Agencies Finalize Rule to Amend Initial Margin Requirements for Inter-Affiliate Swaps

Five federal financial regulatory agencies today finalized a rule that removes the requirement for covered swap entities to collect initial margin from affiliates—an American Bankers Association-supported change that fosters systemic risk mitigation and allows swap entities to better manage liquidity. “Removing the margin requirement for banks and their affiliates recognizes that inter-affiliate swaps help financial institutions centralize risk management, which promotes increased safety and soundness,” said ABA President and CEO Rob Nichols.

Under the final rule, inter-affiliate swaps remain subject to variation margin requirements, and initial margin is required if a bank’s total exposure to all affiliates exceeds 15 percent of its Tier 1 regulatory capital. The 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 changed from Libor to an alternate reference rate.

To facilitate compliance for smaller covered swap entities, the final rule includes a sixth compliance phase for inter-affiliate margin requirements for counterparties with average daily aggregate notional amounts from $8 billion to $50 billion. “Extending the compliance time for Phases 5 and 6 of the Swaps Margin Rule is a welcome step as it provides market participants with more time to comply,” Nichols added.

The agencies also issued an interim final rule extending the compliance date of the initial margin requirements to Sept. 1, 2021, for swap entities and counterparties with average annual notional swap portfolios of $50 billion to $750 billion, and to Sept. 1, 2022, for counterparties with average annual notional swap portfolios of $8 billion to $50 billion. The IFR takes effect 61 days after it is published in the Federal Register, and comments will be accepted for 60 days after its publication.