Community Bankers should not worry about new swap margin rules

Published September 2, 2015  /  In Community Banks and interest rate swaps

Over the next few months you will hear a lot of noise about new requirements for posting margin on swaps.  Initial Margin; Variation Margin; Uncleared Swaps; these are terms that will have a significant impact on the cost of doing business for swap dealers, major swap participants (hedge funds and major non bank institutions), but the vast majority of community banks and end users have nothing to worry about.  The "margin storm" is set to pass by leaving all but the largest community banks untouched.

When it comes to community banks the rules leave current practices untouched.  The vast majority of Community Banks will fall into the category of Low Risk Financial Entities and as such will not be subject to a requirement to post initial margin (aka Independent Amount) or variation margin ("mark to market").  Instead dealers will continue their current practice of setting initial or variation margin requirements based on their standard underwriting practices.  All told, no change for community banks.

For customer swaps on loans,  both the community bank and borrower ("End User") managing a business risk will be exempt from margin requirements and current underwriting rules will apply.

Banks need to continue to underwrite swap exposure to dealers and borrowers, negotiate ISDA docuementation to manage the bank's credit and liquidity risk and secure swap risk using standard 2-way CSAs with dealers and appropriate cross-collateralization strategies for loan swaps.

Call with your questions about how to enhance your existing hedging platform, or how to start a new hedging program.