Law firm Dechert published an article titled "CFTC Helps Seeded Funds and Qualifies More Money Market Funds as Margin." They tell us, "Effective August 17, 2026, the CFTC adopted a Final Rule amending its margin requirements for uncleared swaps applicable to swap dealers and major swap participants that are not subject to prudential regulator margin rules. The Final Rule implements three major changes: A three-year initial margin exception for certain 'seeded funds' that will treat such funds as having no margin affiliates for purposes of calculating initial margin thresholds. Elimination of the 'asset transfer restriction' that had previously disqualified securities issued by most otherwise eligible money market funds ('MMFs') and similar funds that may engage in repurchase and similar transactions from serving as eligible initial margin ('IM') and variation margin ('VM') collateral. [And] Adoption of specific tiered haircuts for eligible MMF and similar fund shares used as initial margin or variation margin."
The piece explains, "The CFTC regulations governing uncleared swaps (the 'CFTC Margin Rules') require covered swap entities ('CSEs') (i.e., swap dealers and major swap participants not subject to prudential regulator margin rules) to exchange collateral as IM and VM with certain counterparties for uncleared swaps. Following the initial adoption of the CFTC Margin Rules in 2016, various challenges were identified and considered by market participants, including the disparate treatment among certain categories of seeded funds subjecting many seeded funds to initial margin obligations, the broad ineligibility of shares of MMFs and similar funds that may engage in repurchase and certain similar transactions to be posted as IM or VM for uncleared swaps, and a lack of a specific haircut schedule for shares of MMFs and similar funds posted as IM or VM."
Dechert writes, "In August 2023, the CFTC proposed to amend CFTC Regulation 23.151 and 23.156 to exempt CSEs from the requirement to exchange IM with certain seeded funds, to eliminate the asset transfer restriction, and to add a footnote to the haircut schedule set forth in CFTC Regulation 23.156 that specifically addressed the haircut schedule for MMFs and similar funds (the 'Proposal')."
They comment, "On July 13, 2026, the CFTC adopted a final rule (the 'Final Rule') amending the CFTC Margin Rules effective August 17, 2026 as follows: Eligible Collateral Amendment. The Eligible Collateral Amendment eliminates the asset transfer restriction that had previously disqualified shares of otherwise eligible MMFs or other similar funds from serving as IM and VM. Haircut Schedule Amendment. The Haircut Schedule Amendment specifies specific tiered haircuts for shares of MMFs and similar funds used as IM or VM."
Dechert's update states, "As described further below, the Final Rule amends only the CFTC Margin Rules. The prudential regulators (i.e., the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency) have not yet taken equivalent action with respect to their uncleared swap margin rules."
It says, "Under the CFTC Margin Rules as initially adopted, otherwise eligible MMF and other similar funds' shares were eligible to serve as IM or VM for certain uncleared swaps transactions only if the fund's assets may not be transferred through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, or similar arrangements. In practice, most large institutional MMFs (particularly government MMFs that invest in U.S. Treasury securities and are more likely than other MMFs to meet the other eligibility requirements) engage in repurchase transactions as cash lenders and their shares therefore could not qualify as eligible collateral under the prior CFTC Margin Rules despite being recognized as highly liquid, low-risk instruments."
Dechert writes, "These conditions have generally limited the scope of eligible fund shares to shares of mutual funds and ETFs that invest only in Treasury securities and that are restricted from engaging in any repurchase or similar agreements. Based on data as of mid-2023, the asset transfer restriction limited the scope of funds whose shares were eligible to serve as IM or VM to approximately 21 MMFs (constituting approximately $649 billion in combined net assets)."
They add, "The Final Rule eliminates the asset transfer restriction in its entirety, allowing otherwise eligible securities to serve as IM for uncleared swaps between a CSE and a covered counterparty or as VM for uncleared swaps between a CSE and a financial end user, regardless of whether the fund engages in repurchase or similar agreements. The Final Rule imposes no new conditions limiting the eligibility of MMF shares to serve as IM or VM."
Finally, the article says, "The Final Rule adopts tiered fixed percentage haircuts based on (1) the fund's maximum value-weighted average time to maturity based on the fund's stated investment restrictions not exceeding a specific time period; or (2) the fund limiting its investments to securities with a specific remaining maturity not exceeding a specific time period. The haircuts are: 0.5% for under one year, 2% for one to five years, and 4% for greater than five years. The CFTC stated in adopting the Final Rule that 'shares of MMFs that meet the IM eligibility requirements ... will be subject to a 0.5 percent haircut.' This tiered approach mirrors the haircuts applicable to direct holdings of the same underlying sovereign securities and reduces the operational burden on market participants. A CSE may rely on a fund's prospectus or other offering documents to determine the applicable limits on value-weighted average time to maturity or remaining maturities and corresponding haircut tier applicable to shares of the fund."
In other news, Federated Hermes recently posted an insight titled, "Navigating the yield curve in today's market," in which Deborah Cunningham and Bradley Payne sit talk about the current market environment. Payne says, "You've written about the possibility of less forward guidance from the Fed. How does that change the way investors should think about positioning when the path of policy becomes less predictable? And what value do liquidity investments provide in this type of environment?"
Cunningham responds, "Well, I certainly think it adds to the volatility that investors see in the marketplace. So with less forward guidance, there has to be sort of a mosaic approach where ultimately you're taking what is less information and trying to predict based on maybe innuendos as opposed to actual statements and guidance in the context of certain instances and examples as opposed to dots and actual numbers. Now, when there's volatility, there's opportunity. So, you know, if you have a level at which, you know, above that level, you'll buy it and below which you won't, that's a good strategy for that type of a marketplace."
She continues, "And I think that benefits investors in the context of them being able to capture where the yield curve is on a more consistent basis in the products without having to assume that same amount of volatility that the actual yield curve itself is providing. So as Fed expectations change with the new leadership change, the market has adjusted its expectations going out the yield curve for what the direction of interest rates is and what the volatility associated with those rates are. What, given where we are right now in the current environment, does this mean for your duration discussions and how you're positioning the products that are beyond the money market side of the equation?"
Payne replies, "So, similar to the liquidity side, in the short-duration fixed-income space, we're also utilizing the longer end of our range that we're given with the re-steepening of the front end of the yield curve. So, we are seeing more attractive levels in the two-year Treasury rates now that there are implied Fed hikes priced into those. So, we're taking opportunities maybe to extend to the more higher edge of our short duration ranges. In addition to that, on the credit side, given that a lot of our alpha is generated from sector positioning and credit allocations, with spreads maintaining resiliency this year, we are seeing opportunities within corporate yields, within ABS spreads, also within certain out-of-index spaces like trade finance and bank loans are offering value too for investors. There are pockets of opportunity both on the credit space and as well as extending out in duration and short-term fixed income."
