No-action relief granted to swap dealers from the uncleared swap margin requirements under Part 23 of the Commission's regulations with respect to certain amendments to legacy swaps.

Summary: No-action relief granted to swap dealers from the uncleared swap margin requirements under Part 23 of the Commission's regulations with respect to certain amendments to legacy swaps.

CFTC Letter No. 19-13 No-Action June 06, 2019

Division of Swap Dealer and

Matthew B. Kulkin

Intermediary Oversight

Director

Re:

No-Action Position: Application of Uncleared Swap Margin Rules to

Immaterial Amendments, Swaption Exercises, Partial Terminations,

Partial Novations, or Multilateral Compression of Legacy Swaps

Ladies and Gentlemen:

This letter is in response to a request for a no-action position received by the Division of

Swap Dealer and Intermediary Oversight (“DSIO”) of the Commodity Futures Trading

Commission (“Commission”) from the International Swaps and Derivatives

Association (“ISDA”) on behalf of its members that are swap dealers (“SDs”) registered

with the Commission and subject to the Commission’s rules regarding margin

requirements for uncleared swaps.1 For the reasons discussed below, ISDA requests a

position of no-action for failure of an SD to comply with the Commission’s uncleared

swap margin requirements with respect to certain amendments to Legacy Swaps.

For purposes of this letter, “Legacy Swap” means a swap executed prior to the

applicable compliance date prescribed in Commission regulation 23.161. Where a swap

is executed after the compliance date for variation margin (i.e., March 1, 2017) but

before the applicable compliance date for initial margin (see infra for a description of

initial margin compliance dates), the swap is a Legacy Swap for the initial margin

requirements only.

1 The Commission’s margin requirements for uncleared swaps apply only to SDs and major swap

participants for which there is not a prudential regulator. See 7 U.S.C. 6s(e)(1)(B)

mpliance date for initial margin (see infra for a description of

initial margin compliance dates), the swap is a Legacy Swap for the initial margin

requirements only.

1 The Commission’s margin requirements for uncleared swaps apply only to SDs and major swap

participants for which there is not a prudential regulator. See 7 U.S.C. 6s(e)(1)(B). SDs and major swap

participants for which there is a prudential regulator must meet the margin requirements for uncleared

swaps established by the applicable prudential regulator. 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39)

(defining the term “Prudential Regulator” to include the Board of Governors of the Federal Reserve

System; the Office of the Comptroller of the Currency; the Federal Deposit Insurance Corporation; the

Farm Credit Administration; and the Federal Housing Finance Agency). The Prudential Regulators

published final margin requirements in November 2015. See Margin and Capital Requirements for

Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015). Although requested by ISDA on behalf of its

members that are SDs, the relief provided by this letter is available to all SDs subject to the Commission’s

rules regarding margin requirements for uncleared swaps.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

p Entities, 80 FR 74840 (Nov. 30, 2015). Although requested by ISDA on behalf of its

members that are SDs, the relief provided by this letter is available to all SDs subject to the Commission’s

rules regarding margin requirements for uncleared swaps.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Uncleared Swap Margin No-Action

Page 2

The Commission’s Office of the Chief Economist (“OCE”) recently conducted an analysis

to estimate, among other things, the population of uncleared swap positions that

constitute Legacy Swaps.2 In particular, OCE analyzed the notional of uncleared swaps

outstanding as of December 2018. Focusing strictly on the entity pairs covered in

phases 1 through 3 of the uncleared margin rule, the three phases implemented as of the

December 2018 reference date, OCE estimated that approximately 41% of credit default

swaps (“CDS”), 5% of forex products, and 40% of interest rate swaps (“IRS”) were

Legacy Swaps. DSIO notes that many of these Legacy Swaps will be terminated prior to

maturity for a variety of reasons. Swaps executed by SDs with counterparties not yet

subject to the initial margin requirements (i.e., phases 4 and 5) may become Legacy

Swaps as defined above to the extent such are still in effect on the compliance dates for

those phases.

ISDA seeks a no-action position for the following types of amendments to Legacy

Swaps: (i) an immaterial amendment to a Legacy Swap, (ii) a swap resulting from the

exercise of a swaption that is a Legacy Swap, (iii) the remaining portion of a swap

resulting from a partial termination of a Legacy Swap, (iv) the remaining portion of a

swap resulting from a partial novation of a Legacy Swap, and (v) new swaps resulting

from a multilateral compression exercise consisting solely of Legacy Swaps

terial amendment to a Legacy Swap, (ii) a swap resulting from the

exercise of a swaption that is a Legacy Swap, (iii) the remaining portion of a swap

resulting from a partial termination of a Legacy Swap, (iv) the remaining portion of a

swap resulting from a partial novation of a Legacy Swap, and (v) new swaps resulting

from a multilateral compression exercise consisting solely of Legacy Swaps. For

purposes of the relief provided by this letter, “Legacy Swap” also includes any swap that

results from the exercise of a swaption that is a Legacy Swap and any swap that results

from an immaterial amendment, partial termination, partial novation, or multilateral

compression of a Legacy Swap in accordance with the terms and conditions of this

letter.

I.

Regulatory Background

Pursuant to section 4s(e) of the Commodity Exchange Act (“CEA”),3 the Commission is

required to promulgate margin requirements for uncleared swaps applicable to each SD

for which there is no Prudential Regulator.4 The Commission published final margin

requirements for such SDs in January 2016 (the “CFTC Margin Rule”).5

2 See Legacy Swaps under the CFTC’s Uncleared Margin and Clearing Rules (May 22, 2019), available at:

https://www.cftc.gov/node/216426.

3 7 U.S.C. § 1 et. seq.

4 See 7 U.S.C. § 6s(e)(1)(B).

5 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR

636 (Jan. 6, 2016). The CFTC Margin Rule, which became effective April 1, 2016, is codified in part 23 of

the Commission’s regulations. See §§ 23.150-159, 161.

Rules (May 22, 2019), available at:

https://www.cftc.gov/node/216426.

3 7 U.S.C. § 1 et. seq.

4 See 7 U.S.C. § 6s(e)(1)(B).

5 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR

636 (Jan. 6, 2016). The CFTC Margin Rule, which became effective April 1, 2016, is codified in part 23 of

the Commission’s regulations. See §§ 23.150-159, 161.

Uncleared Swap Margin No-Action

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The CFTC Margin Rule applies only to swaps of SDs executed after the applicable

compliance date set forth in Commission regulation 23.161.6 Pursuant to Commission

regulation 23.161, compliance dates for the CFTC Margin Rule are staggered such that

SDs must come into compliance in a series of phases over four years with counterparties

depending on the aggregate outstanding notional amounts of uncleared swaps and

certain other financial products. The first phase began on September 1, 2016, and

required SDs to comply with both the initial and variation margin requirements with

counterparties that have the largest aggregate outstanding notional amounts. The

second phase began March 1, 2017, and required SDs to comply with the variation

margin requirements of Commission regulation 23.153 with all relevant counterparties

not covered in the first phase. The third phase began on September 1, 2018, with the

fourth and fifth phases beginning on Sept 1, 2019 and 2020 respectively

arties that have the largest aggregate outstanding notional amounts. The

second phase began March 1, 2017, and required SDs to comply with the variation

margin requirements of Commission regulation 23.153 with all relevant counterparties

not covered in the first phase. The third phase began on September 1, 2018, with the

fourth and fifth phases beginning on Sept 1, 2019 and 2020 respectively. Each phase

requires SDs to begin complying with the initial margin requirements with

counterparties with successively lesser outstanding notional amounts.7

Generally, pursuant to the CFTC Margin Rule, amendments to Legacy Swaps following

the compliance date applicable to an SD and its counterparty would cause such swaps to

be brought into scope and require compliance with the CFTC Margin Rule.8 However,

subsequent to implementation of the rule, DSIO has become aware of discrepancies in

the treatment by SDs of amendments that have an economic impact and those that

reduce risk or are administrative in nature. In addition, other major swap trading

centers have made the distinction between economically significant amendments and

risk reducing or administrative amendments.9

II.

Summary of Request for No-Action Position

A.

Immaterial Amendments to Legacy Swaps.

ISDA argues that immaterial amendments to Legacy Swaps should not require such

swaps to be deemed “new” swaps subject to the CFTC Margin Rule. For example,

changing the contact information for an SD’s counterparty or the account number under

the SD’s payment instructions do not materially alter the economic rights or obligations

6 See Commission regulation 23.150(a), 17 CFR § 23.150(a).

7 See Commission regulation 23.161, 17 CFR § 23.161.

8 See CFTC Margin Rule, 81 FR at 675

. For example,

changing the contact information for an SD’s counterparty or the account number under

the SD’s payment instructions do not materially alter the economic rights or obligations

6 See Commission regulation 23.150(a), 17 CFR § 23.150(a).

7 See Commission regulation 23.161, 17 CFR § 23.161.

8 See CFTC Margin Rule, 81 FR at 675.

9 See, e.g., Australia Prudential Regulation Authority, Prudential Standard CPS 226 recognizing swaps

resulting from compression of Legacy Swaps as not subject to margin requirements; Hong Kong Monetary

Authority, Margin and other Risk Mitigation Standards, recognizing that only material amendments

require recognition of a new transaction; Office of the Superintendent of Financial Institutions Canada,

Margin Requirements for Non-Centrally Cleared Derivatives, recognizing that novations of grandfathered

trades as well as trades resulting from compression of grandfathered trades do not qualify as a new

derivatives contract.

Uncleared Swap Margin No-Action

Page 4

of the parties to the swap and thus should not require the swap to be brought into scope

for purposes the CFTC Margin Rule.

DSIO recognizes that certain amendments are often not a choice of swap counterparties.

For example, administrative changes within firms unconnected to the economics of a

swap portfolio will inevitably occur and will necessitate amendments in order to

maintain operational processes. Accordingly, DSIO does not believe SDs should be

concerned that such changes will bring Legacy Swaps into scope of the CFTC Margin

Rule

ain amendments are often not a choice of swap counterparties.

For example, administrative changes within firms unconnected to the economics of a

swap portfolio will inevitably occur and will necessitate amendments in order to

maintain operational processes. Accordingly, DSIO does not believe SDs should be

concerned that such changes will bring Legacy Swaps into scope of the CFTC Margin

Rule. With respect to defining what would constitute an “immaterial amendment,”

DSIO notes that the Commission has recently updated a definition of the “material

terms” of a swap in connection with its portfolio reconciliation rule, Commission

regulation 23.502.10 For purposes of that rule, the Commission permitted the exclusion

of a number of data fields11 that the Commission determined were not relevant to the

mutual obligations and valuation of swaps.12 In keeping with this rationale, DSIO

believes that a no-action position for amendments to Legacy Swaps that do not amend

any term that would affect the economic obligations of the parties to the swaps or the

valuation of the swaps should allay concerns that SDs would use the exception to evade

the margin requirements of the CFTC Margin Rule.

B.

Swaps Resulting from Exercise of Swaptions that are Legacy Swaps

In the most basic terms, a “swaption” is an option to enter into a specified swap upon

exercise of the option. The exercise of a swaption involves one party exercising its right

to require the other party to enter into a swap on pre-agreed terms.

ISDA argues that although the swap resulting from the exercise of a swaption is

processed in the same way as a new swap, the economic effect of the exercise is

determined by the terms of the swaption transaction, which are agreed by the parties

when they entered into the swaption, not when the swaption is exercised

s right

to require the other party to enter into a swap on pre-agreed terms.

ISDA argues that although the swap resulting from the exercise of a swaption is

processed in the same way as a new swap, the economic effect of the exercise is

determined by the terms of the swaption transaction, which are agreed by the parties

when they entered into the swaption, not when the swaption is exercised. ISDA argues

that because the terms of the swap that results from the exercise of a swaption that is a

Legacy Swap were set prior to the compliance date for the requirements of the CFTC

Margin Rule, such terms would not have “priced in” such requirements and thus such

swap should be treated as a Legacy Swap for purposes of the CFTC Margin Rule. The

10 See Definitions of ‘‘Portfolio Reconciliation’’ and ‘‘Material Terms’’ for Purposes of Swap Portfolio

Reconciliation, 81 FR 27309 (May 6, 2016) (hereinafter, “Material Terms in Portfolio

Reconciliation”).

11 See Commission regulation 23.500(g), 17 CFR § 23.500(g).

12 See Material Terms in Portfolio Reconciliation, 81 FR at 27311, where the Commission determined that

such excluded terms:

(i) pertain to static items about entering into the swap; (ii) pertain to static data fields about a

party’s status; (iii) are only relevant to cleared transactions; (iv) are data which is not agreed,

exchanged, or confirmed between the parties; or (v) are not relevant to the swap’s daily valuation.

Reconciliation, 81 FR at 27311, where the Commission determined that

such excluded terms:

(i) pertain to static items about entering into the swap; (ii) pertain to static data fields about a

party’s status; (iii) are only relevant to cleared transactions; (iv) are data which is not agreed,

exchanged, or confirmed between the parties; or (v) are not relevant to the swap’s daily valuation.

Uncleared Swap Margin No-Action

Page 5

Commission previously recognized the logic of this position in the context of the clearing

mandate.13

C.

Partial Terminations and Partial Novations of Legacy Swaps

ISDA explains that when the original counterparties to a swap wish to novate or

terminate an original swap in part, they may agree to an amendment that reduces the

notional amount of the swap by terminating a portion of the swap (a “partial

termination”) or by novating a portion of the swap to another counterparty (a “partial

novation”). The remaining portion of the swap between the original counterparties after

such reduction by a partial novation or partial termination is referred to as the “stub.”

ISDA represents that the terms of an original swap, including the terms that define the

remaining cash flows, continue to govern the stub (apart from the reduction in the

notional amount of that swap).

Under a partial termination, all terms of the stub, apart from the reduction of the

notional amount, remain the same. The original counterparties remain the same and no

third parties are involved in the transaction. Under a partial novation, one of the two

original counterparties novates part of the original swap to a third party (the “novated

swap”). As with partial terminations, for the remainder of the original swap (i.e., the

stub), all terms, apart from the reduction of the notional amount, remain the same

original counterparties remain the same and no

third parties are involved in the transaction. Under a partial novation, one of the two

original counterparties novates part of the original swap to a third party (the “novated

swap”). As with partial terminations, for the remainder of the original swap (i.e., the

stub), all terms, apart from the reduction of the notional amount, remain the same.

According to ISDA, where the original swap is a Legacy Swap, imposing margin

requirements pursuant to the CFTC Margin Rule on the stub, under either a partial

novation or a partial termination, would create distorted incentives for risk and

investment management decisions. For example, an SD that seeks to reduce its

exposure under a swap with a partial termination (i.e., a reduction in notional amount,

which reduces both market and credit risk) may be incentivized not to do so if the stub

loses its status as a Legacy Swap and becomes subject to the additional costs and

operational burdens associated with compliance with the CFTC Margin Rule.

ISDA states that it does not request relief from DSIO for circumstances where the

original counterparties enter into and book a new swap that fully or partially offsets the

risk of a Legacy Swap and thereby achieves a similar economic result to a partial

termination. ISDA further acknowledges that in the context of partial novations, the

novated swap, which was executed between one of the original counterparties and a

13 “The Commission agrees that the cost of clearing may not be reflected in the pricing of the swaption or

extendible swap if the clearing requirement for the underlying swap or the extendable swap arises after

the execution of the swaption or extendible swap

the

novated swap, which was executed between one of the original counterparties and a

13 “The Commission agrees that the cost of clearing may not be reflected in the pricing of the swaption or

extendible swap if the clearing requirement for the underlying swap or the extendable swap arises after

the execution of the swaption or extendible swap. The Commission is thus clarifying that the clearing

requirement only applies to swaps resulting from the exercise of a swaption or extendible swap extension

if the clearing requirement would have been applicable to the underlying swap or the extended swap at

the time the counterparties executed the swaption or extendible swap.” See “Clearing Requirement

Determination Under Section 2(h) of the CEA; Final Rule,” 77 FR 74284, 74316 (Dec. 13, 2012).

Uncleared Swap Margin No-Action

Page 6

third party, may be subject to the CFTC Margin Rule.14 ISDA does not seek relief for

such novated swap.

ISDA notes that the Commission’s Division of Clearing and Risk provided relief from the

clearing requirement under section 2(h)(1)(A) of the CEA for partial termination and

partial novations of swaps entered into prior to implementation of the Commission’s

clearing requirement.15 ISDA therefore requests that DSIO take a similar no-action

position, subject to the same conditions, such that Legacy Swaps do not lose their legacy

status solely due to a reduction of notional amount by way of partial termination or

partial novation of such swaps.

D.

Multilateral Compression of Legacy Swaps

Multilateral portfolio compression allows swap market participants to decrease the

number of outstanding swaps or the aggregate notional value of such swaps, thereby

reducing operational risk and, in some instances, reducing counterparty credit risk

e to a reduction of notional amount by way of partial termination or

partial novation of such swaps.

D.

Multilateral Compression of Legacy Swaps

Multilateral portfolio compression allows swap market participants to decrease the

number of outstanding swaps or the aggregate notional value of such swaps, thereby

reducing operational risk and, in some instances, reducing counterparty credit risk. For

purposes of this letter, the term “multilateral portfolio compression exercise” has the

meaning given to the term in Commission regulation § 23.500(h).16 Commission

regulation § 23.500(h) defines the term to mean “an exercise in which multiple swap

counterparties wholly terminate or change the notional value of some or all of the swaps

submitted by the counterparties for inclusion in the portfolio compression exercise and,

depending on the methodology employed, replace the terminated swaps with other

swaps whose combined notional value (or some other measure of risk) is less than the

combined notional value (or some other measure of risk) of the terminated swaps in the

compression exercise.”

In a multilateral portfolio compression exercise for uncleared swaps, the compression

service provider analyzes the uncleared swap portfolios of multiple swap market

participants and publishes the optimal solution for the compression cycle based on one

of two methods. Under the first method, the outstanding notional value of the original

swap between two counterparties is reduced by amending the original swap. This

“amended swap” method is the predominant method used in compressions of uncleared

interest rate swaps

wap portfolios of multiple swap market

participants and publishes the optimal solution for the compression cycle based on one

of two methods. Under the first method, the outstanding notional value of the original

swap between two counterparties is reduced by amending the original swap. This

“amended swap” method is the predominant method used in compressions of uncleared

interest rate swaps. Under the second method, one or more existing swaps are

14 The part of the Legacy Swap novated to a third party would be a new swap for the third party, and,

depending on the status of the new counterparty (i.e., an SD, a financial end user, or a non-financial end

user) and the applicable compliance date under Commission regulation 23.161, ISDA acknowledges that

such swap may be subject to the variation and/or initial margin requirements of the CFTC Margin Rule.

15 See No-Action Relief from Required Clearing for Partial Novation and Partial Termination of Swaps,

CFTC Letter No. 13-02 (March 20, 2013), available on the Commission’s website www.cftc.gov.

16 See Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship

Documentation Requirements for Swap Dealers and Major Swap Participants, 77 FR 55904, 55960 (Sept.

11, 2012).

Uncleared Swap Margin No-Action

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terminated and replaced by new swaps that reflect a netting down of existing notional

exposure between the counterparties.17 This “replacement swap” method is

predominantly used in compression exercises for uncleared credit default swaps, but it

can also be used for interest rate swap compression exercises. Counterparties have the

option of electing either of the two methods of compression.

Under the rules of the compression exercise, for either method of compression —

amended swap or replacement swap — the counterparties to the original swap do not

change. In addition, the reference entity and the maximum maturity do not change

it

can also be used for interest rate swap compression exercises. Counterparties have the

option of electing either of the two methods of compression.

Under the rules of the compression exercise, for either method of compression —

amended swap or replacement swap — the counterparties to the original swap do not

change. In addition, the reference entity and the maximum maturity do not change.

Finally, the overall market risk of the portfolios of the market participants in the

compression exercise does not change or is reduced.

ISDA notes that the Commission’s Division of Clearing and Risk provided relief from the

clearing requirement under section 2(h)(1)(A) of the CEA for amended and replacement

swaps resulting from multilateral compression exercises consisting only of swaps

entered into prior to implementation of the Commission’s clearing requirement.18 ISDA

therefore requests that DSIO take a similar no-action position, subject to the same

conditions, such that the amended and replacement swaps of SDs, where the original

swap was a Legacy Swap at the time of execution but that is subsequently amended or

replaced in connection with a multilateral portfolio compression exercise after the

applicable compliance date for the CFTC Margin Rule set forth in Commission

regulation 23.161, do not lose their status as Legacy Swaps solely by virtue of being

amended or replaced through a multilateral portfolio compression exercise.

ISDA represents that requiring amended swaps or replacement swaps resulting from a

multilateral compression exercise consisting of Legacy Swaps to be subject to the CFTC

Margin Rule would alter the credit risk profile for those participating in the compression

exercise because counterparties to the amended or replacement swaps may be required

to comply with the variation and initial margin requirements of the CFTC Margin Rule

with respect to such swaps

waps resulting from a

multilateral compression exercise consisting of Legacy Swaps to be subject to the CFTC

Margin Rule would alter the credit risk profile for those participating in the compression

exercise because counterparties to the amended or replacement swaps may be required

to comply with the variation and initial margin requirements of the CFTC Margin Rule

with respect to such swaps. Further, ISDA represents that because participants would

not know in advance which swaps may be subject to an amendment or replacement, or

the notional amount to be amended or replaced, market participants likely would

reconsider their participation in these industry-wide risk reduction exercises. As a

result, ISDA represents that changing the legacy status of the Legacy Swaps would

discourage participation in compression exercises and inhibit the risk reduction benefits

that such exercises provide.

17 In the vast majority of compression exercises there is a reduction in the notional exposures due to

netting. However, in some exercises there is merely an aggregation of outstanding gross exposures arising

from multiple swaps into one replacement swap with no net reduction in notional exposures.

18 See No-Action Relief from Required Clearing of Swaps Resulting from Multilateral Compression

Exercises, CFTC Letter No. 13-01 (March 18, 2013), available on the Commission’s website www.cftc.gov.

tting. However, in some exercises there is merely an aggregation of outstanding gross exposures arising

from multiple swaps into one replacement swap with no net reduction in notional exposures.

18 See No-Action Relief from Required Clearing of Swaps Resulting from Multilateral Compression

Exercises, CFTC Letter No. 13-01 (March 18, 2013), available on the Commission’s website www.cftc.gov.

Uncleared Swap Margin No-Action

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III.

DSIO No-Action Position

Based on the foregoing, DSIO believes that a no-action position is warranted, subject to

the conditions set forth below.

A.

Immaterial

Amendments,

Partial

Terminations,

and

Partial

Novations of Legacy Swaps

DSIO will not recommend that the Commission take an enforcement action against an

SD for a failure to comply with the CFTC Margin Rule with respect to a Legacy Swap

that is:

1.

Amended, provided that no term is amended that would affect the economic

obligations of the parties or the valuation of the Legacy Swap;19 or

2.

Partially terminated or partially novated by such SD, subject to the following

conditions:

a.

The records of the Legacy Swap that exist in the trading and/or

recordkeeping systems of the SD are amended solely to reflect the reduced

notional amount of the Legacy Swap;

b.

The stated portion of the Legacy Swap that is terminated or novated by

such SD is fully terminated between the SD and its original counterparty,

apart from the stated portion that is the stub; and

c.

All other material terms (as such term is defined in Commission regulation

23.500(g)) of the stub remain the same as the terms of the Legacy Swap.

B

ced

notional amount of the Legacy Swap;

b.

The stated portion of the Legacy Swap that is terminated or novated by

such SD is fully terminated between the SD and its original counterparty,

apart from the stated portion that is the stub; and

c.

All other material terms (as such term is defined in Commission regulation

23.500(g)) of the stub remain the same as the terms of the Legacy Swap.

B.

Swaps Resulting from Exercise of Swaptions that are Legacy Swaps

DSIO will not recommend that the Commission take an enforcement action against an

SD for a failure to comply with the CFTC Margin Rule with respect to swaps resulting

from the exercise of swaptions, provided that the swaption is a Legacy Swap as defined

in this letter and all terms of the swap were established upon execution of the

swaption.20

19 For the avoidance of doubt, DSIO believes that an extension of the maturity date, expiration date, or

termination date of a Legacy Swap will always affect the economic obligations of the parties and the

valuation of the swap.

20 This relief for swaptions in particular and the remaining relief more generally is not available for

market participants who may seek to use the relief to enter into large volumes of swaps or swaptions prior

to the applicable initial margin compliance date with only the intention to evade the uncleared swap

margin requirements.

c obligations of the parties and the

valuation of the swap.

20 This relief for swaptions in particular and the remaining relief more generally is not available for

market participants who may seek to use the relief to enter into large volumes of swaps or swaptions prior

to the applicable initial margin compliance date with only the intention to evade the uncleared swap

margin requirements.

Uncleared Swap Margin No-Action

Page 9

C.

Swaps Resulting from Multilateral Portfolio Compression Exercises

DSIO will not recommend that the Commission take an enforcement action against an

SD for a failure to comply with the CFTC Margin Rule with respect to an amended swap

or a replacement swap that is generated as part of a multilateral portfolio compression

exercise, subject to the following conditions:

1.

The “multilateral portfolio compression exercise” generating the amended and

replacement swaps must meet the definition set forth in Commission regulation

23.500(h) and must involve more than two market participants;

2.

All swaps submitted by market participants as part of the “multilateral portfolio

compression exercise” generating the amended and replacement swaps must be

Legacy Swaps as defined in this letter;

3.

The amended or replacement swaps generated by the multilateral portfolio

compression exercise must:

a.

Be generated in accordance with a multilateral portfolio compression

service provider’s established rules and parameters for multilateral

portfolio compression exercises;

b.

Be entered into between the same counterparties as the Legacy Swaps that

are amended or replaced;

c.

With the exception of reducing the notional amount, have the same

material terms (as such term is defined in Commission regulation

23.500(g)) as the Legacy Swaps that are amended or replaced; and

d.

Be entered into for the sole purpose of reducing operational or

counterparty credit risk; and

4

tered into between the same counterparties as the Legacy Swaps that

are amended or replaced;

c.

With the exception of reducing the notional amount, have the same

material terms (as such term is defined in Commission regulation

23.500(g)) as the Legacy Swaps that are amended or replaced; and

d.

Be entered into for the sole purpose of reducing operational or

counterparty credit risk; and

4.

Once the Legacy Swaps have been selected and submitted by market participants

as part of the multilateral portfolio compression exercise, the multilateral

portfolio compression methodology does not permit participants to specify which

swaps may be amended or replaced.

This letter, and the positions taken herein, represent the views of DSIO only, and do not

necessarily represent the position or view of the Commission or of any other office or

division of the Commission. The relief issued by this letter does not excuse persons

relying on it from compliance with any other applicable requirements contained in the

CEA or in Commission Regulations. Further, this letter, and the positions taken herein,

is based upon the representations made to DSIO. Any different, changed, or omitted

material facts or circumstances might render this no-action position void.

Uncleared Swap Margin No-Action

Page 10

Questions concerning this letter may be directed to me at (202) 418-5213; or Frank

Fisanich, Chief Counsel, at (202) 418-5949.

Very truly yours,

Matthew B. Kulkin

Director

Division of Swap Dealer and Intermediary Oversight

cc:

Regina Thoele, Compliance

National Futures Association, Chicago

Jamila A. Piracci, OTC Derivatives

National Futures Association, New York