Margin and Capital Requirements for Covered Swap Entities: Interim Final Rule

Summary

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency (collectively, the agencies) published an interim final rule in the Federal Register to amend their regulations regarding the minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants (the Swap Margin Rule). The OCC’s Swap Margin Rule applies to certain national banks, federal savings associations, and federal branches and agencies of foreign banking organizations. This interim final rule is intended to address a covered swap entity’s ability to service its cross-border clients in the event that the United Kingdom (U.K.) withdraws from the European Union (E.U.) without a negotiated withdrawal agreement.

The agencies will accept comments on this interim final rule through April 18, 2019.

Highlights

The Swap Margin Rule was issued in 2015 with a phased compliance schedule stretching from 2016 to 2020.  The Swap Margin Rule’s requirements generally apply only to a non-cleared swap entered into on or after the applicable compliance date. A non-cleared swap entered into prior to an entity’s applicable compliance date is grandfathered by this regulatory provision and is generally not subject to the margin requirements in the Swap Margin Rule (legacy swap). A legacy swap may become subject to the Swap Margin Rule if is later amended or novated on or after the applicable compliance date.

There are currently financial services firms located within the U.K. that conduct swap dealing activities subject to the Swap Margin Rule. The government of the U.K. has provided formal notice of its intention to withdraw from the E.U. There is an ongoing risk that this withdrawal—also known as Brexit—may take place without a negotiated agreement authorizing financial services firms located in the U.K. to continue providing full-scope financial services in the E.U. In that event, numerous financial services firms in the U.K. may begin to transfer their existing swap portfolios that face counterparties located in the E.U. over to a related establishment located within the E.U. or the U.S. 

The interim final rule states that such transfers, if carried out in accordance with the conditions of the rule, will not trigger application of the Swap Margin Rule to legacy swaps transferred out of the U.K. In this way, the interim final rule preserves the status quo for legacy swaps for a covered swap entity in the event of a Brexit withdrawal without a negotiated agreement. The interim final rule applies regardless of whether that covered swap entity is the swap counterparty directly involved in the transfer out of the U.K. or the counterparty on the other side of the swap.

Further Information

Please contact Chris McBride, Director for Market Risk, Treasury and Market Risk Policy, at (202) 649-6360, or Allison Hester-Haddad, Counsel, Chief Counsel’s Office, at (202) 649-5490.

Jonathan V. Gould
Senior Deputy Comptroller and Chief Counsel

Related Link

• “Margin and Capital Requirements for Covered Swap Entities” (PDF)