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Nitty-Gritty on the Margin Rules

The Feds proposed collateral rules for swaps trades are meant to exempt end users, but some treasury organizations remain concerned.

By Treasury & Risk Staff | Updated on September 25, 2014
Earlier this month, the Federal Reserve re-proposed collateral rules for swaps that don’t pass through central clearinghouses. The purpose of the rules is to prevent a financial-system meltdown in the event that one or more large traders becomes unable to meet its derivatives obligations. The latest proposal was tailored to minimize the burden of margin rules on companies that use swaps not to speculate, but to hedge against risks incurred in the course of their non-financial lines of business.

On its surface, the proposal looks good for corporate end users of derivatives, but some remain concerned that companies with sophisticated treasury structures may still get caught in the red tape. To get to the bottom of the proposed regulation and the ambiguity that continues to cause anxiety, Treasury & Risk sat down with Luke Zubrod, director of risk and regulatory advisory with Chatham Financial and a technical advisor to the Coalition for Derivatives End-Users. Luke regularly confers with U.S. Congressional staff and federal regulatory agencies including the Commodity Futures Trading Commission (CFTC) and Federal Reserve regarding derivatives regulatory matters.

T&R:  So, what exactly do the Fed’s proposed collateral rules entail?

Luke Zubrod:  They basically create four categories of market participants, and the margin rules apply differently for companies in the different categories. The categories are: first, ‘covered swap entities,’ which are basically swaps dealers and major swap participants; second, financial end users with ‘material swaps exposure’; third, financial end users without material swaps exposure; and then a fourth category, ‘other counterparties,’ which includes both non-financial end users and sovereigns.

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