CFTC Division Of Clearing And Risk Determines Variation Margin Payments Are Settlements

The CFTC Division of Clearing and Risk ("DCR") issued an Interpretive Letter clarifying that variation margin ("VM") for cleared swap positions constitutes the daily settlement of exposure and not collateral under the Commodity Exchange Act ("CEA").

In the letter, the DCR explained that VM for cleared swaps may be transferred under either of two separate legal models: a "collateralized-to-market model" or a "settled-to-market model." Different jurisdictions may permit or require either model, though both achieve the same risk mitigation results. Under the collateralized-to-market model, VM is characterized as collateral, exposures are deemed to carry forward, and the party receiving VM commonly pays interest (often called price alignment interest, or "PAI") on cash collateral received. Under the settled-to-market model, VM payments are characterized as fully settling the outstanding exposure of the counterparties and, regardless of how exposure changes over