CFTC Extends Initial Margin Compliance Timeline for Many Buy-Side Firms
On March 18, 2020, the Commodity Futures Trading Commission (the “CFTC”) voted unanimously to extend the uncleared swap initial margin compliance timeline for financial entities with smaller swap portfolios from September 1, 2020 to September 1, 2021.
Phase 6 Compliance Group
The newly created “Phase 6” compliance group will provide many private funds and other buy-side participants with average daily aggregate swap notional amounts (“AANA”) of less than $50 billion globally with an additional year to build out the necessary operational infrastructure and legal trading documentation that will be needed to comply with the new rules.
The CFTC’s creation of a Phase 6 group is a highly anticipated move and it further harmonizes the initial margin rules with those of the regulatory margin framework issued by the Basel Committee on Banking Supervision (the “BCBS”) and the International Organization of Securities Commissions (the “IOSCO”) in 2019. The CFTC’s action still leaves market participants with less than $8 billion AANA out of scope of the rules.
In CFTC Chairman Tarbert’s statement announcing the extension, he noted that the 40 largest swap dealers are currently subject to the margin requirements, accounting for about 97% of the U.S. market. Over 700 swap market participants were expected to be in-scope at the Phase 5 deadline (September 2020), but now many of these participants will fall within the Phase 6 group.
Given the extended compliance timeline, buy-side firms falling in the Phase 6 group should take this time to continue to push forward with engaging with their swap dealer counterparties on updates to trading documents (e.g., 2018 Credit Support Annex for Initial Margin and custody/tri-party control agreements).
Moreover, firms should use the additional time to continue to assess internal processes/models used to help calculate initial margin requirements or consider engaging third-party vendors to address some of these operational issues.
Our derivatives and counterparty trading team will continue to monitor these swap regulatory developments and will keep our clients and friends updated as things continue to develop.