Statement of Commissioner Rostin Behnam on Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

March 18, 2020

I vote to approve the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) decision today to extend the compliance schedule for the posting and collection of initial margin (“IM”) by swap dealers (“SDs”) and major swap participants (“MSPs”) for which there is no prudential regulator (collectively, “covered swap entities”) under the CFTC Margin Rule, 17 CFR 23.160, which implements section 4s(e) of the Commodity Exchange Act (“CEA”).[1]  As a seminal part of the policy response following the 2008 financial crisis, Section 731 of the Dodd-Frank Wall Street Reform and Consumer Protection Act[2] added section 4s(e) requiring the adoption of rules establishing minimum initial and variation margin requirements for all uncleared swaps entered by covered swaps entities.   

Among many universal commitments established by global leaders in the 2009 G20 Communique,[3] margin requirements for uncleared swaps remain a critical component of financial reform, specifically within the global derivatives markets.  As we learned during the financial crisis, margin provides confidence in times of market stress and volatility by ensuring that collateral is available to offset counterparty losses.   

Right now, we are collectively enduring uncertainty as a result of Covid-19.  As financial leaders are taking action and providing responses intended to address market stress, our progress is being tested as we operate within the new realities of communication and the work environment.  We cannot hesitate in our efforts to preserve market interests and protect customers and market participants in a timely, decisive manner.  It remains critically important that we ensure market continuity, transparency, and resiliency as we work towards normalcy.  

Today’s amendments align implementation of the CFTC Margin Rule with the framework issued by the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”).[4]  The amendments represent a cohesive, data-driven effort by the staffs of the CFTC, the Prudential Regulators—who have proposed similar amendments to the margin implementation schedule for SDs and MSPs subject to their regulations[5]—and international counterparts through the BCBS/IOSCO Working Group on Margining Requirements (“WGMR”) towards regulatory harmonization with respect to margin for uncleared swaps.   

Implementing the margin requirements for uncleared swaps is a challenge we have faced collectively.[6]  As global harmonization is a key hallmark of the 2009 G20 reforms, ensuring we remain vigilant to risks and responsive to real-world concerns articulated by market participants as we work together towards these feats of regulatory engineering will serve us all well into the future.  I commend the work of the our CFTC staff in demonstrating its analytical expertise in both validating the need for the sixth phase of compliance for certain smaller entities, and analyzing the risks of requiring such entities to remain in phase 5.   

The extension of the compliance schedule for initial margin requirements for an additional year will accommodate roughly 700 entities and 7,000 relationships.  While that may seem monumental, the CFTC’s Office of Chief Economist estimates that these relationships represent a relatively small amount of swap activity; approximately three percent of the total average daily aggregate notional amounts of uncleared swaps and certain other financial products across all the compliance phases.[7]   

I believe it is important to highlight that today’s amendments seek to address transition risks by mitigating potential market disruptions due largely to limitations of service providers and related operational burdens associated with those approximately 7,000 relationships.  It remains my expectation that the large number of covered entities who will now fall into the sixth phase of compliance will work diligently over the next year and a half and that with the additional time and a clear demand for services, market participants and the entities they engage will focus resources on compliance.  

To the extent commenters identified additional and potentially significant implementation challenges, I appreciate CFTC staff’s ongoing commitment to monitoring these and other issues as they evolve.  Our open engagement and willingness to address appropriate concerns is a hallmark of our agency, and I believe it is one our greatest strengths.  We should continue to maintain our high standards as we move forward in any additional targeted, strategic modifications to the CFTC Margin Rules and others.   

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