Agencies clear swap margin rule proposal for Federal Register; Brainard echoes concern about inter-affiliate swaps

A joint-agencies proposal to revise swap margin rules to remove the need for holding initial margin for uncleared swaps with affiliates is headed for publication soon in the Federal Register, after which comments will be accepted for 30 days.

The proposal was issued in September by the Federal Deposit Insurance Corp. (FDIC) with Board Member Martin Gruenberg dissenting. Federal Reserve Board Gov. Lael Brainard also issued a statement (dated Oct. 11) that supports portions of the proposed rule, but she too raised concerns about the elimination of the inter-affiliate initial margin requirement without making compensating adjustments elsewhere in regulation.

“During the crisis, the buildup of uncleared swap positions exposed covered swap entities, including banks, to losses and put the broader financial system at risk. In response, pursuant to the requirements of the Dodd-Frank Act, the federal banking agencies adopted a final swap margin rule in 2015 that requires prudent margining practices between covered swap entities, including banks, and their counterparties,” Brainard said in her statement. “These margin requirements are important to protect the safety and soundness of banks that are covered swap entities in the event of a counterparty default and to guard against broader risks to financial stability.”

The five agencies signing off on the proposed rule, besides the FDIC and Fed Board, include the Office of the Comptroller of the Currency (OCC), Farm Credit Administration, and Federal Housing Finance Board (FHFB). The statement adds that the Fed Board “continues to work on proposed amendments to Regulation W that would, among other things, clarify the treatment of bank-affiliate derivatives under sections 23A and 23B.” Regulation W addresses additional requirements for affiliate transactions.

The agencies said the proposal, to aid in the transition away from LIBOR, also would allow certain technical amendments to legacy swaps without altering their status under the swap margin rules.

For smaller counterparties, the proposal would provide clarification on documentation requirements and implementation relief. In addition, the proposal would extend the effective date by one year to Sept. 1, 2021, for smaller counterparties to meet initial margin requirements.

Agencies propose rule to amend swap margin rules

Brainard statement from Oct. 11

RR: With 1 dissenting, FDIC Board proposes changes in swap margin rule (Sept. 17, 2019)