Margin and Capital Requirements for Covered Swap Entities

Published date01 July 2020
Citation85 FR 39754
Record Number2020-14097
SectionRules and Regulations
CourtFederal Reserve System
Federal Register, Volume 85 Issue 127 (Wednesday, July 1, 2020)
[Federal Register Volume 85, Number 127 (Wednesday, July 1, 2020)]
                [Rules and Regulations]
                [Pages 39754-39780]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-14097]
                [[Page 39753]]
                Vol. 85
                Wednesday,
                No. 127
                July 1, 2020
                Part IIIDepartment of the Treasury-----------------------------------------------------------------------Comptroller of the Currency-----------------------------------------------------------------------12 CFR Part 45Federal Reserve System-----------------------------------------------------------------------
                12 CFR Part 237Federal Deposit Insurance Corporation-----------------------------------------------------------------------
                12 CFR Part 349Farm Credit Administration-----------------------------------------------------------------------
                12 CFR 624Federal Housing Finance Agency-----------------------------------------------------------------------
                12 CFR Part 1221Margin and Capital Requirements for Covered Swap Entities; Direct-
                Interim-Final Rule-Final Rule
                Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules
                and Regulations
                [[Page 39754]]
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                DEPARTMENT OF THE TREASURY
                Office of the Comptroller of the Currency
                12 CFR Part 45
                [Docket No. OCC-2019-0023]
                RIN 1557-AE69
                 FEDERAL RESERVE SYSTEM
                12 CFR Part 237
                [Docket No. R-1682]
                RIN 7100-AF62
                FEDERAL DEPOSIT INSURANCE CORPORATION
                12 CFR Part 349
                RIN 3064-AF08
                FARM CREDIT ADMINISTRATION
                12 CFR Part 624
                RIN 3052-AD38
                FEDERAL HOUSING FINANCE AGENCY
                12 CFR Part 1221
                RIN 2590-AB03
                Margin and Capital Requirements for Covered Swap Entities
                AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
                Board of Governors of the Federal Reserve System (Board); Federal
                Deposit Insurance Corporation (FDIC); Farm Credit Administration (FCA);
                and the Federal Housing Finance Agency (FHFA).
                ACTION: Final rule.
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                SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (each, an agency, and
                collectively, the agencies) are adopting a final rule that amends the
                agencies' regulations requiring swap dealers and security-based swap
                dealers under the agencies' respective jurisdictions to exchange margin
                with their counterparties for swaps that are not centrally cleared
                (Swap Margin Rule). The Swap Margin Rule as adopted in 2015 takes
                effect under a phased compliance schedule spanning from 2016 through
                2020, and the entities covered by the rule continue to hold swaps in
                their portfolios that were entered into before the effective dates of
                the rule. Such swaps are grandfathered from the Swap Margin Rule's
                requirements until they expire according to their terms. The final rule
                permits swaps entered into prior to an applicable compliance date
                (legacy swaps) to retain their legacy status in the event that they are
                amended to replace an interbank offered rate (IBOR) or other
                discontinued rate, modifies initial margin requirements for non-cleared
                swaps between affiliates, introduces an additional compliance date for
                initial margin requirements, clarifies the point in time at which
                trading documentation must be in place, permits legacy swaps to retain
                their legacy status in the event that they are amended due to technical
                amendments, notional reductions, or portfolio compression exercises,
                and makes technical changes to relocate the provision addressing
                amendments to legacy swaps that are made to comply with the Qualified
                Financial Contract Rules, as defined in the Supplementary Information
                section. In addition, the final rule addresses comments received in
                response to the agencies' publication of the interim final rule that
                would preserve the status of legacy swaps meeting certain criteria if
                the United Kingdom withdraws from the European Union (hereafter
                ``Brexit) without a negotiated settlement agreement.
                DATES: The final rule is effective August 31, 2020.
                FOR FURTHER INFORMATION CONTACT:
                 OCC: Chris McBride, Director for Market Risk, Treasury and Market
                Risk Policy, (202) 649-6402, or Allison Hester-Haddad, Counsel, Chief
                Counsel's Office, (202) 649-5490, for persons who are deaf or hearing
                impaired, TTY (202) 649-5597, Office of the Comptroller of the
                Currency, 400 7th Street SW, Washington, DC 20219.
                 Board: Constance Horsley, Deputy Associate Director, (202) 452-
                5239, Lesley Chao, Lead Financial Institution Policy Analyst, (202)
                974-7063, or John Feid, Principal Economist, (202) 452-2385, Division
                of Supervision and Regulation; Patricia Yeh, Senior Counsel, (202) 452-
                3089, or Justyna Bolter, Senior Attorney, (202) 452-2686, Legal
                Division; for users of Telecommunication Devices for the Deaf (TDD)
                only, contact 202-263-4869; Board of Governors of the Federal Reserve
                System, 20th and C Streets NW, Washington, DC 20551.
                 FDIC: Irina Leonova, Senior Policy Analyst, [email protected],
                Capital Markets Branch, Division of Risk Management Supervision, (202)
                898-3843; Thomas F. Hearn, Counsel, [email protected], Legal Division,
                Federal Deposit Insurance Corporation, 550 17th Street NW, Washington,
                DC 20429.
                 FCA: Jeremy R. Edelstein, Associate Director, Timothy T. Nerdahl,
                Senior Policy Analyst, Clayton D. Milburn, Senior Financial Analyst,
                Finance and Capital Markets Team, Office of Regulatory Policy, (703)
                883-4414, TTY (703) 883-4056, or Richard A. Katz, Senior Counsel,
                Office of General Counsel, (703) 883-4020, TTY (703) 883-4056, Farm
                Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
                 FHFA: Christopher Vincent, Senior Financial Analyst, Office of
                Financial Analysis, Modeling & Simulations, (202) 649-3685,
                [email protected], or James P. Jordan, Associate General
                Counsel, Office of General Counsel, (202) 649-3075,
                [email protected], Federal Housing Finance Agency, Constitution
                Center, 400 7th St. SW, Washington, DC 20219. The telephone number for
                the Telecommunications Device for the Hearing Impaired is (800) 877-
                8339.
                SUPPLEMENTARY INFORMATION:
                I. Introduction
                 The agencies are adopting the recently proposed amendments to the
                agencies' regulations that require swap dealers and security-based swap
                dealers under the agencies' respective jurisdictions to exchange margin
                with their counterparties for swaps that are not centrally cleared
                (Swap Margin Rule or Rule), with certain adjustments (final rule). As
                discussed in detail below, the final rule (1) permits swaps entered
                into prior to an applicable compliance date (legacy swaps) to retain
                their legacy status in the event that they are amended to replace an
                interbank offered rate (IBOR) or other discontinued rate, (2) modifies
                initial margin requirements for non-cleared swaps between covered swap
                entities and their affiliates, (3) introduces an additional compliance
                date for initial margin requirements, (4) clarifies the point in time
                at which trading documentation must be in place, (5) permits legacy
                swaps to retain their legacy status in the event that they are amended
                due to technical amendments, notional reductions, or portfolio
                compression exercises, (6) makes technical changes to relocate the
                provision within the rule addressing amendments to legacy swaps that
                are made to comply with the qualified financial contract rules (QFC
                Rules),\1\ and (7) addresses comments received in response to the
                agencies' publication of
                [[Page 39755]]
                the interim final rule dealing with Brexit-related issues.
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                 \1\ 83 FR 50805 (October 10, 2018). The QFC Rules are codified
                as follows: 12 CFR part 47 (OCC's QFC Rule); 12 CFR part 252,
                subpart I (Board's QFC Rule); 12 CFR part 382 (FDIC's QFC Rule).
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                A. Background on the Swap Margin Rule
                 The Dodd-Frank Wall Street Reform and Consumer Protection Act
                (Dodd-Frank Act) required the agencies to jointly adopt rules that
                establish capital and margin requirements for swap entities that are
                prudentially regulated by one of the agencies (covered swap
                entities).\2\ These capital and margin requirements apply to swaps that
                are not cleared by a registered derivatives clearing organization or a
                registered clearing agency (non-cleared swaps).\3\ For the remainder of
                this preamble, the term ``non-cleared swaps'' refers to non-cleared
                swaps and non-cleared security-based swaps unless the context requires
                otherwise.
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                 \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
                Public Law 111-203, 124 Stat. 1376 (2010). See 7 U.S.C. 6s; 15
                U.S.C. 78o-10. Sections 731 and 764 of the Dodd-Frank Act added a
                new section 4s to the Commodity Exchange Act of 1936, as amended,
                and a new section, section 15F, to the Securities Exchange Act of
                1934, as amended, respectively, which require registration with the
                Commodity Futures Trading Commission (CFTC) of swap dealers and
                major swap participants and the U.S. Securities and Exchange
                Commission (SEC) of security-based swap dealers and major security-
                based swap participants (each a swap entity and, collectively, swap
                entities). Section 1a(39) of the Commodity Exchange Act of 1936, as
                amended, defines the term ``prudential regulator'' for purposes of
                the margin requirements applicable to swap dealers, major swap
                participants, security-based swap dealers and major security-based
                swap participants. See 7 U.S.C. 1a(39).
                 \3\ A ``swap'' is defined in section 721 of the Dodd-Frank Act
                to include, among other things, an interest rate swap, commodity
                swap, equity swap, and credit default swap, and a security-based
                swap is defined in section 761 of the Dodd-Frank Act to include a
                swap based on a single security or loan or on a narrow-based
                security index. See 7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68).
                ---------------------------------------------------------------------------
                 The Basel Committee on Banking Supervision (BCBS) and the Board of
                the International Organization of Securities Commissions (IOSCO)
                established an international framework for margin requirements on non-
                cleared derivatives in September 2013 (BCBS/IOSCO Framework).\4\
                Following the establishment of the BCBS/IOSCO Framework, on November
                30, 2015, the agencies published the Swap Margin Rule, which includes
                many of the principles and other aspects of the BCBS/IOSCO
                Framework.\5\ In particular, the Swap Margin Rule adopted the
                implementation schedule set forth in the BCBS/IOSCO Framework,
                including the revised implementation schedule adopted on March 18,
                2015.\6\
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                 \4\ See BCBS and IOSCO ``Margin requirements for non-centrally
                cleared derivatives,'' (September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
                 \5\ 80 FR 74840 (November 30, 2015).
                 \6\ See BCBS and IOSCO ``Margin requirements for non-centrally
                cleared derivatives,'' (March 2015), available at https://www.bis.org/bcbs/publ/d317.pdf.
                ---------------------------------------------------------------------------
                 The Swap Margin Rule established an effective date of April 1,
                2016, with a phased-in compliance schedule for the initial and
                variation margin requirements.\7\ On or after March 1, 2017, all
                covered swap entities were required to comply with the variation margin
                requirements for transactions with other swap entities and financial
                end user counterparties. The Swap Margin Rule presently requires all
                covered swap entities to comply with the initial margin requirements
                for non-cleared swaps with all financial end users with a material
                swaps exposure and with all swap entities by September 1, 2020.
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                 \7\ The applicable compliance date for a covered swap entity is
                based on the average daily aggregate notional amount of non-cleared
                swaps, foreign exchange forwards and foreign exchange swaps of the
                covered swap entity and its counterparty (accounting for their
                respective affiliates) for each business day in March, April, and
                May of that year. The applicable compliance dates for initial margin
                requirements that are currently in place, and the corresponding
                average daily aggregate notional amount thresholds, are: September
                1, 2016, $3 trillion; September 1, 2017, $2.25 trillion; September
                1, 2018, $1.5 trillion; September 1, 2019, $0.75 trillion; and
                September 1, 2020, all swap entities and counterparties. See Sec.
                __.1(e) of the Swap Margin Rule. In this final rule, the agencies
                are also adding one additional year to this schedule for certain
                counterparties.
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                B. Overview of the Notice of Proposed Rulemaking and General Summary of
                Comments
                 On November 7, 2019, the agencies sought comment on a proposal to
                revise certain parts of the Swap Margin Rule to facilitate the
                implementation of prudent risk management strategies at covered swap
                entities (proposed rule or proposal).\8\ The proposed amendments
                permitted legacy swaps to retain their legacy status in the event that
                they are amended to replace an interbank offered rate (IBOR) or other
                discontinued rate, introduced an additional compliance date for initial
                margin requirements, clarified the point in time at which trading
                documentation must be in place, and permitted legacy swaps to retain
                their legacy status in the event that they are amended due to technical
                amendments, notional reductions, or portfolio compression exercises.
                The proposal would also have made technical changes to relocate the
                provision within the rule addressing amendments to legacy swaps that
                are made to comply with the QFC Rules.
                ---------------------------------------------------------------------------
                 \8\ 84 FR 59970 (Nov. 7, 2019).
                ---------------------------------------------------------------------------
                 The proposal would also have no longer required covered swap
                entities to collect initial margin for non-cleared swaps with
                affiliates. However, inter-affiliate transactions would have continued
                to be subject to variation margin requirements. Inter-affiliate
                transactions of covered swap entities regulated by the FDIC, the OCC,
                and the Board also would continue to be subject to other applicable
                rules and regulations.
                 The agencies received approximately 20 comments on the proposal,
                from U.S. financial institutions, public interest groups, trade
                associations, academic institutions, and other interested parties.
                Agency staff also met with some commenters at those commenters' request
                to discuss their comments on the proposal.\9\
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                 \9\ Summaries of these meetings may be found at the internet
                sites where the agencies' have posted public comments on the NPR.
                See, e.g., https://www.federalreserve.gov/apps/foia/proposedregs.aspx.
                ---------------------------------------------------------------------------
                 Most commenters supported the proposal's relief to amend certain
                legacy swaps for certain reasons and the proposal's addition of a
                compliance phase for smaller entities, as a meaningful way to assist
                market participants in managing and prioritizing their resources,
                mitigating potential trading disruptions related to the transition of
                IBORs to other interest rates, complying with documentation
                requirements, and engaging in certain trade life-cycle events.
                 With respect to removing the initial margin requirement for inter-
                affiliate transactions, some commenters supported the proposal while
                others expressed the view that the proposal would increase risks to
                covered swap entities individually and financial stability more
                broadly. For example, a few commenters shared their view that
                collateralization (in the form of initial margin collected from a
                covered swap entity's affiliate) is a highly effective tool for
                reducing closeout risk.\10\ These commenters were concerned that the
                proposed rule would eliminate an estimated $40 billion in collateral
                held by covered swap entities, which, in their view, is necessary for
                closeout risk-absorption. Some of the commenters also expressed the
                view that banking organizations are using inter-affiliate swaps for the
                primary purpose of concentrating the risks of the organizations' world-
                wide derivatives activities onto the books of the covered
                [[Page 39756]]
                swap entities subject to the Swap Margin Rule, i.e., U.S. insured
                depository institutions.
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                 \10\ Closeout risk is the risk associated with the period
                following a confirmed default wherein the defaulting counterparty is
                unable to perform on the swap contract and the cost of legally
                closing out the existing swap and establishing a replacement swap
                with a new counterparty is unknown.
                ---------------------------------------------------------------------------
                 By contrast, commenters supporting the removal of the initial
                margin requirement for inter-affiliate transactions asserted that the
                proposal would align the Swap Margin Rule with the margin requirements
                of some other domestic and foreign jurisdictions and facilitate more
                balanced and effective risk management practices across the spectrum of
                risks faced within banking organizations that engage in non-cleared
                swaps.
                 As discussed below in this Supplementary Information section, the
                final rule adopts, with certain adjustments in response to the comments
                received, the proposal that (1) permits swaps entered into prior to an
                applicable compliance date (legacy swaps) to retain their legacy status
                in the event that they are amended to replace an IBOR or other
                discontinued rate, (2) modifies the initial margin requirement for non-
                cleared swaps between covered swap entities and their affiliates, (3)
                introduces an additional compliance date for initial margin
                requirements, (4) clarifies the point in time at which trading
                documentation must be in place, (5) permits legacy swaps to retain
                their legacy status in the event that they are amended due to technical
                amendments, notional reductions, or portfolio compression exercises,
                (6) makes technical changes to relocate the provision within the rule
                addressing amendments to legacy swaps that are made to comply with the
                qualified financial contract rules (QFC Rules),) \11\ and (7) addresses
                comments received in response to the agencies' publication of the
                interim final rule dealing with Brexit-related issues.
                ---------------------------------------------------------------------------
                 \11\ 83 FR 50805 (October 10, 2018). The QFC Rules are codified
                as follows: 12 CFR part 47 (OCC's QFC Rule); 12 CFR part 252,
                subpart I (Board's QFC Rule); 12 CFR part 382 (FDIC's QFC Rule).
                ---------------------------------------------------------------------------
                II. Interbank Offered Rates
                A. Summary of Proposed Rule
                 Due to the potential discontinuation of LIBOR at the end of 2021,
                covered swap entities face uncertainty about the way their swap
                contracts that include an interest rate based on LIBOR and other IBORs
                will operate after a permanent discontinuation. An interest rate is a
                critical term for calculating payments under a swap contract, be it an
                interest rate swap or another type of swap that includes a reference
                interest rate as one of the mechanisms for determining payments or
                premiums. In many instances, covered swap entities may decide to amend
                existing swap contracts to replace an IBOR before the IBOR becomes
                discontinued. Such amendments may also trigger follow-on amendments
                that the counterparties determine are necessary to maintain the
                economics of the contract.\12\ Absent revisions to the Swap Margin
                Rule, an amendment to a legacy swap could affect the legacy status of
                such a swap and make it subject to the margin requirements of the rule.
                In order to enable covered swap entities and their counterparties to
                minimize disturbance to the financial markets, the agencies proposed to
                provide relief to permit covered swap entities to amend the interest
                rates in a legacy swap contract, based on certain conditions of
                eligibility, and to adopt necessary follow-on amendments, without the
                swap losing its legacy status.
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                 \12\ Follow-on amendments may include, for example, spread
                adjustments resulting from the move from a term rate to an overnight
                rate, from an unsecured rate to a secured rate, or from a change in
                tenor.
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                B. Method of Amendment
                1. Proposal
                 In recognition of the ongoing efforts to transition away from
                certain IBORs due to their potential discontinuation, the agencies
                proposed to amend the Swap Margin Rule to remove impediments that would
                limit the ability of covered swap entities to replace certain interest
                rates in their legacy non-cleared swaps. Proposed Sec. __.1(h)
                recognized that these replacements could be carried out using a variety
                of legal mechanisms by permitting amendments accomplished by the
                parties' adherence to a protocol, contractual amendment of an agreement
                or confirmation, or execution of a new contract in replacement of and
                immediately upon termination of an existing contract (i.e., tear-up),
                subject to certain limitations found in Sec. __.1(h)(3).
                2. Final Rule
                 Commenters were supportive of the flexibility that the agencies
                provided regarding the method of amendment, particularly the
                flexibility to make amendments to an individual non-cleared swap or on
                a netting set level. Several commenters requested a technical change to
                the language in proposed Sec. __.1(h) to clarify that the method of
                adherence to a protocol is itself a contractual amendment. To make this
                clarification, the agencies are replacing the language ``contractual
                amendment of an agreement or confirmation'' with ``other amendment of a
                contract or confirmation'' to make clear that both an adherence to a
                protocol as well as other amendments are permissible methods of
                amendment to a legacy swap, and also to maintain consistency in using
                the term ``contract'' rather than ``agreement'' in Sec. __.1(h). The
                agencies are also making non-substantive parallel changes to the rule
                text to clarify that the execution of a new contract or confirmation in
                replacement of and immediately upon termination of an existing contract
                or confirmation is a permitted method of amendment.
                 A few commenters also requested that the agencies expand Sec.
                __.1(h) to include new, non-legacy swaps entered into solely for
                managing the transition away from IBORs, or new, non-legacy swaps
                designed to transition an existing swap away from an IBOR even if the
                swap may not be amended or terminated. These commenters suggested this
                expansion would facilitate use of basis swaps to offset IBOR exposure
                from legacy swaps against new exposure to a risk-free rate (RFR). One
                commenter argued this would be roughly economically equivalent to
                directly amending one or more existing swaps to eliminate the IBOR
                exposure and replacing it with an RFR.
                 The agencies are not expanding the regulation beyond the methods
                that were proposed in Sec. __.1(h).) The alternative suggested by the
                commenters would be ineffective in resolving the problem the agencies
                seek to address. As long as covered swap entities hold existing swaps
                contractually obligating them to exchange payments based on IBORs, they
                bear the risk that those IBORs will be discontinued. If a covered swap
                entity hedges that IBOR exposure to another benchmark by executing a
                new basis swap, one leg of that swap will necessarily be linked to the
                IBOR. While the agencies believe there may be certain circumstances in
                which sound risk management by a covered swap entity would include new
                trading activity between IBOR and non-IBOR market exposures (with
                contract dates ending by December 2021), these activities go beyond the
                scope of relief the agencies are providing with this rule.
                C. Purpose of Amendments
                1. Proposal
                 The proposed rule described the type of interest rate that can be
                replaced and the accompanying changes that would be permitted. Proposed
                Sec. Sec. __.1(h)(3)(i)(A) and (B) would permit amendments that are
                made solely to accommodate the replacement of an IBOR or of any other
                non-IBOR interest rate that a covered swap entity
                [[Page 39757]]
                reasonably expects to be discontinued or reasonably determines has lost
                its relevance as a reliable benchmark due to a significant impairment
                with an alternate interest rate.
                2. Final Rule
                 The agencies did not receive any comments on this part of the
                proposed rule and are adopting it as proposed.
                D. Permitted Interest Rates
                1. Proposal
                 The proposed rule provided that an IBOR could be replaced,
                including but not limited to LIBOR, TIBOR, BBSW, SIBOR, CDOR, EURIBOR,
                and HIBOR. Although the current uncertainty surrounding interest rates
                is tied to IBORs, the agencies also proposed a second, more subjective
                standard that would be applicable to other categories of interest
                rates, should the need arise in the future. This forward-looking
                standard was designed to encourage covered swap entities to resolve
                critical uncertainties before an interest rate is discontinued, or
                loses its market relevance, in order to minimize disturbance to the
                markets.
                 The proposed rule (Sec. __.1(h)(3)(i)(C)) also contemplated that
                an interest rate may need to be replaced more than one time. For
                example, an IBOR may first be replaced with fallback provisions at a
                time when a permanent alternative interest rate is not yet available or
                not yet agreed upon by the swap participants, or amendment
                documentation has not yet been developed. Subsequently, fallback
                provisions may be replaced with permanent alternative interest rates.
                If the original interest rate that is being replaced is an IBOR or any
                other non-IBOR interest rate that otherwise met the requirements of the
                proposed rule and that a covered swap entity reasonably expects to be
                discontinued or reasonably determines has lost its relevance as a
                reliable benchmark due to a significant impairment, the non-cleared
                swap may be amended more than once to accommodate ongoing developments
                toward a permanent replacement interest rate. The proposed rule did not
                limit the number of amendments that could take place, as long as the
                interest rate that was originally present in the non-cleared swap met
                the criteria in either proposed Sec. __.1(h)(3)(i)(A) or Sec.
                __.1(h)(3)(i)(B). The proposed rule would not permit subsequent
                amendments that change interest rates or other terms of the non-cleared
                swap for any purpose other than for those purposes explicitly set out
                in Sec. __.1(h), without triggering application of the margin
                requirements.
                 To benefit from the treatment of this new legacy swap provision, a
                covered swap entity must make the amendments to the non-cleared swap
                solely to accommodate the replacement of an interest rate described in
                the proposed rule. The proposed rule was flexible as to the incoming
                replacement interest rate by leaving it up to the counterparties to
                select a mutually agreeable replacement interest rate. The proposed
                rule provided examples of the Secured Overnight Funding Rate (SOFR),
                the AMERIBOR and the Overnight Bank Funding Rate as some potential
                alternatives suggested by some market participants. The agencies
                expected that any replacement interest rate, including any successor
                replacement interest rate, would be agreed upon by the parties after
                assessing its complexity, safety and soundness, and taking into
                consideration associated risk management practices.\13\
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                 \13\ The replacement rate is also expected to be consistent with
                international standards, such as the IOSCO Principles for Financial
                Benchmarks. See https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf.
                ---------------------------------------------------------------------------
                2. Final Rule
                 The agencies received several comments expressing concern that the
                proposed rule could be read as applying to interest rate swaps only and
                requesting similar relief for all other asset categories of swaps,
                including foreign exchange, equity, commodity, and credit default
                swaps. The agencies are clarifying that amendments to the rule permit
                amendments to interest rates but do not restrict the categories of
                swaps where those interest rates appear and thus do not restrict the
                categories of swaps in which those amendments could be made. Interest
                rates could be used in a variety of different categories of swaps, such
                as an underlying interest rate index in an interest rate swap or as a
                discounting interest rate for collateral or payment calculations in a
                commodity, foreign exchange, equity, or credit swap. In other words,
                the relief provided applies to all categories of non-cleared swaps that
                include or refer to an IBOR or any other interest rate described in
                paragraphs (h)(3)(i)(A)-(C) of the final rule.
                 One commenter requested that the agencies extend the relief in the
                Proposal to cover amendments made solely to accommodate the replacement
                of any reference instrument (e.g., iTraxx) reasonably expected to be
                discontinued or reasonably determined to have lost its relevance as a
                reliable benchmark due to a significant impairment. The agencies note
                that there is no current expectation or indication that any major non-
                interest rate reference instrument is expected to be discontinued.
                Moreover, the expected discontinuation of IBORs place these interest
                rates in a special position that does not extend to periodic revisions
                of underlying reference instruments in commodity, foreign exchange,
                credit, equity, or other swaps. The agencies are not modifying the
                final rule to allow the replacement of a non-interest rate reference
                instrument while retaining the legacy status of the swap. If any
                expectation of discontinuation arises in the future, the agencies may
                reconsider their position.
                 One commenter requested clarification that any new intermediate or
                permanent interest rate does not necessarily have to be viewed by the
                market as a ``successor'' to the IBOR or other discontinued rate, but
                that the counterparties to the swap contract simply have to agree on
                the appropriate replacement interest rate. The agencies confirm this
                understanding.
                 Commenters expressed concern that changes to the discounting
                methods to adopt RFRs used by some central counterparties (CCPs) would
                require conforming changes to over-the-counter swaptions that may be
                presented to these CCPs for clearing. The agencies have modified the
                proposed rule to allow legacy swaps to be amended to reflect these
                changes to the discount interest rate and remain legacy swaps.
                 The agencies did not receive any other comments on this part of the
                proposed rule and are adopting it largely as proposed.
                E. Follow-On Amendments
                1. Proposal
                 In the proposed rule, the agencies acknowledged that replacing an
                interest rate could require other contractual changes to maintain the
                economics of the non-cleared swap and to preserve the relative economic
                values to the parties after incorporating changes to the interest rate.
                The proposed rule would permit changes that incorporate spreads and
                other adjustments that accompany and implement the replacement interest
                rate amendment. The proposed rule would also permit other, more
                administrative and technical changes necessary to operationalize the
                determination of payments or other exchanges of economic value using
                the replacement interest rate, including changes to determination
                dates, calculation agents, and payment dates. These types of
                [[Page 39758]]
                administrative changes may be necessary to adjust computations and
                operational provisions to reflect the differences between an IBOR and
                the replacement interest rate or rates. The agencies envisioned that a
                number of contractual changes could be necessary to maintain the
                economics of the non-cleared swap, and for this reason, the proposed
                rule would permit these changes. However, the agencies did not believe
                that the relief being provided for interest rate replacement purposes
                should be expansively applied to encompass all changes to a legacy
                swap. Accordingly, the proposed rule text clarified that the proposed
                safe harbor for legacy swaps would be unavailable if the amendments
                extend the maturity or increase the total effective notional amount of
                the non-cleared swap, irrespective of the reason for those changes.
                2. Final Rule
                 The agencies received several comments requesting reconsideration
                of the restriction on extending the maturity or increasing the total
                effective notional amount of the non-cleared swap. Day count
                conventions or other factors such as final settlement or final payment
                occurring on the 30th of the month versus the 15th of the month may
                result in an extension of the remaining maturity of a swap. Since the
                counterparty to a non-cleared swap may not know the size of the final
                payment until the end of the interest period, the swap may incorporate
                a payment delay, with the final maturity shifting as a result.
                Commenters also explained that the replacement of an IBOR may increase
                the total effective notional amount of the non-cleared swap under a few
                scenarios. For example, a fixed-for-floating IBOR swap may use a 30/360
                day count fraction market convention, but the market standard for a
                replacement reference benchmark rate swap may use an actual/360 day
                count fraction market convention. Under this scenario, the notional
                amount would need to be adjusted to ensure that the payment amounts on
                the fixed leg of the replacement reference benchmark rate swap are the
                same compared to the IBOR swap.
                 In response to these comments, the agencies understand that certain
                differences in market conventions may not yet be well established or
                expected. The agencies are preserving the proposal's restriction on
                extensions of maturity and increases of total effective notional
                amount, but adding language allowing extensions and increases as
                necessary to accommodate the differences between market conventions for
                an outgoing interest rate and its replacement. Market conventions could
                include changes in day count conventions, settlement date, or final
                payment date.
                 Several commenters also explained that counterparties may employ
                portfolio compression to effectuate amendments to legacy swaps for the
                purpose of eliminating IBORs, and that differences between market
                conventions for an outgoing interest rate and its replacement in this
                context could also affect the remaining maturity and total effective
                notional amount of portfolios of IBOR swaps. The agencies are adding
                new paragraph (h)(3)(iii) to accommodate portfolio compression
                exercises that are driven by the sole purpose of replacing an interest
                rate described in paragraph (h)(3)(i). In such a case, portfolio
                compression would not be subject to the limitations in paragraph
                (h)(4), but may not extend the maturity or increase the total effective
                notional amount of the non-cleared swap or non-cleared security-based
                swap beyond what is necessary to accommodate the differences between
                market conventions for an outgoing interest rate and its replacement.
                 Commenters also expressed a concern that changes associated with
                the liquidity of specific maturities of swaps with a replacement
                interest rate may result in an increase in the remaining maturity of
                the non-cleared swap. For example, a swap with a four-year remaining
                maturity may not be as liquid as a swap with a five-year remaining
                maturity. Given that this rationale for an extension of maturity can
                significantly increase the remaining maturity of a legacy swap, the
                agencies believe that it could lead to inappropriate extensions or
                evasion of the requirements of the rule. Accordingly, the agencies are
                not permitting an extension of the remaining maturity for liquidity or
                similar reasons.
                F. End Date
                 The proposed rule did not specify an end date by which IBOR-related
                amendments must be completed, but requested comment on that issue.
                Several commenters agreed with the agencies' approach to not specify an
                end date, explaining that amendments related to fallbacks or other
                transitions to replacement interest rates may not be completed in one
                step or within a given time frame. Accordingly, the agencies are not
                adopting any specific end date by which IBOR-related amendments must be
                completed.
                G. Exemptions for Commercial and Cooperative End Users
                 One commenter requested that the agencies clarify how the Swap
                Margin Rule treats post-compliance date non-cleared swaps that
                qualified for the commercial/cooperative end user exemption from the
                rule under Sec. __.1(d)(1), if such swaps are amended to accommodate
                changes to referenced benchmark interest rates. The commenter expressed
                concern that post-compliance date non-cleared swaps originally exempted
                under Sec. __.1(d)(1) will need to be amended by commercial end users
                or cooperatives to remove an IBOR benchmark interest rate.
                Specifically, the commenter noted that the amended swaps might become
                subject to temporary mismatches between the rate referenced by such
                swaps and the commercial arrangements being hedged, thereby raising
                questions about their exempt status.
                 The commenter's request is based on two no-action letters that the
                CFTC issued pertaining to non-cleared swaps in which the counterparty
                qualified for an exemption or exception from mandatory clearing and/or
                non-cleared margin requirements under the Commodity Exchange Act (CEA)
                or CFTC regulations.\14\
                ---------------------------------------------------------------------------
                 \14\ See CFTC Letter No. 19-28 (December 17, 2019), in section
                V.A., providing regulatory relief from the mandatory clearing
                requirement, and CFTC Letter 19-26 (December 17, 2019), in section
                E.1., which granted relief from the CFTC's margin requirements for
                non-cleared swaps. In both situations, the counterparties previously
                relied on the end-user exemptions end-user exemptions in the CEA and
                applicable CFTC regulations.
                ---------------------------------------------------------------------------
                 The scope of the agencies' exemption for commercial and cooperative
                end users in Sec. __.1(d)(1) is, by its terms, tied to the scope of
                the commercial end user exemptions in the CEA and their implementing
                regulations. No-action letters are not included under the agencies'
                regulations. However, for the same reasons the agencies are amending
                Sec. __.1(h) to preserve the legacy status of swaps during the IBOR
                transition, the agencies will treat commercial and cooperative end user
                swaps originally exempted under Sec. __.1(d)(1) as remaining within
                the scope of Sec. __.1(d)(1) if those swaps are effectuated under the
                terms of the two applicable CFTC no-action letters.\15\
                ---------------------------------------------------------------------------
                 \15\ Id. The agencies' determination is specific to these two
                CFTC no-action letters, and more specifically to section V.A. of
                CFTC Letter No. 19-28 and section E.1. of CFTC Letter No. 19-26. The
                agencies are not applying CFTC no-action letters to modify the terms
                of the Swap Margin Rule in any other regard.
                ---------------------------------------------------------------------------
                [[Page 39759]]
                III. Non-Cleared Swaps Between Covered Swap Entities and an Affiliate
                 The agencies proposed to amend the treatment of affiliate
                transactions in the Swap Margin Rule by creating an exemption from the
                initial margin requirements for non-cleared swaps between affiliates.
                The agencies also proposed, however, to retain the requirement that
                affiliates exchange variation margin. Twenty-two interested persons
                submitted public comments to the agencies on the proposal, including
                individuals, banking and securities trade groups, public interest
                advocacy groups, and one custodian bank.
                 After consideration of these public comments, as discussed below,
                the agencies are adopting the rule as proposed with a modification (1)
                requiring a covered swap entity to calculate and monitor the amount of
                inter-affiliate initial margin that would otherwise be required to be
                collected by such covered swap entity under the Swap Margin Rule; and
                (2) requiring a covered swap entity to collect initial margin from its
                affiliates on all new non-cleared swaps if the aggregate initial margin
                calculation amount exceeds 15 percent of the covered swap entity's Tier
                1 capital (``15% Tier 1 Threshold''). This requirement will apply to
                inter-affiliate swaps executed on any business day the 15% Tier 1
                Threshold is exceeded and remain in place as long as the 15%Tier 1
                threshold has been exceeded. A covered swap entity will not be required
                to collect initial margin from its affiliates if the aggregate inter-
                affiliate initial margin calculation amount is 15 percent or less of
                the covered swap entity's Tier 1 capital. For purposes of the
                calculation described above and as further discussed below, a covered
                swap entity will treat non-cleared swaps between a subsidiary of the
                covered swap entity and an affiliate as if the non-cleared swaps were
                its own. Additionally, the agencies are also clarifying one aspect of
                the initial margin requirement for affiliates. The final rule clarifies
                that non-cleared swaps between affiliates remain subject to Sec.
                __.3(d), which describes the initial margin requirements that apply to
                non-cleared swaps between a covered swap entity and counterparties that
                are not subject to the Swap Margin Rule's requirement to calculate and
                exchange initial margin on a daily basis. That section provides that a
                covered swap entity shall collect initial margin at such times and in
                such forms and such amounts (if any), that the covered swap entity
                determines appropriately addresses the credit risk posed by the
                counterparty and the risks of such non-cleared swap.
                A. Main Proposal
                 The agencies proposed to amend Sec. __.11 of the Swap Margin Rule,
                which currently establishes a special set of six regulatory
                requirements for swap transactions between a covered swap entity and an
                affiliate. Five of these provisions concern the requirement for a
                covered swap entity to collect initial margin for covered swap
                transactions with an affiliate. Each of these five provisions focuses
                on a particular aspect of the Swap Margin Rule's initial margin
                requirements as they generally apply to non-affiliated counterparties,
                and provides corresponding exemptions from or reductions to that
                particular aspect of the Swap Margin Rule's requirements whenever the
                counterparty is an affiliate of the covered swap entity.\16\ The
                agencies proposed to replace this set of five exemptive provisions with
                a single exemption from the initial margin exchange requirement
                contained in Sec. __.3 of the Swap Margin Rule. The agencies proposed
                to retain the sixth regulatory requirement in Sec. __.11, which is the
                requirement for covered swap entities to collect and post variation
                margin for affiliate swap transactions pursuant to Sec. __.4 of the
                Swap Margin Rule.\17\
                ---------------------------------------------------------------------------
                 \16\ Swap Margin Rule Sec. Sec. __.11(b)(1) (posting initial
                margin); (b)(2) (initial margin threshold amount); (d) (custody of
                margin); (e) (margin model holding period); and (f) (standardized
                margin amounts).
                 \17\ Swap Margin Rule Sec. __.11(c). This subsection creates no
                variations from the generally-applicable requirements of Sec. __.4.
                Accordingly, the agencies proposed to remove it, and Sec. __.4
                directly applies to covered swap entities engaging in swap
                transactions with affiliates on the same terms as it applies with
                any other counterparty.
                ---------------------------------------------------------------------------
                B. Comments and Considerations for the Final Rule
                 Twelve commenters representing the views of covered swap entities
                and their counterparties expressed support for the proposed rule.
                Commenters in this group generally expressed the view that inter-
                affiliate swaps are an important risk management tool, the use of which
                would be facilitated by the proposed rule. Several of these commenters
                further expressed the view that the risks of inter-affiliate swaps are
                better addressed by other means, such as capital, credit risk limits,
                and variation margin. Many also noted the inter-affiliate provisions of
                the current Swap Margin Rule are inconsistent with those of the CFTC
                and most G20 regulators. One commenter estimates that $39.4 billion of
                inter-affiliate initial margin collateral was held at year-end 2018 by
                the group of covered swap entities that first became subject to the
                Swap Margin Rule in 2016.
                 Eight commenters, including public interest advocacy groups and
                individuals, expressed opposition to the agencies' proposal, and
                provided several different grounds for their objections. These views
                are grounded on similar core concerns, which the agencies have
                evaluated as follows.
                 One concern centers on some commenters' view that initial margin
                serves a special loss-absorbing function in the inter-affiliate
                context, and the agencies' proposal would increase risks to covered
                swap entities individually and financial stability more broadly by
                removing this protection. One commenter discussed the specific function
                of initial margin and contrasted it with variation margin.
                 Initial margin is a risk management tool designed to mitigate a
                covered swap entity's exposure to market risk associated with a
                counterparty's default by requiring a counterparty to obtain and
                provide financial collateral equal to the potential future exposure
                (PFE) the covered swap entity would face if the counterparty defaults.
                Under the Swap Margin Rule, a covered swap entity accordingly collects
                high-quality collateral from its counterparty equal to this PFE, placed
                in third-party custody to provide a source of payment to offset this
                risk. This PFE is the measurement of the exposure due to the defaulting
                counterparty's inability to continue performing on the swap contracts
                during the period after the counterparty's default but before the
                covered swap entity closes out its positions with the defaulting
                counterparty and establishes similar trades with a new counterparty.
                 In practice, it can take a varying number of days after default for
                the covered swap entity to establish new trades with new counterparties
                as necessary to replace or re-hedge the defaulted swaps.\18\ The
                process of
                [[Page 39760]]
                obtaining new swaps contracts with new counterparties creates
                additional costs that can vary depending on prevailing market
                conditions at the time default occurs and in the subsequent days needed
                to obtain the new contracts. This potential range of costs represents
                the covered swap entity's PFE.
                ---------------------------------------------------------------------------
                 \18\ If the net value to the covered swap entity of the
                portfolio with the counterparty (the current exposure amount) was
                positive at the time of the default, the covered swap entity already
                holds variation margin--collected from the counterparty on a daily
                basis as required by the Swap Margin Rule--to cover that amount. The
                Swap Margin Rule's variation margin provisions require covered swap
                entities to recalculate the monetary value of the portfolio of swaps
                with each counterparty every business day. If the monetary value of
                the portfolio to the covered swap entity has increased, the covered
                swap entity is required to collect additional variation margin
                collateral from the counterparty. If the monetary value has
                decreased, the covered swap entity is required to return an
                equivalent amount of variation margin collateral to the
                counterparty. Sec. Sec. __.2 ``variation margin'' and ``variation
                margin amount,'' __.4. It is generally industry practice to use cash
                as variation margin collateral; however, if non-cash financial
                collateral is used, the covered swap entity must re-value it each
                day and adjust the daily variation margin collection or return
                amounts to reflect those changes as well. Sec. __.6(e). If the
                event triggering the counterparty's default under a swap is the
                counterparty's failure to provide additional collateral in response
                to a margin call, then the dealer's current credit exposure will be
                undercollateralized by the amount of the day's changes in current
                exposure and/or collateral value.
                ---------------------------------------------------------------------------
                 As the commenter noted, because these costs will vary depending on
                whatever market conditions actually exist at the unknown future time
                when the counterparty defaults, the Swap Margin Rule requires covered
                swap entities to calculate PFE based on the premise that its market
                costs will be on the high end of the expected range, statistically
                speaking. Because of this uncertainty, the amount of initial margin
                collateral a covered swap entity will collect under the Swap Margin
                Rule is significantly higher than the daily amount of variation margin
                exchanged, which is based on current and known changes in the market
                conditions that change the value of the portfolio of swaps.
                 Commenters expressing concern about PFE risk asserted that
                collateralization (in the form of initial margin collected from the
                covered swap entity's affiliate) is an effective tool for reducing the
                close-out and re-hedging risk described above. These commenters
                objected that the proposed rule would eliminate an estimated $40
                billion in collateral held by covered swap entities that, in the
                commenters' views, is necessary for mitigating PFE risk. However, it is
                incumbent on supervisors to evaluate multiple approaches to controlling
                the overall risk of inter-affiliate swaps exposures, and to consider
                which of the available approaches to deploy depending on how those
                risks occur (and evolve) in the industry. Inter-affiliate counterparty
                credit risk, in the form of PFE, is one of several risks that
                affiliated banking organizations need to manage. The nature of these
                risks, their potential severity, and the mechanisms to manage them in
                tandem vary such that no single approach to address all risks in
                isolation is appropriate. Supervisors have a variety of tools at their
                disposal to ensure protection of a banking organization's financial
                integrity, in light of the banking organization's particular scope of
                activities (both financial and geographic).\19\ Initial margin can be
                effective in addressing the PFE risks of inter-affiliate transactions
                within a banking organization, but viewing it as a comprehensive
                solution is a simplistic approach.
                ---------------------------------------------------------------------------
                 \19\ For example, internationally-active banking organizations
                face the financial risks of each location in which they operate, and
                one important tool is the coordination by international supervisors
                to ensure equivalent supervisory requirements are implemented across
                jurisdictions, normalizing market conditions in each location. For
                any banking organization with important sources of revenue spread
                across more than one entity, the strength of the banking
                organization could be materially affected in the absence of
                successful strategic management of all the business components.
                Supervisors play an important role in assessing whether the
                organization's management maintains an effective process for
                identifying, measuring, and managing all key risks in this regard.
                Organization-wide capital, leverage, and liquidity considerations
                are important supervisory considerations. Other measures include
                amount limits, concentration limits, collateral amount and quality,
                qualitative transaction restrictions, or market equivalency
                standards. Even matters such as addressing market concerns about
                ring-fencing available assets can have a significant benefit in
                reducing a U.S. bank's foreign exposures.
                ---------------------------------------------------------------------------
                 Some of these commenters also expressed the view that banking
                organizations are using inter-affiliate swaps for the primary purpose
                of concentrating the risks of the organizations' world-wide derivatives
                activities onto the books of the covered swap entities covered by the
                prudential regulators' Swap Margin Rule, i.e., U.S. insured depository
                institutions (IDIs). These views are not consistent with the agencies'
                supervisory experience since the rule took effect. As described in
                greater detail below, the agencies observe that internationally active
                banking organizations that have a cross-border organizational structure
                relying on separate legal entities must use inter-affiliate swaps to
                manage the risks of the overall banking organization's outward-facing
                derivatives exposures. Other internationally active banks, operating
                cross-border through branching structures, do not have the need to use
                inter-affiliate swaps for risk management.
                 As the agencies discussed in the proposal, actual supervisory
                experience in the years since the agencies imposed the Swap Margin
                Rule's current requirements has raised two inter-related concerns at
                the institution-specific level and the systemic level about the utility
                of initial margin to address exposures arising from inter-affiliate
                swap transactions. These concerns surround impediments to a banking
                organization's best management practices for cross-border swap risks,
                and whether these risks are more appropriately addressed through other
                regulatory and supervisory mechanisms as discussed below, and
                limitations on the effectiveness of inter-affiliate margin to address
                systemic cross-border market risks, also discussed below.
                1. Effects of the Inter-Affiliate Initial Margin Requirement on Banking
                Organizations
                 Some covered swap entities covered by the Swap Margin Rule are
                internationally active banking organizations and their swaps activities
                are carried out in a cross-border marketplace. Some commenters perceive
                that U.S. banking organizations use inter-affiliate swaps primarily to
                transfer the risks of all their foreign derivatives activities into the
                U.S. insured depository institution. However, the agencies observe a
                redistribution of risk based instead on the international scope of the
                banking organization's business.
                 In the market for non-cleared derivatives, inter-dealer trading
                activity for certain types of derivatives is heavily concentrated in
                one geographic location, while the marketplace for other types of
                derivatives takes place in a different geographic location. An
                internationally active U.S. banking organization participates as a
                covered swap entity in a number of these marketplaces by establishing a
                place of business in each, such as a locally incorporated business
                entity, or a foreign branch of the main U.S. bank. The banking
                organization also has swap customers at home and abroad and services
                them by establishing a place of business in the same geographic
                locations as the customers.
                 If a customer in one market (e.g., the U.K.) needs a non-cleared
                swap that is traded in the local market (e.g., a sterling interest rate
                swap), the U.K. operation of the banking organization handles the
                entire transaction locally. On the other hand, if a U.S. customer needs
                the same sterling interest rate swap, the U.S.-based establishment of
                the banking organization enters into the swap with the customer
                (collecting margin and exchanging periodic payments on the swap) while
                the banking organization uses its U.K establishment to execute on the
                market-facing sterling interest rate swap (also exchanging margin with
                its counterparty in that market). Best safety and soundness practices
                in risk management dictate that the banking organization's personnel
                with the expertise in a class of derivatives be located in the relevant
                [[Page 39761]]
                market location, where they can obtain the most advantageous swap
                terms, such as best pricing or a wider range of maturities. On the
                customer side, market expectations are that the banking organization
                will locate personnel in the same location as the customer.
                 As a result, international banking organizations using inter-
                affiliate swaps as a risk management tool under this business model are
                hedging market risk arising from the nature of their world-wide
                customer needs (e.g., dollar swaps, euro swaps) and managing it in the
                corresponding market location. A foreign customer's need for a U.S.
                dollar swap product would engage the involvement of the U.S. banking
                organization's U.S. bank affiliate, due not to the depository
                institution status of the U.S. bank or some bias in favor of the
                banking organization's home market, but rather to its place as the
                banking organization's locus of market activity in the dollar market.
                As in the example above, if a U.S. customer of the U.S. bank sought a
                sterling swap product, the opposite occurs. Moreover, if a non-U.S.
                customer in one location needs a type of swap traded in another non-
                U.S. location, the risk can be transferred between them without any
                direct U.S. intermediation.\20\
                ---------------------------------------------------------------------------
                 \20\ When a non-bank affiliate enters into a non-cleared swap
                with its counterparty, and then enters into an inter-affiliate swap
                with a U.S. institution to manage the market risk component,
                commenters also expressed the view that the affiliate thereby
                ``transfers the risk'' of the non-cleared swap into the U.S.
                institution. The agencies have considered this viewpoint and note
                that the affiliate continues to face the counterparty, actively
                managing the counterparty credit risk and exchanging margin in
                accordance with the same margin standards as the U.S. has imposed
                pursuant to the BCBS-IOSCO framework. To the extent these
                counterparties are also financial intermediaries, they are
                themselves subject to the same margin standards, buttressing their
                financial resiliency. Because the prudential regulators' margin
                rules apply to covered swap entities that are foreign banks, in many
                instances those margin rules are, in fact, identical.
                ---------------------------------------------------------------------------
                 For internationally-active banking organizations, U.S. supervisors
                consider this arrangement a better risk management practice than using
                the U.S. location to manage the market-facing risk of the swap through
                local trading (in a less liquid market for that that type of exposure),
                or U.S. personnel endeavoring to make trades with foreign dealers in
                the relevant market (through cross-border communication and
                contracts).\21\ As discussed below, this is occurring in the context of
                supervisory oversight of the banking organization aimed at ensuring the
                affiliates are in good financial standing, utilizing an appropriate
                system of market and credit risk limits, and the affiliates themselves
                obtain robust initial margin from their counterparties, to protect the
                affiliates from PFE risk if their counterparties should default.\22\
                ---------------------------------------------------------------------------
                 \21\ Commenters in the group objecting to the agencies' initial
                margin proposal did not object to maintaining the Rule's variation
                margin requirement. As one commenter noted, variation margin
                performs a different function than initial margin. Where initial
                margin is calibrated to PFE, variation margin reflects the ongoing
                shift in market value of a swap contract between the covered swap
                entity and the counterparty on a daily basis. Because a non-cleared
                swap creates bilateral payment obligations between the two parties,
                the current market value of the cash flows due to be paid to one
                party will usually be higher than the current market value of the
                cash flows due to be paid to other party, depending on how the
                market value for the underlying reference asset or rate rises or
                falls. In this regard, the agencies note that variation margin
                requires ongoing daily payments from the party that is ``out of the
                money'' over to the party that is ``in the money.'' Internationally
                active banking organizations routinely exchange variation margin on
                inter-affiliate swaps, but not exclusively as a counterparty default
                risk mitigation tool. For strategic purposes, banking organizations
                internally measure and evaluate the relative profitability of their
                differing lines of business and locations (typically by comparing
                profits for the location as a ratio of the level of regulatory
                capital and funding costs associated with the location). The
                exchange of variation margin is a natural way for the two different
                locations (trading desks) to assign the profitability of the swap to
                the right desk for these internal measurements, and related
                purposes.
                 \22\ One commenter expressed the view that these considerations
                would potentially address the commenter's concerns about PFE risk
                transfer from affiliates, but also posited that the agencies were
                unconcerned about the potential absence of these factors in issuing
                the proposal. The agencies note that the presence of these important
                risk management measures is a supervisory expectation for banking
                organizations engaged in the practice. The agencies also note the
                commenter presumes the Swap Margin Rule's methodology for
                determining the initial margin collection amount--which represents
                the agencies' implementation of Section 3.1 of the BCBS-IOSCO
                Framework's requirement for portfolio replacement costs designed to
                address unexpected third-party counterparty defaults based on a
                probability statistical model using a 10-day holding period and
                presuming a period of severe market stress--is properly calibrated
                for the close-out risk of interaffiliate transactions that are
                already subject to several additional prudential risk-reducing
                requirements and reduced information gaps. Moreover, the agencies
                note that Element 6 of the BCBS-IOSCO Framework itself excludes
                interaffiliate swaps from the scope of the Framework and did not
                contemplate that Section 3.1 of the BCBS-IOSCO Framework would be
                applied to them.
                ---------------------------------------------------------------------------
                 Also, as the agencies discussed in the proposal, some
                internationally active U.S. banking organizations utilize the same
                arrangement without creating inter-affiliate PFE, because they set up
                their foreign establishments as a foreign branch of the U.S. bank. From
                an entity and accounting standpoint, the U.S. bank can transact with
                the customer and hedge its cross-border swap risk through foreign swap
                contracts, all within the same entity (and without the need to create
                an internal swap).
                 The risk presented to the U.S. bank by the foreign-market swaps
                themselves is identical under both structural alternatives, whether the
                banking organization uses a foreign branch or a foreign affiliate. That
                risk is managed through several tools, including the banking
                organization's board-approved system of risk limits governing its
                participation in the foreign swap market; the banking organization's
                underwriting and ongoing monitoring of the credit risk of the
                counterparties it faces through swap transactions in the foreign swap
                market; and the collection of variation margin and initial margin
                requirements from those foreign market counterparties, under margin
                regulations developed on a coordinated basis by U.S. and foreign
                regulators through an established, formal process.
                 The addition of an affiliated entity instead of a branch may have
                the effect of creating other regulatory and risk issues to be
                considered, but these are separate from the risks of the foreign swap
                itself and are addressed under separate supervisory and regulatory
                frameworks.
                 The participation of U.S. banking organizations in the derivatives
                markets abroad is substantial, making attempts to ``compartmentalize''
                the exposures of significant market affiliates on the basis of legal
                separation and collateral exclusively challenging.\23\ Sound risk
                management for banking organizations necessitates ongoing assessments
                of financial performance across the organization and corrective
                incremental responses to undesirable changes in key risk metrics.
                ---------------------------------------------------------------------------
                 \23\ See, e.g., https://www.bis.org/ifc/publ/ifcb31n.pdf (U.S.-
                based banking organizations engage in derivatives activities across
                G-10 countries actively, with non-U.S. market participation
                exceeding U.S. market participation in the aggregate); see also,
                Guidance for Sec. 165(d) Resolution Plan Submissions by Domestic
                Covered Companies, 84 FR 1438 (February 4, 2019).
                ---------------------------------------------------------------------------
                 The agencies' structural concerns described above have arisen with
                the benefit of hindsight in the time since the Rule was finalized. In
                2014 and 2015, the future structure of the cross-border non-cleared
                swaps market was potentially subject to significant change in response
                to key factors such as growth in the cleared derivatives market
                (reducing non-cleared activity), industry acclamation to significant
                expected cost increases attributable to the robust world-wide margin
                regimes about to take effect, and new regulatory resolution planning
                requirements, causing internal restructuring within banking
                organizations in response to these factors. These unknowns, and the
                costs of the inter-affiliate initial margin requirement, could have
                reasonably been expected to curtail existing use of
                [[Page 39762]]
                inter-affiliate non-cleared swaps.\24\ For example, some
                internationally-active covered swap entities conducted their cross-
                border business through foreign branches, and others might have
                restructured to eliminate the need for inter-affiliate swaps. The
                agencies' past expectations of reductions in inter-affiliate swap
                activity have not been borne out through the completion of the Swap
                Margin Rule's implementation phase. In addition, among the prudential
                regulators, the banking agencies continue to assess the proper
                calibration of regulatory capital requirements including enhanced
                recognition of collateralization (or the lack of it) for closeout
                risk.\25\
                ---------------------------------------------------------------------------
                 \24\ See 80 FR at 74,893 (``It is likely the behavior of swap
                market participants, including affiliate counterparties, will
                respond to incentives created by these swap margin requirements.
                Such changes could have a dramatic effect on the pattern of
                affiliate swap transactions which would itself have a significant
                impact on the amounts of initial margin that are ultimately
                collected on inter-affiliate transactions.'')
                 \25\ In this regard, it is worth noting that the analysis in
                this Supplementary Information Section evaluates comments on the
                proposal from the perspective of the Swap Margin Rule. The
                evaluation of risk for inter-affiliate trades and the best way to
                address such risks from a regulatory perspective could change
                depending on, among other things, the statutory authority on which a
                regulatory requirement is premised.
                ---------------------------------------------------------------------------
                2. System-Wide Effectiveness of Inter-Affiliate Initial Margin
                Requirements
                 Commenters objecting to the agencies' proposal also expressed the
                view that the agencies are engaging in a ``race to the bottom'' to the
                extent the agencies discussed how inter-affiliate initial margin
                requirements have not been universally applied by other domestic and
                foreign regulators. As stated in the proposal, the agencies raise this
                concern in the context of observing that limited application of the
                initial margin requirements to one slice of the market is a blunt tool
                for enhancing financial stability among interconnected financial market
                participants. With the benefit of hindsight, the agencies observe that
                other regulators developing their implementing rules in 2015 and beyond
                have not implemented the same comprehensive inter-affiliate margin
                collection requirements that the agencies did in 2015.\26\ As a result,
                certain anticipated systemic protections that would have accrued from
                comprehensive inter-affiliate initial margin practices world-wide will
                not be realized.
                ---------------------------------------------------------------------------
                 \26\ In the EU, intragroup transactions are fully exempt (not
                only initial margin, but also variation margin), unless the relevant
                affiliates are subject to specific and identified legal impediments
                to funds transfers between them, such as currency exchange
                restrictions, identified defects in one of the affiliate's formal
                resolution plans, or other specific legal restriction that
                significantly affects the transfer of funds between the affiliates.
                See Commodity Futures Trading Commission Comparability Determination
                for the European Union, 82 FR 48394, 48399-48400 (October 18, 2017)
                (comparing CFTC non-cleared swap margin rules to comparable EU
                rules, discussing EU reliance on appropriate centralized risk
                evaluation, measurement, and control procedures between cross-border
                affiliates, and margin rule comparability determinations outside the
                EU); see also Commission Implementing Decision (EU) 2017/1857
                (October 13, 2017) (EU comparability determination for US
                transactions subject to the CFTC non-cleared margin rules),
                available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017D1857&from=ES; European Supervisory Authorities,
                EMIR RTS on various amendments to the bilateral margin requirements
                in view of the international framework (December 5, 2019) (notice of
                proposed amendments to EMIR non-cleared derivatives margin rule to
                grant an additional extension of the exemption from comparability
                determination requirements), available at https://eba.europa.eu/sites/default/documents/files/document_library//ESAs%202019%2020%20-%20Final%20Report%20-%20Bilateral%20margin%20amendments.pdf. In
                Japan, prudential regulators address inter-affiliate non-cleared
                derivatives with existing capital standards and risk-management
                principles in the first instance, with margin as a voluntary
                alternative. See Commodity Futures Trading Commission Amendment to
                Comparability Determination for the Japan, 84 FR 12074, 12079 (April
                1, 2019). All other major jurisdictions also exempt inter-affiliate
                non-cleared derivatives from margin requirements, including Canada
                (https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/e22.aspx, both initial and variation margin); Australia (https://www.apra.gov.au/sites/default/files/prudential_standard_cps_226_margining_and_risk_mitigation_for_non-centrally_cleared_derivatives.pdf, initial margin); Hong Kong
                (https://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/CR-G-14.pdf, both initial and
                variation margin); and Singapore (https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Securities-Futures-and-Fund-Management/Regulations-Guidance-and-Licensing/Guidelines/Guidelines-on-Margin-Requirements-for-NonCentrally-Cleared-OTC-Derivatives-Contracts-revised-on-5-October-2018.pdf, both initial and variation margin).
                ---------------------------------------------------------------------------
                 Commenters opposing the agencies' proposal also expressed the view
                that the agencies were eliminating an estimated $40 billion of initial
                margin collateral that will serve a ``loss absorbing capacity'' to
                protect against potential affiliate default on their swaps exposures.
                Initial margin, however, is not loss-absorbing in the same sense as
                equity capital; initial margin collateral is funded with borrowings
                from the banking organization's creditors.\27\ The practice in banking
                organizations of providing collateral to their bank affiliates as
                security for the banking organization's financial obligations is a
                routine and expected aspect of the business. But it is accompanied by
                market expectations on behalf of each banking organization's creditors
                if the aggregate extent to which it is employed in the banking
                organization materially exceeds established expectations. During
                periods of market distress, those creditors' claims are potentially
                subordinated to the bank's claim on the banking organization's assets,
                placing additional stress on the banking organization's access to
                funding if the subordination effects are materially beyond the norm.
                ---------------------------------------------------------------------------
                 \27\ Two commenters suggested the affiliate's use of leverage to
                acquire initial margin collateral was a choice, and the affiliate
                could instead raise additional equity or retain earnings to fund it.
                This is not consistent with the agencies' supervisory and policy-
                making experience for internationally-active banks, where public
                policy and competitiveness concerns serve to establish and maintain
                capital requirements that must address not only adequacy, but regime
                equivalency.
                ---------------------------------------------------------------------------
                C. Description of the Final Rule
                 After considering commenters' range of views about the proposed
                rule, the agencies have determined to finalize it consistent with the
                proposal, with two revisions.
                 First, the agencies are including a limit on the aggregate amount
                that a covered swap entity may recognize pursuant to the inter-
                affiliate initial margin exemption provided under the final rule. This
                limit, as further described below, is set at 15 percent of the covered
                swap entity's tier 1 capital. The agencies are incorporating the 15%
                Tier 1 Threshold into Sec. __.11 as an augmentation to reflect safety
                and soundness and financial system risk concerns of the Board, the
                FDIC, and the OCC surrounding the status of covered swap entities that
                are U.S. insured depository institutions.\28\ The agencies, in their
                supervisory experience, have observed that covered swap entities have
                collected inter-affiliate initial margin under the current rule at
                levels that do not exceed this limit. Nevertheless, the agencies'
                determinations underlying the decision to issue this final rule are
                informed significantly by the agencies' supervisory experience
                overseeing inter-affiliate swap activities at covered swap entities
                during the first four years the Swap Margin Rule has been in effect.
                Accordingly, the agencies believe it is appropriate to apply the 15%
                Tier 1 Threshold as an augmentation, as the agencies continue to
                supervise covered swap entities further into the maturation of the
                international derivatives market reforms that have been under
                development since 2010. This augmentation will address additional
                supervisory concerns that may arise at a covered swap entity whose tier
                1 capital base is contracting in an unusually rapid pattern, a
                situation that evidences the institution is experiencing
                [[Page 39763]]
                heightened levels of stress, or whose inter-affiliate derivative
                exposures increase in an unusually rapid pattern. Thus, the agencies
                have set it at a level that exceeds the typical initial margin
                collection amounts at the affected covered swap entities, to
                accommodate expected levels and taking into consideration a range of
                those levels that varies somewhat across those covered swap entities.
                ---------------------------------------------------------------------------
                 \28\ 7 U.S.C. 6s(e)(3); 15 U.S.C. 78o-10(e)(3).
                ---------------------------------------------------------------------------
                 This provision requires a covered swap entity to calculate the
                initial margin collection amount \29\ each business day for each
                counterparty that is a swap entity or a financial end-user with a
                material swaps exposure that is an affiliate, and aggregate these
                amounts to determine whether the aggregate amount exceeds the 15% Tier
                1 Threshold.\30\ When a covered swap entity calculates the 15 percent
                threshold, it must include all non-cleared swaps between the covered
                swap entity and its affiliates (which includes subsidiaries of the
                covered swap entity) plus all non-cleared swaps between an covered swap
                entity subsidiary and other affiliates (but not double counting non-
                cleared swaps with the parent covered swap entity). So long as the
                aggregate remains below the 15% Tier 1 Threshold, the covered swap
                entity is exempt from the requirement to collect initial margin from
                its affiliates. If, however, the aggregate exceeds the 15% Tier 1
                Threshold on any business day, the final rule requires the covered swap
                entity to collect initial margin on any additional non-cleared swap
                executed with an affiliated swap entity or financial end user.\31\ Once
                the 15 percent threshold is exceeded, the covered swap entity is
                required to collect initial margin on all new transactions with its
                affiliates (which includes the covered swap entity subsidiaries). Also,
                if a covered swap entity subsidiary enters into a non-cleared swap with
                an affiliate other than the covered swap entity,\32\ the covered swap
                entity must collect initial margin from the affiliate, and the
                subsidiary does not need to also collect initial margin for the
                affiliate for that non-cleared swap. This provision is designed to
                provide protection for the covered swap entity. Initial margin
                collection takes place pursuant to the generally-applicable initial
                margin requirement specified in Sec. __.3(a) of the current rule,
                commencing the day after execution of the non-cleared swap and with
                updates each business day as specified in Sec. __.3(c).\33\ The
                covered swap entity is obligated to continue initial margin collection
                on these new swaps until they terminate under their own terms. If,
                however, the covered swap entity's aggregate initial margin collection
                amount calculation falls below the 15% Tier 1 Threshold, the covered
                swap entity is no longer obligated to maintain initial margin on these
                non-cleared swaps. Consistent with Sec. __.11(d) of the current rule,
                the covered swap entity is permitted to maintain custody of non-cash
                initial margin collateral collected pursuant to these requirements with
                the covered swap entity itself or with an affiliate, but is otherwise
                subject to the segregation requirements of Sec. __.7 of the current
                rule.\34\
                ---------------------------------------------------------------------------
                 \29\ Section __.2 of the current rule defines the ``initial
                margin collection amount'' as the amount of initial margin the
                covered swap entity calculates for a counterparty using the covered
                swap entity's approved initial margin model under Sec. __.8 (or if
                the covered swap entity does not have an initial margin model, the
                standardized approach under Appendix A).
                 \30\ The final rule specifies that tier 1 capital for this
                purpose is comprised of common equity tier 1 capital and additional
                tier 1 capital, as defined in the agencies' respective regulations
                at 12 CFR 3.20(b)-(c) (OCC); 12 CFR 217.20(b)-(c) (Board); 12 CFR
                324.20(b)-(c) (FDIC); 12 CFR 628.20(b)-(c) for Farm Credit System
                banks and associations and 12 CFR 652.61(b) for the Federal
                Agricultural Mortgage Corporation (FCA); and 12 CFR 1240(b)-(c)
                (FHFA). Covered swap entities are required to use the tier 1 capital
                amounts reported in their most recent Call Report.
                 \31\ The final rule does not require the covered swap entity to
                begin collecting initial margin on its portfolio of interaffiliate
                swaps that were executed before the business day on which the 15%
                Tier 1 Threshold is exceeded.
                 \32\ The rule provides that if any subsidiary of the covered
                swap entity executes a non-cleared swap with any other affiliated
                swap entity or financial end user, the covered swap entity must
                treat that swap as its own for purposes of complying with these
                requirements. Additionally, the agencies have added an expanded
                definition of a ``subsidiary'' to Sec. __.11(d) for these purposes,
                consistent with the structure of the expanded ``affiliate''
                definition. The agencies have also incorporated language in Sec.
                __.11(a)(5)(ii) for multi-tier CSE structures that permit the lower
                tier CSEs to count their inter-affiliate non-cleared swaps as part
                of the top-tier IDI's 15% Tier 1 Threshold if the top-tier IDI
                collects initial margin for additional inter-affiliate swaps entered
                into by the lower tier CSEs after the limit is reached. This is
                intended to greatly simply the limit calculations for multi-tiered
                CSEs, while still ensuring the requirements of Sec. __.11(a) are
                fully satisfied at the IDI level.
                 \33\ Covered swap entities may avail themselves of the option,
                pursuant to Sec. __.5(a)(3)(ii) of the current rule, to place these
                swaps in a separate netting set for purposes of calculating the
                initial margin collection amount on a portfolio basis under an
                eligible master netting agreement.
                 \34\ The agencies have also made corresponding technical
                revisions to the language of Sec. __.11 to provide an exemption
                from the requirements to post initial margin under Sec. __.3(b),
                consistent with the current rule. This exemption is not subject to
                the 15% Tier 1 Threshold.
                ---------------------------------------------------------------------------
                 As part of this addition, the agencies are making associated
                changes to Sec. __.9 of the Swap Margin Rule. Section __.9 addresses
                cross-border application of the Swap Margin Rule to certain foreign
                financial firms that are organized under non-U.S. law and operate
                abroad, and that fall within the scope of the Rule because they are
                also registered with the CFTC or SEC as swap dealers or security-based
                swap dealers. These firms include foreign-chartered banks, and foreign-
                chartered subsidiaries of Edge corporations and agreement
                corporations.\35\ Under the current rule, these foreign firms are
                currently not subject to comprehensive initial margin collection
                requirements for affiliate swap transactions under the laws of their
                home counties.\36\ However, if they engage in a swap transaction with a
                U.S. affiliate, Sec. __.9 currently requires them to collect initial
                margin from the U.S. affiliate.
                ---------------------------------------------------------------------------
                 \35\ Specifically, see Sec. Sec. __.9(a) and __.9(d)(3)(i)-
                (ii). These entities are often governed by non-U.S. regulatory
                capital requirements and they do not file Call Reports; U.S.
                branches and agencies of foreign banks are not subject to stand-
                alone capital requirements.
                 \36\ See footnote 27, supra.
                ---------------------------------------------------------------------------
                 The amendment to Sec. __.11 that the agencies issue today would
                apply to these foreign firms, absent a change to Sec. __.9. As
                discussed above, the 15 percent threshold in Sec. __.11 is an
                augmentation reflecting safety and soundness and financial system risk
                concerns of covered swap entities that are U.S. insured depository
                institutions. Imposing the 15 percent threshold requirement on these
                foreign firms is not relevant to these concerns and could even have the
                incongruous result of requiring a U.S. covered swap entity to post
                initial margin collateral to an affiliated foreign firm. Accordingly,
                the agencies are adding a new subsection Sec. __.9(h), which provides
                that these foreign firms are exempt from the requirement to collect
                initial margin from their affiliates under Sec. __.3(a), and the
                foreign firms are not subject to the 15 percent threshold under Sec.
                __.11(a) unless they are subsidiaries of a covered swap entity subject
                to the requirements of Sec. __.11. In that case, the firm is treated
                the same as any other subsidiary, as described above, and the parent
                covered swap entity is required to treat inter-affiliate exposures
                between the subsidiary and an affiliate as if it is its own.\37\
                ---------------------------------------------------------------------------
                 \37\ For applicable transactions with U.S. affiliates, these
                foreign firms will be covered by Sec. __.11(b), exempting them from
                posting initial margin to affiliates pursuant to Sec. __.3(b).
                These foreign firms will be subject to Sec. __.4, requiring them to
                exchange variation margin, which is standard practice for these
                firms, and Sec. __.11(c), requiring swap dealers to collect initial
                margin at such times and in such forms and such amounts (if any)
                that the covered swap entity determines appropriately address the
                credit risk posed by the counterparty and the risks of the swap,
                consistent with Sec. __.3(d).
                ---------------------------------------------------------------------------
                 Second, the agencies are also including an additional revision that
                is
                [[Page 39764]]
                consistent with the Rule's current treatment of counterparties that are
                not subject to the Rule's quantitative requirement to exchange and
                segregate initial margin on a daily basis.
                 Section __.3 of the Rule contains the core initial margin
                requirement, directing covered swap entities to collect and post
                initial margin as calculated under Sec. __.8. Accordingly, in drafting
                the proposed rule text for the initial margin exemption in proposed
                Sec. __.11(a), the agencies exempted swaps between affiliates from
                Sec. __.3 in its entirety. In the final rule, the agencies have
                revised the text of the exemption in Sec. __.11, in order to preserve
                the applicability of Sec. __.3(d).
                 Section __.3(d) addresses counterparties who are not financial end
                users with a material swaps exposure or swap entities. These
                counterparties are not subject to daily initial margin exchange
                pursuant to Sec. __.3(a)-(c). For these other counterparties, Sec.
                __.3(d) requires covered swap entities to collect initial margin at
                such times and in such forms and such amounts (if any) that the covered
                swap entity determines appropriately address the credit risk posed by
                the counterparty and the risks of the swap. When the agencies adopted
                the Rule in 2015, this provision was included to reflect prudent risk
                management practices in the industry before the Rule's issuance,
                whereby an institution would include initial margin on a case-by-case
                basis for any type of swap counterparty, as part of their internal risk
                management practices, if the institution judged it to be
                appropriate.\38\
                ---------------------------------------------------------------------------
                 \38\ 80 FR 74840, 74844 (November 30, 2015).
                ---------------------------------------------------------------------------
                 The agencies, in assessing the risk of PFE to a covered swap entity
                in transacting swaps with an affiliate, have determined that an across-
                the-board requirement in the Swap Margin Rule to collect initial margin
                from affiliates is not the best approach. That being said, the agencies
                do not assess inter-affiliate swaps to be risk-free, and there can
                still be circumstances in which the agencies would expect a covered
                swap entity to incorporate initial margin as well as variation margin
                into its risk management for exposures to a particular affiliate or
                particular swaps. Accordingly, the agencies have revised the text of
                Sec. __.11 to treat inter-affiliate swaps the same way as swaps with
                other counterparties pursuant to Sec. __.3(d).
                 Commenters that addressed the agencies' proposed definition of an
                ``affiliate'' for purposes of Sec. __.11 supported it. The agencies
                are adopting it without change.
                D. Federal Reserve Board Statement on Sections 23A and 23B of the
                Federal Reserve Act
                 Although this final rule will exempt non-cleared swaps between a
                bank and its affiliates from the initial margin requirements of the
                swap margin rule under the conditions described above, swaps between a
                bank and its affiliates are of course also subject to sections 23A and
                23B of the Federal Reserve Act and the Board's Regulation W.
                 The Board's position is that, under section 23A, bank-affiliate
                derivatives generally can be valued at the bank's current exposure to
                the affiliate. Accordingly, the Board believes that a bank must collect
                23A-compliant variation margin from its affiliates to cover its current
                exposure on bank-affiliate derivatives, but generally is not required
                to collect initial margin to cover the bank's potential future exposure
                on the transactions.
                 Under section 23B, a bank's swaps with its affiliates must be on
                terms and conditions that are substantially the same, or at least as
                favorable to the bank, as those prevailing at the time for comparable
                transactions with third parties. In part because of the swap margin
                rule and in part due to natural evolution in the financial markets,
                comparable swap transactions between a bank and a third party today
                involve the bank collecting initial margin from, and posting initial
                margin to, the counterparty.
                 In many cases the Board finds it reasonable to conclude that a
                bank-affiliate swap with no initial margin requirement is at least as
                favorable to the bank as a comparable bank-nonaffiliate swap with two-
                way initial margin requirements. This occurs where the two-way initial
                margining described above requires each of the two counterparties to
                give the other counterparty a contractual term of roughly equivalent
                value. In the Board's view, situations where the bank and affiliate
                each agree not to require an equivalent exchange of initial margin from
                the other will generally create a set of contractual terms that is
                roughly equally favorable to the bank as a two-way initial margin
                regime.
                 Some cases of specific bank-affiliate swap arrangements without
                initial margin requirements could raise issues under section 23B,
                however, as can every affiliate transaction depending on the facts and
                circumstances of the arrangement. In the Board's view, relevant facts
                for the section 23B analysis include the relative creditworthiness of
                the bank vs. the affiliate, whether the bank-affiliate swap portfolio
                is more likely to create potential future exposure of the bank to the
                affiliate or vice versa, and whether or not the affiliate requires
                initial margin from the bank under the swap arrangement.
                E. Other Comments
                 Four commenters expressed the view that the agencies are without
                the statutory authority to adopt the proposed rule. One among these
                commenters provided an analysis of the language Congress used in
                requiring the prudential regulators to issue the margin requirements.
                In this commenter's view, the meaning of the words Congress chose are
                so prescriptive that they compel the agencies to impose initial margin
                and variation margin requirements on all swap transactions within the
                scope of the legislation.
                 The agencies note that, in requiring the prudential regulators to
                issue margin and capital requirements, the statutory language also
                mandates that the requirements shall help ensure the safety and
                soundness of covered swap entities and be appropriate for the risk
                associated with the swaps held by the covered swap entity.\39\ The
                agencies have previously considered the same line of analysis pursued
                by the commenters, in connection with adopting the Swap Margin Rule in
                2015.\40\ The agencies have concluded that the statutes direct the
                agencies to employ a risk-based approach to imposing margin
                requirements, and the agencies have done so by imposing rules that vary
                depending on the type of counterparty in light of the risks
                presented.\41\
                ---------------------------------------------------------------------------
                 \39\ 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-10(e)(3)(A).
                 \40\ 80 FR at 74866; see also 79 FR 57348, 57354-55 (September
                24, 2014).
                 \41\ The agencies also note that the Swap Margin Rule imposes
                margin requirements on a covered swap entity's non-cleared swaps
                with affiliates, specifically the variation margin collection
                requirement of Sec. __4(a)-(b), and the above-described requirement
                of Sec. __.3(d).
                ---------------------------------------------------------------------------
                 Commenters that opposed the agencies' proposal also expressed the
                view that the agencies' discussion and analysis in the Supplementary
                Information section of the proposal was deficient. The commenters were
                of the view that the agencies discussed the same factors in 2015 and
                2019, but in the first instance the agencies determined initial margin
                was required to address the risk of inter-affiliate swap exposures,
                whereas in the second instance the agencies drew the opposite
                conclusion.\42\ In this regard, the
                [[Page 39765]]
                agencies note that the analysis in 2015 did not propound the imposition
                of an across-the-board inter-affiliate initial margin requirement, and
                the agencies carefully evaluated the extent to which numerous aspects
                of the Rule's initial margin requirements should be reduced
                commensurate with the risks the agencies anticipated.\43\ In issuing
                these revisions, the agencies have performed the same probing analysis
                of the relevant factors, based on industry practices as they have
                settled after the Rule's compliance period.
                ---------------------------------------------------------------------------
                 \42\ Some commenters also expressed the view that the agencies
                are obligated to perform an analysis of the PFEs between covered
                swap entities and their affiliates, using the Swap Margin Rule's
                framework for quantifying initial margin collection amounts, in
                order to quantify how much PFEs would increase as a result of the
                proposed change. As the agencies discussed above, however, the
                Rule's methodology for evaluating the PFE of an unaffiliated
                counterparty is not an appropriate measurement of inter-affiliate
                risk. Among other things, it does not take relevant additional risk
                management factors into account, and it was originally formulated
                with the expectation it would not be applied to inter-affiliate
                swaps.
                 \43\ 80 FR 74887-889.
                ---------------------------------------------------------------------------
                IV. Additional Compliance Date for Initial Margin Requirements
                A. Proposal
                 The agencies proposed to give covered swap entities an additional
                year to implement initial margin requirements for certain smaller
                counterparties. The implementation of both initial and variation margin
                requirements started on September 1, 2016. With respect to initial
                margin requirements, the requirements in the Swap Margin Rule were
                implemented in five phases from September 1, 2016, through September 1,
                2020, depending on the size of the covered swap entity's portfolio of
                non-cleared swaps and the counterparty's portfolio of non-cleared
                swaps. Variation margin requirements for all covered swap entities and
                counterparties were completely phased in by March 1, 2017. This
                schedule was consistent with BCBS/IOSCO Framework when the Swap Margin
                Rule was adopted in 2015.
                 The phase-in schedule for initial margin is based on the average
                daily aggregate notional amount (AANA) of non-cleared swaps for March,
                April, and May, held in each party's market-wide portfolio, measured
                separately from the standpoint of the covered swap entity and the
                standpoint of the counterparty.\44\ With the recent occurrence of the
                fourth phase of initial margin compliance obligations on September 1,
                2019--for covered swap entities and counterparties with an AANA of $750
                billion to $1.5 trillion--the group currently scheduled for the fifth
                phase of compliance in the upcoming year includes all remaining
                entities within the scope of the initial margin requirements, spanning
                AANAs from $8 billion up to $750 billion.\45\
                ---------------------------------------------------------------------------
                 \44\ See supra note 7.
                 \45\ The Swap Margin Rule does not require initial margin to be
                exchanged with any counterparty whose AANA is less than $8 billion
                as of the previous June, July, and August. See Sec. __.3 and the
                definition of ``material swaps exposure'' in Sec. __.1.
                ---------------------------------------------------------------------------
                 The industry raised significant concerns about the operational and
                other difficulties associated with beginning to exchange initial margin
                with the large number of relatively small counterparties encompassed in
                the Swap Margin Rule's fifth phase.\46\ Following the revisions adopted
                in July 2019 to the BCBS/IOSCO Framework to permit an additional phase
                for smaller counterparties, the agencies proposed to amend the Swap
                Margin Rule to add an additional phase for smaller counterparties.\47\
                Specifically, the agencies proposed to amend the compliance schedule to
                add a sixth phase of compliance for certain smaller entities that are
                currently subject to the ``phase five'' compliance deadline. The
                proposed amendments would have required compliance by September 1,
                2020, for counterparties with an AANA ranging from $50 billion up to
                $750 billion, while the compliance date for all other counterparties
                (with an AANA ranging from a ``material swaps exposure'' of $8 billion
                up to $50 billion) would have been extended to September 1, 2021.
                ---------------------------------------------------------------------------
                 \46\ The industry's implementation work to execute new trading
                documentation to meet variation margin compliance obligations by
                2017 largely excluded any required documentation for initial margin,
                due to the greater operational complexity associated with ``T+1''
                portfolio reconciliation of internally-modeled initial margin
                amounts and third-party segregation of initial margin collateral.
                 \47\ See BCBS and IOSCO ``Margin requirements for non-centrally
                cleared derivatives,'' (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf.
                ---------------------------------------------------------------------------
                B. Final Rule
                 Commenters supported the proposed amendments to the compliance
                schedule, specifically, the additional phase six for all other
                counterparties (i.e., with an AANA of $8 billion up to $50 billion)
                with a compliance date of September 1, 2021. Commenters noted that the
                proposal did not clarify the convention that should be used for
                calculating the AANA for purposes of the proposed phase six and
                therefore, by default, the calculation would be based on the
                methodology for calculating ``material swaps exposure,'' which is
                determined based on an entity's and its affiliates AANA for June, July,
                and August of the previous calendar year (in this case, 2020). Several
                commenters recommended that the agencies clarify that, for purposes of
                the new phase six, the calculation is based on the AANA for March,
                April, and May of the same year, which is consistent with the BCBS/
                IOSCO Framework. One commenter recommended that the calculation of
                ``material swaps exposure'' be based on the AANA for March, April, and
                May, beginning in 2021 and thereafter, and asserted this approach would
                maintain consistency with the BCBS/IOSCO Framework and other foreign
                jurisdictions.
                 The final rule adopts the additional phase six as proposed. The
                agencies acknowledge that a change to the AANA calculation for phase
                six would result in greater consistency with the BCBS/IOSCO Framework,
                but are not adopting the recommended change to the month calculation
                convention because basing AANA on June, July, and August of the
                previous calendar year will provide end users subject to phase six with
                more time to prepare for compliance with initial margin requirements
                following meeting the material swaps exposure threshold. Moreover, the
                definition of material swaps exposure is not being amended as part of
                this final rule. The material swaps exposure definition was not raised
                as an issue in the proposal, as an amendment to that definition would
                affect more than just the phase-in periods in Sec. __.1(e). The
                agencies confirm that the material swaps exposure is to be calculated
                based on the previous year.\48\ For example, for the period January 1,
                2022 through December 31, 2022, an entity would determine whether it
                had a material swaps exposure with reference to June, July, and August
                of 2021.
                ---------------------------------------------------------------------------
                 \48\ See 80 FR 74857 (November 30, 2015).
                ---------------------------------------------------------------------------
                V. Documentation Requirements
                A. Proposal
                 The agencies proposed to amend the documentation requirements under
                Sec. __.10 of the Swap Margin Rule. Pursuant to Sec. __.10 of the
                Rule, a covered swap entity must execute trading documentation with
                each counterparty that falls within the scope of the Rule's definition
                of a ``swap entity'' or a ``financial end user'' regarding credit
                support arrangements unless the swap entity or financial end user is
                explicitly exempt from the Rule pursuant to Sec. __.1(d).\49\ The
                documentation must provide the covered swap entity the contractual
                rights and obligations to collect and post initial and variation margin
                in such amounts, in such form, and under such circumstances as are
                required by the Rule. The documentation must also
                [[Page 39766]]
                specify the methods, procedures, rules, and inputs for determining the
                value of each non-cleared swap for purposes of calculating variation
                margin and the procedures by which any disputes concerning the
                valuation of non-cleared swaps or the valuation of assets collected or
                posted as initial margin or variation margin may be resolved. Finally,
                the documentation must also describe the methods, procedures, rules,
                and inputs used to calculate initial margin for non-cleared swaps
                entered into between the covered swap entity and the counterparty.\50\
                The proposed rule clarified that under Sec. __.10 of the Rule, a
                covered swap entity is not required to execute initial margin trading
                documentation with a counterparty prior to the time that it is required
                to collect or post initial margin pursuant to Sec. __.3.\51\
                ---------------------------------------------------------------------------
                 \49\ 80 FR 74886-74887 (November 30, 2015).
                 \50\ Id.
                 \51\ Under Sec. __.3, a covered swap entity must collect or
                post initial margin when it calculates an initial margin amount
                that, after subtracting the initial margin threshold amount (not
                including any portion of the initial margin threshold amount already
                applied by the covered swap entity or its affiliates to other non-
                cleared swaps or non-cleared security-based swaps with the
                counterparty or its affiliates), exceeds zero.
                ---------------------------------------------------------------------------
                B. Final Rule
                 Commenters supported the proposed amendment to Sec. __.10 of the
                Rule. The agencies are adopting the amendment to Sec. __.10 of the
                Rule as proposed.
                 In addition, the preamble to the proposal discussed the operation
                of the custody agreement requirements in Sec. __.7 of the Swap Margin
                Rule. Under Sec. __.7, custody agreements are required to be in place
                only after initial margin is required to be collected or posted
                pursuant to Sec. __.3, or when initial margin is posted by a covered
                swap entity beyond an amount required by the Rule. The agencies
                explained that they expect that covered swap entities will closely
                monitor their exposures and take appropriate steps to ensure that
                trading documentation is in place at such time as initial margin is
                required to be exchanged pursuant to Sec. __.3. The agencies noted
                that this view is consistent with statements of the BCBS and IOSCO with
                respect to internationally agreed standards for margin requirements for
                non-centrally cleared derivatives.\52\ Commenters supported this
                clarification, and the agencies reaffirm their statement regarding the
                execution of custody agreements required pursuant to Sec. __.7 of the
                Rule.
                ---------------------------------------------------------------------------
                 \52\ BCBS/IOSCO statement on the final implementation phases of
                the Margin requirements for non-centrally cleared derivatives, March
                5, 2019, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD624.pdf, stating that ``the framework does not specify
                documentation, custodial or operational requirements if the
                bilateral initial margin amount does not exceed the framework's
                [euro]50 million initial margin threshold. It is expected, however,
                that covered entities will act diligently when their exposures
                approach the threshold to ensure that the relevant arrangements
                needed are in place if the threshold is exceeded.''
                ---------------------------------------------------------------------------
                VI. Portfolio Compression Exercises and Other Amendments
                A. Summary of Proposed Rule
                 The Swap Margin Rule applies to non-cleared swaps entered into on
                or after the applicable compliance date. The agencies are concerned
                about amendments to a swap that was entered into before the applicable
                compliance date if the amendments would have the effect of allowing
                covered swap entities and their counterparties to evade or otherwise
                artificially delay implementation of margin requirements. In
                particular, the agencies are concerned that market participants might
                amend legacy swaps, rather than entering into new swaps and exchanging
                margin pursuant to the Rule once the legacy swaps expire according to
                their original terms. The proposed rule permitted certain amendments,
                particularly non-material amendments to non-economic terms, as well as
                amendments that are made to reduce operational or counterparty risk,
                such as notional reductions and portfolio compressions, to be executed
                while still allowing those amended legacy swaps to remain exempt from
                the Swap Margin Rule.
                 The proposed rule clarified the agencies' implementation of the
                legacy swaps provisions of the Swap Margin Rule since its adoption in
                2015. The proposed rule was intended to permit amendments to legacy
                swaps arising from certain routine industry practices over the life-
                cycle of a non-cleared swap that are carried out for logistical
                reasons, risk-management purposes, or IBOR replacement. The proposed
                rule covered amendments that do not raise concerns that the covered
                swap entity is seeking to evade or otherwise delay the application of
                margin requirements for non-cleared swaps.
                B. Technical Changes
                1. Proposal
                 The proposed rule recognized the legacy status of a non-cleared
                swap that has been amended to reflect technical changes, such as
                addresses, the identities of parties for delivery of formal notices,
                and other administrative or operational provisions of the non-cleared
                swap that do not alter the non-cleared swap's underlying asset or
                indicator, such as a security, currency, interest rate, commodity, or
                price index, the remaining maturity, or the total effective notional
                amount. For example, an interest rate swap documentation amendment that
                changes the counterparty's contact person or a weather swap
                documentation amendment that changes the margin payment instructions
                would not impact those swaps' legacy status. However, an interest rate
                swap amendment to the fixed leg interest rate or a weather swap
                amendment to the measurement of the precipitation level would impact
                those swaps' legacy status as it is intended to change the economic
                valuation of the swap. The technical changes permitted by the proposed
                rule are necessary to reflect changes in a counterparty's
                circumstances, but are not associated with a desire by either party to
                increase or decrease its exposure to market risk factors.
                2. Final Rule
                 Commenters were supportive of the proposal. Commenters agreed with
                the agencies that amendments made for logistical or risk management
                purposes arising from routine industry practices over the life-cycle of
                the swap, should not cause legacy swaps to lose their legacy status.
                One commenter requested that the agencies permit any technical
                amendment that does not affect the economic obligations of the parties
                or the valuation of the legacy swap. Two commenters requested
                clarification that the language in the proposed rule aligns with the
                CFTC's Division of Swap Dealer and Intermediary Oversight's June 6,
                2019 No Action Position wherein the CFTC took a no action position on
                legacy swaps that are amended, ``provided that no term is amended that
                would affect the economic obligations of the parties or the valuation''
                of the swap or that are partially terminated or partially novated
                subject to certain conditions.\53\ The agencies are clarifying that the
                language in the proposed rule is intended to align with the CFTC's No
                Action Position. With respect to the language in Sec. __.1(h)(5)(i), a
                commenter requested a technical change from usage of the word
                ``indicator,'' because it is not a common term in the industry, to the
                word ``reference.'' The agencies are amending the rule to reflect this
                technical change.
                ---------------------------------------------------------------------------
                 \53\ CFTC Letter No. 19-13 (June 06, 2019) at 8.
                ---------------------------------------------------------------------------
                 The agencies did not receive any other comments on this part of the
                proposed rule and are adopting it, subject to the technical change
                discussed, as proposed.
                [[Page 39767]]
                C. Reduction in Notional Amount
                1. Proposal
                 The proposed rule recognized the legacy status of a non-cleared
                swap that has been amended solely to reduce the notional amount of the
                non-cleared swap, without altering other terms of the original non-
                cleared swap. For these purposes, a reduction in notional amount may be
                achieved through a partial termination of the original non-cleared
                swap, with the remaining non-terminated non-cleared swap being able to
                retain its legacy status. A reduction in notional amount could also be
                achieved by novating a portion of the original non-cleared swap's
                notional amount to a third party. The original non-cleared swap, with a
                lower notional amount, would retain legacy status, but the novated
                portion would not retain legacy status.
                2. Final Rule
                 The agencies did not receive comments on this amendment and are
                adopting it as proposed.
                C. Portfolio Compression Exercises
                1. Proposal
                 The proposed rule recognized the legacy status of non-cleared swaps
                that have been modified as part of certain portfolio compression
                exercises used as a risk management tool or for IBOR replacement. In
                compression, offsetting trades between two or more parties are amended
                or torn up and replaced, which reduces the size of gross derivatives
                exposures and generally reduces the number or frequency of payments
                between parties, thus maintaining or reducing the overall risk profile
                of the portfolio.
                 In a simple bilateral form of compression between two
                counterparties, the dealer agrees with another dealer to compress
                trades so that offsetting positions are cancelled and only the net
                amount remains, without any change to the overall market exposures. The
                resulting net position is documented by amending one of the original
                swaps. This ``amended swap'' method is the predominant method used in
                compressions of non-cleared interest rate swaps. Compression can also
                be done on a multilateral basis among more than two counterparties, and
                is often even more efficient, as trades across multiple dealers
                involved in a compression exercise can be offset, reducing the risk in
                each relationship across the various counterparties involved in the
                compression. The resulting net position is documented by creating a
                replacement swap reflecting the net position. This ``replacement swap''
                method is predominantly used in compression exercises for non-cleared
                credit default swaps, but it can also be used for interest rate swap
                compression. Compression often results in the cancellation of
                offsetting positions, but it could also result in new trades being
                booked into an existing non-cleared portfolio to reflect the netted-
                down risk of the original portfolio.
                2. Final Rule
                 Commenters were generally supportive of this amendment to maintain
                legacy status of non-cleared swap after portfolio compression
                exercises. Commenters noted that portfolio compression generally
                reduces gross derivative exposures and reduces the frequency of
                payment, reducing the portfolio's risk profile.
                 The agencies are modifying the language in Sec. __.1(h)(4) to make
                clear that when parties engage in portfolio compression, the resulting
                replacement swap from the compression exercise is accorded legacy
                treatment so long as it meets the limitations in Sec. __.1(h)(4). As
                described above, in order to separate compression for the purposes of
                replacing an interest rate listed in Sec. __.1(h)(3)(i) and
                compression for other risk reducing or risk neutral purposes, the rule
                now has a section for the former (under Sec. __.1(h)(3)) and the
                latter (under Sec. __.1(h)(4)). The rule also makes clear that the
                resulting non-cleared swap or non-cleared security-based swap from the
                portfolio compression exercises may not (1) exceed the sum of the total
                effective notional amounts of all of the swaps that were submitted to
                the compression exercise that had the same or longer remaining maturity
                as the resulting swap; or (2) exceed the longest remaining maturity of
                all the swaps submitted to the compression exercise. This is consistent
                with the proposal.
                 As in other areas of the final rule, supervisors may review these
                changes to confirm that covered swap entities are not purposefully
                avoiding the requirements of the rule.
                VII. Technical Changes
                 The proposed rule would have deleted Sec. __.1(e)(7), which
                includes an amendment relating to the QFC Rules. The text of Sec.
                __.1(e)(7), with slight modifications, would have been moved to Sec.
                __.1(h)(1), so that it would reside in the section of the Swap Margin
                Rule dedicated to legacy swap amendments. The methods of amendment
                listed in Sec. __.1(h) would have applied not only to IBOR
                replacements, but also to any other contractual modifications permitted
                under Sec. __.1(h), including amendments relating to the QFC Rules.
                 The agencies did not receive any comments on this part of the
                proposed rule and are adopting it as proposed.
                VIII. Comments Regarding Broader Changes to the Swap Margin Rule
                 Several commenters that supported the proposed rule also requested
                broader changes to the rule. Some commenters requested a carve-out for
                seeded funds and an alternative approach to US GAAP accounting analysis
                for purposes of determining the application of the rule. These
                commenters asserted that the limited and passive nature of the
                relationship between seeded funds and their sponsors does not warrant
                the requirement to aggregate a seeded fund's swap exposures with those
                of its parent or other commonly consolidated entities for the purpose
                of calculation material swap exposure. One commenter requested the
                agencies make an announcement to deprioritize compliance with any
                enforcement of the swap margin rule with respect to seeded funds.
                Another commenter stated that non-public and mutual insurance companies
                that are not required to perform GAAP accounting analysis do not
                routinely do so because the cost to perform such analysis for limited
                purposes is significant. They suggested engagement with the regulators
                to determine if an alternative approach may be available.
                 Other commenters representing nonprofit organizations, asset
                managers, mutual funds, other institutional asset managers, and
                custodian banks recommended the types of eligible collateral be
                expanded to include certain types of money market mutual funds and
                exchange traded funds. Commenters also requested exclusion of seeded
                funds from the definition of a consolidated group through limited rule
                making. Other commenters raised concerns with the current $50 million
                initial margin threshold and requested that an additional 6-month grace
                period be provided after a financial end user crosses the initial
                margin threshold. In addition, commenters requested a less frequent
                calculation of the initial margin threshold amount because of the
                burden associated with the testing and monitoring in-scope
                counterparties. Commenters also requested that the agencies work with
                regulated entities to develop an approach for the allocation of the
                initial margin amounts and the minimum transfer amount across multiple
                asset managers for a given client.
                [[Page 39768]]
                 Commenters also requested that the agencies exclude physically
                settled foreign exchange swaps from the material swaps exposure
                calculation and consider making comparability and substitute compliance
                determination for foreign jurisdictions.
                 The agencies are not adopting these broader proposed changes in
                this final rule because they fall outside the scope of the changes the
                agencies sought comment on in the proposed rule. The agencies will
                continue to evaluate the requirements of this rule to ensure they meet
                the agencies' objectives.
                IX. Brexit IFR
                 The agencies issued an interim final rule, which became effective
                on March 19, 2019, to provide certainty for covered swap entities as
                they prepare for the event commonly described as ``Brexit.'' \54\ In
                particular, the interim final rule provided a covered swap entity with
                the ability to continue to service its cross-border clients in the
                event that the U.K. withdraws from the E.U. without a Withdrawal
                Agreement. A Withdrawal Agreement between the UK and EU was ratified in
                January 2020.\55\ The Withdrawal Agreement addresses certain EU-related
                matters that will immediately be affected by the withdrawal itself and
                a transition period. The transition period will run until December 31,
                2020 and could be extended by one or two years.
                ---------------------------------------------------------------------------
                 \54\ 84 FR 9940 (March 19, 2019).
                 \55\ See European Council Press Release ``Brexit: Council adopts
                decision to conclude the withdraw agreement'' (January 30, 2020),
                available at https://www.consilium.europa.eu/en/press/press-releases/2020/01/30/brexit-council-adopts-decision-to-conclude-the-withdrawal-agreement/.
                ---------------------------------------------------------------------------
                 The agencies received one comment letter on the interim final rule.
                The commenter requested that the agencies amend the interim final rule
                to exclude swaps with a flip clause. The comment raised an issue that
                was not within the scope of the interim final rule. Accordingly, the
                agencies are not making any revisions to the rule and are retaining it
                as a final rule as initially adopted.
                X. Administrative Law Matters
                Paperwork Reduction Act Analysis
                 Certain provisions of the final rulemaking contain ``collection of
                information'' requirements within the meaning of the Paperwork
                Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
                the requirements of the PRA, the agencies may not conduct or sponsor,
                and a respondent is not required to respond to, an information
                collection unless it displays a currently valid Office of Management
                and Budget (OMB) control number.
                 The agencies reviewed the final rulemaking and determined that it
                reduces certain recordkeeping requirements that have been previously
                cleared under various OMB control numbers. In order to be consistent
                across the agencies, the agencies are also applying a conforming
                methodology for calculating the burden estimates. The agencies are
                proposing to extend for three years, with revision, these information
                collections. The OCC and FDIC have submitted to OMB for review under
                section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of
                the OMB's implementing regulations (5 CFR 1320). The Board has reviewed
                the information collection under its delegated authority. The OMB
                control numbers are 1557-0251 (OCC), 3064-0204 (FDIC), and 7100-0364
                (Board). The FCA has determined the final rulemaking has no PRA
                implications because Farm Credit System institutions are Federally
                chartered instrumentalities of the United States and instrumentalities
                of the United States are specifically excepted from the definition of
                ``collection of information'' contained in 44 U.S.C. 3502(3). The FHFA
                has determined that the final rulemaking does not contain any
                collection of information for which the agency must obtain clearance
                under the PRA.
                Current Actions
                 The final rulemaking removes the record keeping requirement in
                Sec. __.11(b) that a covered swap entity shall calculate the amount of
                initial margin that would be required to be posted to an affiliate that
                is a financial end user with material swaps exposure pursuant to Sec.
                __.3(b) and provide documentation of such amount to each affiliate on a
                daily basis.
                Final Revision, With Extension, of the Following Information
                Collections
                 Title of information collection: Reporting and Recordkeeping
                Requirements Associated with Swaps Margin and Swaps Push-Out.
                 Frequency: Annual and event generated.
                 Affected public: Businesses or other for-profit.
                 Estimated average hours per response:
                Reporting
                 Section __.1(d)--1 hour (on average of 1,000 times per year).
                 Sections __.8(c) and __.8(d)--240 hours.
                 Section __.8(f)(3)--50 hours.
                 Section __.9(e)--10 hours (on average of 3 times per year).
                 Sections 237.22(a)(1) and 237.22(e) (Board only)--7 hours.
                Recordkeeping
                 Sections __.2 (definition of ``eligible master netting agreement,''
                item 4), 237.8(g), and 237.10--5 hours.
                 Section __.5(c)(2)(i)--4 hours.
                 Section __.7(c)--100 hours.
                 Sections __.8(e) and 237.8(f)--40 hours.
                 Section __.8(h)--20 hours.
                Disclosure
                 Section __.1(h)--1 hour.
                OCC
                 Respondents: Any national bank or a subsidiary thereof, Federal
                savings association or a subsidiary thereof, or Federal branch or
                agency of a foreign bank that is registered as a swap dealer, major
                swap participant, security-based swap dealer, or major security-based
                swap participant.
                 Estimated number of respondents: 10.
                 Proposed revisions only estimated annual burden: -2,500 hours.
                 Total estimated annual burden: 14,900 hours.
                Board
                 Respondents: Any state member bank (as defined in 12 CFR 208.2(g)),
                bank holding company (as defined in 12 U.S.C. 1841), savings and loan
                holding company (as defined in 12 U.S.C. 1467a), foreign banking
                organization (as defined in 12 CFR 211.21(o)), foreign bank that does
                not operate an insured branch, state branch or state agency of a
                foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12)), or Edge or
                agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)) that
                is registered as a swap dealer, major swap participant, security-based
                swap dealer, or major security-based swap participant.
                 Estimated number of respondents: 41.
                 Proposed revisions only estimated annual burden: -10,209 hours.
                 Total estimated annual burden: 61,104 hours.
                FDIC
                 FDIC: Any FDIC-insured state-chartered bank that is not a member of
                the Federal Reserve System or FDIC-insured state-chartered savings
                association that is registered as a swap dealer, major swap
                participant, security-based swap dealer, or major security-based swap
                participant.
                 Estimated number of respondents: 1.
                 Proposed revisions only estimated annual burden: -249 hours.
                [[Page 39769]]
                 Total estimated annual burden: 1,490 hours.
                Regulatory Flexibility Act Analysis
                 OCC: In general, the Regulatory Flexibility Act (RFA) (5 U.S.C. 601
                et seq.) requires that in connection with a final rulemaking, an agency
                publish a final regulatory flexibility analysis that describes the
                impact of the rule on small entities. Under section 605(b) of the RFA,
                this analysis is not required if an agency certifies that the rule will
                not have a significant economic impact on a substantial number of small
                entities and publishes its certification and a brief explanatory
                statement in the Federal Register along with its rule.
                 As part of our analysis, we consider whether, pursuant to the RFA,
                the final rule would have a significant economic impact on a
                substantial number of small entities. The OCC currently supervises
                approximately 745 small entities.\56\ Among these 745 small entities,
                42 could be affected by the final rule if one or more of these small
                entities are a party to a financial contract with a covered swap
                entity. Because we believe banks will incur de minimis costs, if any,
                to comply with the final rule, we conclude that the final rule would
                not have a significant economic impact on a substantial number of small
                entities.\57\
                ---------------------------------------------------------------------------
                 \56\ We base our estimate of the number of small entities on the
                Small Business Administration's (SBA's) size thresholds for
                commercial banks and savings institutions, and trust companies,
                which are $600 million and $41.5 million, respectively. Consistent
                with the General Principles of Affiliation, 13 CFR 121.103(a), we
                count the assets of affiliated financial institutions when
                determining if we should classify an OCC-supervised institution as a
                small entity. We use December 31, 2019, to determine size because a
                ``financial institution's assets are determined by averaging the
                assets reported on its four quarterly financial statements for the
                preceding year.'' See footnote 8 of the SBA's Table of Size
                Standards.
                 \57\ As one way of determining whether any of the small entities
                is a covered swap entity, the OCC reviewed the CFTC's listing of
                registered swap dealers at http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer. The SEC has not yet imposed a
                registration requirement on entities that meet the definition of
                security-based swap dealer or major security-based swap participant.
                ---------------------------------------------------------------------------
                 Board: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
                generally requires that an agency prepare and make available for public
                comment a final regulatory flexibility analysis in connection with a
                final rulemaking or certify that the final rule will not have a
                significant economic impact on a substantial number of small
                entities.\58\
                ---------------------------------------------------------------------------
                 \58\ See 5 U.S.C. 603(a).
                ---------------------------------------------------------------------------
                 As described above, the final rule amends the Swap Margin Rule as
                follows:
                 First, the final rule provides relief by allowing legacy swaps to
                be amended to replace interbank offered rates (IBORs) and other
                interest rates that are reasonably expected to be discontinued or are
                reasonably determined to have lost their relevance as a reliable
                benchmark due to a significant impairment, without such swaps losing
                their legacy status.
                 Second, the final rule adds an additional initial margin compliance
                period for swaps with certain smaller counterparties, and clarifies the
                existing trading documentation requirements in Sec. __.10 of the Rule.
                 Third, the final rule permits amendments driven by certain routine
                life-cycle activities that covered swap entities may conduct for legacy
                swaps, such as reduction of notional amounts and portfolio compression
                exercises, without triggering margin requirements.
                 Fourth, the final rule would make final a previously issued interim
                final rule that preserve the status of legacy swaps meeting certain
                criteria after the United Kingdom withdraws from the European Union
                without a negotiated settlement agreement.
                 Lastly, the final rule amends the treatment of affiliate
                transactions by amending the regulatory requirement that a covered swap
                entity collect initial margin for non-cleared swaps from its
                affiliates. The final rule retains the requirement that affiliates
                exchange variation margin. It also makes clear that affiliates should
                continue to use sound judgment to impose initial margin on non-cleared
                swaps when appropriate.
                 This final rule applies to financial institutions that are covered
                swap entities that are subject to the requirements of the Swap Margin
                Rule. Under SBA regulations, the finance and insurance sectors include
                commercial banking, savings institutions, credit unions, other
                depository credit intermediation and credit card issuing entities
                (financial institutions). With respect to financial institutions that
                are covered swap entities under the Swap Margin Rule, a financial
                institution generally is considered small if it has assets of $600
                million or less.\59\ Covered swap entities would be considered
                financial institutions for purposes of the RFA in accordance with SBA
                regulations. The Board does not expect that any covered swap entity is
                likely to be a small financial institution, because a small financial
                institution is unlikely to engage in the level of swap activity that
                would require it to register as a swap dealer or a major swap
                participant with the CFTC or a security-based swap dealer or security-
                based major swap participant with the U.S. Securities and Exchange
                Commission (SEC).\60\ None of the current Board-regulated covered swap
                entities are small entities for purposes of the RFA.
                ---------------------------------------------------------------------------
                 \59\ See 13 CFR 121.201 (effective December 2, 2014, as amended
                by 84 FR 34261, effective August 19, 2019); see also 13 CFR
                121.103(a)(6) (noting factors that the SBA considers in determining
                whether an entity qualifies as a small business, including receipts,
                employees, and other measures of its domestic and foreign
                affiliates).
                 \60\ The CFTC has published a list of provisionally registered
                swap dealers as of February 27, 2020, that does not include any
                small financial institutions. See http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer. The SEC has not yet imposed a
                registration requirement on entities that meet the definition of
                security-based swap dealer or major security-based swap participant.
                ---------------------------------------------------------------------------
                 The Board does not believe that this final rule will result in any
                new reporting, recordkeeping or other compliance requirements resulting
                in increased burden to any small entities, nor, therefore, that there
                are any significant alternatives to the final rule that would reduce
                the impact on small entities. In light of the foregoing, the Board
                certifies pursuant to section 605(b) of the RFA that the final rule
                will not have a significant economic impact on a substantial number of
                small entities.
                 FDIC: The RFA generally requires that, in connection with a final
                rulemaking, an agency prepare and make available for public comment a
                final regulatory flexibility analysis describing the impact of the
                final rule on small entities. However, a regulatory flexibility
                analysis is not required if the agency certifies that the final rule
                will not have a significant economic impact on a substantial number of
                small entities. The SBA has defined ``small entities'' to include
                banking organizations with total assets of less than or equal to $600
                million that are independently owned and operated or owned by a holding
                company with less than or equal to $600 million in total assets.\61\
                Generally, the FDIC considers a significant effect to be a quantified
                effect in excess of 5 percent of total annual salaries and benefits per
                institution, or 2.5 percent of total non-interest expenses. The FDIC
                believes that effects in excess of these thresholds typically represent
                significant effects for FDIC-
                [[Page 39770]]
                supervised institutions. For the reasons described below, the FDIC
                certifies pursuant to section 605(b) of the RFA that the final rule
                will not have a significant economic impact on a substantial number of
                small entities.
                ---------------------------------------------------------------------------
                 \61\ The SBA defines a small banking organization as having $600
                million or less in assets, where an organization's ``assets are
                determined by averaging the assets reported on its four quarterly
                financial statements for the preceding year.'' See 13 CFR 121.201
                (as amended by 84 FR 34261, effective August 19, 2019). In its
                determination, the ``SBA counts the receipts, employees, or other
                measure of size of the concern whose size is at issue and all of its
                domestic and foreign affiliates.'' See 13 CFR 121.103. Following
                these regulations, the FDIC uses a covered entity's affiliated and
                acquired assets, averaged over the preceding four quarters, to
                determine whether the covered entity is ``small'' for the purposes
                of RFA.
                ---------------------------------------------------------------------------
                 According to data from recent Consolidated Reports of Income and
                Condition (Call Report),\62\ the FDIC supervised 3,344 institutions. Of
                those, 2,581581 are considered ``small,'' according to the terms of the
                RFA. As discussed previously, the final rule directly applies to
                covered swap entities (which includes persons registered with the CFTC
                as swap dealers or major swap participants pursuant to the Commodity
                Exchange Act of 1936 and persons registered with the SEC as security-
                based swap dealers and major security-based swap participants under the
                Securities Exchange Act of 1934) that are subject to the requirements
                of the Swap Margin Rule. The FDIC has identified 108 swap dealers and
                major swap participants that, as of February 27, 2020, have registered
                as swap entities.\63\ One of these institutions is supervised by the
                FDIC, however that institution holds in excess of $460 billion in
                assets and does not meet the definition of ``small'' for the purpose of
                RFA.
                ---------------------------------------------------------------------------
                 \62\ FDIC Call Report, December 31, 2019.
                 \63\ While the SEC had adopted a regulation that would require
                registration of security-based swap dealers and major security-based
                swap participants, as of June 28, 2019, there was no date
                established as the compliance date and no SEC-published list of any
                such entities that so registered (see 84 FR 4906 at 4925).
                Accordingly, no security-based swap dealers and no major security-
                based swap participants have been identified as swap entities by the
                FDIC. In identifying the 105 institutions referred to in the text,
                the FDIC used the list of swap dealers set forth, on March 22, 2020
                (providing data as of February 27, 2020) at https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html. Major swap
                participants, among others, are required to apply for registration
                through a filing with the National Futures Association. Accordingly,
                the FDIC reviewed the National Futures Association https://www.nfa.futures.org/members/sd/index.html to determine whether there
                were registered major swap participants. As of March 22, 2020, there
                were no major swap participants listed on this link.
                ---------------------------------------------------------------------------
                 As an amendment to the Swap Margin Rule, the final rule also
                affects counterparties to swaps entered into by covered swap entities.
                However, the Terrorism Risk Insurance Program Reauthorization Act of
                2015 excludes non-cleared swaps entered into for hedging purposes by a
                financial institution with total assets of $10 billion or less from the
                requirements of the Swap Margin Rule. Given this exclusion, a non-
                cleared swap between a covered swap entity and a small FDIC-supervised
                entity that is used to hedge a commercial risk of the small entity will
                not be subject to the Swap Margin Rule. The FDIC believes that it is
                unlikely that any small entity it supervises will engage in non-cleared
                swaps for purposes other than hedging.
                 Given that no FDIC-supervised small entities are covered swap
                entities and that it is unlikely that FDIC-supervised small entities
                enter into non-cleared swaps for purposes other than hedging, this
                final rule is not expected to have a significant economic impact on a
                substantial number of small entities supervised by the FDIC. For these
                reasons, the FDIC certifies that the final rule will not have a
                significant economic impact on a substantial number of small entities,
                within the meaning of those terms as used in the RFA. Accordingly, a
                regulatory flexibility analysis is not required.
                 FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act
                (5 U.S.C. 601 et seq.), FCA hereby certifies that the final rule will
                not have a significant economic impact on a substantial number of small
                entities. Each of the banks in the Farm Credit System, considered
                together with its affiliated associations, has assets and annual income
                in excess of the amounts that would qualify them as small entities; nor
                does the Federal Agricultural Mortgage Corporation meet the definition
                of ``small entity.'' Therefore, Farm Credit System institutions are not
                ``small entities'' as defined in the Regulatory Flexibility Act.
                 FHFA: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.)
                requires that a regulation that has a significant economic impact on a
                substantial number of small entities, small businesses, or small
                organizations must include a final regulatory flexibility analysis
                describing the regulation's impact on small entities. FHFA need not
                undertake such an analysis if the agency has certified the regulation
                will not have a significant economic impact on a substantial number of
                small entities. 5 U.S.C. 605(b). FHFA has considered the impact of the
                final rule under the Regulatory Flexibility Act, and certifies that the
                final rule does not have a significant economic impact on a substantial
                number of small entities because the final rule is applicable only to
                FHFA's regulated entities, which are not small entities for purposes of
                the Regulatory Flexibility Act.
                Unfunded Mandates Reform Act of 1995
                 The OCC has analyzed the final rule under the factors in the
                Unfunded Mandates Reform Act of 1995 (UMRA).\64\ Under this analysis,
                the OCC considered whether the final rule includes a Federal mandate
                that may result in the expenditure by State, local, and tribal
                governments, in the aggregate, or by the private sector, of $100
                million or more in any one year (adjusted annually for inflation). The
                UMRA does not apply to regulations that incorporate requirements
                specifically set forth in law.
                ---------------------------------------------------------------------------
                 \64\ 2 U.S.C. 1531 et seq.
                ---------------------------------------------------------------------------
                 The OCC analyzed the amendments proposed in this final rulemaking
                and has determined that they would not result in expenditures by State,
                local, and Tribal governments, in the aggregate, or by the private
                sector, of $157 million in any one year. Accordingly, the OCC has not
                prepared a written statement under sections 202 and 205.
                Riegle Community Development and Regulatory Improvement Act of 1994
                 Pursuant to section 302(a) of the Riegle Community Development and
                Regulatory Improvement Act (RCDRIA),\65\ in determining the effective
                date and administrative compliance requirements for new regulations
                that impose additional reporting, disclosure, or other requirements on
                insured depository institutions (IDIs), each Federal banking agency
                must consider, consistent with principles of safety and soundness and
                the public interest, any administrative burdens that such regulations
                would place on depository institutions, including small depository
                institutions, and customers of depository institutions, as well as the
                benefits of such regulations. In addition, section 302(b) of RCDRIA
                requires new regulations and amendments to regulations that impose
                additional reporting, disclosures, or other new requirements on IDIs
                generally to take effect on the first day of a calendar quarter that
                begins on or after the date on which the regulations are published in
                final form.\66\
                ---------------------------------------------------------------------------
                 \65\ 12 U.S.C. 4802(a).
                 \66\ 12 U.S.C. 4802.
                ---------------------------------------------------------------------------
                 Each Federal banking agency has determined that the final rule
                would not impose additional reporting, disclosure, or other
                requirements on IDIs; therefore, the requirements of the RCDRIA do not
                apply.
                A. Plain Language
                 Section 722 of the Gramm-Leach-Bliley Act \67\ requires the Federal
                banking agencies to use plain language in all proposed and final rules
                published after January 1, 2000. The agencies have sought to present
                the final rule in a simple and straightforward
                [[Page 39771]]
                manner and did not receive comment on the use of plain language.
                ---------------------------------------------------------------------------
                 \67\ 12 U.S.C. 4809.
                ---------------------------------------------------------------------------
                B. The Congressional Review Act
                 For purposes of Congressional Review Act, the OMB makes a
                determination as to whether a final rule constitutes a ``major''
                rule.\68\ If a rule is deemed a ``major rule'' by the OMB, the
                Congressional Review Act generally provides that the rule may not take
                effect until at least 60 days following its publication.\69\
                ---------------------------------------------------------------------------
                 \68\ 5 U.S.C. 801 et seq.
                 \69\ 5 U.S.C. 801(a)(3).
                ---------------------------------------------------------------------------
                 The Congressional Review Act defines a ``major rule'' as any rule
                that the Administrator of the Office of Information and Regulatory
                Affairs of the OMB finds has resulted in or is likely to result in--(A)
                an annual effect on the economy of $100,000,000 or more; (B) a major
                increase in costs or prices for consumers, individual industries,
                Federal, State, or local government agencies or geographic regions, or
                (C) significant adverse effects on competition, employment, investment,
                productivity, innovation, or on the ability of United States-based
                enterprises to compete with foreign-based enterprises in domestic and
                export markets.\70\ As required by the Congressional Review Act, the
                agencies will submit the final rule and other appropriate reports to
                Congress and the Government Accountability Office for review.
                ---------------------------------------------------------------------------
                 \70\ 5 U.S.C. 804(2).
                ---------------------------------------------------------------------------
                List of Subjects
                12 CFR Part 45
                 Administrative practice and procedure, Capital, Margin
                requirements, National Banks, Federal Savings Associations, Reporting
                and recordkeeping requirements, Risk.
                12 CFR Part 237
                 Administrative practice and procedure, Banks, Banking, Foreign
                Banking, Holding companies, Reporting and recordkeeping requirements,
                Swaps.
                 12 CFR Part 349
                 Administrative practice and procedure, Banks, Banking, Holding
                companies, Capital, Margin requirements, Reporting and recordkeeping
                requirements, Savings associations, Risk, Swaps.
                12 CFR Part 624
                 Accounting, Agriculture, Banks, Banking, Capital, Cooperatives,
                Credit, Margin requirements, Reporting and recordkeeping requirements,
                Risk, Rural areas, Swaps.
                12 CFR Part 1221
                 Government-sponsored enterprises, Mortgages, Securities.
                DEPARTMENT OF THE TREASURY
                Office of the Comptroller of the Currency
                12 CFR Chapter I
                Authority and Issuance
                 For the reasons set forth in the common preamble and under the
                authority of 12 U.S.C. 93a and 5412(b)(2)(B), the Office of the
                Comptroller of the Currency amends part 45 of Title 12, Code of Federal
                Regulations, as follows:
                PART 45--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
                0
                1. The authority citation for part 45 continues to read as follows:
                 Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et seq., 12 U.S.C. 93a,
                161, 481, 1818, 3907, 3909, 5412(b)(2)(B), and 15 U.S.C. 78o-10(e).
                0
                2. Section 45.1 is amended by revising paragraphs (e)(6) and (7) and
                (h) introductory text and adding paragraphs (h)(1) and (3) through (5)
                to read as follows:
                Sec. 45.1 Authority, purpose, scope, exemptions and compliance
                dates.
                * * * * *
                 (e) * * *
                 (6) September 1, 2020, with respect to requirements in Sec. 45.3
                for initial margin for any non-cleared swaps and non-cleared security-
                based swaps, where both:
                 (i) The covered swap entity combined with all its affiliates; and
                 (ii) Its counterparty combined with all its affiliates, have an
                average daily aggregate notional amount of non-cleared swaps, foreign
                exchange forwards and foreign exchange swaps for March, April, and May
                2020 that exceeds $50 billion, where such amounts are calculated only
                for business days; and
                 (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
                of this section, an entity shall count the average daily aggregate
                notional amount of a non-cleared swap, a non-cleared security-based
                swap, a foreign exchange forward or a foreign exchange swap between the
                entity and an affiliate only one time, and shall not count a swap or
                security-based swap that is exempt pursuant to paragraph (d) of this
                section.
                 (7) September 1, 2021, with respect to requirements in Sec. 45.3
                for initial margin for any other covered swap entity with respect to
                non-cleared swaps and non-cleared security-based swaps entered into
                with any other counterparty.
                * * * * *
                 (h) Legacy swaps. Covered swaps entities are required to comply
                with the requirements of this part for non-cleared swaps and non-
                cleared security-based swaps entered into on or after the relevant
                compliance dates for variation margin and for initial margin
                established in paragraph (e) of this section. Any non-cleared swap or
                non-cleared security-based swap entered into before such relevant date
                shall remain outside the scope of this part if amendments are made to
                the non-cleared swap or non-cleared security-based swap by method of
                adherence to a protocol, other amendment of a contract or confirmation,
                or execution of a new contract or confirmation in replacement of and
                immediately upon termination of an existing contract or confirmation,
                as follows:
                 (1) Amendments to the non-cleared swap or non-cleared security-
                based swap solely to comply with the requirements of 12 CFR part 47, 12
                CFR part 252 subpart I, or 12 CFR part 382, as applicable;
                * * * * *
                 (3)(i) Amendments to the non-cleared swap or non-cleared security-
                based swap that are made solely to accommodate the replacement of:
                 (A) An interbank offered rate (IBOR) including, but not limited to,
                the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
                Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
                Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
                Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
                Rate (HIBOR);
                 (B) Any other interest rate that a covered swap entity reasonably
                expects to be replaced or discontinued or reasonably determines has
                lost its relevance as a reliable benchmark due to a significant
                impairment; or
                 (C) Any other interest rate that succeeds a rate referenced in
                paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under
                this paragraph (h)(3)(i)(C) could be one of multiple amendments made
                under this paragraph (h)(3)(i)(C). For example, an amendment could
                replace an IBOR with a temporary interest rate and later replace the
                temporary interest rate with a permanent interest rate.
                [[Page 39772]]
                 (ii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also incorporate
                spreads or other adjustments to the replacement interest rate and make
                other necessary technical changes to operationalize the determination
                of payments or other exchanges of economic value using the replacement
                interest rate, including changes to determination dates, calculation
                agents, and payment dates. The changes may not extend the maturity or
                increase the total effective notional amount of the non-cleared swap or
                non-cleared security-based swap beyond what is necessary to accommodate
                the differences between market conventions for an outgoing interest
                rate and its replacement.
                 (iii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also be
                effectuated through portfolio compression between or among covered swap
                entities and their counterparties. Portfolio compression under this
                paragraph is not subject to the limitations in paragraph (h)(4) of this
                section but any non-cleared swaps or non-cleared security-based swaps
                resulting from the portfolio compression may not have a longer maturity
                or increase the total effective notional amount more than what is
                necessary to accommodate the differences between market conventions for
                an outgoing interest rate and its replacement.
                 (4) Amendments solely to reduce risk or remain risk-neutral through
                portfolio compression between or among covered swap entities and their
                counterparties, as long as any non-cleared swaps or non-cleared
                security-based swaps resulting from the portfolio compression do not:
                 (i) Exceed the sum of the total effective notional amounts of all
                of the swaps that were submitted to the compression exercise that had
                the same or longer remaining maturity as the resulting swap; or
                 (ii) Exceed the longest remaining maturity of all the swaps
                submitted to the compression exercise.
                 (5) The non-cleared swap or non-cleared security-based swap was
                amended solely for one of the following reasons:
                 (i) To reflect technical changes, such as addresses, identities of
                parties for delivery of formal notices, and other administrative or
                operational provisions as long as they do not alter the non-cleared
                swap's or non-cleared security-based swap's underlying asset or
                reference, the remaining maturity, or the total effective notional
                amount; or
                 (ii) To reduce the notional amount, so long as:
                 (A) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                terminated; or
                 (B) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                novated to a third party, who complies with applicable margin rules for
                the novated portion upon the transfer.
                0
                3. Section 45.9 is amended by adding paragraph (h) to read as follows:
                Sec. 45.9 Cross-border application of margin requirements.
                * * * * *
                 (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
                (ii) of this section is not subject to the requirements of Sec.
                45.3(a) or Sec. 45.11(a) for any non-cleared swap or non-cleared
                security-based swap executed with an affiliate of the covered swap
                entity; and
                 (2) For purposes of paragraph (h)(1) of this section, ``affiliate''
                has the same meaning provided in Sec. 45.11(d).
                0
                4. Section 45.10 is amended by revising paragraph (a) to read as
                follows:
                Sec. 45.10 Documentation of margin matters.
                * * * * *
                 (a) Provides the covered swap entity and its counterparty with the
                contractual right to collect and post initial margin and variation
                margin in such amounts, in such form, and under such circumstances as
                are required by this subpart, and at such time as initial margin or
                variation margin is required to be collected or posted under Sec. 45.3
                or Sec. 45.4, as applicable; and
                * * * * *
                0
                5. Section 45.11 is revised to read as follows:
                Sec. 45.11 Special rules for affiliates.
                 (a)(1) A covered swap entity shall calculate on each business day
                an initial margin collection amount for each counterparty that is a
                swap entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity.
                 (2) If the aggregate of all initial margin collection amounts
                calculated under paragraph (a)(1) of this section does not exceed 15
                percent of the covered swap entity's tier 1 capital, the requirements
                for a covered swap entity to collect initial margin under Sec. 45.3(a)
                do not apply with respect to any non-cleared swap or non-cleared
                security-based swap with a counterparty that is an affiliate.
                 (3) On each business day that the aggregate of all initial margin
                collection amounts calculated under paragraph (a)(1) of this section
                exceeds 15 percent of the covered swap entity's tier 1 capital:
                 (i) The covered swap entity shall collect initial margin under
                Sec. 45.3(a) for each additional non-cleared swap and non-cleared
                security-based swap executed that business day with a counterparty that
                is a swap entity or financial end user with a material swaps exposure
                and an affiliate of the covered swap entity, commencing on the day
                after execution and continuing on a daily basis as required under Sec.
                45.3(c), until the earlier of:
                 (A) The termination date of such non-cleared swap or non-cleared
                security-based swap, or
                 (B) The business day on which the aggregate of all initial margin
                collection amounts calculated under Sec. 45.11(a)(1) falls below 15
                percent of the covered swap entity's tier 1 capital;
                 (ii) Notwithstanding Sec. 45.7(b), to the extent the covered swap
                entity collects initial margin pursuant to paragraph (a)(3)(i) of this
                section in the form of collateral other than cash collateral, the
                custodian for such collateral may be the covered swap entity or an
                affiliate of the covered swap entity;
                 (4) For purposes of this paragraph (a), ``tier 1 capital'' means
                the sum of common equity tier 1 capital as defined in 12 CFR 3.20(b)
                and additional tier 1 capital as defined in 12 CFR 3.20(c), as reported
                in the institution's most recent Consolidated Reports of Income and
                Condition (Call Report); and
                 (5) If any subsidiary of the covered swap entity (including a
                subsidiary described in Sec. 45.9(h)) executes any non-cleared swap or
                non-cleared security-based swap with any counterparty that is a swap
                entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity:
                 (i) The covered swap entity shall treat such non-cleared swap or
                security-based swap as its own for purposes of this paragraph (a); and
                 (ii) If the subsidiary is itself a covered swap entity, the
                compliance by its parent covered swap entity with this paragraph (a)(5)
                shall be deemed to establish the subsidiary's compliance with the
                requirements of this paragraph (a) and to exempt the subsidiary from
                the requirements for a covered swap entity to collect initial margin
                under Sec. 45.3(a) from an affiliate.
                 (b) The requirement for a covered swap entity to post initial
                margin under Sec. 45.3(b) does not apply with respect to any non-
                cleared swap or non-cleared security-based swap with a counterparty
                that is an affiliate.
                [[Page 39773]]
                 (c) Section 45.3(d) shall apply to a counterparty that is an
                affiliate in the same manner as it applies to any counterparty that is
                neither a financial end user without a material swap exposure nor a
                swap entity.
                 (d) For purposes of this section:
                 (1) An affiliate means:
                 (i) An affiliate as defined in Sec. 45.2; or
                 (ii) Any company that controls, is controlled by, or is under
                common control with the covered swap entity through the direct or
                indirect exercise of controlling influence over the management or
                policies of the controlled company.
                 (2) A subsidiary means:
                 (i) A subsidiary as defined in Sec. 45.2; or
                 (ii) Any company that is controlled by the covered swap entity
                through the direct or indirect exercise of controlling influence over
                the management or policies of the controlled company.
                BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
                12 CFR Chapter II
                Authority and Issuance
                 For the reasons set forth in the common preamble, the Board of
                Governors of the Federal Reserve System amends 12 CFR part 237 as
                follows:
                PART 237--SWAPS MARGIN AND SWAPS PUSH-OUT (REGULATION KK)
                0
                6. The authority citation for part 237 continues to read as follows:
                 Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 15 U.S.C. 8305,
                12 U.S.C. 221 et seq., 12 U.S.C. 343-350, 12 U.S.C. 1818, 12 U.S.C.
                1841 et seq., 12 U.S.C. 3101 et seq., and 12 U.S.C. 1461 et seq.
                0
                7. Revise the heading of part 237 to read as shown above.
                Subpart A--Margin and Capital Requirements for Covered Swap
                Entities (Regulation KK)
                0
                8. Section 237.1 is amended by revising paragraphs (e)(6) and (7) and
                (h) introductory text and adding paragraphs (h)(1) and (3) through (5)
                to read as follows:
                Sec. 237.1 Authority, purpose, scope, exemptions and compliance
                dates.
                * * * * *
                 (e) * * *
                 (6) September 1, 2020, with respect to requirements in Sec. 237.3
                for initial margin for any non-cleared swaps and non-cleared security-
                based swaps, where both:
                 (i) The covered swap entity combined with all its affiliates; and
                 (ii) Its counterparty combined with all its affiliates, have an
                average daily aggregate notional amount of non-cleared swaps, foreign
                exchange forwards and foreign exchange swaps for March, April, and May
                2020 that exceeds $50 billion, where such amounts are calculated only
                for business days; and
                 (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
                of this section, an entity shall count the average daily aggregate
                notional amount of a non-cleared swap, a non-cleared security-based
                swap, a foreign exchange forward or a foreign exchange swap between the
                entity and an affiliate only one time, and shall not count a swap or
                security-based swap that is exempt pursuant to paragraph (d) of this
                section.
                 (7) September 1, 2021, with respect to requirements in Sec. 237.3
                for initial margin for any other covered swap entity with respect to
                non-cleared swaps and non-cleared security-based swaps entered into
                with any other counterparty.
                * * * * *
                 (h) Legacy swaps. Covered swaps entities are required to comply
                with the requirements of this subpart for non-cleared swaps and non-
                cleared security-based swaps entered into on or after the relevant
                compliance dates for variation margin and for initial margin
                established in paragraph (e) of this section. Any non-cleared swap or
                non-cleared security-based swap entered into before such relevant date
                shall remain outside the scope of this subpart if amendments are made
                to the non-cleared swap or non-cleared security-based swap by method of
                adherence to a protocol, other amendment of a contract or confirmation,
                or execution of a new contract or confirmation in replacement of and
                immediately upon termination of an existing contract or confirmation,
                as follows:
                 (1) Amendments to the non-cleared swap or non-cleared security-
                based swap solely to comply with the requirements of 12 CFR part 47, 12
                CFR part 252 subpart I, or 12 CFR part 382, as applicable;
                * * * * *
                 (3)(i) Amendments to the non-cleared swap or non-cleared security-
                based swap that are made solely to accommodate the replacement of:
                 (A) An interbank offered rate (IBOR) including, but not limited to,
                the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
                Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
                Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
                Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
                Rate (HIBOR);
                 (B) Any other interest rate that a covered swap entity reasonably
                expects to be replaced or discontinued or reasonably determines has
                lost its relevance as a reliable benchmark due to a significant
                impairment; or
                 (C) Any other interest rate that succeeds a rate referenced in
                paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under
                this paragraph (h)(3)(i)(C) could be one of multiple amendments made
                under this paragraph (h)(3)(i)(C). For example, an amendment could
                replace an IBOR with a temporary interest rate and later replace the
                temporary interest rate with a permanent interest rate.
                 (ii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also incorporate
                spreads or other adjustments to the replacement interest rate and make
                other necessary technical changes to operationalize the determination
                of payments or other exchanges of economic value using the replacement
                interest rate, including changes to determination dates, calculation
                agents, and payment dates. The changes may not extend the maturity or
                increase the total effective notional amount of the non-cleared swap or
                non-cleared security-based swap beyond what is necessary to accommodate
                the differences between market conventions for an outgoing interest
                rate and its replacement.
                 (iii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also be
                effectuated through portfolio compression between or among covered swap
                entities and their counterparties. Portfolio compression under this
                paragraph is not subject to the limitations in paragraph (h)(4) of this
                section, but any non-cleared swaps or non-cleared security-based swaps
                resulting from the portfolio compression may not have a longer maturity
                or increase the total effective notional amount more than what is
                necessary to accommodate the differences between market conventions for
                an outgoing interest rate and its replacement.
                 (4) Amendments solely to reduce risk or remain risk-neutral through
                portfolio compression between or among covered swap entities and their
                counterparties, as long as any non-cleared swaps or non-cleared
                security-based swaps resulting from the portfolio compression do not:
                 (i) Exceed the sum of the total effective notional amounts of all
                of the
                [[Page 39774]]
                swaps that were submitted to the compression exercise that had the same
                or longer remaining maturity as the resulting swap; or
                 (ii) Exceed the longest remaining maturity of all the swaps
                submitted to the compression exercise.
                 (5) The non-cleared swap or non-cleared security-based swap was
                amended solely for one of the following reasons:
                 (i) To reflect technical changes, such as addresses, identities of
                parties for delivery of formal notices, and other administrative or
                operational provisions as long as they do not alter the non-cleared
                swap's or non-cleared security-based swap's underlying asset or
                reference, the remaining maturity, or the total effective notional
                amount; or
                 (ii) To reduce the notional amount, so long as:
                 (A) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                terminated; or
                 (B) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                novated to a third party, who complies with applicable margin rules for
                the novated portion upon the transfer.
                0
                9. Section 237.9 is amended by adding paragraph (h) to read as follows:
                Sec. 237.9 Cross-border application of margin requirements.
                * * * * *
                 (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
                (ii) of this section is not subject to the requirements of Sec.
                237.3(a) or Sec. 237.11(a) for any non-cleared swap or non-cleared
                security-based swap executed with an affiliate of the covered swap
                entity; and
                 (2) For purposes of paragraph (h)(1) of this section, ``affiliate''
                has the same meaning provided in 12 CFR 237.11(d).
                0
                10. Section 237.10 is amended by revising paragraph (a) to read as
                follows:
                Sec. 237.10 Documentation of margin matters.
                * * * * *
                 (a) Provides the covered swap entity and its counterparty with the
                contractual right to collect and post initial margin and variation
                margin in such amounts, in such form, and under such circumstances as
                are required by this subpart, and at such time as initial margin or
                variation margin is required to be collected or posted under Sec.
                237.3 or Sec. 237.4, as applicable; and
                * * * * *
                0
                11. Section 237.11 is revised to read as follows:
                Sec. 237.11 Special rules for affiliates.
                 (a)(1) A covered swap entity shall calculate on each business day
                an initial margin collection amount for each counterparty that is a
                swap entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity.
                 (2) If the aggregate of all initial margin collection amounts
                calculated under paragraph (a)(1) of this section does not exceed 15
                percent of the covered swap entity's tier 1 capital, the requirements
                for a covered swap entity to collect initial margin under Sec.
                237.3(a) do not apply with respect to any non-cleared swap or non-
                cleared security-based swap with a counterparty that is an affiliate.
                 (3) On each business day that the aggregate of all initial margin
                collection amounts calculated under paragraph (a)(1) of this section
                exceeds 15 percent of the covered swap entity's tier 1 capital:
                 (i) The covered swap entity shall collect initial margin under
                Sec. 237.3(a) for each additional non-cleared swap and non-cleared
                security-based swap executed that business day with a counterparty that
                is a swap entity or financial end user with a material swaps exposure
                and an affiliate of the covered swap entity, commencing on the day
                after execution and continuing on a daily basis as required under Sec.
                237.3(c), until the earlier of:
                 (A) The termination date of such non-cleared swap or non-cleared
                security-based swap, or
                 (B) The business day on which the aggregate of all initial margin
                collection amounts calculated under paragraph (a)(1) of this section
                falls below 15 percent of the covered swap entity's tier 1 capital;
                 (ii) Notwithstanding Sec. 237.7(b), to the extent the covered swap
                entity collects initial margin pursuant to paragraph (a)(3)(i) of this
                section in the form of collateral other than cash collateral, the
                custodian for such collateral may be the covered swap entity or an
                affiliate of the covered swap entity; and
                 (4) For purposes of this paragraph (a), ``tier 1 capital'' means
                the sum of common equity tier 1 capital as defined in 12 CFR 217.20(b)
                and additional tier 1 capital as defined in 12 CFR 217.20(c), as
                reported in the institution's most recent Consolidated Reports of
                Income and Condition (Call Report).
                 (5) If any subsidiary of the covered swap entity (including a
                subsidiary described in Sec. 237.9(h)) executes any non-cleared swap
                or non-cleared security-based swap with any counterparty that is a swap
                entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity:
                 (i) The covered swap entity shall treat such non-cleared swap or
                security-based swap as its own for purposes of this paragraph (a); and
                 (ii) If the subsidiary is itself a covered swap entity, the
                compliance by its parent affiliated covered swap entity with this
                paragraph (a)(5) shall be deemed to establish the subsidiary's
                compliance with the requirements of this paragraph (a) and to exempt
                the subsidiary from the requirements for a covered swap entity to
                collect initial margin under Sec. 237.3(a) from an affiliate.
                 (b) The requirement for a covered swap entity to post initial
                margin under Sec. 237.3(b) does not apply with respect to any non-
                cleared swap or non-cleared security-based swap with a counterparty
                that is an affiliate.
                 (c) Section 237.3(d) shall apply to a counterparty that is an
                affiliate in the same manner as it applies to any counterparty that is
                neither a financial end user without a material swap exposure nor a
                swap entity.
                 (d) For purposes of this section,
                 (1) An affiliate means:
                 (i) An affiliate as defined in Sec. 237.2; or
                 (ii) Any company that controls, is controlled by, or is under
                common control with the covered swap entity through the direct or
                indirect exercise of controlling influence over the management or
                policies of the controlled company.
                 (2) A subsidiary means:
                 (i) A subsidiary as defined in Sec. 237.2; or
                 (ii) Any company that is controlled by the covered swap entity
                through the direct or indirect exercise of controlling influence over
                the management or policies of the controlled company.
                FEDERAL DEPOSIT INSURANCE CORPORATION
                12 CFR Chapter III
                Authority and Issuance
                 For the reasons set forth in the Supplementary Information section,
                the Federal Deposit Insurance Corporation amends 12 CFR chapter III as
                follows:
                PART 349--DERIVATIVES
                Subpart A--Margin and Capital Requirements for Covered Swap Entries
                0
                12. The authority citation for subpart A of part 349 continues to read
                as follows:
                 Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), and 12 U.S.C.
                1818 and 12 U.S.C.
                [[Page 39775]]
                1819(a)(Tenth), 12 U.S.C. 1813(q), 1818, 1819, and 3108.
                0
                13. Section 349.1 is amended by revising paragraphs (e)(6) and (7) and
                (h) introductory text, and adding paragraphs (h)(1) and (3) through (5)
                to read as follows:
                Sec. 349.1 Authority, purpose, scope, exemptions and compliance
                dates.
                * * * * *
                 (e) * * *
                 (6) September 1, 2020, with respect to requirements in Sec. 349.3
                for initial margin for any non-cleared swaps and non-cleared security-
                based swaps, where both:
                 (i) The covered swap entity combined with all its affiliates; and
                 (ii) Its counterparty combined with all its affiliates, have an
                average daily aggregate notional amount of non-cleared swaps, foreign
                exchange forwards and foreign exchange swaps for March, April, and May
                2020 that exceeds $50 billion, where such amounts are calculated only
                for business days; and
                 (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
                of this section, an entity shall count the average daily aggregate
                notional amount of a non-cleared swap, a non-cleared security-based
                swap, a foreign exchange forward or a foreign exchange swap between the
                entity and an affiliate only one time, and shall not count a swap or
                security-based swap that is exempt pursuant to paragraph (d) of this
                section.
                 (7) September 1, 2021, with respect to requirements in Sec. 349.3
                for initial margin for any other covered swap entity with respect to
                non-cleared swaps and non-cleared security-based swaps entered into
                with any other counterparty.
                * * * * *
                 (h) Legacy swaps. Covered swaps entities are required to comply
                with the requirements of this subpart for non-cleared swaps and non-
                cleared security-based swaps entered into on or after the relevant
                compliance dates for variation margin and for initial margin
                established in paragraph (e) of this section. Any non-cleared swap or
                non-cleared security-based swap entered into before such relevant date
                shall remain outside the scope of this subpart if amendments are made
                to the non-cleared swap or non-cleared security-based swap by method of
                adherence to a protocol, other amendment of a contract or confirmation,
                or execution of a new contract or confirmation in replacement of and
                immediately upon termination of an existing contract or confirmation,
                as follows:
                 (1) Amendments to the non-cleared swap or non-cleared security-
                based swap solely to comply with the requirements of 12 CFR part 47, 12
                CFR part 252 subpart I, or 12 CFR part 382, as applicable;
                * * * * *
                 (3)(i) Amendments to the non-cleared swap or non-cleared security-
                based swap that are made solely to accommodate the replacement of:
                 (A) An interbank offered rate (IBOR) including, but not limited to,
                the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
                Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
                Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
                Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
                Rate (HIBOR);
                 (B) Any other interest rate that a covered swap entity reasonably
                expects to be replaced or discontinued or reasonably determines has
                lost its relevance as a reliable benchmark due to a significant
                impairment; or
                 (C) Any other interest rate that succeeds a rate referenced in
                paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under
                this paragraph (h)(3)(i)(C) could be one of multiple amendments made
                under this paragraph (h)(3)(i)(C). For example, an amendment could
                replace an IBOR with a temporary interest rate and later replace the
                temporary interest rate with a permanent interest rate.
                 (ii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also incorporate
                spreads or other adjustments to the replacement interest rate and make
                other necessary technical changes to operationalize the determination
                of payments or other exchanges of economic value using the replacement
                interest rate, including changes to determination dates, calculation
                agents, and payment dates. The changes may not have a longer maturity
                or increase the total effective notional amount of the non-cleared swap
                or non-cleared security-based swap beyond what is necessary to
                accommodate the differences between market conventions for an outgoing
                interest rate and its replacement.
                 (iii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also be
                effectuated through portfolio compression between or among covered swap
                entities and their counterparties. Portfolio compression under this
                paragraph is not subject to the limitations in paragraph (h)(4) of this
                section, but any non-cleared swap[s] or non-cleared security-based
                swaps resulting from the portfolio compression may not extend the
                maturity or increase the total effective notional amount more than what
                is necessary to accommodate the differences between market conventions
                for an outgoing interest rate and its replacement.
                 (4) Amendments solely to reduce risk or remain risk-neutral through
                portfolio compression between or among covered swap entities and their
                counterparties, as long as any non-cleared swaps or non-cleared
                security-based swaps resulting from the portfolio compression do not:
                 (i) Exceed the sum of the total effective notional amounts of all
                of the swaps that were submitted to the compression exercise that had
                the same or longer remaining maturity as the resulting swap; or
                 (ii) Exceed the longest remaining maturity of all the swaps
                submitted to the compression exercise.
                 (5) The non-cleared swap or non-cleared security-based swap was
                amended solely for one of the following reasons:
                 (i) To reflect technical changes, such as addresses, identities of
                parties for delivery of formal notices, and other administrative or
                operational provisions as long as they do not alter the non-cleared
                swap's or non-cleared security-based swap's underlying asset or
                reference, the remaining maturity, or the total effective notional
                amount; or
                 (ii) To reduce the notional amount, so long as:
                 (A) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                terminated; or
                 (B) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                novated to a third party, who complies with applicable margin rules for
                the novated portion upon the transfer.
                0
                14. Section 349.9 is amended by adding paragraph (h) to read as
                follows:
                Sec. 349.9 Cross-border application of margin requirements.
                * * * * *
                 (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
                (ii) is not subject to the requirements of Sec. 349.3(a) or Sec.
                349.11 for any non-cleared swap or non-cleared security-based swap
                executed with an affiliate of the covered swap entity; and
                 (2) For purposes of paragraph (h)(1) of this section, ``affiliate''
                has the same meaning provided in Sec. 349.11(d).
                0
                15. Section 349.10 is amended by revising paragraph (a) to read as
                follows:
                [[Page 39776]]
                Sec. 349.10 Documentation of margin matters.
                * * * * *
                 (a) Provides the covered swap entity and its counterparty with the
                contractual right to collect and post initial margin and variation
                margin in such amounts, in such form, and under such circumstances as
                are required by this subpart, and at such time as initial margin or
                variation margin is required to be collected or posted under Sec.
                349.3 or Sec. 349.4, as applicable; and
                * * * * *
                0
                16. Section 349.11 is revised to read as follows:
                Sec. 349.11 Special rules for affiliates.
                 (a)(1) A covered swap entity shall calculate on each business day
                an initial margin collection amount for each counterparty that is a
                swap entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity.
                 (2) If the aggregate of all initial margin collection amounts
                calculated under paragraph (a)(1) of this section does not exceed 15
                percent of the covered swap entity's tier 1 capital, the requirements
                for a covered swap entity to collect initial margin under Sec.
                349.3(a) do not apply with respect to any non-cleared swap or non-
                cleared security-based swap with a counterparty that is an affiliate.
                 (3) On each business day that the aggregate of all initial margin
                collection amounts calculated under paragraph (a)(1) of this section
                exceeds 15 percent of the covered swap entity's tier 1 capital:
                 (i) The covered swap entity shall collect initial margin under
                Sec. 349.3(a) for each additional non-cleared swap and non-cleared
                security-based swap executed that business day with a counterparty that
                is a swap entity or financial end user with a material swaps exposure
                and an affiliate of the covered swap entity, commencing on the day
                after execution and continuing on a daily basis as required under Sec.
                45.3(c), until the earlier of:
                 (A) The termination date of such non-cleared swap or non-cleared
                security-based swap, or
                 (B) The business day on which the aggregate of all initial margin
                collection amounts calculated under paragraph (a)(1) of this section
                falls below 15 percent of the covered swap entity's tier 1 capital;
                 (ii) Notwithstanding Sec. 349.7(b), to the extent the covered swap
                entity collects initial margin pursuant to paragraph (a)(3)(i) of this
                section in the form of collateral other than cash collateral, the
                custodian for such collateral may be the covered swap entity or an
                affiliate of the covered swap entity;
                 (4) For purposes of this paragraph (a), ``tier 1 capital'' means
                the sum of common equity tier 1 capital as defined in 12 CFR 324.20(b)
                and additional tier 1 capital as defined in 12 CFR 324.20(c), as
                reported in the institution's most recent Consolidated Reports of
                Income and Condition (Call Report); and
                 (5) If any subsidiary of the covered swap entity (including a
                subsidiary described in Sec. 349.9(h)) executes any non-cleared swap
                or non-cleared security-based swap with any counterparty that is a swap
                entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity:
                 (i) The covered swap entity shall treat such non-cleared swap or
                security-based swap as its own for purposes of this paragraph (a); and
                 (ii) If the subsidiary is itself a covered swap entity, the
                compliance by its parent covered swap entity with this paragraph (a)(5)
                shall be deemed to establish the subsidiary's compliance with the
                requirements of this paragraph (a) and to exempt the subsidiary from
                the requirements for a covered swap entity to collect initial margin
                under Sec. 349.3(a) from an affiliate.
                 (b) The requirement for a covered swap entity to post initial
                margin under Sec. 349.3(b) does not apply with respect to any non-
                cleared swap or non-cleared security-based swap with a counterparty
                that is an affiliate.
                 (c) Section 349.3(d) shall apply to a counterparty that is an
                affiliate in the same manner as it applies to any counterparty that is
                neither a financial end user without a material swap exposure nor a
                swap entity.
                 (d) For purposes of this section:
                 (1) An affiliate means:
                 (i) An affiliate as defined in Sec. 349.2; or
                 (ii) Any company that controls, is controlled by, or is under
                common control with the covered swap entity through the direct or
                indirect exercise of controlling influence over the management or
                policies of the controlled company.
                 (2) A subsidiary means:
                 (i) A subsidiary as defined in Sec. 349.2; or
                 (ii) Any company that is controlled by the covered swap entity
                through the direct or indirect exercise of controlling influence over
                the management or policies of the controlled company.
                FARM CREDIT ADMINISTRATION
                12 CFR Chapter VI
                Authority and Issuance
                 For the reasons set forth in the preamble, the Farm Credit
                Administration amends chapter VI of title 12, Code of Federal
                Regulations, as follows:
                PART 624--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
                0
                17. The authority citation for part 624 continues to read as follows:
                 Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 2154,
                12 U.S.C. 2243, 12 U.S.C. 2252, 12 U.S.C. 2279bb-1.
                0
                18. Section 624.1 is amended by revising paragraphs (e)(6) and (7) and
                (h) introductory text and adding paragraphs (h)(1) and (3) through (5)
                to read as follows:
                Sec. 624.1 Authority, purpose, scope, exemptions and compliance
                dates.
                * * * * *
                 (e) * * *
                 (6) September 1, 2020, with respect to requirements in Sec. 624.3
                for initial margin for any non-cleared swaps and non-cleared security-
                based swaps, where both:
                 (i) The covered swap entity combined with all its affiliates; and
                 (ii) Its counterparty combined with all its affiliates, have an
                average daily aggregate notional amount of non-cleared swaps, foreign
                exchange forwards and foreign exchange swaps for March, April, and May
                2020 that exceeds $50 billion, where such amounts are calculated only
                for business days; and
                 (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
                of this section, an entity shall count the average daily aggregate
                notional amount of a non-cleared swap, a non-cleared security-based
                swap, a foreign exchange forward or a foreign exchange swap between the
                entity and an affiliate only one time, and shall not count a swap or
                security-based swap that is exempt pursuant to paragraph (d) of this
                section.
                 (7) September 1, 2021, with respect to requirements in Sec. 624.3
                for initial margin for any other covered swap entity with respect to
                non-cleared swaps and non-cleared security-based swaps entered into
                with any other counterparty.
                * * * * *
                 (h) Legacy swaps. Covered swaps entities are required to comply
                with the requirements of this subpart for non-cleared swaps and non-
                cleared security-
                [[Page 39777]]
                based swaps entered into on or after the relevant compliance dates for
                variation margin and for initial margin established in paragraph (e) of
                this section. Any non-cleared swap or non-cleared security-based swap
                entered into before such relevant date shall remain outside the scope
                of this subpart if amendments are made to the non-cleared swap or non-
                cleared security-based swap by method of adherence to a protocol, other
                amendment of a contract or confirmation, or execution of a new contract
                or confirmation in replacement of and immediately upon termination of
                an existing contract or confirmation, as follows:
                 (1) Amendments to the non-cleared swap or non-cleared security-
                based swap solely to comply with the requirements of 12 CFR part 47, 12
                CFR part 252 subpart I, or 12 CFR part 382, as applicable;
                * * * * *
                 (3)(i) Amendments to the non-cleared swap or non-cleared security-
                based swap that are made solely to accommodate the replacement of:
                 (A) An interbank offered rate (IBOR) including, but not limited to,
                the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
                Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
                Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
                Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
                Rate (HIBOR);
                 (B) Any other interest rate that a covered swap entity reasonably
                expects to be replaced or discontinued or reasonably determines has
                lost its relevance as a reliable benchmark due to a significant
                impairment; or
                 (C) Any other interest rate that succeeds a rate referenced in
                paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under
                this paragraph (h)(3)(i)(C) could be one of multiple amendments made
                under this paragraph (h)(3)(i)(C). For example, an amendment could
                replace an IBOR with a temporary interest rate and later replace the
                temporary interest rate with a permanent interest rate.
                 (ii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also incorporate
                spreads or other adjustments to the replacement interest rate and make
                other necessary technical changes to operationalize the determination
                of payments or other exchanges of economic value using the replacement
                interest rate, including changes to determination dates, calculation
                agents, and payment dates. The changes may not extend the maturity or
                increase the total effective notional amount of the non-cleared swap or
                non-cleared security-based swap beyond what is necessary to accommodate
                the differences between market conventions for an outgoing interest
                rate and its replacement.
                 (iii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also be
                effectuated through portfolio compression between or among covered swap
                entities and their counterparties. Portfolio compression under this
                paragraph is not subject to the limitations in paragraph (h)(4) of this
                section, but any non-cleared swap[s] or non-cleared security-based
                swaps resulting from the portfolio compression may not extend the
                maturity or increase the total effective notional amount more than what
                is necessary to accommodate the differences between market conventions
                for an outgoing interest rate and its replacement.
                 (4) Amendments solely to reduce risk or remain risk-neutral through
                portfolio compression between or among covered swap entities and their
                counterparties, as long as any non-cleared swaps or non-cleared
                security-based swaps resulting from the portfolio compression do not:
                 (i) Exceed the sum of the total effective notional amounts of all
                of the swaps that were submitted to the compression exercise that had
                the same or longer remaining maturity as the resulting swap; or
                 (ii) Exceed the longest remaining maturity of all the swaps
                submitted to the compression exercise.
                 (5) The non-cleared swap or non-cleared security-based swap was
                amended solely for one of the following reasons:
                 (i) To reflect technical changes, such as addresses, identities of
                parties for delivery of formal notices, and other administrative or
                operational provisions as long as they do not alter the non-cleared
                swap's or non-cleared security-based swap's underlying asset or
                reference, the remaining maturity, or the total effective notional
                amount; or
                 (ii) To reduce the notional amount, so long as:
                 (A) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                terminated; or
                 (B) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                novated to a third party, who complies with applicable margin rules for
                the novated portion upon the transfer.
                0
                19. Section 624.9 is amended by adding paragraph (h) to read as
                follows:
                Sec. 624.9 Cross-Border application of margin requirements.
                * * * * *
                 (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
                (ii) of this section is not subject to the requirements of Sec.
                624.3(a) or Sec. 624.11(a) for any non-cleared swap or non-cleared
                security-based swap executed with an affiliate of the covered swap
                entity; and
                 (2) For purposes of paragraph (h)(1) of this section, ``affiliate''
                has the same meaning provided in Sec. 624.11(d).
                0
                20. Section 624.10 is amended by revising paragraph (a) to read as
                follows:
                Sec. 624.10 Documentation of margin matters.
                * * * * *
                 (a) Provides the covered swap entity and its counterparty with the
                contractual right to collect and post initial margin and variation
                margin in such amounts, in such form, and under such circumstances as
                are required by this subpart, and at such time as initial margin or
                variation margin is required to be collected or posted under Sec.
                624.3 or Sec. 624.4, as applicable; and
                * * * * *
                0
                21. Section 624.11 is revised to read as follows:
                Sec. 624.11 Special rules for affiliates.
                 (a)(1) A covered swap entity shall calculate on each business day
                an initial margin collection amount for each counterparty that is a
                swap entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity.
                 (2) If the aggregate of all initial margin collection amounts
                calculated under paragraph (a)(1) of this section does not exceed 15
                percent of the covered swap entity's tier 1 capital, the requirements
                for a covered swap entity to collect initial margin under Sec.
                624.3(a) do not apply with respect to any non-cleared swap or non-
                cleared security-based swap with a counterparty that is an affiliate.
                 (3) On each business day that the aggregate of all initial margin
                collection amounts calculated under paragraph (a)(1) of this section
                exceeds 15 percent of the covered swap entity's tier 1 capital:
                 (i) The covered swap entity shall collect initial margin under
                Sec. 624.3(a) for each additional non-cleared swap and non-cleared
                security-based swap executed that business day with a counterparty that
                is a swap entity or financial end user with a material swaps exposure
                and an affiliate of the covered
                [[Page 39778]]
                swap entity, commencing on the day after execution and continuing on a
                daily basis as required under Sec. 624.3(c), until the earlier of;
                 (A) The termination date of such non-cleared swap or non-cleared
                security-based swap, or
                 (B) The business day on which the aggregate of all initial margin
                collection amounts calculated under paragraph (a)(1) of this section
                falls below 15 percent of the covered swap entity's tier 1 capital;
                 (ii) Notwithstanding Sec. 624.7(b), to the extent the covered swap
                entity collects initial margin pursuant to paragraph (a)(3)(i) of this
                section in the form of collateral other than cash collateral, the
                custodian for such collateral may be the covered swap entity or an
                affiliate of the covered swap entity; and
                 (4) For purposes of this paragraph (a), ``tier 1 capital'' means:
                 (i) For Farm Credit System banks and associations, the sum of
                common equity tier 1 capital as defined in 12 CFR 628.20(b) and
                additional tier 1 capital as defined in 12 CFR 628.20(c), and as
                reported in the institution's most recent Uniform Reports of Financial
                Condition and Performance (Call Report); or
                 (ii) For the Federal Agricultural Mortgage Corporation, as defined
                and required in in 12 CFR 652.61, and as reported in the institution's
                most recent Call Report.
                 (5) If any subsidiary of the covered swap entity (including a
                subsidiary described in Sec. 624.9(h)) executes any non-cleared swap
                or non-cleared security-based swap with any counterparty that is a swap
                entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity:
                 (i) The covered swap entity shall treat such non-cleared swap or
                security-based swap as its own for purposes of this paragraph (a); and
                 (ii) If the subsidiary is itself a covered swap entity, the
                compliance by its parent covered swap entity with this paragraph (a)(5)
                shall be deemed to establish the subsidiary's compliance with the
                requirements of Sec. 624.11(a) and to exempt the subsidiary from the
                requirements for a covered swap entity to collect initial margin under
                Sec. 624.3(a) from an affiliate.
                 (b) The requirement for a covered swap entity to post initial
                margin under Sec. 624.3(b) does not apply with respect to any non-
                cleared swap or non-cleared security-based swap with a counterparty
                that is an affiliate.
                 (c) Section 624.3(d) shall apply to a counterparty that is an
                affiliate in the same manner as it applies to any counterparty that is
                neither a financial end user without a material swap exposure nor a
                swap entity.
                 (d) For purposes of this section:
                 (1) An affiliate means:
                 (i) An affiliate as defined in Sec. 624.2; or
                 (ii) Any company that controls, is controlled by, or is under
                common control with the covered swap entity through the direct or
                indirect exercise of controlling influence over the management or
                policies of the controlled company.
                 (2) A subsidiary means:
                 (i) A subsidiary as defined in Sec. 624.2; or
                 (ii) Any company that is controlled by the covered swap entity
                through the direct or indirect exercise of controlling influence over
                the management or policies of the controlled company.
                FEDERAL HOUSING FINANCE AGENCY
                12 CFR Chapter XII
                Authority and Issuance
                 For the reasons set forth in the preamble, the Federal Housing
                Finance Agency amends chapter XII of title 12, Code of Federal
                Regulations, as follows:
                PART 1221--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP
                ENTITIES
                0
                22. The authority citation for part 1221 continues to read as follows:
                 Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 4513,
                and 12 U.S.C. 4526(a).
                0
                23. Section 1221.1 is amended by revising paragraphs (e)(6) and (7) and
                (h) introductory text and adding paragraphs (h)(1) and (3) through (5)
                to read as follows:
                Sec. 1221.1 Authority, purpose, scope, exemptions and compliance
                dates.
                * * * * *
                 (e) * * *
                 (6) September 1, 2020, with respect to the requirements in Sec.
                1221.3 for initial margin for any non-cleared swaps and non-cleared
                security-based swaps, where both:
                 (i) The covered swap entity combined with all its affiliates; and
                 (ii) Its counterparty combined with all its affiliates, have an
                average daily aggregate notional amount of non-cleared swaps, foreign
                exchange forwards and foreign exchange swaps for March, April, and May
                2020 that exceeds $50 billion, where such amounts are calculated only
                for business days; and
                 (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
                of this section, an entity shall count the average daily aggregate
                notional amount of a non-cleared swap, a non-cleared security-based
                swap, a foreign exchange forward or a foreign exchange swap between the
                entity and an affiliate only one time, and shall not count a swap or
                security-based swap that is exempt pursuant to paragraph (d) of this
                section.
                 (7) September 1, 2021, with respect to requirements in Sec. 1221.3
                for initial margin for any other covered swap entity with respect to
                non-cleared swaps and non-cleared security-based swaps entered into
                with any other counterparty.
                * * * * *
                 (h) Legacy swaps. Covered swaps entities are required to comply
                with the requirements of this part for non-cleared swaps and non-
                cleared security-based swaps entered into on or after the relevant
                compliance dates for variation margin and for initial margin
                established in paragraph (e) of this section. Any non-cleared swap or
                non-cleared security-based swap entered into before such relevant date
                shall remain outside the scope of this part if amendments are made to
                the non-cleared swap or non-cleared security-based swap by method of
                adherence to a protocol, other amendment of a contract or confirmation,
                or execution of a new contract or confirmation in replacement of and
                immediately upon termination of an existing contract or confirmation,
                as follows:
                 (1) Amendments to the non-cleared swap or non-cleared security-
                based swap solely to comply with the requirements of 12 CFR part 47, 12
                CFR part 252 subpart I, or 12 CFR part 382, as applicable;
                * * * * *
                 (3)(i) Amendments to the non-cleared swap or non-cleared security-
                based swap that are made solely to accommodate the replacement of:
                 (A) An interbank offered rate (IBOR) including, but not limited to,
                the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
                Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
                Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), the Euro
                Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
                Rate (HIBOR);
                 (B) Any other interest rate that a covered swap entity reasonably
                expects to be replaced or discontinued or reasonably determines has
                lost its relevance as a reliable benchmark due to a significant
                impairment; or
                 (C) Any other interest rate that succeeds a rate referenced in
                paragraph
                [[Page 39779]]
                (h)(3)(i)(A) or (B) of this section. An amendment made under this
                paragraph (h)(3)(i)(C) could be one of multiple amendments made under
                this paragraph (h)(3)(i)(C). For example, an amendment could replace an
                IBOR with a temporary interest rate and later replace the temporary
                interest rate with a permanent interest rate.
                 (ii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also incorporate
                spreads or other adjustments to the replacement interest rate and make
                other necessary technical changes to operationalize the determination
                of payments or other exchanges of economic value using the replacement
                interest rate, including changes to determination dates, calculation
                agents, and payment dates. The changes may not have a longer maturity
                or increase the total effective notional amount of the non-cleared swap
                or non-cleared security-based swap beyond what is necessary to
                accommodate the differences between market conventions for an outgoing
                interest rate and its replacement.
                 (iii) Amendments to accommodate replacement of an interest rate
                described in paragraph (h)(3)(i) of this section may also be
                effectuated through portfolio compression between or among covered swap
                entities and their counterparties. Portfolio compression under this
                paragraph (h)(3)(iii) is not subject to the limitations in paragraph
                (h)(4) of this section, but any non-cleared swap[s] or non-cleared
                security-based swaps resulting from the portfolio compression may not
                have a longer maturity or increase the total effective notional amount
                more than what is necessary to accommodate the differences between
                market conventions for an outgoing interest rate and its replacement.
                 (4) Amendments solely to reduce risk or remain risk-neutral through
                portfolio compression between or among covered swap entities and their
                counterparties, as long as any non-cleared swaps or non-cleared
                security-based swaps resulting from the portfolio compression do not:
                 (i) Exceed the sum of the total effective notional amounts of all
                of the swaps that were submitted to the compression exercise that had
                the same or longer remaining maturity as the resulting swap; or
                 (ii) Exceed the longest remaining maturity of all the swaps
                submitted to the compression exercise.
                 (5) The non-cleared swap or non-cleared security-based swap was
                amended solely for one of the following reasons:
                 (i) To reflect technical changes, such as addresses, identities of
                parties for delivery of formal notices, and other administrative or
                operational provisions as long as they do not alter the non-cleared
                swap's or non-cleared security-based swap's underlying asset or
                reference, the remaining maturity, or the total effective notional
                amount; or
                 (ii) To reduce the notional amount, so long as:
                 (A) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                terminated; or
                 (B) All payment obligations attached to the total effective
                notional amount being eliminated as a result of the amendment are fully
                novated to a third party, who complies with applicable margin rules for
                the novated portion upon the transfer.
                0
                24. Section 1221.9 is amended by adding paragraph (h) to read as
                follows:
                Sec. 1221.9 Cross-Border application of margin requirements.
                * * * * *
                 (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
                (ii) of this section is not subject to the requirements of Sec.
                1221.3(a) or Sec. 1221.11(a) for any non-cleared swap or non-cleared
                security-based swap executed with an affiliate of the covered swap
                entity; and
                 (2) For purposes of paragraph (h)(1) of this section, ``affiliate''
                has the same meaning provided in Sec. 1221.11(d).
                0
                25. In Sec. 1221.10 revise paragraph (a) to read as follows:
                Sec. 1221.10 Documentation of margin matters.
                * * * * *
                 (a) Provides the covered swap entity and its counterparty with the
                contractual right to collect and post initial margin and variation
                margin in such amounts, in such form, and under such circumstances as
                are required by this part, and at such time as initial margin or
                variation margin is required to be collected or posted under Sec.
                1221.3 or Sec. 1221.4, as applicable; and
                * * * * *
                0
                26. Section 1221.11 is revised to read as follows:
                Sec. 1221.11 Special rules for affiliates.
                 (a)(1) A covered swap entity shall calculate on each business day
                an initial margin collection amount for each counterparty that is a
                swap entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity.
                 (2) If the aggregate of all initial margin collection amounts
                calculated under paragraph (a)(1) of this section does not exceed 15
                percent of the covered swap entity's tier 1 capital, the requirements
                for a covered swap entity to collect initial margin under Sec.
                1221.3(a) do not apply with respect to any non-cleared swap or non-
                cleared security-based swap with a counterparty that is an affiliate.
                 (3) On each business day that the aggregate of all initial margin
                collection amounts calculated under paragraph (a)(1) of this section
                exceeds 15 percent of the covered swap entity's tier 1 capital:
                 (i) The covered swap entity shall collect initial margin under
                Sec. 1221.3(a) for each additional non-cleared swap and non-cleared
                security-based swap executed that business day with a counterparty that
                is a swap entity or financial end user with a material swaps exposure
                and an affiliate of the covered swap entity, commencing on the day
                after execution and continuing on a daily basis as required under Sec.
                1221.3(c), until the earlier of;
                 (A) The termination date of such non-cleared swap or non-cleared
                security-based swap, or
                 (B) The business day on which the aggregate of all initial margin
                collection amounts calculated under paragraph (a)(1) of this section
                falls below 15 percent of the covered swap entity's tier 1 capital;
                 (ii) Notwithstanding Sec. 1221.7(b), to the extent the covered
                swap entity collects initial margin pursuant to paragraph (a)(3)(i) of
                this section in the form of collateral other than cash collateral, the
                custodian for such collateral may be the covered swap entity or an
                affiliate of the covered swap entity; and
                 (4) For purposes of paragraph (a) of this section, ``tier 1
                capital'' means:
                 (i) The sum of common equity tier 1 capital as defined in 12 CFR
                1240.20(b) and additional tier 1 capital as defined in 12 CFR
                1240.20(c).
                 (5) If any subsidiary of the covered swap entity (including a
                subsidiary described in Sec. 1221.9(h)) executes any non-cleared swap
                or non-cleared security-based swap with any counterparty that is a swap
                entity or financial end user with a material swaps exposure and an
                affiliate of the covered swap entity;
                 (i) The covered swap entity shall treat such non-cleared swap or
                security-based swap as its own for purposes of this paragraph (a); and
                 (ii) If the subsidiary is itself a covered swap entity, the
                compliance by its parent covered swap entity with this paragraph (a)(5)
                shall be deemed to establish the subsidiary's compliance
                [[Page 39780]]
                with the requirements of this paragraph (a) and to exempt the
                subsidiary from the requirements for a covered swap entity to collect
                initial margin under Sec. 1221.3(a) from an affiliate.
                 (b) The requirement for a covered swap entity to post initial
                margin under Sec. 1221.3(b) does not apply with respect to any non-
                cleared swap or non-cleared security-based swap with a counterparty
                that is an affiliate.
                 (c) Section 1221.3(d) shall apply to a counterparty that is an
                affiliate in the same manner as it applies to any counterparty that is
                neither a financial end user without a material swap exposure nor a
                swap entity.
                 (d) For purposes of this section:
                 (1) An affiliate means:
                 (i) An affiliate as defined in Sec. 1221.2; or
                 (ii) Any company that controls, is controlled by, or is under
                common control with the covered swap entity through the direct or
                indirect exercise of controlling influence over the management or
                policies of the controlled company.
                 (2) A subsidiary means:
                 (i) A subsidiary as defined in Sec. 1221.2; or
                 (ii) Any company that is controlled by the covered swap entity
                through the direct or indirect exercise of controlling influence over
                the management or policies of the controlled company.
                Brian P. Brooks,
                Acting Comptroller of the Currency.
                 By order of the Board of Governors of the Federal Reserve
                System.
                Ann E. Misback,
                Secretary of the Board.
                Federal Deposit Insurance Corporation.
                 By order of the Board of Directors.
                 Dated at Washington, DC, on or about June 25, 2020.
                James P. Sheesley,
                Acting Assistant Executive Secretary.
                 Dated: June 24, 2020.
                Dale Aultman
                Secretary, Farm Credit Administration Board.
                Mark A. Calabria,
                Director, Federal Housing Finance Agency.
                [FR Doc. 2020-14097 Filed 6-30-20; 8:45 am]
                BILLING CODE 4810-33; 6210-01; 6705-01; 6714-01; 7535-01-P
                

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