2017-22616

Law & Regulation

2017-22616

  •  

    Federal Register, Volume 82 Issue 200 (Wednesday, October 18, 2017)

    [Federal Register Volume 82, Number 200 (Wednesday, October 18, 2017)]

    [Rules and Regulations]

    [Pages 48394-48413]

    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

    [FR Doc No: 2017-22616]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Chapter I

    Comparability Determination for the European Union: Margin

    Requirements for Uncleared Swaps for Swap Dealers and Major Swap

    Participants

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notification of determination.

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    SUMMARY: The following is the analysis and determination of the

    Commodity Futures Trading Commission (``Commission'') regarding a

    request by the European Commission (``EC'') that the Commission

    determine that laws and regulations applicable in the European Union

    (``EU'') provide a sufficient basis for an affirmative finding of

    comparability with respect to margin requirements for uncleared swaps

    applicable to certain swap dealers (``SDs'') and major swap

    participants (``MSPs'') registered with the Commission. As discussed in

    detail herein, the Commission has found the margin requirements for

    uncleared swaps under the laws and regulations of the EU comparable in

    outcome to those under the Commodity Exchange Act (``CEA'') and

    Commission regulations.

    DATES: This determination was made and issued by the Commission on

    October 13, 2017.

    FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-

    5213, [email protected], or Katherine S. Driscoll, Associate Chief

    Counsel, 202-418-5544, [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. Introduction

    Pursuant to section 4s(e) of the CEA,\1\ the Commission is required

    to promulgate margin requirements for uncleared swaps applicable to

    each SD and MSP for which there is no Prudential Regulator

    (collectively, ``Covered Swap Entities'' or ``CSEs'').\2\ The

    Commission published final margin requirements for such CSEs in January

    2016 (the ``Final Margin Rule'').\3\

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    \1\ 7 U.S.C. 1 et seq.

    \2\ 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 include: 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

    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'

    Final Margin Rule'').

    \3\ See Margin Requirements for Uncleared Swaps for Swap Dealers

    and Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The Final

    Margin Rule, which became effective April 1, 2016, is codified in

    part 23 of the Commission's regulations. See Sec. Sec. 23.150--

    23.159 and 23.161. The Commission's regulations are found in Chapter

    I of Title 17 of the Code of Federal Regulations, 17 CFR parts 1

    through 199.

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    Subsequently, on May 31, 2016, the Commission published in the

    Federal Register its final rule with respect to the cross-border

    application of the Commission's margin requirements for uncleared swaps

    applicable to CSEs (hereinafter, the ``Cross-Border Margin Rule'').\4\

    The Cross-Border Margin Rule sets out the circumstances under which a

    CSE is allowed to satisfy the requirements under the Final Margin Rule

    by complying with comparable foreign margin requirements (``substituted

    compliance''); offers certain CSEs a limited exclusion from the

    Commission's margin requirements; and outlines a framework for

    assessing whether a foreign jurisdiction's margin requirements are

    comparable in outcome to the Final Margin Rule (``comparability

    determinations''). The Commission promulgated the Cross-Border Margin

    Rule after close consultation with the Prudential Regulators and in

    light of comments

    [[Page 48395]]

    from and discussions with market participants and foreign

    regulators.\5\

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    \4\ See 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). The Cross-Border Margin

    Rule, which became effective August 1, 2016, is codified in part 23

    of the Commission's regulations. See Sec. 23.160.

    \5\ In 2014, in conjunction with re-proposing its margin

    requirements, the Commission requested comment on three alternative

    approaches to the cross-border application of its margin

    requirements: (i) A transaction-level approach consistent with the

    Commission's guidance on the cross-border application of the CEA's

    swap provisions, see Interpretive Guidance and Policy Statement

    Regarding Compliance with Certain Swap Regulations, 78 FR 45292

    (July 26, 2013) (the ``Guidance''); (ii) an approach consistent with

    the Prudential Regulators' proposed cross-border framework for

    margin, see Margin and Capital Requirements for Covered Swap

    Entities, 79 FR 57348 (Sept. 24, 2014); and (iii) an entity-level

    approach that would apply margin rules on a firm-wide basis (without

    any exclusion for swaps with non-U.S. counterparties). See Margin

    Requirements for Uncleared Swaps for Swap Dealers and Major Swap

    Participants, 79 FR 59898 (Oct. 3, 2014). Following a review of

    comments received in response to this release, the Commission's

    Global Markets Advisory Committee (``GMAC'') hosted a public panel

    discussion on the cross-border application of margin requirements.

    See GMAC Meeting (May 14, 2015), transcript and webcast available at

    http://www.cftc.gov/PressRoom/Events/opaevent_gmac051415.

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    On November 22, 2016, the EC (the ``applicant'') submitted a

    request that the Commission determine that laws and regulations

    applicable in the EU provide a sufficient basis for an affirmative

    finding of comparability with respect to the Final Margin Rule.\6\ The

    Commission's analysis and comparability determination for the EU

    regarding the Final Margin Rule is detailed below.

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    \6\ The Commission understands that competent authorities in the

    individual EU Member States have direct supervisory authority over

    CSEs in their respective Member State with respect to the EU margin

    requirements (as defined below) and are responsible for

    administering those margin requirements. Nevertheless, given that

    the EU comprises the Member States and the EU margin requirements

    are directly applicable in the Member States, the Commission

    recognizes the EC as the relevant foreign regulatory authority for

    purposes of Sec. 23.160(c)(1)(ii).

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    II. Cross-Border Margin Rule

    A. Regulatory Objective of Margin Requirements

    The regulatory objective of the Final Margin Rule is to further the

    congressional mandate to ensure the safety and soundness of CSEs in

    order to offset the greater risk to CSEs and the financial system

    arising from the use of swaps that are not cleared.\7\ As the

    Commission has previously stated, the primary function of margin is to

    protect a CSE from counterparty default, allowing it to absorb losses

    and continue to meet its obligations using collateral provided by the

    defaulting counterparty. While the requirement to post margin protects

    the counterparty in the event of the CSE's default, it also functions

    as a risk management tool, limiting the amount of leverage a CSE can

    utilize by requiring that it have adequate eligible collateral to enter

    into an uncleared swap. In this way, margin serves as a first line of

    defense not only in protecting the CSE but in containing the amount of

    risk in the financial system as a whole, reducing the potential for

    contagion arising from uncleared swaps.\8\

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    \7\ See 7 U.S.C. 6s(e)(3)(A).

    \8\ See Final Margin Rule, 81 FR 689.

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    However, the global nature of the swap market, coupled with the

    interconnectedness of market participants, also necessitate that the

    Commission recognize the supervisory interests of foreign regulatory

    authorities and consider the impact of its choices on market efficiency

    and competition, which the Commission believes are vital to a well-

    functioning global swap market.\9\ Foreign jurisdictions are at various

    stages of implementing margin reforms. To the extent that other

    jurisdictions adopt requirements with different coverage or timelines,

    the Commission's margin requirements may lead to competitive burdens

    for U.S. entities and deter non-U.S. persons from transacting with U.S.

    CSEs and their affiliates overseas.

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    \9\ In determining the extent to which the Dodd-Frank swap

    provisions apply to activities overseas, the Commission strives to

    protect U.S. interests, as determined by Congress in Title VII, and

    minimize conflicts with the laws of other jurisdictions, consistent

    with principles of international comity. See Guidance, 78 FR 45300-

    45301 (referencing the Restatement (Third) of Foreign Relations Law

    of the United States).

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    B. Substituted Compliance

    To address these concerns, the Cross-Border Margin Rule provides

    that, subject to certain findings and conditions, a CSE is permitted to

    satisfy the requirements of the Final Margin Rule by complying with the

    margin requirements in the relevant foreign jurisdiction. This

    substituted compliance regime is intended to address the concerns

    discussed above without compromising the congressional mandate to

    protect the safety and soundness of CSEs and the stability of the U.S.

    financial system. Substituted compliance helps preserve the benefits of

    an integrated, global swap market by reducing the degree to which

    market participants will be subject to multiple sets of regulations.

    Further, substituted compliance builds on international efforts to

    develop a global margin framework.\10\

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    \10\ In October 2011, the Basel Committee on Banking Supervision

    (``BCBS'') and the International Organization of Securities

    Commissions (``IOSCO''), in consultation with the Committee on

    Payment and Settlement Systems and the Committee on Global Financial

    Systems, formed a Working Group on Margining Requirements to develop

    international standards for margin requirements for uncleared swaps.

    Representatives of 26 regulatory authorities participated, including

    the Commission. In September 2013, the Working Group on Margin

    Requirements published a final report articulating eight key

    principles for non-cleared derivatives margin rules. These

    principles represent the minimum standards approved by BCBS and

    IOSCO and their recommendations to the regulatory authorities in

    member jurisdictions. See BCBS/IOSCO, Margin requirements for non-

    centrally cleared derivatives (updated March 2015) (``BCBS/IOSCO

    Framework''), available at http://www.bis.org/bcbs/publ/d317.pdf.

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    Pursuant to the Cross-Border Margin Rule, any CSE that is eligible

    for substituted compliance under Sec. 23.160 \11\ and any foreign

    regulatory authority that has direct supervisory authority over one or

    more CSEs and that is responsible for administering the relevant

    foreign jurisdiction's margin requirements may apply to the Commission

    for a comparability determination.\12\

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    \11\ See Sec. 23.160(c)(1)(i).

    \12\ See Sec. 23.160(c)(1)(ii).

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    The Cross-Border Margin Rule requires that applicants for a

    comparability determination provide copies of the relevant foreign

    jurisdiction's margin requirements \13\ and descriptions of their

    objectives,\14\ how they differ from the BCBS/IOSCO Framework,\15\ and

    how they address the elements of the Commission's margin

    requirements.\16\ The applicant must identify the specific legal and

    regulatory provisions of the foreign jurisdiction's margin requirements

    that correspond to each element and, if necessary, whether the relevant

    foreign jurisdiction's margin requirements do not address a particular

    element.\17\

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    \13\ See Sec. 23.160(c)(2)(v).

    \14\ See Sec. 23.160(c)(2)(i).

    \15\ See Sec. 23.160(c)(2)(iii). See also Sec. 23.160(a)(3)

    (defining ``international standards'' as based on the BCBS-ISOCO

    Framework).

    \16\ See 17 CFR 23.160(c)(2)(ii) (identifying 12 particular

    elements of the Commission's margin requirements). Section

    23.160(c)(2)(ii) largely tracks the elements of the BCBS/IOSCO

    Framework but breaks them down into their components as appropriate

    to ensure ease of application.

    \17\ See id.

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    C. Standard of Review for Comparability Determinations

    The Cross-Border Margin Rule identifies certain key factors that

    the Commission will consider in making a comparability determination.

    Specifically, the Commission will consider the scope and objectives of

    the relevant foreign jurisdiction's margin requirements; \18\ whether

    the relevant foreign jurisdiction's margin requirements achieve

    comparable outcomes to the Commission's

    [[Page 48396]]

    corresponding margin requirements; \19\ and the ability of the relevant

    regulatory authority or authorities to supervise and enforce compliance

    with the relevant foreign jurisdiction's margin requirements.\20\

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    \18\ See Sec. 23.160(c)(3)(i).

    \19\ See Sec. 23.160(c)(3)(ii). As discussed above, the

    Commission's Final Margin Rule is based on the BCBS/IOSCO Framework;

    therefore, the Commission expects that the relevant foreign margin

    requirements would conform to such Framework at minimum in order to

    be deemed comparable to the Commission's corresponding margin

    requirements.

    \20\ See Sec. 23.160(c)(3)(iii). See also Sec.

    23.160(c)(3)(iv) (indicating the Commission would also consider any

    other relevant facts and circumstances).

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    This process reflects an outcomes-based approach to assessing the

    comparability of a foreign jurisdiction's margin requirements. Instead

    of demanding strict uniformity with the Commission's margin

    requirements, the Commission evaluates the objectives and outcomes of

    the foreign margin requirements in light of foreign regulator(s)'

    supervisory and enforcement authority. Recognizing that jurisdictions

    may adopt different approaches to achieving the same outcome, the

    Commission will focus on whether the foreign jurisdiction's margin

    requirements are comparable to the Commission's in purpose and effect,

    not whether they are comparable in every aspect or contain identical

    elements.

    In keeping with the Commission's commitment to international

    coordination on margin requirements for uncleared derivatives, the

    Commission believes that the standards it has established are fully

    consistent with the BCBS/IOSCO Framework.\21\ Accordingly, where

    relevant to the Commission's comparability analysis, the BCBS/IOSCO

    Framework is discussed to explain certain internationally agreed upon

    concepts.

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    \21\ The Final Margin Rule was modified substantially from its

    proposed form to further align the Commission's margin requirements

    with the BCBS/IOSCO Framework and, as a result, the potential for

    conflict with foreign margin requirements should be reduced. For

    example, the Final Margin Rule raised the material swaps exposure

    level from $3 billion to the BCBS/IOSCO standard of $8 billion,

    which reduces the number of entities that must collect and post

    initial margin. See Final Margin Rule, 81 FR at 644. In addition,

    the definition of uncleared swap was amended to not include swaps

    cleared by derivatives clearing organizations that are not

    registered with the Commission but pursuant to Commission orders are

    permitted to clear for U.S. persons. See id. at 638. The Commission

    notes, however, that the BCBS/IOSCO Framework leaves certain

    elements open to interpretation (e.g., the definition of

    ``derivative'') and expressly invites regulators to build on certain

    principles as appropriate. See, e.g., Element 4 (eligible

    collateral) (national regulators should ``develop their own list of

    eligible collateral assets based on the key principle, taking into

    account the conditions of their own markets''); Element 5 (initial

    margin) (the degree to which margin should be protected would be

    affected by ``the local bankruptcy regime, and would vary across

    jurisdictions''); Element 6 (transactions with affiliates)

    (``Transactions between a firm and its affiliates should be subject

    to appropriate regulation in a manner consistent with each

    jurisdiction's legal and regulatory framework.'').

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    The Cross-Border Margin Rule provided a detailed discussion

    regarding the facts and circumstances under which substituted

    compliance for the requirements under the Final Margin Rule would be

    available and such discussion is not repeated here. CSEs seeking to

    rely on substituted compliance based on the comparability

    determinations contained herein are responsible for determining whether

    substituted compliance is available under the Cross-Border Margin Rule

    with respect to the CSE's particular status and circumstances.

    D. Conditions to Comparability Determinations

    The Cross-Border Margin Rule provides that the Commission may

    impose terms and conditions it deems appropriate in issuing a

    comparability determination.\22\ Specific terms and conditions with

    respect to margin requirements are discussed in the Commission's

    determinations detailed below.

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    \22\ See 17 CFR 23.160(c)(5).

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    As a general condition to all determinations, however, the

    Commission requires notification of any material changes to information

    submitted to the Commission by the applicant in support of a

    comparability finding, including, but not limited to, changes in the

    relevant foreign jurisdiction's supervisory or regulatory regime. The

    Commission also expects that the relevant foreign regulator will enter

    into, or will have entered into, an appropriate memorandum of

    understanding or similar arrangement with the Commission in connection

    with a comparability determination.\23\

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    \23\ Under Commission regulations 23.203 and 23.606, CSEs must

    maintain all records required by the CEA and the Commission's

    regulations in accordance with Commission regulation 1.31 and keep

    them open for inspection by representatives of the Commission, the

    U.S. Department of Justice, or any applicable prudential regulator.

    See 17 CFR 23.203, 23.606. The Commission further expects that

    prompt access to books and records and the ability to inspect and

    examine a non-U.S. CSE will be a condition to any comparability

    determination.

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    Finally, the Commission will generally rely on an applicant's

    description of the laws and regulations of the foreign jurisdiction in

    making its comparability determination. The Commission considers an

    application to be a representation by the applicant that the laws and

    regulations submitted are finalized,\24\ that the description of such

    laws and regulations is accurate and complete, and that, unless

    otherwise noted, the scope of such laws and regulations encompasses the

    swaps activities \25\ of CSEs \26\ in the relevant jurisdictions.\27\

    Further, the Commission requires that an applicant would notify the

    Commission of any material changes to information submitted in support

    of a comparability determination (including, but not limited to,

    changes in the relevant supervisory or regulatory regime) as, depending

    on the nature of the change, the Commission's comparability

    determination may no longer be valid.\28\

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    \24\ The Commission notes that finalized rules of the foreign

    jurisdiction must be in full force and effect before a CSE may rely

    on this comparability determination for purposes of substituted

    compliance.

    \25\ ``Swaps activities'' is defined in Commission regulation

    23.600(a)(7) to mean, ``with respect to a registrant, such

    registrant's activities related to swaps and any product used to

    hedge such swaps, including, but not limited to, futures, options,

    other swaps or security-based swaps, debt or equity securities,

    foreign currency, physical commodities, and other derivatives.'' The

    Commission's regulations under 17 CFR part 23 are limited in scope

    to the swaps activities of CSEs.

    \26\ No CSE that is not legally required to comply with a law or

    regulation determined to be comparable may voluntarily comply with

    such law or regulation in lieu of compliance with the CEA and the

    relevant Commission regulation. Each CSE that seeks to rely on a

    comparability determination is responsible for determining whether

    it is subject to the laws and regulations found comparable.

    \27\ The Commission has provided the relevant foreign

    regulator(s) with opportunities to review and correct the

    applicant's description of such laws and regulations on which the

    Commission will base its comparability determination. The Commission

    relies on the accuracy and completeness of such review and any

    corrections received in making its comparability determinations. A

    comparability determination based on an inaccurate description of

    foreign laws and regulations may not be valid.

    \28\ 78 FR 45345.

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    III. Margin Requirements for Swaps Activities in the EU

    As represented to the Commission by the applicant, margin

    requirements for swap activities in the EU are governed by the

    Regulatory Technical Standards for Risk-Mitigation Techniques for OTC

    Derivative Contracts Not Cleared by a Central Counterparty

    (``RTS'').\29\ The RTS supplement the requirements of EMIR with a more

    detailed direction

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    with respect to margin requirements \30\ and are directly applicable in

    all countries that are members of the EU (each country a ``Member

    State''). Article 12 of EMIR further gives Member States the authority

    to ``lay down the rules on penalties'' that apply to infringements of

    the RTS and to take all measures necessary to ensure that those rules

    are implemented.\31\

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    \29\ Regulation No. 2016/2251 of October 4, 2016 Supplementing

    Regulation (EU) No 648/2012 of the European Parliament and of the

    Council of July 4, 2012 on OTC Derivatives, Central Counterparties

    and Trade Repositories with Regard to Regulatory Technical Standards

    for Risk-Mitigation Techniques for OTC Derivative Contracts Not

    Cleared by a Central Counterparty (as corrected by Commission

    Delegated Regulation (EU) 2017/323 of January 20, 2017). Regulation

    (EU) No 648/2012 of the European Parliament and the Council of July

    4, 2012 is more commonly known as the European Market Infrastructure

    Regulation or ``EMIR.''

    \30\ Together, EMIR and RTS are referred to herein as the ``EU

    margin rules,'' ``the EU's margin regime,'' ``EU margin

    requirements'' or the ``laws of the EU.''

    \31\ See RTS, Article 40 and EMIR, Article 12(1).

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    IV. Comparability Analysis

    The following section describes the regulatory objectives of the

    Commission's requirements with respect to margin for uncleared swaps

    imposed by the CEA and the Final Margin Rule and a description of such

    requirements. Immediately following a description of the requirement(s)

    of the Final Margin Rule for which a comparability determination was

    requested by the applicant, the Commission provides a description of

    the foreign jurisdiction's comparable laws, regulations, or rules. The

    Commission then provides a discussion of the comparability of, or

    differences between, the Final Margin Rule and the foreign

    jurisdiction's laws, regulations, or rules.

    A. Objectives of Margin Requirements

    1. Commission Statement of Regulatory Objectives

    The regulatory objectives of the Final Margin Rule are to ensure

    the safety and soundness of CSEs in order to offset the greater risk to

    CSEs and the financial system arising from the use of swaps that are

    not cleared. The primary function of margin is to protect a CSE from

    counterparty default, allowing it to absorb losses and continue to meet

    its obligations using collateral provided by the defaulting

    counterparty. While the requirement to post margin protects the

    counterparty in the event of the CSE's default, it also functions as a

    risk management tool, limiting the amount of leverage a CSE can incur

    by requiring that it have adequate eligible collateral to enter into an

    uncleared swap. In this way, margin serves as a first line of defense,

    not only in protecting the CSE, but in containing the amount of risk in

    the financial system as a whole, reducing the potential for contagion

    arising from uncleared swaps.\32\

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    \32\ See Cross-Border Margin Rule, 81 FR 34819.

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    2. EC Statement of Regulatory Objectives

    The applicant states that, in the absence of clearing of OTC

    derivatives by a CCP, it is essential that counterparties apply robust

    risk-mitigation techniques to their bilateral relationships to reduce

    counterparty credit risk and to mitigate the potential systemic risk

    that could arise. Article 11 of EMIR prescribes risk-mitigation

    techniques for OTC derivative contracts not cleared by a CCP. The RTS

    supplement EMIR with regard to regulatory technical standards for risk-

    mitigation techniques for OTC derivative contracts not cleared by a CCP

    and take into account the Basel Committee-IOSCO margin framework for

    non-centrally cleared OTC derivatives and the Basel Committee

    guidelines for managing settlement risk in foreign exchange

    transactions.\33\

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    \33\ See RTS, Explanatory Memorandum at 3.

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    B. Products Subject to Margin Requirements

    The Commission's Final Margin Rule applies only to uncleared swaps.

    Swaps are defined in section 1a(47) of the CEA \34\ and Commission

    regulations.\35\ ``Uncleared swap'' is defined for purposes of the

    Final Margin Rule in Commission regulation Sec. 23.151 to mean a swap

    that is not cleared by a registered derivatives clearing organization,

    or by a clearing organization that the Commission has exempted from

    registration by rule or order pursuant to section 5b(h) of the Act.\36\

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    \34\ 7 U.S.C. 1a(47).

    \35\ See, e.g., Sec. 1.3(xxx), 17 CFR 1.3(xxx).

    \36\ 17 CFR 23.151.

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    The EU's margin rules apply to OTC derivatives not cleared by a CCP

    (``non-centrally cleared OTC derivative'').\37\ ``Derivative'' for

    purposes of the EU margin rules is defined in Article 2(5) of EMIR as a

    financial instrument as set out in points (4) to (10) of Section C of

    Annex I to MIFID \38\ as implemented by Articles 38 and 39 of EU

    Regulation No. 1287/2006.\39\ Initial margin need not be collected for

    physically-settled foreign exchange forwards, physically-settled

    foreign exchange swaps, or cross-currency swaps.\40\ Regarding covered

    bonds for hedging purposes, no variation margin needs to be posted by a

    covered bond issuer or covered pool but must be collected from a

    counterparty in cash and returned to a counterparty when due, and no

    initial margin required.\41\

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    \37\ See EMIR, Article 11(1) and RTS, Recital (1). CCP is

    defined in Article 2(1) of EMIR to mean ``a legal person that

    interposes itself between the counterparties to the contracts traded

    on one or more financial markets, becoming the buyer to every seller

    and the seller to every buyer.''

    \38\ Under MiFID, such financial instruments are: (4) Options,

    futures, swaps, forward rate agreements and any other derivative

    contracts relating to securities, currencies, interest rates or

    yields, or other derivatives instruments, financial indices or

    financial measures which may be settled physically or in cash; (5)

    Options, futures, swaps, forward rate agreements and any other

    derivative contracts relating to commodities that must be settled in

    cash or may be settled in cash at the option of one of the parties

    (otherwise than by reason of a default or other termination event);

    (6) Options, futures, swaps, and any other derivative contract

    relating to commodities that can be physically settled provided that

    they are traded on a regulated market and/or an MTF; (7) Options,

    futures, swaps, forwards and any other derivative contracts relating

    to commodities, that can be physically settled not otherwise

    mentioned in C.6 and not being for commercial purposes, which have

    the characteristics of other derivative financial instruments,

    having regard to whether, inter alia, they are cleared and settled

    through recognised clearing houses or are subject to regular margin

    calls; (8) Derivative instruments for the transfer of credit risk;

    (9) Financial contracts for differences; (10) Options, futures,

    swaps, forward rate agreements and any other derivative contracts

    relating to climatic variables, freight rates, emission allowances

    or inflation rates or other official economic statistics that must

    be settled in cash or may be settled in cash at the option of one of

    the parties (otherwise than by reason of a default or other

    termination event), as well as any other derivative contracts

    relating to assets, rights, obligations, indices and measures not

    otherwise mentioned in this Section, which have the characteristics

    of other derivative financial instruments, having regard to whether,

    inter alia, they are traded on a regulated market or an MTF, are

    cleared and settled through recognised clearing houses or are

    subject to regular margin calls. See MiFID, Annex I, Section C(4)-

    (10).

    \39\ Article 38 of EU Regulation No. 1287/2006 further defines

    the financial instruments described in Point (7) of Section C of

    Annex I to MiFID to generally be physically-settled FX forwards and

    swaps. Article 39 of EU Regulation No. 1287/2006 further refines the

    definition of financial instruments described in Point (10) of

    Section C of Annex I to MiFID to generally be exchanges of principal

    of currency swaps.

    \40\ See RTS, Article 27.

    \41\ See RTS, Article 30.

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    An OTC derivative is a derivative which is not executed on a

    regulated market or on a third-country market considered as equivalent

    to a regulated market.\42\ While it is beyond the scope of this

    comparability determination to definitively map any differences between

    the definitions of ``swap'' and ``uncleared swap'' under the CEA and

    Commission regulations and the EU's definitions of ``OTC derivative''

    and ``non-centrally cleared OTC derivative,'' the Commission believes

    that such definitions largely cover the same products and instruments.

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    \42\ See EMIR, Article 2(7).

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    However, because the definitions are not identical, the Commission

    recognizes the possibility that a CSE may enter into a transaction that

    is an uncleared swap as defined in the CEA and Commission regulations,

    but that is not a non-centrally cleared OTC

    [[Page 48398]]

    derivative as defined under the laws of the EU. In such cases, the

    Final Margin Rule would apply to the transaction but the EU's margin

    rules would not apply and thus, substituted compliance would not be

    available. The CSE could not choose to comply with the EU's margin

    rules in place of the Final Margin Rule.

    Likewise, if a transaction is a non-centrally cleared OTC

    derivative as defined under the laws of the EU but not an uncleared

    swap subject to the Final Margin Rule, a CSE could not choose to comply

    with the Final Margin Rule pursuant to this determination, unless the

    EU determines that it will permit the EU entity to follow the

    Commission's margin requirements. CSEs are solely responsible for

    determining whether a particular transaction is both an uncleared swap

    and a non-centrally cleared OTC derivative before relying on

    substituted compliance under the comparability determinations set forth

    below.

    C. Entities Subject to Margin Requirements

    As stated previously, the Commission's Final Margin Rule and Cross-

    Border Margin Rule apply only to CSEs, i.e., SDs and MSPs registered

    with the Commission for which there is not a Prudential Regulator.\43\

    Thus, only such CSEs may rely on the determinations herein for

    substituted compliance, while CSEs for which there is a Prudential

    Regulator must look to the determinations of the Prudential Regulators.

    ---------------------------------------------------------------------------

    \43\ 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 include 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

    Prudential Regulators published final margin requirements in

    November 2015. See Prudential Regulators' Final Margin Rule, 80 FR

    74840 (Nov. 30, 2015).

    ---------------------------------------------------------------------------

    CSEs are not required to collect and/or post margin with every

    uncleared swap counterparty. Under the Final Margin Rule, the initial

    margin obligations of CSEs apply only to uncleared swaps with

    counterparties that meet the definition of ``covered counterparty'' in

    Sec. 23.151.\44\ Such definition provides that a ``covered

    counterparty'' is a counterparty that is a financial end user \45\ with

    material swaps exposure \46\ or a swap entity \47\ that enters into a

    swap with a CSE. The variation margin obligations of CSEs under the

    Final Margin Rule apply more broadly. Such obligations apply to

    counterparties that are swap entities and all financial end users,

    regardless of their level of material swaps exposure.\48\

    ---------------------------------------------------------------------------

    \44\ See Sec. 23.152.

    \45\ See definition of ``Financial end user'' in Sec. 23.150.

    \46\ See Sec. 23.150, which states that ``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.

    That provision further states that an entity shall count the average

    daily aggregate 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. For purposes of this calculation, an entity shall not count a

    swap that is exempt pursuant to Sec. 23.150(b) or a security-based

    swap that qualifies for an exemption under section 3C(g)(10) of the

    Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4)) and

    implementing regulations or that satisfies the criteria in section

    3C(g)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78-

    c3(g)(4)) and implementing regulations.

    \47\ ``Swap entity'' is defined in Sec. 23.150 as a person that

    is registered with the Commission as a swap dealer or major swap

    participant pursuant to the Act.

    \48\ See Sec. 23.153.

    ---------------------------------------------------------------------------

    As represented by the applicant, the EU's margin rules apply to all

    financial counterparties, which include investment firms, credit

    institutions, insurance companies, and alternative investment funds

    that are authorized or registered in accordance with various EU

    directives (``FC'').\49\ CCPs not authorized as credit institutions are

    outside the scope of Article 11 of EMIR and CCPs authorized as credit

    institutions are exempt from the RTS.\50\ The EU's margin rules also

    apply to non-financial counterparties (any EU entity other than an FC

    or a CCP \51\) (``NFC'') that are above a certain clearing threshold

    (``NFC+'').\52\ Under the EU rules, no margin is required for non-

    centrally cleared OTC derivatives with NFCs that fall below the

    clearing threshold (``NFC-'') or non-EU entities that would be NFC-s if

    established in the EU.\53\ However, under the EU margin rules,

    counterparties must take into account the different risk profiles of

    NFC-s when entering into non-centrally cleared OTC derivatives with

    such counterparties and determine whether or not the level of

    counterparty credit risk posed by those NFC-s needs to be mitigated

    through the exchange of collateral.\54\ Like the Final Margin Rule, the

    EU margin rules include a threshold under which initial margin

    requirements will not apply, while the variation margin requirements

    apply more broadly.\55\

    ---------------------------------------------------------------------------

    \49\ See EMIR, Article 11 (Risk-Mitigation Techniques for OTC

    Derivative Contracts Not Cleared by a CCP). While the definition of

    ``financial counterparty'' under EMIR includes credit institutions

    authorized in accordance with Directive 2006/48/EU, CCPs that are

    authorized as credit institutions are exempted from the EU's margin

    rules. See RTS, Article 23. As explained in the RTS, since CCPs

    might be authorized as a credit institution according to Union

    legislation, it is necessary to excluded non-centrally cleared OTC

    derivative contracts that CCPs enter into during a default

    management process from the requirements of this Regulation since

    those contracts are already subject to the provisions of Commission

    Delegated Regulation (EU) No 153/2013 and therefore they are not

    subject to the provisions of these Regulations.

    \50\ See RTS, Article 23.

    \51\ See EMIR, Article 2(9).

    \52\ See EMIR, Article 11(3) (``[NFCs] . . . shall have risk-

    management procedures that require the timely, accurate and

    appropriately segregated exchange of collateral with respect to OTC

    derivative contracts that are entered into on or after the clearing

    threshold is exceeded.''). The clearing threshold values are

    measured by asset class as follows:

    (a) EUR 1 billion in gross notional value for OTC credit

    derivative contracts;

    (b) EUR 1 billion in gross notional value for OTC equity

    derivative contracts;

    (c) EUR 3 billion in gross notional value for OTC interest rate

    derivative contracts;

    (d) EUR 3 billion in gross notional value for OTC foreign

    exchange derivative contracts;

    (e) EUR 3 billion in gross notional value for OTC commodity

    derivative contracts and other OTC derivative contracts not provided

    for under points (a) to (d).

    See Article 11 of Commission Delegated Regulation (EU) No 149/

    2013 of December 19, 2012 Supplementing EMIR with Regard to

    Regulatory Technical Standards on Indirect Clearing Arrangements,

    the Clearing Obligation, the Public Register, Access to a Trading

    Venue, Non-Financial Counterparties, and Risk Mitigation Techniques

    for Uncleared OTC Derivatives (pursuant to Article 10(4)(b) of

    EMIR).

    \53\ See RTS, Article 24.

    \54\ See RTS, Recital (2).

    \55\ See RTS, Article 28, stating: Counterparties may provide in

    their risk management procedures that initial margins are not

    collected for all new OTC derivative contracts entered into within a

    calendar year where one of the two counterparties has an aggregate

    month-end average notional amount of non-centrally cleared OTC

    derivatives for the months March, April and May of the preceding

    year of below EUR 8 billion. The aggregate month-end average

    notional amount referred to in the first subparagraph shall be

    calculated at the counterparty level or at the group level where the

    counterparty belongs to a group.

    ---------------------------------------------------------------------------

    Given the definitional differences and differences in activity

    thresholds with respect to the scope of application of the Final Margin

    Rule and the EU's margin requirements, the Commission notes the

    possibility that the Final Margin Rule and the EU's margin rules may

    not apply to every uncleared swap that a CSE may enter into with a EU

    counterparty. For example, it appears possible that a financial end

    user with ``material swaps exposure'' would meet the definition of

    ``covered counterparty'' under the Final Margin Rule (and thus the

    initial and variation margin

    [[Page 48399]]

    requirements) while at the same time fall under the EU's clearing

    threshold (an NFC-) and not be subject the EU margin requirements. It

    may also be possible that the Final Margin Rule's definition of

    ``financial end user'' could capture an entity that is an NFC under the

    EU's margin regime.

    With these differences in scope in mind, the Commission reiterates

    that no CSE may rely on substituted compliance unless it and its

    transaction are subject to both the Final Margin Rule and the EU's

    margin rules; a CSE may not voluntarily comply with the EU's margin

    rules where such law does not otherwise apply. Likewise, a CSE that is

    not seeking to rely on substituted compliance should understand that

    the EU's margin rules may apply to its counterparty irrespective of the

    CSE's decision to comply with the Final Margin Rule.

    D. Treatment of Inter-Affiliate Derivative Transactions

    The BCBS/IOSCO Framework recognizes that the treatment of inter-

    affiliate derivative transactions will vary between jurisdictions.

    Thus, the BCBS/IOSCO Framework does not set standards with respect to

    the treatment of inter-affiliate transactions. Rather, it recommends

    that regulators in each jurisdiction review their own legal frameworks

    and market conditions and put in place margin requirements applicable

    to inter-affiliate transactions as appropriate.\56\

    ---------------------------------------------------------------------------

    \56\ See BCBS/IOSCO Framework, Element 6: Treatment of

    transactions with affiliates.

    ---------------------------------------------------------------------------

    1. Commission Requirements for Treatment of Inter-Affiliate

    Transactions

    The Commission determined through its Final Margin Rule to provide

    rules for swaps between ``margin affiliates.'' In defining ``margin

    affiliate,'' those rules provide that a company is a margin affiliate

    of another company if: (1) 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; (2) both companies are consolidated with a

    third company on a financial statement prepared in accordance with such

    principles or standards; or (3) for a company that is not subject to

    such principles or standards, if consolidation as described in (1) or

    (2) would have occurred if such principles or standards had

    applied.\57\

    ---------------------------------------------------------------------------

    \57\ Sec. 23.151.

    ---------------------------------------------------------------------------

    With respect to swaps between margin affiliates, the Final Margin

    Rule, with one exception explained below, provides that a CSE is not

    required to collect initial margin \58\ from a margin affiliate

    provided that the CSE meets the following conditions: (i) The swaps are

    subject to a centralized risk management program that is reasonably

    designed to monitor and to manage the risks associated with the inter-

    affiliate swaps; and (ii) the CSE exchanges variation margin with the

    margin affiliate.\59\

    ---------------------------------------------------------------------------

    \58\ ``Initial margin'' is margin exchanged to protect against a

    potential future exposure and is defined in Sec. 23.151 to mean the

    collateral, as calculated in accordance with Sec. 23.154 that is

    collected or posted in connection with one or more uncleared swaps.

    \59\ See Sec. 23.159(a).

    ---------------------------------------------------------------------------

    In an exception to the foregoing general rule, the Final Margin

    Rule does require CSEs to collect initial margin from non-U.S.

    affiliates that are financial end users that are not subject to initial

    margin collection requirements on their own outward-facing swaps with

    financial end users that are not comparable in outcome to the Final

    Margin Rule.\60\ This provision is an important anti-evasion measure.

    It is designed to prevent the potential use of affiliates to avoid

    collecting initial margin from third parties. For example, suppose that

    an unregistered non-U.S. affiliate of a CSE enters into a swap with a

    financial end user and does not collect initial margin. Suppose further

    that the affiliate then enters into a swap with the CSE. Effectively,

    the risk of the swap with the third party would have been passed to the

    CSE without any initial margin. The rule would require this affiliate

    to post initial margin with the CSE in such cases. The rule would

    further require that the CSE collect initial margin even if the

    affiliate routed the trade through one or more other affiliates.\61\

    ---------------------------------------------------------------------------

    \60\ See Sec. 23.159(c).

    \61\ See id.

    ---------------------------------------------------------------------------

    The Commission has stated that its inter-affiliate initial margin

    requirement is consistent with its goal of harmonizing its margin rules

    as much as possible with the BCBS/IOSCO Framework. Such Framework, for

    example, states that the exchange of initial and variation margin by

    affiliated parties ``is not customary'' and that initial margin in

    particular ``would likely create additional liquidity demands.'' \62\

    With an understanding that many authorities, such as those in Europe

    and Japan, are not expected to require initial margin for inter-

    affiliate swaps, the Commission recognized that requiring the posting

    and collection of initial margin for inter-affiliate swaps generally

    would be likely to put CSEs at a competitive disadvantage to firms in

    other jurisdictions.

    ---------------------------------------------------------------------------

    \62\ See BCBS/IOSCO Framework, Element 6: Treatment of

    transactions with affiliates.

    ---------------------------------------------------------------------------

    The Final Margin Rule however, does require CSEs to exchange

    variation margin with affiliates that are SDs, MSPs, or financial end

    users (as is also required under the Prudential Regulators' rules).\63\

    The Commission stated that marking open positions to market each day

    and requiring the posting or collection of variation margin reduces the

    risks of inter-affiliate swaps.

    ---------------------------------------------------------------------------

    \63\ See Sec. 23.159(b); see also Prudential Regulators' Final

    Margin Rule, 80 FR 74909.

    ---------------------------------------------------------------------------

    2. Requirement for Treatment of Inter-Affiliate Derivatives Under the

    Laws of the EU

    Under Article 11 of EMIR, the EU's margin requirements generally

    apply to intragroup transactions as defined in Article 3 of EMIR. Such

    ``intragroup transactions'' are defined differently for intragroup

    transactions in relation to an FC (``FC Intragroup Transactions'') \64\

    and intragroup transactions in relation to an NFC (``NFC Intragroup

    Transactions'' and, together with FC Intragroup Transactions,

    ``Intragroup Transactions'').\65\ What the EU defines

    [[Page 48400]]

    as Intragroup Transactions is generally in keeping with the

    Commission's definition of ``margin affiliate'' for purposes of the

    Final Margin Rule, discussed above.

    ---------------------------------------------------------------------------

    \64\ Article 3(2) of EMIR defines an ``intragroup transaction''

    for an FC to be:

    (a) An OTC derivative contract entered into with another

    counterparty which is part of the same group, provided that the

    following conditions are met:

    (i) The financial counterparty is established in the Union or,

    if it is established in a third country, the Commission has adopted

    an implementing act under Article 13(2) in respect of that third

    country;

    (ii) the other counterparty is a financial counterparty, a

    financial holding company, a financial institution or an ancillary

    services undertaking subject to appropriate prudential requirements;

    (iii) both counterparties are included in the same consolidation

    on a full basis; and

    (iv) both counterparties are subject to appropriate centralised

    risk evaluation, measurement and control procedures;

    (b) an OTC derivative contract entered into with another

    counterparty where both counterparties are part of the same

    institutional protection scheme, referred to in Article 80(8) of

    Directive 2006/48/EC, provided that the condition set out in point

    (a)(ii) of this paragraph is met;

    (c) an OTC derivative contract entered into between credit

    institutions affiliated to the same central body or between such

    credit institution and the central body, as referred to in Article

    3(1) of Directive 2006/48/EC; or

    (d) an OTC derivative contract entered into with a non-financial

    counterparty which is part of the same group provided that both

    counterparties are included in the same consolidation on a full

    basis and they are subject to an appropriate centralised risk

    evaluation, measurement and control procedures and that counterparty

    is established in the Union or in a third-country jurisdiction for

    which the Commission has adopted an implementing act as referred to

    in Article 13(2) in respect of that third country.

    \65\ Article 3(1) of EMIR defines an ``intragroup transaction''

    for an NFC to be:

    [A]n OTC derivative contract entered into with another

    counterparty which is part of the same group provided that both

    counterparties are included in the same consolidation on a full

    basis and they are subject to an appropriate centralised risk

    evaluation, measurement and control procedures and that counterparty

    is established in the Union or, if it is established in a third

    country, the Commission has adopted an implementing act under

    Article 13(2) in respect of that third country.

    ---------------------------------------------------------------------------

    For Intragroup Transactions between counterparties established in

    the same Member State, no margin requirements will apply, but only as

    long as there is no legal impediment to the prompt transfer of own

    funds or repayment of liabilities between counterparties.\66\ A legal

    impediment to the prompt transfer of own funds and repayment of

    liabilities shall be deemed to exist where there are actual or foreseen

    restrictions of a legal nature.\67\

    ---------------------------------------------------------------------------

    \66\ See EMIR, Article 11(5); see also RTS, Article 33

    (Applicable Criteria for the Legal Impediment to the Prompt Transfer

    of Own Funds and Repayment of Liabilities).

    \67\ See RTS, Article 33. Such restrictions include:

    (a) Currency and exchange controls;

    (b) a regulatory, administrative, legal or contractual framework

    that prevents mutual financial support or significantly affects the

    transfer of funds within the group;

    (c) any of the conditions on the early intervention, recovery

    and resolution as referred to in Directive 2014/59/EU of the

    European Parliament and of the Council (1) are met, as a result of

    which the competent authority foresees an impediment to the prompt

    transfer of own funds or repayment of liabilities;

    (d) the existence of minority interests that limit decision-

    making power within entities that form the group;

    (e) the nature of the legal structure of the counterparty, as

    defined in its statutes, instruments of incorporation and internal

    rules.

    See RTS, Article 33(a)-(e).

    ---------------------------------------------------------------------------

    For Intragroup Transactions between counterparties established in

    different Member States, the EU margin rules generally provide,

    depending on the nature and location of the counterparties, that such

    Intragroup Transactions may be excluded from the EU margin requirements

    but only if, in addition to there being no current or legal impediment

    to the prompt transfer of own funds or repayment of liabilities between

    the counterparties, the counterparties (i) have risk management

    procedures that are sound, robust, and consistent with the level of

    complexity of the derivative transaction, and (ii) in keeping with the

    procedures established under the RTS,\68\ the counterparties have

    notified the relevant competent authority \69\ or authorities of the

    intention to use the exemption and the authority or authorities have

    reached a positive decision to allow the exemption.\70\ The

    counterparties to an exempted Intragroup Transaction must publicly

    disclose information about the exemption.\71\

    ---------------------------------------------------------------------------

    \68\ See RTS, Article 32.

    \69\ See EMIR, Article 2(13) for the definition of ``competent

    authority'' for purposes of the RTS.

    \70\ See EMIR, Article 11(6) to (10).

    \71\ See EMIR, Article 11(11).

    ---------------------------------------------------------------------------

    Where one of the two counterparties in the group is domiciled in a

    third-country for which an equivalence determination under Article

    13(2) of EMIR has not yet been provided, the group has to exchange

    variation and appropriately segregated initial margins for all the

    Intragroup Transactions with the subsidiaries in those third-

    countries.\72\ However, the requirements are delayed for three years in

    these cases.\73\ This is to allow enough time for completion of the

    process to produce the equivalence determinations, while not requiring

    an inefficient allocation of resources to the groups with subsidiaries

    domiciled in third-countries.\74\ Where an equivalence decision has

    been made, counterparties may then apply for an exemption pursuant to

    the timing and process established under EMIR and the RTS.\75\

    ---------------------------------------------------------------------------

    \72\ See RTS, Recital (40).

    \73\ See RTS, Articles 36 and 37.

    \74\ See RTS, Recital (40).

    \75\ See RTS, Articles 36 and 37.

    ---------------------------------------------------------------------------

    3. Commission Determination

    Having compared the outcomes of the EU's margin requirements

    applicable to Intragroup Transactions to the outcomes of the

    Commission's corresponding margin requirements applicable to inter-

    affiliate swaps, the Commission finds that the treatment of inter-

    affiliate transactions under the Final Margin Rule and under the EU's

    margin requirements are comparable in outcome.

    A CSE entering into a transaction with a consolidated affiliate

    under the Final Margin Rule would be required to exchange variation

    margin in accordance with Sec. Sec. 23.151 through 23.161, and in

    certain circumstances, collect initial margin in accordance with Sec.

    23.159(c). The Commission continues to deem this provision an important

    anti-evasion measure, designed to prevent the potential use of

    affiliates to avoid collecting initial margin from third parties.\76\

    In adopting its Final Margin Rule, the Commission recognized that, in

    absence of proper anti-evasion measures, a CSE could import risk from

    another jurisdiction, one with potentially less stringent margin

    protections, through inter-affiliate trades.\77\ In analyzing the EU's

    margin rules, the Commission specifically notes that the EU margin

    rules will apply to inter-affiliate trades involving an affiliate that

    is established in a third-country (non-EU) jurisdiction, unless

    specifically excluded. Any exclusion from the EU margin rules is

    subject to an application process, which would require a finding that

    the relevant non-EU jurisdiction's margin requirements are equivalent.

    This comparability requirement provides protection to the consolidated

    entity, as the consolidated entity would not be able to import risk

    from third country jurisdictions that are not equivalent, without

    posting and collecting initial margin and exchanging variation margin.

    Therefore, the Commission believes that the EU's review process for

    finding comparability in third-country jurisdictions addresses the

    Commission's anti-evasion concerns relating to inter-affiliate

    transactions.

    ---------------------------------------------------------------------------

    \76\ See Final Margin Rule, 81 FR 674.

    \77\ See id.

    ---------------------------------------------------------------------------

    In addition, where a CSE and its inter-affiliate counterparty are

    subject to the Commission's margin requirements and the EU's margin

    requirements, all of the EU's margin requirements would apply,

    including the requirement to exchange variation margin, absent meeting

    the specific conditions detailed above. Other than where the two

    counterparties are established in the same Member State, those specific

    conditions involve a process of applying to the relevant Member State

    competent authority(ies) \78\ and receiving a positive determination

    from either or both competent authorities \79\ or upon notification to

    the relevant Member State competent authority(ies) and agreement of

    those competent authorities.\80\ All exemptions are also predicated on

    the absence of any current or foreseen practical or legal impediment to

    the prompt transfer of own funds or repayment of liabilities between

    the counterparties \81\ and on the

    [[Page 48401]]

    existence of adequately sound and robust risk management practices that

    are consistent with the level of complexity of the derivatives

    transaction.\82\

    ---------------------------------------------------------------------------

    \78\ RTS, Recital (37) states:

    When a counterparty notifies the relevant competent authority

    regarding its intention to take advantage of the exemption of

    intragroup transactions, in order for the competent authority to

    decide whether the conditions for the exemption are met, the

    counterparty should provide a complete file including all relevant

    information necessary for the competent authority to complete its

    assessment.

    \79\ See EMIR, Article 11(6), (8), and (10).

    \80\ See EMIR, Article 11(7) and (9).

    \81\ See EMIR, Article 11(6)-(10). In addition, RTS, Recital

    (39) states:

    In order for the exemption for intragroup transactions to be

    applicable, it must be certain that no legislative, regulatory,

    administrative or other mandatory provisions of applicable law could

    legally prevent the intragroup counterparties from meeting their

    obligations to transfer monies or repay liabilities or securities

    under the terms of the intragroup transactions. Similarly, there

    should be no operational or business practices of the intragroup

    counterparties or the group that could result in funds not being

    available to meet payment obligations as they fall due on a day-to-

    day basis, or in prompt electronic transfer of funds not being

    possible.

    \82\ RTS, Recital (38) states:

    For a group to be deemed to have adequately sound and robust

    risk management procedures, a number of conditions have to be met.

    The group should ensure a regular monitoring of the intragroup

    exposures, and the timely settlement of the obligations resulting

    from the intragroup OTC derivative contracts should be guaranteed

    based on the monitoring and liquidity tools at group level that are

    consistent with the complexity of the intragroup transactions.

    ---------------------------------------------------------------------------

    E. Methodologies for Calculating the Amounts of Initial and Variation

    Margin

    As an overview, the methodologies for calculating initial and

    variation margin as agreed under the BCBS/IOSCO Framework state that

    the margin collected from a counterparty should (i) be consistent

    across entities covered by the requirements and reflect the potential

    future exposure (initial margin) and current exposure (variation

    margin) associated with the particular portfolio of non-centrally

    cleared derivatives, and (ii) ensure that all counterparty risk

    exposures are covered fully with a high degree of confidence.

    With respect to the calculation of initial margin, as a minimum the

    BCBS/IOSCO Framework generally provides that:

    Initial margin requirements will not apply to

    counterparties that have less than EUR 8 billion of gross notional in

    outstanding derivatives.

    Initial margin may be subject to a EUR 50 million

    threshold applicable to a consolidated group of affiliated

    counterparties.

    All margin transfers between parties may be subject to a

    de-minimis minimum transfer amount not to exceed EUR 500,000.

    The potential future exposure of a non-centrally cleared

    derivative should reflect an extreme but plausible estimate of an

    increase in the value of the instrument that is consistent with a one-

    tailed 99% confidence interval over a 10-day horizon, based on

    historical data that incorporates a period of significant financial

    stress.

    The required amount of initial margin may be calculated by

    reference to either (i) a quantitative portfolio margin model or (ii) a

    standardized margin schedule.

    When initial margin is calculated by reference to an

    initial margin model, the period of financial stress used for

    calibration should be identified and applied separately for each broad

    asset class for which portfolio margining is allowed.

    Models may be either internally developed or sourced from

    the counterparties or third-party vendors but in all such cases, models

    must be approved by the appropriate supervisory authority.

    Quantitative initial margin models must be subject to an

    internal governance process that continuously assesses the value of the

    model's risk assessments, tests the model's assessments against

    realized data and experience, and validates the applicability of the

    model to the derivatives for which it is being used.

    An initial margin model may consider all of the

    derivatives that are approved for model use that are subject to a

    single legally enforceable netting agreement.

    Initial margin models may account for diversification,

    hedging, and risk offsets within well-defined asset classes such as

    currency/rates, equity, credit, or commodities, but not across such

    asset classes and provided these instruments are covered by the same

    legally enforceable netting agreement and are approved by the relevant

    supervisory authority.

    The total initial margin requirement for a portfolio

    consisting of multiple asset classes would be the sum of the initial

    margin amounts calculated for each asset class separately.

    Derivatives for which a firm faces zero counterparty risk

    require no initial margin to be collected and may be excluded from the

    initial margin calculation.

    Where a standardized initial margin schedule is

    appropriate, it should be computed by multiplying the gross notional

    size of a derivative by the standardized margin rates provided under

    the BCBS/IOSCO Framework and adjusting such amount by the ratio of the

    net current replacement cost to gross current replacement cost (NGR)

    pertaining to all derivatives in a legally enforceable netting set. The

    BCBS/IOSCO Framework provides the following standardized margin rates:

    \83\

    ---------------------------------------------------------------------------

    \83\ See BCBS/IOSCO Framework.

    ------------------------------------------------------------------------

    Initial margin

    requirement (% of

    Asset class notional

    exposure)

    ------------------------------------------------------------------------

    Credit:

    0-2 year duration................................. 2

    2-5 year duration.................................. 5

    5+ year duration................................... 10

    Commodity............................................ 15

    Equity............................................... 15

    Foreign exchange..................................... 6

    Interest rate:

    0-2 year duration.................................. 1

    2-5 year duration.................................. 2

    5+ year duration................................... 4

    Other................................................ 15

    ------------------------------------------------------------------------

    For a regulated entity that is already using a schedule-

    based margin to satisfy requirements under its required capital regime,

    the appropriate supervisory authority may permit the use of the same

    schedule for initial margin purposes, provided that it is at least as

    conservative.

    The choice between model- and schedule-based initial

    margin calculations should be made consistently over time for all

    transactions within the same well defined asset class.

    Initial margin should be collected at the outset of a

    transaction, and collected thereafter on a routine and consistent basis

    upon changes in measured potential future exposure, such as when trades

    are added to or subtracted from the portfolio.

    In the event that a margin dispute arises, both parties

    should make all necessary and appropriate efforts, including timely

    initiation of dispute resolution protocols, to resolve the dispute and

    exchange the required amount of initial margin in a timely fashion.

    With respect to the calculation of variation margin, as a minimum

    the BCBS/IOSCO Framework generally provides that:

    The full amount necessary to fully collateralize the mark-

    to-market exposure of the non-centrally cleared derivatives must be

    exchanged.

    Variation margin should be calculated and exchanged for

    derivatives subject to a single, legally enforceable netting agreement

    with sufficient frequency (e.g., daily).

    In the event that a margin dispute arises, both parties

    should make all necessary and appropriate efforts, including timely

    initiation of dispute resolution protocols, to resolve the dispute and

    exchange the required amount of variation margin in a timely fashion.

    1. Commission Requirement for Calculation of Initial Margin

    In keeping with the BCBS/IOSCO Framework described above, with

    respect to the calculation of initial

    [[Page 48402]]

    margin, the Commission's Final Margin Rule generally provides that:

    Initial margin is intended to address potential future

    exposure, i.e., in the event of a counterparty default, initial margin

    protects the non-defaulting party from the loss that may result from a

    swap or portfolio of swaps, during the period of time needed to close

    out the swap(s).\84\

    ---------------------------------------------------------------------------

    \84\ See Final Margin Rule, 81 FR 683.

    ---------------------------------------------------------------------------

    Potential future exposure is to be an estimate of the one-

    tailed 99% confidence interval for an increase in the value of the

    uncleared swap or netting portfolio of uncleared swaps due to an

    instantaneous price shock that is equivalent to a movement in all

    material underlying risk factors, including prices, rates, and spreads,

    over a holding period equal to the shorter of 10 business days or the

    maturity of the swap or netting portfolio.\85\

    ---------------------------------------------------------------------------

    \85\ See Sec. 23.154(b)(2)(i).

    ---------------------------------------------------------------------------

    The required amount of initial margin may be calculated by

    reference to either (i) a risk-based margin model or (ii) a table-based

    method.\86\

    ---------------------------------------------------------------------------

    \86\ See Sec. 23.154(a)(1)(i) and (ii).

    ---------------------------------------------------------------------------

    All data used to calibrate the initial margin model shall

    incorporate a period of significant financial stress for each broad

    asset class that is appropriate to the uncleared swaps to which the

    initial margin model is applied.\87\

    ---------------------------------------------------------------------------

    \87\ See Sec. 23.154(b)(2)(ii).

    ---------------------------------------------------------------------------

    CSEs shall obtain the written approval of the Commission

    or a registered futures association to use a model to calculate the

    initial margin required.\88\

    ---------------------------------------------------------------------------

    \88\ See Sec. 23.154(b)(1)(i).

    ---------------------------------------------------------------------------

    An initial margin model may calculate initial margin for a

    netting portfolio of uncleared swaps covered by the same eligible

    master netting agreement.\89\

    ---------------------------------------------------------------------------

    \89\ See Sec. 23.154(b)(2)(v).

    ---------------------------------------------------------------------------

    An initial margin model may reflect offsetting exposures,

    diversification, and other hedging benefits for uncleared swaps that

    are governed by the same eligible master netting agreement by

    incorporating empirical correlations within the following broad risk

    categories, provided the CSE validates and demonstrates the

    reasonableness of its process for modeling and measuring hedging

    benefits: Commodity, credit, equity, and foreign exchange or interest

    rate.\90\

    ---------------------------------------------------------------------------

    \90\ See id.

    ---------------------------------------------------------------------------

    Empirical correlations under an eligible master netting

    agreement may be recognized by the model within each broad risk

    category, but not across broad risk categories.\91\

    ---------------------------------------------------------------------------

    \91\ See id.

    ---------------------------------------------------------------------------

    If the initial margin model does not explicitly reflect

    offsetting exposures, diversification, and hedging benefits between

    subsets of uncleared swaps within a broad risk category, the CSE shall

    calculate an amount of initial margin separately for each subset of

    uncleared swaps for which such relationships are explicitly recognized

    by the model and the sum of the initial margin amounts calculated for

    each subset of uncleared swaps within a broad risk category will be

    used to determine the aggregate initial margin due from the

    counterparty for the portfolio of uncleared swaps within the broad risk

    category.\92\

    ---------------------------------------------------------------------------

    \92\ See Sec. 23.154(b)(2)(vi).

    ---------------------------------------------------------------------------

    Where a risk-based model is not used, initial margin must

    be computed by multiplying the gross notional size of a derivative by

    the standardized margin rates provided under Sec. 23.154(c)(i) \93\

    and adjusting such amount by the ratio of the net current replacement

    cost to gross current replacement cost (NGR) pertaining to all

    derivatives under the same eligible master netting agreement.\94\

    ---------------------------------------------------------------------------

    \93\ The standardized margin rates provided in Sec.

    23.154(c)(i) are, in all material respects, the same as those

    provided under the BCBS/IOSCO Framework. See supra note 83 and table

    in accompanying text.

    \94\ See Sec. 23.154(c).

    ---------------------------------------------------------------------------

    A CSE shall not be deemed to have violated its obligation

    to collect or post initial margin if, inter alia, it makes timely

    initiation of dispute resolution mechanisms, including pursuant to

    Sec. 23.504(b)(4).\95\

    ---------------------------------------------------------------------------

    \95\ See Sec. 23.152(d)(2)(i).

    ---------------------------------------------------------------------------

    2. Commission Requirements for Calculation of Variation Margin

    In keeping with the BCBS/IOSCO Framework described above, with

    respect to the calculation of variation margin, the Commission's Final

    Margin Rule generally provides that:

    Each business day, a CSE must calculate variation margin

    amounts for itself and for each counterparty that is an SD, MSP, or

    financial end user. Such variation margin amounts must be equal to the

    cumulative mark-to-market change in value to the CSE of each uncleared

    swap, adjusted for any variation margin previously collected or posted

    with respect to that uncleared swap.\96\

    ---------------------------------------------------------------------------

    \96\ See Sec. 23.155(a).

    ---------------------------------------------------------------------------

    Variation margin must be calculated using methods,

    procedures, rules, and inputs that to the maximum extent practicable

    rely on recently-executed transactions, valuations provided by

    independent third parties, or other objective criteria.\97\

    ---------------------------------------------------------------------------

    \97\ See id.

    ---------------------------------------------------------------------------

    CSEs may comply with variation margin requirements on an

    aggregate basis with respect to uncleared swaps that are governed by

    the same eligible master netting agreement.\98\

    ---------------------------------------------------------------------------

    \98\ See Sec. 23.153(d)(1).

    ---------------------------------------------------------------------------

    A CSE shall not be deemed to have violated its obligation

    to collect or post variation margin if, inter alia, it makes timely

    initiation of dispute resolution mechanisms, including pursuant to

    Sec. 23.504(b)(4).\99\

    ---------------------------------------------------------------------------

    \99\ See Sec. 23.153(e)(2)(i).

    ---------------------------------------------------------------------------

    3. EU Requirements for Calculation of Initial Margin

    In keeping with the BCBS/IOSCO Framework, with respect to the

    calculation of initial margin, the EU's margin requirements generally

    provide:

    Initial margin protects counterparties against potential

    losses which could stem from movements in the market value of the

    derivatives position occurring between the last exchange of variation

    margin before the default of a counterparty and the time that the OTC

    derivatives are replaced or the corresponding risk is hedged.\100\ It

    is the collateral collected by a counterparty to cover its current and

    potential future exposure in the interval between the last collection

    of margin and the liquidation of positions or hedging of market risk

    following a default of the other counterparty.\101\

    ---------------------------------------------------------------------------

    \100\ See RTS, Recital (3).

    \101\ See RTS, Article 1.

    ---------------------------------------------------------------------------

    The assumed variations in the value of the non-centrally

    cleared OTC derivative contracts within the netting set for the

    calculation of initial margins using an initial margin model shall be

    based on a one-tailed 99% confidence interval over a margin period of

    risk (``MPOR'') of at least 10 days.\102\

    ---------------------------------------------------------------------------

    \102\ See RTS, Article 15(1).

    ---------------------------------------------------------------------------

    Counterparties shall calculate the amount of initial

    margin to be collected using either a standardized approach or an

    initial margin model or both.\103\

    ---------------------------------------------------------------------------

    \103\ See RTS, Article 11(1).

    ---------------------------------------------------------------------------

    Parameters used in initial margin models shall be

    calibrated, at least annually, based on historical data from a time

    period with a minimum duration of three years and a maximum duration of

    five years.

    The data used for calibrating the parameters of initial

    margin models shall include the most recent continuous period from the

    date on which the calibration is performed and at least 25% of those

    data shall be

    [[Page 48403]]

    representative of a period of significant financial stress (stressed

    data).\104\

    ---------------------------------------------------------------------------

    \104\ See RTS, Article 16(1) and (2).

    ---------------------------------------------------------------------------

    Where a counterparty uses an initial margin model, that

    model may be developed by any of, or both, counterparties or by a third

    party agent.

    Where a counterparty uses an initial margin model

    developed by a third party agent, the counterparty shall remain

    responsible for ensuring that that model complies with the EU's margin

    rules.\105\

    ---------------------------------------------------------------------------

    \105\ See RTS, Article 14.

    ---------------------------------------------------------------------------

    Initial margin models shall only include non-centrally

    cleared OTC derivative contracts within the same netting set.\106\

    ---------------------------------------------------------------------------

    \106\ See RTS, Article 17(1) and (2).

    ---------------------------------------------------------------------------

    Initial margin models may provide for diversification,

    hedging and risk offsets arising from the risks of the contracts within

    the same netting set, provided that the diversification, hedging or

    risk offset is only carried out within the same underlying asset class

    as referred to in these requirements.

    Diversification, hedging, and risk offsets may only be

    carried out within the following underlying asset classes: (a) Interest

    rates, currency and inflation; (b) equity; (c) credit; (d) commodities

    and gold; (e) other.\107\

    ---------------------------------------------------------------------------

    \107\ See RTS, Article 17(1) and (2).

    ---------------------------------------------------------------------------

    In the event of a dispute over the amount of initial

    margin due, counterparties shall provide at least the part of the

    initial margin amount that is not being disputed within the same

    business day of the calculation date determined in accordance with

    Article 9(3).\108\

    ---------------------------------------------------------------------------

    \108\ See RTS, Article 13(3).

    ---------------------------------------------------------------------------

    4. EU Requirements for Calculation of Variation Margin

    In keeping with the BCBS/IOSCO Framework, with respect to the

    calculation of variation margin, the EU's margin requirements generally

    provide:

    FCs and NFC+s shall mark-to-market on a daily basis the

    value of outstanding contracts. Where market conditions prevent

    marking-to-market, reliable and prudent marking-to-model shall be

    used.\109\

    ---------------------------------------------------------------------------

    \109\ See EMIR, Article 11(2); RTS, Article 9.

    ---------------------------------------------------------------------------

    The amount of variation margin to be collected by a

    counterparty shall be the aggregation of the values calculated for

    purposes of variation margin of all contracts in the netting set, minus

    the value of all variation margin previously collected, minus the net

    value of each contract in the netting set at the point of entry into

    the contract, and plus the value of all variation margin previously

    posted.\110\

    ---------------------------------------------------------------------------

    \110\ See EMIR, Article 11(2); RTS, Article 10.

    ---------------------------------------------------------------------------

    In the event of a dispute over the amount of variation

    margin due, counterparties shall provide at least the part of the

    variation margin amount that is not being disputed.\111\

    ---------------------------------------------------------------------------

    \111\ See RTS, Article 12(3).

    ---------------------------------------------------------------------------

    5. Commission Determination

    Based on the foregoing and the representations of the applicant,

    the Commission has determined that the amounts of initial and variation

    margin calculated under the methodologies required under the EU's

    margin rules would be similar to those calculated under the

    methodologies required under the Final Margin Rule. Specifically, under

    the Final Margin Rule and the EU's margin rules:

    The definitions of initial and variation margin are

    similar, including the description of potential future exposure agreed

    under the BCBS/IOSCO Framework;

    Margin models and/or a standardized margin schedule may be

    used to calculate initial margin;

    Criteria for historical data to be used in initial margin

    models is similar;

    Eligibility for netting is similar;

    Correlations may be recognized within broad risk

    categories, but not across such risk categories;

    The required method of calculating initial margin using

    standardized margin rates is essentially identical; and

    The proscribed standardized margin rates are essentially

    identical.

    Accordingly, the Commission finds that the methodologies for

    calculating the amounts of initial and variation margin for non-

    centrally cleared OTC derivatives under the laws of the EU are

    comparable in outcome to those of the Final Margin Rule.

    F. Process and Standards for Approving Margin Models

    Pursuant to the BCBS/IOSCO Framework, initial margin models may be

    either internally developed or sourced from counterparties or third-

    party vendors but in all such cases, models must be approved by the

    appropriate supervisory authority.\112\

    ---------------------------------------------------------------------------

    \112\ See BCBS/IOSCO Framework Requirement 3.3.

    ---------------------------------------------------------------------------

    1. Commission Requirement for Margin Model Approval

    In keeping with the BCBS/IOSCO Framework, the Final Margin Rule

    generally requires:

    CSEs shall obtain the written approval of the Commission

    or a registered futures association to use a model to calculate the

    initial margin required.\113\

    ---------------------------------------------------------------------------

    \113\ See Sec. 23.154(b)(1)(i).

    ---------------------------------------------------------------------------

    The Commission or a registered futures association will

    approve models that demonstrate satisfaction of all of the requirements

    for an initial margin model set forth above in Section IV(E)(1), in

    addition to the requirements for annual review; \114\ control,

    oversight, and validation mechanisms; \115\ documentation; \116\ and

    escalation procedures.\117\

    ---------------------------------------------------------------------------

    \114\ See Sec. 23.154(b)(4), discussed further below.

    \115\ See Sec. 23.154(b)(5), discussed further below.

    \116\ See Sec. 23.154(b)(6), discussed further below.

    \117\ See Sec. 23.154(b)(7), discussed further below.

    ---------------------------------------------------------------------------

    CSEs must notify the Commission and the registered futures

    association in writing 60 days prior to extending the use of an initial

    margin model to an additional product type; making any change to the

    model that would result in a material change in the CSE's assessment of

    initial margin requirements; or making any material change to modeling

    assumptions.

    The Commission or the registered futures association may

    rescind its approval, or may impose additional conditions or

    requirements if the Commission or the registered futures association

    determines, in its discretion, that a model no longer complies with the

    requirements for an initial margin model summarized above in Section

    IV(E)(1).

    2. EU Requirement for Approval of Margin Models

    The EU's margin rules generally require:

    Upon request, counterparties using a non-standardized

    initial margin model shall provide the competent authorities with any

    documentation relating to the risk management procedures relating to

    such model at any time.\118\

    ---------------------------------------------------------------------------

    \118\ See RTS, Article 2(6).

    ---------------------------------------------------------------------------

    3. Commission Determination

    Based on the foregoing and the representations of the applicant,

    the Commission has determined that the EU margin rules' requirement

    that an FC/NFC+ make documentation supporting an initial model

    available to a competent authority at any time is comparable in outcome

    to, the regulatory approval requirements of the Final Margin Rule.

    While the Commission recognizes that keeping documents open to

    regulatory review is not the same as requiring specific pre-approval

    from a regulator, the EC has represented that competent authorities

    within the Member States responsible for supervising FCs and, where

    applicable NFC+s, as part of their ongoing prudential regulation and

    supervision will enforce applicable

    [[Page 48404]]

    legislation and control whether the models adopted by these entities

    comply with the requirements under the EU margin rules. Furthermore,

    Article 12 of EMIR grants the competent authorities in each Member

    State the authority to impose fines in case of infringement of the

    rules promulgated under EMIR, such as the RTS.\119\ Such infringement

    could include an FC's or NFC+'s violations of the provisions under

    Section 4 of the RTS that establish the general requirements for

    initial margin models.\120\

    ---------------------------------------------------------------------------

    \119\ See RTS, Article 40.

    \120\ The applicant noted that, in a November 23, 2016 report to

    the European Parliament and the Council on areas where further

    action is necessary to ensure that the objectives of EMIR are

    fulfilled ``in a more appropriate, efficient and effective manner,''

    on the issue of margin model approval, the EC stated:

    [W]ith respect to non-cleared transactions, some respondents,

    notably financial institutions, noted the absence of a clear mandate

    for initial margin models to be endorsed by authorities, which could

    lead to uncertainty among market participants as to whether their

    calculations are considered by authorities to be fully compliant

    with regulations. A mandate for initial margin models to be endorsed

    by authorities could promote certainty for market participants and

    authorities alike.

    See November 23, 2016 Report from the EC to the European

    Parliament and the Council under Article 85(1) of EMIR on OTC

    Derivatives, Central Counterparties and Trade Repositories, section

    4.1.2 (emphasis included), at http://ec.europa.eu/finance/financial-markets/docs/derivatives/161123-report_en.pdf.

    ---------------------------------------------------------------------------

    G. Timing and Manner for Collection or Payment of Initial and Variation

    Margin

    1. Commission Requirement for Timing and Manner for Collection or

    Payment of Initial and Variation Margin

    With respect to the timing and manner for collection or posting of

    initial margin, the Final Margin Rule generally provides that:

    Where a CSE is required to collect initial margin, it must

    be collected on or before the business day after execution of an

    uncleared swap, and thereafter the CSE must continue to hold initial

    margin in an amount equal to or greater than the required initial

    margin amount as re-calculated each business day until such uncleared

    swap is terminated or expires.

    Where a CSE is required to post initial margin, it must be

    posted on or before the business day after execution of an uncleared

    swap, and thereafter the CSE must continue to post initial margin in an

    amount equal to or greater than the required initial margin amount as

    re-calculated each business day until such uncleared swap is terminated

    or expires.

    Required initial margin amounts must be posted and

    collected by CSEs on a gross basis (i.e., amounts to be posted may not

    be set-off against amounts to be collected from the same counterparty).

    With respect to the timing and manner for collection or posting of

    variation margin, the Final Margin Rule generally provides that:

    Where a CSE is required to collect variation margin, it

    must be collected on or before the business day after execution of an

    uncleared swap, and thereafter the CSE must continue to collect the

    required variation margin amount, if any, each business day as re-

    calculated each business day until such uncleared swap is terminated or

    expires.\121\

    ---------------------------------------------------------------------------

    \121\ See Sec. 23.153(a).

    ---------------------------------------------------------------------------

    Where a CSE is required to post variation margin, it must

    be posted on or before the business day after execution of an uncleared

    swap, and thereafter the CSE must continue to post the required

    variation margin amount, if any, each business day as re-calculated

    each business day until such uncleared swap is terminated or

    expires.\122\

    ---------------------------------------------------------------------------

    \122\ See Sec. 23.153(b).

    ---------------------------------------------------------------------------

    With respect to both initial and variation margin, a CSE shall not

    be deemed to have violated its obligation to collect or post margin if,

    inter alia, it makes timely initiation of dispute resolution

    mechanisms, including pursuant to Sec. 23.504(b)(4).\123\

    ---------------------------------------------------------------------------

    \123\ See Sec. 23.153(e)(2)(i).

    ---------------------------------------------------------------------------

    2. EU Requirements for Timing and Manner for Collection of Initial and

    Variation Margin

    With respect to the timing and manner for collection or posting of

    initial margin, the EU's margin rules generally provide that:

    Counterparties shall calculate initial margin no later

    than the business day following one of these events: (a) Where a new

    non-centrally cleared OTC derivative contract is executed or added to

    the netting set; (b) where an existing non-centrally cleared OTC

    derivative contract expires or is removed from the netting set; (c)

    where an existing non-centrally cleared OTC derivative contract

    triggers a payment or a delivery other than the posting and collecting

    of margins; (d) where the initial margin is calculated in accordance

    with the standardized approach and an existing contract is reclassified

    in terms of the asset category referred to by the RTS as a result of

    reduced time to maturity; (e) where no calculation has been performed

    in the preceding 10 business days.\124\

    ---------------------------------------------------------------------------

    \124\ See RTS, Article 9(2).

    ---------------------------------------------------------------------------

    The posting counterparty shall provide the initial margin

    within the same business day of the calculation date.\125\

    ---------------------------------------------------------------------------

    \125\ See RTS, Article 13(2).

    ---------------------------------------------------------------------------

    Where two counterparties are located in the same time-

    zone, the calculation shall be based on the netting set of the previous

    business day.\126\

    ---------------------------------------------------------------------------

    \126\ See RTS, Article 9(3)(a).

    ---------------------------------------------------------------------------

    Where two counterparties are not located in the same time-

    zone, the calculation shall be based on the transactions in the netting

    set which are entered into before 16:00 hours of the previous business

    day of the time-zone where it is first 16:00 hours.\127\

    ---------------------------------------------------------------------------

    \127\ See RTS, Article 9(3)(b).

    ---------------------------------------------------------------------------

    In the event of a dispute over the amount of initial

    margin due, counterparties shall provide at least the part of the

    initial margin amount that is not being disputed within the same

    business day of the calculation date.\128\

    ---------------------------------------------------------------------------

    \128\ See RTS, Article 13(3).

    ---------------------------------------------------------------------------

    With respect to the timing and manner for collection or posting of

    variation margin, the EU's margin rules generally provide that:

    Counterparties shall calculate variation margin at least

    on a daily basis.\129\

    ---------------------------------------------------------------------------

    \129\ See RTS, Article 9(1).

    ---------------------------------------------------------------------------

    The posting counterparty shall provide the variation

    margin as follows: (a) Within the same business day of the calculation

    date; (b) where certain conditions are met,\130\ within two business

    days of the calculation date.\131\

    ---------------------------------------------------------------------------

    \130\ The provision of variation margin within two business of

    the calculation date may only be applied to the following: (a)

    Netting sets comprising derivative contracts not subject to initial

    margin requirements in accordance with this Regulation, where the

    posting counterparty has provided, at or before the calculation date

    of the variation margin, an advance amount of eligible collateral

    calculated in the same manner as that applicable to initial margins

    in accordance with Article 15, for which the collecting counterparty

    has used a margin period of risk (MPOR) at least equal to the number

    of days in between and including the calculation date and the

    collection date; (b) netting sets comprising contracts subject to

    initial margin requirements in accordance with this Regulation,

    where the initial margin has been adjusted in one of the following

    ways: (i) By increasing the MPOR referred to in Article 15(2) by the

    number of days in between, and including, the calculation date

    determined in accordance with Article 9(3) and the collection date

    determined in accordance with paragraph 1 of this Article; (ii) by

    increasing the initial margin calculated in accordance with the

    standardised approach referred to in Article 11 using an appropriate

    methodology taking into account a MPOR that is increased by the

    number of days in between, and including, the calculation date

    determined in accordance with Article 9(3) and the collection date

    determined in accordance with paragraph 2 of this Article. For the

    purposes of point (a), in case no mechanism for segregation is in

    place between the two counterparties, those counterparties may

    offset the amounts to be provided.

    \131\ See RTS, Article 12(1).

    ---------------------------------------------------------------------------

    In the event of a dispute over the amount of variation

    margin due,

    [[Page 48405]]

    counterparties shall provide at least the part of the variation margin

    amount that is not being disputed.\132\

    ---------------------------------------------------------------------------

    \132\ See RTS, Article 12(3).

    ---------------------------------------------------------------------------

    3. Commission Determination

    Having compared the EU's margin requirements applicable to the

    timing and manner of collection and payment of initial and variation

    margin to the Commission's corresponding margin requirements, the

    Commission finds that the EU's margin requirements are, despite

    apparent differences in certain respects, comparable in outcome.

    Under the Final Margin Rule, where initial margin is required, a

    CSE must calculate the amount of initial margin each business day. The

    EU's margin rules only require initial margin to be calculated after

    certain events, including the addition or removal of a non-centrally

    cleared OTC derivative from the netting set or at least within 10 days

    after the last initial margin calculation. While this is different from

    the Final Margin Rule's requirement that the amount of initial margin

    be calculated each business day, the EC has explained that the more

    sophisticated counterparties subject to the EU margin rules actively

    operate in non-centrally cleared OTC derivatives to the point where the

    RTS requirement to recalculate whenever there is a change to the

    netting set will in practice require these types of counterparties to

    recalculate daily. Because of this, the EC views the 10-day allowance

    under Article 9(2)(e) of the RTS as a backstop only and one that is

    likely to be exercised only in the case of a static portfolio. The

    Commission believes that as a result of these entities still exchanging

    variation margin, and thereby eliminating current exposure, this

    difference will be mitigated.

    With respect to the timing of collecting/posting margin, the Final

    Margin Rule requires CSEs to collect/post any required margin amount

    within one business day of calculation which, under the Final Margin

    Rule, must occur daily. In contrast, the EU's margin rules allow for a

    variation margin posting date within two business days of the

    calculation date (T+2) when certain conditions are met.\133\ As

    explained in the Recitals to the RTS, additional time for posting of

    variation margin is allowed only where compensated by an adjustment to

    initial margin by an adequate recalculation of MPOR.\134\ Where initial

    margin is required, an adequate recalculation of MPOR under the RTS

    would occur by increasing the MPOR by the number of days in between,

    and including, the calculation and collection dates or by increasing

    the initial margin calculated with the standardized approach taking

    into account a MPOR increased by the number of days in between, and

    including, the calculation and collection dates.\135\ Where no initial

    margin requirements apply, additional time is permitted for posting of

    variation margin if the posting counterparty has provided, at or before

    the variation margin calculation date, an advance amount of eligible

    collateral calculated in the same manner as required for initial margin

    with an MPOR at least equal to the number of days in between, and

    including, the calculation and collection dates.\136\

    ---------------------------------------------------------------------------

    \133\ See RTS, Article 12(2).

    \134\ See RTS, Recital (20).

    \135\ See RTS, Article 12(2)(b).

    \136\ See RTS, Recital (20) and Article 12(2)(a).

    ---------------------------------------------------------------------------

    While the RTS conditions to a delay in the exchange of variation

    margin do not make the EU's rule in this area the same as the Final

    Margin Rule, they do serve to mitigate the potential risks, as

    described above, by increasing the initial margin's MPOR by the

    corresponding number of days associated with a delay in the exchange of

    variation margin. Furthermore, although the EU's allowance for a delay

    of up to 10 days to recalculate initial margin is not the same as the

    Final Margin Rule's daily recalculation requirement, as detailed above,

    the EC has represented that, in practice, it expects the most

    sophisticated counterparties subject to the EU margin rules to

    recalculate initial margin on a daily basis. Thus, the Commission finds

    that the requirements of the EU margin rules with respect to the timing

    and manner for collection or payment of initial and variation margin

    are comparable in outcome to the Final Margin Rule.

    H. Margin Threshold Levels or Amounts

    The BCBS/IOSCO Framework provides that initial margin could be

    subject to a threshold not to exceed EUR 50 million. The threshold is

    applied at the level of the consolidated group to which the threshold

    is being extended and is based on all non-centrally cleared derivatives

    between the two consolidated groups.

    Similarly, to alleviate operational burdens associated with the

    transfer of small amounts of margin, the BCBS/IOSCO Framework provides

    that all margin transfers between parties may be subject to a de-

    minimis minimum transfer amount not to exceed EUR 500,000.

    1. Commission Requirement for Margin Threshold Levels or Amounts

    In keeping with the BCBS/IOSCO Framework, with respect to margin

    threshold levels or amounts the Final Margin Rule generally provides

    that:

    CSEs may agree with their counterparties that initial

    margin may be subject to a threshold of no more than $50 million

    applicable to a consolidated group of affiliated counterparties.\137\

    ---------------------------------------------------------------------------

    \137\ See Sec. 23.154(a)(3) and definition of ``initial margin

    threshold'' in Sec. 23.151.

    ---------------------------------------------------------------------------

    CSEs are not required to collect or to post initial or

    variation margin with a counterparty until the combined amount of

    initial margin and variation margin to be collected or posted is

    greater than $500,000 (i.e., a minimum transfer amount).\138\

    ---------------------------------------------------------------------------

    \138\ See Sec. 23.152(b)(3).

    ---------------------------------------------------------------------------

    2. EU Requirement for Margin Threshold Levels or Amounts

    In keeping with the BCBS/IOSCO Framework, with respect to margin

    threshold levels or amounts, the EU's margin requirements generally

    provide that:

    Counterparties may provide in their risk management

    procedures that initial margin collected is reduced by an amount up to

    EUR 50 million where neither counterparty belongs to any group or the

    counterparties are part of different groups; or EUR 10 million where

    both counterparties belong to the same group.\139\

    ---------------------------------------------------------------------------

    \139\ See RTS, Article 29(1).

    ---------------------------------------------------------------------------

    Counterparties may provide in their risk management

    procedures that no collateral is collected from a counterparty where

    the amount due from the last collection of collateral is equal to or

    lower than the amount agreed by the counterparties. The minimum

    transfer amount shall not exceed EUR 500,000 or the equivalent amount

    in another currency.\140\

    ---------------------------------------------------------------------------

    \140\ See RTS, Article 25(1).

    ---------------------------------------------------------------------------

    3. Commission Determination

    Based on the foregoing and the representations of the applicant,

    the Commission has determined that the EU requirements for margin

    threshold levels or amounts, in the case of FCs and NFC+s, are

    comparable in outcome to those required by the Final Margin Rule, in

    the case of CSEs.

    The Commission notes that at current exchange rates, EUR 50 million

    is approximately $59 million, while EUR 500,000 is approximately

    $588,000. Although these amounts are greater than those permitted by

    the Final Margin Rule, the Commission recognizes that

    [[Page 48406]]

    exchange rates will fluctuate over time and thus the Commission finds

    that such requirements under the laws of the EU are comparable in

    outcome to those of the Final Margin Rule.

    I. Risk Management Controls for the Calculation of Initial and

    Variation Margin

    1. Commission Requirement for Risk Management Controls for the

    Calculation of Initial and Variation Margin

    With respect to risk management controls for the calculation of

    initial margin, the Final Margin Rule generally provides that:

    CSEs are required to have a risk management unit pursuant

    to Sec. 23.600(c)(4). Such risk management unit must include a risk

    control unit tasked with validation of a CSE's initial margin model

    prior to implementation and on an ongoing basis, including an

    evaluation of the conceptual soundness of the initial margin model, an

    ongoing monitoring process that includes verification of processes and

    benchmarking by comparing the CSE's initial margin model outputs

    (estimation of initial margin) with relevant alternative internal and

    external data sources or estimation techniques, and an outcomes

    analysis process that includes back testing the model.\141\

    ---------------------------------------------------------------------------

    \141\ See Sec. 23.154(b)(5).

    ---------------------------------------------------------------------------

    In accordance with Sec. 23.600(e)(2), CSEs must have an

    internal audit function independent of the business trading unit and

    the risk management unit that at least annually assesses the

    effectiveness of the controls supporting the initial margin model

    measurement systems, including the activities of the business trading

    units and risk control unit, compliance with policies and procedures,

    and calculation of the CSE's initial margin requirements under this

    part.\142\

    ---------------------------------------------------------------------------

    \142\ See Sec. 23.154(b)(5)(iv).

    ---------------------------------------------------------------------------

    At least annually, such internal audit function shall

    report its findings to the CSE's governing body, senior management, and

    chief compliance officer.\143\

    ---------------------------------------------------------------------------

    \143\ See Sec. 23.154(b)(5)(iv).

    ---------------------------------------------------------------------------

    With respect to risk management controls for the calculation of

    variation margin, the Final Margin Rule generally provides that:

    CSEs must maintain documentation setting forth the

    variation methodology with sufficient specificity to allow a

    counterparty, the Commission, a registered futures association, and any

    applicable prudential regulator to calculate a reasonable approximation

    of the margin requirement independently.

    CSEs must evaluate the reliability of its data sources at

    least annually, and make adjustments, as appropriate.

    CSEs, upon request of the Commission or a registered

    futures association, must provide further data or analysis concerning

    the variation methodology or a data source, including: (a) The manner

    in which the methodology meets the requirements of the Final Margin

    Rule; (b) a description of the mechanics of the methodology; (c) the

    conceptual basis of the methodology; (d) the empirical support for the

    methodology; and (e) the empirical support for the assessment of the

    data sources.

    2. EU Requirement for Risk Management Controls for the Calculation of

    Initial and Variation Margin

    With respect to risk management controls for the calculation of

    initial margin, the EU's margin requirements generally provide that:

    Counterparties shall establish an internal governance

    process to assess the appropriateness of the initial margin model on a

    continuous basis, including all of the following: (a) An initial

    validation of the model by suitably qualified persons who are

    independent from the persons developing the model; (b) a follow up

    validation whenever a significant change is made to the initial margin

    model and at least annually; and (c) a regular audit process to assess

    the following: (i) The integrity and reliability of the data sources;

    (ii) the management information system used to run the model; (iii) the

    accuracy and completeness of data used; (iv) the accuracy and

    appropriateness of volatility and correlation assumptions.\144\

    ---------------------------------------------------------------------------

    \144\ See RTS, Article 1.

    ---------------------------------------------------------------------------

    The documentation of the risk management procedures

    relating to the initial margin model shall meet all of the following

    conditions: (a) It shall allow a knowledgeable third-party to

    understand the design and operational detail of the initial margin

    model; (b) it shall contain the key assumptions and the limitations of

    the initial margin model; (c) it shall define the circumstances under

    which the assumptions of the initial margin model are no longer

    valid.\145\

    ---------------------------------------------------------------------------

    \145\ See RTS, Article 18(2).

    ---------------------------------------------------------------------------

    Counterparties shall document all changes to the initial

    margin model. That documentation shall also detail the results of the

    validations carried out after those changes.\146\

    ---------------------------------------------------------------------------

    \146\ See RTS, Article 18(3).

    ---------------------------------------------------------------------------

    3. Commission Determination

    Based on the foregoing and the representations of the applicant,

    the Commission has determined that the EU requirements applicable to

    FCs and NFC+s pertaining to risk management controls for the

    calculation of initial and variation margin are substantially the same

    as the corresponding requirements under the Final Margin Rule.

    Specifically, the Commission finds that under both the EU's

    requirements and the Final Margin Rule, a CSE is required to establish

    a unit that is tasked with comprehensively managing the entity's use of

    an initial margin model, including establishing controls and testing

    procedures. Accordingly, the Commission finds that the EU's

    requirements pertaining to risk management controls over the use of

    initial margin models are comparable in outcome to the controls

    required by the Final Margin Rule.

    J. Eligible Collateral for Initial and Variation Margin

    As explained in the BCBS/IOSCO Framework, to ensure that

    counterparties can liquidate assets held as initial and variation

    margin in a reasonable amount of time to generate proceeds that could

    sufficiently protect collecting entities from losses on non-centrally

    cleared derivatives in the event of a counterparty default, assets

    collected as collateral for initial and variation margin purposes

    should be highly liquid and should, after accounting for an appropriate

    haircut, be able to hold their value in a time of financial stress.

    Such a set of eligible collateral should take into account that assets

    which are liquid in normal market conditions may rapidly become

    illiquid in times of financial stress. In addition to having good

    liquidity, eligible collateral should not be exposed to excessive

    credit, market and FX risk (including through differences between the

    currency of the collateral asset and the currency of settlement). To

    the extent that the value of the collateral is exposed to these risks,

    appropriately risk-sensitive haircuts should be applied. More

    importantly, the value of the collateral should not exhibit a

    significant correlation with the creditworthiness of the counterparty

    or the value of the underlying non-centrally cleared derivatives

    portfolio in such a way that would undermine the effectiveness of the

    protection offered by the margin collected. Accordingly, securities

    issued by the counterparty or its related entities should not be

    accepted as collateral. Accepted

    [[Page 48407]]

    collateral should also be reasonably diversified.

    1. Commission Requirement for Eligible Collateral for Initial and

    Variation Margin

    With respect to eligible collateral that may be collected or posted

    to satisfy an initial margin obligation, the Final Margin Rule

    generally provides that CSEs may collect or post: \147\

    ---------------------------------------------------------------------------

    \147\ See Sec. 23.156(a)(1).

    ---------------------------------------------------------------------------

    Cash denominated in a major currency, being United States

    Dollar (USD); Canadian Dollar (CAD); Euro (EUR); United Kingdom Pound

    (GBP); Japanese Yen (JPY); Swiss Franc (CHF); New Zealand Dollar (NZD);

    Australian Dollar (AUD); Swedish Kronor (SEK); Danish Kroner (DKK);

    Norwegian Krone (NOK); any other currency designated by the Commission;

    or any currency of settlement for a particular uncleared swap.

    A security that is issued by, or unconditionally

    guaranteed as to the timely payment of principal and interest by, the

    U.S. Department of Treasury.

    A security that is issued by, or unconditionally

    guaranteed as to the timely payment of principal and interest by, a

    U.S. government agency (other than the U.S. Department of Treasury)

    whose obligations are fully guaranteed by the full faith and credit of

    the U.S. government.

    A security that is issued by, or fully guaranteed as to

    the payment of principal and interest by, the European Central Bank or

    a sovereign entity that is assigned no higher than a 20 percent risk

    weight under the capital rules applicable to SDs subject to regulation

    by a prudential regulator.

    A publicly-traded debt security issued by, or an asset-

    backed security fully guaranteed as to the timely payment of principal

    and interest by, a U.S. Government-sponsored enterprise that is

    operating with capital support or another form of direct financial

    assistance received from the U.S. government that enables the

    repayments of the U.S. Government-sponsored enterprise's eligible

    securities.

    A security that is issued by, or fully guaranteed as to

    the payment of principal and interest by, the Bank for International

    Settlements, the International Monetary Fund, or a multilateral

    development bank as defined in Sec. 23.151.

    Other publicly-traded debt that has been deemed acceptable

    as initial margin by a prudential regulator as defined in Sec. 23.151.

    A publicly-traded common equity security that is included

    in the Standard & Poor's Composite 1500 Index (or any other similar

    index of liquid and readily marketable equity securities as determined

    by the Commission) or an index that a CSE's supervisor in a foreign

    jurisdiction recognizes for purposes of including publicly traded

    common equity as initial margin under applicable regulatory policy, if

    held in that foreign jurisdiction.

    Securities in the form of redeemable securities in a

    pooled investment fund representing the security-holder's proportional

    interest in the fund's net assets and that are issued and redeemed only

    on the basis of the market value of the fund's net assets prepared each

    business day after the security-holder makes its investment commitment

    or redemption request to the fund, if the fund's investments are

    limited to securities that are issued by, or unconditionally guaranteed

    as to the timely payment of principal and interest by, the U.S.

    Department of the Treasury, and immediately-available cash funds

    denominated in U.S. dollars; or securities denominated in a common

    currency and issued by, or fully guaranteed as to the payment of

    principal and interest by, the European Central Bank or a sovereign

    entity that is assigned no higher than a 20% risk weight under the

    capital rules applicable to SDs subject to regulation by a Prudential

    Regulator, and immediately-available cash funds denominated in the same

    currency; and assets of the fund may not be transferred through

    securities lending, securities borrowing, repurchase agreements,

    reverse repurchase agreements, or other means that involve the fund

    having rights to acquire the same or similar assets from the

    transferee.

    Gold.

    A CSE may not collect or post as initial margin any asset

    that is a security issued by: The CSE or a margin affiliate of the CSE

    (in the case of posting) or the counterparty or any margin affiliate of

    the counterparty (in the case of collection); a bank holding company, a

    savings and loan holding company, a U.S. intermediate holding company

    established or designated for purposes of compliance with 12 CFR

    252.153, a foreign bank, a depository institution, a market

    intermediary, a company that would be any of the foregoing if it were

    organized under the laws of the United States or any State, or a margin

    affiliate of any of the foregoing institutions; or a nonbank financial

    institution supervised by the Board of Governors of the Federal Reserve

    System under Title I of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act (12 U.S.C. 5323).\148\

    ---------------------------------------------------------------------------

    \148\ See Sec. 23.156(a)(2).

    ---------------------------------------------------------------------------

    The value of any eligible collateral collected or posted

    to satisfy initial margin requirements must be reduced by the following

    haircuts: an 8% discount for initial margin collateral denominated in a

    currency that is not the currency of settlement for the uncleared swap,

    except for eligible types of collateral denominated in a single

    termination currency designated as payable to the non-posting

    counterparty as part of an eligible master netting agreement; and the

    discounts set forth in the following table: \149\

    ---------------------------------------------------------------------------

    \149\ See Sec. 23.156(a)(3).

    Standardized Haircut Schedule

    ------------------------------------------------------------------------

     

    ------------------------------------------------------------------------

    Cash in same currency as swap obligation................ 0.0

    Eligible government and related debt (e.g., central 0.5

    bank, multilateral development bank, GSE securities

    identified in paragraph (a)(1)(iv) of this section):

    Residual maturity less than one-year...................

    Eligible government and related debt (e.g., central 2.0

    bank, multilateral development bank, GSE securities

    identified in paragraph (a)(1)(iv) of this section):

    Residual maturity between one and five years...........

    Eligible government and related debt (e.g., central 4.0

    bank, multilateral development bank, GSE securities

    identified in paragraph (a)(1)(iv) of this section):

    Residual maturity greater than five years..............

    Eligible corporate debt (including eligible GSE debt 1.0

    securities not identified in paragraph (a)(1)(iv) of

    this section): Residual maturity less than one-year....

    Eligible corporate debt (including eligible GSE debt 4.0

    securities not identified in paragraph (a)(1)(iv) of

    this section): Residual maturity between one and five

    years..................................................

    Eligible corporate debt (including eligible GSE debt 8.0

    securities not identified in paragraph (a)(1)(iv) of

    this section): Residual maturity greater than five

    years..................................................

    Equities included in S&P 500 or related index........... 15.0

    [[Page 48408]]

     

    Equities included in S&P 1500 Composite or related index 25.0

    but not S&P 500 or related index.......................

    Gold.................................................... 15.0

    ------------------------------------------------------------------------

    With respect to eligible collateral that may be collected or posted

    to satisfy a variation margin obligation, the Final Margin Rule

    generally provides that CSEs may collect or post: \150\

    ---------------------------------------------------------------------------

    \150\ See Sec. 23.156(b)(1).

    ---------------------------------------------------------------------------

    With respect to uncleared swaps with an SD or MSP, only

    immediately available cash funds that are denominated in: U.S. dollars,

    another major currency (as defined in Sec. 23.151), or the currency of

    settlement of the uncleared swap.

    With respect to any other uncleared swaps for which a CSE

    is required to collect or post variation margin, any asset that is

    eligible to be posted or collected as initial margin, as described

    above.

    The value of any eligible collateral collected or posted

    to satisfy variation margin requirements must be reduced by the same

    haircuts applicable to initial margin described above.\151\

    ---------------------------------------------------------------------------

    \151\ See Sec. 23.156(b)(2).

    ---------------------------------------------------------------------------

    Finally, CSEs must monitor the value and eligibility of collateral

    collected and posted: \152\

    ---------------------------------------------------------------------------

    \152\ See Sec. 23.156(c).

    ---------------------------------------------------------------------------

    CSEs must monitor the market value and eligibility of all

    collateral collected and posted, and, to the extent that the market

    value of such collateral has declined, the CSE must promptly collect or

    post such additional eligible collateral as is necessary to maintain

    compliance with the margin requirements of Sec. Sec. 23.150 through

    23.161.

    To the extent that collateral is no longer eligible, CSEs

    must promptly collect or post sufficient eligible replacement

    collateral to comply with the margin requirements of Sec. Sec. 23.150

    through 23.161.

    2. EU Requirement for Eligible Collateral for Initial and Variation

    Margin

    With respect to eligible collateral that may be collected to

    satisfy an initial or variation margin obligation, the EU's margin

    requirements generally provide that counterparties may collect: \153\

    ---------------------------------------------------------------------------

    \153\ See RTS, Article 4.

    ---------------------------------------------------------------------------

    Cash in the form of money credited to an account in any

    currency, or similar claims for the repayment of money, such as money

    market deposits.

    Gold.

    Debt securities issued by Member States' central

    governments or central banks.

    Debt securities issued by Member States' regional

    governments or local authorities whose exposures are treated as

    exposures to the central government of that Member State in accordance

    with Article 115(2) of Regulation (EU) No 575/2013.

    Debt securities issued by Member States' public sector

    entities whose exposures are treated as exposures to the central

    government, regional government or local authority of that Member State

    in accordance with Article 116(4) of Regulation (EU) No 575/2013.

    Debt securities issued by multilateral development banks

    listed in Article 117(2) of Regulation (EU) No 575/2013.

    Debt securities issued by the international organizations

    listed in Article 118 of Regulation (EU) No 575/2013.

    Debt securities issued by third countries' governments or

    central banks.

    Where the assets are not issued by the posting

    counterparty, not issued by entities that are part of the same group as

    the posting counterparty, or not otherwise subject to any wrong way

    risk, a counterparty may collect:

    [ssquf] Debt securities issued by Member States' regional

    governments or local authorities whose exposures are not treated as

    exposures to the central government of that Member State;

    [ssquf] Debt securities issued by Member States' public sector

    entities whose exposures are treated as exposures to the central

    government, regional government, or local authority of that Member

    State;

    [ssquf] Debt securities issued by third countries' regional

    governments or local authorities whose exposures are treated as

    exposures to the central government, regional government, or local

    authority of that third country;

    [ssquf] Debt securities issued by third countries' regional

    governments or local authorities whose exposures are not treated as

    exposures to the central government, regional government, or local

    authority of that third country;

    [ssquf] Debt securities issued by credit institutions or investment

    firms including bonds referred to in Article 52(4) of Directive 2009/

    65/EC of the European Parliament and of the Council;

    [ssquf] Corporate bonds;

    [ssquf] The most senior tranche of a securitization, as defined in

    Article 4(61) of Regulation (EU) No 575/2013, that is not a re-

    securitization as defined in Article 4(63) of that Regulation;

    [ssquf] Convertible bonds provided that they can be converted only

    into equities which are included in an index specified pursuant to

    point (a) of Article 197 (8) of Regulation (EU) No 575/2013;

    [ssquf] Equities included in an index specified pursuant to point

    (a) of Article 197(8) of Regulation (EU) No 575/2013;

    [ssquf] A counterparty may only use units or shares in undertakings

    for collective investments in transferable securities (UCITS) as

    eligible collateral where all the following conditions are met: (a) The

    units or shares have a daily public price quote; (b) the UCITS are

    limited to investing in assets that are eligible in accordance with

    Article 4(1); (c) the UCITS meet the criteria laid down in Article

    132(3) of Regulation (EU) No 575/2013. For the purposes of point (b),

    UCITS may use derivative instruments to hedge the risks arising from

    the assets in which they invest. In addition, where a UCITS invests in

    shares or units of other UCITS, these conditions shall also apply to

    those UCITS.\154\

    ---------------------------------------------------------------------------

    \154\ See RTS, Article 5(1).

    ---------------------------------------------------------------------------

    [ssquf] Where a UCITS or any of its underlying UCITS do not only

    invest in assets that are eligible collateral under the RTS, only the

    value of the unit or share of the UCITS that represents investment in

    eligible assets may be used as eligible collateral.\155\

    ---------------------------------------------------------------------------

    \155\ See RTS, Article 5(2).

    ---------------------------------------------------------------------------

    [ssquf] Where non-eligible assets of a UCITS can have a negative

    value, the value of the unit or share of the UCITS that may be used as

    eligible collateral shall be determined by deducting the maximum

    negative value of the non-eligible assets from the value of eligible

    assets.\156\

    ---------------------------------------------------------------------------

    \156\ See RTS, Article 5(3).

    ---------------------------------------------------------------------------

    Counterparties must assess the credit quality of certain

    asset classes.\157\

    ---------------------------------------------------------------------------

    \157\ See RTS, Article 6.

    ---------------------------------------------------------------------------

    Counterparties shall adjust the value of collected

    collateral in accordance with either a methodology prescribed by the

    RTS \158\ or a methodology using their own volatility estimates.\159\

    ---------------------------------------------------------------------------

    \158\ See RTS, Annex III.

    \159\ See RTS, Article 21.

    ---------------------------------------------------------------------------

    There are certain concentration limits for collateral

    collected as initial margin.\160\

    ---------------------------------------------------------------------------

    \160\ See RTS, Article 8.

    ---------------------------------------------------------------------------

    [[Page 48409]]

    If a counterparty chooses to not use its own volatility estimates,

    the value of any eligible collateral collected or posted to satisfy

    initial margin requirements must be reduced by the following haircuts:

    \161\

    ---------------------------------------------------------------------------

    \161\ See RTS, Annex II.

    ------------------------------------------------------------------------

     

    ------------------------------------------------------------------------

    Cash in same currency as swap obligation................ 0.0

    Debt securities issued by entities describe in Article 0.5

    4(1)(c) to (e) and (h) to (k): Residual maturity less

    than one-year..........................................

    Debt securities issued by entities describe in Article 2.0

    4(1)(c) to (e) and (h) to (k): Residual maturity

    between one and five years.............................

    Debt securities issued by entities describe in Article 4.0

    4(1)(c) to (e) and (h) to (k): Residual maturity

    greater than five years................................

    Debt securities issued by entities describe in Article 1.0

    4(1)(f), (g) and (l) to (n): Residual maturity less

    than one-year..........................................

    Debt securities issued by entities describe in Article 4.0

    4(1)(f), (g) and (l) to (n): Residual maturity between

    one and five years.....................................

    Debt securities issued by entities describe in Article 8.0

    4(1)(f), (g) and (l) to (n): Residual maturity greater

    than five years........................................

    Securitization positions meeting the criteria in Article 2.0

    4(1)(o): Residual maturity of less than one year.......

    Securitization positions meeting the criteria in Article 8.0

    4(1)(o): Residual maturity between one and five years..

    Securitization positions meeting the criteria in Article 16.0

    4(1)(o): Residual maturity of more than five years.....

    Equities included in main indices, bonds convertible to 15.0

    equities in main indices, and gold.....................

    ------------------------------------------------------------------------

    In addition to the foregoing, under the EU's margin requirements,

    for the purpose of exchanging initial margin, all cash and non-cash

    collateral posted in a currency other than the currency in which the

    payments in case of early termination or default have to be made in

    accordance with the single derivative contract, the relevant exchange

    of collateral agreement or the relevant credit support annex

    (``termination currency''). Each of the counterparties may choose a

    different termination currency. Where the agreement does not identify a

    termination currency, the haircut shall apply to the market value of

    all the assets posted as collateral.\162\

    ---------------------------------------------------------------------------

    \162\ See RTS, Annex II, Table 3.

    ---------------------------------------------------------------------------

    3. Commission Determination

    Based on the foregoing and the representations of the applicant,

    the Commission finds that the EU's requirements pertaining to assets

    eligible for posting or collecting by FCs and NFC+s as collateral for

    non-centrally cleared OTC derivatives, while different than the Final

    Margin Rule in some respects, are comparable in outcome to the Final

    Margin Rule.

    For example, under the EU margin regime, cash in the form of a

    claim for the repayment of money, such as money market deposits, is

    eligible collateral while under the Final Margin Rule it is not.

    However, although the EU margin regime and Final Margin Rule take

    different approaches on this point, the Commission did recognize the

    need for flexibility provided to counterparties by money market funds

    when it allowed for the use of redeemable securities in a pooled

    investment fund that holds only securities that are issued by, or

    unconditionally guaranteed as to the timely payment of principal and

    interest by, the U.S. Department of the Treasury, and cash funds

    denominated in U.S. dollars.\163\

    ---------------------------------------------------------------------------

    \163\ See Final Margin Rule, 81 FR 636, 665.

    ---------------------------------------------------------------------------

    The EU's requirements are also different with respect to the

    eligible collateral for variation margin for non-centrally cleared OTC

    derivatives between FC/NFC+s that are CSEs and FC/NFC+s that are SDs

    and MSPs (including other CSEs). For uncleared swaps with an SD or MSP,

    the Final Margin Rule only permits variation margin to be posted or

    collected as immediately available cash funds that are denominated in

    U.S. dollars, another major currency (as defined in Sec. 23.151), or

    the currency of settlement of the uncleared swap, while the EU's margin

    requirements would permit any form of eligible collateral (as described

    above). The Commission did state in the Final Margin Rule, however,

    that requiring variation margin to be posted or collected as

    immediately available cash funds is ``consistent with regulatory and

    industry initiatives to improve standardization and efficiency in the

    OTC swaps market.'' \164\ Thus, in outcome, an SD or MSP that is also

    subject to the EU margin rules likely would, in the normal course of

    business, be exchanging variation margin in immediately available cash

    funds.

    ---------------------------------------------------------------------------

    \164\ See id. at 668.

    ---------------------------------------------------------------------------

    Other differences concern corporate bonds, the most senior tranche

    of a securitization, and convertible bonds that can be converted only

    into equities listed on specific indexes, all of which are allowed

    under the EU margin rules but not under the Final Margin Rule. However,

    the EU margin rules do address the inherent risk posed by these assets

    by including additional safeguards when using these types of

    collateral. Regarding corporate bonds and convertible bonds, a

    counterparty subject to the EU margin rules must assess the credit

    quality of the assets using a specified internal rating or a credit

    quality assessment issued by a recognized External Credit Assessment

    Institution (``ECAI'').\165\ Regarding the most senior tranche of a

    securitization, a counterparty must use an ECAI's credit quality

    assessment to assess the tranche's credit quality.\166\

    ---------------------------------------------------------------------------

    \165\ See RTS, Article 6(1).

    \166\ See RTS, Article 6(2).

    ---------------------------------------------------------------------------

    The EU's margin rules on eligible collateral also differ from the

    Final Margin Rule in ways that make the EU rules more stringent than

    the Final Margin Rule. For example, the EU margin rules require a

    larger haircut than the Final Margin Rule on government, central bank,

    and corporate debt where a credit quality assessment, as required under

    Article of the RTS, indicates low credit quality for such debt.\167\ In

    addition, the EU's margin rules impose concentration limits for initial

    margin.\168\

    ---------------------------------------------------------------------------

    \167\ See RTS, Articles 6 and 7.

    \168\ See RTS, Article 8.

    ---------------------------------------------------------------------------

    While not identical, the Commission finds that the forms of

    eligible collateral for initial and variation margin under the laws of

    the EU provide protections that are comparable in outcome, as explained

    above, to the forms of eligible collateral mandated by the Final Margin

    Rule. Specifically, the Commission finds that the EU's margin regime

    ensures that assets collected as collateral for initial and variation

    margin purposes are highly liquid and able to hold their value in a

    time of financial stress. Because under the EU's margin regime a non-

    defaulting party would be able to liquidate assets held as initial and

    variation margin in a reasonable amount of time to generate proceeds

    that could sufficiently protect collecting entities from losses on

    uncleared swaps in the event of a counterparty default, the Commission

    finds the EU's margin regime with respect to the forms of eligible

    collateral for initial and variation margin for uncleared swaps is

    comparable in outcome to the Final Margin Rule.

    K. Requirements for Custodial Arrangements, Segregation, and

    Rehypothecation

    As explained in the BCBS/IOSCO Framework, the exchange of initial

    margin on a net basis may be

    [[Page 48410]]

    insufficient to protect two market participants with large gross

    derivatives exposures to each other in the case of one firm's failure.

    Thus, the gross initial margin between such firms should be

    exchanged.\169\

    ---------------------------------------------------------------------------

    \169\ See BCBS/IOSCO Framework, Key principle 5.

    ---------------------------------------------------------------------------

    Further, initial margin collected should be held in such a way as

    to ensure that (i) the margin collected is immediately available to the

    collecting party in the event of the counterparty's default, and (ii)

    the collected margin must be subject to arrangements that protect the

    posting party to the extent possible under applicable law in the event

    that the collecting party enters bankruptcy.\170\

    ---------------------------------------------------------------------------

    \170\ See id.

    ---------------------------------------------------------------------------

    1. Commission Requirement for Custodial Arrangements, Segregation, and

    Rehypothecation

    In keeping with the principles set forth in the BCBS/IOSCO

    Framework, with respect to custodial arrangements, segregation, and

    rehypothecation, the Final Margin Rule generally requires that:

    All assets posted by or collected by CSEs as initial

    margin must be held by one or more custodians that are not the CSE, the

    counterparty, or margin affiliates of the CSE or the counterparty.\171\

    ---------------------------------------------------------------------------

    \171\ See Sec. 23.157(a) and (b).

    ---------------------------------------------------------------------------

    CSEs must enter into an agreement with each custodian

    holding initial margin collateral that:

    [ssquf] Prohibits the custodian from rehypothecating, repledging,

    reusing, or otherwise transferring (through securities lending,

    securities borrowing, repurchase agreement, reverse repurchase

    agreement or other means) the collateral held by the custodian;

    [ssquf] May permit the custodian to hold cash collateral in a

    general deposit account with the custodian if the funds in the account

    are used to purchase an asset that qualifies as eligible collateral

    (other than equities, investment vehicle securities, or gold), such

    asset is held in compliance with Sec. 23.157, and such purchase takes

    place within a time period reasonably necessary to consummate such

    purchase after the cash collateral is posted as initial margin; and

    [ssquf] Is a legal, valid, binding, and enforceable agreement under

    the laws of all relevant jurisdictions including in the event of

    bankruptcy, insolvency, or a similar proceeding.\172\

    ---------------------------------------------------------------------------

    \172\ See Sec. 23.157(c)(1) and (2).

    ---------------------------------------------------------------------------

    A posting party may substitute any form of eligible

    collateral for posted collateral held as initial margin.\173\

    ---------------------------------------------------------------------------

    \173\ See Sec. 23.157(c)(3).

    ---------------------------------------------------------------------------

    A posting party may direct reinvestment of posted

    collateral held as initial margin in any form of eligible

    collateral.\174\

    ---------------------------------------------------------------------------

    \174\ See id.

    ---------------------------------------------------------------------------

    Collateral that is collected or posted as variation margin

    is not required to be held by a third party custodian and is not

    subject to restrictions on rehypothecation, repledging, or reuse.\175\

    ---------------------------------------------------------------------------

    \175\ See Final Margin Rule, 81 FR at 672.

    ---------------------------------------------------------------------------

    2. EU Requirement for Custodial Arrangements, Segregation, and

    Rehypothecation

    In keeping with the principles set forth in the BCBS/IOSCO

    Framework, with respect to custodial arrangements, segregation, and

    rehypothecation, the EU's margin rules generally require that:

    Cash collected as initial margin must be maintained in

    cash accounts at central banks or credit institutions which fulfill all

    of the following conditions: (i) They are authorized in accordance with

    Directive 2013/36/EU or are authorized in a third country whose

    supervisory and regulatory arrangements have been found to be

    equivalent in accordance with Article 142(2) of Regulation (EU) No 575/

    2013; and (ii) they are neither the posting nor the collecting

    counterparties, nor part of the same group as either of the

    counterparties.\176\

    ---------------------------------------------------------------------------

    \176\ See RTS, Article 19(1)(e).

    ---------------------------------------------------------------------------

    Any collateral posted as initial or variation margin may

    be substituted by alternative collateral where all of the following

    conditions are met: (a) The substitution is made in accordance with the

    terms of the collateral agreement between the counterparties; (b) the

    alternative collateral is eligible under the RTS; (c) the value of the

    alternative collateral is sufficient to meet all margin requirements

    after applying any relevant haircut.\177\

    ---------------------------------------------------------------------------

    \177\ See RTS, Article 19(2).

    ---------------------------------------------------------------------------

    Initial margin shall be protected from the default or

    insolvency of the collecting counterparty by segregating it in either

    or both of the following ways: (a) On the books and records of a third

    party-holder or custodian; (b) via other legally binding

    arrangements.\178\

    ---------------------------------------------------------------------------

    \178\ See RTS, Article 19(3).

    ---------------------------------------------------------------------------

    Counterparties shall ensure that non-cash collateral

    exchanged as initial margin is segregated as follows: (a) Where

    collateral is held by the collecting counterparty on a proprietary

    basis, it shall be segregated from the rest of the proprietary assets

    of the collecting counterparty; (b) where collateral is held by the

    posting counterparty on a non-proprietary basis, it shall be segregated

    from the rest of the proprietary assets of the posting counterparty;

    (c) where collateral is held on the books and records of a custodian or

    other third party holder, it shall be segregated from the proprietary

    assets of that third-party holder or custodian.\179\

    ---------------------------------------------------------------------------

    \179\ See RTS, Article 19(5).

    ---------------------------------------------------------------------------

    The collecting counterparty shall not rehypothecate,

    repledge nor otherwise reuse the collateral collected as initial

    margin.\180\

    ---------------------------------------------------------------------------

    \180\ See RTS, Article 20(1).

    ---------------------------------------------------------------------------

    A third party holder may use the initial margin received

    in cash for reinvestment purposes.\181\

    ---------------------------------------------------------------------------

    \181\ See RTS, Article 20(2).

    ---------------------------------------------------------------------------

    3. Commission Determination

    The Commission notes that in one respect, the EU's margin

    requirements with respect to custodial arrangements are less stringent

    than those of the Final Margin Rule. Under the Final Margin Rule, all

    assets posted by or collected by CSEs as initial margin must be held by

    one or more custodians that are not the CSE, the counterparty, or

    margin affiliates of the CSE or the counterparty.\182\ The EU's margin

    rules do not prohibit an FC or NFC+ from using an affiliated entity as

    custodian to hold initial margin other than cash collected from

    counterparties.

    ---------------------------------------------------------------------------

    \182\ See Sec. 23.157(a) and (b).

    ---------------------------------------------------------------------------

    However, the EC has highlighted in its application that Article

    19(3) of the RTS, which governs how initial margin must be held, leads

    with the requirement that ``initial margin shall be protected from the

    default or insolvency of the collecting counterparty.'' As the

    applicant further represented, the EC and the European Supervisory

    Authorities favor the use of third-party holders or custodians for non-

    cash collateral but recognize through Article 19(3)(b) of the RTS that

    the legal framework in the EU and, in particular, the Financial

    Collateral Directive,\183\ allows Member States to authorize other

    specific legally binding arrangements with equivalent finality and

    protection. An example, according to the applicant, would be a third-

    country trust bank that, while not necessarily recognized as a

    custodian in the EU or individual Member State, may offer equivalent

    collateral protection, both legally and operationally.

    ---------------------------------------------------------------------------

    \183\ See http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02002L0047-20140702&from=EN.

    ---------------------------------------------------------------------------

    To further encourage the use of arrangements that protect initial

    margin from the default or insolvency of a counterparty, FCs and NFC+s

    subject to the EU margin regime must get legal certainty (either by way

    of an internal

    [[Page 48411]]

    and independent opinion or via an external independent third party) as

    to whether the segregation requirements have been met.\184\ In

    addition, the RTS require counterparties to provide documentation to

    their competent authority upon request supporting that the segregation

    arrangements in all relevant jurisdictions meet these requirements. The

    RTS also require counterparties subject to the EU margin regime to have

    procedures that ensure ongoing compliance with these requirements,

    particularly to show that initial margin is freely transferable to the

    posting counterparty in a timely manner in case of default of the

    collecting counterparty.\185\

    ---------------------------------------------------------------------------

    \184\ See RTS, Article 19(6).

    \185\ See RTS, Article 19(1)(g).

    ---------------------------------------------------------------------------

    Accordingly, despite the differences in required custodial

    arrangements, the Commission has determined that the EU's margin

    requirements applicable to FCs and NFC+s pertaining to custodial

    arrangements, segregation, and rehypothecation are comparable in

    outcome to the corresponding requirements under the Final Margin Rule.

    Specifically, the Commission finds that under both the EU's

    requirements and the Final Margin Rule, a CSE/FC/NFC+ is required to

    segregate the initial margin posted by its counterparties under terms

    that ensure initial margin is protected from the default or insolvency

    of the collecting counterparty and freely transferable to the posting

    counterparty in a timely manner in case of any such default. Both

    regimes also prohibit the rehypothecation of initial margin.

    Accordingly, the Commission finds that the EU's requirements pertaining

    to custodial arrangements, segregation, and rehypothecation are

    comparable in outcome to those required by the Final Margin Rule.

    L. Requirements for Margin Documentation

    1. Commission Requirement for Margin Documentation

    With respect to requirements for documentation of margin

    arrangements, the Final Margin Rule generally provides that:

    CSEs must execute documentation with each counterparty

    that provides the CSE with the contractual right and obligation to

    exchange initial margin and variation margin in such amounts, in such

    form, and under such circumstances as are required by the Final Margin

    Rule.\186\

    ---------------------------------------------------------------------------

    \186\ See Sec. 23.158(a).

    ---------------------------------------------------------------------------

    The margin documentation must specify the methods,

    procedures, rules, inputs, and data sources to be used for determining

    the value of uncleared swaps for purposes of calculating variation

    margin; describe the methods, procedures, rules, inputs, and data

    sources to be used to calculate initial margin for uncleared swaps

    entered into between the CSE and the counterparty; and specify the

    procedures by which any disputes concerning the valuation of uncleared

    swaps, or the valuation of assets collected or posted as initial margin

    or variation margin may be resolved.\187\

    ---------------------------------------------------------------------------

    \187\ See Sec. 23.158(b).

    ---------------------------------------------------------------------------

    2. EU Requirement for Margin Documentation

    With respect to requirements for documentation of margin

    arrangements, the EU's margin rules generally provide that the terms of

    all necessary agreements to be entered into by counterparties, at the

    latest, at the moment in which a non-centrally cleared OTC derivative

    contract is concluded. Such documentation shall include the terms of

    the netting agreement and the terms of the exchange of collateral

    agreement, and (a) any payment obligations arising between

    counterparties; (b) the conditions for netting payment obligations; (c)

    events of default or other termination events of the non-centrally

    cleared OTC derivative contracts; (d) all calculation methods used in

    relation to payment obligations; (e) the conditions for netting payment

    obligations upon termination, (f) the transfer of rights and

    obligations upon termination; (g) the governing law of the transactions

    of the non-centrally cleared OTC derivative contracts.\188\

    ---------------------------------------------------------------------------

    \188\ See RTS, Article 2(g).

    ---------------------------------------------------------------------------

    3. Commission Determination

    Based on the foregoing and the representations of the applicant,

    the Commission has determined that the EU's margin requirements

    pertaining to margin documentation are substantially the same as the

    margin documentation requirements under the Final Margin Rule.

    Specifically, the Commission finds that under both the EU's

    requirements and the Final Margin Rule, a CSE/FC/NFC+ is required to

    enter into documentation with each OTC derivative/swap counterparty

    that sets forth the method for calculating and transferring initial and

    variation margin. Accordingly, the Commission finds that the EU's

    requirements pertaining to margin documentation are comparable in

    outcome to those required by the Final Margin Rule.

    M. Cross-Border Application of the Margin Regime

    1. Cross-Border Application of the Final Margin Rule

    The general cross-border application of the Final Margin Rule, as

    set forth in the Cross-Border Margin Rule, is discussed in detail in

    Section II above. However, Sec. Sec. 23.160(d) and (e) of the Cross-

    Border Margin Rule also provide certain alternative requirements for

    uncleared swaps subject to the laws of a jurisdiction that does not

    reliably recognize close-out netting under a master netting agreement

    governing a swap trading relationship, or that has inherent limitations

    on the ability of a CSE to post initial margin in compliance with the

    custodial arrangement requirements \189\ of the Final Margin Rule.\190\

    ---------------------------------------------------------------------------

    \189\ See Sec. 23.157 and Section IV(K) above.

    \190\ See Sec. 23.160(d) and (e). Paragraph (d) of the rule

    addresses requirements for non-netting jurisdictions, and paragraph

    (e) addresses jurisdictions where compliance with custodial

    arrangement requirements is unavailable.

    ---------------------------------------------------------------------------

    Section 23.160(d) generally provides that where a jurisdiction does

    not reliably recognize close-out netting, the CSE must treat the

    uncleared swaps covered by a master netting agreement on a gross basis

    with respect to collecting initial and variation margin, but may treat

    such swaps on a net basis with respect to posting initial and variation

    margin.\191\

    ---------------------------------------------------------------------------

    \191\ See id.

    ---------------------------------------------------------------------------

    Section 23.160(e) generally provides that where certain CSEs are

    required to transact with certain counterparties in uncleared swaps

    through an establishment in a jurisdiction where, due to inherent

    limitations in legal or operational infrastructure, it is impracticable

    to require posted initial margin to be held by an independent custodian

    pursuant to Sec. 23.157, the CSE is required to collect initial margin

    in cash (as described in Sec. 23.156(a)(1)(i)) and post and collect

    variation margin in cash, but is not required to post initial margin.

    In addition, the CSE is not required to hold the initial margin

    collected with an unaffiliated custodian.\192\ Finally, the CSE may

    only enter into such affected transactions up to 5% of its total

    uncleared swap notional outstanding in each broad category of swaps

    described in Sec. 23.154(b)(2)(v).

    ---------------------------------------------------------------------------

    \192\ See Sec. Sec. 23.160(e) and 23.157(b).

    ---------------------------------------------------------------------------

    2. Cross-Border Application of EU's Margin Regime

    With respect to cross-border transactions, the EU's margin

    requirements generally provide that the

    [[Page 48412]]

    EC may, in order to avoid duplicative and conflicting requirements in

    respect of derivatives transactions, adopt implementing acts declaring

    that the legal, supervisory, and enforcement arrangements of a non-EU

    country are equivalent to the margin requirements for non-centrally

    cleared OTC derivatives in Article 11 or EMIR.\193\ An implementing act

    determining equivalence shall imply that counterparties entering into a

    transaction within the scope of EMIR will be deemed to have fulfilled

    their requirements where at least one of the counterparties is

    established in the third country in respect of which the implementing

    act has been adopted, and with respect to the requirements to which the

    implementing act applies.\194\

    ---------------------------------------------------------------------------

    \193\ See EMIR, Article 13(2).

    \194\ See EMIR, Article 13(3).

    ---------------------------------------------------------------------------

    With respect to non-centrally cleared OTC derivatives subject to

    the laws of a jurisdiction where legal enforceability of netting

    agreements or collateral protection cannot be ensured, the EU's margin

    regime provides that:

    Where counterparties enter into a netting or an exchange

    of collateral agreement, they shall perform an independent legal review

    of the enforceability of those agreements. The review may be conducted

    by an internal independent unit or by an independent third party.\195\

    ---------------------------------------------------------------------------

    \195\ See RTS, Article 2(3).

    ---------------------------------------------------------------------------

    Counterparties shall perform an independent legal review

    in order to verify that the segregation arrangement meets the

    requirements of the RTS. The review may be conducted by an internal

    independent unit or by an independent third party.\196\

    ---------------------------------------------------------------------------

    \196\ See RTS, Article 19(6).

    ---------------------------------------------------------------------------

    Counterparties established in the EU may provide in their

    risk management procedures that variation and initial margins are not

    required to be posted for non-centrally cleared OTC derivative

    contracts concluded with counterparties established in a third-country

    for which any of the following apply: (a) The legal review referred to

    in Article 2(3) of the RTS confirms that the netting agreement and,

    where used, the exchange of collateral agreement cannot be legally

    enforced with certainty at all times; (b) the legal review referred to

    in Article 19(6) of the RTS confirms that the segregation requirements

    of the RTS cannot be met. For the purposes of subparagraph (a),

    counterparties established in the EU shall collect margin on a gross

    basis.\197\

    ---------------------------------------------------------------------------

    \197\ See RTS, Article 31(1).

    ---------------------------------------------------------------------------

    Counterparties established in the EU may provide in their

    risk management procedures that variation and initial margins are not

    required to be posted or collected for contracts concluded with

    counterparties established in a third-country where all of the

    following conditions apply: (a) The legal review referred to in Article

    2(3) of the RTS confirms that the netting agreement and, where used,

    the exchange of collateral agreement cannot be legally enforced with

    certainty at all times and, where applicable, the legal review referred

    to in Article 19(6) of the RTS confirms that the segregation

    requirements of the RTS cannot be met; (b) the legal reviews confirm

    that collecting collateral in accordance with this RTS is not possible,

    even on a gross basis; and (c) the OTC derivatives in a counterparty's

    portfolio from counterparties in non-netting jurisdictions is below

    2.5%.\198\

    ---------------------------------------------------------------------------

    \198\ See RTS, Article 31(2) and (3).

    ---------------------------------------------------------------------------

    3. Commission Determination

    Based on the foregoing and the representations of the applicant,

    the Commission finds that the EU's margin regime with respect to its

    cross-border application is comparable in outcome to that of the Final

    Margin Rule as set forth in the Cross-Border Margin Rule.

    First, the Commission recognizes that the EU's margin regime

    permits substituted compliance to substantially the same extent as the

    Cross-Border Margin Rule. For example, where a CSE finds itself subject

    to both the Final Margin Rule and the EU's margin regime, it may be

    possible under an EC equivalence determination that such CSE's

    compliance with the Final Margin Rule will have fulfilled the

    corresponding obligation under the EU's margin regime.

    Second, with respect to transactions subject to the laws of a non-

    netting jurisdiction or a jurisdiction where collateral protection

    cannot be ensured, the EU's margin regime requires that margin be

    collected on a gross basis and, where that is not possible, that the

    FC/NFC+ limit their dealings in such jurisdiction to 2.5% of the OTC

    derivatives in the FC/NFC+'s portfolio. While this framework for non-

    centrally cleared OTC derivatives transacted with counterparties in

    these types of jurisdictions is not identical to the Final Margin Rule

    on this subject, the Commission recognizes that the conditions

    requiring that margin be collected on a gross basis or, where that is

    not possible, such transactions be subject to a conservative limit,

    will serve to mitigate the potential risks associated with these types

    of transactions. The RTS also provides that ``these treatments would be

    considered sufficiently prudent, because there are also other risk-

    mitigation techniques as an alternative to margins.'' \199\ Moreover,

    before a counterparty may even consider collecting margin on a gross

    basis or be permitted to transact with counterparties in a non-netting

    jurisdiction up to any level, the EU margin rules obligate

    counterparties to conduct a legal review on the enforceability of

    netting agreements in the third-country jurisdiction and to obtain a

    negative independent legal review.\200\

    ---------------------------------------------------------------------------

    \199\ See RTS, Recital (18).

    \200\ See RTS, Article 31(2).

    ---------------------------------------------------------------------------

    The Commission also notes that a CSE, including a CSE that would be

    operating under a substituted compliance determination, is required to

    have a risk management program pursuant Sec. 23.600, and thus the

    Commission has the authority to inquire as to the adequacy of the risk

    management covering uncleared swaps in non-netting jurisdictions.

    Having considered the similarities and differences described above,

    the Commission finds that: (1) The availability of reciprocity of

    substituted compliance available from the EU makes the EU margin regime

    comparable in outcome in this respect to that of the Final Margin Rule

    and the Cross-Border Margin Rule; and (2) the conditions that would

    allow an FC/NFC+ to engage in up to 2.5% of its OTC derivatives

    portfolio in jurisdictions that do not recognize non-netting agreements

    or where collateral protection cannot be ensured, including that a

    counterparty must obtain a negative independent legal opinion about the

    enforceability of netting agreements before even considering trading

    with counterparties in non-netting jurisdictions, plus other risk-

    mitigation techniques that FC/NFC+s must have, make the EU margin

    regime comparable in outcome in this respect to that of the Final

    Margin Rule and the Cross-Border Margin Rule. Accordingly, the

    Commission finds the cross-border aspects of the EU's margin regime

    comparable in outcome to those of the Commission.

    N. Supervision and Enforcement

    The Commission has a long history of regulatory cooperation with

    the Member State competent authorities, including cooperation in the

    regulation of registrants of the Commission that are also FCs.\201\

    These competent

    [[Page 48413]]

    authorities, as noted above, are responsible for supervising FCs as

    part of their ongoing prudential regulation and supervision of such

    FCs, will enforce the RTS, which are directly applicable in the Member

    States, and will take all measures necessary to ensure that those rules

    are implemented. Thus, the Commission finds that the EC, through the

    competent authorities, has the necessary powers to supervise,

    investigate, and discipline entities for compliance with its margin

    requirements and recognizes the relevant competent authorities' ongoing

    efforts to detect and deter violations of, and ensure compliance with,

    the margin requirements applicable in the EU.

    ---------------------------------------------------------------------------

    \201\ To facilitate this cooperation, the Commission has

    concluded memoranda of understanding with many of the competent

    authorities. See the Commission's Web site at http://www.cftc.gov/International/MemorandaofUnderstanding/index.htm.

    ---------------------------------------------------------------------------

    V. Conclusion

    As detailed above, the Commission has noted several differences

    between the Final Margin Rule and the EU margin rules. However, having

    considered the scope and objectives of the margin requirements for

    uncleared swaps under the laws of the EU,\202\ whether such margin

    requirements achieve comparable outcomes to the Commission's

    corresponding margin requirements,\203\ and the ability of the Member

    State competent authorities to supervise and enforce compliance with

    the margin requirements for non-centrally cleared OTC derivatives under

    the laws of the EU,\204\ the Commission has determined that the EU

    margin rules are comparable in outcome to the Final Margin Rule.

    ---------------------------------------------------------------------------

    \202\ See Sec. 23.160(c)(3)(i).

    \203\ See Sec. 23.160(c)(3)(ii). As discussed above, the

    Commission's Final Margin Rule is based on the BCBS/IOSCO Framework;

    therefore, the Commission expects that the relevant foreign margin

    requirements would conform to such Framework at minimum in order to

    be deemed comparable in outcome to the Commission's corresponding

    margin requirements.

    \204\ See Sec. 23.160(c)(3)(iii). See also Sec.

    23.160(c)(3)(iv) (indicating the Commission would also consider any

    other relevant facts and circumstances).

    ---------------------------------------------------------------------------

    As noted above, the Final Margin Rule's regulatory objective is to

    ensure the safety and soundness of CSEs in order to offset the greater

    risk to CSEs and the financial system arising from the use of swaps

    that are not cleared. The EU margin rules require counterparties to

    apply robust risk-mitigation techniques to their bilateral

    relationships to reduce counterparty credit risk and to mitigate the

    potential systemic risk that could arise. Moreover, the EU margin rules

    achieve comparable outcomes to the Final Margin Rule in the following

    specific areas: The products and entities subject to the EU's margin

    requirements; the treatment of inter-affiliate derivative transactions;

    the methodologies for calculating the amounts of initial and variation

    margin; the process and standards for approving models for calculating

    initial and variation margin models; the timing and manner in which

    initial and variation margin must be collected and/or paid; any

    threshold levels or amounts; risk management controls for the

    calculation of initial and variation margin; eligible collateral for

    initial and variation margin; the requirements of custodial

    arrangements, including segregation of margin and rehypothecation;

    margin documentation requirements; and the cross-border application of

    the EU's margin regime. Finally, based on the long history of

    regulatory cooperation between the Commission and Member State

    competent authorities with supervisory and enforcement authority under

    the RTS, the Commission finds that the EC, through the competent

    authorities, has the necessary powers to supervise, investigate, and

    discipline entities for compliance with its margin requirements, and

    recognizes the relevant authorities' ongoing efforts to detect and

    deter violations of, and ensure compliance with, the margin

    requirements applicable in the EU.

    Accordingly, a CSE that is subject to both the Final Margin Rule

    and the EU's margin rules with respect to an uncleared swap that is

    also a non-centrally cleared OTC derivative may rely on substituted

    compliance for all aspects of the Final Margin Rule and the Cross-

    Border Margin Rule. Any such CSE that, in accordance with this

    comparability determination, complies with the EU margin rules, would

    be deemed to be in compliance with the Final Margin Rule but would

    remain subject to the Commission's examination and enforcement

    authority.\205\

    ---------------------------------------------------------------------------

    \205\ See Sec. 23.160(c)(4).

    Issued in Washington, DC, on October 13, 2017, by the

    Commission.

    Christopher J. Kirkpatrick,

    Secretary of the Commission.

    Appendix to Comparability Determination for the European Union: Margin

    Requirements for Uncleared Swaps for Swap Dealers and Major Swap

    Participants--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz

    and Behnam voted in the affirmative. No Commissioner voted in the

    negative.

    [FR Doc. 2017-22616 Filed 10-17-17; 8:45 am]

    BILLING CODE 6351-01-P

     

    Last Updated: October 18, 2017