The FDIC has consolidated a number of resources relating to derivatives, including central clearing. This webpage will allow users to:
- Review FDIC regulations regarding derivatives.
- Reference some relevant Securities and Exchange Commission (SEC) and U.S. Commodity Futures Trading Commission (CFTC) regulations related to derivatives. (Links to SEC.gov and CFTC.gov)
- Browse relevant speeches, press releases, and related documents regarding derivatives.
Margin and Capital Requirements for Covered Swap Entities
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established a new regulatory framework for derivatives. Swaps are defined in section 721 of the Dodd-Frank Act to include interest rate swaps, commodity swaps, equity swaps, and credit default swaps. Security based swaps are defined in section 761 of the Dodd-Frank Act to include a swap based on a single security or loan or on a narrow-based security index.
Sections 731 and 764 of the Dodd-Frank Act add a new section, 4s, to the Commodity Exchange Act of 1936, and a new section, 15F, to the Securities Exchange Act of 1934. The new sections require swap dealers and major swap participants to register with the CFTC and security based swap dealers and major security based swap participants to register with the SEC. Swap entities that are prudentially regulated by one of the Agencies and therefore subject to the final rule “Margin and Capital Requirements for Covered Swap Entities” are referred to as “covered swap entities.”
In the derivatives clearing process, one way central counterparties (CCPs) manage credit risk is through initial and variation margin requirements on parties to cleared transactions. The mandatory clearing requirement established by the Dodd-Frank Act for swaps effectively requires a party to any transaction subject to the clearing mandate to post initial and variation margin. However, a particular swap may not be cleared either because it is not subject to the mandatory clearing requirement, or because one of the parties to the swap is eligible for, and uses, an exception or exemption from the clearing requirement. Such a swap is a ‘‘noncleared’’ swap.
The margin requirements will apply to any prudentially-regulated entity that: (1) is registered as a swap dealer or major swap participant with the CFTC, or as a security-based swap dealer, major security-based swap participant with the SEC; and (2) enters into a noncleared swap. In addition, the requirements apply to all of a covered swap entity’s swap and security-based swap activities.
Generally, the final rule requires covered swap entities to:
- Collect initial margin and variation margin from other covered swap entity counterparties.
- Post and collect daily initial margin when trading with financial end-user counterparties with material swaps exposure (notional exposure of $8 billion or more).
- Post and collect daily variation margin when trading with financial end-user counterparties, regardless of the level of swaps exposure if the required amount of variation margin and initial margin exceeds $500,000.
In addition, the final rule:
- Includes specific provisions for inter-affiliate swaps.
- Does not require covered swap entities to exchange margin with commercial end-users or financial institutions with total assets of $10 billion or less, provided that the swaps are entered into for hedging purposes.
- Establishes minimum quality standards for acceptable initial and variation margin collateral. It also establishes minimum safekeeping standards for initial margin collateral.
- Applies only to new swaps entered into after the applicable compliance dates which range from September 2016 to September 2020.