The U.S. prudential regulators recently adopted a joint final rule establishing minimum initial and variation margin requirements for certain non-cleared swaps. The CFTC adopted a substantially similar final rule for swaps not regulated by a U.S. prudential regulator. Hedge funds and other investment funds trading non-cleared swaps with registered swap dealers supervised by either the U.S. prudential regulators or the CFTC will be impacted by these final rules and will likely face increased costs of trading non-cleared swaps. In a two-part guest series, Fabien Carruzzo and Philip Powers – partner and associate, respectively, at Kramer Levin – discuss these final rules and analyze their impact on hedge funds. This first article addresses the calculation of a fund’s material swaps exposure, as well as the requirements under the final rules for covered swap dealers to collect and post initial and variation margin with respect to non-cleared swaps with their counterparties. The second article
will address minimum transfer amounts; eligible collateral and haircuts; netting of exposure; documentation and industry initiatives; compliance obligations under the final rules; and the practical implications of the final rules on hedge funds. For additional insight from Carruzzo, see “OTC Derivatives Clearing: How Does It Work and What Will Change?
” (Jul. 14, 2011). For more from Kramer Levin practitioners, see “‘Interval Alts’ Combine Benefits of Alternative Mutual Funds and Traditional Hedge Funds
” (Jul. 16, 2015).