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March 14, 2017

Mandatory Margin Requirements for Uncleared Swaps

by Miki Kolobara, Esq.

At the request of several attendees at the upcoming ISDA seminar, the seminar agenda has been expanded to include an in-depth look at the mandatory margin requirements for uncleared swaps and its effect on various market participants.  Dodd-Frank’s swap margin rule requirements became applicable for “financial end-users” on March 1, 2017.  However, there appears to be a considerable amount of confusion among market participants about which type of entities are included in the definition of “financial end-user.”  In order to address this issue, the seminar will examine the statutory definition of the term financial end-user and some practical steps that market participants can apply in determining their status under the rule.  Also, the seminar will include the differences between the terms “hedging entity” and “financial end-user” due to some uncertainty about the impact of each designation on the margin rule implementation.

Many end-users including energy companies, commodity producers, transporters, and marketers have been receiving numerous self-disclosure letters from swap dealers and major swap participants requesting certain identifying information, even though those end-users may not be considered “financial end-users.”  The seminar will examine the scope of the margin rule’s impact on the non-financial end-users and what exactly they are required to comply with under the margin rule.  In addition, the practical implementation of any margin rule requirements is very likely to impact the underlying swap documentation including any credit support documentation.  The seminar will examine some practical steps that can assist market participants in the most efficient way for amending existing documentation in order to comply with the margin rule.

The margin rule’s requirements are likely to increase the cost of OTC (uncleared) derivatives.  One of the most pressing challenges for all market participants is the impact of this increased transactional cost on their hedging ability.  All end-users, whether financial or non-financial, may have to re-evaluate the availability of hedging opportunities due to market liquidity fluctuations and the cost fluctuation associated with their particular hedging strategies.  The hedging headwinds may also be amplified by the potential for regulatory arbitrage as United States regulators, including the CFTC and the Prudential Regulators (OCC, FRB, FDIC, FCA, and FHFA), are expected to significantly modify the Dodd-Frank rules while the European, Asian, Canadian, and Australian regulators are expected to continue their regulatory requirements unchanged, at least for now.  The seminar will examine some practical implications of this regulatory arbitrage.

The seminar agenda can be found at the following link: http://kolobaralaw.com/client_alerts.html

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