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CFTC clarity on uncleared swaps margin minutiae

The CFTC’s DSIO has issued clarification as to notification and reporting requirements with respect to margin in uncleared swaps. Regulation 23.701 imposes an annual obligation to notify counterparties of their right to elect segregation of initial margin. Regulation 23.704 stipulates quarterly reports of any compliance breaches with respect to omnibus (non-segregated) accounts.

The guidance in Letter No. 14-132 states that when initial margin is not required by contract or regulation, there is no benefit in enforcing the above regulations and clarifies that these obligations on SDs and MSPs will not apply. The letter also answers queries regarding lack of counterparty response to notification, in the event of which SDs and MSPs may rely on negative consent, providing that the initial notification contains a statement to that effect. In cases where counterparty has initially elected segregation, then fails to respond to the annual “renewal” notice, the negative consent presumption should be to continue account segregation. The guidance states that in neither case, does a lack of response trigger a “trading blackout” pending a reply.

In contrast to the SEC, which is barely at the end of its beginning with respect to derivatives regulation; the CFTC is at the beginning of its end. Letters such as the one above represent the Agency’s next stage of evolution, filling the many fine-focus gaps in an existing framework.

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