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Digital Subscriptions > The Hedge Fund Journal > Issue 109 - November 2015 > US Regulators Adopt Final Rule On Margin Requirements For Non–Cleared Swaps

US Regulators Adopt Final Rule On Margin Requirements For Non–Cleared Swaps

On 22 October 2015 a group of five banking regulators (the “prudential regulators”) adopted a final rule establishing minimum margin and capital requirements for non-cleared swaps and non-cleared security-based swaps.1 The Final Rule, which does not begin phasing in until September 2016, applies to swaps executed by swap dealers, major swap participants, securitybased swap dealers and major security-based swap participants for which one of the federal agencies is the prudential regulator (each, a “covered swap entity”).2 Although most investment managers and other buy-side firms are already margining non-cleared swaps under ISDA master agreements and credit support annexes, the Final Rule imposes material obligations on swap dealers that diverge from current industry practice. This likely will require amendments to current trading documentation and result in increased costs for many market participants.

In Brief

• Dealers soon will be required to collect and post initial margin with certain swap counterparties with high levels of exposure to non-cleared swaps, and such initial margin must be segregated with a third-party custodian.

• Dealers may impose an initial margin threshold of up to $50 million, lessening the rule’s impact.

• Parties to non-cleared swaps generally will be required to exchange variation margin on a daily basis regardless of the counterparty’s non-cleared swap exposure level.

• Investment managers will be required to make certain determinations in order to establish the Final Rule’s applicability and relevant compliance dates.

• Entities managed by the same investment manager are unlikely to be considered “affiliates,” and managers therefore will be required to make entity-level determinations.

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