Swap Margin Rule Update:

LIBOR, Brexit, and Other Current Matters

FCA Board Meeting

March 12, 2020

Clayton Milburn, Senior Financial Analyst, 

Finance and Capital Markets Team

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Outline

 Clarifying Scope and Terminology

 Current Proposed Rule - LIBOR and Legacy Swap 

Amendments, Inter-affiliate Initial Margin

 March 2019 Interim Final Rule – “Brexit” and Legacy 

Swap Amendments

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Clarifying Scope & Terminology

Rule Scope: Establishes margin requirements for the non-cleared

swap and security-based swap activities of Covered Swap Entities.

Covered Swap Entity (CSE)

• Swap Dealer / Security-Based Swap Dealer: Generally, an entity that makes a 

market in swaps.

• Major Swap Participant: Generally, an entity that maintains a “substantial 

position” in any major swap category (i.e., interest rate swaps).

Excepted or Exempted Swaps: As outlined in FCA Regulation §

624.1(d).

• Small Institution - FCS Institutions with Total Assets < $10 billion.

• Cooperative - FCS Institutions with Total Assets > $10 billion (swaps entered into 

for the benefit of FCS institution members).

• NOTE: Farmer Mac is not exempted or excepted under either of these provisions.

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Clarifying Scope & Terminology

Variation Margin: Covers day-to-day changes in market value.

Initial Margin: Covers costs to replace swap upon counterparty 

default. 

Legacy Swap: Any non-cleared swap entered into before the relevant 

compliance date outlined in the swap margin rule.

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Current Proposed Rule - Overview

• Amendments to Preserve Legacy Status:

• Swaps Amended to Accommodate a Change in Referenced 

Benchmark Interest Rates (“LIBOR” Amendments).

• Swaps Amended as Part of Standard “Lifecycle” Events.

• Amendment to Extend the Initial Margin Compliance Phase-In.

• Amendment to Clarify Initial Margin Contract Requirements.

• Amendment to Exempt Inter-Affiliate Swaps from Margin 

Requirements.

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Current Proposed Rule – “IBOR” 

Amendments

• Policy Objective: Accommodate transition of legacy swaps away 

from Inter-Bank Offered Rates (IBORs) like LIBOR due to their 

potential discontinuation.

• Amendment Detail: Allow amendments, via various contractual 

means, to replace certain referenced rates in legacy swaps without 

triggering margin requirements.

• Public Response: Respondents generally support the Agencies’ 

proposal.

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Current Proposed Rule – “Lifecycle” 

Amendments

• Policy Objective: Accommodate amendments to legacy swaps that 

reduce operational or counterparty risk.

• Amendment Detail: Permit amendments to legacy swaps arising 

from routine industry practices over the life-cycle of a non-cleared 

swap without triggering margin requirements:

• Compression Exercises.

• Notional Reductions.

• Technical Amendments.

• Public Response: Limited, and generally supportive.

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Current Proposed Rule – Initial Margin 

Contract Requirements

• Policy Objective: To address market concerns regarding when 

initial margin trading documentation must be in place for CSEs and 

their counterparties.

• Amendment Detail: Amend regulation text to expressly state 

when initial margin trading documentation must be executed; 

specifically at the time when initial margin must be collected or 

posted under the Swap Margin Rule.

• Public Response: Commenters supported the Agencies’ proposal.

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Current Proposed Rule – Initial Margin 

Phase-In Extension

• Policy Objective: Address industry concerns regarding the 

operational and other difficulties associated with beginning to 

exchange initial margin with a large number of relatively small 

counterparties.

• Amendment Detail: Extend the Initial Margin phase-in schedule to 

give CSEs an additional year to implement initial margin 

requirements with smaller counterparties. 

• Public Response: Commenters supported the Agencies’ proposal.

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Current Proposed Rule – Inter-Affiliate Initial 

Margin Requirements

• Policy Objective: Encourage prudent risk management; harmonize 

U.S. requirements with other international jurisdictions.

• Amendment Detail: Exempt non-cleared swaps between CSEs and 

their affiliates from Initial Margin requirements [variation margin 

still required]; expand the definition of “affiliate.”

• Public Response: Mixed

• In Favor: IAIM requirements are unnecessary, discourage 

sound risk management, put U.S. firms at a competitive 

disadvantage, and increase costs to end-users.

• Opposed: Eliminating IAIM increases risk to U.S. depository 

institutions [and thus U.S. Taxpayers] and increases overall 

systemic risk.

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“Brexit” Interim Final Rule

• Policy Objective: Address industry concerns regarding the legacy 

status of swaps transferred from swap counterparties in the U.K. 

to affiliates in the E.U. or U.S. in preparation for a non-negotiated 

U.K. exit from the E.U. (a “Hard Brexit”). 

• Amendment Detail: Permit amendments to legacy swaps to effect 

a transfer from a U.K. entity to an affiliate located in the E.U. or the 

U.S. without triggering margin requirements.

• Public Response: None.

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Questions?

• Tim Nerdahl – Senior Policy Analyst

nerdahlt@fca.gov or (952) 259-0435

• Clayton Milburn – Senior Financial Analyst

milburnc@fca.gov or (916) 604-3142

• Jeremy Edelstein – Associate Director, Office of Regulatory Policy

Finance and Capital Markets Team

edelsteinj@fca.gov or (703) 883-4497

• Richard Katz – Senior Counsel

katzr@fca.gov or (703) 883-4085

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