Source: http://route2finance.com/2015/04/03/cftc-uncleared-swap-margin-rules-to-take-effect-in-september/
Timestamp: 2019-01-21 05:04:38
Document Index: 783136691

Matched Legal Cases: ['§ 1', '§ 6', '§ 8302', '§ 1752', '§ 78', '§ 1002', '§ 252', '§ 270', '§ 23', '§ 23', '§ 1', '§ 1', '§ 23', '§ 7', '§ 2', '§ 78', '§ 80', '§ 302', '§ 2', '§ 23', '§ 303', '§ 23', '§ 23', '§ 23', '§ 23', '§ 1', '§ 1', '§ 23', '§ 78', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 50', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§\n23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 1811', '§ 23', '§ 23', '§ 23', '§ 23', '§ 23', '§ 78', '§ 23']

CFTC Uncleared Swap Margin Rules to Take Effect in September – Route2Finance
Home / Posts / CFTC Uncleared Swap Margin Rules to Take Effect in September
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The US Commodity Futures Trading Commission (the CFTC) finalized its margin requirements for uncleared swap transactions on December 16, 2015 (the CFTC Margin Rules). The CFTC’s adoption of the final rules comes on the tails of the Prudential Regulators, who jointly finalized their uncleared swap margin rules in October 2015 (the PR Margin Rules). Compliance with both sets of rules will be phased in over a period of time beginning in September 2016. The CFTC Margin Rules apply to swap dealers and major swap participants that are not subject to supervision by the Prudential Regulators (collectively referred to herein as CFTC Covered Swap Entities). The CFTC Margin Rules largely track the PR Margin Rules, except with respect to the treatment of certain affiliate-related issues, the proprietary margin model approval process and the calculation of variation margin. Though the finalization of the CFTC Margin Rules is a key piece of the puzzle with respect to the margin framework for uncleared swaps, market participants are still waiting for (i) the CFTC to finalize the rules addressing the cross-border application of the CFTC Margin Rules and (ii) European regulators and the US Securities and Exchange Commission (the SEC) to finalize their respective rules for uncleared derivative transactions.
Latham & Watkins Financial Institutions Group February 19, 2016 | Number 1928
CFTC Uncleared Swap Margin Rules to Take Effect in
While the US gears up for compliance with uncleared swap margin rules, cross-border
application of the CFTC rules remains unclear.
The US Commodity Futures Trading Commission (the CFTC) finalized its margin requirements for
uncleared swap transactions on December 16, 2015 (the CFTC Margin Rules).1 The CFTC’s adoption of
the final rules comes on the tails of the Prudential Regulators2, who jointly finalized their uncleared swap
margin rules in October 2015 (the PR Margin Rules).3 Compliance with both sets of rules will be phased
in over a period of time beginning in September 2016. The CFTC Margin Rules apply to swap dealers
and major swap participants that are not subject to supervision by the Prudential Regulators (collectively
referred to herein as CFTC Covered Swap Entities). The CFTC Margin Rules largely track the PR Margin
Rules, except with respect to the treatment of certain affiliate-related issues, the proprietary margin model
approval process and the calculation of variation margin. Though the finalization of the CFTC Margin
Rules is a key piece of the puzzle with respect to the margin framework for uncleared swaps, market
participants are still waiting for (i) the CFTC to finalize the rules addressing the cross-border application of
the CFTC Margin Rules and (ii) European regulators and the US Securities and Exchange Commission
(the SEC) to finalize their respective rules for uncleared derivative transactions.
For further discussion of the PR Margin Rules, please refer to our Client Alert: Prudential Regulators Are
First to Finalize Uncleared Swap Margin Rules.
I. Summary ……………………………………………………………………………………………………………………….. 2
A. Background …………………………………………………………………………………………………………. 2
B. CFTC Margin Rules ……………………………………………………………………………………………… 2
C. Exempted End-Users ……………………………………………………………………………………………. 4
D. Cross-Border Application ………………………………………………………………………………………. 4
II. Margin Requirements …………………………………………………………………………………………………….. 4
A. Minimum Transfer Amount …………………………………………………………………………………….. 4
B. Initial Margin Requirements …………………………………………………………………………………… 5
1. Posting and Collecting Initial Margin ……………………………………………………………. 5
2. Calculating Initial Margin ……………………………………………………………………………. 6
C. Variation Margin Requirements ……………………………………………………………………………… 8
D. Inter-Affiliate Swaps ……………………………………………………………………………………………… 9
1. Variation Margin ……………………………………………………………………………………….. 9
2. Initial Margin …………………………………………………………………………………………….. 9
Latham & Watkins February 19, 2016 | Number 1928 | Page 2
III. Collateral ……………………………………………………………………………………………………………………… 10
A. Market Value and Eligibility of Collateral ……………………………………………………………….. 10
B. Collateral Segregation ………………………………………………………………………………………… 11
1. Custodial Agreement ………………………………………………………………………………. 11
2. Custody Arrangements for Inter-Affiliate Swaps ………………………………………….. 12
C. Collateral Valuation …………………………………………………………………………………………….. 12
IV. Netting Arrangements and Retroactive Application ………………………………………………………. 13
A. Eligible Master Netting Agreements………………………………………………………………………. 13
B. No Retroactive Application to Previously Executed Uncleared Swaps ………………………. 14
V. Documentation …………………………………………………………………………………………………………….. 14
A. Swap Documentation ………………………………………………………………………………………….. 14
B. Approved Proprietary Initial Margin Models ……………………………………………………………. 15
VI. Phased-in Compliance Period ………………………………………………………………………………………. 15
A. Calculating Average Daily Aggregate Notional Amount …………………………………………… 16
B. Ongoing Compliance Obligations …………………………………………………………………………. 16
VII. Cross-Border Application …………………………………………………………………………………………….. 17
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) directs the CFTC
to adopt rules establishing minimum initial margin (IM) and variation margin (VM) requirements for CFTC
Covered Swap Entities on all swaps that are not cleared by a registered derivatives clearing organization
(DCO) (as used herein, uncleared swaps).4 Though the CFTC initially proposed margin rules for public
comment on April 28, 2011,5 the CFTC reproposed regulations to implement IM and VM requirements for
uncleared swaps for CFTC Covered Swap Entities on October 3, 2014 (the CFTC Reproposed Margin
Rules).6
The CFTC Reproposed Margin Rules followed the publication in September 2013 by the Basel
Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions
(IOSCO), at the direction of the Group of Twenty (G-20), of international standards for margin
requirements for non-centrally cleared derivatives (the International Standards).7 The International
Standards were intended to reduce the opportunity for regulatory arbitrage by creating an international
framework for uncleared swaps that regulators could use as a guide to frame their respective margin
rules. European regulators also reproposed their respective margin requirements for uncleared
derivatives (the EMIR Proposed Margin Rules).8 Prompted by market demand for more time and given
the lack of finalized rules both in the United States and abroad, BCBS and IOSCO revised the compliance
timeline under the International Standards to recommend delaying effectiveness of uncleared swap
margin rules by nine months.9
B. CFTC Margin Rules
Following the recommended timeline of BCBS and IOSCO, the CFTC Margin Rules (like the PR Margin
Rules) will be phased in beginning on September 1, 2016, with the highest-volume dealers that are CFTC
Covered Swap Entities becoming subject to IM and VM requirements first. All market participants, other
than Exempted End-Users (defined below), will be required to post VM by March 2017. Market
participants subject to IM requirements will become subject to the rules in phases, with the final phase
requiring all covered market participants to post/collect IM under the CFTC Margin Rules by September 1,
Latham & Watkins February 19, 2016 | Number 1928 | Page 3
The CFTC Margin Rules generally provide that:
• The term “CFTC Covered Swap Entity” captures Swap Entities (defined below) that are not
prudentially regulated, including, inter alia, nonbank subsidiaries of bank holding companies and
foreign Swap Entities not otherwise subject to prudential regulation.10
• CFTC Covered Swap Entities entering into uncleared swaps with a person registered with the CFTC
as a swap dealer (SD) or a major swap participant (MSP) (SDs and MSPs collectively referred to
herein as Swap Entities), or with Financial End-Users11 with Material Swaps Exposure (defined below)
(Financial End-Users with Material Swaps Exposure and Swap Entities collectively referred to herein
as Covered Counterparties), must collect and post IM12 and VM13 on a daily basis.
• CFTC Covered Swap Entities entering into uncleared swaps with Financial End-Users that do not
have Material Swaps Exposure must collect and post daily VM, but will not be required to post or
collect IM.
• CFTC Covered Swap Entities are not required to post or collect IM or VM with respect to uncleared
swap transactions entered into with Exempted End-Users.
• For purposes of portfolio margining, uncleared swap counterparties may enter into Eligible Master
Netting Agreements that separately account for pre- and post-compliance date positions.
• CFTC Covered Swap Entities are generally not required to collect IM from their Margin Affiliates
(defined below), except in the case of certain inter-affiliate swaps with certain foreign Margin Affiliates
that are not subject to comparable IM collection requirements. CFTC Covered Swap Entities are also
generally not required to post IM to their Margin Affiliates, except where such Margin Affiliate is a
prudentially regulated Swap Entity (a PR Covered Swap Entity) subject to the PR Margin Rules.
• VM must be both collected and posted for uncleared swaps between a CFTC Covered Swap Entity
and its Margin Affiliates.
• For purposes of the CFTC Margin Rules, “Margin Affiliate” is defined with a bright-line test, which
provides greater legal certainty than under the CFTC Reproposed Margin Rules, in particular with
respect to determining Material Swaps Exposure and IM Threshold Amount (defined below).
• IM must be segregated with independent, non-affiliate custodians.
• For purposes of calculating IM, CFTC Covered Swap Entities may use approved proprietary margin
models instead of the standardized margin schedule provided by the CFTC in the CFTC Margin
We have used the term “uncleared swaps” herein to encompass swaps14 that are not cleared by either a
DCO15 registered with the CFTC or by a clearing organization exempted from registration pursuant to the
Commodity Exchange Act.16
Key Divergences from PR Margin Rules
While largely mirroring the PR Margin Rules, the CFTC Margin Rules notably diverge from those finalized
by the Prudential Regulators with respect to the:
• Treatment of certain treasury affiliates
Latham & Watkins February 19, 2016 | Number 1928 | Page 4
• Exclusion of the Prudential Regulators’ discretionary “anti-evasion” provision in the “Margin Affiliate”
• Proprietary IM model approval process
• Calculation of VM and related documentation requirements
• Treatment of certain inter-affiliate trades17
C. Exempted End-Users
On January 12, 2015, the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) was
signed into law.18 Title III of TRIPRA amends certain provisions of the Dodd-Frank Act to exempt certain
counterparties from the IM and VM requirements for uncleared swaps. Specifically, TRIPRA prohibits
applying any margin requirements promulgated under the Dodd-Frank Act to uncleared swaps with any of
the following counterparties (collectively referred to herein as Exempted End-Users), so long as such
counterparty is using the uncleared swaps to hedge commercial risk:
• Commercial end-users, including treasury affiliates (that do not otherwise qualify as Financial End-
Users)19 acting as agent
• Financial institutions (i.e., small banks, savings associations, Farm Credit System institutions, credit
unions) with total assets of US$10 billion or less and certain financial cooperatives hedging the risks
associated with originating loans for their members20
• Captive finance companies21
Pursuant to TRIPRA, the CFTC Margin Rules contained an interim final rule (the Interim Final Rule)
exempting from the CFTC Margin Rules certain uncleared swaps entered into with Exempted End-
Users using such uncleared swaps to hedge or mitigate commercial risk.22 The Interim Final Rule is
scheduled to go into effect with the CFTC Margin Rules on April 1, 2016. The comment period for the
Interim Final Rule closed on February 5, 2016. We expect the Interim Final Rule to be finalized in
substantially similar form.
D. Cross-Border Application
On June 29, 2015, the CFTC proposed regulations that would frame the reach of the CFTC Margin Rules
in cross-border swap transactions (the CFTC Proposed Cross-Border Margin Rules).23 The CFTC
Proposed Cross-Border Margin Rules would subject all uncleared swap transactions entered into by US
CFTC Covered Swap Entities to the CFTC Margin Rules, as well as certain uncleared swaps entered into
by non-US CFTC Covered Swap Entities where the risk flows back to a US entity. Though the CFTC
declined to finalize a definitive cross-border framework concurrently with the CFTC Margin Rules, the
CFTC has indicated that it anticipates finalizing such cross-border rules in the near future,24 which should
close the loop on the cross-border application of the CFTC Margin Rules.
II. Margin Requirements
A CFTC Covered Swap Entity must post and/or collect (as applicable) IM and VM daily under the CFTC
Margin Rules, for the life of the uncleared swap.25
A. Minimum Transfer Amount
The minimum transfer amount below which a CFTC Covered Swap Entity need not collect or post margin
pursuant to the CFTC Margin Rules with respect to a particular counterparty has been set at US$500,000
Latham & Watkins February 19, 2016 | Number 1928 | Page 5
(calculated in the aggregate taking into account all IM and VM required under the CFTC Margin Rules
with respect to such counterparty). This amount has been lowered from US$650,000, the amount
reproposed by the CFTC in October 2014.26
B. Initial Margin Requirements
1. Posting and Collecting Initial Margin
The CFTC Margin Rules require that a CFTC Covered Swap Entity collect IM, with respect to any
uncleared swap, from a Covered Counterparty on a daily basis, in an amount no less than the IM amount
calculated in accordance with the CFTC Margin Rules (discussed further below), less the IM Threshold
Amount (not including any portion of the IM Threshold Amount already applied by the CFTC Covered
Swap Entity or its Margin Affiliates to other uncleared swaps with such Covered Counterparty or its
Margin Affiliates), as applicable.27
Further, the CFTC Margin Rules require that a CFTC Covered Swap Entity post IM with respect to any
uncleared swap with a counterparty that is a Financial End-User with Material Swaps Exposure, in an
amount at least as large as what the CFTC Covered Swap Entity would be required to collect under the
CFTC Margin Rules — note that the CFTC Covered Swap Entity would also be required to post this
amount to a counterparty that is also a CFTC Covered Swap Entity, to satisfy such CFTC Covered Swap
Entity counterparty’s own IM collection obligations under the CFTC Margin Rules. The CFTC Covered
Swap Entity must also post IM to any counterparty that is a Swap Entity, though the amount would be
determined under the margin regime applicable to such Swap Entity.28
Material Swaps Exposure. Under the CFTC Margin Rules, a Financial End-User has “Material Swaps
Exposure” if such entity and its Margin Affiliates, in the aggregate, have an average daily aggregate
notional amount of uncleared swaps, uncleared security-based swaps, foreign exchange (FX) forwards29
and FX swaps30 with all counterparties for June, July and August of the previous calendar year that
exceeds US$8 billion (calculated only for business days). The CFTC Reproposed Margin Rules originally
provided for a Material Swaps Exposure threshold amount of US$3 billion. The increase in the threshold
for Material Swaps Exposure further aligns with the recommended threshold of €8 billion under the
International Standards31 and the US$8 billion threshold for Material Swaps Exposure under the PR
Margin Rules. The CFTC Margin Rules provide for the following adjustments in calculating a Financial
End-User’s Material Swaps Exposure:
• Transactions between a CFTC Covered Swap Entity and a Margin Affiliate need only be counted
• Swaps exempt from the CFTC Margin Rules by virtue of the Interim Final Rule (i.e., uncleared swaps
with Exempted End-Users entering into such transactions to hedge or mitigate their commercial risk)
would not be included in the calculation.
• Security-based swaps that (i) are exempt pursuant to the SEC clearing exemption for affiliates of end-
users or (ii) satisfy the criteria for the SEC’s end-user exception for clearing would not be included in
the calculation.32
The CFTC has confirmed a CFTC Covered Swap Entity may rely on a Financial End-User counterparty’s
good-faith representations in determining whether such Financial End-User has Material Swaps
Exposure.33 Additionally, in response to market concerns, the CFTC has included a new provision in the
CFTC Margin Rules to clarify what happens when a Financial End-User counterparty’s exposure moves
Latham & Watkins February 19, 2016 | Number 1928 | Page 6
above or below the Material Swaps Exposure threshold for a given calendar year (discussed further
below).34
Initial Margin Threshold Amount. Rather than the US$65 million proposed in the CFTC Reproposed
Margin Rules, the CFTC has lowered the IM Threshold Amount under the CFTC Margin Rules to an
aggregate credit exposure of US$50 million resulting from all uncleared swaps between (i) a CFTC
Covered Swap Entity or any of its Margin Affiliates and (ii) a Covered Counterparty or any of its Margin
Affiliates. Uncleared swaps entered into with Exempted End-Users are excluded from this calculation
under the Interim Final Rule. The reduction in the IM Threshold Amount is consistent with the
International Standards and the PR Margin Rules. The IM Threshold Amount may be allocated among
entities within a consolidated group at the agreement of the CFTC Covered Swap Entity and its
counterparties, but the total must remain below US$50 million on a combined basis.35
Margin Affiliates. The CFTC (like the Prudential Regulators in the PR Margin Rules) has applied a
bright-line test to the definition of “Margin Affiliate,”36 abandoning the control-based approach taken under
the proposal. A company is considered a “Margin Affiliate” of another company under any of the following
• Either company consolidates the other on financial statements prepared in accordance with US
Generally Accepted Accounting Principles, the International Financial Reporting Standards or other
similar standards (referred to collectively herein as Accounting Standards).
• Both companies are consolidated with a third company on a financial statement prepared in
• For a company that is not subject to Accounting Standards, such consolidation would have occurred if
such Accounting Standards had applied.
Notably, however, while the Prudential Regulators gave themselves leeway to otherwise determine that a
company is an “affiliate” of another for purposes of the PR Margin Rules (based on the applicable
Prudential Regulator’s conclusion that either company provides significant support to, or is materially
subject to the risks or losses of, the other company), the CFTC expressly declined to include a parallel
provision in the CFTC Margin Rules.37
The “Margin Affiliate” concept is present throughout the CFTC Margin Rules, including with respect to IM
Threshold Amount, Material Swaps Exposure and special considerations for inter-affiliate uncleared
swaps. Abandoning the proposed control test for this bright-line accounting-based approach eliminates
legal uncertainty regarding the calculation of IM Threshold Amount and Material Swaps Exposure on an
aggregate basis under the CFTC Margin Rules.
2. Calculating Initial Margin
A CFTC Covered Swap Entity may calculate its minimum IM amount under the CFTC Margin Rules in
one of two ways: (i) by using a standardized margin schedule (as set out in Rule 23.154(c) of the CFTC
Margin Rules and reproduced below), which allows for certain types of netting and offsetting of
exposures; or (ii) by using an internal IM model that satisfies the CFTC Margin Rules criteria and that has
been approved by the CFTC or a registered futures association (i.e., the National Futures Association
(the NFA)) (an approved proprietary IM model). In an effort to disincentivize “cherry picking” the method
that produces the “most favorable” IM results, the CFTC has stated that it would expect a CFTC Covered
Swap Entity switching between the two IM calculation options to provide the CFTC upon request with a
rationale for changing methodologies.38
Latham & Watkins February 19, 2016 | Number 1928 | Page 7
Standardized Initial Margin Schedule. The CFTC has adopted as proposed the following standardized
minimum gross IM requirements for uncleared swaps, as divided by swap asset class:39
Asset Class Gross IM (% of Notional Exposure)
FX/Currency 6
Cross-Currency Swaps40
• Eligible Master Netting Agreements. If the standardized margin schedule is being used to calculate IM
for multiple uncleared swaps that are subject to an Eligible Master Netting Agreement (defined
below), the amount of IM that the CFTC Covered Swap Entity must collect or post (as applicable)
under the CFTC Margin Rules is determined according to the following calculation:
IM = ( 0.4 x Gross IM ) + ( 0.6 x Net-to-Gross Ratio x Gross IM )41
Approved Proprietary Initial Margin Models. The CFTC Margin Rules permit a CFTC Covered Swap
Entity to calculate IM using a proprietary IM model that captures all of the material risks that affect an
uncleared swap (including material non-linear price characteristics of such swap), so long as the CFTC or
the NFA has granted prior written approval to use the model.42 Such approval (which may be revoked) is
premised on the model satisfying certain qualitative criteria and minimum control, oversight and validation
mechanisms (which the CFTC adopted substantially as proposed in the CFTC Reproposed Margin
Rules), including, inter alia:
• The model must determine the potential future exposure of an uncleared swap (or applicable netting
portfolio (discussed further below)), where “potential future exposure” is an estimate of the one-tailed
99% confidence interval for an increase in the value of such uncleared swap (or applicable netting
portfolio) over a period equal to the shorter of 10 business days or the maturity of such uncleared
swap (or applicable netting portfolio) (referred to as a holding period). Note that (i) this 10-day holding
period is longer than the holding period (i.e., three to five days) that central counterparties typically
require and, (ii) unlike under bank regulatory capital rules, the CFTC Margin Rules do not permit,
under any circumstances, a CFTC Covered Swap Entity using an approved proprietary IM model to
indirectly compute the 10-day horizon by making an IM calculation over a shorter horizon and then
scaling such IM calculation to the required 10-day horizon. The CFTC Margin Rules instead require
that such CFTC Covered Swap Entity’s IM calculation be performed directly over the 10-day close-out
• If the model reflects offsetting exposures, diversification and other hedging benefits for uncleared
swaps that are executed under the same Eligible Master Netting Agreement, the CFTC Covered
Latham & Watkins February 19, 2016 | Number 1928 | Page 8
Swap Entity must demonstrate the reasonableness for modeling and measuring such hedging
benefits.44
• With respect to an uncleared cross-currency swap, the model need not recognize risks or risk factors
associated with the embedded FX swap (i.e., the fixed, physically-settled exchange of principal), but
must recognize all material risks associated with all other payments and cash flows under such
uncleared cross-currency swap.45
• The CFTC Margin Rules also impose various annual assessment requirements on CFTC Covered
Swap Entities that calculate IM pursuant to an approved proprietary IM model.46
We have set forth below a number of additional considerations related to a CFTC Covered Swap Entity’s
use of an approved proprietary IM model.
• Risk Categories. The CFTC Margin Rules require that an approved proprietary IM model assign each
derivative contract to a single asset class or broad risk category (i.e., FX and interest rates
(considered together as a single asset class), credit, equity, commodities) and that the IM calculations
for each broad risk category be performed separately. In a departure from the CFTC Reproposed
Margin Rules, the finalized CFTC Margin Rules no longer divide commodities into smaller asset
classes.47
• Eligible Master Netting Agreements. A CFTC Covered Swap Entity that uses an approved proprietary
IM model to calculate IM under an Eligible Master Netting Agreement may only offset an uncleared
swap against other uncleared swaps within the same asset class under such Eligible Master Netting
Agreement when calculating IM.48
• Previously Approved Proprietary IM Models. Recognizing that CFTC Covered Swap Entities may
employ vender-supplied IM models, the CFTC has stated that it (or the NFA) may approve, on a
case-by-case basis, such vendor-supplied models and model-related inputs, which the CFTC or the
NFA have previously approved for one CFTC Covered Swap Entity, for use by other CFTC Covered
Swap Entities (i.e., a vendor-supplied proprietary IM model that the CFTC or the NFA has approved
for use by a CFTC Covered Swap Entity may also be approved for another CFTC Covered Swap
Entity’s use). The CFTC Margin Rules also provide for coordination with the Prudential Regulators,
the SEC or foreign regulators, as applicable, to facilitate expedited approval for proprietary IM models
that have previously obtained the requisite approval by such regulator (e.g., a proprietary IM model
the Prudential Regulators have approved under the PR Margin Rules for use by a CFTC Covered
Swap Entity’s prudentially regulated Margin Affiliate).49
• Inter-Affiliate Swaps. Unlike under the PR Margin Rules,50 the CFTC Margin Rules provide for no
special treatment of inter-affiliate swaps when it comes to calculating IM amount.
C. Variation Margin Requirements
The CFTC Margin Rules require that a CFTC Covered Swap Entity collect and post (as applicable) VM
in accordance with the CFTC Margin Rules after such CFTC Covered Swap Entity has entered into an
uncleared swap with a Swap Entity or a Financial End-User (regardless of whether such Financial
End-User has Material Swaps Exposure), including any Margin Affiliates of such CFTC Covered Swap
Entity.51
Latham & Watkins February 19, 2016 | Number 1928 | Page 9
Like the PR Margin Rules, the CFTC Margin Rules define “VM amount” as the cumulative mark-to-market
change in value to a CFTC Covered Swap Entity of an uncleared swap, as measured from the date such
uncleared swap is entered into, less the value of all VM previously collected, plus the value of all VM
previously posted with respect to such uncleared swap.52 The CFTC Margin Rules do, however, go into
further detail with respect to VM calculation, requiring that a CFTC Covered Swap Entity use methods,
procedures, rules and inputs that, to the maximum extent practicable, rely on recently executed
transactions, valuations provided by independent third parties or other objective criteria.53
D. Inter-Affiliate Swaps
1. Variation Margin
Similar to the PR Margin Rules, the CFTC Margin Rules require that a CFTC Covered Swap Entity post
and collect VM on inter-affiliate swaps entered into with each Margin Affiliate that is a Swap Entity or a
Financial End-User.54 Note that there is no comparable requirement under the current version of the EMIR
Proposed Margin Rules to exchange VM with respect to uncleared swaps among affiliates.55
Collecting Initial Margin. A CFTC Covered Swap Entity is not required to collect IM from a Margin
Affiliate under the CFTC Margin Rules if each of the following conditions are met:
• The uncleared swaps entered into between such CFTC Covered Swap Entity and such Margin
Affiliate are subject to a centralized risk-management program that is reasonably designed to monitor
and manage the risks associated with such inter-affiliate swap(s)
• Such CFTC Covered Swap Entity exchanges VM with such Margin Affiliate in accordance with the
CFTC Margin Rules56
The CFTC Margin Rules do, however, require CFTC Covered Swap Entities to collect IM from foreign
Margin Affiliates that (i) are Financial End-Users and (ii) are not subject to comparable IM collection
requirements on their own outward-facing swaps with Financial End-Users. Such Margin Affiliates would
generally include Financial End-Users located in jurisdictions for which substituted compliance has not
been granted with respect to the collection of IM, but would also apply in the case of a series of uncleared
swap transactions involving, directly or indirectly, a Margin Affiliate that is not subject to comparable IM
collection requirements (e.g., the CFTC Covered Swap Entity is facing a Margin Affiliate that is subject to
such requirements, but such Margin Affiliate is, directly or indirectly, transacting with another Margin
Affiliate that is not subject to such requirements). The CFTC has referred to this collection requirement as
“an important anti-evasion measure,” as it is concerned with the potential incentive to use Margin
Affiliates to avoid collecting IM from third parties.57
Posting Initial Margin. The CFTC Margin Rules only require a CFTC Covered Swap Entity to post IM to
those Margin Affiliates that are prudentially regulated Swap Entities (PR Covered Swap Entities), in an
amount equal to the amount that any such PR Covered Swap Entity is required to collect from the CFTC
Covered Swap Entity under the PR Margin Rules — CFTC Covered Swap Entities are otherwise not
required to post IM with respect to any other inter-affiliate swaps. This posting requirement works in
harmony with the PR Margin Rules, which require PR Covered Swap Entities to collect IM from affiliates
that are Swap Entities or Financial End-Users.58
Latham & Watkins February 19, 2016 | Number 1928 | Page 10
A. Market Value and Eligibility of Collateral
The CFTC Margin Rules require a CFTC Covered Swap Entity to monitor the market value and eligibility
of all collateral collected and posted to satisfy the IM and VM requirements under the CFTC Margin
Rules. Only certain types of assets satisfy these requirements, and the eligibility of the collateral differs
based on the type of margin (i.e., IM or VM) being posted and/or collected and, with respect to VM, the
identity of the CFTC Covered Swap Entity’s counterparty. To the extent that either (i) the market value of
such collateral has declined or (ii) such collateral no longer qualifies as Eligible Collateral, CFTC Covered
Swap Entities are required to collect or post (as applicable) sufficient collateral to remain compliant with
the CFTC Margin Rules.59
Similar to the PR Margin Rules, the CFTC Margin Rules expand the scope of collateral that CFTC
Covered Swap Entities may post or collect (Eligible Collateral) beyond the original proposal.
Eligible Collateral for Initial Margin. CFTC Covered Swap Entities may post and collect the following
types of collateral to satisfy their IM obligations under the CFTC Margin Rules:
• Immediately available cash funds denominated in (i) US dollars or another major currency60 or (ii) the
currency of settlement61 under the uncleared swap (referred to herein as the settlement currency)
(unless noted otherwise, such funds are referred to herein as cash collateral)
• Securities issued by or guaranteed by a US government agency, the European Central Bank (the
ECB) or certain sovereign entities62
• Certain debt securities issued by, and asset-backed securities guaranteed by, US government-
sponsored enterprises (GSEs)63
• Certain redeemable securities in pooled investment funds that invest in US government securities or
securities issued by the ECB or certain sovereign entities (referred to herein as Eligible Investment
Fund Interests)
• Securities issued or guaranteed by the Bank for International Settlements, the International Monetary
Fund or a multilateral development bank64
• Gold65
Many of these types of collateral are subject to significant Haircuts (defined below) to reflect their liquidity
and market valuation risk.
Eligible Collateral for Variation Margin. As noted above, the scope of Eligible Collateral for VM under
the CFTC Margin Rules varies depending on the identity of such CFTC Covered Swap Entity’s
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• Swap Entity Counterparties. A CFTC Covered Swap Entity may only post and collect cash collateral
to satisfy VM requirements imposed by the CFTC Margin Rules for uncleared swaps entered into with
a Swap Entity counterparty.
• Financial End-User Counterparties. A CFTC Covered Swap Entity may post and collect the following
forms of collateral to satisfy VM requirements under the CFTC Margin Rules for uncleared swaps
entered into with a Financial End-User counterparty:
– Cash collateral
– Non-cash collateral that is eligible to satisfy the IM requirements (listed above)66
Note that the CFTC Margin Rules do not restrict the types of collateral a CFTC Covered Swap Entity may
post and/or collect for bilaterally agreed amounts above the IM or VM amount required by the CFTC
Margin Rules.67
Ineligible Securities. The following securities are specifically excluded from the Eligible Collateral
definition under the CFTC Margin Rules:
• Securities issued by (i) the party pledging such collateral (the posting counterparty) or (ii) a Margin
Affiliate of the posting counterparty
• Securities issued by a wide range of US and non-US financial entities and market intermediaries,
including banks, bank holding companies, savings and loan holding companies and Margin Affiliates
of the foregoing, and brokers, dealers, SDs and futures commission merchants68
B. Collateral Segregation
The CFTC Margin Rules require that IM (but not VM) posted or collected by a CFTC Covered Swap Entity
be segregated at one or more custodians that are not Margin Affiliates of either the CFTC Covered Swap
Entity or its counterparty (such custodian is referred to as a third-party custodian).69 These segregation
rules are similar to the PR Margin Rules — however, unlike under the PR Margin Rules, any excess
collateral posted above the IM amounts required by the CFTC Margin Rules is not subject to these
segregation requirements.70
1. Custodial Agreement
Any IM a CFTC Covered Swap Entity posts and/or collects under the CFTC Margin Rules must be subject
to a custodial agreement that satisfies the following conditions:
• The custodial agreement is a legal, valid, binding and enforceable agreement under the laws of all
relevant jurisdictions (including in the event of bankruptcy, insolvency or similar proceeding).
• The custodial agreement prohibits the third-party custodian from rehypothecating, repledging, reusing
or otherwise transferring any of the collateral it holds, except that cash collateral may be held in a
general deposit account with the third-party custodian if (i) such funds in the account are used to
purchase an asset qualifying as Eligible Collateral, (ii) such Eligible Collateral is not otherwise
rehypothecated, repledged or reused and (iii) such purchase takes place within a time period
reasonably necessary to consummate such purchase after the cash collateral is posted as IM in
satisfaction of the IM requirements under the CFTC Margin Rules.
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• If the custodial agreement permits the posting party to substitute or direct any reinvestment of
collateral held by the third-party custodian pursuant to the CFTC Margin Rules, the custodial
agreement may only permit the substitution or reinvestment of such collateral in assets (i) that would
qualify as Eligible Collateral and (ii) for which the amount net of applicable Haircuts would be
sufficient to meet the IM requirements under the CFTC Margin Rules.71
2. Custody Arrangements for Inter-Affiliate Swaps
To the extent that a CFTC Covered Swap Entity collects Eligible Collateral from a Margin Affiliate to
satisfy its IM collection requirements under the CFTC Margin Rules, the custodian for such Eligible
Collateral may be such CFTC Covered Swap Entity or a Margin Affiliate thereof.72
The value of any Eligible Collateral is calculated as follows:
Collateral Value = Eligible Collateral Market Value x ( 1 – Applicable Haircut ),
with such value expressed in percentage terms (referred to herein as Collateral Value). The total value of
all IM or VM collateral collected or posted pursuant to the CFTC Margin Rules is calculated as the sum of
the Collateral Values of each item of Eligible Collateral.73
The value of any Eligible Collateral collected or posted to satisfy the CFTC Margin Rules is subject to the
sum of the following discounts (such discounts referred to herein as Haircuts):
Asset Class Discount (%)
VM collateral denominated in a currency that is not the settlement currency
(except for immediately available cash funds denominated in US dollars or
another major currency)
IM collateral denominated in a currency that is not the settlement currency
(except for Eligible Collateral denominated in a single termination currency
designated as payable to the collecting counterparty under an Eligible Master
Netting Agreement)
Eligible government and related debt
Residual maturity <1 year 0.5
Residual maturity 1-5 years 2.0
Residual maturity >5 years 4.0
Eligible corporate debt
Residual maturity <1 year 1.0
Residual maturity 1-5 years 4.0
Residual maturity >5 years 8.0
Equity included in the S&P 500 or a related index 15.0
Equity included in the S&P 1500 Composite or a related index (but not the S&P
500 or related index) 25.0
Additional (additive) haircut on asset in which the currency of the swap obligation
differs from that of the collateral asset 8.0
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IV. Netting Arrangements and Retroactive Application
As under the PR Margin Rules, the CFTC Margin Rules permit a CFTC Covered Swap Entity to net
multiple uncleared swaps with a counterparty for purposes of calculating IM and VM amounts and of
posting or collecting margin, so long as all uncleared swaps netted against each other have been
executed pursuant to an Eligible Master Netting Agreement entered into as between such CFTC Covered
Swap Entity and such counterparty. Note that IM amounts may not be netted against VM amounts (or
vice versa) under the CFTC Margin Rules.74
A. Eligible Master Netting Agreements
Further aligning with the PR Margin Rules, the CFTC Margin Rules define “Eligible Master Netting
Agreement” to mean a legally enforceable agreement for which the following conditions are satisfied:
• Upon an event of default following any permitted stay (discussed below), the agreement creates a
single legal obligation for all transactions entered into under such agreement.
• The agreement provides the CFTC Covered Swap Entity the right (i) to accelerate, terminate and
close out on a net basis all transactions under such agreement and (ii) to liquidate or set off collateral
promptly upon an event of default, including upon an event of receivership, conservatorship,
insolvency, liquidation or similar proceeding, of the counterparty. Upon the occurrence of any such
proceeding, the agreement shall provide that any exercise of rights under such agreement will not be
stayed or avoided under applicable law in the relevant jurisdictions, except under either of the
– In receivership, conservatorship or resolution under the Federal Deposit Insurance Act, Title II of
the Dodd-Frank Act, the Federal Housing Enterprises Financial Safety and Soundness Act of
1992, as amended, or the Farm Credit Act of 1971, as amended, or laws of foreign jurisdictions
that are substantially similar to the foregoing in order to facilitate the orderly resolution of the
defaulting counterparty.
– The agreement is subject by its terms to, or incorporates, any of the laws referenced above (any
such stay referred to herein as a permitted stay).
• The agreement does not contain a walkaway clause (i.e., a provision that permits a non-defaulting
counterparty to make a lower payment than it otherwise would make under the agreement, or no
payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate of the
defaulter is a net creditor under the agreement).
A CFTC Covered Swap Entity that relies on an Eligible Master Netting Agreement to calculate the margin
required under the CFTC Margin Rules must:
• Conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written
documentation of such legal review) that each of the following conditions has been met:
– The agreement satisfies the requirements of the “Eligible Master Netting Agreement” definition.
– In the event of a legal challenge (including one resulting from default or from receivership,
conservatorship, insolvency, liquidation or similar proceeding), the relevant court and
administrative authorities would find the agreement to be legal, valid, binding and enforceable
under the law of the relevant jurisdictions.
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• Establish and maintain written procedures to monitor possible changes in relevant law and to ensure
that the agreement continues to satisfy the requirements of the “Eligible Master Netting Agreement”
B. No Retroactive Application to Previously Executed Uncleared Swaps
The CFTC Margin Rules permit a CFTC Covered Swap Entity to identify separate pre- and post-
compliance date groups of uncleared swaps to be netted only against the other uncleared swaps in their
respective group, even if two or more groups of uncleared swaps were executed pursuant to the same
Eligible Master Netting Agreement. As a result, CFTC Covered Swap Entities may continue to use an
existing Eligible Master Netting Agreement after the applicable compliance date(s) without subjecting the
pre-compliance trades thereunder to the CFTC Margin Rules.76 This flexibility aligns with the PR Margin
• For example, if the uncleared swaps under a particular Eligible Master Netting Agreement entered
into between a CFTC Covered Swap Entity and a counterparty (that is a Swap Entity or a Financial
End-User) is divided into two netting portfolios — (1) uncleared swaps entered into before the
compliance date applicable to such CFTC Covered Swap Entity in respect of such counterparty (the
pre-compliance portfolio) and (2) uncleared swaps entered into on or after the applicable compliance
date (the post-compliance portfolio) — the CFTC Covered Swap Entity is permitted to net the
uncleared swaps in the post-compliance portfolio against only other post-compliance uncleared
swaps, and the uncleared swaps in the pre-compliance portfolio against only other pre-compliance
Like the Prudential Regulators, the CFTC expressly declined to exempt new swap transactions arising
from amendments to, and novations or compressions of, uncleared swaps entered into prior to the
applicable compliance date (legacy swaps) from the CFTC Margin Rules; accordingly (and absent further
guidance from the CFTC to the contrary), the following transactions will be subject to the CFTC Margin
Rules beginning on the applicable compliance date, despite their relationship to any legacy swap, to the
extent such transactions give rise to a new swap transaction (note the list below is not necessarily
• Amendments to legacy swaps
• Novations of legacy swaps
• New derivatives resulting from portfolio compression of legacy swaps77
A. Swap Documentation
Consistent with documentation standards under the Dodd-Frank Act, the CFTC Margin Rules require a
CFTC Covered Swap Entity to document margin-related matters. Such documentation must satisfy the
• Provide such CFTC Covered Swap Entity with the contractual right to exchange IM and VM in such
amounts, in such form and under such circumstances as the CFTC Margin Rules require
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• Specify the methods, procedures, rules, inputs and data sources to be used for (i) determining the
value of each uncleared swap for purposes of calculating VM and (ii) calculating IM for uncleared
swaps entered into between such CFTC Covered Swap Entity and its counterparty
• Specify the procedures by which any disputes may be resolved with respect to the valuation of (i) the
uncleared swaps or (ii) any collateral collected or posted as IM or VM78
The CFTC has removed the documentation requirements with respect to non-financial end-users that had
previously been included in the CFTC Reproposed Margin Rules.79
B. Approved Proprietary Initial Margin Models
If a CFTC Covered Swap Entity calculates IM under the CFTC Margin Rules by using an approved
proprietary IM model, then such CFTC Covered Swap Entity must adequately document the following
additional items with respect to such model:
• All material aspects of such approved proprietary IM model, including (i) the management and
valuation of the uncleared swaps to which the model applies, (ii) the control, oversight and validation
of such model and (iii) any review processes and the results of such processes
• (i) Internal authorization procedures (including escalation procedures) that require review and
approval of any change to the IM calculation under such approved proprietary IM model, (ii)
demonstrable analysis that any basis for any such change is consistent with the CFTC Margin Rules
and (iii) independent review of such demonstrable analysis and approval80
VI. Phased-in Compliance Period
The phased-in compliance schedule, which is consistent with the International Standards and the PR
Margin Rules, is set forth below. The compliance dates for the IM and VM requirements are determined
by calculating the average daily aggregate notional amount of uncleared swaps, uncleared security-based
swaps, FX forwards and FX swaps (computed for business days only) for both the CFTC Covered Swap
Entity and its counterparty (with each including their respective Margin Affiliates). Where both the CFTC
Covered Swap Entity and the respective counterparty exceed the relevant average daily aggregate
notional amount listed below, such uncleared swap transactions will be subject to the CFTC Margin
Rules.81
Exceeding US$3 trilliona Sept. 1, 2016 Sept. 1, 2016
Exceeding US$2.25 trillionb
Exceeding US$1.5 trillionc Sept. 1, 2018
Exceeding US$750 billiond Sept. 1, 2019
Any amount Sept. 1, 2020
a Calculated for March, April and May 2016 c Calculated for March, April and May 2018
b Calculated for March, April and May 2017 d Calculated for March, April and May 2019
Note that a CFTC Covered Swap Entity may be subject to multiple compliance dates for both the IM and
the VM requirements under the CFTC Margin Rules, since the CFTC Covered Swap Entity will calculate
separate average daily aggregate notional amounts under the CFTC Margin Rules with respect to each of
its counterparties.82
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A. Calculating Average Daily Aggregate Notional Amount
To determine the applicable compliance date, a CFTC Covered Swap Entity would take into account the
average daily aggregate notional amounts of the following transactions of such CFTC Covered Swap
Entity and its counterparty (accounting for their respective Margin Affiliates):
• Uncleared security-based swaps
Additionally, the CFTC Margin Rules provide for the following adjustments in calculating the average daily
aggregate notional amounts:
• Transactions between a CFTC Covered Swap Entity and a Margin Affiliate (or between a
counterparty and a Margin Affiliate) need only be counted once.
entered into with Exempted End-Users) would not be included in the calculation.
the calculation.83
Note that the applicable compliance date under the CFTC Margin Rules is determined based on the
average daily aggregate notional amount of uncleared swaps, whereas the International Standards
proposed compliance dates determined by the average month-end aggregate notional amount of non-
centrally cleared derivatives.
B. Ongoing Compliance Obligations
Once a CFTC Covered Swap Entity is subject to the CFTC Margin Rules with respect to a particular
counterparty by virtue of the above compliance schedule, such CFTC Covered Swap Entity will remain
subject to the CFTC Margin Rules with respect to such counterparty, regardless of the average daily
aggregate notional amount with respect to that particular counterparty or the CFTC Covered Swap Entity.
However, in the event that a counterparty’s status changes in a way that would subject any uncleared
swaps entered into by the CFTC Covered Swap Entity with such counterparty to “less strict” margin
requirements under the CFTC Margin Rules (e.g., the counterparty is a Financial End-User that
previously had, but no longer has, Material Swaps Exposure), then the CFTC Covered Swap Entity may
comply with the “less strict” margin requirements for both: (i) any uncleared swaps entered into after such
counterparty’s status change and (ii) any outstanding uncleared swaps entered into after the applicable
compliance date and before such counterparty changed its status. Note that the converse is also true — if
a CFTC Covered Swap Entity’s counterparty changes its status such that it would be subject to “stricter”
margin rules, the CFTC Covered Swap Entity must comply with the “stricter” margin requirements for any
uncleared swap entered into with that counterparty after the status change.84
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VII. Cross-Border Application
The CFTC Proposed Cross-Border Margin Rules were published on June 29, 2015 and, if finalized, would
subject all uncleared swap transactions entered into by US CFTC Covered Swap Entities to the CFTC
Margin Rules, as well as certain uncleared swaps entered into by non-US CFTC Covered Swap Entities
where the risk flows back to a US entity.85 Specifically, in the case of an uncleared swap transaction in
which a non-US CFTC Covered Swap Entity is facing a counterparty that is a (i) non-US person whose
relevant swap obligations are guaranteed by a US person, (ii) US branch of a foreign bank, (iii) foreign
branch of a US CFTC Covered Swap Entity or (iv) non-US CFTC Covered Swap Entity whose financials
are consolidated in the annual report of a US ultimate parent, such swap would be subject to the CFTC
Margin Rules, though substituted compliance would be available in certain instances. The comment
period for the CFTC Proposed Cross-Border Margin Rules closed on September 14, 2015, and the CFTC
has indicated that it anticipates finalizing such cross-border rules in the near future,86 which should close
the loop on the cross-border application of the CFTC Margin Rules.
For further discussion of the CFTC Proposed Cross-Border Margin Rules, please refer to our Client Alert:
CFTC Proposes Cross-Border Application of Margin Requirements for Uncleared Swaps.
+1.212.906.1269
+1.212.906.4630
Latham & Watkins February 19, 2016 | Number 1928 | Page 18
Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The
information contained in this publication should not be construed as legal advice. Should further analysis or
explanation of the subject matter be required, please contact the lawyer with whom you normally consult. The
invitation to contact is not a solicitation for legal work under the laws of any jurisdiction in which Latham lawyers are
not authorized to practice. A complete list of Latham’s Client Alerts can be found at www.lw.com. If you wish to
http://events.lw.com/reaction/subscriptionpage.html to subscribe to the firm’s global client mailings program.
1 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed. Reg. 636 (Jan. 6, 2016) (to
be codified at 17 C.F.R. pts. 23, 140), available at https://www.gpo.gov/fdsys/pkg/FR-2016-01-06/pdf/2015-32320.pdf (CFTC
Margin Rules).
2 The term “Prudential Regulators” as used herein means the Office of the Comptroller of the Currency (Department of Treasury)
(the OCC), the Board of Governors of the Federal Reserve System (the FRB), the Federal Deposit Insurance Corporation (the
FDIC), the Farm Credit Administration (the FCA) and the Federal Housing Finance Agency (the FHFA). 7 U.S.C. § 1a(39).
3 Margin and Capital Requirements for Covered Swap Entities, 80 Fed. Reg. 74840 (Nov. 30, 2015) (to be codified at 12 C.F.R.
pts. 45, 237, 349, 624, 1221), available at https://www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.pdf (PR Margin
Rules). For further discussion, please refer to our Client Alert regarding the PR Margin Rules. Prudential Regulators Are First to
Finalize Uncleared Swap Margin Rules, Client Alert No. 1896 (Nov. 20, 2015), available at
https://www.lw.com/thoughtLeadership/LW-prudential-regulators-finalize-uncleared-swap-margin-rules.
4 7 U.S.C. § 6s(e)(3)(D)(ii); see also 15 U.S.C. § 8302(a)(1). In accordance with a 2012 determination by the Secretary of the
Treasury, the following transactions will not be subject to the CFTC Margin Rules: (i) FX swaps; (ii) FX forwards; and (iii) the
fixed, physically-settled FX transactions associated with the exchange of principal in cross-currency swaps. See CFTC Margin
Rules, 81 Fed. Reg. at 638; Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity
Exchange Act, 77 Fed. Reg. 69694 (Nov. 20, 2012), available at https://www.gpo.gov/fdsys/pkg/FR-2012-11-20/pdf/2012-
28319.pdf.
5 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 Fed. Reg. 23732 (proposed April
28, 2011) (proposing amendment of 17 C.F.R. pt. 23), available at http://www.gpo.gov/fdsys/pkg/FR-2011-04-28/pdf/2011-
9598.pdf. For further discussion, please refer to our publication regarding the CFTC’s regulatory proposals to implement Title VII
of the Dodd-Frank Act. Commodity Futures Trading Commission “Pro Forma” Proposed Rules July 2011 (July 6, 2011),
available at http://www.lw.com/thoughtLeadership/4233-CommodityFuturesTradingCommission-ProForma-
ProposedRulesJuly2011.
6 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 Fed. Reg. 59897 (proposed Oct.
3, 2014) (proposing amendment of 17 C.F.R. pt. 23), available at http://www.gpo.gov/fdsys/pkg/FR-2014-10-03/pdf/2014-
22962.pdf (CFTC Reproposed Margin Rules). For further discussion, please refer to our Client Alert on the CFTC Reproposed
Margin Rules. UPDATE: Swap Dealers Will Face Significant Challenges from Reproposed Margin Rules for Uncleared Swaps,
Client Alert No. 1792 (Jan. 26, 2015), available at http://www.lw.com/thoughtLeadership/lw-dealers-margin-rules-for-uncleared-
7 Margin Requirements for Non-Centrally Cleared Derivatives (updated March 2015), available at
http://www.bis.org/bcbs/publ/d317.pdf (International Standards).
8 Draft Regulatory Technical Standards on Risk-Mitigation Techniques for OTC-Derivative Contracts Not Cleared by a CCP Under
Article 11(15) of Regulation (EU) No 648/2012 (proposed April 14, 2014), available at
https://www.eba.europa.eu/documents/10180/655149/JC+CP+2014+03+%28CP+on+risk+mitigation+for+OTC+derivatives%29.
pdf; Second Consultation Paper: Draft Regulatory Technical Standards on Risk-Mitigation Techniques for OTC-Derivative
Contracts Not Cleared by a CCP Under Article 11(15) of Regulation (EU) No 648/2012 (proposed June 10, 2015), available at
https://www.eba.europa.eu/documents/10180/1106136/JC-CP-2015-
002+JC+CP+on+Risk+Management+Techniques+for+OTC+derivatives+.pdf (EMIR Proposed Margin Rules).
9 See International Standards.
10 See CFTC Margin Rules, 81 Fed. Reg. at 637.
11 The CFTC Margin Rules define “Financial End-User” to include the following counterparties:
• Bank holding companies (or Margin Affiliates thereof)
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• Certain US intermediate holding companies
• Certain nonbank financial institutions supervised by the FRB
• Depository institutions
• Certain institutions functioning solely in a trust or fiduciary capacity
• Industrial loan companies, industrial banks or similar institutions
• State-licensed or registered money services businesses
• Entities regulated by the FHFA
• Institutions regulated by the FCA
• Brokers or dealers
• Registered investment companies, certain securitization vehicles or private real estate investment entities
• Registered security-based swap dealers or major security-based swap participants
• Private funds relying on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act; mortgage-related funds
(including some REITs) relying on Section 3(c)(5)(C) of the Investment Company Act; and issuers of asset-backed
securities relying on Rule 3a-7 under the Investment Company Act
• Commodity pools, commodity pool operators or commodity trading advisors
• Floor brokers, floor traders or introducing brokers
• Insurance companies or other entities primarily engaged in writing insurance or reinsuring risks underwritten by insurance
companies or that are otherwise subject to supervision as an insurance company by an insurance regulator
• Entities, persons or arrangements that are, or hold themselves out as being, an entity, person or arrangement that raises
money from investors, accepts money from clients or uses its own money primarily for purposes of investing or trading or
facilitating the investing or trading in loans, securities, swaps, funds or other assets
• Foreign entities that would be considered Financial End-Users or Swap Entities if they were organized in the United
The term Financial End-User expressly excludes any counterparty that is:
• An entity that is exempt from the definition of “financial entity” under the Commodity Exchange Act
• An affiliate that qualifies for the inter-affiliate exemption from clearing
• An eligible treasury affiliate expressly exempted from the CFTC Margin Rules (i.e., one qualifying under the Interim Final
Rule) — note that the PR Margin Rules do not expressly exclude eligible treasury affiliates from the “Financial End-User”
definition therein
17 C.F.R. 23.151; see 12 U.S.C. §§ 1752(1), (6), 1841(c)(2)(D), (c)(2)(H), 2001 et seq., 4502(20), 5323; 15 U.S.C. §§ 78a et
seq., 80a-1 et seq., 80a-3, 80a-53(a), 80b-2(a); 29 U.S.C. § 1002; 12 C.F.R. § 252.153; 17 C.F.R. § 270.3a-7.
12 “Initial margin” is defined in the CFTC Margin Rules to mean collateral as calculated in accordance with a permitted IM margin
model that is posted or collected in connection with one or more uncleared swaps. 17 C.F.R. § 23.151.
13 “Variation margin” is defined in the CFTC Margin Rules to mean collateral provided by a party to its counterparty to meet the
performance of its obligation under one or more uncleared swaps between the parties as a result of a change in value of such
obligations since the trade was executed or the last time such collateral was provided. 17 C.F.R. § 23.151.
14 See 7 U.S.C. § 1a(47).
15 See 7 U.S.C. § 1a(15).
16 17 C.F.R. § 23.151; see 7 U.S.C. §§ 7a-1(a), (h).
17 See CFTC Margin Rules, 81 Fed. Reg. at 638.
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18 Terrorism Risk Insurance Program Reauthorization Act of 2015, Pub. L. No. 114-1 (2015) (TRIPRA).
19 The “treasury affiliate acting as agent” exception to the CFTC’s clearing mandate does not apply to a person that is a swap
dealer, security-based swap dealer, major swap participant, major security-based swap participant, an issuer that would be an
investment company as defined in Section 3 of the Investment Company Act of 1940 but for Section 3(c)(1) or (7) of that Act, a
commodity pool or a bank holding company with over US$50 billion in consolidated assets. See CFTC Margin Rules, 81 Fed.
Reg. at 679, n. 337; 7 U.S.C. § 2(h)(7)(D); 15 U.S.C. § 78c-3(g)(4); see also 15 U.S.C. § 80a-3.
20 Section 302 of TRIPRA specifically provides that the CFTC Margin Rules shall not apply to a swap in which a counterparty: (i)
qualifies for an exemption under Section 2(h)(7)(A) of the Commodity Exchange Act; (ii) qualifies for an exemption issued under
Section 4(c)(1) of the CEA for cooperative entities as defined in such exemption; or (iii) satisfies the criteria in Section 2(h)(7)(D)
of the CEA. TRIPRA at § 302; see CFTC Margin Rules, 81 Fed. Reg. at 637-638, 678-679.
21 The term “captive finance company” describes an entity whose primary business is providing financing and uses derivatives for
the purposes of hedging underlying commercial risks relating to interest rate and FX exposures, 90% or more of which arise
from financing that facilitates the purchase or lease of products, 90% or more of which are manufactured by the parent company
or another subsidiary of the parent company. See CFTC Margin Rules, 81 Fed. Reg. at 679; 7 U.S.C. § 2(h)(7)(C)(iii).
22 17 C.F.R. § 23.150(b); see CFTC Margin Rules, 81 Fed. Reg. at 637-638, 678-679; TRIPRA at § 303.
23 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants—Cross-Border Application of the
Margin Requirements, 80 Fed. Reg. 41376 (proposed July 14, 2015) (proposing amendment of 17 C.F.R. pt. 23), available at
https://www.gpo.gov/fdsys/pkg/FR-2015-07-14/pdf/2015-16718.pdf (CFTC Proposed Cross-Border Margin Rules). For further
discussion, please refer to our Client Alert regarding the CFTC Proposed Cross-Border Margin Rules. CFTC Proposes Cross-
Border Application of Margin Requirements for Uncleared Swaps, Client Alert No. 1865 (Aug. 13, 2015), available at
https://www.lw.com/thoughtLeadership/lw-CFTC-Cross-Border-Application-Uncleared-Swaps.
24 See Statement of Chairman Timothy Massad, Final Rule on Margin for Uncleared Swaps (Dec. 16, 2015), available at
http://www.cftc.gov/PressRoom/SpeechesTestimony/massadstatement121615d.
25 17 C.F.R. § 23.153(b).
26 17 C.F.R. §§ 23.151, 23.152(b)(3), 23.153(c); see CFTC Margin Rules, 81 Fed. Reg. at 652-653.
27 17 C.F.R. §§ 23.152(a), 23.154.
28 See 17 C.F.R. §§ 23.152(b), 23.154.
29 See 7 U.S.C. § 1a(24).
30 See 7 U.S.C. § 1a(25).
31 See International Standards at 10, 25.
32 17 C.F.R. § 23.151; see 15 U.S.C. §§ 78c-3(g)(1), (4).
33 CFTC Margin Rules, 81 Fed. Reg. at 645.
34 See 17 C.F.R. § 23.161(c); CFTC Margin Rules, 81 Fed. Reg. at 645-646, 676-677.
35 See CFTC Margin Rules, 81 Fed. Reg. at 652-653, n. 154.
36 The use of the term “Margin Affiliate” rather than “affiliate” was presumably meant to avoid confusion of the use of the term
“affiliate” in other CFTC regulations.
37 CFTC Margin Rules, 81 Fed. Reg. at 647.
38 CFTC Margin Rules, 81 Fed. Reg. at 652.
39 17 C.F.R. § 23.154(c)(1).
40 “Cross-currency swap” is defined in the CFTC Margin Rules to mean a swap in which one party exchanges with another party
principal and interest rate payments in one currency for principal and interest rate payments in another currency, and the
exchange of principal occurs on the date the swap is entered into, with a reversal of the exchange of principal at a later date that
is agreed upon when the swap is entered into. 17 C.F.R. § 23.151.
41 “Gross IM” is equal to the sum of the product of each uncleared swap’s effective notional amount and the gross IM requirement
for all uncleared swaps subject to the Eligible Master Netting Agreement; “Net-to-Gross Ratio” is the ratio of the net current
replacement cost to the gross current replacement cost, where “net current replacement cost” equals the total replacement cost
for all uncleared swaps subject to the Eligible Master Netting Agreement and “gross current replacement cost” equals the sum of
the replacement cost for each uncleared swap subject to the Eligible Master Netting Agreement for which the cost is positive
(except if the gross current replacement cost is zero, the Net-to-Gross Ratio should be set to 1.0). 17 C.F.R. § 23.154(c)(2).
42 17 C.F.R. § 23.154(b); see CFTC Margin Rules, 81 Fed. Reg. at 653.
43 See 17 C.F.R. § 23.154(b)(2)(i); see CFTC Margin Rules, 81 Fed. Reg. at 656.
44 17 C.F.R. § 23.154(b)(2)(v); see CFTC Margin Rules, 81 Fed. Reg. at 657.
45 17 C.F.R. § 23.154(b)(2)(iv).
46 17 C.F.R. §§ 23.154(b)(2)-(5).
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47 17 C.F.R. § 23.154(b)(2)(iii); see CFTC Margin Rules, 81 Fed. Reg. at 657.
48 17 C.F.R. § 23.154(b)(2)(v); see CFTC Margin Rules, 81 Fed. Reg. at 657-658.
49 See CFTC Margin Rules, 80 Fed. Reg. at 654-658.
50 See PR Margin Rules, 80 Fed. Reg. at 74887, 12 C.F.R. § _.11(b)(1).
51 17 C.F.R. § 23.153(a)-(b).
52 In the case of an uncleared swap that has a positive or negative value to a CFTC Covered Swap Entity on the date it is entered
into, “VM amount” means such positive or negative value, plus any cumulative mark-to-market change in value to the CFTC
Covered Swap Entity, less the value of all VM previously collected, plus the value of all VM previously posted with respect to
such uncleared swap. 17 C.F.R. § 23.151; see also PR Margin Rules, 12 C.F.R. § __.2.
53 17 C.F.R. § 23.155(a)(1); see CFTC Margin Rules, 81 Fed. Reg. at 665; see also PR Margin Rules, 80 Fed. Reg. at 101-103;
12 C.F.R. §§ __.2, __.3(c), __.4(b).
54 17 C.F.R. § 23.159(b).
55 See EMIR Proposed Margin Rules; see also International Standards at 21; CFTC Margin Rules, 81 Fed. Reg. at 674.
56 Note that these conditions largely mirror the requirements for qualifying for the CFTC’s inter-affiliate exemption from the clearing
mandate. See CFTC Margin Rules, 81 Fed. Reg. at 673; 17 C.F.R. § 50.52; Clearing Exemption for Swaps Between Certain
Affiliated Entities, 78 Fed. Reg. 21750, 21760 (April 11, 2013) (amending 17 C.F.R. pt. 50), available at
https://www.gpo.gov/fdsys/pkg/FR-2013-04-11/pdf/2013-07970.pdf.
57 17 C.F.R. § 23.159(c); see CFTC Margin Rules, 81 Fed. Reg. at 673-674.
58 17 C.F.R. § 23.159(a); see CFTC Margin Rules, 81 Fed. Reg. at 673; see also PR Margin Rules, 80 Fed. Reg. at 74888-74889.
59 17 C.F.R. § 23.156(c).
60 “Major currencies” is defined in the CFTC Margin Rules to mean (i) the United States Dollar (USD), (ii) Canadian Dollar (CAD),
(iii) Euro (EUR), (iv) United Kingdom Pound (GBP), (v) Japanese Yen (JPY), (vi) Swiss Franc, (vii) New Zealand Dollar (NZD),
(viii) Australian Dollar (AUD), (ix) Swedish Kronor (SEK), (x) Danish Kroner (DKK), (xi) Norwegian Krone (NOK) and any other
currency designated by the CFTC. 17 C.F.R. § 23.151.
61 “Currency of settlement” is defined in the CFTC Margin Rules to mean a currency in which a party has agreed to discharge
payment obligations related to an uncleared swap or a group of uncleared swaps subject to a master netting agreement at the
regularly occurring dates on which such payments are due in the ordinary course. 17 C.F.R. § 23.151.
62 The CFTC Margin Rules define “sovereign entity” to mean a central government (including the US government) or an agency,
department, ministry or central bank of a central government. 17 C.F.R. § 23.151.
63 The CFTC Margin Rules define “US government-sponsored enterprise” to mean an entity established or chartered by the US
government to serve public purposes specified by federal statute but whose debt obligations are not explicitly guaranteed by the
full faith and credit of the US government. 17 C.F.R. § 23.151.
64 The CFTC Margin Rules define “multilateral development bank” to include (i) the International Bank for Reconstruction and
Development, (ii) the Multilateral Investment Guarantee Agency, (iii) the International Finance Corporation, (iv) the Inter-
American Development Bank, (v) the Asian Development Bank, (vi) the African Development Bank, (vii) the European Bank for
Reconstruction and Development, (viii) the European Investment Bank, (ix) the European Investment Fund, (x) the Nordic
Investment Bank, (xi) the Caribbean Investment Bank, (xii) the Islamic Development Bank, (xiii) the Council of Europe
Development Bank and (xiv) any other entity that provides financing for national or regional development in which the US
government is a shareholder or contributing member or which the CFTC determines poses comparable credit risk. 17 C.F.R. §
23.151.
65 17 C.F.R. § 23.156(a)(1).
66 17 C.F.R. § 23.156(b)(1).
67 17 C.F.R. § 23.156(d); see CFTC Margin Rules, 81 Fed. Reg. at 667.
68 17 C.F.R. § 23.156(a)(2).
69 17 C.F.R. §§ 23.157(a)-(b).
70 See CFTC Margin Rules, 81 Fed. Reg. at 670-671; see also PR Margin Rules, 80 Fed. Reg. at 74873.
71 17 C.F.R. § 23.157(c).
72 17 C.F.R. § 23.159(a)(3).
73 17 C.F.R. §§ 23.156(a)(3), (b)(2).
74 17 C.F.R. §§ 23.152(c), 23.153(d).
75 17 C.F.R. § 23.151; see CFTC Margin Rules, 81 Fed. Reg. at 655-656; see also 12 U.S.C. §§ 1811 et seq., 2183, 2279cc,
4617, 5381 et seq.
76 17 C.F.R. §§ 23.152(c), 153(d); see CFTC Margin Rules, 81 Fed. Reg. at 676-677.
77 See CFTC Margin Rules, 81 Fed. Reg. at 675; see also PR Margin Rules, 80 Fed. Reg. at 74851.
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78 17 C.F.R. § 23.158.
79 See CFTC Margin Rules, 81 Fed. Reg. at 672.
80 17 C.F.R. §§ 23.154(b)(6)-(7).
81 17 C.F.R. § 23.161.
82 CFTC Margin Rules, 81 Fed. Reg. at 676.
83 17 C.F.R. §§ 23.161(a)(1)(iii), (a)(3)(iii), (a)(4)(iii), (a)(5)(iii); see 15 U.S.C. §§ 78c-3(g)(1), (4), 78o-10(e).
84 17 C.F.R. § 23.161(c).
85 See CFTC Proposed Cross-Border Margin Rules.
86 See Statement of Chairman Timothy Massad, Final Rule on Margin for Uncleared Swaps (Dec. 16, 2015), available at
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