act (an Agreement corporation), and (v) a bank holding company, a foreign bank that is treated 

as a bank holding company under section 8(a) of the International Banking Act of 1978, as amended, or a savings 

and loan holding company (on or after the transfer date established under section 311 of the Dodd-Frank Act), or a 

subsidiary of such a company or foreign bank (other than a subsidiary for which the Office of the Comptroller of the 

Currency (OCC) or the Federal Deposit Insurance Corporation (FDIC) is the prudential regulator or that is required 

to be registered with the CFTC or Securities and Exchange Commission (SEC) as a swap dealer or major swap 

participant or a security-based swap dealer or major security-based swap participant, respectively). This guidance 

focuses on CFTC-registered swap dealers as there are currently no major swap participants registered with the 

CFTC or security-based swap dealers or major security-based swap participants registered with the SEC. 
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Background

Sections 731 and 764 of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act) require the Federal Reserve, FDIC, OCC, Farm Credit Administration, 

and Federal Housing Finance Agency (collectively, the “agencies”) to adopt rules jointly for 

swap dealers, major swap participants, security-based swap dealers and major security-based 

swap participants (“swap entities”) that are prudentially regulated by one of the agencies that 

establish initial and variation margin requirements on all swaps that are not cleared by a 

registered derivatives clearing organization or a registered clearing agency.2

 

The agencies published the final rule establishing initial and variation margin 

requirements pursuant to sections 731 and 764 of the Dodd-Frank Act in November 2015.3 The 

effective date for the final rule was April 1, 2016. However, the phase-in of the minimum 

margin requirements did not begin until September 1, 2016. Under the final rule, only the largest 

swap market counterparties (those with more than $3 trillion in outstanding swap activity) were 

required to implement both the initial and variation margin requirements for non-cleared swap 

trades between those largest swap counterparties by September 1, 2016. On March 1, 2017, the 

phase-in schedule will begin to encompass all firms that qualify as covered swap entities, 

regardless of their volume of outstanding swap activity, for the exchange of variation margin for 

all transactions with other swap entities and financial end-user counterparties. 

Guidance for Initial Examinations for Compliance with Minimum Variation Margin 

Requirements for Non-Cleared Swaps 

In exercising supervisory discretion in initial examinations for compliance with the 

minimum variation margin requirements for non-cleared swaps, Federal Reserve examiners 

should be guided by the following principles:

• Priority should be given to compliance efforts by covered swap entities based on the size 

of and risk inherent in the credit and market risk exposures presented by each 

counterparty. A covered swap entity is expected to comply with the variation margin 

requirements of the final rule with respect to swap entities and financial end user 

counterparties4 that present significant exposures as of March 1, 2017. With respect to 

other counterparties, Federal Reserve examiners should focus on a covered swap entity’s 

good faith efforts to comply with the variation margin requirements of the final rule as 

soon as possible, and in no case later than September 1, 2017. This focus ensures that an 

entity’s compliance with respect to the highest risks and largest counterparties are 

prioritized and adequately met first. 

• The scope and scale of changes necessary for each covered swap entity to achieve 

effective compliance for each of its non-cleared swap transactions is recognized. During 

initial examinations for compliance with the variation margin requirements that will 

 2

 See 7 U.S.C. 6s(e)(2)(A); 15 U.S.C. 78o-10(e)(2)(A). 

3

 See 80 FR 74,840 (Nov. 30, 2015). 

4

 The term “financial end user” is defined in the final rule. See 12 CFR 237.2. 
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phase in under the final rule on March 1, 2017, Federal Reserve examiners should 

evaluate a covered swap entity’s management systems and program for compliance. 

• A covered swap entity is expected to have governance processes that assess and manage 

its current and potential future credit exposure to non-cleared swap counterparties, as 

well as any other market risk arising from such transactions. 

• Federal Reserve examiners should consider the covered swap entity’s implementation 

plan, including actions taken to update documentation, policies, procedures, and 

processes, as well as its training program for staff on how to handle technical problems or 

other implementation challenges. 

Federal Reserve Banks are asked to distribute this letter to their supervised financial 

institutions and to appropriate supervisory staff. Questions regarding this guidance may be 

directed to: 

• Division of Supervision and Regulation: Anna Harrington, Senior Supervisory 

Financial Analyst, at (202) 452-6406, and Sean Campbell, Associate Director, at 

(202) 452-3760. 

In addition, questions may be sent via the Board’s public website.5

Michael S. Gibson

Director

 5 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.