FDIC Adopts Final Rule on Collateral for Swaps

"Establishing margin requirements for non-cleared swaps is one of the most important reforms of the Dodd-Frank Act," said the FDIC chair.
Matthew HellerOctober 22, 2015

The Federal Deposit Insurance Corp. on Thursday approved a final rule requiring banks to collect more collateral for certain swaps trades, saying the new regulation would promote financial stability.

The Dodd-Frank Act required regulators to impose margin requirements on swaps as part of the post-crisis effort to shore up the financial system. Swaps contracts involving excessive risk were at the heart of the crisis, destabilizing firms such as American International Group.

The rule covers swaps that aren’t cleared through a central counterparty. Banks had been concerned about the added costs of compliance, but for certain swaps deals the cost may be roughly half of what it would have been under the draft rule issued last year.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The FDIC voted unanimously in favor of the final rule.

“Establishing margin requirements for non-cleared swaps is one of the most important reforms of the Dodd-Frank Act,” FDIC Chairman Martin J. Gruenberg said in a news release. “These margining practices will promote financial stability by reducing systemic leverage in the swaps marketplace, and promote the safety and soundness of banks by discouraging the excessive growth of risky non-cleared swap positions.”

Under the new rule, covered swaps entities must post and collect initial margin, which is collateral intended to ensure the ability of both parties to perform on the swaps contract. They must also post and collect variation margin, which is collateral collected from counteparties to offset credit exposures created by changes in the value of their swaps contracts.

A change from the draft rule applies to swaps between a covered swap entity and larger affiliates. For such swaps, a covered swap entity is required to only collect — but not post — initial margin.

“While the system overall would have been best served if banks posted as well as collected margin with their affiliates, much is accomplished with the requirement that the insured bank collect margin,” FDIC Vice-Chairman Thomas Hoenig said. “I also recognize that other agencies with jurisdiction over non-bank affiliates could require these firms to collect margin as they finalize their rules on this matter.”