On February 1, 2017, the Division of Swap Dealer and Intermediary Oversight (“DSIO”) of the Commodity Futures Trading Commission (“CFTC”) issued a no-action letter granting relief from compliance with certain provisions of the CFTC’s margin requirements for uncleared swaps. This relief applies to swap dealers entering into swaps with counterparties subject to the non-centrally cleared over-the-counter derivative margin requirements of the European Union (the “EMIR RTS”). The relief is effective beginning February 4, 2017, and expires on May 8, 2017.
The CFTC published its final rule on margin for uncleared swaps for swap dealers and major swap participants in January 2016, and certain entities were required to begin compliance on September 1, 2016. Meanwhile, the EMIR RTS entered into force on January 4, 2017, and on February 4, 2017, the first phase of counterparties will have to comply with its initial and variation margin requirements. Pursuant to its final rule regarding cross-border application of the margin requirements for uncleared swaps, the CFTC will exempt entities subject to the CFTC’s margin rule from certain aspects of those requirements if they are in compliance with the requirements of a foreign jurisdiction that are comparable to the CFTC’s rule, known as “substituted compliance.” However, the CFTC has not yet made a comparability determination as to the EMIR RTS. Thus, on February 4, 2017, certain swap dealers could be required to comply with both the CFTC’s margin requirements and EMIR RTS. The no-action letter grants temporary relief from this possibility, allowing swap dealers who comply with EMIR RTS to be exempt from compliance with the CFTC’s requirements until May 8, 2017.
DSIO notes in the no-action letter that swap dealers “should not presume that the Commission’s ultimate determination on substituted compliance for the European Union will be comparable to the relief provided for under this letter.” However, it is worth noting that Acting CFTC Chair J. Christopher Giancarlo has previously criticized the CFTC’s cross-border approach, arguing that it’s rule-by-rule substituted compliance approach is overly prescriptive and harms the goal of cross-border harmonization and consistency. This could have an impact on how future comparability determinations, including that for EMIR RTS, are made.