Regulators Release Guidance for Compliance with Variation Margin Requirements for Non-Cleared Swaps

Today, both the Federal Reserve and the Office of the Comptroller of the Currency (“OCC”) published guidance addressing the agencies’ “expectations for compliance” with minimum variation margin requirements for non-cleared swaps that become effective March 1, 2017. The guidance is relevant to any swap dealer registered with the Commodity Futures Trading Commission (“CFTC”) for which the Federal Reserve or the OCC is the prudential regulator. The guidance advises examiners to consider the following principles in conducting initial examinations for compliance with minimum variation margin requirements for non-cleared swaps:

1. While covered entities should attempt to comply with the rule in a timely manner, the guidance suggests that examiners will first focus on covered entities’ compliance efforts with respect to the counterparties to which they have the most significant exposures beginning March 1, 2017. For other counterparties, the guidance directs examiners to focus on whether covered entities are making a good faith effort to comply with the rule as soon as possible, and by no later than September 1, 2017.

2. Examiners should recognize the “scope and scale of changes necessary for each covered swap entity to achieve effective compliance for each of its non-cleared swap transactions.”

3. Covered entities should have “governance processes” aimed at “asse[ssing] and manag[ing]” credit and market risk arising from non-cleared swap transactions.

4. Examiners should consider covered entities’ implementation of compliance initiatives, such as “documentation, policies, procedures, … processes,” and training programs.

The guidance comes shortly after the CFTC provided a similar grace period for swap dealers not subject to oversight by prudential regulators. As with the CFTC’s no-action “transition,” the Federal Reserve’s and the OCC’s guidance requires non-compliant covered entities to work toward full compliance during the period from March 1 to September 1, 2017.

In a similar vein, the European Supervisory Authorities have also acknowledged requests from EU-regulated market participants to delay the effective date of the EU’s variation margin exchange rules, and stated that while EU regulators still plan to enforce the variation margin exchange rules after March 1, they would also undertake “case-by-case” assessments of each covered entity’s compliance and progress.

The Federal Deposit Insurance Corporation also issued a press release supporting the Federal Reserve’s and the OCC’s guidance, but noted that it currently does not regulate swap entities affected by the guidance.

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