A joint statement by the Federal Reserve and the Office of the Comptroller of Currency (OCC) announcing new guidance for swap dealers provides a window into the sweeping new regulatory power of Dodd/Frank.
“The Federal Reserve Board and the Office of the Comptroller of the Currency (OCC) on Thursday issued guidance explaining how supervisors should examine for compliance with the swap margin rule,” the Federal Reserve and OCC announced in a joint statement, “which established margin requirements for swaps not cleared through a clearinghouse.
“The guidance explains that the Board and the OCC expect swap entities covered by the rule to prioritize their compliance efforts surrounding the March 1, 2017, variation margin deadline according to the size and risk of their counterparties.”
The guidance- part of new powers under sections 731 and 764 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) which grant four agencies regulatory authority over swap dealers- OCC, Federal Reserve, Farm Credit Administration (FCA), and Federal Housing Finance Agency (FHFA).
The announcement was so significant that the Federal Deposit Insurance Corporation (FDIC), which has no entities affected, still released its own press release: “The Farm Credit Administration, the Federal Deposit Insurance Corporation, and the Federal Housing Finance Agency also administer the final rule for institutions under their jurisdiction, but currently have no swap entities affected by this guidance. However, they support the guidance issued by the Board and the OCC.”
The FDIC insures deposits in US banks, the OCC supervises national banks, and the FCA regulates a network of borrower-owned financial institutions that provide credit to farmers, ranchers, and agricultural and rural utility cooperatives.
“Beginning March 1, 2017, firms that are “Financial End Users,”1 including registered investment companies, business development companies, private funds, commodity pools, employee benefit plans, investment advisers, broker-dealers, insurance companies and certain banking and lending entities, will be required to post variation margin to and collect variation margin from dealers.” An analysis of the rule by Willkie, Farr and Gallagher, a law firm in existence since 1888 with a specialty in securities compliance, stated. “Under regulations adopted by U.S. bank regulators (the “Prudential Regulators”)2 and the Commodity Futures Trading Commission (“CFTC”) pursuant to Dodd-Frank3 (the “Swap Margin Rules”),4 swap dealers and other “Covered Swap Entities”5 will be required to post and collect variation margin with respect to uncleared swaps and security-based swaps entered into with Financial End Users on or after March 1, 2017.6 Similar rules with the same compliance date have been adopted by regulators in Europe,7 Canada, Switzerland, Singapore, Japan, and Hong Kong.”
It’s noteworthy that part of the Federal Reserve’s power to regulate swaps comes from the Volcker rule, which has been extensively analyzed by The Industry Spread.
“Priority should be given to compliance efforts by covered swap entities based on the size of and risk inherent in the credit and market risk exposures presented by each counterparty. A covered swap entity is expected to comply with the variation margin requirements of the final rule with respect to swap entities and financial end user counterparties that present significant exposures as of March 1, 2017. With respect to other counterparties, Federal Reserve examiners should focus on a covered swap entity’s good faith efforts to comply with the variation margin requirements of the final rule as soon as possible, and in no case later than September 1, 2017. This focus ensures that an entity’s compliance with respect to the highest risks and largest counterparties are prioritized and adequately met first.” The Federal reserve stated in announcing one of several points of guidance.
“The OCC expects national banks, federal savings associations, and other swap market participants subject to the OCC’s supervisory oversight to have governance processes that assess and manage their current and potential future credit exposure to non-cleared swap counterparties, as well as any other market risks arising from such transactions.” The OCC stated.