(a) A covered swap entity that posts any
collateral other than for variation margin with respect to a non-cleared
swap or a non-cleared security-based swap shall require that all funds
or other property other than variation margin provided by the covered
swap entity be held by one or more custodians that are not the covered
swap entity or counterparty and not affiliates of the covered swap
entity or the counterparty.
(b) A covered swap entity that
collects initial margin required by section 237.3(a) with respect
to a non-cleared swap or a non-cleared security-based swap shall require
that such initial margin be held by one or more custodians that are
not the covered swap entity or counterparty and not affiliates of
the covered swap entity or the counterparty.
(c) For purposes
of paragraphs (a) and (b) of this section, the custodian must act
pursuant to a custody agreement that:
(1) Prohibits the custodian from rehypothecating,
repledging, reusing, or otherwise transferring (through securities
lending, securities borrowing, repurchase agreement, reverse repurchase
agreement or other means) the collateral held by the custodian, except
that cash collateral may be held in a general deposit account with
the custodian if the funds in the account are used to purchase an
asset described in section 237.6(a)(2) or (b), such asset is held
in compliance with this section 237.7, and such purchase takes place
within a time period reasonably necessary to consummate such purchase
after the cash collateral is posted as initial margin; and
(2) Is a legal, valid, binding, and enforceable
agreement under the laws of all relevant jurisdictions, including
in the event of bankruptcy, insolvency, or a similar proceeding.
(d) Notwithstanding paragraph (c)(1) of this section,
a custody agreement may permit the posting party to substitute or
direct any reinvestment of posted collateral held by the custodian,
provided that, with respect to collateral collected by a covered swap
entity pursuant to section 237.3(a) or posted by a covered swap entity
pursuant to section 237.3(b), the agreement requires the posting party
to:
(1) Substitute only
funds or other property that would qualify as eligible collateral
under section 237.6, and for which the amount net of applicable discounts
described in appendix B of this subpart would be sufficient to meet
the requirements of section 237.3; and
(2) Direct reinvestment of funds only in assets that would qualify
as eligible collateral under section 237.6, and for which the amount
net of applicable discounts described in appendix B of this subpart
would be sufficient to meet the requirements of section 237.3.
