By Andrew P. Cross and Shawn R. Durrani

In a speech before the FIA International Derivatives Conference earlier this week, CFTC Chairman Timothy G. Massad outlined a proposal for dealing with the issue of margin on uncleared swaps in situations where one of the counterparties (or perhaps one or both of their guarantors or parent companies) are located in the United States and the other counterparty is not a U.S. entity.  We have prepared a table that summarizes Chairman Massad’s comments and is available for download at the end of this posting.

In short, Chairman Massad’s comments appear to be focused on two key principles:

1) U.S. margin rules should apply if a counterparty has its obligations guaranteed by, or financial results consolidated with, a U.S. Person.

2) U.S. margin rules are designed to mitigate systemic risk introduced into the U.S. markets vis-à-vis the swap dealing activity of a U.S. swap dealer or a non-U.S. swap dealer with obligations guaranteed by, or financials consolidated with, a U.S. person. Accordingly, the CFTC appears to be considering an application of U.S. rules to the collection of margin by a swap dealer, even if the counterparty to the swap is a non-U.S. person.

Consistent with those principles, the CFTC is also considering allowing certain swap dealers to comply with the margin rules of a jurisdiction other than the U.S, as long as the CFTC has deemed the laws of that jurisdiction to be comparable to U.S. laws. This position is referred to by the CFTC as “substituted compliance,” since the non-U.S. swap dealer is permitted to comply with the laws of the non-U.S. jurisdiction, as a substitute for complying with the laws of the U.S. jurisdiction. Finally, the CFTC also appears to be giving consideration to the exclusion of some arrangements entirely from the U.S. margin rules.  The table available at the end of this posting has more details about the application of the uncleared margin rules in several cross-border scenarios.

In conclusion, it is important to note that there is a world of difference between informal comments from a Commissioner (or the Chairperson) about a prospective rule proposal and a formal rule proposal from the Commission.  Nevertheless, such comments do have value, in that they provide market participants with insights about the “current thinking” of the Commission and its staff.

The June 9th speech is available here and the table summarizing Chairman Massad’s June 9th comments is available at the end of this posting.

Good day. Good principles? DR2

SUMMARY OF CFTC CHAIRMAN MASSAD JUNE 9TH SPEECH ON UNCLEARED MARGIN