The CFTC proposed changes to its uncleared swap margin requirements. The proposed amendments would prevent unintentional regulatory burdens that may result from rules recently adopted by prudential regulators with regard to qualified financial contracts ("QFCs"). The CFTC proposal is designed to ensure that swap dealers and major swap participants are not subjected to additional margin requirements as a result of amending contracts to comply with the prudential regulators' new rules.

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the FDIC recently adopted rules that restrict the cancellation rights that can be included in QFCs in the event of bankruptcy or resolution proceedings (the "QFC Rules"). The QFC Rules require global systemically important banking institutions and other covered entities to amend certain existing QFCs with a counterparty (and its affiliates) to the extent that they enter into new QFCs with that counterparty after the relevant compliance date.

Under the CFTC Margin Rule, covered swap dealers and major swap participants are permitted to calculate initial and variation margin for uncleared swaps that are executed under an "eligible master netting agreement" ("EMNA") on an aggregate net basis. The definition of EMNA includes various requirements and limits insolvency stays that can be recognized. The CFTC is proposing to amend the definition of EMNA so that current netting agreements that are amended to insert certain contractual stays to comply with the QFC rules still qualify as EMNAs.

In addition, the CFTC Margin Rule grandfathers legacy trades but includes very strict requirements to margin such trades if they are amended. Accordingly, the CFTC is proposing to specifically exclude amendments that are solely for the purpose of compliance with the QFC Rules. Under the proposal, legacy swaps amended for compliance with the QFC Rules would not thereby be "Covered Swaps" subject to the CFTC margin requirements.

The CFTC is requesting comments on the proposed amendments. Comments must be received within 60 days of publication in the Federal Register.

Commentary / Jeff Robins

The approach to grandfathering legacy swaps taken by the CFTC and the prudential regulators in the margin rules was unduly restrictive. The CFTC should take the opportunity to establish that amendments to comply with law and non-material amendments will not cause swaps to be subject to regulatory margin. Otherwise the non-amendment rule will continue to cause trouble in the future as regulation evolves.

As market participants know all too well, post-crisis rulemaking has necessitated round after round of expensive and disruptive industry re-documentation efforts to embed successive new requirements into the terms of swap agreements. Recent regulatory efforts to end-run the legislative process by imposing requirements for contracting parties to effectively "agree" to insolvency stays not provided in the actual insolvency statutes just make this problem worse. Each time there is a new documentation requirement, will the CFTC come out with another narrowly specified exemption from the no-amendments rule? What if Congress enacts bankruptcy reform that the QFC Rules are intended to replicate or they otherwise become obsolete?

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