On 3 October 2014, the Commodity Futures Trading Commission (CFTC) published a proposed rule in the Federal Register that would establish initial and variation margin requirements for swap dealers and major swap participants regarding uncleared swaps. The proposed rule would directly affect swap dealers and major swap participants and indirectly affect their counterparties. Recognizing the value of expert analysis in informing regulators of the potential costs and benefits of the current rulemaking, NERA expert Dr. Sharon Brown-Hruska and Analyst Trevor Wagener conducted a detailed quantitative impact study to analyze the potential costs and benefits of these regulations. NERA’s study concludes:

• The proposed rule aims to mitigate systemic risks the CFTC believes are associated with uncleared swaps.
• The aggregate incremental opportunity costs of the proposed margin requirements in normal markets are substantial, estimated at $411 million per year.
• Several aspects of the proposed rule are pro-cyclical and thus will likely increase systemic risks rather than mitigate them. Such aspects include monthly recalibration of initial margin models with immediate margin requirement increases, limits on the forms of eligible collateral available for margin purposes, and mandatory full, daily posting of variation margin.
• Several aspects of the proposed rule place US firms at a disadvantage to foreign competitors, and threaten more than 4,000 derivatives industry job listings in the US. Such provisions include a Material Swaps Exposure threshold of $3 billion rather than the international standard of $11 billion and limits on variation margin eligible collateral.

The proposed rule may not reduce systemic risks due to its pro-cyclical provisions, and imposes substantial costs. The intent of the proposed rule is reasonable, and in order to efficiently achieve its objective, the rule should be modified in order to eliminate pro-cyclical aspects and provisions placing US firms at a competitive disadvantage, and other provisions should be modified to reduce the total incremental costs of compliance.