Presentation to the CFTC Agricultural Advisory 

Committee - May 19, 2011

Ananda Radhakrishnan, Director

Division of Clearing and Intermediary Oversight

CFTC 
Section 731 of the Dodd-Frank Act 

requires the Commission to adopt rules 

for non-bank swap dealers and major 

swap participants for which there is not 

a prudential regulator –

imposing both initial and variation margin 

requirements on all swaps that are not 

cleared by a registered derivatives clearing 

organization.

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In prescribing margin requirements with 

respect to swap dealers and major swap 

participants for which there is no prudential 

regulator, the Commission shall permit the 

use of noncash collateral as it determines to 

be consistent with—

(i) preserving the financial integrity of markets 

trading swaps; and

(ii) preserving the stability of the United States 

financial system

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 The proposed rules address margin 

requirements for uncleared swaps entered into 

by swap dealers (SDs) or major swap 

participants (MSPs). 

 The rules would apply to SDs and MSPs that are 

not subject to regulation by the Federal Reserve 

Board, the Office of the Comptroller of the 

Currency, the Federal Deposit Insurance 

Corporation, the Farm Credit Administration or 

the Federal Housing Finance Agency (collectively 

the prudential regulators). 

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 The rules would not impose margin 

requirements on commercial end users, defined 

under the proposed rules as non-financial 

entities. 

 The margin requirements under the proposed 

rules would vary by counterparty. 

 The rules would distinguish between financial 

entities and non-financial entities. 

 The definition of financial entity is based on section 

2(h)(7)(C) of the Commodity Exchange Act, which 

addresses the exemption from mandatory clearing.

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 Trades between SDs/MSPs and other SDs/MSPs: rules 

would require paying and collecting initial and 

variation margin for each trade. 

 Trades between SDs/MSPs and financial entities: rules 

would require the SD/MSP to collect, but not pay, 

initial and variation margin for each trade, subject in 

certain circumstances to permissible thresholds. 

 Trades between SDs/MSPs and non-financial entities: 

rules would not require the SD/MSP to pay or collect 

initial or variation margin from non-financial entities. 

The rule would simply require SDs/MSPs to enter into 

credit support arrangements with their counterparties 

and to abide by those arrangements.

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 The rules would apply to uncleared swaps 

entered into after the effective date of the 

regulation. 

 The proposal would not apply retroactively.

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 Initial margin could be calculated using a model that is 

approved by the Commission and:

i. is used by a derivatives clearing organization for 

clearing swaps, 

ii. is used by an entity subject to oversight by a prudential 

regulator, or 

iii. made available for licensing to any market participant 

by a vendor. 

 If no such model is available, initial margin would be 

calculated by selecting a comparable cleared swap or 

futures contract and applying a multiplier set forth in 

the rule. All initial margin must cover 99% of 10-day 

price moves.

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 Variation margin would be calculated to cover 

the current exposure arising from changes in the 

market value of the swap since the trade was 

executed or the previous time the position was 

marked to market. 

 Rules previously proposed for SDs and MSPs 

would require that documentation include 

agreement on the methods, procedures, rules, 

and inputs for determining the value of each 

swap at any time from execution to the 

termination, maturity, or expiration of the swap.

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 SDs/MSPs would be required to accept only 

certain specified assets as initial or variation 

margin from other SDs/MSPs or from 

financial entities. Appropriate haircuts are 

specified in the proposed rule. 

 By contrast, in cases where non-financial 

entities posted collateral, they would be 

permitted to post non-traditional forms of 

collateral in accordance with their 

individually-negotiated agreements.

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 Collateral for trades between SDs/MSPs and 

other SDs/MSPs would be required to be held 

at third-party custodians and could not be 

rehypothecated. 

 SDs and MSPs would be required to offer 

non-SDs/MSPs the opportunity to have any 

initial margin segregated.

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