U.S. federal regulators propose amendments to swap margin regulations

The Dodd-Frank Act requires entities that engage in swap activities to either submit their swaps for clearing with a central clearinghouse or to collect and post collateral (margin) based on the daily mark-to-market exposure under the swaps, subject to certain exemptions, notably for non-financial entities that enter into swaps for the purposes of hedging or mitigating commercial risk. Financial institutions, funds, and other entities that are not eligible for an exemption are now, or will in the coming years become, subject to mandatory margin rules for uncleared swaps.

In other words, swaps entered into between such entities that are not submitted for clearing must have arrangements in place for the collection and posting of margin, with staggered compliance dates being rolled out through September 1, 2020. “Legacy” swaps, i.e. swaps that were executed prior to the effective date of the margin regulations, are (unless modified later) generally “grandfathered” from the margin regulations. If, however, the material economic terms of a swap are subsequently modified or amended this could bring the swap within the scope of the margin regulations even though the swap was initially entered before the margin regulations were effective. The Dodd-Frank Act regulations on margin, which were finalized in 2015, are intricate and complex and cover topics such as eligibility of collateral, valuation of collateral, frequency of margin transfers, and use of master netting agreements. The regulations were summarized in detail in a previous Hogan Lovells memorandum.

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