RegAlert2017-10-12 | CFTC Staff Letter 17-51Added · Updated
CFTC Staff Letter 17-51: Characterization of Variation Margin and Cash Flows for Cleared Swaps
The Division of Clearing and Risk confirms that variation margin (VM) and all other payments satisfying outstanding exposures on cleared swap positions constitute settlement rather than collateral under the Commodity Exchange Act and Commission regulations. This interpretation applies to payments made by derivatives clearing organizations (DCOs) to or from their clearing members, including price alignment amounts (PAA). Consequently, DCO rules must reflect that these cash flows represent the settlement of outstanding exposures and reset the contract's present value daily, rather than securing obligations as collateral.
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U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5430
Facsimile: (202) 418-5547 jlawton@cftc.gov
Division of Clearing and Risk John C. Lawton
Acting Director
CFTC Letter No. 17-51
Interpretation
Division of Clearing and Risk
Senior Managing Director and President
CME Clearing
550 W. Washington Blvd.
Chicago, IL 60661
RE: Request for Interpretation of the Commodity Exchange Act and Commission Regulations regarding the Characterization of Variation Margin Payments and all other Cash Flows for Cleared Swaps Dear Mr. Cutinho:
This is in response to your letter dated July 17, 2017 (“Letter”), to the Division of Clearing and Risk (“Division”) of the Commodity Futures Trading Commission (“Commission”). In the Letter, you asked for clarification as to whether payments of variation margin (“VM”)1 and all other payments in satisfaction of outstanding exposures on cleared swap positions would constitute settlement or collateral under the Commodity Exchange Act (“CEA”) and Commission regulations. For the reasons stated below, the Division confirms that VM and all other payments in satisfaction of outstanding exposures on a counterparty’s cleared swap positions constitute settlement of the outstanding exposure and not collateral against it.
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Source: Commodity Futures Trading Commission — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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