The Federal Deposit Insurance Corporation's board of directors, along with other banking regulators, has approved a final rule establishing minimum margin requirements for certain swaps that are not cleared through a clearinghouse.
The rule requires insured depository institutions that are designated by the Securities and Exchange Commission or Commodity Futures Trading Commission as swap dealers or major swap participants to post and collect initial margin on non-cleared swaps entered into with other dealers, and with financial end users that have at least $8 billion in non-cleared swaps. Initial margin—collateral set aside to offset the risk of the trade—can be held as cash, foreign currency, treasuries or corporate and municipal bonds. The FDIC projects that the new requirement will add roughly a 30 percent premium to traditional swap margin requirements. The rule also requires so-called “variation margin” to be posted if the values of a transaction shift over time; it must be posted in cash.
The final rule is consistent with an international agreement published in September 2013 by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions.
A related interim final rule, also announced this week, exempts swaps with a financial institution that has less than $10 billion in assets and commercial end-users that use swaps to hedge risks, such as oil companies and farmers.
The rules, which go into effect in September 2016, are issued and overseen jointly by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Farm Credit Administration, and the Federal Housing Finance Agency. The SEC and CFTC will also need to give their approval.
“Establishing margin requirements for non-cleared swaps is one of the most important reforms of the Dodd-Frank Act,” FDIC Chairman Martin Gruenberg said in a statement. Prior to the financial crisis, some insured depository institutions entered into large, non-cleared swaps positions without the prudent exchange of collateral—or margin—to support those positions. The result, he said, was a large buildup of leverage that exposed the financial system to significant risk.”
“Because the FDIC ‘backstops’ these institutions and their activities, effectively providing a generous subsidy, the rule is important in mitigating risk to the firm and in promoting greater overall financial stability,” added FDIC Vice Chairman Thomas Hoenig, vice chairman of the FDIC. “It also mitigates the financial exposure to the FDIC should an affiliate of the bank, as a counterparty to the bank, fail and be resolved in bankruptcy.”