On February 13, 2017 the Commodity Futures Trading Commission delivered an early Valentine’s Day present to swap dealers and major swap participants by extending the deadline to comply with the variation margin requirements for un-cleared swaps stipulated by Commission Regulation § 23.153 from March 1, 2017 to September 1, 2017. The CFTC’s No-Action Letter announcing this extension, CFTC Letter No. 17-11, applies only to swap dealers and major swap participants without a prudential regulator.
The CFTC granted this extension in response to requests for relief from “virtually all [swap dealers] and entities that use swaps to hedge commercial risk,” including SIFMA, IAA, ISDA, and the ABA Securities Association. The Commission recognized that the end-user community had “actively engaged” with swap dealers in an effort to help swap dealers execute the necessary credit support documentation to comply with the Regulation by March 1st. However, the volume of credit support documents that needed to be executed or amended overwhelmed the industry as there was not a “one-size-fits all credit support agreement” that would translate across the varying market participants.
Fortunately, the CFTC understood the situation may have required some swap dealers to cease trading with most of their counterparties, possibly resulting in reduced access to liquidity and a dealer’s inability to hedge positions for other counterparties. As this disruption to the market would have negatively affected the national and global swaps markets, the CFTC issued this No-Action Letter to save the industry from possible pandemonium in the un-cleared swap market.
However, this extension is not unconditional. The Commission will not recommend an enforcement action against a swap dealer before September 1, 2017 as long as the swap dealer satisfies the following four conditions. First, the swap dealer’s failure to comply with the March deadline must result from the dealer’s failure, despite its good faith efforts, to complete necessary credit support documentation with a counterparty or the dealer’s need for additional time to implement operational processes to settle variation margins in accordance with the Regulation with such counterparty. Second, the swap dealer must use its best efforts to continue to implement compliance with § 23.153 with each counterparty after the March deadline passes. Third, the swap dealer must continue to post and collect variation margin with counterparties in accordance with its existing variation margin agreements with such counterparties until the dealer can comply with the § 23.153 requirements. Fourth, and finally, all swaps subject to the March 1st deadline entered into on or after March 1st must comply with the regulation by September 1, 2017.
The CFTC’s Division of Swap Dealer and Intermediary Oversight will monitor the progress of swap dealers and expects dealers to “make continual, consistent, and quantifiable progress towards compliance” during the no-action period. Therefore, swap dealers must remain dedicated to complying with the regulation or they risk CFTC enforcement action and will not be able to use the No-Action Letter as an affirmative defense.
 CFTC Letter No. 17-11 does not apply to swap dealers subject to the variation margin requirements of § 23.153 that were subject to a compliance date of September 1, 2016. On September 1, 2016, swap dealers were required to comply with § 23.153 if they and their counterparties (combined with each side’s affiliates) had an average daily notional amount in excess of $3 trillion for covered swaps executed in March, April, and May of 2016. See § 23.161(a)(1) for the CFTC’s list of compliance dates with § 23.153.
 See 7 U.S.C. §1a(39) for the definition of “prudential regulator.” Generally, a prudential regulator is either the OCC, the Federal Reserve Board of Governors, the FDIC, the Farm Credit Administration, or the Federal Housing Finance Agency, but see the rule for more specific information.
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