If you have been following our alerts on the pending deadlines (and the delays of these deadlines by certain regulators) of the new swap variation margin rules (New Swap Margin Rules) that were due to go into effect on March 1, the last piece of the puzzle has finally fallen into place.

On February 23, 2017, the Board of Governors of the Federal Reserve (Fed) and the Office of the Comptroller of the Currency (OCC) released guidance to banks and other depository institutions under their supervision relating to the New Swap Margin Rules. While the guidance does not technically delay the March 1, 2017 deadline for compliance with the New Swap Margin Rules, it directs bank examiners of swap dealers and other entities to consider the “good-faith efforts at compliance” by banks until September 1, 2017.

This guidance can be viewed — like the February 13, 2017 Commodity Futures Trading Commission (CFTC) letter that was discussed in our February 15 Client Alert — as a grace period for swap participants that do not themselves pose systemic risk. The Fed and the OCC do expect swap dealers to prioritize and focus on their counterparties that pose significant credit and market risk: For these counterparties, swap dealers are expected to comply with the March 1, 2017 deadline and get the necessary variation margin posted. While the guidance does not quantify “significant credit and market risk,” we believe it is likely that only the very largest buy-side financial end users would be viewed as posing such risks. Without specific guidance, however, we are left to read the tea leaves given us.

As a result of the CFTC extension letter and now the Fed and OCC guidance, buy-side market participants should be able to continue to trade under existing swap documentation with their sell-side counterparties until September 1, 2017, even if their existing documentation does not comply with the New Swap Margin Rules. That being said, we expect swap dealers will continue to press the buy side to complete the compliant versions of the New Swap Margin Rules documentation in a timely manner.

As a technical matter, the New Swap Margin Rules also apply to certain entities regulated by the Farm Credit Administration, the Federal Deposit Insurance Corporation and the Federal Housing Finance Agency, but no such swap entities exist, and therefore, those prudential regulators do not need to address the March 1, 2017 deadline.

We also understand that various European supervisory authorities have issued a similar delay in implementing the European counterpart of the New Swap Margin Rules. The European authorities stressed that enforcement of those rules will occur on a case-by-case basis, with examiners taking into account the size of exposure and efforts toward full compliance. While the guidance from European authorities seems less accommodating to swap participants than that of U.S. regulators, we believe that market participants will view it in a similar light, and that it will function as a delay in implementation of the European swap margin rules.

Pepper Point: We suggest that buy-side counterparties contact their swap dealers as soon as possible and ascertain whether their swap dealers will permit them to enter into new trades after the March 1, 2017 deadline without new documentation.

Pepper Point: Despite the “soft delay” for non-systemically risky market participants, we encourage all participants to continue their compliance efforts and to consider possible strategies for complying with the rule in greater detail. September 1, 2017 will be here before you realize it.