Portfolio Margining of Uncleared Swaps and Non-Cleared Security-Based Swaps

Published date05 November 2020
Citation85 FR 70536
Record Number2020-23928
SectionProposed rules
CourtCommodity Futures Trading Commission
Federal Register, Volume 85 Issue 215 (Thursday, November 5, 2020)
[Federal Register Volume 85, Number 215 (Thursday, November 5, 2020)]
                [Proposed Rules]
                [Pages 70536-70544]
                From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
                [FR Doc No: 2020-23928]
                [[Page 70536]]
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                COMMODITY FUTURES TRADING COMMISSION
                17 CFR Part 23
                RIN 3038-AF07
                SECURITIES AND EXCHANGE COMMISSION
                17 CFR Part 240
                [Release No. 34-90246; File No. S7-15-20]
                RIN 3235-AM64
                Portfolio Margining of Uncleared Swaps and Non-Cleared Security-
                Based Swaps
                AGENCY: Commodity Futures Trading Commission and Securities and
                Exchange Commission.
                ACTION: Request for comment.
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                SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
                Securities and Exchange Commission (``SEC'') (collectively, the
                ``Commissions'') seek public comment on potential ways to implement
                portfolio margining of uncleared swaps and non-cleared security-based
                swaps.
                DATES: Comments should be received on or before December 7, 2020.
                ADDRESSES: Comments should be sent to both agencies at the addresses
                listed below.
                 CFTC: You may submit comments, identified by RIN 3038-AF07, by any
                of the following methods: CFTC website: https://comments.cftc.gov.
                Follow the instructions for submitting comments through the website.
                 Mail: Christopher Kirkpatrick, Secretary of the
                Commission, Commodity Futures Trading Commission, Three Lafayette
                Centre, 1155 21st Street NW, Washington, DC 20581.
                 Hand Delivery/Courier: Same as Mail above.
                 Please submit your comments using only one method.
                 All comments must be submitted in English, or if not, accompanied
                by an English translation. Comments will be posted as received to
                https://www.cftc.gov. You should submit only information that you wish
                to make available publicly. If you wish for the CFTC to consider
                information that you believe is exempt from disclosure under the
                Freedom of Information Act, a petition for confidential treatment of
                the exempt information may be submitted according to the procedures
                established in CFTC Rule 145.9, 17 CFR 145.9.
                 The CFTC reserves the right, but shall have no obligation, to
                review, pre-screen, filter, redact, refuse, or remove any or all of
                your submission from https://www.cftc.gov that it may deem to be
                inappropriate for publication, such as obscene language. All
                submissions that have been redacted or removed that contain comments on
                the merits of the rulemaking will be retained in the public comment
                file and will be considered as required under the Administrative
                Procedure Act and other applicable laws, and may be accessible under
                the Freedom of Information Act.
                 SEC: Comments may be submitted by any of the following methods:
                Electronic Comments
                 Use the SEC's internet comment form (http://www.sec.gov/rules/other.shtml); or
                 Send an email to [email protected]. Please include
                File No. S7-15-20 on the subject line.
                Paper Comments
                 Send paper comments to Secretary, Securities and Exchange
                Commission, 100 F Street NE, Washington, DC 20549-1090.
                All submissions should refer to File Number S7-15-20. This file number
                should be included on the subject line if email is used. To help the
                SEC process and review your comments more efficiently, please use only
                one method of submission. The SEC will post all comments on the SEC's
                website (http://www.sec.gov). Comments are also available for website
                viewing and printing in the SEC's Public Reference Room, 100 F Street
                NE, Washington, DC 20549, on official business days between the hours
                of 10:00 a.m. and 3:00 p.m. All comments received will be posted
                without change. Persons submitting comments are cautioned that we do
                not redact or edit personal identifying information from comment
                submissions. You should submit only information that you wish to make
                publicly available.
                FOR FURTHER INFORMATION CONTACT:
                 CFTC: Thomas J. Smith, Deputy Director, at (202) 418-5495,
                [email protected] or Joshua Beale, Associate Director, at (202) 418-5446,
                [email protected], Division of Swap Dealer and Intermediary Oversight;
                Robert B. Wasserman, Chief Counsel and Senior Advisor, at (202) 418-
                5092, [email protected], Division of Clearing and Risk, Commodity
                Futures Trading Commission, Three Lafayette Centre, 1155 21st Street
                NW, Washington, DC 20581.
                 SEC: Michael A. Macchiaroli, Associate Director, at (202) 551-5525;
                Thomas K. McGowan, Associate Director, at (202) 551-5521; Randall W.
                Roy, Deputy Associate Director, at (202) 551-5522; Raymond Lombardo,
                Assistant Director, at 202-551-5755; or Sheila Dombal Swartz, Senior
                Special Counsel, at (202) 551-5545, Division of Trading and Markets,
                Securities and Exchange Commission, 100 F Street NE, Washington, DC
                20549-7010.
                SUPPLEMENTARY INFORMATION:
                I. Introduction
                 Title VII of the Dodd-Frank Wall Street Reform and Consumer
                Protection Act (``Title VII'') established a new regulatory framework
                for the U.S. over-the-counter (``OTC'') derivatives markets.\1\ The
                Dodd-Frank Act assigns responsibility for certain aspects of the U.S.
                OTC derivatives markets to the CFTC and the SEC. In particular, the
                CFTC has oversight authority with respect to swaps, and the SEC has
                oversight authority with respect to security-based swaps.\2\ The CFTC
                has adopted final margin rules for uncleared swaps applicable to
                nonbank swap dealers and nonbank major swap participants.\3\ The SEC
                has adopted final margin requirements for non-cleared security-based
                swaps applicable to nonbank security-based swap dealers (``SBSDs'') and
                nonbank major security-based swap participants (``MSBSPs'').\4\
                [[Page 70537]]
                Bank regulators have adopted capital and margin requirements for bank
                swap dealers and bank major swap participants and for bank SBSDs and
                bank MSBSPs pursuant to Title VII.\5\ The SEC and CFTC also have issued
                exemptive orders to facilitate the portfolio margining of cleared swaps
                and security-based swaps that are credit default swaps (``CDS'') held
                in a swap account.\6\
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                 \1\ See Public Law 111-203, 771 through 774 (``Dodd-Frank
                Act'').
                 \2\ The CFTC has oversight authority with respect to a ``swap''
                as defined in Section 1(a)(47) of the Commodity Exchange Act
                (``CEA'') (7 U.S.C. 1(a)(47)), including to implement a registration
                and oversight program for a ``swap dealer'' as defined in Section
                1(a)(49) of the CEA (7 U.S.C. 1(a)(49)) and a ``major swap
                participant'' as defined in Section 1(a)(33) of the CEA (7 U.S.C.
                1(a)(33)). The SEC has oversight authority with respect to a
                ``security-based swap'' as defined in Section 3(a)(68) of the
                Exchange Act (15 U.S.C. 78c(a)(68)), including to implement a
                registration and oversight program for a ``security-based swap
                dealer'' as defined in Section 3(a)(71) of the Exchange Act (15
                U.S.C. 78c(a)(71)) and a ``major security-based swap participant''
                as defined in Section 3(a)(67) of the Exchange Act (15 U.S.C.
                78c(a)(67)). The SEC and the CFTC jointly have adopted rules to
                further define those terms. See Further Definition of ``Swap,''
                ``Security-Based Swap,'' and ``Security-Based Swap Agreement'';
                Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Exchange
                Act Release No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012);
                Further Definition of ``Swap Dealer,'' ``Security-Based Swap
                Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
                Participant'' and ``Eligible Contract Participant,'' Exchange Act
                Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012).
                 \3\ CFTC, Margin Requirements for Uncleared Swaps for Swap
                Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016)
                (``CFTC Final Margin Release''). The Commissions use the terms
                ``uncleared swaps'' and ``non-cleared security-based swaps''
                throughout this request for comment because those are the defined
                terms adopted in their respective final margin rules.
                 \4\ SEC, Capital, Margin, and Segregation Requirements for
                Security-Based Swap Dealers and Major Security-Based Swap
                Participants and Capital and Segregation Requirements for Broker-
                Dealers (``SEC Final Capital, Margin and Segregation Release''),
                Exchange Act Release No. 86175 (June 21, 2019), 84 FR 43872, 43956-
                43957 (Aug. 22, 2019). The compliance date for the SEC's margin
                rules is October 6, 2021. Covered counterparties under the CFTC's
                uncleared swap margin rules already post and collect variation
                margin. CFTC initial margin requirements are being implemented under
                a phase-in schedule through September 1, 2022. See Margin
                Requirements for Uncleared Swaps for Swap Dealers and Major Swap
                Participants, 85 FR 41463 (Jul. 10, 2020); see also CFTC, Press
                Release Number 8287-20, CFTC Finalizes Position Limits Rule at
                October 15 Open Meeting, Commission Also Approves Final Rules on
                Margin Requirements for Uncleared Swaps and Registration Exemptions
                for Foreign Commodity Pools (Oct. 15, 2020).
                 \5\ See Margin and Capital Requirements for Covered Swap
                Entities, 80 FR 74840 (Nov. 30, 2015). These margin requirements for
                bank entities were adopted by 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, or the Federal Housing Finance Agency (collectively,
                these organizations are known as the ``prudential regulators'').
                 \6\ Order Granting Conditional Exemptions under the Securities
                Exchange Act of 1934 in Connection with Portfolio Margining of Swaps
                and Security-based Swaps, Exchange Act Release No. 68433 (Dec. 12,
                2012) 77 FR 75211 (Dec. 19, 2012); CFTC, Order, Treatment of Funds
                Held in Connection with Clearing by ICE Clear Credit of Credit
                Default Swaps (Jan. 13, 2013), available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/icecreditclearorder011413.pdf; CFTC, Order, Treatment of Funds Held
                in Connection with Clearing by ICE Clear Europe of Credit Default
                Swaps (Apr. 9, 2013), available at: https://www.cftc.gov/sites/default/files/stellent/groups/public/@requestsandactions/documents/ifdocs/icecleareurope4dfcds040913.pdf.
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                 In implementing Title VII, the Commissions are committed to working
                together to ensure that each agency's respective regulations are
                effective, consistent, mutually reinforcing, and efficient. In certain
                cases, the Commissions believe that these objectives may be served
                better by harmonizing requirements. Portfolio margining is one area
                where the Commissions believe it is appropriate to explore whether
                increased harmonization would better serve the purposes of Title VII.
                 Portfolio margining generally refers to the cross margining of
                related positions in a single account, allowing netting of appropriate
                offsetting exposures. Portfolio margining of uncleared swaps, non-
                cleared security-based swaps, and related positions can offer benefits
                to customers and the markets, including promoting greater efficiencies
                in margin calculations with respect to offsetting positions. This can
                align margining and other costs more closely with overall risks
                presented by a customer's portfolio. This alignment can reduce the
                aggregate amount of collateral required to meet margin requirements,
                facilitating the availability of excess collateral that can be deployed
                for other purposes. The netting of exposures allowed by portfolio
                margining may also help to improve efficiencies in collateral
                management, alleviate excessive margin calls, improve cash flows and
                liquidity, and reduce volatility.
                 At the same time, facilitating portfolio margining for uncleared
                swaps, non-cleared security-based swaps, and related positions requires
                careful consideration to ensure that any customer protection, financial
                stability and other applicable regulatory objectives and potential
                impacts are appropriately considered and addressed. These
                considerations include, among other things, potential impacts on margin
                requirements, the segregation and bankruptcy treatment of uncleared
                swaps and non-cleared security-based swaps in different account types
                and entities, and the potential impact on regulatory capital
                requirements.
                 The implementation of portfolio margining of uncleared swaps and
                non-cleared security-based swaps also requires careful consideration of
                the differences in the capital, margin, and segregation requirements of
                the CFTC and SEC applicable to uncleared swaps and non-cleared
                security-based swaps, respectively. These differences reflect the
                policy objectives of, and choices made by, each agency and reflect each
                agency's assessment of potential costs and benefits of alternative
                approaches and the impact on the markets for swaps and security-based
                swaps. The differences between the CFTC and SEC requirements is a
                result of these differing policy objectives and related assessments.
                 For example, the CFTC's margin rule for uncleared swaps requires
                swap dealers to collect and post initial margin to certain
                counterparties, subject to exceptions.\7\ When adopting this
                requirement, the CFTC stated that ``the posting requirement under the
                final rule is one way in which the Commission seeks to reduce overall
                risk to the financial system, by providing initial margin to non-dealer
                swap market counterparties that are interconnected participants in the
                financial markets (i.e., financial end users that have material swap
                exposure).'' \8\ The CFTC further noted that commenters stated that
                requiring swap dealers to post initial margin ``not only would better
                protect financial end users from concerns about the failure of [the
                swap dealer], but would also act as a discipline on [swap dealers] by
                requiring them to post margin reflecting the risk of their swaps
                business.'' \9\
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                 \7\ See 17 CFR 23.152.
                 \8\ See CFTC Final Margin Release, 81 FR at 649.
                 \9\ Id.
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                 The SEC's margin rule for non-cleared swaps does not require
                nonbank SBSDs to post initial margin.\10\ The SEC stated when adopting
                the margin rule that ``[r]equiring nonbank SBSDs to deliver initial
                margin could impact the liquidity of these firms'' and that
                ``[d]elivering initial margin would prevent this capital of the nonbank
                SBSD from being immediately available to the firm to meet liquidity
                needs.'' \11\ The SEC further stated that, ``[i]f the delivering SBSD
                is undergoing financial stress or the markets more generally are in a
                period of financial turmoil, a nonbank SBSD may need to liquidate
                assets to raise funds and reduce its leverage'' and that ``[a]ssets in
                the control of a counterparty would not be available for this
                purpose.'' \12\
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                 \10\ See 17 CFR 240.18a-3.
                 \11\ See SEC Final Capital, Margin and Segregation Release, 84
                FR at 43918.
                 \12\ Id.
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                 In addition, the CFTC's margin rule requires that initial margin
                posted to or by the swap dealer must be held by a third-party custodian
                and does not permit the initial margin to be re-hypothecated.\13\ When
                adopting the margin rule, the CFTC stated ``that the ultimate purpose
                of the custody agreement is twofold: (1) That the initial margin be
                available to a counterparty when its counterparty defaults and a loss
                is realized that exceeds the amount of variation margin that has been
                collected as of the time of default; and (2) initial margin be returned
                to the posting party after its swap obligations have been fully
                discharged.'' \14\
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                 \13\ See 17 CFR 23.157.
                 \14\ See CFTC Final Margin Release, 81 FR at 670.
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                 The SEC margin rule for non-cleared swaps does not require that
                initial margin posted to the nonbank SBSD be held at a third-party
                custodian.\15\ The SEC stated that this difference from the CFTC's
                margin rule reflects its ``judgment of how to `help ensure the safety
                and soundness' of nonbank
                [[Page 70538]]
                SBSDs . . . as required by Section 15F(e)(3)(i) of the Exchange Act.''
                \16\
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                 \15\ See 17 CFR 240.18a-3.
                 \16\ See SEC Final Capital, Margin and Segregation Release, 84
                FR at 43909.
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                 Moreover, there are differences in the segregation schemes for
                swaps and security-based swaps. As discussed above, the CFTC's margin
                rule requires initial margin received from customers with respect to
                uncleared swaps to be held by an independent third-party custodian.
                 With respect to the SEC's rules for non-cleared security-based
                swaps, Section 3E(f) of the Exchange Act establishes a program by which
                a counterparty to an SBSD can elect to have an independent third-party
                custodian hold the initial margin it posts to the SBSD.\17\ Section
                3E(f)(4) provides that if the counterparty does not choose to require
                segregation of funds or other property (i.e., waives segregation), the
                SBSD shall send a report to the counterparty on a quarterly basis
                stating that the firm's back office procedures relating to margin and
                collateral requirements are in compliance with the agreement of the
                counterparties.\18\ Security-based swap customers of a broker-dealer
                (other than an OTC derivatives dealer), including a broker-dealer
                registered as an SBSD, that are not affiliates of the firm cannot waive
                segregation. The SEC explained that this prohibition against waiving
                the segregation requirement in the case of a non-affiliated customer of
                the broker-dealer is a consequence of the broker-dealer segregation
                rule--Rule 15c3-3--being promulgated under Section 15(c)(3) of the
                Exchange Act, which does not have an analogous provision to Section
                3E(f) of the Exchange Act.\19\ More specifically, Section 15(c)(3) of
                the Exchange Act and Rule 15c3-3 thereunder do not contain provisions
                pursuant to which a customer can waive segregation.\20\ The SEC further
                explained that the prohibition will protect customers and the safety
                and soundness of broker-dealers.\21\
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                 \17\ See 15 U.S.C. 78c-5(f).
                 \18\ See 15 U.S.C. 78c-5(f)(4),
                 \19\ See SEC Final Capital, Margin and Segregation Release, 84
                FR at 43931. See also 17 CFR 240.15c3-3; 15 U.S.C. 78o(c)(3); 15
                U.S.C. 78c-5(f)(4).
                 \20\ See SEC Final Capital, Margin and Segregation Release, 84
                FR at 43931.
                 \21\ Id. at 43931.
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                 In addition to these two statutory options, the SEC adopted
                segregation rules permitting broker-dealers and SBSDs to hold and
                commingle initial margin received from security-based swap customers.
                These rules restrict how initial margin can be used by a broker-dealer
                or SBSD and require that it be held in a manner that is designed to
                facilitate its prompt return to the customers (``omnibus segregation
                rules'').\22\ The omnibus segregation rules are mandatory requirements
                with respect to cleared security-based swaps and the default
                requirements with respect to non-cleared security-based swaps if a
                customer of an SBSD does not choose one of the two statutory options:
                (1) Having initial margin held by an independent third-party custodian
                or (2) waiving segregation, if permitted.
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                 \22\ See 17 CFR 240.15c3-3(p); 17 CFR 240.18a-4. See also SEC
                Final Capital, Margin and Segregation Release, 84 FR at 43930-43.
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                 The omnibus segregation rules permit broker-dealers and SBSDs to
                re-hypothecate initial margin received with respect to non-cleared
                swaps under limited circumstances. In the case of a broker-dealer
                (other than an OTC derivatives dealer), including a broker-dealer
                registered as an SBSD, the ability to re-hypothecate initial margin is
                limited. For example, if the broker-dealer enters into a non-cleared
                security-based swap with a customer and hedges that transaction with a
                second broker-dealer, the first broker-dealer can use the initial
                margin collected from its customer to meet a regulatory margin
                requirement arising from a transaction with a second SBSD to hedge the
                transaction with the customer.\23\ The SEC stated that it ``designed
                the hedging exception for non-cleared security-based swap collateral to
                accommodate dealers in OTC derivatives maintaining `matched books' of
                transactions.'' \24\
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                 \23\ See 17 CFR 240.15c3-3(p)(1)(ii)(B) and (p)(2).
                 \24\ See SEC Final Capital, Margin and Segregation Release, 84
                FR at 43937 (footnote omitted).
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                 Similarly, an SBSD that is registered as an OTC derivatives dealer
                or not registered as a broker-dealer (both types of SBSDs hereinafter a
                ``Stand-Alone SBSD'') that enters into a non-cleared, security-based
                swap with a customer and hedges that transaction with another SBSD also
                may use the initial margin collected from its customer to meet a
                regulatory margin requirement arising from the hedging transaction with
                the other SBSD.\25\ This provision applies if the Stand-Alone SBSD is
                required to comply with the omnibus segregation requirements of Rule
                18a-4 or offers omnibus segregation to its customers.\26\ However,
                pursuant to Section 3E(f) of the Exchange Act, customers of a Stand-
                Alone SBSD also may waive their right to have initial margin for non-
                cleared security-based swaps segregated, and a Stand-Alone SBSD can
                operate under an exemption from the omnibus segregation requirements of
                Rule 18a-4, subject to certain conditions.\27\ If the customer waives
                segregation or the Stand-Alone SBSD operates under the exemption from
                Rule 18a-4, the Stand-Alone SBSD may re-hypothecate the initial margin
                without restriction. Pursuant to Section 3E(f) of the Exchange Act,
                customers of this Stand-Alone SBSD can elect to have the initial margin
                they post to the SBSD held by a third-party custodian rather than
                waiving the right to segregation.\28\ The SEC explained that permitting
                customers to elect to either have their initial margin held by a third-
                party custodian or waive their right to segregation reflected the
                provisions of Section 3E(f) of the Exchange Act, providing customers
                with these two options.\29\
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                 \25\ See 17 CFR 240.18a-4(a)(2)(ii) and (b).
                 \26\ See 17 CFR 240.18a-4.
                 \27\ See 15 U.S.C. 78c-5(f)(4); 17 CFR 18a-4(f).
                 \28\ See 15 U.S.C. 78c-5(f)(4).
                 \29\ See SEC Final Capital, Margin and Segregation Release, 84
                FR at 43877-78, 43930, 43937.
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                 Finally, the implementation of portfolio margining of uncleared
                swaps and non-cleared security-based swaps also requires careful
                consideration of the potential impact on competition, including how it
                might influence customer behavior in selecting to do business with
                certain types of registrants (e.g., firms with multiple registrations
                that permit them to engage in a broader range of activities).
                 Given the scope, importance and interrelationships among the
                matters to consider, the Commissions believe it would be helpful to
                gather further information and comment from interested persons
                regarding portfolio margining of uncleared swaps and non-cleared
                security-based swaps. In section III below, the Commissions request
                comment generally on portfolio margining these instruments and on
                portfolio margining these positions in different account types.
                II. Regulatory Background
                 The specific requests for comment below take into account: (1) The
                types of registrations (broker-dealer, OTC derivatives dealer, SBSD,
                futures commission merchant (``FCM''), and swap dealer) an entity may
                need in order to engage in portfolio margining of uncleared swaps, non-
                cleared security-based swaps, and related positions; (2) the account
                types (securities account, security-based swap account, and swap
                account) these registrants can maintain; and (3) the margin and
                segregation requirements that apply to products carried in these
                account types. In particular, a broker or dealer in securities must be
                registered with the SEC. A broker-dealer that limits
                [[Page 70539]]
                securities dealing to OTC equity options and other OTC derivatives can
                operate as a special purpose broker-dealer known as an OTC derivatives
                dealer. An entity that deals in security-based swaps above a de minimis
                notional threshold will need to register with the SEC as an SBSD. An
                entity that solicits and accepts funds from customers to margin,
                secure, or guarantee futures, options on futures, or cleared swap
                transactions must register with the CFTC as an FCM. And, an entity that
                deals in swaps above a de minimis notional threshold must register with
                the CFTC as a swap dealer.
                A. Broker-Dealers
                 A broker-dealer is subject to initial margin requirements
                promulgated by the Board of Governors of the Federal Reserve System
                (``Federal Reserve Board'') in Regulation T.\30\ A broker-dealer also
                is subject to maintenance margin requirements promulgated by self-
                regulatory organizations (``SROs'').\31\ The initial margin
                requirements of Regulation T generally govern the amount of credit that
                can be extended by a broker-dealer to finance a position in a margin
                account. The maintenance margin requirements of the SROs govern the
                amount of equity that must be maintained in the margin account on an
                ongoing basis. Regulation T has an exception from its initial margin
                requirements for accounts that are margined pursuant to an SRO
                portfolio margin rule.\32\ SROs have adopted portfolio margin rules
                subject to this exception and, therefore, a broker-dealer must collect
                initial and maintenance margin in a portfolio margin account in
                accordance with the SRO portfolio margin rules. Margin calculations
                under the SRO portfolio margin rules are based on the method in
                Appendix A to Rule 15c3-1 (``Appendix A Methodology'').\33\ With
                respect to options, initial and maintenance margin requirements are
                generally set by the SROs.\34\
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                 \30\ 12 CFR 220.1, et seq.
                 \31\ See, e.g., FINRA Rules 4210-4240. Customers of broker-
                dealers are also subject to specific margin rules for security
                futures, jointly regulated by the CFTC and the SEC.
                 \32\ 12 CFR 220.1(b)(3)(i).
                 \33\ See, e.g., FINRA Rule 4210(g).
                 \34\ 12 CFR 220.12(f).
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                 A broker-dealer also is subject to margin rules for security
                futures promulgated jointly by the Commissions.\35\ Security futures
                margined in an SRO portfolio margin account are not subject to the
                Commissions' rules and, therefore, are margined according to the SRO
                portfolio margin rules.\36\
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                 \35\ See 17 CFR 41.42-41.49 (CFTC regulations); 17 CFR 242.400-
                242.406 (SEC regulations).
                 \36\ See 17 CFR 242.400(c)(2).
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                 A broker-dealer that operates as an OTC derivatives dealer is
                exempt from the requirements of Regulation T, provided that the firm
                complies with Regulation U of the Federal Reserve Board.\37\ While an
                OTC derivative dealer is subject to Regulation U, this rule generally
                does not prescribe margin requirements for OTC derivatives such as OTC
                equity options. The firm also is exempt from membership in an SRO and,
                therefore, not subject to SRO margin rules.\38\
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                 \37\ 17 CFR 240.36a1-1.
                 \38\ 17 CFR 240.15b9-2.
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                 A broker-dealer that is also registered as an SBSD will be subject
                to the margin requirements of Rule 18a-3 for non-cleared security-based
                swaps on the compliance date for that rule.\39\ A broker-dealer SBSD
                may apply to the SEC for authorization to use a model (including an
                industry standard model) to calculate initial margin for non-cleared
                security-based swaps. However, broker-dealer SBSDs (other than OTC
                derivatives dealers registered as SBSDs (``OTCDD/SBSDs'')) must use
                standardized haircuts prescribed in Rule 15c3-1 (which includes the
                option to use the Appendix A Methodology) to compute initial margin for
                non-cleared equity security-based swaps (even if the firm is approved
                to use a model to calculate initial margin for other types of
                positions).\40\ Moreover, as discussed above, Rule 18a-3 does not
                require a nonbank SBSD to post initial margin to any counterparties.
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                 \39\ See 17 CFR 240.18a-3.
                 \40\ 17 CFR 240.15c3-1.
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                 A broker-dealer that holds customer securities and cash (including
                securities and cash being used as initial margin) is subject to Rule
                15c3-3.\41\ The SEC amended Rule 15c3-3 to adopt the omnibus
                segregation requirements for security-based swaps applicable to a
                broker-dealer and a broker-dealer (other than an OTC derivatives
                dealer) also registered as a SBSD.\42\ A customer of a broker-dealer
                that is also registered as an SBSD can elect to have initial margin
                held by a third-party custodian pursuant to Section 3E(f) of the
                Exchange Act or held by the SBSD subject to the omnibus segregation
                requirements of Rule 15c3-3. Customers that are not affiliates of the
                broker-dealer cannot waive segregation, whereas affiliates can waive
                segregation.
                ---------------------------------------------------------------------------
                 \41\ 17 CFR 240.15c3-3. For a discussion of Rule 15c3-3, see
                SEC, Capital, Margin, and Segregation Proposing Release, 77 FR at
                70276-70277. Regulation T and portfolio margin accounts are combined
                when calculating segregation requirements under Exchange Act Rule
                15c3-3.
                 \42\ See 17 CFR 240.15c3-3(p).
                ---------------------------------------------------------------------------
                 As discussed above, the broker-dealer can re-hypothecate initial
                margin received from a customer for the limited purpose of entering
                into a transaction with another SBSD that hedges the transaction with
                the customer.\43\ Cash and securities held in a securities account at a
                broker-dealer (other than an OTC derivatives dealer) \44\ is protected
                under the Securities Investor Protection Act (``SIPA''), subject to
                certain exceptions. An OTC derivatives dealer is not subject to Rule
                15c3-3 and is not a member of the Security Investor Protection
                Corporation.\45\ Consequently, cash and securities held in a securities
                account at an OTC derivatives dealer are not protected by SIPA.
                ---------------------------------------------------------------------------
                 \43\ See 17 CFR 240.15c3-3(p)(1)(ii)(B) and (p)(2).
                 \44\ See section II.A (describing regulatory requirements for
                OTC derivatives dealers).
                 \45\ 17 CFR 240.15c3-3(a)(1) (defining the term customer to
                exclude a counterparty to an OTC derivatives transaction with an OTC
                derivatives dealer if certain conditions are met) and 17 CFR
                240.36a1-2 (Exemption from SIPA for OTC derivatives dealers).
                ---------------------------------------------------------------------------
                B. Nonbank Stand-Alone SBSDs
                 A Stand-Alone SBSD that is not a bank (``Nonbank Stand-Alone
                SBSD'') will be subject to the margin requirements of Rule 18a-3 for
                non-cleared security-based swaps on the compliance date for that
                rule.\46\ A Nonbank Stand-Alone SBSD may apply to the SEC for
                authorization to use a model (including an industry standard model) to
                calculate initial margin for non-cleared security-based swaps.
                Moreover, unlike a broker-dealer (other than an OTCDD/SBSD) registered
                as an SBSD, a Nonbank Stand-Alone SBSD may use a model to calculate
                initial margin for non-cleared equity security-based swaps, provided
                the account of the counterparty does not hold equity security positions
                other than equity security-based swaps and equity swaps. Initial margin
                requirements also may be calculated by applying the standardized
                haircuts prescribed in Rule 18a-1, the net capital rule for Stand-Alone
                SBSDs.\47\ As discussed above, Rule 18a-3 does not require a Nonbank
                Stand-Alone SBSD to post initial margin to its counterparties.
                ---------------------------------------------------------------------------
                 \46\ 17 CFR 240.18a-3.
                 \47\ 17 CFR 240.18a-1.
                ---------------------------------------------------------------------------
                 Pursuant to Section 3E(f) of the Exchange Act, a customer of a
                Nonbank Stand-Alone SBSD can elect to have initial margin posted to the
                firm held by a third-party custodian or waive segregation with respect
                to the initial margin.\48\ In addition, a Nonbank Stand-
                [[Page 70540]]
                Alone SBSD will be subject to the omnibus segregation requirements of
                Rule 18a-4 with respect to non-cleared security-based swaps.\49\ The
                omnibus segregation requirements are the default requirement if the
                counterparty does not elect to have initial margin held by a third-
                party custodian or waive segregation.
                ---------------------------------------------------------------------------
                 \48\ See 15 U.S.C. 78c-5(f).
                 \49\ 17 CFR 240.18a-4.
                ---------------------------------------------------------------------------
                 A Nonbank Stand-Alone SBSD, however, will be exempt from the
                requirements of Rule 18a-4 if the firm meets certain conditions,
                including that the firm: (1) Does not clear security-based swap
                transactions for other persons; (2) provides notice to the counterparty
                regarding the right to segregate initial margin at an independent
                third-party custodian; (3) discloses to the counterparty in writing
                that any collateral received by the Nonbank Stand-Alone SBSD will not
                be subject to a segregation requirement; and (4) discloses to the
                counterparty how a claim of the counterparty for the collateral would
                be treated in a bankruptcy or other formal liquidation proceeding of
                the Nonbank Stand-Alone SBSD.\50\
                ---------------------------------------------------------------------------
                 \50\ 17 CFR 240.18a-4(f). Rule 18a-4 also has exceptions
                pursuant to which a foreign stand-alone SBSD need not comply with
                the segregation requirements (including the omnibus segregation
                requirements) for certain transactions. 17 CFR 240.18a-4(e).
                ---------------------------------------------------------------------------
                C. Swap Dealers
                 The CFTC's margin rules impose initial and variation margin
                requirements on covered swap dealers and covered major swap
                participants for swap transactions (``covered swap entities'') that are
                not cleared by a registered derivatives clearing organization.\51\ The
                CFTC's initial margin rules require a covered swap dealer to both
                collect and post initial margin on uncleared swap transactions entered
                into with other swap dealers and with financial end users with material
                swaps exposure.\52\ CFTC margin rules require that initial margin be
                calculated using a standardized table-based method or a model
                (including an industry standard model).\53\ The initial margin model
                must be approved by the CFTC or a registered futures association (i.e.,
                National Futures Association).
                ---------------------------------------------------------------------------
                 \51\ The CFTC's uncleared swap margin rules are codified in part
                23 of the CFTC's regulations (17 CFR 23.150--23.161).
                 \52\ 17 CFR 23.152. The term ``material swaps exposure'' 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 and
                August of the previous calendar year that exceeds $8 billion, where
                such amount is calculated only for business days.
                 \53\ 17 CFR 23.154.
                ---------------------------------------------------------------------------
                 The CFTC's uncleared swap margin rules also establish minimum
                standards for the safekeeping of collateral. The rules generally
                require that initial margin collateral received or posted by the
                covered swap entity must be held by one or more unaffiliated third-
                party custodians.\54\ The rules also require the custodian to act
                pursuant to a custodial agreement that is legal, valid, binding, and
                enforceable under the laws of all relevant jurisdictions, including in
                the event of bankruptcy, insolvency, or similar proceedings.\55\ The
                custodial agreement must prohibit the custodian from rehypothecating,
                repledging, reusing, or otherwise transferring (through securities
                lending, repurchase agreement, reverse repurchase agreement, or other
                means) the funds or other property held by the custodian.\56\
                ---------------------------------------------------------------------------
                 \54\ 17 CFR 23.157(a)-(b).
                 \55\ 17 CFR 23.157(c).
                 \56\ Id.
                ---------------------------------------------------------------------------
                III. Request for Comment
                A. General Request for Comment
                 The Commissions request comment on all aspects of the portfolio
                margining of uncleared swaps and non-cleared security-based swaps,
                including on the merits, benefits, and risks of portfolio margining
                these types of positions, and on any regulatory and operational issues
                associated with portfolio margining them. The Commissions seek comment
                on these matters generally and commenters are encouraged to address
                matters related to portfolio margining not specifically identified in
                the requests for comment below.
                 In responding to this general request for comment and on the
                specific requests for comment below, the Commissions encourage
                commenters to provide empirical support for their arguments and
                analyses. Comments are of the greatest assistance to the Commissions
                when accompanied by supporting data and analysis.
                B. Specific Requests for Comment
                1. Securities Account
                 The Commissions request comment on whether uncleared swaps, non-
                cleared security-based swaps, cash market securities positions, listed
                securities options, OTC securities options, futures, options on
                futures, and security futures should be permitted to be portfolio
                margined in the following account types: (1) A securities account that
                is subject to SRO portfolio margin rules; and (2) a securities account
                that is subject to the initial margin requirements of Regulation T and
                maintenance margin requirements of the SRO margin rules (i.e., a
                securities account that is not subject to the SRO portfolio margin
                rules). Commenters are asked to address the following matters.
                 Identify and describe the relative benefits of portfolio
                margining in each of these securities account types, and describe how
                the benefits compare to the benefits of other account types discussed
                in this request for comment.
                 Identify and describe the risks of portfolio margining in
                each of these securities account types, and describe how those risks
                compare to the risks of other account types discussed in this request
                for comment, as well as how the risks compare to margining under the
                existing framework.
                 Identify and describe what models might be appropriate for
                portfolio margining positions in each of these securities account
                types, as well as the process for approving and reviewing such models.
                 Identify and describe any regulatory issues associated
                with portfolio margining in each of these securities account types,
                including issues relating to (1) differences in the statutes governing
                futures, options on futures, uncleared swaps, non-cleared security-
                based swaps, and securities other than security-based swaps, (2)
                differences in the regulatory requirements of the CFTC, SEC, and SROs
                applicable to futures, options on futures, uncleared swaps, non-cleared
                security-based swaps, and securities other than security-based swaps
                (including differences in margin and segregation requirements), and (3)
                differences in the bankruptcy treatment of futures, options on futures,
                uncleared swaps, non-cleared security-based swaps, and securities other
                than security-based swaps.
                 As discussed above, the CFTC's rules prohibit the re-
                hypothecation of initial margin collateral. The SEC's rules permit
                limited re-hypothecation of initial margin collateral received from
                customers or counterparties. Discuss the potential implications of the
                differences in the Commissions' approaches to the re-hypothecation of
                initial margin collateral relevant to a portfolio margin scheme.
                 Section 16 of SIPA defines the terms ``customer,''
                ``customer property,'' and ``net equity'' to include securities,
                futures, and options on futures, but not swaps or security-based
                swaps.\57\ The
                [[Page 70541]]
                Commissions request comment on steps broker-dealers (including broker-
                dealers that are SBSDs) can take to ensure the protections afforded by
                SIPA will apply to all positions held in a securities account. Comment
                also is sought on the types of disclosures broker-dealers and SBSDs can
                make to their portfolio margin accountholders about positions in a
                securities account that are not within the SIPA definitions of
                ``customer,'' ``customer property,'' and ``net equity.'' Comment also
                is sought on the expectations of market participants as to whether the
                initial margin and accrued gains associated with uncleared swaps and
                non-cleared security-based swaps held in a portfolio margin account
                that is a securities account is subject to SIPA protection in the event
                of the insolvency of the broker-dealer.
                ---------------------------------------------------------------------------
                 \57\ Section 983 of the Dodd-Frank Act amended Section 16 of
                SIPA to define the term ``customer'' to include a person that has a
                claim for futures and options on futures, and to define the term
                ``customer property'' to include futures and options on futures, in
                each case where they are held in a portfolio margining account
                carried as a securities account pursuant to a portfolio margining
                program approved by the SEC. Section 3(a)(10) of the Exchange Act
                defines the term ``security'' to include a security-based swap for
                purposes of the Exchange Act. 15 U.S.C 78c(a)(10).
                ---------------------------------------------------------------------------
                 As noted above, the CFTC margin rules require swap dealers
                to post initial margin for uncleared swaps entered into with other swap
                dealers or with financial end users with material swaps exposure. The
                SEC's margin rules permit, but do not require, an SBSD to post initial
                margin for non-cleared security-based swaps entered into with other
                broker-dealers, SBSDs, swap dealers, or financial end users. How should
                the Commissions address the differences in the initial margin posting
                requirements in a portfolio margin account? If portfolio margining
                resulted in the transfer of significant swap trading relationships to
                SBSDs, which would operate under a ``collect only'' regime, would that
                increase the potential for counterparty risk, including liquidity
                mismatches between counterparties? Alternatively, would it lower
                systemic risk by promoting the liquidity of SBSDs? Discuss the
                potential impact on the markets and market participants if entities
                registered as broker-dealers and swap dealers or as broker-dealers,
                SBSDs, and swap dealers are not required to post initial margin to
                counterparties for uncleared swaps held in a portfolio margin account
                while stand-alone swap dealers are required to post initial margin to
                counterparties for uncleared swap transactions. Should the Commissions
                require entities registered as broker-dealers and swap dealers or as
                broker-dealers, SBSDs, and swap dealers to post margin for uncleared
                swaps held in a portfolio margin account with covered counterparties?
                How should such margin be computed? Would requiring these entities to
                post margin undermine the benefits of portfolio margining? Would it
                increase costs to customers to compensate these entities for having to
                use their capital to meet margin requirements? In addition, would
                requiring these entities to post initial margin create a barrier to
                entry for smaller firms that do not have the resources to post initial
                margin?
                 If portfolio margining resulted in the transfer of
                significant swap trading relationships to broker-dealer SBSDs, which
                would operate under a ``collect only'' regime, how would this impact
                the risks customers face in the event of an SBSD's default? How should
                the Commissions balance the relative concerns related to trying to
                enhance liquidity of SBSDs while ensuring customer protection? Are
                there any lessons to be learned from events impacting swap markets
                during the recent COVID market volatility?
                 Identify and describe any operational issues associated
                with portfolio margining in each of these securities account types.
                 SIPA defines the term ``customer'' to include a person
                that has a claim for futures and options on futures, and defines the
                term ``customer property'' to include futures and options on futures,
                in each case where they are held in a portfolio margining account
                carried as a securities account pursuant to a portfolio margining
                program approved by the SEC. The Commissions request specific comment
                on any legal and operational issues associated with holding futures and
                options on futures in a portfolio margin account that is a securities
                account.
                 As discussed above, an entity that effects transactions in
                securities must be registered with the SEC as a broker-dealer. A
                broker-dealer that limits securities dealing to OTC equity options and
                other OTC derivatives can operate as a special purpose broker-dealer
                known as OTC derivatives dealer. An entity that deals in security-based
                swaps above a de minimis notional threshold will need to register with
                the SEC as an SBSD. An entity that deals in swaps above a de minimis
                notional threshold must register with the CFTC as a swap dealer. And,
                an entity that clears futures, or options on futures, or swaps for
                customers must register as an FCM. Please discuss any regulatory or
                operational issues raised by portfolio margining in each securities
                account type in light of these and any other relevant registration
                requirements.
                 Discuss how the Commissions could implement portfolio
                margin requirements for each securities account type, including
                potential relief the Commissions could provide to address regulatory
                and operational issues associated with portfolio margining in each
                securities account type.
                 Identify and describe any conditions the Commissions
                should consider with respect to portfolio margining in each securities
                account type to mitigate risk and address regulatory and operational
                issues.
                 Identify the categories of futures, options on futures,
                uncleared swaps, non-cleared security-based swaps, and securities
                (other than security-based swaps) that should be permitted to be
                portfolio margined in each securities account type and discuss why they
                should be included and, if applicable, why other categories of these
                instruments should be excluded.
                 Discuss whether market participants would be likely to use
                either of these securities account types to portfolio margin futures,
                options on futures, uncleared swaps, non-cleared security-based swaps,
                cash market securities positions, listed securities options, and OTC
                securities options, and explain why they would or would not use the
                securities account type.
                 Identify and describe the potential costs and benefits, as
                well as the competitive impact--either positive or negative--of
                permitting market participants to portfolio margin futures, options on
                futures, uncleared swaps, non-cleared security-based swaps, cash market
                securities positions, listed securities options, OTC securities
                options, and security futures in either of these securities account
                types. Please quantify, including by way of example, these potential
                costs, benefits and impacts to the extent practicable.
                2. Security-Based Swap Account
                 The Commissions request comment on whether non-cleared security-
                based swaps, uncleared swaps, and OTC securities options (if the firm
                is registered as an OTCDD/SBSD) should be permitted to be portfolio
                margined in a security-based swap account. Commenters are asked to
                address the following matters.
                 Identify and describe the relative benefits of portfolio
                margining in a security-based swap account, and describe how the
                benefits compare to the benefits of other account types discussed in
                this request for comment, as well as how the risks compare to margining
                under the existing framework.
                 Identify and describe the risks of portfolio margining in
                a security-based swap account, and describe how those risks compare to
                the risks of other
                [[Page 70542]]
                account types discussed in this request for comment.
                 Identify and describe what models might be appropriate for
                portfolio margining positions in a security-based swap account, as well
                as the process for approving and reviewing such models.
                 Identify and describe any regulatory issues associated
                with portfolio margining in a security-based swap account, including
                issues relating to (1) differences in the statutes governing uncleared
                swaps, non-cleared security-based swaps, and securities other than
                security-based swaps, (2) differences in the regulatory requirements of
                the CFTC, SEC, and SROs applicable to uncleared swaps, non-cleared
                security-based swaps, and securities other than security-based swaps
                (including differences in margin and segregation requirements), and (3)
                differences in the bankruptcy treatment of uncleared swaps, non-cleared
                security-based swaps, and securities other than security-based swaps.
                 The Dodd-Frank Act amended section 3E(g) of the Exchange
                Act to provide that a security-based swap shall be considered a
                ``security'' as the term is used in a stockbroker liquidation under
                Subchapter III of title 11 of the U.S. bankruptcy code (11 U.S.C. 741-
                753). Section 3E(g) was not amended to provide that a swap shall be
                considered a ``security'' as the term is used in a stockbroker
                liquidation under Subchapter III of title 11 of the U.S. bankruptcy
                code. Section 3E(g) of the Securities Exchange Act also provides that
                the term ``customer'' as defined in section Sec. 741 of title 11 of
                the U.S. bankruptcy code, excludes any person to the extent that such
                person has a claim based on a non-cleared option or non-cleared
                security-based swap except to the extent of margin delivered to or by
                the customer with respect to which there is a customer protection
                requirement under Section 15(c)(3) of the Exchange Act or a segregation
                requirement. The Commissions request specific comment on steps SBSDs
                can take to ensure the protections afforded by the stockbroker
                liquidation provisions will apply to positions held in a security-based
                swap account, including swaps and accrued gains on open options and
                non-cleared security-based swaps. What are the implications for
                customer protection? Can those implications be mitigated? If so, how?
                 Comment also is sought on the types of disclosures SBSDs
                can make to their portfolio margin accountholders about positions in a
                security-based swap account that are not within the definitions of
                ``customer,'' ``customer property,'' and ``net equity'' in the
                stockbroker liquidation provisions of the U.S. bankruptcy code. Comment
                also is sought on the expectations of market participants as to the
                extent to which customer claims in a stockbroker liquidation under the
                U.S. bankruptcy code include property held to margin swaps or accruing
                to the customer as a result of swap transactions in a portfolio
                margining account held in a security-based swap account.
                 As noted above, the CFTC margin rules require swap dealers
                to post initial margin for uncleared swaps entered into with other swap
                dealers or with financial end users with material swaps exposure. The
                SEC's margin rules permit, but do not require, an SBSD to post initial
                margin for non-cleared security-based swaps entered into with other
                broker-dealers, SBSDs, swap dealers, or with financial end users. How
                should the Commissions address the differences in the initial margin
                posting requirements in a portfolio margin account? If portfolio
                margining resulted in the transfer of significant swap trading
                relationships to SBSDs, which would operate under a ``collect only''
                regime, would that increase the potential for risk and liquidity
                mismatches between counterparties? Alternatively, would it lower
                systemic risk by promoting the liquidity of SBSDs? Discuss the
                potential impact on the markets and market participants if entities
                registered as SBSDs and swap dealers are not required to post initial
                margin to counterparties for uncleared swaps held in a portfolio margin
                account while stand-alone swap dealers are required to post initial
                margin to counterparties for uncleared swap transactions. Should the
                Commissions require entities registered as SBSDs and swap dealers to
                post margin for uncleared swaps held in a portfolio margin account with
                covered counterparties? How should such margin be computed?
                Alternatively, would requiring these entities to post margin undermine
                the benefits of portfolio margining? Would it increase costs to
                customers to compensate these entities for having to use their capital
                to meet margin requirements? In addition, would requiring these
                entities to post initial margin create a barrier to entry for smaller
                firms that do not have the resources to post initial margin?
                 If portfolio margining resulted in the transfer of
                significant swap trading relationships to Nonbank Stand-Alone SBSDs,
                which would operate under a ``collect only'' regime, how would this
                impact the risks customers face in the event of an SBSD's default? How
                should the Commissions balance the relative concerns related to trying
                to enhance liquidity of SBSDs while ensuring customer protection? Are
                there any lessons to be learned from events impacting swap markets
                during the recent COVID market volatility?
                 Identify and describe any operational issues associated
                with portfolio margining in a security-based swap account.
                 As discussed above, an entity that effects transactions in
                securities must be registered with the SEC as a broker-dealer. A
                broker-dealer that limits securities dealing to OTC equity options and
                other OTC derivatives can operate as special purpose broker-dealer
                known as OTC derivatives dealer. An entity that deals in security-based
                swaps above a de minimis notional threshold will need to register with
                the SEC as an SBSD. And, an entity that deals in swaps above a de
                minimis notional threshold must register with the CFTC as a swap
                dealer. Please discuss any regulatory or operational issues raised by
                portfolio margining in a security-based swap account in light of these
                and any other relevant registration requirements.
                 Discuss how the Commissions could implement portfolio
                margin requirements for a security-based swap account, including
                potential relief the Commissions could provide to address regulatory
                and operational issues associated with portfolio margining in a
                security-based swap account.
                 Identify and describe any conditions the Commissions
                should consider with respect to portfolio margining in a security-based
                swap account to mitigate risk and address regulatory and operational
                issues.
                 Identify the categories of uncleared swaps, non-cleared
                security-based swaps, and OTC securities options (if the firm is
                registered as an OTC derivatives dealer) that should be permitted to be
                portfolio margined in the security-based swap account and discuss why
                they should be included and, if applicable, why other categories of
                these instruments should be excluded.
                 Discuss whether market participants would use a security-
                based swap account to portfolio margin uncleared swaps, non-cleared
                security-based swaps, and OTC securities options (if the firm is
                registered as an OTCDD/SBSD) and explain why they would or would not
                use this account type for this purpose.
                 Identify and describe the potential costs and benefits, as
                well as the competitive impact--either positive or negative--of
                permitting market participants to portfolio margin non-cleared
                security-based swaps, uncleared
                [[Page 70543]]
                swaps, and OTC securities options (if the firm is registered as an
                OTCDD/SBSD) in a security-based swap account. Please quantify,
                including by way of example, these potential costs, benefits and
                impacts to the extent practicable.
                3. Swap Account
                 The Commissions request comment on whether uncleared swaps and non-
                cleared security-based swaps should be permitted to be portfolio
                margined in a swap account. Commenters are asked to address the
                following matters.
                 Identify and describe the relative benefits of portfolio
                margining in a swap account, and describe how the benefits compare to
                the benefits of other account types discussed in this request for
                comment.
                 Identify and describe the risks of portfolio margining in
                a swap account, and describe how those risks compare to the risks of
                other account types discussed in this request for comment, as well as
                how the risks compare to margining under the existing framework.
                 Identify and describe what models might be appropriate for
                portfolio margining positions in a swap account, as well as the process
                for approving and reviewing such models.
                 Identify and describe any regulatory issues associated
                with portfolio margining in a swap account, including issues relating
                to (a) differences in the statutes governing uncleared swaps, non-
                cleared security-based swaps, and securities other than security-based
                swaps, (b) differences in the regulatory requirements of the CFTC, SEC,
                and SROs applicable to uncleared swaps, non-cleared security-based
                swaps, and securities other than security-based swaps (including
                differences in margin and segregation requirements), and (c)
                differences in the bankruptcy treatment of uncleared swaps, non-cleared
                security-based swaps, and securities other than security-based swaps.
                 As noted above, the CFTC margin rules require swap dealers
                to post initial margin for uncleared swaps entered into with other swap
                dealers or with financial end users with material swaps exposure. The
                SEC's margin rules permit, but do not require, an SBSD to post initial
                margin for non-cleared security-based swaps entered into with other
                broker-dealers, SBSDs, swap dealers, or with financial end users. How
                should the Commissions address the differences in the initial margin
                posting requirements in a portfolio margin account? If portfolio
                margining resulted in the transfer of significant swap trading
                relationships to SBSDs, which would operate under a ``collect only''
                regime, would that increase the potential for risk and liquidity
                mismatches between counterparties? How do commenters view any systemic
                risk implications of SBSDs not posting initial margin? Would it lower
                systemic risk by promoting the liquidity of SBSDs? Discuss the
                potential impact on the markets and market participants if entities
                registered as broker-dealers and swap dealers or as broker-dealers,
                SBSDs, and swap dealers or as SBSDs and swap dealers are not required
                to post initial margin to counterparties for uncleared swaps held in a
                portfolio margin account while stand-alone swap dealers are required to
                post initial margin to counterparties for uncleared swap transactions.
                Would such a portfolio margining approach provide a disincentive for
                customers to trade with stand-alone swap dealers and what would be the
                potential market impact of such a disincentive? Should the Commissions
                require entities registered as broker-dealers and swap dealers or as
                broker-dealers, SBSDs, and swap dealers or as SBSDs and swap dealers to
                post margin for uncleared swaps held in a portfolio margin account with
                covered counterparties? How should such margin be computed?
                Alternatively, would requiring these entities to post margin undermine
                the benefits of portfolio margining? Would it increase costs to
                customers to compensate these entities for having to use their capital
                to meet margin requirements? In addition, would requiring these
                entities to post initial margin create a barrier to entry for smaller
                firms that do not have the resources to post initial margin?
                 As discussed above, an entity that effects transactions in
                securities must be registered with the SEC as a broker-dealer. A
                broker-dealer that limits securities dealing to OTC equity options and
                other OTC derivatives can operate as special purpose broker-dealer
                known as OTC derivatives dealer. An entity that deals in security-based
                swaps above a de minimis notional threshold will need to register with
                the SEC as an SBSD. And, an entity that deals in swaps above a de
                minimis notional threshold must register with the CFTC as a swap
                dealer. And, an entity that clears futures, options on futures, or
                swaps for customers must register as an FCM. Please discuss any
                regulatory or operational issues raised by portfolio margining in a
                swap account in light of these and any other relevant registration
                requirements.
                 Identify and describe any operational issues associated
                with portfolio margining in a swap account.
                 Discuss how the Commissions could implement portfolio
                margin requirements for a swap account, including potential relief the
                Commissions could provide to address regulatory and operational issues
                associated with portfolio margining in a swap account.
                 Identify and describe any conditions the Commissions
                should consider with respect to portfolio margining in a swap account
                to mitigate risk and address regulatory and operational issues.
                 Identify the categories of swaps and security-based swaps
                that should be permitted to be portfolio margined in the swap account
                and discuss why they should be included and, if applicable, why other
                categories of these instruments should be excluded.
                 Discuss whether market participants would use a swap
                account to portfolio margin uncleared swaps and non-cleared security-
                based swaps, and explain why they would or would not use this account
                type for this purpose.
                 Identify and describe the potential costs and benefits, as
                well as the competitive impact--either positive or negative--of
                permitting market participants to portfolio margin uncleared swaps and
                non-cleared security-based swaps in a swap account. Please quantify,
                including by way of example, these potential costs, benefits and
                impacts to the extent practicable.
                4. Other Potential Portfolio Margin Scenarios
                 In addition to the requests for comment on the specific account
                types discussed above, the Commissions request comment on whether there
                are any other potential portfolio margin scenarios with regard to
                uncleared swaps, non-cleared security-based swaps, and other related
                positions that the Commissions should consider at this time. Commenters
                should identify and describe the specific products and account type
                involved in any other potential portfolio margin alternatives.
                Commenters also are asked to address any potential regulatory or
                operational issues involving a particular portfolio margin scenario.
                Finally, commenters should address any potential costs and benefits and
                competitive impact the Commissions should consider in evaluating a
                particular portfolio margin scenario.
                 By the Securities and Exchange Commission.
                [[Page 70544]]
                 Dated: October 22, 2020.
                Vanessa A. Countryman,
                Secretary.
                 Issued in Washington, DC, on October 23, 2020, by the Commodity
                Futures Trading Commission.
                Christopher Kirkpatrick,
                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--CFTC Voting Summary and Commissioner's
                Statement
                Appendix 1--CFTC 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--Supporting Statement of CFTC Commissioner Brian Quintenz
                 I am proud to support today's request for comment, which marks
                the beginning of the agencies' consideration of ways to implement a
                portfolio margining regime for uncleared swaps and non-cleared
                security-based swaps. Portfolio margining can lead to efficiencies
                in margin calculation by appropriately accounting for the impact
                offsetting positions have on a portfolio's actual risk profile.
                This, in turn, gives firms and customers additional capital that can
                be deployed elsewhere. However, given the differences between the
                regulatory regimes for swaps and security-based swaps, it also
                implicates incredibly important legal and policy considerations.
                This request for comment solicits critical feedback from market
                participants on how portfolio margining could impact the safety and
                soundness of firms, result in competitive advantages for certain
                types of registrants, and raise questions about how collateral would
                be treated in the event of bankruptcy. In order to make an informed
                decision about if, and how, portfolio margining should be
                implemented for uncleared swaps and non-cleared security-based
                swaps, we need thoughtful feedback on these complex questions. I
                encourage all interested parties to provide written comments,
                including data wherever possible, in order to further the agencies'
                understanding of the various options presented in the request for
                comment.
                [FR Doc. 2020-23928 Filed 11-4-20; 8:45 am]
                BILLING CODE 6351-01-P
                

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