The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the Commission adopt margin rules for swaps of covered swap entities that are not centrally cleared. Because swaps that are not centrally cleared are an important part of the swaps market, margin requirements for uncleared swaps are critical to ensuring the safety and soundness of swap dealers and major swap participants and the stability of the U.S. financial system. In October 2014, the Commission proposed margin rules for uncleared swaps of covered swap entities and sought comment on three alternative approaches to the application of its margin rules in the context of cross-border transactions.
Under the Proposed Rule issued today, covered swap entities would be required to comply with the Commission’s margin rules for all uncleared swaps in cross-border transactions, with a limited exclusion. In addition, the Proposed Rule would allow covered swap entities to comply with comparable margin requirements in a foreign jurisdiction as an alternative means of complying with the Commission’s margin rules for uncleared swaps (substituted compliance). The Proposed Rule would work as follows:
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U.S. covered swap entities would be required to comply with the Commission’s margin rules for all uncleared swaps but would be eligible for substituted compliance with respect to margin that they post (but not that they collect) for swaps with certain non-U.S. counterparties.
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Uncleared swaps of non-U.S. covered swap entities whose obligations under the relevant swap are guaranteed by a U.S. person would be treated the same as uncleared swaps of U.S. covered swap entities.
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Uncleared swaps of non-U.S. covered swap entities whose obligations under the relevant swap are not guaranteed by a U.S. person would be eligible for substituted compliance unless the counterparty to the swap is a U.S. covered swap entity or a non-U.S. covered swap entity whose obligations under the swap are guaranteed by a U.S. person.
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Uncleared swaps between a non-U.S. covered swap entity and a non-U.S. counterparty would be excluded from the margin rules, if neither party’s obligations under the relevant swap are guaranteed by a U.S. person and neither party is a U.S. branch of a non-U.S. covered swap entity nor consolidated in the financial statements of a U.S. person.
With regard to substituted compliance, the Proposed Rule sets forth proposed procedures for requests for comparability determinations, including eligibility and submission requirements, as well as the standard of review that would apply to Commission determinations.
Full press release
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