dodd frank uncleared margin rules

Dodd Frank Summary ! U.S. Commodity Futures Trading Commission (CFTC) !

& Prudential Regulators (PR)!Margin Rules for Uncleared Swaps !

“A Simple Transparent Approach”!For lawyers and non-lawyers!

Created and Presented by Billy Gopeesingh, Esq.

This presentation is for illustration purpose only and does not constitute legal advice !

CFTC and PR Rules for Uncleared Swaps Summary

5/26/16 Created and Presented by Billy Gopeesingh 2

The CFTC and PR margin rules for uncleared swaps (“Final Margin Rules”) apply generally to on and after the Effective Date, September 1, 2016. The products or asset classes affects commodities, interest rates, credits and equities—with some exceptions in product lines. For market participants, the Final Margin Rules apply to Swap Dealers (SD) and Major Swap Participants (MSP)—collectively, Covered Swap Entities (CSE). The rules impose Initial and Variation Margin requirements on: (A) trades between a CSE and another CSE; (B) CSEs and Financial End Users with Material Swap Exposure; (C) CSEs and Financial End Users without Material Swap Exposures that are not an Inter-Affiliate of the CSE; (D) CSEs and Inter-Affiliates of the CSE; and (E) CSEs and Financial End Users with Material Swap Exposures that are a Foreign Inter-Affiliate of the CSE. There are no imposed margin requirements for Commercial End Users, unless such counterparties pose credit risk, determined by the SD and MSP. The Final Margin Rules for uncleared swaps require two-way posting and collecting for Initial and Variation Margins, once certain requirements are satisfied. The forms of Eligible Collateral are U.S. cash, other major currency, settlement currency of uncleared swaps, and government debt backed by the full-faith and credit of the U.S. Government.

The Final Margin Rules for Uncleared Swaps


What is the effect of the Final Margin Rules? The CFTC and PR rules impose margin requirements for uncleared swaps for registered SDs and MSPs with the CFTC and Prudential Regulators. !

Element One!

Who are the PR entities? The Prudential Regulators are the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve, the Comptroller of the Currency, the Farm Credit Administration and the Federal Housing Finance Agency.!

Element Two!Who is regulated and when do the CFTC and PR rules apply? Both the CFTC and the PR regulate SDs and MSPs (CSE). The CSE is regulated either by the CFTC or PR—not both. The CFTC rules triggers regulation of CSE when there is no legal jurisdiction from the PR. !

Element Three!

What are the issues? The major issues are Initial Margin (IM) and Variation Margin (VM) requirements, the timing of margin requirements, calculating IM and VM, custodial arrangements, inter-affiliate swaps, role of custodian, and eligible collateral.!

Element Five!

What are the differences? The more notable differences between the CFTC and PR Margin Rules are i) certain treasury affiliates and inter-affiliates, ii) anti-Invasion definition for margin-affiliates, iii) calculation of model approval process, and iv) application of margin and related documents.!

Element Four!

5

Overview of main elements and implications

4

3

2

1


Road Map

Due Diligence before Repapering

Step One

Due Diligence for Repapering; drafting CSA, Custodian Agreement and

Eligible Master Netting Agreement; application of Business Conduct Rules;

and implementing Policy & Procedures

Step Two

Step Three

The Law

Due Diligence after Repapering

Application of Margin Rules

Impact on Documentation

Process


Due Diligence for Repapering

Organizing and analyzing ISDAs

Active Trades!

Client Information!

Manage data for client contact, signing authority information and formation documentation!

Parties legal status entities with PR and CFTC Rules classification !Legal entity status, Financial End User with or without Material Swap Exposure, Inter-affiliate, and exemptions!

Determine active and inactive trades for repapering!

Collection of all ISDAs!

Inventory of all ISDAs!

Rank ISDAs by Revenue!Prioritize ISDAs by revenues that qualify for margin requirements !

Ranked by Relationship!

Impact on Documentation

Process

Step One

Prioritize ISDA by relationship !


Repapering CSAs, Drafting Custodian and Master Netting Agreements

Issues and drafting process for repapering CSA ! !!

Step Two

ISSUES IN CSA !

Eligible Master NeAng Agreement

CSA

Dispute Resolution !

Initial Margin ! Variation Margins !

Calculation!

Minimum Transfer Amount ! Acceptable Collateral !

Fallback Positions !Segregation

Custodian Agreement !

New requirements mandate the CSA to have Custodian and!Eligible Master Netting Agreements!


Due Diligence after Repapering CSA Daily Operation of Trades after Repapering from a CSA Centric View

Step Three, A

CSA

Risk Data !

Trades Trade Bundling Trade Calculator

Credit Data! !

Margin Rules

Legal and Compliance !Department:!

Margin Analysis & Explanation !

Margin Calls and Dispute !

Front Office

Operations !

Collateral Department !


Due Diligence After Repapering Daily operation after repapering for a margin rule centric view that reshapes the derivatives OTC business

Step Three, B

Margin Rules

For ISDAs negotiated after Effective Date, Good Faith representation that Counterparty is in compliance with classification of Financial End User !

Financial End User !

Exemption to Financial End

Users !

Trade Calculator !

Legal and Compliance !Department:!

Margin Analysis & Explanation !

Margin Calls and Dispute !

On-boarding !

Operations !

Collateral Department !

Information! to capture!

ISDA ! Trade !confirmation!

On and ALer the EffecNve Date

Credit!

Risk!


Application of the Law Regulators

Federal Deposit !

Insurance Corporation !

The Board of Governors of the Federal Reserve !

The Comptroller of the Currency ! The Federal

Housing Finance Agency !

The Farm Credit Administration !

Prudential Regulators!

CFTC! SEC!

Uncleared Swaps!

The Law


Jurisdiction CFTC or PR Margin Rules Apply to Uncleared Swaps

Extensive transacNon diligence is needed in applicaNon of Final Margin Rules.

PR

Regulators!

CFTC

The CFTC Final Rules cover margin calls for !only SDs and MSPs with no oversight !

from the PR!

Uncleared swaps !

Rules ImplicaNon

The PR Final Rules apply to margin calls for only !SDs and MSPs with no oversight !

from the CFTC !


(CFTC, PR) and Foreign Regulators: Margin Rules Apply to Uncleared Swaps

PR Regulators

CFTC Uncleared

swaps !

Uncleared swaps will eventually be regulated both by U.S. and foreign jurisdicNons

E.U. and U.K.!

Canada

Japan!

U.S. REGULATORS FOREIGN REGULATORS – Currently DraLing RegulaNon


The Margin Rules The margin rules requires that CSE collect and post IniNal and VariaNon Margins for uncleared swaps with certain counterparNes.

Counterparties!!

•  SDs!•  MSPs !•  Inter-Affiliate

Swaps!•  Financial End

Users!

Collateral !!

•  Different requirement for IM and

VM collateral!!

Custodian and Eligible Master Netting Agreement!

!•  Ancillary Documents !

!

Method of Calculating and Timing Obligations of initial Margin! !•  Certain

requirements!

Trade Calculator !

!•  Certain

requirements!

Model Approval Process!

!•  All rules,

risk, and credit models must be integrated in margin calculation!

•  Approved model or Standard model!

QuesNons to implement uncleared swaps: -‐ Is the CSE supervised by a PrudenNal Regulator? -‐ Who qualifies for a Financial End User? -‐ What enNNes are the exempted enNNes of a Financial End User? -‐ How to calculate iniNal margins? -‐ Who is an Affiliate?

Affiliate and!Inter-Affiliate! •  Rules affect! aggregate ! notional! exposure!

Compliance Schedule !

Jurisdiction:!Either the CFTC or the!PR—but not both!!

Two way CFTC IM and VM posting – Party B Trading Entity: Swap Dealer or Major Market Participant !

The CFTC rules: Two-Way Initial Margin Requirement for Swap Dealers and Major Market Participants !

5/26/16 13

Counterparty A !

A

Uncleared Swaps ! Counterparty B !

Counterparty A is a!Swap Dealer or Major

Market Participant (Covered Swap Entity

(CSE))!

!Counterparty B is a!

Swap Dealer or Major Market Participant

(Covered Swap Entity!(CSE))!!

CFTC rules: Party A is required to collect and post, daily. [17 C.F.R. § 23.152]. IM must be in U.S Dollars, major currency, currency of settlement, U.S. Government debt and equities in S&P 500 or S&P 1500 composite. [17 C.F.R. § 23.156(a)(3)(b)]. ! Party A is required to collect and post VM, daily. [17 C.F.R. § 23.153(a)-153]. VM must be in U.S. Dollars, major currency or the currency of settlement. [17 C.F.R. § 23.156(b)(1)(i)]. !

CFTC rules: Party B is required to collect and post collateral, daily. [17 C.F.R. § 23.152]. IM must be in U.S. Dollars, major currency, currency of settlement, U.S. Government debt and equities in S&P 500 or S&P 1500 composite. [17 C.F.R. § 23.156(a)(3)(b)]. ! Party B is required to collect and post VM, daily. [17 C.F.R. § 23.153(a)-153; 12 C.F.R. § 237.4(a).] VM must be in U.S. Dollars, major currency or the currency of settlement. [17 C.F.R. § 23.156(b)(1)(i)]. !

IM

VM

Application of Rules !IM Exposure Threshold:

CSE is not required to collect until aggregate of uncleared swaps exposure between Counterparty A and its affiliates and Counterparty B and its affiliates is at least $50 million [17 C.F.R. § 23.151].

Minimum Transfer Amount:

When the aggregated exposure hits $50 million, the IM and VM Minimum Transfer Amount each needs to exceed $500,000 to collect and post collateral. [17 C.F.R. § 23.152(b)(3)].

Created and Presented by Billy Gopeesingh

Two Way CFTC IM and VM posting – Party B Trading Entity: Financial End User with Material Swap Exposure

The CFTC rules: Two-Way Initial Margin for Swap Dealers and Major Market Participants!

5/26/16 14

Counterparty A !

B




(CSE))!

!!

Counterparty B Financial End User !with Material Swap Exposure–

aggregated notional exposure exceeds $8 billion with its affiliates!

!


Parties are not required to collect until aggregate of uncleared swaps exposure between Counterparty A and its affiliates and Counterparty B and its affiliates is at least $50 million [17 C.F.R. § 23.151].



CFTC rules: Party A is required to collect and post, daily. [17 C.F.R. § 23.152]. IM must be in U.S. Dollars, major currency, currency of settlement, U.S. Government debt and equities in S&P 500 or S&P 1500 composite. [17 C.F.R. § 23.156(a)(3)(b)]. ! Party A is required to collect and post VM, daily. [17 C.F.R. § 23.153(a)-153]. VM must be in U.S. Dollars, major currency or the currency of settlement. [17 C.F.R. § 23.156(b)(1)(i)]. !

CFTC rules: Party B is required to collect and post collateral, daily. [17 C.F.R. § 23.152]. IM must be in cash, major currency, currency of settlement, U.S. Government debt and equities in S&P 500 or S&P 1500 composite. [17 C.F.R. § 23.156(a)(3)(b)]. ! Party B is required to collect and post VM, daily. [17 C.F.R. § 23.153(a)-153; 12 C.F.R. § 237.4(a).] VM must be in U.S. Dollars, major currency or the currency of settlement. [17 C.F.R. § 23.156(b)(1)(i)]. !

IM

VM


One Way PR IM and Two Way CFTC VM posting – Party B Trading Entity: Financial End Users without Material Swap Exposure

The CFTC rules: One-Way Initial Margin for Swap Dealers and Financial End User!!

5/26/16 15

Counterparty A !

C


Counterparty A is a Swap Dealer or Major


(CSE))!

Counterparty B is Financial End User

without Material Swap Exposure and not-inter-

affiliate !

Under CFTC rules, Party A is not required to collect or post collateral, provided certain condition are met. [17 C.F.R. § 23.159(a)]. Under PR rules, Party A is required to collect, but not post Initial Margins. [12 C.F.R. 237.11(a)]. See pervious pages for eligible collateral. Under CFTC rules, Party A is required to collect and post Variation Margins. [17 C.F.R. § 23.159(b)]. See previous pages for eligible collateral.

Under CFTC rules, Party B is not required to collect or post collateral, provided certain conditions are met. [17 C.F.R. § 23.159(a)]. !PR rules, Party B is required to post eligible collateral, daily but not collect Initial Margin. [12 C.F.R. § 237.3(d) and § 237.4(c).] See pervious pages for eligible collateral. !!Party B is required to collect and post Variation Margin. 17 C.F.R. § 23.153(a); 12 C.F.R. !§ 237.4(a).] See previous pages for eligible collateral.!

IM

VM


Parties are not required to collect until aggregate of uncleared swaps exposure between Counterparty A and its affiliates and Counterparty B and its affiliates is at least $50 million [17 C.F.R. § 23.151].



IM


One Way PR IM and Two Way CFTC VM posting – Party is a B: Financial End User, Material Swap Exposure, Inter-Affiliate

The CFTC rules generally preclude Inter-Affiliate transactions for Initial Margin requirements. The PR rules, however, !establish a one-way Initial Margin requirement for inter-affiliate transactions [12 C.F.R. § 237.11(a)]!

5/26/16 16

Counterparty A !

D


Counterparty A is a Swap Dealer or Major


(CSE))!

!Financial End user with Material Swap Exposure and is an inter-affiliate

of counterparty A!!

Under CFTC rules, Party A is not required to collect or post collateral, provided certain condition are met. [17 C.F.R. § 23.159(a)]. Under PR rules, Party A is required to collect, but not post Initial Margins. [12 C.F.R. 237.11(a)] See previous pages for eligible collateral. Under CFTC rules, Party A is required to collect and post Variation Margins. [17 C.F.R. § 23.159(b)]. See previous pages for eligible collateral.

Under CFTC rules, Party B is not required and collect or post collateral, provided certain conditions are met. [17 C.F.R. § 23.159(a)].!!Under RP rules, Party B is required to post, under certain conditions, but not collect Initial Margins. [12 C.F.R. § 237.11(a)]. See pervious page for collateral.!!Under CFTC rules, Party B is required to collect and post Variation Margin. [17 C.F.R. § 23.159(b)]. See previous pages for eligible collateral.!

IM

VM


CSE is not required to collect until aggregate of uncleared swaps exposure is at least $20 million. [12 C.F.R. § 237.11(b)(2)].

Minimum Transfer Amount: When the aggregated exposure hits $20 million, IM and VM Minimum Transfer Amount each needs to exceed $500,000 to collect

and post collateral. [17 C.F.R. § 23.152(b)(3)].!IM


Applicable Trading Entity: Financial End User Who are Foreign Affiliates Under this scenario, this CFTC rule is designed to prevent the potential use of affiliates to avoid collecting IM from third parties…!

because foreign affiliate are currently not subjected to margin requirements and its jurisdiction !has no regulation of such transaction. [17 C.F.R. § 23.159(c)(2).]!

5/26/16 17

Counterparty A !

E




(CSE))!

!Financial End user with Material Swap Exposure and is an foreign inter-

affiliates of counterparty A!!

Under CFTC rules, Party A is not required to collect or post collateral, provided certain conditions are met. [17 C.F.R. § 23.159(a)]. Under PR rules, Party A is required to collect, but not post Initial Margins. [12 C.F.R. 237.11(a)]. Under CFTC rules, Party A is required to collect and post Variation Margins. [17 C.F.R. § 23.159(b)]. See previous pages for eligible collateral.

Under CFTC rules , Party B is not required to collect or post collateral, provided certain conditions are met. [17 C.F.R. § 23.159(a)]/ !!Under RP rules, Party B is required to post but not collect Initial Margins. [12 C.F.R. § 237.11(a)]/!!Under CFTC rules, Party B is required to collect and post Variation Margin. [17 C.F.R. § 23.159(b)] See previous pages for eligible collateral.!

IM

VM


PR rules establishes threshold amount of is at least $20 million. [12 C.F.R. § 237.11(b)].

Minimum Transfer Amount: When the aggregated exposure hits $20 million, IM and VM Minimum Transfer Amount each needs to exceed $500,000 to collect

and post collateral. [17 C.F.R. § 23.152(b)].!


Who are Inter-Affiliates? Under this scenario, this CFTC rule is designed to preclude the potential use of affiliates to avoid collecting IM from third parties. !

[CFTC Final Rule at 674] … because foreign affiliates are currently not subjected to margin requirements and its jurisdiction !has no regulation of such transaction—however some jurisdictions are drafting legislation. [17 C.F.R. § 23.159(c)(2)]!

5/26/16 18

Counterparty A !

F




(CSE))!

!Financial End user with Material Swap Exposure and is an foreign inter-

affiliate of counterparty A!!

Application of Rules!to determine what entity is an Inter-Affiliate !

•  Inter-‐affiliate enNty financial statement is consolidated with the CSE financial statement, prepared with GAAP, IFRS, or other similar standard;

•  Inter-‐affiliate enNty financial informaNon is consolidated with the CSE and a third company on a financial statement, prepared according to

GAAP, IFRS, or other similar standard; or •  Inter-‐affiliate enNty is not consolidated with the CSE, but otherwise would be consolidated if the affiliate were subject to GAAP, IFRS, or

other similar standard.



Eligible Collateral – Non Cash Eligible Collateral!

Asset ! Haircuts!

Cash in same currency as swap obligation ! 0!

Eligible government and related debt (e.g., central bank, multilateral development bank, !eligible GSE securities) with residual maturity: !

a. !less than one-year ! 0.5!

b. !between one and five years ! 2.0!

b. !Greater than five years ! 4.0!

Eligible corporate debt (including eligible GSE debt securities with residual maturity): !

a. !less than one-year ! 1.0!

b. !between one and five years ! 4.0!

b. !Greater than five years ! 8.0!

Equities included in S&P 500 or related index ! 15.0!

Equities included in the S&P 1500 Composite or related index but not the S&P 500 or related index ! 25.0!

Gold ! 15.0!

!Additional haircut on asset in which the currency of the swap obligation differs from that of the collateral asset !

8.0!


Eligible Collateral - CASH

Eligible Collateral, as Cash [the CFTC’s regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries for this list of major currencies, 75 FR 55410 at 55412 (September 10, 2010)]!

Asset ! Haircuts!

Cash in same currency as swap obligation ! 0!

United States Dollars (USD)!

Euro (EUR)!

Pound Sterling (GBP)!

Canadian Dollar ( CAD)!

Japanese Yen (JPY)!

Swiss Franc ( CHF)!

New Zealand Dollars (NZD)!

Australian Dollar ( AUD)!

Swedish Kroner (SEK)!

Danish Kroner ( DKK)!

Norwegian Krone ( NOK)!

Any other currency as determine by the relevant Agency !

Compliance Date! IM Requirement !

Initial Margins is required when both counterparties and its affiliates average daily aggregate notional amount excluding foreign exchange transaction for March, April and May of the phase-in year exceeds:!

September 1, 2016! $3 trillion!

September 1, 2017! $2.25 trillion!

September 1, 2019! $1.5 trillion!

September 1, 2019! $750 billion!

September 1, 2020! IM is required for any other CSE with any other counterparty!

Variation Margins Implementation!

VM Requirements !

September 1, 2016! VM is required where both counterparties and affiliates have an average daily notional amount of covered swaps and excluded foreign exchange transaction for March, April and May of 2016 that exceeds $3 trillion !

March 1, 2017! Mandatory VM for CSE !


Phase in Margin Requirement Over Time


Who are Financial End Users?

Financial End Users! Financial End Users Definitions [RP Final Rules, 50 to 51]!!!

A bank holding company or an affiliate thereof; a saving and loan holding company!

...a U.S. intermediate holding company established or designated for purposes of compliance with 12 CFR 252.153; a nonbank financial institution supervised by the Board of Governors of the Federal Reserve System under Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323).!!

A depository institution; a foreign bank; a Federal credit union, a State credit union !

...as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) & (6)); an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H)).!!

An entity that is state-licensed or registered as a credit or lending entity !

This includes a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending!company; or commercial mortgage company; but excluding entities registered or licensed solely on account of financing the entity’s direct sales of goods or services to customers.!

A money services business! This includes a check casher; money transmitter; currency dealer or exchange; or money order or traveler’s check issuer !

A entity that is regulated under the Federal Housing Enterprise Financial Safety and Soundness Act of 1992 !

This type of regulated entity as defined in section 1303(20) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502(20)) and any entity for which the Federal Housing Finance Agency or its successor is the primary federal regulator. !

A farm credit entity ! The farm credit enNty is any insNtuNon chartered in accordance with the Farm Credit Act of 1971, as amended, 12 U.S.C. § 2001 et seq. that is regulated by the Farm Credit AdministraNon.!

Financial End Users! Financial End Users Definitions [RP Rules, 50 to 51]!!

A securities holding company, a broker or dealer, an investment adviser !

These type of entities as a securities holding company; a broker or dealer; an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53);!

A private fund! A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80-b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 of the Securities and Exchange Commission (17 CFR 270.3a-7);!

Commodity pool entities ! A commodity pool, a commodity pool operator, or a commodity trading advisor as defined in, respectively, sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a (10), 7 U.S.C. 1a(11), 7 U.S.C 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28))

An employee benefit plan! An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002);!

An insurance company! An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator !


Financial End Users Group


Financial End Users Group

Financial End Users! Financial End Users Definitions [RP Rules, 50 to 51]!!

An entity or person! An entity, person or arrangement that is, or holds itself out as being, an entity, person or arrangement that raises money from investors, accepts money from clients, or uses its own money primarily for the purpose of investing or trading or facilitating the investing or trading in loans, securities, swaps, funds or other assets for resale or other disposition or otherwise trading in loans, securities, swaps, funds or other assets.!

Catch Provision - Financial end user or swap entity ! An entity that is or would be a financial end user or swap entity, if it were organized under the laws of the United States or any State.!!


What Entities are Excluded from Financial End Users Group ?

Financial End Users that trigger Margin requirements!

Financial End Users’ Definitions [RP Final Rules, 50 to 51]!!

A sovereign entity ! Sovereign entity is defined to mean a central government (including the U.S. government) or an agency, department, or central bank of a central government. A sovereign entity would include the European Central Bank for purposes of this exclusion.!

A multilateral development bank ! Multilateral development bank is defined to mean the International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other entity that provides financing for national or regional development in which the U.S. government is a shareholder or contributing member or which the relevant Agency determines poses comparable credit risk. !

The Bank for International Settlements !

A captive finance company! A captive finance company that qualifies for the exemption from clearing under section 2(h)(7)(C)(iii) of the Commodity Exchange Act of 1936 and implementing regulations !

A person that qualifies for affiliate exemption! A person that qualifies for the affiliate exemption from clearing pursuant to section 2(h)(7)(D) of the Commodity Exchange Act of 1936 or section 3C(g)(4) of the Securities Exchange Act of 1934 and implementing regulations !

Eligible centralized treasury unit [of H.R.!2029, an omnibus appropriations package, amended and clarified CEA Section 2(h)(7)(D) that allow centralized treasury units (CTU) to take advantage of the clearing exception, 17 C.F.R. § 23.151(2)(vi).] !

The PR Agencies intend to align the exclusion from the definition of financial end user as much as possible with the statutory exceptions as well as exclusions implemented by the CFTC by rule. There if the CFTC acts to exempt such an entities fro the clearing by rule, the the PR would do the same. [PR Final Rules page 60]!


Derivatives Products Asset Class

Asset Class that are includes in the definition !

Asset Class that are excluded from the definition of swaps ( but is still included in the exposure calculation. !!

Commodities, Interest Rates, Credit and Equity! The Secretary of Treasury made a determination that Foreign Exchange Swaps and Foreign Exchange Forwards are not included from the definition of swap, however, are included the exposure calculation. [See Determination of Foreign Exchange Swaps and Foreign Exchange Forwards Under the Commodity Exchange Act, 77 Fed. Reg. 69694 (Nov. 20, 2012)]!Foreign Exchange products that are fixed, physically settled and cross-currency swaps are not subject included in the definition of swap and are not included in the Final Margin Rules, however, are included the exposure calculation. [17 C.F.R. § 23.154(b)(2)(iv)] !

Initial Margins Implementation!

To qualify for the exemption, the CSE must not transact with small banks and savings associations, Farm Credit System Institutions, or credit unions with total assets exceeding $10,000,000,000. 7 U.S.C § 2(h)(7)(C)(ii).!!

CEA Section 2(h)(7)(A) exempts certain entities from clearing requirements when uncleared swaps are intended for hedging or other risk mitigation. As a natural outflow of the recognition of this clearing exemption, the CFTC and Prudential Regulators have also exempted these transactions from the Final Margin Requirements. The broadest of the three TRIPRA exemptions, CSEs transacting with counterparties that qualify for the CEA Section 2(h)(7)(A) clearing exception--such as non-financial end users, small banks and savings associations, Farm Credit System Institutions, credit unions, and captive finance companies--will not be subject to margin requirements under the Final Margin Requirements !

!The CFTC under its CEA Section 4(c)(1) powers exempts certain cooperative financial entities from clearing requirements when they (1) enter into uncleared swaps in connection with originating loans for their members or (2) hedge or mitigate commercial risks related to loans to members or swaps with non-financial entity members. [17 C.F.R. § 50.51 ]!

[CEA Section 2(h)(7)(D) was recently amended by Title VII of the Consolidated Appropriations Act, 2016 and, exempts affiliates of an entity that otherwise qualifies for the clearing requirement under CEA Section 2(h)(7)(A) when certain conditions are met. [7 U.S.C. § 2(h)(7)(D)(ii); 15 U.S.C. § 78c-3(g)(4)(B)]!


Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) Exempts Certain End Users !


Calculation Compliance Process

The margin rules requires that enhance collecNon process

•  Decision to use Regulator Model,!

Third Party Model! or Proprietary Model!

What Model?

•  Ensure all rules and internal requirement are built in the algorithms for Model!

Rules and algorithms ! Monitoring

Regulator

•  Enhance Calculation Department to develop controls, processes !

•  Develop processes to ensure i) ongoing compliance ii) Periodical auditsiii) Escalation iv) Internal and regulator reporting!

Regulators approval!

Internal Model

Third Party

Model: SIMM

Regulator Model