CFTC confirms Morgan Stanley internal merger will not affect status of legacy swaps

By way of background, when the CFTC’s swap margin and clearing rules were enacted, the CFTC exempted uncleared swaps executed before the applicable compliance date for the new mandatory margin requirements. These swaps, deemed legacy swaps, remain exempt from the initial and variation margin requirements imposed under Commodity Exchange Act Section 4s(e) and the CFTC’s uncleared swap margin rules. 

In granting this exception, the CFTC specified that a legacy swap loses its status if, after the compliance date of the margin rules, the parties to the swap make a material amendment or change to the terms of the swap, including changing the core economic terms, renegotiation of rights and obligations beyond the original terms or causing events that effectively create a new swap, such as full novation to a new counterparty. The CFTC has also issued no action relief and interpretations which further clarify that certain immaterial amendments and life-cycle events do not cause a swap to lose its legacy status, such as the creation of a new swap resulting from a multilateral compression exercise of only legacy swaps, or the maintaining of a portion of a legacy swap following the partial termination or novation of the swap. 

In the Staff Letter, the CFTC confirmed that MSCS’s legacy swaps will retain their legacy status, notwithstanding their transfer as part of the merger of the fixed income derivatives and foreign exchange swaps business of MSCS into MSBNA. Because the transfer arose solely from an internal corporate merger by operation of state corporation law and not from any renegotiation, amendment or novation of the swap terms, the merger does not, by itself, trigger new margin or clearing requirements for swaps originally executed with MSCS. CFTC staff also noted in their reasoning that its interpretative relief also benefits market participants by providing regulatory certainty in similar future restructuring scenarios.
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