CFTC No Action Relief Regarding Variation Margin Rules
Yesterday, the U.S. Commodity Futures Trading Commission’s (CFTC) Division of Swap Dealer and Intermediary Oversight (DSIO) announced the issuance of a time-limited no-action letter stating that, from March 1, 2017 to September 1, 2017, DSIO will not recommend an enforcement action against a swap dealer (SD) for failure to comply with the variation margin requirements for swaps that are subject to a March 1, 2017 compliance date. The DSIO no-action letter does not postpone the March 1, 2017 compliance date for variation margin, rather it allows market participants a grace period to come into compliance. The alternative investment community should address this letter in conjunction with separately issued CFTC no action letters as well as EMIR’s variation margin requirements which target March 1st. Check with your counsel on “real time” developments that directly affect your portfolio.
The alternative investment community is thrilled given that these new rules require that initial margin be segregated from variation margin which produces opportunity costs to both sides. Netting allows parties to benefit from heavily in-the-money positions in light of large initial margin amounts due at trading. Another major issue with the variation margin rules is the shorter delivery and resolution period. Are our back offices truly ready and is this rule actually benefiting our community or hurting our bottom line?! Irrespective of the opportunity costs or benefits to tax payers and investors alike, the alternative investment community undoubtedly welcomes the extra time to become compliant.