# CFTC Letter No. 19-16: Advisory clarifying that no documentation concerning the collection, posting and custody of initial margin is required to be completed until the initial margin threshold amount of $50 million has been exceeded

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/CFTC_L19_16

## Section

- **Citation:** CFTC Letter No. 19-16
- **Heading:** Advisory clarifying that no documentation concerning the collection, posting and custody of initial margin is required to be completed until the initial margin threshold amount of $50 million has been exceeded
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** CFTC Staff Letters (2008-present) / Advisory clarifying that no documentation concerning the collection, posting and custody of initial margin is required to be completed until the initial margin threshold amount of $50 million has been exceeded.

## Text

Summary: Advisory clarifying that no documentation concerning the collection, posting and custody of initial margin is required to be completed until the initial margin threshold amount of $50 million has been exceeded.

CFTC Letter No. 19-16 Advisories July 09, 2019

Division of Swap Dealer and

Matthew B. Kulkin
Intermediary Oversight

Director

Audience:
Registered Swap Dealers

Topic:
Initial Margin Documentation Requirements

I.
Introduction
The Division of Swap Dealer and Intermediary Oversight (“Division” or “DSIO”) of the
Commodity Futures Trading Commission (“Commission” or “CFTC”) is issuing this advisory to
clarify that, pursuant to CFTC regulations, the documentation governing the posting, collection,
and custody of initial margin (“IM”) is not required to be completed until such time as the initial
margin amount exceeds $50 million. This advisory is issued in light of the March 5, 2019
statement by the Basel Committee on Banking Supervision (BCBS) and the International
Organization of Securities Commissions (IOSCO) with respect to the internationally agreed
framework for margin requirements for non-centrally-cleared derivatives, which provides that:
[T]he framework does not specify documentation, custodial or operational requirements
if the bilateral initial margin amount does not exceed the framework’s €50 million initial
margin threshold
e International
Organization of Securities Commissions (IOSCO) with respect to the internationally agreed
framework for margin requirements for non-centrally-cleared derivatives, which provides that:
[T]he framework does not specify documentation, custodial or operational requirements
if the bilateral initial margin amount does not exceed the framework’s €50 million initial
margin threshold. It is expected, however, that covered entities will act diligently when
their exposures approach the threshold to ensure that the relevant arrangements needed
are in place if the threshold is exceeded.1

Specifically, this advisory addresses inquiries concerning when swap dealers (“SDs”)2 that are
subject to the CFTC Margin Rule3 (“covered swap entities” or “CSEs”)4 are required to

1 BCBS/IOSCO statement on the final implementation phases of the Margin requirements for non-centrally cleared
derivatives (March 5, 2019), https://www.bis.org/press/p190305a.htm.
2 The guidance addresses only SDs because there are no major swap participants (“MSPs”) currently registered with
the Commission.
3 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. 17 CFR 23.150 - 23.159, 23.161. In May 2016, the Commission amended the CFTC Margin Rule to
add Commission regulation 23.160, providing rules on its cross border application. Margin Requirements for
Uncleared Swaps for Swap Dealers and Major Swap Participants – Cross-Border Application of the Margin
Requirements, 81 FR 34818 (May 31, 2016). 17 CFR 23.160.
U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5000
egulation 23.160, providing rules on its cross border application. Margin Requirements for
Uncleared Swaps for Swap Dealers and Major Swap Participants – Cross-Border Application of the Margin
Requirements, 81 FR 34818 (May 31, 2016). 17 CFR 23.160.
U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5000

Page 2

complete documentation governing the posting, collection, and custody of initial margin (“IM
documentation”).5 This advisory clarifies that no IM documentation is required until the amount
of IM exchangeable between a CSE and a counterparty, on a counterparty by counterparty basis,
exceeds the initial margin threshold amount of $50 million (or “$50 million IM threshold”).6
The Division expects that CSEs will closely monitor as the amount of IM approaches the $50
million IM threshold and take appropriate steps to ensure that the required IM documentation is
in place at such time as the threshold is reached.

This advisory applies only to CSEs. The CFTC Margin Rule does not require counterparties to
CSEs, other than other CSEs, to establish custodial services, document margin relationships, or
operationalize the exchange of IM. Therefore, this advisory is not applicable to non-SD
counterparties and does not address any obligation of such counterparties or suggest any such
obligations.
II
This advisory applies only to CSEs. The CFTC Margin Rule does not require counterparties to
CSEs, other than other CSEs, to establish custodial services, document margin relationships, or
operationalize the exchange of IM. Therefore, this advisory is not applicable to non-SD
counterparties and does not address any obligation of such counterparties or suggest any such
obligations.
II.
Requested Guidance
Covered swap entities are required to post and collect IM with counterparties that are SDs or
financial end users with material swap exposure (“MSE”)7 in accordance with a compliance
schedule set forth in Commission regulation 23.161.8 Five compliance dates, from September 1,
2016 to September 1, 2020, are staggered such that CSEs and their counterparties, starting with

4 The CFTC Margin Rule applies to SDs for which there is not a prudential regulator. See 7 U.S.C. 6s(e)(1)(B). SDs
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). The margin requirements of
the Prudential Regulators are similar to the CFTC Margin Rule, including with respect to the compliance schedule
poration; 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). The margin requirements of
the Prudential Regulators are similar to the CFTC Margin Rule, including with respect to the compliance schedule.
5 See 17 CFR 23.157 (requiring entry into custodial agreements with custodians that hold funds posted or collected
as IM) and 17 CFR 23.158 (requiring execution of documentation providing for the contractual right and obligation
to exchange IM and variation margin).
6 Under Commission regulation 23.154(a)(3), CSEs are not required to post or collect IM until the initial margin
threshold amount has been exceeded. See 17 CFR 23.154(a)(3). The term “initial margin threshold amount” is
defined in Commission regulation 23.151 to mean “an aggregate credit exposure of $50 million resulting from all
uncleared swaps between a covered swap entity and its margin affiliates on the one hand, and a covered counterparty
and its margin affiliates on the other.” 17 CFR 23.151.
7 Commission regulation 23.151 provides that MSE for an entity means that the entity and its margin affiliates have
an average daily aggregate notional amount of uncleared swaps, uncleared security-based swaps, foreign exchange
forwards, and foreign exchange swaps with all counterparties for June, July or August of the previous calendar year
that exceeds $8 billion, where such amount is calculated only for business days. A company is a “margin affiliate”
of another company if: (i) either company consolidates the other on a financial statement prepared in accordance
with U.S
red security-based swaps, foreign exchange
forwards, and foreign exchange swaps with all counterparties for June, July or August of the previous calendar year
that exceeds $8 billion, where such amount is calculated only for business days. A company is a “margin affiliate”
of another company if: (i) either company consolidates the other on a financial statement prepared in accordance
with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other
similar standards; (ii) both companies are consolidated with a third company on a financial statement prepared in
accordance with such principles or standards; or (iii) for a company that is not subject to such principles or
standards, if consolidation as described in paragraph (1) or (2) of this definition would have occurred if such
principles or standards had applied. 17 CFR 23.151.
8 See 17 CFR 23.161.

Page 3

the largest average daily aggregate notional amounts (“AANA”) of uncleared swaps and certain
other financial products, and then successively lesser AANA, come into compliance with the IM
requirements in a series of phases.
The fourth compliance date, September 1, 2019, will bring within the scope of compliance CSEs
and counterparties where each exceeds $750 billion in AANA. On the fifth compliance date,
September 1, 2020, CSEs with counterparties that are SDs or financial end users with a MSE
exceeding $8 billion in AANA will be required to comply with the IM requirements. As a result
of the large reduction in the compliance threshold from $750 billion to $8 billion, a significant
number of counterparties will come into scope of the IM requirements.
Coming within the scope of the IM requirement creates regulatory obligations for CSEs and
implications for their counterparties.9 CSEs must calculate IM10 and monitor IM amounts to
determine if and when collection or posting of IM is required
duction in the compliance threshold from $750 billion to $8 billion, a significant
number of counterparties will come into scope of the IM requirements.
Coming within the scope of the IM requirement creates regulatory obligations for CSEs and
implications for their counterparties.9 CSEs must calculate IM10 and monitor IM amounts to
determine if and when collection or posting of IM is required. Prior to collecting and posting IM
with counterparties, CSEs must execute IM documentation, including credit support annexes
addressing the regulatory requirement to exchange IM and custodian arrangements addressing
the regulatory requirement to segregate margin assets with an independent custodian.11 The
amount and complexity of the documentation may vary depending on the terms of the swap
transactions, as well as regulatory requirements and business practices in various jurisdictions.12
In addition, CSEs and their counterparties will need to have adequate resources and time to set
up and implement the arrangements.
III.
Guidance
This advisory clarifies that while no specific IM documentation is required prior to reaching the
$50 million IM threshold, DSIO expects that CSEs will take appropriate steps to have the
required IM documentation upon reaching the IM threshold. The applicable IM documentation
requirements are interpreted accordingly and discussed in more detail below.
A.
Preparatory Steps
Commission regulation 23.504 requires SDs, including CSEs, to establish, maintain and follow
written policies and procedures reasonably designed to ensure the execution of IM
documentation
ps to have the
required IM documentation upon reaching the IM threshold. The applicable IM documentation
requirements are interpreted accordingly and discussed in more detail below.
A.
Preparatory Steps
Commission regulation 23.504 requires SDs, including CSEs, to establish, maintain and follow
written policies and procedures reasonably designed to ensure the execution of IM
documentation. Commission regulation 23.504 directs CSEs to take appropriate steps to ensure
the timely execution of IM documentation required by the CFTC Margin Rule, such that a CSE

9 See 17 CFR 23.161(b) (providing that once a CSE must comply with the margin requirements for uncleared swaps
with respect to a counterparty, the CSE remains subject to the requirements of Commission regulations 23.150
through 23.161 with respect to such counterparty).
10 See 17 CFR 23.154(a).
11 See 17 CFR 23.157.
12 For example, custodian arrangements, which may involve a single custodian or separate custodians for the parties,
may take different forms, such as tri-party or third party arrangements, and may require the execution of multiple
documents, including account control agreements, collateral transfer agreements, securities agreements, membership
agreements, among others.

Page 4

must complete the documentation by the time it reaches the $50 million IM threshold. In the
event a CSE opts to post IM below the threshold, before reaching the threshold, the CSE must
require that the IM collateral be held by an independent custodian and must enter into a
custodian agreement in accordance with Commission regulation 23.157(c).
SDs must also comply with section 4s(j)(2) of the Commodity Exchange Act13 and
implementing Commission regulation 23.600.14 Pursuant to these provisions, SDs must establish
a risk management system to monitor and manage risk associated with their swap activities,
including legal risk, such as the failure to comply with applicable CFTC regulations
cordance with Commission regulation 23.157(c).
SDs must also comply with section 4s(j)(2) of the Commodity Exchange Act13 and
implementing Commission regulation 23.600.14 Pursuant to these provisions, SDs must establish
a risk management system to monitor and manage risk associated with their swap activities,
including legal risk, such as the failure to comply with applicable CFTC regulations. CSEs must
therefore have an appropriate risk management system to calculate and monitor IM amounts and
must act diligently as such amounts approach the $50 million IM threshold, so that they can
ensure compliance with the IM requirements and have all required IM documentation in place
once IM amounts reach such level.
B.
IM Documentation Requirements
Commission regulation 23.504 requires SDs to establish, maintain and follow written policies
and procedures reasonably designed to ensure that SDs execute swap trading relationship
documentation, including credit support annexes and custodial arrangements, prior to or
contemporaneously with entering into a swap transaction.15 Concerning IM documentation, the
rule provides that the documentation is required if there are any IM requirements.16 The rule
also provides that documentation for custodial arrangements is required if there are any such
arrangements.17
Commission regulation 23.158, which is part of the set of rules comprising the CFTC Margin
Rule (Commission regulations 23.150 through 23.161), provides that CSEs must execute margin
documentation that complies with the requirements of Commission regulation 23.504.18 The
documentation must provide CSEs with the contractual right and obligation to exchange IM with
a counterparty, in such amounts, in such form and under such circumstances, as required by
Commission regulations 23.150 through 23.161
n regulations 23.150 through 23.161), provides that CSEs must execute margin
documentation that complies with the requirements of Commission regulation 23.504.18 The
documentation must provide CSEs with the contractual right and obligation to exchange IM with
a counterparty, in such amounts, in such form and under such circumstances, as required by
Commission regulations 23.150 through 23.161. Commission regulation 23.157(c) also requires
CSEs to enter into an agreement with each custodian that holds any funds posted as IM, and
funds collected as IM pursuant to Commission regulation 23.152.19

13 7 U.S.C. § 6c(j)(2).
14 17 CFR 23.600.
15 See 17 CFR 23.504(a)(2).
16 See 17 CFR 23.504(b)(3)(i).
17 See 17 CFR 23.504(b)(3)(iv).
18 See 17 CFR 23.158.
19 See 17 CFR 23.157(c).

Page 5

C.
DSIO Guidance
DSIO believes that the above-referenced rules collectively require the execution of IM
documentation when the collection or posting of IM is actually required; that is when the $50
million IM threshold is exceeded. In this regard, DSIO points to the Commission’s statement in
the preamble to the CFTC Margin Rule that “[t]he final rule does not require a CSE to collect or
post initial margin collateral to the extent that the aggregate un-margined exposure either to or
from its counterparty remains below $50 million.” 20
DSIO notes that Commission regulation 23.504 requires the execution of IM documentation
“prior to or contemporaneously with entering into a swap transaction.” However, the IM
documentation is required only if there are any IM requirements and any custodial arrangements.
Accordingly, to the extent the $50 million IM threshold is not exceeded, there are no applicable
IM requirements, and no need for any pertinent documentation or custodial arrangements.21
Issued in Washington, D.C. on July 9, 2019, by the Division of Swap Dealer and
Intermediary Oversight
IM
documentation is required only if there are any IM requirements and any custodial arrangements.
Accordingly, to the extent the $50 million IM threshold is not exceeded, there are no applicable
IM requirements, and no need for any pertinent documentation or custodial arrangements.21
Issued in Washington, D.C. on July 9, 2019, by the Division of Swap Dealer and
Intermediary Oversight.

Matthew Kulkin
DIRECTOR

20 Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR at 652.
21 While CSEs and their counterparty may enter into custodial arrangements in anticipation of meeting the $50
million IM threshold, the arrangements are not required until the threshold is exceeded. The Commission also notes
that once a CSE and a counterparty exceed the $50 million IM threshold, even in the event that the IM amount
subsequently falls below the threshold level, the CSE must still meet all the above IM documentation requirements.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/CFTC_L19_16. Check the current official text before relying on it. Not legal advice.