Margin, Capital Requirements for Uncleared Swaps Finalized; Small Banks Exempt

The FDIC, OCC and Farm Credit Administration today approved a final rule that requires prudentially-regulated swap dealers and participants to put up capital and exchange initial margin and variation margin from counterparties to swaps not cleared through a central counterparty. The Federal Reserve and Federal Housing Finance Agency are expected to approve the joint rule shortly.

To protect the use of swaps by end-users and community banks for sound risk management practices — as ABA has advocated — the agencies issued an additional interim rule clarifying that the margin and capital requirements do not apply to swaps entered into for hedging purposes by commercial end users and banks with less than $10 billion in assets. The rule otherwise applies initial margin and variation margin requirements to swaps between prudentially regulated swap dealers and financial end users with a “material swaps exposure” of more than $8 billion in a three-month period of the previous calendar year. Community banks that enter into non-cleared swaps with their commercial customers will not be required to apply the final rule’s requirements for initial margin or variation margin to those swaps.

The agencies’ final rule determines what is eligible collateral and establishes a schedule whereby initial margin is phased in from Sept. 1, 2016, to Sept. 1, 2020, while variation margin is phased in from Sept. 1, 2016 to March 1, 2017. The rule comes after capital and margin requirements for swap entities were originally proposed in April 2011 and then re-proposed in Sept. 2014. Staff with ABA’s Center for Bank Derivatives Policy are currently reviewing the final rule and interim final rule to assess their impact on members. Comments on the interim rule are due Jan. 31, 2016. For more information, contact ABA’s Jason Shafer.