Resolution 112 and standards incorporated by reference in regulations

A resolution to urge Congress to make freely available privately developed standards that are incorporated by reference into regulations was passed on Aug. 9, 2016, by the by the House of Delegates of the American Bar Association at its annual meeting following a lively debate (see video).  With various pros & cons being laid out in the recorded debate, there is no need for me to add much opinion of my own to this.  However, it is worth noting that those involved in energy trading generally can't help being involved in standards, including standard forms of trading agreements (e.g. those published by ISDA, EEI, NAESB, EFET, globalCOAL, etc.).  I understand at least one of these publishers was following the resolution process via ANSI.  Post Dodd-Frank, there have been numerous regulations put in place that impact trading.  If the ABA resolution ever evolved into a bill before Congress, it would be interesting to see what standard forms of trading documentation some regulations may or may not pickup.  Where trading documentation incorporates by reference other trading documentation and standards, granting free access might become less than simple, especially if only certain parts are to be made freely available.

It's new, it's compliant, and it's from ISDA.

ISDA's announcement of the regulation-driven 2016 Credit Support Annex for Variation Margin (VM) (Security Interest - New York Law) is available here.  Where does it fit among margining standards (and will the artistic placement in the list below need to be modified in the future)?

..

Dodd-Frank recent contract provisions sampler.

More than 5 years after the passage of DF¹, the law that changed [master trading agreements]² [forever]³, a mix of published and non-published standard wordings have worked their way into templates for trading contracts. Some recent iterations can be found in the PDF embedded below which contains DF-related provisions excerpted from 3 ISDAs and 1 NAESB done in the past 12 months⁴. Some annotative references are included.

1. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111 -203, 124 Stat. 1376 (2010).
2. Substitute with your applicable concern(s) here, as necessary.

3. Substitute duration here based on your expectations for economic or election cycles, as applicable.

4. Sourced from public regulatory filings ("transparency in the financial system" noted).

Note: you may wish to save the PDF to your desktop for more convenient viewing and access to links.

Nationwide is on your side (after 4 p.m.)

Dale Earnhardt, Jr. says in a Nationwide commercial that one of the reasons that the Earnhardt family has trusted Nationwide for more than 30 years is because "...as a mutual, Nationwide doesn't report to Wall Street…"  While this is surely true (in fact, no person or company anywhere in the world reports to Wall Street), Nationwide did just pay an $8 million fine to the Securities and Exchange Commission ("SEC"), which is the federal agency that oversees participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds.  Nationwide paid the $8 million fine because, according to the SEC's press release dated May 14, 2015, for 15 years (i.e., half of the length of time that the Earnhardt family trusted Nationwide), Nationwide routinely violated "pricing rules in its daily processing of purchase and redemption orders for variable insurance contracts and underlying mutual funds."  According to the SEC statement, Nationwide's prospectuses stated that orders received by 4 p.m. at its home office would receive that day's price, while orders received after 4 p.m. would receive the next day's price.  The problem that the SEC found was that Nationwide intentionally delayed the retrieval of mail so that it could apply the next day's price to customer orders (as if the customers' orders were received too late in the day to qualify for that day's prices).  The SEC's investigation found that Nationwide did a number of things to ensure late delivery of these orders, including:  (1) having the post office separate its variable contracts business mail (to which these orders relate) from mail relating to Nationwide's other business so that couriers could be sent early in the morning to pick up mail relating to other business and then come back later in the day to pick up the mail that related to orders for the variable contracts business;  (2) instructing couriers carrying variable contracts business mail who arrived before 4 p.m. to wait in until 4:01 p.m. before entering Nationwide's building; and (3) complaining to the post office when its variable contracts business mail was mixed with mail relating to other business (including requesting a meeting with the post office to stress "that it needed 'late delivery' of variable contract mail 'due to regulations that require Nationwide to process any mail received by 4 p.m. the same day' ").

To close the loop on the racing connection, a few things come to mind, including Ricky Bobby's estranged father's admonition in Talladega Nights that "If you're not first, you're last."  Of course, with Nationwide's practice, if you were an order that came in first before 4 p.m., you might as well still have been last because you would be treated as coming in after 4 p.m.  There is also the phrase "second is first loser", but here, first would be the first loser, if it was an order that came in before 4 p.m.  There is also a phrase in racing that "in order to finish first, you first must finish."  At least it appears that Nationwide has finished with the dilatory practice, as according to the SEC statement, Nationwide must cease and desist from the violations of the rule. 

It should be noted that Nationwide did not admit that it did anything wrong, but it did consent to the entry of an order finding that it willfully violated Rule 22c-1 under the Investment Company Act of 1940.   Such a non-admission and consent seems about as straightforward as saying that one will honor orders received in the mail by 4 p.m., but then do everything in one's power to ensure that no mail is received by 4 p.m.  There's another saying in racing that "It ain't cheatin' if you don't get caught".

Unaccountable Coalitions & Unconstitutional Conduits

FSCC says the FSOC and the FSB are both kinds of UCs.  Excerpt below is from remarks by Financial Services Committee Chairman Jeb Hensarling given on March 17, 2015 at the International Financial System Hearing (available here):

 “…FSOC is especially concerning because among other matters it seemingly takes direction from the FSB, the Financial Stability Board. Again, a fairly secretive, unaccountable coalition of global bureaucrats that has found in FSOC a conduit to export its views on regulations and risk models to the United States.  Just as one-size-fits-all mandates imported from Washington typically do more harm than good, the U.S. economy does not need a one-world view of risk imported from Europe. We tried that with Basel; think Greek sovereign debt and Fannie and Freddie mortgage backed securities. We know where that got us.

Yet FSOC has seemingly rubber-stamped decisions made by this international board when it comes to deciding whether large U.S. non-bank financial institutions should be designated as too big to fail. This does not appear to be coordination; it appears to be capitulation. Since today’s SIFI designations are tomorrow’s taxpayer-funded bailouts, this has potentially disastrous consequences for the American people.

The imposition of one global standard of financial regulation by this administration will undoubtedly harm American innovation and American economic growth. It can impinge on U.S. sovereignty and bypass the constitutional check and balance of the United States Congress….”

I'm a Regulator (and Other Matters, Including Position Limits)

The webcast for the CFTC’s Energy and Environmental Markets Advisory Committee held on February 26, 2015, is available here, and the transcript (from which the excerpt below was taken) has been posted here.

Where's the Love?

The WSJ reports today (Mar. 5) in "Washington Strips New York Fed’s Power"  that bank supervision is moving from NY to Washington.  Reference is made to a new structure described in a previously undisclosed paper from 2010 identified as the "Triangle Document".  The document is described as being six pages, which is much shorter than many other regulatory materials--maybe they are on to something. 

In other news, the regional Federal Reserve Banks are an unconstitutional part of the Federal Reserve System according to a paper from the Brookings Institution's Hutchins Center on Fiscal and Monetary Policy released on Mar. 2, 2015.  New York has one of these banks.

Follow-up on End-User Margining Relief Under TRIA

In remarks dated Feb. 26, 2015 from CFTC Chairman Timothy G. Massad before the Coalition for Derivatives End-Users, he referred to exemptions for end-users (provided for in last year's rulemakings involving margining of uncleared swaps) proposed by the CFTC and also by the prudential regulators.  He also stated that "...in light of the passage of the margin provisions in the TRIA bill, we are working to implement these statutory end-user margin protections quickly through an interim final rule, as Congress intended.". 

Presumably (and hopefully) this reference to TRIA (i.e., Terrorism Risk Insurance Program Reauthorization Act of 2015) and an interim final rule means that such a rulemaking pursuant to Section 303(2) of TRIA will address the discretionary concerns in the CFTC's current proposed margin rules as were identified by this blog last month (see post here).

The text of the Chairman's remarks are available here.  The press release from the Coalition for Derivatives End-Users, who hosted the event where the remarks were made, is available here. 

It is noted that the remarks on the CFTC's website are dated today (Feb. 26, 2015), and the press release from the Coalition (also dated as of today) refers to a 2 day summit.  The Chairman is a busy man.  He was at today's Energy and Environmental Markets Advisory Committee meeting sponsored by Commissioner J. Christopher Giancarlo at the CFTC, which ran from 10:00 a.m. to about 4:00 p.m.

CFTC Chairman Timothy Massad Testimony Before the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies

It is a remarkable thing to watch the Chairman of an agency tasked by Congress under Dodd-Frank legislation to expand its oversight over market activity appear before Congressmen to ask for money to do his job, as he did on Wednesday, February 11 before the U.S. House Appropriations Committee, Subcommittee on Agriculture, Rural Development, Food and Drug Administration and Related Agencies, in Washington, DC.  While the legislation itself is messy, it also doesn't help to have those regulators who are tasked with implementing the law not have sufficient resources to do so.  If, for example, the law requires a regulator to write rules that require market participants to submit certain filings and information to the regulator, but the regulator does not have the resources to fully review these filings, the (tax payer) money that is being spent on regulation is arguably not being put to good use.

Chairman Massad appears to understand well how the markets work, so I imagine that it is a strange feeling for him when he gets support for more resources from Congressmen who don't have such market understanding, but does not get the needed support from the Congressmen who do have an understanding of the markets. 

During the hearing, Congresswoman Rosa DeLauro's speaking through an over-amplified microphone was painful to listen to, not just because of the noise, but because of the laying of leading questions on to Chairman Massad (equally undesirable were the direct questions that essentially were tacked on to lengthy commentary from Congresswoman Rosa DeLauro about how she felt about an issue).  How weird that she sounded like she was cross-examining an opposition's witness in a trial, when her line of questioning was part of her case for supporting granting more money to Chairman Massad's agency, e.g.:

Congresswoman DeLauro:  You're a regulatory agency? Mr. Massad. Chairman Massad? OK?

Chairman Massad: Yes.

Congresswoman DeLauro:  The responsibility, the responsibility is, open fair transparent markets, avoiding systemic risk, protect market users, consumers, protect the public from fraud manipulation and abusive practices related to commodities futures and swap markets, is that the mission?

Chairman Massad: Yes.

Congresswoman DeLauro:  Is it true that, that the expansion of what Dodd-Frank did, expanded what the effort is to 400 trillion dollars in the domestic swaps market?

Chairman Massad: Correct.

Congresswoman DeLauro:  That’s what the scope of the jurisdiction is.

Chairman Massad: Yes.

Congresswoman DeLauro: This is a committee that has often times consumed itself with the issues of fraud and error rates, whether it is in a SNAP program, by the way, lower error rates than any other federal agency, so my hope would be that we would see folks on this committee be as concerned now [looking at Chairman Massad and pointing at him with both pointer fingers] with the fraud and abuse that goes unchecked in the swaps futures and commodities market.  I will also point out that this is a small agency. Huge responsibility.  Gets a fraction of what we spend on oversight for other agencies including Medicare social security, a point at which looking at what banks are doing you asked, you talked about I.T. before?  Collecting the data that you needed in order to move forward. For 2016, 63, 63 million dollars. That's what it says here. Citibank!  Citibank.  250 to 300 million dollars a year to take a look at information security with regard to the, cyber-attacks .  What are we speaking about here? 72 million dollars.  I defy you to go to any other agency and take a look at what they are spending in a whole variety of efforts.  Tell me how much money you brought back from what you uncovered last year.  [finally a direct question]  How many?  How much money?

Chairman Massad: This year alone, 1.5 billion in fines and penalties.  Between 2009 and 2014, it was over 2 billion.

It should be noted that earlier on in the hearing, Congressman Sam Farr stated an amount of penalties collected by the CFTC go to the US Treasury.  This would be one of the reasons why the CFTC needs to ask for money.

When Congressman David Young addressed Chairman Massad, he asked about a lease in Kansas City, where apparently the CFTC had 25 employees working in a space that could hold 80 employees.  The Congressman mentioned a report that estimated $3.6 million was wasted over the course of the lease.  When asked what Chairman Massad planned to do about such waste, he responded that shortly after he was sworn in in June 2014, he went to the Kansas City office, and a decision was made to give up unneeded space.  Chairman Massad mentioned that if he could sublease the space out, he would, but that he didn't have the statutory authority to do so.  He indicated that the issue was with the landlord to whom a request was made to reduce the leased space and the rent, but the landlord had not yet agreed.  As a taxpayer, I found this to be useful information to come out of actual discourse between a member of the panel and the witness.

Not all of the Congressmen shared the same mood, e.g.,:

Congressman Andy Harris: ...The other one is, you said you fly coach.  Does that imply your predecessors didn't?

Chairman Massad: No, not at all.

Congressman Andy Harris: Yeah, good, because I hope that..

Chairman Massad: Let me clarify, I meant that...

Congressman Andy Harris: I have 5 minutes I've got to move on

Chairman Massad: I meant that when I go overseas...

Congressman Andy Harris: Chairman, I only have 5 minutes.  I got it.  I have to move on.  I just want to know if that it is a distinction from predecessors.

Chairman Massad: Sorry

At several points during the hearing there were comments from a couple of the Congressman who did not like the use of the term "cuts" to imply that funds were being reduced instead of a request for funds being denied.  Congressman Harris suggested that such interpretation occurred "only in Washington", and Congressman Yoder stated to Chairman Massad that "Most Americans understand that a cut to a request is not a cut."  Interestingly, some whispered comments about cuts were picked up from about 31:56 in the webcast when Congressman Farr's microphone appeared to be off, but someone else's was on, e.g.:

32:16
"What is a cut from a request?"

32:40
"It’s just a silly argument."

32:46
"Its Washington jargon."

It’s interesting to note how the notifications from the CFTC about the hearing are sent out.  I received the CFTC email after the hearing at 12:24pm with a link to Chairman Massad's testimony, but the tweet from the CFTC came in at 9:03am before the hearing advising of the upcoming webcast.  I guess the early bird (or the one who gets tweets) gets the worm--actually, the late bird gets the worm too, as the replay is available here.

The House Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies holds a hearing on the Fiscal Year 2016 budget for the Commodity Futures Trading Commission on February 11, 2015. Witness Mr. Timothy Massad Chairman Commodity Futures Trading Commission

Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank

Yesterday, January 28, 2015, Commodity Futures Trading Commission (CFTC) Commissioner J. Christopher Giancarlo released a White Paper titled “Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank.” According to the CFTC's website, "the paper analyzes flaws in the CFTC’s implementation of its swaps trading regulatory framework under Title VII of the Dodd-Frank Act and proposes a more effective alternative."  The White Paper is available here.  The paper has a 3 page executive summary and is over 80 pages in total.  The paper includes 303 footnotes.  While not a critical concern, it is noted that the paper is light on illustration, and accordingly, I would propose that the image below be added to the paper, in the event that the paper is updated in the future.

International fora

On Wednesday, Jan. 21, 2015, the Commodity Futures Trading Commission ("CFTC") Commissioner Sharon Bowen issued a statement¹ regarding the prior week's activity in the retail foreign exchange markets (i.e., the wild surge in the value of the Swiss franc following the Swiss central bank's surprise decision to remove the cap on its currency exchange rate).² She expressed concern about risks that low standards of regulation pose to the retail foreign exchange industry and to retail foreign exchange investors. She suggested that the CFTC should consider enhancing regulations.

Should existing regulations that protect retail investors and day and night traders from themselves (and from those that they trade with) be enhanced? It makes me think of an old Jerry Seinfeld line about maximum strength pain reliever--find out how much will kill me, and give me a little less. Similar to maximum strength over-the-counter (i.e., OTC) medicine, maximum strength OTC rulemaking could find out how much trading credit will bankrupt me, and give me a little less. Without considering what constitutes the appropriate strength of regulation (and without choosing sides among any of the views expressed by a regulator or by any commenter  in any of the 9000+ comments submitted to the CFTC in 2010³ regarding its Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries), it would be helpful to understand more about the regulatory view as to what actually caused the problem--Switzerland's central bank, the Swiss National Bank ("SNB"). 

Unlike the 2008 financial crisis, where the causes have not been fully determined (blame has been attributed to credit rating agencies, failures by regulators, excessive risk taking, concealed conflicts of interest, and derivatives and complex financial products), last week's market damage was caused by the central bank in Switzerland. We know what happened. It changed its monetary policy. It could happen again⁴ with another central bank.

Does this knowledge of a discrete cause and of a persistent risk (of foreign exchange market damage following another central bank's policy change) not present a new path for preparing for another similar occurrence? Should the response (rule writing) to a problem when one knows its cause (SNB currency peg removal) be similar to the response (lots of rule writing) to a problem when one is not sure about its cause (maybe market participants, rules, rule makers, bad faith, and/or bad luck)? Could anything have been done to prevent the problem created by the SNB or mitigate its impact (other than putting more limitations on trading business)? Is there an opinion about the SNB' s action? What if the CFTC knew in advance about the SNB's action? What if another regulator knew and it told the CFTC? What would it want to do with this information?

An IMF Working Paper from April of last year on international monetary policy coordination among central banks indicates that there is a renewed debate on the merits of central bank coordination.⁵ (As a non-economist who listens to economists joke on Bloomberg radio and elsewhere as to how often economists are wrong, I am going to presume that international coordination among central banks is not particularly desirable, except in certain emergencies, such as on October 8, 2008, where there was a coordinated reduction in interest rates by 6 countries' central banks following the collapse of Lehman.)⁶ Referring to a limited coordination among central banks, the IMF Working Paper states "Although there is no regular coordination among the major central banks on monetary policy actions, a great deal of discussion does occur among leading central banks at various international fora."⁷

The Financial Stability Board ("FSB"), according to its website,⁸ promotes international financial stability by coordinating national financial authorities and international standard-setting bodies. The SNB is a member of the FSB, as are the United States' Board of Governors of the Federal Reserve System (“FRB”),  Securities & Exchange Commission (“SEC”), and the Department of Treasury (“TREAS”). Can the CFTC increase its exposure to the FSB? If membership is not available to the CFTC, can the CFTC make a point of talking more with the FRB, SEC, and/or TREAS, who are FSB members (according to the U.S. Governmental Accountability Office ("GAO") they do talk some,⁹ but maybe they could talk more--specifically about central bank risk in the foreign exchange markets)? Is there anything to explore in the area of IMF-FSB Early Warning Exercises? Is there anything else to explore outside of the collateral-increasing-investment-discouraging-rule-writing box?

1. Statement of U.S. Commodity Futures Trading Commissioner Sharon Bowen Regarding Last Week’s Activity in the Retail Foreign Exchange Markets, http://www.cftc.gov/PressRoom/SpeechesTestimony/bowenstatement012115 (Jan. 21, 2015).

2. Jill Treanor and Patrick Collinson, Swiss currency crisis claims casualties across the world, The Guardian (Jan. 16, 2015), available at http://www.theguardian.com/business/2015/jan/16/west-ham-sponsor-alpari-swiss-currency-crisis
3. Comments filed in response to CFTC's Proposed Rule entitled Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, 75  Fed. Reg. 3282 (Jan. 20, 2010), available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=748
4. Ralph Atkins, Why ECB action is likely to stoke global currency wars, Financial Times (Jan. 22, 2015), available at http://www.ft.com/intl/cms/s/0/10083c7e-a187-11e4-bd03-00144feab7de.html#axzz3Pf4uUul6
5. Rakesh Mohan and Muneesh Kapur, Monetary Policy Coordination and the Role of Central Banks, 3 (Int'l Monetary Fund, Working Paper WP/14/70, April 2014), available at https://www.imf.org/external/pubs/ft/wp/2014/wp1470.pdf#page=4
6. Id. at 6.
7. Id. at 5.
8. The Financial Stability Board, About the FSB, http://www.financialstabilityboard.org/about/ (last visited Jan. 23, 2014).
9. U.S. Gov't. Accountability Office, GAO-15-81, DODD-FRANK REGULATIONS: Regulators' Analytical and Coordination Efforts (Dec. 2014), available at http://www.gao.gov/assets/670/667633.pdf

A Currency

Yesterday, the Swiss franc rose 30% against the euro upon a surprise move by the Swiss National Bank to remove a cap on its country's currency (see WSJ).

In other news, according to commentary from Latham & Watkins dated Jan. 8, 2015, rulemakings by Prudential Regulators and the CFTC regarding the margining of uncleared swaps are expected to be completed early this year.

The rulemakings are being made pursuant to DF ¹, which requires regulators to adopt margin (and other) rules for uncleared swaps to ensure the safety and soundness of certain swap entities and to reduce risk to the financial system. The regulators draw on principles from an international framework developed by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions ², such as a principle that requires collateral to be liquid and to hold its value (see excerpt below from the CFTC's proposed rule)³:

Based on considerations such as the principle referred to above, the proposed rule allows for certain types of assets to qualify for initial margin requirements, which are chosen in part because of a determination that they can be readily valued and easily liquidated⁴. These assets include the following major currencies⁵:

Basel is in Switzerland.

1. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111 -203, 124 Stat. 1376 (2010).
2. Margin requirements for non-centrally cleared derivatives, Basel Committee on Banking Supervision and the International Organization of Securities Commissions (Sep. 2013).
3. Proposed Rule and Advance Notice of Proposed Rulemaking, Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 Fed. Reg. 59898, 59912 (Oct. 3, 2014).
4. Id.
5. Id. at 59927.

Metlife v. FSOC

On Tuesday, Jan. 13, 2015, Metlife filed a complaint against the Financial Stability Oversight Council for designating the insurer a nonbank systemically important financial institution.  There is no lack of media coverage on this topic (e.g., the Hill, Bloomberg, NYTimes, etc.).  The WSJ has posted a copy of the complaint here.  This is one to watch.

BRMPSA (i.e., Title III to TRIA) Signed Into Law

On Monday, January 12, 2015, President Obama signed into law, the Terrorism Risk Insurance Program Reauthorization Act of 2015 ("TRIA").  Title III of TRIA contains the Business Risk Mitigation and Price Stabilization Act of 2015 ("BRMPSA"), wherein amendments are made to parts of the Commodity Exchange Act ("CEA") and the Securities Exchange Act of 1934 ("SEA") that were added as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DF”). 

BRMPSA, which is not related to terrorism insurance, was added to the end of TRIA as a short Title III (less than 350 words). It removes certain margining obligations imposed on certain end-users and other germane counterparties.

DF requires the Prudential Regulators (i.e., the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Federal Reserve Board, and the Office of the Comptroller of the Currency) and the Commodity Futures Trading Commission ("CFTC") to adopt rules that put initial and variation margin requirements on uncleared swaps traded by certain financial entities.

BRMPSA, with respect to certain non-financial hedging entities¹, certain cooperatives², and certain financial entities who perform a hedging function for affiliates³ (each, for the sake of this discussion, being referred to as a "commercial end-user oriented business"), amends DF by specifying that (1) the requirement of the regulators to adopt margin rules, along with (2) any margin rules adopted based on such requirement, shall have no application to any swap where a counterparty is a commercial end-user oriented business.

Recent uncleared swap margin rules proposed by the Prudential Regulators (see the Notice of Proposed Rulemaking entitled “Margin and Capital Requirements for Covered Swap Entities,” 79 Fed.Reg. 57348, Sep. 24, 2014)(the "Prudential Regulators' Proposal") and by the CFTC (see Proposed Rule and Advance Notice of Proposed Rulemaking entitled “Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants,” 79 Fed.Reg. 59898, Oct. 3, 2014) (the "CFTC's Proposal") largely and already exclude non-financial end-users from the scope of what BRMPSA now states shall not apply to a commercial end-user oriented business. That said, there are some potential nuances of note:

With respect to the Prudential Regulators

The Prudential Regulators' Proposal provides (see excerpts below from §§.3,.4 on pages 57391, 57392) that covered swap entities are not required to collect initial margin or variation margin from end-users, however, the Prudential Regulators' Proposal also (in this author's opinion) grants to a covered swap entity a sweeping amount of discretion to collect margin from an end-user at any time, in any form, and in any amount that it determines addresses the credit risk posed by uncleared swaps with such end-user.

Ҥ_.3 Initial margin.
. . .
(d) Other counterparties. A covered
swap entity is not required to collect
initial margin with respect to any non-
cleared swap or non-cleared security-
based swap with a counterparty that is
neither a financial end user with
material swaps exposure nor a swap
entity but shall collect initial margin at
such times and in such forms and such
amounts (if any), that the covered swap
entity determines appropriately address
the credit risk posed by the counterparty
and the risks of such non-cleared swaps
and non-cleared security-based swaps.
. . .
§_.4 Variation margin
. . .
(c) Other counterparties. A covered
swap entity is not required to collect
variation margin with respect to any
non-cleared swap or non-cleared
security-based swap with a counterparty
that is neither a financial end user nor
a swap entity but shall collect variation
margin at such times and in such forms
and such amounts (if any), that the
covered swap entity determines
appropriately address the credit risk
posed by the counterparty and the risks
of such non-cleared swaps and non-
cleared security-based swaps.”

To the extent that BRMPSA eliminates this grant of discretion, a degree of respect has been restored to the interest that a commercial end-user oriented business has in the sanctity of contract. 

To demonstrate the potential harm such discretion would otherwise pose to a commercial end-user oriented business, the following hypothetical example may be considered:

• A covered swap entity ("X") has an ISDA master agreement ("ISDA") with a Credit Support Annex ("CSA") in place with a non-financial end-user ("Y") that provides  Y with a collateral Threshold (like a line of credit) of $50 million.
• Under the ISDA, X and Y have a portfolio of interest rate swap transactions that were entered into over a period of months.
• Recently, interest rates have moved in such a way as to create significant unrealized losses for Y (e.g., $35 million) on the portfolio of interest rate swaps that have not yet settled such that X is exposed to the risk that Y may not pay the amount owed to X (currently an unrealized gain of $35 million) upon settlement or termination of the interest rate swaps.
• X has not received any collateral or margin from Y because the value of the exposure is below the Threshold (i.e., Y's agreed line of credit has not been exceeded)
• X determines that the credit risk posed by the interest rate swaps is high because of turbulent market conditions
• Notwithstanding the fact that X and Y have previously agreed to a $50 million Threshold in the CSA, X unilaterally decides to amend the Threshold to $zero and makes a margin call on Y for $35 million
• X states that it is given the right to adjust such Threshold based on a determination made in accordance with applicable regulation (i.e., the Prudential Regulators' Proposal)

In effect, in the foregoing example, the non-financial end-user's counterparty is given a discretionary right to demand adequate assurance.  To analyze the power of this discretion, one needs to ask whether or not regulation in such a case can trump contract.  But now, with the passing of BRMPSA, the more relevant question becomes whether or not the power of the Prudential Regulators to grant such discretion has been (or has to be) eliminated.

With respect to the CFTC

The CFTC's Proposal does not grant a discretionary right to non-financial end-users' counterparties to demand margin.  However, the CFTC has retained discretion for itself to treat any entity (e.g., a non-financial end-user) as a financial end-user for margin purposes (see the excerpt below from the definition of “Financial end user” on page 59927 of the CFTC's Proposal):

“(xiii) Notwithstanding paragraph (2)
of this definition, any other entity that
the Commission determines should be
treated as a financial end user.”

It would appear that with the passing of BRMPSA, this discretion of the CFTC to deem a non-financial end-user to be a financial end-user for margin purposes has been (or has to be) eliminated.

The text of BRMPSA is available at PDF p26 of TRIA at this link, and it is also included below with color coded cross-references to the CEA and the US Code (to help differentiate between references to "paragraphs (2)" and "section 2").  

1. See CEA §2(h)(7)(A) and CFTC Regulation at 17 C.F.R. §50.50.
2. See CEA §4(c)(1) and CFTC Regulation at 17 C.F.R. §50.51.
3. See CEA §2(h)(7)(D) and CFTC No-Action Letter 14-144 (Nov. 24, 2014).