Agencies Clarify Capital Treatment of Centrally Cleared Derivatives Contracts

The federal regulatory agencies today issued joint guidance on the regulatory capital treatment of certain centrally cleared derivative contracts in light of recent changes to the rulebooks of certain central counterparties. The guidance specifically addresses the regulatory capital treatment of variation margin requirements for such centrally cleared derivative contracts and will result in more beneficial regulatory capital treatment for centrally cleared derivative contracts.

Previously, variation margin transferred to cover the exposure that arises from marking such centrally cleared derivatives contracts to market price was considered collateral pledged by one party to the other, with title to the collateral remaining with the posting party. However, under the central counterparties’ revised rulebooks, such variation margin for centrally cleared derivative contracts is considered a settlement payment for the exposure, with title to the payment transferring to the receiving party.

Under the guidance, if banks, after conducting accounting and legal analysis, determine that variation margin payments may be considered settlement of outstanding exposure under the regulatory capital rules, and that the payer of the variation margin has relinquished all legal claims to the variation margin, then variation margin would no longer be considered collateral pledged by one party to the other. ABA has long advocated for more risk-based bank regulatory capital treatment for centrally cleared derivative contracts.  For more information, contact ABA’s Ananda Radhakrishnan.