Hedge Funds Face Increased Trading Costs Under Final Swap Rules (Part Two of Two)

The new joint final rule adopted by the U.S. prudential regulators – establishing minimum initial and variation margin requirements for certain non-cleared swaps – likely means cost increases for hedge funds and other investment funds trading those swaps. Hedge funds face comparable issues under the substantially similar final rule adopted by the CFTC for margin requirements for non-cleared swaps entered into by registered swap dealers or major swap participants that are not regulated by a U.S. prudential regulator. In a guest two-part series, Fabien Carruzzo and Philip Powers, partner and associate, respectively, at Kramer Levin, discuss these final rules and their impact on hedge funds. This second article explores minimum transfer amounts; eligible collateral and haircuts; netting of exposure; documentation and industry initiatives; compliance obligations; and practical implications of the final rules on hedge funds. The first article focused on calculating a fund’s material swaps exposure, as well as the final rules’ requirements for collecting and posting initial and variation margin with respect to non-cleared swaps. For more from Kramer Levin practitioners, see “Risks Faced by Hedge Fund Managers That Access the Alternative Mutual Fund Market Via Turnkey Platforms” (Mar. 13, 2014); and “Kramer Levin Partner George Silfen Discusses Challenges Faced by Hedge Fund Managers in Operating and Distributing Alternative Mutual Funds” (Apr. 18, 2013).

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