To help address market participants in the face of the coronavirus (COVID-19) crisis, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions have provided a one-year extension to the fifth and sixth phases of the implementation schedule of the rules requiring margin for uncleared swaps.
In response to the financial crisis of 2007-2008, the Group of Twenty (G-20) agreed to include in its regulatory reform program margin requirements on non-centrally cleared derivatives, tasking the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) to develop standards for consultation. Although these standards have been established, BCBS and IOSCO made changes to the implementation schedule to provide sufficient time for market participants to comply with the new requirements. To address challenges faced by market participants in light of COVID-19, BCBS and IOSCO have now provided an extension to the final phases of the margin implementation deadlines. Although the US Commodity Futures Trading Commission (CFTC) and the Prudential Regulators have not extended the deadlines of these remaining two implementation phases, we expect that they will follow BCBS and IOSCO’s lead and extend the deadlines in a similar manner.
In July 2019, BCBS and IOSCO agreed to a one-year extension to the final implementation phases of the margin requirements. Initially there were five implementation phases of the margin requirements, but with the extension BCBS and IOSCO introduced a sixth phase to occur on September 1, 2021. The sixth phase applies to covered entities (e.g., swap dealers and financial end users with material swaps exposure) with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than €8 billion. BCBS and IOSCO introduced an additional implementation phase, scheduled for September 1, 2020, subjecting covered entities with an AANA of non-centrally cleared derivatives greater than €50 billion to the requirements. The CFTC adopted these implementation phases just last month, and the Prudential Regulators proposed to incorporate in their rules these implementation phases in late 2019.
However, in light of challenges presented by COVID-19, BCBS and IOSCO have provided a one-year extension to each of the fifth and sixth implementation phases. The fifth phase will now occur on September 1, 2021, and the sixth implementation phase will occur on September 1, 2022. The CFTC and the Prudential Regulators have not yet extended the deadlines.
The relief is not unexpected as many industry trade groups had advocated for relief.
We expect that the CFTC and the Prudential Regulators (as well as other financial regulators) will follow the global standard-setting organizations’ lead and extend the implementation phases by one year.
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If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Michael M. Philipp
Thomas V. D’Ambrosio
Katherine Dobson Buckley
 See, e.g., Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (Mar. 17, 2020); Margin and Capital Requirements for Covered Swap Entities, 84 Fed. Reg. 59,970 (proposed on Nov. 7, 2019) (comment period extended, 84 Fed. Reg. 71,833 (Dec. 30, 2019)).