1. What are the CFTC Initial Margin Segregation Regulations?
    • The CFTC has published final rules requiring swap dealers and major swap participants to notify counterparties of their right to require segregation of initial margin (“IM”) for uncleared swap transactions where such IM is not otherwise required to be segregated pursuant the rules promulgated under the CEA by the prudential regulators or the CFTC.
    • Such notification must be provided to the counterparty prior to the first execution of the first uncleared swap transaction with the counterparty that provides for exchange of IM.
    • The swap dealer and major swap participant must obtain the counterparty’s election about whether or not the counterparty requires segregation of IM in accordance with the rule.
  2. Who do the regulations apply to?
    • The right to require segregation of IM belongs to any counterparty who may post IM to CONA with respect to uncleared swap transactions, provided that such IM is not required to be segregated pursuant to the rules of the prudential regulators or CFTC. Please note the regulation applies to each such counterparty at the legal entity counterparty level.
  3. What right does the regulation give to counterparties that post IM?
    • The right to have IM segregated with a third-party custodian. This right is only with respect to uncleared swap transactions entered into on or after CONA’s registration as a swap dealer.
  4. Which custodians may hold the segregated IM?
    • The regulation requires that the custodian of IM be a legal entity independent of both CONA and the counterparty.
  5. What is the cost of segregation?
    • If you elect to require segregation, you will need to negotiate and execute a definitive agreement with a custodian acceptable to yourself and CONA.
    • CONA would expect any custodial fees, charges or costs related to IM segregation to be borne by our counterparty.
    • The segregation of IM may lead to increased trading costs due to the resulting increased costs of funding incurred by CONA. Please discuss this with your CONA sales representative.
  6. What actions do counterparties need to perform?
    • First, review the “Notification of Right to Segregation of Initial Margin Posted in Respect of Uncleared Swaps Pursuant to CFTC Rule 23.701” and “CFTC IM Segregation Letter” provided to you by CONA.
    • Second, return to CONA a signed and completed “CFTC IM Segregation Letter” through which you must confirm receipt of the notice and elect whether or not you require IM segregation.
    • As the regulation prohibits CONA from taking IM until your election has been received and, if relevant, executing an acceptable triparty custodian agreement, any delay in responding may inhibit our ability to transact uncleared swaps with you after the relevant compliance date. Please discuss with your CONA sales representative
  7. What are the implications of electing to require IM segregation?
    • If you elect to require IM segregation, it will be necessary to execute a triparty custodial agreement prior to entering into any further uncleared swaps with CONA. Such custodial agreement must be compliant with the regulation.
    • Segregated IM must be held in an account segregated for, and on behalf of, the counterparty, and designated as such. Such segregated account may also hold variation margin if agreed to by CONA and counterparty.
    • You will be responsible for establishing the required communication and data information exchange capabilities with your selected custodian.
    • As negotiating an acceptable triparty arrangement may be time consuming, counterparties who wish to avoid trading disruptions should carefully consider their election. Please speak with your CONA sales representative to discuss timing prior to finalizing your election.
    • Where applicable, your existing Credit Support Annex will need to be amended.
  8. What are the implications of electing to not require IM segregation?
    • Your existing contractual arrangements with respect to IM, if any, will be preserved. In addition, any pending or future negotiations with respect to IM segregation will not be impacted by such election.
    • If you elect to not require IM segregation, the regulation requires CONA to report to you, on a quarterly basis, whether or not our back office procedures relating to margin and collateral requirements were, at any point during the previous quarter, not in compliance with the agreement of the parties.
  9. What if I already have a custodial arrangement in place?
    • An election to segregate will require your existing custodial arrangements be reviewed and possibly amended to ensure compliance with the regulation. Therefore, choosing to elect segregation may inhibit CONA’s ability to transact uncleared swaps with you.
    • An election to not require segregation will preserve your existing contractual arrangements, including with respect to any IM segregation already in place. Any pending or future negotiations with respect to IM segregation will not be impacted by such election.
  10. May a counterparty change its election?
    • Yes. Your election may be changed at any time upon written notice delivered to CONA. However, the changed election shall be applicable only to uncleared swaps entered into after the delivery of such notice.

This fact sheet, which we believe may be of interest to our clients, is for general information only and is not a full analyses of the matters presented. This fact sheet may not be relied upon as legal advice. You should consult with your legal, compliance and regulatory advisors in evaluating the matters presented herein.