Banking and Finance Law Daily Interim final rule facilitates transfers of legacy swaps
Friday, March 15, 2019

Interim final rule facilitates transfers of legacy swaps

By J. Preston Carter, J.D., LL.M.

Federal regulatory agencies adopted a rule to allow transfers of legacy swaps from the U.K. to EU affiliates without triggering new margin requirements.

Five federal regulatory agencies adopted an interim final rule to ensure that qualifying swaps may be transferred from a United Kingdom entity to an affiliate in the European Union or the United States without triggering new margin requirements. According to the agencies, the action is in response to the possibility of a non-negotiated withdrawal of the U.K. from the EU. This action applies to legacy swaps that were entered into before applicable regulatory margin requirements took effect and is generally consistent with similar relief contemplated by international jurisdictions.

The interim final rule was adopted by the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Federal Housing Finance Agency, and Farm Credit Administration. The rule would ensure that any legacy swap currently exempt from the agencies’ rule on margin for non-cleared swaps (Swap Margin Rule) would not become subject to the rule if such swap is amended solely for the purpose of transferring it to an affiliate as a result of a non-negotiated U.K. withdrawal from the EU.

The Swap Margin Rule takes effect under a phased compliance schedule stretching from 2016 through 2020, and the dealers covered by the rule continue to hold swaps in their portfolios that were entered into before the effective dates of the rule. Those swaps are grandfathered from the Swap Margin Rule’s requirements until they expire according to their terms.

There are currently financial services firms located within the U.K. that conduct swap dealing activities subject to the Swap Margin Rule. The U.K. has provided formal notice of its intention to withdraw from the EU on March 29, 2019. If this transpires without a negotiated agreement between the U.K. and EU, these entities located in the U.K. may not be authorized to provide full-scope financial services to swap counterparties located in the EU.

According to the current notice, the agencies’ policy objective in developing the interim final rule is to address one aspect of the scenario likely to ensue, whereby entities located in the U.K. might transfer their existing swap portfolios that face counterparties located in the EU over to an affiliate or other related establishment located within the EU or the United States. The agencies seek to address industry concerns about the status of grandfathered swaps in this scenario, so the industry can focus on making preparations for swap transfers. These transfers, if carried out in accordance with the conditions of the interim final rule, will not trigger the application of the Swap Margin Rule to grandfathered swaps that were entered into before the compliance dates of the Swap Margin Rule.

The agencies state that the rule, adopted on March 15, 2019, becomes effective immediately, and they are accepting comments on the rule for 30 days after publication in the Federal Register.

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