Last week the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Office of the Comptroller of the Currency (the “OCC” and, collectively with the Federal Reserve, the “Banking Agencies”) released guidance (the “Examination Guidance”) on the examinations of swap entities subject to their regulation (the “Fed/OCC Swap Entities”) with respect to rules requiring such entities to exchange margin with their counterparties to non-cleared swaps and security-based swaps (the “Margin Rules”). The Examination Guidance signals that, with respect to variation margin, the Banking Agencies will not immediately seek to enforce strict compliance with the Margin Rules, which are scheduled to go into effect on March 1, 2017, in relation to variation margin requirements for non-cleared transactions between swap dealers and counterparties including financial end users. Instead, the Examination Guidance states the Banking Agencies’ expectation that the Fed/OCC Swap Entities will prioritize their compliance efforts, achieving full compliance by March 1 in relation to those counterparties whose transactions pose significant credit or market risks.

The Examination Guidance will likely have a significant effect on the manner in which the Fed/OCC Swap Entities implement their plans to comply with the Margin Rules and, in turn, on their counterparties, including financial end users. Together with a no-action letter6 issued earlier this month by the Commodity Futures Trading Commission (“CFTC”) regarding its margin rules for dealers that are not subject to regulation by the Federal Reserve or OCC, the Examination Guidance provides much needed relief not only to swap dealers but also to their smaller counterparties, many of which are not expected to be fully prepared to comply with variation margin requirements by March 1.