The initial margin requirements for uncleared swaps force both sides of a privately negotiated derivatives trade to lock up collateral at the start of the transaction, held by an independent custodian, to cover potential losses if one party defaults. The framework lives primarily in 17 CFR Part 23 and is enforced by the Commodity Futures Trading Commission together with the federal prudential regulators. Compliance turns on four questions: whether you’re in scope, whether your exposure has crossed the thresholds that trigger posting, how much you owe, and where and how the collateral must be held.
Who Has to Post Initial Margin
The rules directly bind a category of firms called Covered Swap Entities: registered swap dealers and major swap participants. A CSE must collect and post initial margin when it trades uncleared swaps with another swap dealer, a major swap participant, or a financial end user that meets the exposure threshold.1Federal Register. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
Financial end user is defined broadly. It captures registered investment companies, private funds, commodity pools, insurance companies, bank holding companies, and entities that hold themselves out as raising money from investors or trading in securities, swaps, or similar assets.1Federal Register. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants If your firm fits any of those descriptions and faces a CSE across an uncleared swap, you are on the counterparty side of the requirement.
Exemptions That Take You Out of Scope
Three carve-outs matter. A firm that is not a swap dealer, major swap participant, or financial end user is a commercial end user and is exempt entirely, provided the swap hedges or mitigates commercial risk. A manufacturer using interest rate swaps to lock in borrowing costs is the classic example.2Commodity Futures Trading Commission. Commercial End-User Exemption Fact Sheet
Financial institutions with total assets of $10 billion or less are exempt from initial margin on swaps entered into for hedging purposes, a carve-out created by the Terrorism Risk Insurance Program Reauthorization Act of 2015. Community banks and smaller insurance companies commonly rely on it.3Federal Reserve. Margin and Capital Requirements for Covered Swap Entities
Swaps between affiliates in the same corporate group are treated separately. A CSE does not have to collect initial margin from an affiliate as long as the group maintains a centralized risk management program covering inter-affiliate swap risk and the parties continue to exchange variation margin.4eCFR. 17 CFR 23.159 – Special Rules for Affiliates
When the Obligation Actually Triggers
Being in scope is not the same as having to move collateral. Two separate thresholds sit between a financial end user and an active posting obligation.
The first is material swaps exposure. Regulators calculate this by averaging the month-end aggregate notional amount of all uncleared swaps, security-based swaps, foreign exchange forwards, and foreign exchange swaps across March, April, and May of the current year.5Commodity Futures Trading Commission. Release Number 8328-20 If that average exceeds $8 billion, the entity has material swaps exposure and falls within the scope of the initial margin rules.1Federal Register. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants Positions are aggregated across all affiliates, so splitting trades among subsidiaries doesn’t help.
The second operates at the relationship level. No initial margin has to be exchanged between two counterparties until the calculated margin amount for their specific portfolio exceeds $50 million.6eCFR. 17 CFR 23.151 The $50 million functions as a credit rather than a trigger: once you cross it, only the excess above $50 million has to move.
How Much You Owe
Firms have two paths for calculating the margin amount, and both require daily recalculation.7Federal Register. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
The Standardized Table
The simpler method applies fixed percentages to the notional amount of each swap based on asset class and, for some classes, remaining duration. The schedule in 17 CFR 23.154(c) is:8eCFR. 17 CFR 23.154 – Calculation of Initial Margin
- Interest rate, 0–2 years: 1% of notional
- Interest rate, 2–5 years: 2%
- Interest rate, 5+ years: 4%
- Credit, 0–2 years: 2%
- Credit, 2–5 years: 5%
- Credit, 5+ years: 10%
- Foreign exchange: 6%
- Equity: 15%
- Commodity: 15%
- Cross-currency, 0–2 years: 1%
- Cross-currency, 2–5 years: 2%
- Cross-currency, 5+ years: 4%
A two-year interest rate swap with $100 million in notional produces a $1 million margin requirement under the table; a commodity swap on the same notional demands $15 million. When a portfolio spans multiple asset classes, each class is calculated separately and summed. The table does not allow netting benefits across asset classes.
ISDA SIMM and Other Approved Models
Most large dealers and buy-side firms use the ISDA Standard Initial Margin Model, known as SIMM. Regulators must approve the model before a firm can rely on it. SIMM uses risk sensitivities and historical market data to estimate potential future exposure at a 99% confidence level over a 10-day close-out period.9Federal Register. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants The 10-day horizon is longer than the 3-to-5 day window used at central clearinghouses, reflecting that uncleared swaps are harder to replace quickly. For swaps with fewer than 10 days remaining to maturity, the model may use the actual remaining life. SIMM generally produces lower numbers than the standardized table because it recognizes offsetting risks within a portfolio.
Any internal model carries continuing obligations. It must be reviewed at least annually, its calibration data revisited on at least the same schedule, and an independent risk control unit must validate it initially and on an ongoing basis. A separate internal audit function must assess controls around the model at least annually and report to the firm’s governing body and chief compliance officer.8eCFR. 17 CFR 23.154 – Calculation of Initial Margin
What Counts as Collateral
Only high-quality, liquid instruments qualify. Eligible collateral includes:10Federal Register. Margin and Capital Requirements for Covered Swap Entities
- Cash in U.S. dollars or another major currency
- U.S. Treasury and agency debt
- Sovereign and supranational debt, subject to risk-weight limits
- Government-sponsored enterprise securities
- Publicly traded investment-grade corporate bonds
- Equities in the S&P 500 or S&P 1500 Composite indices
- Gold
Cash is the simplest and most common. Non-cash collateral takes a haircut, a percentage discount to market value that accounts for possible depreciation between default and liquidation.11eCFR. 17 CFR Part 23 Subpart E – Capital and Margin Requirements for Swap Dealers and Major Swap Participants Short-term government debt (under one year) carries a 0.5% haircut, so a $10 million Treasury bill counts as $9.95 million. Longer-dated government bonds face 2% to 4%. Equities take the steepest discounts: 15% for S&P 500 names and 25% for broader S&P 1500 stocks outside the S&P 500.10Federal Register. Margin and Capital Requirements for Covered Swap Entities An additional 8% haircut applies when collateral is denominated in a different currency than the swap’s settlement currency.
The rules do not set hard percentage caps on concentration in a single issuer or asset type, but CSEs are expected to manage concentration prudently, particularly for equities and corporate bonds.10Federal Register. Margin and Capital Requirements for Covered Swap Entities
Where the Collateral Has to Sit
Initial margin must be held by an independent third-party custodian. It cannot be held by the CSE, the counterparty, or an affiliate of either. Both sides of the trade have to comply: margin a firm posts goes to a custodian under the posting arrangement, and margin it collects goes to a custodian under the collecting arrangement.12eCFR. 17 CFR 23.157a> The custodial agreement must be enforceable in bankruptcy.
Rehypothecation is flatly prohibited for initial margin. The custodian cannot repledge, lend, or transfer the collateral through securities lending, repos, or any other mechanism. One narrow exception: cash posted as initial margin may sit in a general deposit account at the custodian, provided the custodian uses it to purchase eligible non-cash collateral within a reasonable time and holds the purchased assets under the same segregation rules.13eCFR. 17 CFR 23.157 The posting party may also substitute collateral or direct reinvestment, so long as the replacement assets are eligible and meet the requirement after haircuts.
Note the boundary here. Variation margin, which settles gains and losses that have already occurred, is not subject to these segregation or rehypothecation restrictions. A counterparty can freely reuse variation margin collateral.9Federal Register. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants The custody and rehypothecation rules described above apply only to initial margin.
Documentation You Need Before Trading
All of the legal infrastructure has to be in place before a single trade executes. Parties typically use the standardized documentation published by the International Swaps and Derivatives Association, including credit support annexes built for the initial margin framework. These agreements define collateral eligibility, haircut schedules, dispute resolution procedures, and the mechanics of margin calls and returns.14International Swaps and Derivatives Association. Summary of ISDA Initial Margin Documentation
The custodial side needs its own paperwork: an account control agreement among the two trading counterparties and the custodian bank, setting the custodian’s obligations and the conditions under which collateral can be released. Without signed margin agreements and custodial arrangements, a CSE cannot legally enter into uncleared swaps with counterparties within the scope of the rules.
If the two sides disagree on the calculated margin amount, the regulation does not fix a calendar deadline. A CSE avoids a compliance violation by showing timely, good-faith efforts to resolve the dispute, including any applicable formal dispute-resolution mechanisms.15eCFR. 17 CFR 23.152 – Collection and Posting of Initial Margin If the dispute can’t be resolved, the entity must move promptly to terminate the swap after the applicable cure period.
Cross-Border Trades and Substituted Compliance
When a U.S. CSE trades with a foreign counterparty, the question of whose margin rules apply becomes practical. The CFTC uses an outcome-based approach: if a foreign jurisdiction’s margin requirements are comparable in purpose and effect to the U.S. rules, the Commission may issue a comparability determination allowing compliance with the foreign regime to satisfy U.S. requirements.16Federal Register. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants – Cross-Border Application of the Margin Requirements
The relief is asymmetric. U.S. entities, and non-U.S. entities whose swap obligations are guaranteed by a U.S. person, may use substituted compliance only for the requirement to post initial margin, not the requirement to collect it, and only when the counterparty is a non-U.S. person without a U.S. guarantee.16Federal Register. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants – Cross-Border Application of the Margin Requirements Even after a comparability determination is issued, the CFTC retains authority to bring an enforcement action if a firm fails to comply with the foreign rules it elected to follow.