Governmental issuers with outstanding interest rate swaps may be contacted by swap providers with respect to “variation margin (VM) rules” protocols and possible exceptions to them. These VM rules, which apply to U.S. swap dealers, are proposed to go into effect on March 1 in the U.S. (the E.U., Canada, Japan and Australia have comparable VM rules also going into effect for dealers from those countries, such as Canadian banks). The VM rules require banks and other swap dealers to take collateral based on changes in interest rates or creditworthiness (typically addressed in a “Credit Support Annex” to an ISDA swap agreement), even if the parties to the swap originally chose not to require collateral posting. As a result, banks and swap counterparties (such as governmental issuers) have to enter into documentation protocols for any swaps written on or after March 1.
As with prior swap regulations and protocols, there are exceptions for various types of counterparties. Although governmental issuers often don’t neatly fit the exceptions, we believe there is a good argument that most governmental issuers should again be exempt, depending on the particular facts of their financial operations. Similar to prior swap regulations, swap providers must enter into these protocols with swap counterparties or be able to document that the counterparty is exempt. Swap dealers may request a governmental issuer affirmatively state that it is exempt, either in the form of a “Regulatory Margin Self-Disclosure Letter” or a simple email.
If you are contacted by one of your swap dealers (e.g., a bank) with respect to the VM rules, protocols or disclosure letters and wish to discuss the basis for your governmental issuer claiming an exemption, please feel free to contact any Kutak Rock public finance attorney. The firm has developed a sample exemption response letter for the use of interested governmental issuers and can answer any questions you may have regarding the VM rules. In addition, we can assist you (or act as an interpreter/intermediary with one of our swap specialists) if you wish to delve into the technical aspects of such issues.
If you have questions regarding the content of this alert, please contact your Kutak Rock attorney, a member of the national public finance group of the authors of this client alert listed in the right-hand column.