The American Bankers Association joined several industry groups in a comment letter to the financial regulatory agencies this week supporting a long-awaited change to swap margin rules that would remove the requirement for covered swap entities to collect initial margin from affiliates. The groups noted that the exemption would foster systemic risk mitigation and allow swap entities to better manage liquidity.
In addition, the proposed rule will also facilitate an orderly transition away from the London Interbank Offered Rate, which is frequently used in derivatives contracts, by ensuring that legacy interest swaps do not lose their legacy status if the rate is change from Libor to an alternate reference rate. It would also specify that IM trading documentation must be in place only at the time a swap entity is required to collect or post initial margin with respect to a counterparty.
Finally, rule would also add a sixth compliance phase for inter-affiliate margin requirements for counterparties with average daily aggregate notional amounts from $8 billion to $50 billion, which the groups noted would provide regulators with additional time to consider additional modifications, particularly for smaller counterparties that do not pose systemic risk.