Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants
| Published date | 09 April 2020 |
| Citation | 85 FR 19878 |
| Record Number | 2020-06625 |
| Section | Rules and Regulations |
| Court | Commodity Futures Trading Commission |
Federal Register, Volume 85 Issue 69 (Thursday, April 9, 2020)
[Federal Register Volume 85, Number 69 (Thursday, April 9, 2020)]
[Rules and Regulations]
[Pages 19878-19884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06625]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AE89
Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is adopting amendments to the margin requirements for
uncleared swaps for swap dealers (``SD'') and major swap participants
(``MSP'') for which there is no prudential regulator (the ``CFTC Margin
Rule''). Specifically, the Commission is adopting an amendment, along
with certain conforming, technical changes, to extend the compliance
schedule for the posting and collection of initial margin (``IM'')
under the CFTC Margin Rule to September 1, 2021, for entities with
smaller average daily aggregate notional amounts of swaps and certain
other financial products (``Final Rule''). The compliance schedule
currently extends from September 1, 2016 to September 1, 2020. The
revised compliance schedule mitigates the potential of a market
disruption, which could be triggered by the large number of entities
that would come into the scope of the IM requirements at the end of the
current compliance schedule on September 1, 2020.
DATES: This final rule is effective May 11, 2020.
FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, 202-418-
6056, [email protected]; Thomas J. Smith, Deputy Director, 202-418-
5495, [email protected]; Warren Gorlick, Associate Director, 202-418-
5195, [email protected]; Carmen Moncada-Terry, Special Counsel, 202-
418-5795, [email protected]; or Rafael Martinez, Senior Financial
Risk Analyst, 202-418-5462, [email protected], Division of Swap Dealer
and Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
Section 4s(e) of the Commodity Exchange Act (``CEA'') \1\ requires
the Commission to adopt rules establishing minimum initial and
variation margin requirements for all swaps \2\ that are (i) entered
into by an SD or MSP for which there is no Prudential Regulator \3\
(collectively, ``covered swap entities'' or ``CSEs'') and (ii) not
cleared by a registered derivatives clearing organization (``uncleared
swaps'').\4\ To offset the greater risk to the SD or MSP \5\ and the
financial system arising from the use of uncleared swaps, these
requirements must (i) help ensure the safety and soundness of the SD or
MSP and (ii) be appropriate for the risk associated with the uncleared
swaps held by the SD or MSP.\6\
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\1\ 7 U.S.C. 1 et seq.
\2\ For the definition of swap, see section 1a(47) of the CEA
and Commission regulation 1.3. 7 U.S.C. 1a(47) and 17 CFR 1.3. The
term ``swap'' includes, among other things, an interest rate swap,
commodity swap, credit default swap, and currency swap.
\3\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a
Prudential Regulator must meet the margin requirements for uncleared
swaps established by the applicable Prudential Regulator. 7 U.S.C.
6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining the term
``Prudential Regulator'' to mean the Board of Governors of the
Federal Reserve System; the Office of the Comptroller of the
Currency; the Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency). The
definition further specifies the entities for which these agencies
act as Prudential Regulators. The Prudential Regulators published
final margin requirements in November 2015. See Margin and Capital
Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015)
(``Prudential Regulators' Margin Rule'').
\4\ See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission regulation
23.151, the Commission further defined this statutory language to
mean all swaps that are not cleared by a registered derivatives
clearing organization or a derivatives clearing organization that
the Commission has exempted from registration as provided under the
CEA. 17 CFR 23.151.
\5\ For the definitions of SD and MSP, see section 1a of the CEA
and Commission regulation 1.3. 7 U.S.C. 1a and 17 CFR 1.3.
\6\ 7 U.S.C. 6s(e)(3)(A).
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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 for
uncleared derivatives in September 2013 (the ``BCBS/IOSCO
framework'').\7\ After the establishment of the BCBS/IOSCO framework,
the CFTC, on January 6, 2016, consistent with Section 4s(e),
promulgated rules requiring CSEs to collect and post initial and
variation margin for uncleared swaps,\8\ adopting the implementation
schedule set forth in the BCBS/IOSCO framework, including the revised
implementation schedule adopted on March 18, 2015.\9\
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\7\ See BCBS/IOSCO Margin requirements for non-centrally cleared
derivatives (September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
\8\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The CFTC
Margin Rule, which became effective April 1, 2016, is codified in
part 23 of the Commission's regulations. 17 CFR 23.150--23.159,
23.161. In May 2016, the Commission amended the CFTC Margin Rule to
add Commission regulation 23.160, providing rules on its cross
border application. Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants--Cross-Border Application of the
Margin Requirements, 81 FR 34818 (May 31, 2016). 17 CFR 23.160.
\9\ See BCBS/IOSCO Margin requirements for non-centrally cleared
derivatives (March 2015), available at https://www.bis.org/bcbs/publ/d317.pdf.
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In July 2019, the BCBS and IOSCO further revised the framework to
extend the implementation schedule for compliance with IM requirements
to September 1, 2021.\10\ Shortly after, the
[[Page 19879]]
Commission proposed to amend and similarly extend the compliance
schedule for the IM requirements under the CFTC Margin Rule
(``Proposal'').\11\
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\10\ See BCBS/IOSCO Margin requirements for non-centrally
cleared derivatives (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf (``July 2019 BCBS/IOSCO Margin Framework'').
\11\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 84 FR 56950 (Oct. 24, 2019).
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II. Final Rule
The Commission is adopting the Final Rule to amend the CFTC Margin
Rule to extend the schedule for compliance with the IM requirements by
adding September 1, 2021 as an additional phase-in date, in order to
help ensure continued access to the swaps markets for certain entities
with relatively smaller levels of swaps trading activities as discussed
below and in light of the recent revision to the implementation
schedule set forth in the BCBS/IOSCO framework. The Commission received
nine comment letters expressing support for the Proposal to extend the
CFTC compliance schedule for the IM requirements, noting that the
change aligns the CFTC Margin Rule with the BCBS/IOSCO framework and
allows market participants to manage resources and mitigate trading
disruptions that could arise at the conclusion of the current
compliance schedule.\12\
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\12\ The Commission received nine relevant comment letters from
the Asset Management Group of the Securities Industry and Financial
Markets Association, Blackrock, Inc., the Futures Industry
Association, the eleven Federal Home Loan Banks, the Global Foreign
Exchange Division of the Global Financial Markets Association, the
International Swaps and Derivatives Association, Inc., the Institute
of International Bankers jointly with the Securities Industry and
Financial Markets Association, the Managed Funds Association, and
State Street Corporation. Some of these comment letters, in addition
to a letter from the American Council of Life Insurers, addressed
issues outside the scope the Proposal. The Commission will monitor
these issues as well as any additional issues that may be raised in
the future concerning the implementation and operation of the CFTC
Margin Rule, and act upon them as appropriate.
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The CFTC Margin Rule requires covered swap entities to post and
collect IM with counterparties that are SDs, MSPs, or financial end
users with material swap exposure (``MSE'') \13\ (``covered
counterparties'') in accordance with a compliance schedule set forth in
Commission regulation 23.161.\14\ The compliance schedule comprises
five compliance dates, from September 1, 2016 to September 1, 2020,
staggered such that CSEs and covered counterparties, starting with the
largest average daily aggregate notional amounts (``AANA'') of
uncleared swaps and certain other financial products, and then
successively lesser AANA, come into compliance with the IM requirements
in a series of five phases.
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\13\ Commission regulation 23.151 provides that MSE for an
entity means that the entity and its margin affiliates have an
average daily aggregate notional amount of uncleared swaps,
uncleared security-based swaps, foreign exchange forwards, and
foreign exchange swaps with all counterparties for June, July or
August of the previous calendar year that exceeds $8 billion, where
such amount is calculated only for business days. A company is a
``margin affiliate'' of another company if: (i) Either company
consolidates the other on a financial statement prepared in
accordance with U.S. Generally Accepted Accounting Principles, the
International Financial Reporting Standards, or other similar
standards; (ii) both companies are consolidated with a third company
on a financial statement prepared in accordance with such principles
or standards; or (iii) for a company that is not subject to such
principles or standards, if consolidation as described in paragraph
(1) or (2) of this definition would have occurred if such principles
or standards had applied. 17 CFR 23.151.
\14\ See 17 CFR 23.161.
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The fourth compliance date, September 1, 2019, brought within the
scope of compliance CSEs and covered counterparties each exceeding $750
billion in AANA. The fifth and last compliance date of September 1,
2020, absent a rule change, will bring into the scope of compliance all
remaining CSEs and covered counterparties, including financial end user
counterparties with an MSE exceeding $8 billion in AANA. As a result of
the large reduction in the compliance threshold from $750 billion to $8
billion at the end of the compliance schedule, a significant number of
financial end user counterparties, including relatively small
counterparties, will be required to comply with the IM requirements and
implement related operational processes. According to the CFTC's Office
of the Chief Economist (``OCE''), compared with the first through the
fourth phases of compliance, which brought approximately 40 entities
into scope, phase 5 could bring approximately 700 entities, as well as
7,000 relationships representing the number of IM agreements that would
need to be in place to carry out swap transactions.\15\
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\15\ See Richard Haynes, Madison Lau, & Bruce Tuckman, Initial
Margin Phase 5 (Oct. 24, 2018), available at https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf (``OCE Initial Margin
Phase 5 Study'').
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As stated in the Proposal, market participants have expressed
concerns regarding the onset of phase 5 under the current schedule
given the operational complexity associated with IM calculation and
third-party segregation of IM collateral.\16\ As a large number of
counterparties prepare to meet applicable IM deadlines, newly in-scope
entities could encounter operational difficulties because a significant
number of the entities may engage the same limited number of entities
that provide IM required services, involving, among other things, the
preparation of IM-related documentation, the approval and
implementation of risk-based models for IM calculation, and custodial
arrangements. The potential for compliance delays may lead to
disruption in the markets, including the possibility that some
counterparties could, for a time, be prohibited from entering into
uncleared swaps and, therefore, be unable to use swaps to hedge their
financial risk. In recognition of these difficulties, BCBS/IOSCO
revised its framework to extend the schedule for compliance with the IM
requirements and provide an additional phase-in period for smaller
counterparties.\17\
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\16\ See, e.g., Letter from the Securities Industry and
Financial Markets Association (``SIFMA''), the American Bankers
Association (``ABA''), the Global Foreign Exchange Division of the
Global Financial Markets Association (``GFXD''), and the Institute
of International Bankers (``IIB'') (April 5, 2019); Letter from the
Managed Funds Association (June 20, 2019).
\17\ See July 2019 BCBS/IOSCO Margin Framework.
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The CFTC believes it is appropriate to amend the CFTC Margin Rule
consistent with the BCBS/IOSCO framework's revision. In particular, the
Commission is adopting the Final Rule to extend the compliance schedule
for the IM requirements in order to mitigate the potential for a market
disruption that could be brought upon by phase 5 at the end of the
current compliance schedule. The Commission's action reflects an effort
to undertake coordinated action with international counterparts and the
Prudential Regulators \18\ to achieve regulatory harmonization with
respect to uncleared swaps margin.
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\18\ The Prudential Regulators recently issued a notice of
proposed rulemaking to, among other things, revise their rules
consistent with the revised BCBS/IOSCO framework. See Margin and
Capital Requirements for Covered Swap Entities, 84 FR 59970 (Nov. 7,
2019).
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In adopting the Final Rule, the Commission has considered the
relatively small amount of swap activity of the financial end users
that would be subject to the one year extension. The OCE has estimated
that the average AANA per entity in phase 5, under the current
schedule, would be $54 billion compared to an average $12.71 trillion
AANA for each entity in phases 1, 2, and 3 and $1 trillion in phase 4.
The OCE has also estimated that the total AANA for entities that would
be subject to the one year extension, if adopted, would be
approximately three percent of the total AANA across all the
phases.\19\ Given the relatively small amount of swap activity of the
financial end users in the extended compliance
[[Page 19880]]
date group, the Commission believes the Final Rule will have a
relatively minor impact on the systemic risk mitigating effects of the
IM requirements during the extension period.
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\19\ See OCE Initial Margin Phase 5 Study at 4-5.
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As proposed, the Final Rule amends Commission regulation 23.161(a)
by adding a sixth phase of compliance for certain smaller entities that
are currently subject to phase 5. The Final Rule requires compliance by
September 1, 2020, for CSEs and covered counterparties with an AANA
ranging from $50 billion up to $750 billion. The compliance date for
all other remaining CSEs and covered counterparties, including
financial end user counterparties exceeding an MSE of $8 billion in
AANA, is extended to September 1, 2021.
In addition, the Commission is adopting non-substantive, conforming
technical changes to Commission regulation 23.161(a).\20\ The
Commission is amending Commission regulation 23.161(a) to replace,
where applicable, between an entity or a margin affiliate only one time
with between the entity and a margin affiliate only one time. This
change conforms the CFTC Margin Rule to the rule text of the Prudential
Regulators' Margin Rule, promoting harmonization between both
regulators.
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\20\ The adopted changes include revisions to text in Commission
regulation 23.161(a) relating to compliance dates that have already
passed.
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The Commission is also amending Commission regulation 23.161(a) to
replace, where applicable, shall not count a swap or a security-based
swap that is exempt pursuant to Sec. 23.150(b) with shall not count a
swap that is exempt pursuant to Sec. 23.150(b). This change removes
the term ``security-based swap'' from certain parts of Commission
regulation 23.161(a). The change is necessary because, due to a
transcription error, the current rule text incorrectly indicates that
Commission regulation 23.150(b) exempts security-based swaps from the
CFTC Margin Rule even though such provision only applies to swaps.
Notwithstanding this technical change that eliminates the reference to
Commission regulation 23.150(b) with respect to security-based swaps,
Commission regulation 23.161(a) will continue to exclude any security-
based swap, for purposes of the calculation of the various thresholds
set forth in Commission regulation 23.161(a), that is exempt pursuant
to section 15F(e) of the Securities Exchange Act of 1934, as is the
case under the current rule text.
III. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \21\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget control number. The Final Rule, as adopted, contains no
requirements subject to the PRA.
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\21\ 44 U.S.C. 3501 et seq.
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B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires agencies, in
promulgating regulations, to consider whether the regulations they
propose will have a significant economic impact on a substantial number
of small entities and, if so, to provide a flexibility analysis
regarding the economic impact on those entities.\22\ In the Proposal,
the Commission certified that the Proposal would not have a significant
economic impact on a substantial number of small entities. The
Commission requested comments with respect to the RFA and received no
comments.
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\22\ 5 U.S.C. 601 et seq.
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As discussed in the Proposal, the Final Rule only affects SDs and
MSPs that are subject to the CFTC Margin Rule and their covered
counterparties, all of which are required to be eligible contract
participants (``ECPs'').\23\ The Commission has previously determined
that SDs, MSPs, and ECPs are not small entities for purposes of the
RFA.\24\ Therefore, the Commission believes that the Final Rule will
not have a significant economic impact on a substantial number of small
entities, as defined in the RFA.
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\23\ Each counterparty to an uncleared swap must be an ECP, as
the term is defined in section 1a(18) of the CEA, 7 U.S.C. 1a(18)
and Commission regulation 1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
\24\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001)
(ECPs).
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that this Final Rule will not
have a significant economic impact on a substantial number of small
entities.
C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA. Section 15(a) further specifies that the costs and
benefits shall be evaluated in light of the following five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the section 15(a) considerations.
Further, the Commission has considered the extraterritorial reach of
the Final Rule and notes where this reach may be especially relevant.
This Final Rule extends the compliance schedule for the CFTC Margin
Rule and introduces an additional compliance date for smaller
counterparties.\25\ The revised compliance schedule requires CSEs and
covered counterparties, with an AANA ranging from $50 billion up to
$750 billion, to exchange IM in phase 5. All remaining CSEs and covered
counterparties, including financial end user counterparties exceeding
an MSE of $8 billion in AANA, will come into scope in the additional
sixth phase beginning September 1, 2021.
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\25\ The Commission is also adopting conforming technical
changes to Commission regulation 23.161(a). Given the non-
substantive nature of these changes, there are no costs or benefits
to be considered.
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As discussed in the Proposal, the Commission believes that as a
result of the large number of counterparties that would be required to
comply with the IM requirements for the first time at the end of the
current compliance schedule, market disruption may arise. The markets
may be strained given counterparties' demand for resources and services
to meet the September 2020 deadline and operationalize the exchange of
IM, involving, among other things, counterparty onboarding, approval
and implementation of risk-based models for the calculation of IM, and
documentation associated with the exchange of IM.
The baseline against which the benefits and costs associated with
the Final Rule are compared is the uncleared swaps markets as they
exist today, including the impact of the current compliance schedule
and the implementation of phase 5 on September 1, 2020. With this as
the baseline, the following are the benefits and costs of the Final
Rule.
The Commission sought comment on all aspects of the cost and
benefit
[[Page 19881]]
considerations in the Proposal but received no substantive comments.
1. Benefits
As described above, the Final Rule extends the compliance schedule
for the IM requirements for certain smaller entities to September 1,
2021. The Final Rule is intended to alleviate the potential congestion
and possible market disruption resulting from the large number of
counterparties that would come into scope under the current compliance
schedule and the strain on the uncleared swaps markets resulting from
the increased demand for limited resources and services to set up
operations to comply with the IM requirements, including counterparty
onboarding, adoption and implementation of risk-based models to
calculate IM, and documentation associated with the exchange of IM.
The Final Rule prioritizes applicable IM compliance deadlines in
order to focus on certain financial end users, SDs, and MSPs that
engage in greater swap trading activity and that may significantly
contribute to systemic risk in the financial markets, while providing a
12-month delay for smaller counterparties, whose swap trading may not
pose the same level of risk, to prepare for their eventual compliance
with the IM requirements. The Final Rule therefore promotes a smooth
and orderly transition into IM compliance.
The Final Rule amends the CFTC Margin Rule consistent with the
revised BCBS/IOSCO margin framework and the Prudential Regulators'
proposed rulemaking to amend the IM compliance schedule.\26\ The Final
Rule promotes harmonization with international and domestic margin
regulatory requirements and reduces the potential for regulatory
arbitrage.
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\26\ See supra, n. 18.
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2. Costs
The Final Rule extends the time frame for compliance with the IM
requirements for the smallest CSEs and covered counterparties in terms
of notional amount, including SDs and MSPs and financial end users that
exceed an MSE of $8 billion, by an additional 12 months. Uncleared
swaps entered into during this period with the smallest covered
counterparties may be treated as legacy swaps exempt from the IM
requirements. In the Commission's view, the contagion risk associated
with these potentially uncollateralized legacy swaps is a lesser
concern because the legacy swap portfolios will be entered into with
counterparties that engage in lower levels of notional trading.
The Final Rule also delays the implementation of IM by smaller
CSEs. There may not be as much IM posted to protect the financial
system as would otherwise be the case. As such, the severity of any
financial contagion that might occur may potentially increase.
3. Section 15(a) Considerations
In light of the foregoing, the CFTC has evaluated the costs and
benefits of the Final Rule pursuant to the five considerations
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
The Final Rule will protect market participants and the public
against the potential disruption that may be caused by the large number
of counterparties that would come into scope of the IM requirements at
the end of the current compliance schedule.
Under the revised compliance schedule, fewer counterparties will
come into scope in phase 5 and many smaller counterparties will be able
to defer compliance until the sixth and last compliance date on
September 1, 2021. As such, the demand for resources and services to
achieve operational readiness will be reduced, mitigating the potential
strain on the uncleared swaps markets.
Also, the Final Rule will appropriately prioritize IM compliance
requirements for counterparties and CSEs that have greater swap trading
activity, while giving more time to smaller counterparties to come into
compliance with the IM requirements.
Inasmuch as this Final Rule delays the implementation of IM for the
smallest CSEs, there may not be as much IM posted to protect the
financial system as would otherwise be the case. Consequently, the
severity of any financial contagion that might occur may potentially
increase, especially among the smallest CSEs.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
The Final Rule will make the uncleared swaps markets more
streamlined by facilitating counterparties' transition into compliance
with the IM requirements. Counterparties will have additional time to
document their swap relationships and set up adequate processes to
operationalize the exchange of IM. As such, the Final Rule will promote
fairer competition among counterparties in the uncleared swaps markets,
as it will remove the potential incentive of CSEs to prioritize
arrangements with larger counterparties to the detriment of smaller
counterparties and will help maintain the current state of market
efficiency.
By preventing the market disruption that could be brought upon by
the large number of counterparties that would come into scope at the
end of the current compliance schedule, the Final Rule promotes the
financial integrity of the markets, reducing the probability of
congestion resulting from the heightened demand for limited financial
infrastructure resources. On the other hand, there will be less IM
posted overall, making uncleared swaps markets more susceptible to
financial contagion where the default of one counterparty could lead to
subsequent defaults of other counterparties potentially harming market
integrity.
(c) Price Discovery
The Final Rule will not harm price discovery and might help
preserve it. In the absence of the Final Rule, counterparties, in
particular smaller counterparties, could be discouraged from entering
or even foreclosed from entering the uncleared swaps markets because
they may not be able to secure resources and services in a timely
manner to operationalize the exchange of IM. These counterparties thus
could be shut out from the uncleared swaps markets, potentially
reducing liquidity and harming price discovery.
(d) Sound Risk Management
The Final Rule will stave off the potential market disruption that
could result from the large number of counterparties that would come
into the scope of the IM requirements at the end of the current
compliance schedule. The extended compliance schedule will alleviate
the potential congestion in establishing the financial infrastructure
to post IM between in scope entities and will give counterparties time
to prepare for the exchange of IM and to establish operational
processes tailored to their uncleared swaps and associated risks. The
additional compliance time may also improve risk management practices
because there might be some parties who may prefer to enter into
cleared swaps rather than install otherwise required financial
infrastructure in a short time frame, choosing to enter into swaps that
are more standardized but that do not match their risk management needs
as well.
The Commission acknowledges that the Final Rule extends the time
frame for compliance with the IM requirements for the smallest CSEs and
covered counterparties by an additional 12 months. Uncleared swaps
entered into during this period by these entities
[[Page 19882]]
may be treated as legacy swaps and will not be subject to the IM
requirements. As a result, lesser amounts of margin will be collected
to mitigate the risk of uncleared swaps, which may increase the
possibility of systemic risk. Nevertheless, the risk associated with
these potentially uncollateralized legacy swaps is a lesser concern
because the legacy swap portfolios will be entered into with
counterparties that engage in lower levels of notional trading.
(e) Other Public Interest Considerations
The Final Rule amends the CFTC Margin Rule consistent with the
revised BCBS/IOSCO margin framework and the Prudential Regulators'
proposed rulemaking to amend the IM compliance schedule, promoting
harmonization with international and domestic margin regulatory
requirements and reducing the potential for regulatory arbitrage.
D. Antitrust Laws
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or 4c(b)
of the CEA), or in requiring or approving any bylaw, rule, or
regulation of a contract market or registered futures association
established pursuant to section 17 of the CEA.\27\
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\27\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. Further, the
Commission believes that allowing parties more time to come into
compliance with the CFTC Margin Rule by splitting the last compliance
phase into two phases will preserve competition by encouraging more
participation in the uncleared swaps markets. The Commission requested
comments on whether the Proposal implicated any other specific public
interest to be protected by the antitrust laws and received no
comments.
The Commission has considered this Final Rule to determine whether
it is anticompetitive and has identified no anticompetitive effects.
The Commission requested comments on whether the Proposal was
anticompetitive and, if it is, what the anticompetitive effects are,
and received no comments.
Because the Commission has determined that the Final Rule is not
anticompetitive and has no anticompetitive effects, the Commission has
not identified any less anticompetitive means of achieving the purposes
of the CEA.
List of Subjects in 17 CFR Part 23
Capital and margin requirements, Major swap participants, Swap
dealers, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 23 as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1,6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).
0
2. Amend Sec. 23.161 by:
0
a. Revising paragraphs (a)(1)(iii), (a)(3)(iii), (a)(4)(iii),
(a)(5)(iii), and (a)(6); and
0
b. Adding paragraph (a)(7).
The addition and revisions read as follows.
Sec. 23.161 Compliance dates.
(a) * * *
(1) * * *
(iii) In calculating the amounts in paragraphs (a)(1)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign-exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o-10(e)).
* * * * *
(3) * * *
(iii) In calculating the amounts in paragraphs (a)(3)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign-exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o-10(e)).
(4) * * *
(iii) In calculating the amounts in paragraphs (a)(4)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign-exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o-10(e)).
(5) * * *
(iii) In calculating the amounts in paragraphs (a)(5)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign-exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o-10(e)).
(6) September 1, 2020 for the requirements in Sec. 23.152 for
initial margin for any uncleared swaps where both--
(i) The covered swap entity combined with all its margin
affiliates; and
(ii) Its counterparty combined with all its margin affiliates have
an average daily aggregate notional amount of uncleared swaps,
uncleared security-based swaps, foreign exchange forwards, and foreign
exchange swaps in March, April, and May 2020 that exceeds $50 billion,
where such amounts are calculated only for business days; and where
(iii) In calculating the amounts in paragraphs (a)(6)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o.10(e)).
(7) September 1, 2021 for the requirements in Sec. 23.152 for
initial margin for any other covered swap entity with respect to
uncleared swaps entered into with any other counterparty.
* * * * *
[[Page 19883]]
Issued in Washington, DC, on March 25, 2020, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Commission Voting Summary and
Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Commissioner Rostin Behnam
I vote to approve the Commodity Futures Trading Commission's
(the ``Commission'' or ``CFTC'') decision today to extend the
compliance schedule for the posting and collection of initial margin
(``IM'') by swap dealers (``SDs'') and major swap participants
(``MSPs'') for which there is no prudential regulator (collectively,
``covered swap entities'') under the CFTC Margin Rule, 17 CFR
23.160, which implements section 4s(e) of the Commodity Exchange Act
(``CEA'').\1\ As a seminal part of the policy response following the
2008 financial crisis, Section 731 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act \2\ added section 4s(e) requiring
the adoption of rules establishing minimum initial and variation
margin requirements for all uncleared swaps entered by covered swaps
entities.
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\1\ 7 U.S.C. 1 et seq.
\2\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203 section 731, 124 Stat. 1376, 1704-5 (2010).
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Among many universal commitments established by global leaders
in the 2009 G20 Communique,\3\ margin requirements for uncleared
swaps remain a critical component of financial reform, specifically
within the global derivatives markets. As we learned during the
financial crisis, margin provides confidence in times of market
stress and volatility by ensuring that collateral is available to
offset counterparty losses.
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\3\ G20, Leaders' Statement, The Pittsburgh Summit (Sept. 24-25,
2009), available at http://www.g20.utoronto.ca/2009/2009communique0925.html.
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Right now, we are collectively enduring uncertainty as a result
of Covid-19. As financial leaders are taking action and providing
responses intended to address market stress, our progress is being
tested as we operate within the new realities of communication and
the work environment. We cannot hesitate in our efforts to preserve
market interests and protect customers and market participants in a
timely, decisive manner. It remains critically important that we
ensure market continuity, transparency, and resiliency as we work
towards normalcy.
Today's amendments align implementation of the CFTC Margin Rule
with the framework issued by the Basel Committee on Banking
Supervision (``BCBS'') and the International Organization of
Securities Commissions (``IOSCO'').\4\ The amendments represent a
cohesive, data-driven effort by the staffs of the CFTC, the
Prudential Regulators--who have proposed similar amendments to the
margin implementation schedule for SDs and MSPs subject to their
regulations \5\--and international counterparts through the BCBS/
IOSCO Working Group on Margining Requirements (``WGMR'') towards
regulatory harmonization with respect to margin for uncleared swaps.
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\4\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (July 2019), https://www.bis.org/bcbs/publ/d475.pdf.
\5\ See Margin and Capital Requirements for covered swap
entities, 84 FR 59970 (Nov. 7, 2019).
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Implementing the margin requirements for uncleared swaps is a
challenge we have faced collectively.\6\ As global harmonization is
a key hallmark of the 2009 G20 reforms, ensuring we remain vigilant
to risks and responsive to real-world concerns articulated by market
participants as we work together towards these feats of regulatory
engineering will serve us all well into the future. I commend the
work of the our CFTC staff in demonstrating its analytical expertise
in both validating the need for the sixth phase of compliance for
certain smaller entities, and analyzing the risks of requiring such
entities to remain in phase 5.
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\6\ See Rostin Behnam, Our Collective Strength, Remarks of CFTC
Commissioner Rostin Behnam at the 2018 ISDA Annual Japan Conference,
Shangri-La Hotel, Tokyo (Oct. 26, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam11; Rostin Behnam, Sowing the
Seeds of Success in 2020, Remarks of CFTC Commissioner Rostin Behnam
at the ISDA 34th Annual General Meeting, Grand Hyatt Hong Kong, Hong
Kong (Apr. 9, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam13.
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The extension of the compliance schedule for initial margin
requirements for an additional year will accommodate roughly 700
entities and 7,000 relationships. While that may seem monumental,
the CFTC's Office of Chief Economist estimates that these
relationships represent a relatively small amount of swap activity;
approximately three percent of the total average daily aggregate
notional amounts of uncleared swaps and certain other financial
products across all the compliance phases.\7\
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\7\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 84 FR 56950, 56952 (proposed Oct. 24,
2019); Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants at II.
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I believe it is important to highlight that today's amendments
seek to address transition risks by mitigating potential market
disruptions due largely to limitations of service providers and
related operational burdens associated with those approximately
7,000 relationships. It remains my expectation that the large number
of covered entities who will now fall into the sixth phase of
compliance will work diligently over the next year and a half and
that with the additional time and a clear demand for services,
market participants and the entities they engage will focus
resources on compliance.
To the extent commenters identified additional and potentially
significant implementation challenges, I appreciate CFTC staff's
ongoing commitment to monitoring these and other issues as they
evolve. Our open engagement and willingness to address appropriate
concerns is a hallmark of our agency, and I believe it is one our
greatest strengths. We should continue to maintain our high
standards as we move forward in any additional targeted, strategic
modifications to the CFTC Margin Rules and others.
Appendix 3--Concurring Statement of Commissioner Dan M. Berkovitz
I concur with issuing the final rule to extend by one year the
initial swap margin compliance deadline for financial entities with
smaller swap portfolios.
As I noted in my statement when this rule was proposed,
generally I am not sympathetic to requests to extend compliance
deadlines when a long lead-in period has been provided. The
compliance date for swap margin rule compliance was set more than
four years ago. However, this deadline extension will benefit
hundreds of entities with smaller swap portfolios while having only
a limited impact on the systemic risk mitigation benefits of the
initial margin requirements.
Importantly, the final rule does not change variation margin
requirements that are already effective. The extension in the final
rule only applies to the initial margin requirement, which covers
estimated potential future exposures.
Furthermore, the final rule only extends the deadline for
financial end users that have average daily aggregate notional
amounts (``AANA'') less than $50 billion. A CFTC Office of the Chief
Economist (``OCE'') analysis indicates that around 700 entities with
7,000 swap arrangements that need to be modified would be included
in this group. The final rule provides more time to these smaller
users of swaps, which will help maintain the hedging capabilities of
these market participants while they negotiate and establish the
necessary margining agreements.
The OCE analysis also provides data on the muted impact of the
final rule on systemic risk mitigation. The total estimated AANA for
entities that can use the extension is approximately three percent
of the total AANA of entities subject to the margin rules. In my
view, this data is critical to supporting a one year extension as it
indicates the likely effect on systemic risk mitigation will be
quite limited.
Also, other United States and foreign regulators are adopting
similar extensions. The prudential banking regulators in the United
States have adopted a margin rule deadline extension proposal that
is substantively the same as the CFTC final rule. At this time there
is no reason to believe the prudential regulators will not adopt
their proposal.
Finally, the current financial market turmoil resulting from the
global coronavirus pandemic makes issuance of this relief to these
smaller financial end users particularly timely.
[[Page 19884]]
Accordingly, I concur in adopting the final rule.
[FR Doc. 2020-06625 Filed 4-8-20; 8:45 am]
BILLING CODE 6351-01-P
