Federal financial regulators are proposing to amend the swap margin rule by allowing legacy swaps to retain their status if they are amended to replace an interbank offered rate or other discontinued rates.
The Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Farm Credit Administration and Federal Housing Finance Agency are also proposing to repeal inter-affiliate initial margin provisions and introduce an additional compliance date for initial margin requirements, among other things.
The swap margin rule, a Dodd-Frank Act rule that introduces various capital requirements for swap dealers, was made effective April 1, 2016, and it has a phased-in compliance date for all swap entities by Sept. 1, 2020. Generally speaking, legacy swaps that are later amended after the compliance date will lose their status in order to avoid cases of evasion with capital and margin requirements under the rule, according to regulators.
However, federal regulators have since introduced certain exemptions to the rule. Regulators in September 2018 issued a final rule that will preserve the status of legacy swaps if they are amended to comply with restrictions on certain contracts by systemically important banking organizations, or qualified contract rules. They also proposed in March to preserve the status of legacy swaps for U.K.-based financial companies if they are transferring certain swaps to an EU member state or to the U.S. in the case of a no-deal Brexit.
The regulators are also proposing to preserve legacy swaps if they are amended "due to technical amendments, notional reductions, or portfolio compression exercises" and also if they are amended to comply with the qualified financial contract rules.
The regulators also said that as the number of covered swap entities has risen, and as the amount of inter-affiliate margin to be collected has increased, banks have borrowed more cash to fund the collateral.
That is "placing additional demands on [banks'] asset-liability management structure and increasing their liability exposure to depositors and other creditors in the market," the regulators said. Repealing these provisions would therefore provide banks with "additional flexibility for internal allocation of collateral" and lead to risk management practices that can improve the safety of a covered swap entity.
They also said other jurisdictions do not consistently apply swap margin rules on inter-affiliate swaps, so implementing these provisions puts U.S. banks at a competitive disadvantage.
