Uncleared Legacy Swaps Margin Rule Prompts No-Action Relief From CFTC

On June 6, 2019, the Commodity Futures Trading Commission (CFTC) took on a point that was giving those engaging in legacy swaps some cause for concern. More specifically, the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) announced it was offering no-action relief, a move that would ultimately offer amendments to legacy swaps without those being declared legacy swaps no longer.

The relief came about as a result of CFTC No Action Letter Number 19-13, a move stemming from an ISDA request for no-action relief. The ISDA sent the request to the CFTC on its members’ behalf, said members looking for a position of no-action in an earlier case where a swap dealer failed to comply with the CRFT’s requirements on uncleared swap margins. More specifically, the swap dealer hadn’t complied with amendments related to legacy swaps.

Legacy swaps, as the CFTC notes, are those swaps that were carried out before the compliance date the CFTC set in its uncleared swap margin rule, regulation 23.161. Swaps executed after the compliance date for variation margin but before the date for initial margin became legacy swaps in relation to initial margin requirements.

With the letter from the CFTC in place, swap dealers could carry on with legacy swaps in several key settings. One, they could continue dealing in legacy swaps that were amended in a minor fashion, where some small point or another had been addressed. Since these were effectively older swaps, the ISDA noted, these shouldn’t fall under current rules, a point the CFTC seemed to agree on.

Two, they could carry on with swaps that came about as the result of a swaption—an option to enter into a swap after an option was exercised—that was inherently a legacy swap to begin with. Three, they could conclude a swap that was part of a partially-terminated legacy swap. Fourth, they could carry on with a swap that emerged after the “partial novation” of a legacy swap, and finally, they could address new swaps that were generated from multilateral compression of exclusively legacy swaps.

In each of these cases, the underlying argument, effectively, is that these aren’t newly-generated swaps, but rather the fallout of some condition or set of conditions that created a “new” swap from the ashes of the old. If this is the case, the ISDA argued, then why should it be treated under the new rules? It was a point the CFTC appeared to hold to as the request for no-action relief was granted in each case.

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