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Derivatives

The FDIC has consolidated a number of resources relating to derivatives, including central clearing. This webpage will allow users to:

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:

In addition, the final rule:

Aside from margin requirements, there are other rules and risk management considerations for derivatives, such as counterparty credit risk and capital requirements.