On May 19, the Global Markets Advisory Committee (GMAC) of the Commodity Futures Trading Commission (CFTC) endorsed the recommendations of the GMAC Subcommittee on Margin Requirements for Non-Cleared Swaps by a vote of 17-1. The subcommittee’s recommendations addressed challenges and potential unintended consequences from the implementation of the later phases of the CFTC’s rules pertaining to regulatory initial margin (regulatory IM).

In light of the COVID-19 pandemic, the subcommittee applauded the timeliness of the April 2020 Basel Committee on Banking Supervision/International Organisation of Securities Commission (BCBS/IOSCO) decision to push out each of the last two regulatory IM compliance dates by one year. It also strongly encouraged the CFTC and other U.S. and global regulators to formally adopt the BCBS/IOSCO push-out of the compliance dates.

In addition, the subcommittee made several scoping and implementation recommendations for consideration by the GMAC. The recommendations include both near-term and longer-term actions, including addressing the following:

• Challenges faced in the context of trading with separately managed accounts;

• Restrictions on money market funds’ ability to transfer certain assets;

• Uneven consolidation of seeded funds with their parent entities;

• Mismatch between the model-driven IM calculations of larger covered swap entities (CSEs) versus the expected schedule-based IM calculations of the smallest CSEs;

• Documentation and operational issues relating to the smallest CSEs subject to the Margin Rules;

• Mismatches between the Margin Rules and BCBS/IOSCO framework relating to the timing and method of the material swaps exposure calculation;

• Challenges in the application of minimum transfer amount requirements; and

• Unnecessary inclusion of small financial end users in the scope of the Margin Rules.

Patomak Insights:

Since March, the CFTC has issued targeted relief to market participants in response to the COVID-19 pandemic. Should the Commission adopt the GMAC’s endorsement of the recommendation to adopt the BCBS/IOSCO decision to push out the remaining compliance dates for regulatory IM requirements, it would be consistent with the relief granted to date. As noted by the subcommittee, while there are an estimated 700 firms affected by the remaining compliance dates for the Margin Rules, their activity accounts for only 11 percent of the average aggregate notional amount of swaps across all phases. Thus, regulatory IM requirements already apply to the vast majority of U.S. swaps activity.

Looking ahead, on Thursday, May 28, the CFTC will hold a public meeting to consider extending the compliance schedule for initial margin requirements for uncleared swaps in response to the COVID-19 pandemic, in line with the GMAC endorsement discussed above.

It is noteworthy that the GMAC has made significant progress in a relatively short time frame. In October 2018, Commissioner Dawn Stump was appointed the GMAC sponsor and a year later, in October 2019, she announced the subcommittee that began leading this effort earlier this year.

Given that the subcommittee’s other recommendations for implementation and scoping adjustments in the Margin Rules will be considered over a longer period, there will be more to come in this area.