United States: CFTC Proposes to Broaden Scope of Eligible Collateral for Initial Margin

By: Kenneth Holston, Cheryl Isaac, Matthew Rogers and Gustavo De La Cruz Reynozo

On July 26, 2023, the Commodity Futures Trading Commission (“CFTC”) proposed an amendment (“Proposal”) to, among other things, expand the universe of eligible collateral for the CFTC’s initial margin (“IM”) requirements for uncleared swaps. The Proposal would result in swap dealers that are not subject to prudential regulation being able to use a broader range of money market funds (“MMFs”) and similar funds as collateral to meet their uncleared swap IM requirements under CFTC Regulation 23.156(a)(1)(ix).

Under existing rules, securities issued by MMFs cannot be used as eligible IM if the MMF engages in transferring assets through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, and similar arrangements. By eliminating this restriction, securities issued by MMFs that use repurchase or similar arrangements would qualify as IM collateral.

Many MMFs available in the institutional marketplace use repurchase or similar arrangements as part of their strategy and, therefore, those shares do not currently qualify as eligible IM collateral.

In January 2020, the CFTC’s Global Markets Advisory Committee (“GMAC”) created a subcommittee focused on margin for uncleared swaps, which ultimately issued a report with recommendations on how to fix certain issues with the CFTC margin rules. GMAC voted to adopt the report, and recommended that the Commission adopt the subcommittee’s recommendations.  One of the recommendations was the elimination of the asset transfer restriction in paragraph (C) of the CFTC Regulation 23.156(a)(1)(ix), which disqualifies the securities of funds that transfer their assets through repurchase or similar arrangements. If adopted as proposed, the restriction on the use of securities of money market and similar funds that transfer their assets through repurchase or similar arrangements would be eliminated.

Comments on the Proposal must be submitted within 60 days after the Proposal is published in the Federal Register (which has not yet occurred at the time of this writing).

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