Each of these actions is summarized below.
Uncleared Swaps Margin
Prudential Regulators Final Rules: Amendments to Uncleared Swap Margin Rules
The Prudential Regulators jointly adopted a final rule that amends certain aspects of their uncleared swap margin rules to, among other things,
- permit swaps entered into prior to an applicable compliance date (i.e., legacy swaps) to be amended to replace an interbank offered rate (IBOR) or other discontinued rate without triggering margin requirements
- permit legacy swaps to be amended in connection with portfolio compression exercises, notional reductions and certain technical changes without triggering margin requirements
- provide an exemption from initial margin (IM) requirements for swaps between affiliates
- introduce an additional, final phase-in compliance date for IM requirements covering counterparties with the smallest swap portfolios subject to the IM rules
Simultaneously, the Prudential Regulators jointly adopted, and are requesting comment on, an interim final rule that would extend the compliance date of the IM requirements under the Prudential Regulators’ uncleared swap margin rules to
- September 1, 2021, for counterparties with average annual notional swap portfolios of $50 billion to $750 billion
- September 1, 2022, for counterparties with average annual notional swap portfolios of $8 billion to $50 billion3
These extended compliance dates are consistent with the recommendation of the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) issued in April to address the impact of the COVID-19 pandemic on the market.4
CFTC Proposed Rule: “Phase VI” Compliance Date Extension
In response to the COVID-19 pandemic and consistent with both the recommendation of BCBS/IOSCO and the interim final rule of the Prudential Regulators discussed above, the CFTC unanimously approved a rule proposal that would delay the final phase-in compliance date for IM requirements under the CFTC’s uncleared swap margin rules (known as the “Phase VI” compliance date) to September 1, 2022.5 This compliance date would apply to counterparties with average annual notional swap portfolios of $8 billion to $50 billion. The CFTC separately issued an interim final rule in May delaying the “Phase V” compliance date to September 1, 2021, for counterparties with average annual notional swap portfolios of $50 billion to $750 billion.
The proposed rule will have a 60-day comment period following publication in the Federal Register, following which the CFTC is expected to adopt a final rule.
CFTC Swaps Rulemakings
Final Rule: Post-Trade Name Give-Up on Swap Execution Facilities
The CFTC approved a final rule that will prohibit the practice of “post-trade name give-up” by swap execution facilities (SEFs) for swaps that are executed, prearranged or prenegotiated anonymously on or pursuant to the rules of a SEF and intended to be cleared.6 Post-trade name give-up is the practice that some SEFs employ of disclosing or causing to be disclosed the identity of each swap counterparty to the other after a swap transaction has been matched anonymously on a SEF and submitted for clearing to a derivatives clearing organization. The practice has been described as a vestige of the pre-Dodd-Frank era, when few swaps were centrally cleared and disclosure of a counterparty’s identity was necessary to manage credit risk.7 The practice has been criticized for, among other things, acting as an obstacle to broad and diverse participation on SEFs.8
The final rule, which followed the CFTC’s 2018 request for comment and 2019 rule proposal,9 requires SEFs to establish and enforce rules prohibiting any person from disclosing the identity of counterparties to swaps that are executed anonymously on a SEF and intended to be cleared. The prohibition will not apply to uncleared swaps or with respect to any method of execution whereby the identity of a counterparty is disclosed prior to execution (such as a disclosed request for quote system). In addition, the final rule provides an exception for package transactions that include at least one component transaction that is an uncleared swap or a nonswap instrument, such as U.S. Treasury swap spreads.
Compliance with the final rule will be phased in to give SEFs time to modify their operations. The compliance deadline for swaps subject to the trade execution requirement (so-called “MAT” swaps) is November 1, 2020, and the compliance deadline for swaps not subject to the trade execution requirement is July 5, 2021.
Final Rule: Inter-Affiliate Clearing Exemption — Codification of Alternative Compliance Frameworks
The CFTC approved a final rule that will amend the so-called “outward-facing swaps condition” of the inter-affiliate exemption to mandatory swap clearing.10 The outward-facing swaps condition generally requires counterparties relying on the inter-affiliate clearing exemption to clear all swaps entered into with unaffiliated counterparties to the extent those swaps are of a type or class required to be cleared under the CFTC’s regulations, either in accordance with the requirements of the Commodity Exchange Act or the clearing regime of a foreign jurisdiction that has been determined by the CFTC to be comparable and comprehensive. This condition is an anti-evasionary measure designed to prevent swap market participants from using the inter-affiliate exemption to circumvent clearing by transacting market-facing swaps through non-U.S. affiliates with counterparties in jurisdictions that do not have mandatory clearing regimes comparable to the CFTC’s.
The rule codifies existing practice and CFTC no-action relief11 by making permanent two alternative compliance frameworks originally introduced in 2013 that permit eligible affiliate counterparties relying on the inter-affiliate clearing exemption to pay and collect variation margin on uncleared swaps instead of complying with the outward-facing swaps condition. The final rule is intended to make the inter-affiliate clearing exemption workable for cross-border corporate groups in the absence of foreign clearing regimes determined to be comparable to CFTC requirements.
The final rule will become effective 30 days after publication in the Federal Register.
CFTC Regulation of Automated Trading
The CFTC took two actions on June 25 that represent a substantial change in the CFTC’s proposed approach to regulating automated trading. Neither action was taken unanimously.
Withdrawal of the Proposed Rule and Supplemental Proposal for Regulation AT
First, the CFTC approved the withdrawal its December 2015 notice of proposed rulemaking, Regulation AT,12 and its related November 2016 supplemental notice of proposed rulemaking13 (collectively, the Regulation AT NPRM).14 The withdrawal was approved over the objection of the two Democratic Commissioners. The decision to withdraw the Regulation AT NPRM was made in light of the feedback the CFTC received from market participants. In particular, the CFTC rejected the prescriptive approach taken by Regulation AT and emphasized the benefits of the principle-based approach used in the proposed Electronic Trading Risk Principles (described below).
CFTC Proposed Rule: Electronic Trading Risk Principles
The CFTC also approved a proposed rulemaking to adopt amendments to Part 38 of the CFTC’s regulations to address the prevention, detection and mitigation of market disruptions and system anomalies associated with the entry of electronic orders into the electronic trading platforms of designated contract markets (DCMs).15 The proposal is intended to ensure that DCMs take reasonable measures to address the risk of market disruption as technology and markets evolve.
The proposal, which takes a principles-based approach, is based largely on existing DCM and industry practices and draws from comments provided to the CFTC in response to now-withdrawn Regulation AT NPRM. The CFTC noted that DCMs have already developed mitigation measures in response to actual or potential disruption to their markets and in response to existing rules, and therefore DCMs may not be required to put in place any new measures under the proposed rules.
Comments for the proposed rule must be received on or before the later of 60 days from the date of the CFTC vote and 30 days following publication of the proposed rule in the Federal Register.
1The five U.S. prudential regulators are (i) the Office of the Comptroller of the Currency, (ii) the Board of Governors of the Federal Reserve System, (iii) the Federal Deposit Insurance Corporation, (iv) the Farm Credit Administration and (v) the Federal Housing Finance Agency (collectively, the Prudential Regulators).
2The CFTC and certain of the Prudential Regulators, together with the Securities and Exchange Commission, on June 25 also finalized rules modifying regulations implementing the Volcker Rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds. That rulemaking will be addressed in a separate Sidley Update.
3See Sidley Derivatives Update, Initial Margin Requirements on the Horizon: FAQs for Buy Side Firms (July 31, 2018) (discussing the IM rules and requisite average notional calculations), available at https://www.sidley.com/en/insights/newsupdates/2018/07/initial-margin-requirements-on-the-horizon.
4See Basel Committee and IOSCO Announce Deferral of Final Implementation Phases of the Margin Requirements for Non-centrally Cleared Derivatives, available at: https://www.iosco.org/news/pdf/IOSCONEWS560.pdf.
5Voting Draft: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, Notice of Proposed Rulemaking, available at https://www.cftc.gov/media/4071/votingdraft062520d/download.
6Voting Draft: Post-Trade Name Give-Up on Swap Execution Facilities, Final Rule, available at https://www.cftc.gov/media/4066/votingdraft062520e/download.
7See Joint Statement of Chairman Heath P. Tarbert, Commissioner Rostin Behnam, and Commissioner Dan M. Berkovitz in Support of Final Rule Restricting Post-Trade Name Give-Up (June 25, 2020), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertbehnamberkovitzjointstatement062520.
9See Sidley Derivatives Update, CFTC Proposes to Prohibit Practice of “Post-Trade Name Give-Up” on Swap Execution Facilities for Certain Cleared Swaps (January 10, 2020), available at https://www.sidley.com/en/insights/newsupdates/2020/01/cftc-proposes-to-prohibit-practice.
10Voting Draft: Exemption from the Swap Clearing Requirement for Certain Affiliated Entities – Alternative Compliance Frameworks for Anti-Evasionary Measures, available at https://www.cftc.gov/media/4076/votingdraft062520f/download.
11See CFTC Letter No. 17-66, No-Action Relief from Certain Provisions of the Outward-Facing Swaps Condition in the Inter-Affiliate Exemption from the Clearing Requirement (December 14, 2017), available at https://www.cftc.gov/csl/17-66/download.
12Regulation Automated Trading, 80 FR 78824 (December 17, 2015), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2015-30533a.pdf.
13Regulation Automated Trading, 81 FR 85334 (November 25, 2016), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrfederalregister/documents/file/2016-27250c.pdf.
14Voting Draft: Regulation Automated Trading, Withdrawal of Proposed Rulemakings, available at https://www.cftc.gov/media/4061/votingdraft062520c/download.
15Voting Draft: Electronic Trading Risk Principles, Notice of Proposed Rulemaking, available at https://www.cftc.gov/media/4056/votingdraft062520b/download.
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