CFTC initial margin requirements

On October 31, the Commodity Futures Trading Commission adopted final rules with respect to the segregation of initial margin for uncleared swaps. The rules impose new obligations on swap dealers (SDs) and major swap participants (MSPs) that amplify and go beyond the notification and segregation requirements that are set out in Section 4s(l) of the Commodity Exchange Act. The notification to each counterparty that it has the right to require segregation of initial margin must now include the following information:

  1. The names of one or more possible custodians, one of which must be a creditworthy non-affiliate and all of which must be independent of both parties.
  2. Information about the price of segregation for each custodian identified (to the extent the SD/MSP has such information).

The rules also contain detailed specifications concerning the manner in which the notification must be given. The preferred recipient of the notice is the “officer of the counterparty responsible for the management of collateral, ” but if no such officer had been identified by the counterparty, the notification must be sent to the counterparty’s chief risk officer or, if there is no person with that title, to the counterparty’s chief executive officer or equivalent. SDs and MSPs must now obtain confirmation of receipt of the notice by the addressee and an affirmative response from the counterparty indicating whether the counterparty is exercising its segregation right. As to timing, the rule states that notice may be given either on a swap-by-swap basis or once per calendar year; so in practice annual notifications should be the norm.

If a counterparty does not elect to segregate initial margin, an SD or MSP must submit a report to the counterparty no later than the 15th business day of each calendar quarter on whether its back-office procedures relating to margin and collateral requirements were in compliance with the agreement of the parties during the preceding calendar quarter. A counterparty has the right to change its election at any time by written notice to its SD or MSP, but only for swaps executed after delivery of such notice.

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