Last fall both the Commodity Futures Trading Commission (“CFTC”) and five U.S. prudential banking regulators (the “Prudential Regulators”) released proposed rules for margin requirements for uncleared swap transactions for the entities subject to their regulation (the proposed rules of the CFTC, the “CFTC Proposal,” the proposed rules of the Prudential Regulators, the “Prudential Regulators Proposal,” and the proposed rules, collectively, the “Proposals”). The margin requirements, when finalized, will play a significant role in determining the economics of the post-Dodd-Frank uncleared swaps market, including the extent to which market participants may favor or disfavor uncleared swaps in comparison with other types of transactions. In a previous Client Alert, available here, we summarized the Proposals. In this Client Alert, we take a deeper look at the Proposals and highlight some of the many challenges that they would pose for market participants if implemented in their proposed form.

Both the CFTC and the Prudential Regulators released proposals for margin in 2011. Since that time, however, there has grown an international consensus around the policy framework for margin stated in a series of papers released by the Basel Committee on Banking Supervision and the Board of the International Organization of Securities Commissions, the last of which was published in September, 2013 (the “BCBS/IOSCO Framework”). With some significant exceptions, which we note below, the Proposals are broadly consistent both with the BCBS/IOSCO Framework and with each other.