CFTC Issues No-Action Letter re: Variation Margin Requirements Compliance; Yellen Pressed on Issue

On Monday, February 13th, 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.

Following the CFTC's no-action release, on February 15th, at the semi-annual Monetary Policy Report hearing before the House Financial Services Committee, Congressman Frank Lucas (R-OK) posed a question to Chairwoman of the Federal Reserve Janet Yellen regarding uncleared swaps and compliance with variation margin requirements.

Lucas, the former Chairman of the House Agriculture Committee and a senior member of Financial Services, pointed out that the CFTC had released a no-action letter on February 13th instituting a 6-month grace period for compliance. Specifically, during the hearing at 2:32:18, Lucas described the issue of variation margin compliance and asked Yellen whether the FRB intended "to coordinate with the CFTC on providing relief the entities under its jurisdiction that are part of this market?"

Yellen replied, "We are aware of the problems that you described, we've been monitoring trends in compliance very closely, we are in touch with some of the firms that are involved, and we will be in discussions with other banking regulators to discuss what response may be needed to this." Rep. Lucas pressed further, noting, "But it is being analyzed, that the circumstances are evolving as they are, and the potential impact on the participants. From my perspective, it is those end-users that matter to me and I guess I would have to say thank you for taking that note and I hope, like the CFTC and Asian regulators and our European friends, that we will see a similar response."

SFIG is pleased that Congressman Lucas raised this important issue and highlighted the need to go beyond the CFTC. We will continue to work with the relevant senior staff members of the House Financial Services Committee and Lucas' staff to ensure this issue continues to receive timely attention.

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