On February 13, 2017, the U.S. Commodity Futures Trading Commission (CFTC) issued time-limited no-action relief providing a six-month grace period for certain swap dealers to come into compliance with the variation margin rules that are set to come into force March 1, 2017.  As CFTC Acting Chairman Giancarlo noted, as much as 90 percent of financial end-users in-scope under the rules are not ready to meet the new requirements.

Global systemic risk is not reduced by the abrupt cessation of risk hedging activity by American life insurance companies and retirement funds at a time of enormous changes in financial rates and global asset values. This action by the CFTC does not change the scheduled time of arrival for the agreed margin implementation. It just foams the runway to ensure a safe landing.”  – CFTC Acting Chairman Giancarlo

The CFTC’s relief will primarily benefit smaller swap dealers and energy companies registered as swap dealers.  While the relief contains certain conditions, these are not generally onerous. The relief is similar to that provided by regulators in Australia, Singapore and Hong Kong.

However, U.S. prudential regulators and European regulators have yet to issue similar relief.  Given that many of the largest swap dealers are subject to rules issued by the U.S. banking agencies, the Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, the relief issued by the CFTC will do little to prevent last-minute trading disruptions or market fragmentation if the U.S. banking regulators do not follow suit.  Further, European dealers are subject to variation margin rules promulgated by European regulators under EMIR.  European regulators have yet to issue any final relief, although they have made noises indicating that such relief is being considered.  In short, the CFTC’s relief will have limited benefit to impacted market participants if these other regulators do not follow suit before March 1.