Stock @emmyl.com hotday03 @emmyl.com 1y ago

Legacy Swaps, Margin Requirements, Phase 6, oh my!

Legacy Swaps, Margin Requirements, Phase 6, oh my! I AM NOT SEEING ENOUGH CONVERSATION ABOUT THIS Sept 1st margin requirement that has been delayed longer than usual...

I tried posting this earlier but it contained the virus word that is blocked by automod here.

The following is discussion of the rule published by the CFTC in Jan 2021 with a recent proposed rule change. Herein I post a summary of the rule (important terms bolded), my interpretation, and speculation on how this relates to our beloved stock. I would like more EyeBalls on this. The Rule explains that the majority (492 of 514) entities would fall under this rule; seems rather important to me and not many have discussed this thoroughly here in detail.

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

Final Rule Jan 5 21 / Document Citation: 86 FR 229

Old Rule: Margin requirements start Jan 1st every year based on average daily aggregate notional amount from Jun-Aug.
New Initial Margin (IM) requirements started Sept 1 2022 based on average month-end aggregate notional amount (ANAA) positions over Mar-May of that year. Margin requirements are required every Sept 1st based upon the Mar-May monitoring period. Previously this was a daily average with margin requirement starting on Jan 1st and based on Jun-Aug of the prior year. If the entity’s position is >$8B then margin requirements are in effect. Most situations use a risk-based model (ranging 1-15%), but certain participants can elect to use a standard model.
ELI5: entity marks positions during a timeframe and if they meet the criteria they are subject to posting the margin (IM) requirements on the listed date.

Final Rule Jan 25 21 / Document Citation: 86 FR 6850

Proposed Rule (comments close 10/10/23) / Document Citation: 88 FR 53409

"The proposed amendment would revise the definition of “margin affiliate” to provide that certain collective investment vehicles (“investment funds” or “funds”) that receive all of their start-up capital, or a portion thereof, from a sponsor entity (“seeded funds”) would be deemed not to have any margin affiliates for the purposes of calculating certain thresholds that trigger the requirement to exchange initial margin (“IM”) for uncleared swaps. This proposed amendment (“Seeded Funds Proposal”) would effectively relieve SDs and MSPs from the requirement to post and collect IM with certain eligible seeded funds for their uncleared swaps for a period of three years from the date on which the eligible seeded fund's asset manager first begins making investments on behalf of the fund (“trading inception date”). "

TRANSITION PERIOD

“The shift of the MSE determination date from January 1 to September 1 may defer for nine months to September 1, 2023, the obligation to exchange IM for a firm that absent the rule change would have been subject to the IM requirements on January 1, 2023. Uncleared swaps entered into by the firm during the nine-month deferral period will be deemed legacy swaps, or uncleared swaps exempt from the IM requirements.[49] As a result, in 2023, less collateral may be collected for uncleared swaps, which could render uncleared swap positions riskier and increase the risk of contagion and systemic risk.”

ELI5: If you were required to post margin on Jan 1 2023 based on the old rules, you can elect to defer until Sept 1 2023.

"The Commission further notes that the amendment to the timing of post-phase-in compliance, as proposed, will defer compliance with the IM requirements with respect to uncleared swaps entered into by a CSE with an FEU that comes into the scope of IM compliance after the end of the last compliance phase. Under the current rule being amended, FEUs with MSE as measured in June, July, and August 2022 would have come into the scope of compliance post-phase-in beginning on January 1, 2023. On the other hand, under the Final Rule, FEUs with MSE as measured in March, April, and May 2023 will come into scope, post-phase-in compliance, beginning on September 1, 2023. As a result, for FEUs with MSE in both periods, less collateral for uncleared swaps may be collected given that the Final Rule changes the beginning of post-phase-in compliance from January 1, 2023, to September 1, 2023, rendering uncleared swap positions entered into between January 1, 2023, and September 1, 2023, riskier, as no IM will be required to be collected during that period, which could increase the risk of contagion and the potential for systemic risk."

ELI5: If you came into the scope of our margin requirements you can defer to Sept 1 2023.

CONCERNS

There are several concerns aired in the documents about how the month-end calculation can have fuckery such that entities do things to avoid meeting the margin cutoff or to improve their positions during the monitoring period. I would defer the reader to the above initial Rule for discussion there.

TECHNICAL ANALYSIS

I would encourage the reader to review 2022 and 2023 Mar-May month-end (last business day) price action - the position on that day determines whether future margin is required. Take note of how a swap and counterparty may consider managing other securities before/after swap dates.
Notice the consistent attempts at price suppression and/or stabilization during the monitoring period.
Pardon me for using Yahoo.

JAN 1 2019 MARGIN: Mar-May was monitoring period (daily avg). Jan 1st margin required. Position going as planned…
JAN 1 2020 MARGIN: Jun-Aug was monitoring period (daily avg). Jan 1st margin required. Position going as planned…
JAN 1 2021 MARGIN: Jun-Aug was monitoring period (daily avg). Jan 1st margin required. We should all know the company events here. Macro equity V-shaped recovery period. RC buy-in on Aug 28, Aug 31, Sept 21 2020.
JAN 1 2022 MARGIN: Jun-Aug was monitoring period (daily avg). Jan 1st margin required. Macro market peak around Dec 2021.
SEPT 1 2022 MARGIN: New Rule in effect (except for Legacy Swaps). Mar-May end-month monitoring. Sept 1st margin required. Macro market starts transitioning upwards in October 2022. Opinion: RC buy-in in March 22 2022 messed up the end-month calculation. ![](https://preview.redd.it/legacy-swaps-margin-requirements-phase-6-oh-my-v0-dyb9lmxxmxjb1.png?width=1470&format=png&auto=webp&s=696ab50e9ce81d87b4ad55d4509186405b85dfd9 "Image from r/Superstonk - JAN 1 2023 MARGIN: Last Jan 1st margin requirement for those NOT electing to defer to Sept 1 2023. Aug-Jun monitoring period; notice price action at month-end. [Scontinue