US Fed finalizes uncleared swaps rule for banks

OREANDA-NEWS. November 03, 2015. Large banks that trade energy commodity swaps outside of a central clearinghouse will have to post and collect margin on those transactions starting in late 2016 under rules the US Federal Reserve finalized today.

The Federal Reserve said its new margin requirements would reduce the risks that uncleared swaps might pose to the financial system. Large amounts of those swaps that banks held during the start of the 2007 financial crisis increased instability in the markets. US regulators at the time did not know how exposed banks were to uncleared swaps or if they had enough capital to cover their losses.

The 2010 Dodd-Frank financial reform law in response ordered federal regulators to issue rules requiring market participants to start posting margin for uncleared swaps, prompting the Federal Reserve to issue the regulations it finalized today. The US Congress early this year passed another law to ensure the regulation did not apply to commercial end-users using swaps to hedge their risks.

The Federal Reserve said the amount of margin that banks have to collect and post under the new rules will depend on the risk of the uncleared swaps. The requirements to collect and post margin will be phased in over a period of four years and start to take effect on 1 September 2016.

The Commodity Futures Trading Commissions in December 2014 proposed its own margin requirements for uncleared swaps, but the regulations are still under development. Those rules would apply to swap dealers and major swap participants.