February 13, 2017 Alert - CFTC Issues No-Action Letter for Variation Margin Compliance

Today, the U.S. Commodity Futures Trading Commission (CFTC) issued a time-limited no-action letter stating that, from March 1, 2017 to September 1, 2017, the Division of Swap Dealer and Intermediary Oversight (DSIO) will not recommend an enforcement action against a swap dealer for failure to comply with the variation margin requirements for swaps that are subject to a March 1, 2017 compliance date.

 CFTC Acting Chairman J. Christopher Giancarlo stated that:

The CFTC remains committed to the March 1 date, agreed with its fellow U.S. and overseas regulators, for posting of variation margin on swaps transactions between swaps dealers and their financial end-user customers. Nevertheless, the facts on the ground cannot be ignored that as much as ninety percent of those end-users are not ready to meet the new requirements despite their best efforts to do so.

Global systemic risk is not reduced by the abrupt cessation of risk hedging activity by American life insurance companies and retirement funds at a time of enormous changes in financial rates and global asset values. This action by the CFTC does not change the scheduled time of arrival for the agreed margin implementation. It just foams the runway to ensure a safe landing.

The no-action letter follows a request sent by SFIG to the CFTC and the prudential regulators seeking temporary relief for legacy securitization transactions from the compliance date for variation margin requirements. The request was submitted after SFIG staff and members met with the CFTC's DSIO on January 31st  to convey our concerns regarding the March 1st implementation date for the posting of variation margin on derivatives transactions. We also discussed previous no-action relief granted by the CFTC in connection with legacy SPV swaps. SFIG applauds the CFTC for recognizing industry concerns and acting swiftly to prevent negative market impact.

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