On October 22, 2015, U.S. prudential regulators published final and interim final margin rules governing swaps that are not centrally cleared (the “PR margin rule”) and on December 16, 2015, the Commodity Futures Trading Commission published its corresponding final margin rules (the “CFTC margin rule” and together with the PR margin rule, the “Margin Rule”). The Margin Rule requires financial end users to back their uncleared OTC derivatives transactions with cash or liquid securities.
Who is Affected?
Financial end users that may face these requirements include private equity, real estate, infrastructure, and microfinance fund vehicles, as well as banks and insurance companies, among others. These Financial end users could face substantial new requirements mainly as a result of the variation margin (“VM”) obligations. In contrast, banks are not required to impose margin requirements on nonfinancial end users which includes corporate end users of derivatives. In addition, funds hedging at the special purpose vehicle (“SPV”), asset or acquisition level likely will not be subject to the Margin Rule.
Financial end users that are subject to the Margin Rule will need to have appropriate policies and procedures in place to comply with this obligation. The challenges will include having to post and receive collateral as well as making the required changes to trading documentation. Additionally, financial end users should begin to consider whether and how the obligation may affect their hedging strategies. The Margin Rule is not retroactive to pre-existing transactions; however, certain life-cycle events may bring a pre-existing transaction within the scope of the Margin Rule. The Margin Rule provides entities with two options to document their trading relationships. First, entities may enter into new ISDA agreements and Credit Support Annexes to functionally separate the trades that are subject to the Margin Rules from their pre-existing trades. However, the rule also provides with the option to create separate portfolios within their pre-existing ISDA documentation for trades that would be subject to the Margin Rule and pre-existing trades that are not subject to the Margin Rule.
Most Impacted Entities will be subject to VM beginning on March 1, 2017 with the largest market participants being required to comply with the Margin Rule beginning on September 1, 2016. While many market participants may not be immediately subject to the Margin Rule, their dealer banks will require these market participants to make certain representations and amend trading documentation prior to the September 1, 2016 implementation date.
Final European OTC Derivatives Margin Rule
Frequently Asked Questions
On 4 October, 2016, the European Commission published its Final Draft Regulatory Technical Standards on margin for derivatives that are not centrally cleared (“OTC Margin Rule”). The OTC Margin Rule, which is arguably the most significant of the derivative risk mitigation rules introduced under EMIR, requires financial counterparties (“FCs”) and non-financial counterparties that exceed specific thresholds (“NFC+s” and together with FCs, “Impacted Entities”) to exchange collateral in respect of their uncleared over-the-counter derivative transactions. The OTC Margin Rule does not require banks to impose margin requirements on nonfinancial counterparties whose volume of non-hedging derivative transactions are below the clearing threshold (“NFC-s”). The requirements will be phased in beginning in early 2017 and ending 1 September, 2020, giving market participants some time to prepare for the changes.
When deciding to prepay your fixed rate CMBS debt, whether through yield maintenance or defeasance, most borrowers have questions. Here are a few of the more common ones, but if you have others, or just want to talk to a defeasance expert, don’t hesitate to contact us.
Defeasance Frequently Asked Questions
When deciding to prepay your fixed rate CMBS debt, whether through yield maintenance or defeasance, most borrowers have questions. Here are a few of the more common ones, but if you have others, or just want to talk to a defeasance expert, don’t hesitate to contact us. 610.925.3120
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