The Federal Reserve Board and Office of the Comptroller of the Currency have issued guidance regarding initial examinations of the agencies’ supervised institutions for compliance with certain provisions of the November 2015 interagency rule that established initial and variation margin requirements for non-cleared swaps and non-cleared security-based swaps.
Although the interagency final rule, which was adopted by the Fed, OCC, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, and Farm Credit Administration, became effective April 1, 2016, it included a set of delayed mandatory compliance dates. Variation margin requirements applied to large covered swap entities, those with more than $3 trillion in outstanding swap activity, starting on Sept. 1, 2016, and to all other covered swap entities on March 1, 2017. Initial margin requirements are being phased in between Sept. 1, 2016, and Sept. 1, 2020.
Fed compliance expectations. The Fed’s expectations for compliance were provided in SR 17-3 and apply to Commodity Futures Trading Commission (CFTC)-registered swap dealers for which the Federal Reserve is the prudential regulator.
In determining whether a covered swap entity is compliant with the variation margin requirements, Fed examiners should:
- Give priority to compliance efforts by covered swap entities that have the highest risks and largest counterparties. For other counterparties, Fed examiners should focus on a covered swap entity’s good faith efforts to comply with the variation margin requirements as soon as possible, and in no case later than Sept. 1, 2017.
- Recognize the scope and scale of changes necessary for each covered swap entity to achieve effective compliance for each of its non-cleared swap transactions.
- Evaluate a covered swap entity’s governance processes to ensure that those processes assess and manage its current and potential future credit exposure to non-cleared swap counterparties, as well as any other market risk arising from such transactions.
- Consider the covered swap entity’s implementation plan, including actions taken to update documentation, policies, procedures, and processes, as well as its training program for staff on how to handle technical problems or other implementation challenges.
OCC compliance expectations. The OCC’s compliance expectations were provided to national banks and federal savings associations in OCC Bulletin 2017-12 and echo many of the expectations set forth by the Fed.
The OCC did note that its supervisory approach regarding the interagency final rule is similar to the approach the OCC took in initial examinations for compliance with the TILA-RESPA Integrated Disclosure Rule or TRID Rule, as well as other mortgage rules implementing provisions of the Dodd–Frank Act that went into effect in January 2014.
Under the OCC’s TRID Rule supervisory approach, banks and federal savings associations were to make good faith efforts to comply with the rule’s requirements in a timely manner. In addition, examiners considering a bank’s implementation plan were to focus on:
- actions taken to update policies, procedures, and processes;
- training of appropriate staff; and
- handling of early technical problems or other implementation challenges.
Interagency support. In a press release, the FDIC, FHFA, and Farm Credit Administration noted that institutions under their jurisdiction are not currently affected by the compliance guidance, but that they support the guidance issued by the OCC and Fed.
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