US CFTC pushes off deadline for initial margin for uncleared swaps

Washington — The US Commodity Futures Trading Commission has voted unanimously to extend by one year the initial margin requirements for uncleared swaps for financial entities with smaller swap portfolios.

The while many energy companies are excluded from the requirements because of hedge exemptions for derivatives end users, the relief could have indirect impacts on energy market participants.

The action harmonizes CFTC requirements with those of global regulators and US banking regulators who have extended the deadline for a major expansion of the entities facing initial market requirements beyond those large financial entities initially covered. Newly covered companies reflect the remaining 3% of the US market, expanding covered entities from 40 to over 700, CFTC officials said.

"There is universal agreement that this extension will mitigate rather than exacerbate risk," CFTC Chairman Heath Tarbert said in a statement Wednesday. The action is one of nearly a dozen steps the CFTC will have taken by week's end to address the spread of the coronavirus outbreak and its effect on financial markets, he added.

Many buy-side market participants will gain needed time to put required custodial arrangements in place, he said.

The action extends the deadline to September 1, 2021, for smaller swap participants.

Operational hurdles

Commissioner Brian Quintenz said he was pleased the CFTC is "avoiding any potential market disruption that could have occurred due to the practical, operational difficulties caused by a significant number of counterparties needing to begin posting and collecting margin at the same time."

Commissioner Dan Berkovitz concurred, while noting that the small share of the market that is covered by the rule helped him overcome concerns about extending a compliance date set more than four years earlier.

The extension will "benefit hundreds of entities with smaller swap portfolios while having only a limited impact on the systemic risk mitigation benefits of the initial margin requirements," he said. The relief is particularly timely in light of financial market turmoil resulting from the global coronavirus pandemic, he said.

CFTC coronavirus steps

Seeking to avoid market disruptions during the virus outbreak, the CFTC earlier in the week said it was relaxing recordkeeping and reporting requirements for swap dealers, such as the use of recorded telephonic lines for trading. It announced targeted relief as well, from a variety of requirements, for futures brokers, introducing brokers, retail foreign exchange dealers, floor brokers, and others. Swap execution facilities also received temporary relief from voice recording requirements and audit trail requirements until June 30. Major exchanges, as well, received a waiver from audit trail requirements until June 30.

Tarbert has said derivatives markets have been "quite resilient" amid the record volatility, and market infrastructure has continued to operate seamlessly, based on the CFTC's advanced monitoring and surveillance tools. He said the CFTC is coordinating closely with exchanges to monitor individual market infrastructures, focusing on "the critical pipes" at the clearinghouses through which trades are margined and settled.