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Help on the Way Over Dodd-Frank IM Segregation

More hard-lifting from ISDA as the association busies itself preparing yet more documentation to assist the industry’s efforts to comply with the Dodd-Frank Act.  This time it’s CFTC rule 23.701 which requires Swap Dealers (SDs) and Major Swap Counterparties (MSPs) to notify counterparties of their right to require the segregation of initial margin (IM) posted as collateral in relation to uncleared swap transactions.

The rule took effect from 6 January 2014 (the “Effective Date”), but is introduced in stages:

  • 5 May 2014: for counterparties of SDs/MSPs with which no agreement concerning uncleared swaps existed on the Effective Date; and
  • 3 November 2014: for counterparties of SDs/MSPs with which agreement concerning uncleared swaps did exist on the Effective Date.

Notification of the right to segregate must be given annually and must identify one or more third party custodians which are acceptable to the SD/MSP as a depository for IM as well as provide indicative costings of the price of segregation (to the extent that this information is available).  For its part, the SD/MSP must obtain confirmation from its counterparty of receipt of the notification and an election to segregate or not.

The draft form prepared by ISDA meets the requirements of the rule and is largely non-controversial, although counterparties should note the warning that those that require IM segregation may not be able to enter into uncleared swaps until a satisfactory tri-party custodial arrangement is established.  In parallel to its drafting exercise, ISDA and Markit are also developing additional functionality on ISDA Amend which will assist market participants in delivering contact information, receipt confirmations and segregation elections.  However, timing on the completion of this work is not yet known.  In the interim, and also after the event, a degree of bilateral outreach is likely to be required meaning that this is yet another addition to the already long ‘to do’ list of client outreach required by both Dodd-Frank and EMIR.

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