The Prudential Regulators and the CFTC release final initial and variation margin rules for uncleared swaps and security-based swaps
On October, 22 2015, the Federal Deposit Insurance Corporation, the Department of the Treasury (the Office of the Comptroller of the Currency), the Board of Governors of the Federal Reserve System, the Farm Credit Administration and the Federal Housing Finance Agency (collectively, the "Prudential Regulators") released final rules and accompanying interpretive guidance setting out the Prudential Regulators' initial and variation margin requirements applicable to uncleared swaps and security-based swaps. Subsequently, on December 16, 2015, the Commodity Futures Trading Commission (the "CFTC") released final rules and accompanying interpretive guidance setting out the CFTC's initial and variation margin requirements applicable to uncleared swaps.
The Prudential Regulators' final rules apply to registered swap dealers, major swap participants, security-based swap dealers and major security-based swap participants that are regulated by a Prudential Regulator. The CFTC's final rules apply to swap dealers and major swap participants that are not regulated by a Prudential Regulator.
The finalization of these rules substantially implements one of the key regulatory reforms contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act by requiring swap dealers, security-based swap dealers, major swap participants and major security-based swap participants that enter into uncleared swaps and security-based swaps to exchange both initial margin and variation margin with certain of their counterparties with the aim of protecting such entities from the risks arising from such transactions and to also generally cushion the US financial system at times of systemic stress.
This Client Alert outlines the important concepts and consequences of these final rules.
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