2018-25602
Federal Register, Volume 83 Issue 227 (Monday, November 26, 2018)
[Federal Register Volume 83, Number 227 (Monday, November 26, 2018)]
[Rules and Regulations]
[Pages 60341-60347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-25602]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AE71
Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is adopting amendments (``Final Rule'') to its margin
requirements for uncleared swaps for swap dealers (``SD'') and major
swap participants (``MSP'') for which there is no prudential regulator
(``CFTC Margin Rule''). The Commission is adopting these amendments in
light of the rules recently adopted by the Board of Governors of the
Federal Reserve System (``Board''), the Federal Deposit Insurance
Corporation (``FDIC''), and the Office of the Comptroller of the
Currency (``OCC'') (collectively, the
[[Page 60342]]
``QFC Rules'') that impose restrictions on certain uncleared swaps and
uncleared security-based swaps and other financial contracts.
Specifically, the Commission is amending the definition of ``eligible
master netting agreement'' in the CFTC Margin Rule to ensure that
master netting agreements of firms subject to the CFTC Margin Rule are
not excluded from the definition of ``eligible master netting
agreement'' based solely on such agreements' compliance with the QFC
Rules. The Commission also is amending the CFTC Margin Rule such that
any legacy uncleared swap (i.e., an uncleared swap entered into before
the applicable compliance date of the CFTC Margin Rule) that is not now
subject to the margin requirements of the CFTC Margin Rule will not
become so subject if it is amended solely to comply with the QFC Rules.
These amendments are consistent with amendments that the Board, FDIC,
OCC, the Farm Credit Administration (``FCA''), and the Federal Housing
Finance Agency (``FHFA'' and, together with the Board, FDIC, OCC, and
FCA, the ``Prudential Regulators''), jointly published in the Federal
Register on October 10, 2018.
DATES: This final rule is effective December 26, 2018.
FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, (202) 418-
5213, [email protected]; Frank Fisanich, Chief Counsel, (202) 418-5949,
[email protected]; or Jacob Chachkin, Special Counsel, (202) 418-5496,
[email protected], Division of Swap Dealer and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. The CFTC Margin Rule
Section 731 of the Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') \1\ added a new section 4s to the Commodity
Exchange Act (``CEA'') \2\ setting forth various requirements for SDs
and MSPs. Section 4s(e) of the CEA directs the Commission to adopt
rules establishing minimum initial and variation margin requirements on
all swaps \3\ that are (i) entered into by an SD or MSP for which there
is no Prudential Regulator \4\ (collectively, ``covered swap entities''
or ``CSEs'') and (ii) not cleared by a registered derivatives clearing
organization (``uncleared swaps'').\5\ To offset the greater risk to
the SD or MSP \6\ and the financial system arising from the use of
uncleared swaps, these requirements must (i) help ensure the safety and
soundness of the SD or MSP and (ii) be appropriate for the risk
associated with the uncleared swaps held as an SD or MSP.\7\
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\2\ 7 U.S.C. 1 et seq.
\3\ For the definition of swap, see section 1a(47) of the CEA
and Commission regulation 1.3. 7 U.S.C. 1a(47) and 17 CFR 1.3. It
includes, among other things, an interest rate swap, commodity swap,
credit default swap, and currency swap.
\4\ 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; the OCC; the FDIC;
the FCA; and the FHFA). The definition further specifies the
entities for which these agencies act as Prudential Regulators. The
Prudential Regulators published final margin requirements in
November 2015. See Margin and Capital Requirements for Covered Swap
Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential Margin Rule'').
\5\ See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission regulation
23.151, the Commission further defined this statutory language to
mean all swaps that are not cleared by a registered derivatives
clearing organization or a derivatives clearing organization that
the Commission has exempted from registration as provided under the
CEA. 17 CFR 23.151.
\6\ For the definitions of SD and MSP, see section 1a of the CEA
and Commission regulation 1.3. 7 U.S.C. 1a and 17 CFR 1.3.
\7\ 7 U.S.C. 6s(e)(3)(A).
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To this end, the Commission promulgated the CFTC Margin Rule in
January 2016,\8\ establishing requirements for a CSE to collect and
post initial margin \9\ and variation margin \10\ for uncleared swaps.
These requirements vary based on the type of counterparty to such
swaps.\11\ These requirements generally apply only to uncleared swaps
entered into on or after the compliance date applicable to a particular
CSE and its counterparty (``covered swap'').\12\ An uncleared swap
entered into prior to a CSE's applicable compliance date for a
particular counterparty (``legacy swap'') is generally not subject to
the margin requirements in the CFTC Margin Rule.\13\
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\8\ Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The CFTC Margin
Rule, which became effective April 1, 2016, is codified in part 23
of the Commission's regulations. 17 CFR 23.150-23.159, 23.161.
\9\ Initial margin, as defined in Commission regulation 23.151
(17 CFR 23.151), is the collateral (calculated as provided by Sec.
23.154 of the Commission's regulations) that is collected or posted
in connection with one or more uncleared swaps. Initial margin is
intended to secure potential future exposure following default of a
counterparty (i.e., adverse changes in the value of an uncleared
swap that may arise during the period of time when it is being
closed out), while variation margin is provided from one
counterparty to the other in consideration of changes that have
occurred in the mark-to-market value of the uncleared swap. See CFTC
Margin Rule, 81 FR at 664 and 683.
\10\ Variation margin, as defined in Commission regulation
23.151 (17 CFR 23.151), is the collateral provided by a party to its
counterparty to meet the performance of its obligation under one or
more uncleared swaps between the parties as a result of a change in
the value of such obligations since the trade was executed or the
last time such collateral was provided.
\11\ See Commission regulations 23.152 and 23.153, 17 CFR 23.152
and 23.153. For example, the CFTC Margin Rule does not require a CSE
to collect margin from, or post margin to, a counterparty that is
neither a swap entity nor a financial end user (each as defined in
17 CFR 23.151). Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e),
each counterparty to an uncleared swap must be an eligible contract
participant (``ECP''), as defined in section 1a(18) of the CEA, 7
U.S.C. 1a(18).
\12\ Pursuant to Commission regulation 23.161, compliance dates
for the CFTC Margin Rule are staggered such that SDs must come into
compliance in a series of phases over four years. The first phase
affected SDs and their counterparties, each with the largest
aggregate outstanding notional amounts of uncleared swaps and
certain other financial products. These SDs began complying with
both the initial and variation margin requirements of the CFTC
Margin Rule on September 1, 2016. The second phase began March 1,
2017, and required SDs to comply with the variation margin
requirements of Commission regulation 23.153 with all relevant
counterparties not covered in the first phase. See 17 CFR 23.161. On
each September 1 thereafter ending with September 1, 2020, SDs will
begin to comply with the initial margin requirements with
counterparties with successively lesser outstanding notional
amounts.
\13\ See CFTC Margin Rule, 81 FR at 651 and Commission
regulation 23.161. 17 CFR 23.161.
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To the extent that more than one uncleared swap is executed between
a CSE and its covered counterparty, the CFTC Margin Rule permits the
netting of required margin amounts of each swap under certain
circumstances.\14\ In particular, the CFTC Margin Rule, subject to
certain limitations, permits a CSE to calculate initial margin and
variation margin, respectively, on an aggregate net basis across
uncleared swaps that are executed under the same eligible master
netting agreement (``EMNA'').\15\ Moreover, the CFTC Margin Rule
permits swap counterparties to identify one or more separate netting
portfolios (i.e., a specified group of uncleared swaps the margin
obligations of which will be netted only against each other) under the
same EMNA, including having separate netting portfolios for covered
swaps and legacy swaps.\16\ A netting
[[Page 60343]]
portfolio that contains only legacy swaps is not subject to the initial
and variation margin requirements set out in the CFTC Margin Rule.\17\
However, if a netting portfolio contains any covered swaps, the entire
netting portfolio (including all legacy swaps) is subject to such
requirements.\18\
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\14\ See CFTC Margin Rule, 81 FR at 651 and Commission
regulations 23.152(c) and 23.153(d). 17 CFR 23.152(c) and 23.153(d).
\15\ Id. The term EMNA is defined in Commission regulation
23.151. 17 CFR 23.151. Generally, an EMNA creates a single legal
obligation for all individual transactions covered by the agreement
upon an event of default following certain specified permitted
stays. For example, an International Swaps and Derivatives
Association (``ISDA'') form Master Agreement may be an EMNA, if it
meets the specified requirements in the EMNA definition.
\16\ See CFTC Margin Rule, 81 FR at 651 and Commission
regulations 23.152(c)(2)(ii) and 23.153(d)(2)(ii). 17 CFR
23.152(c)(2)(ii) and 23.153(d)(2)(ii).
\17\ Id.
\18\ Id.
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A legacy swap may lose its legacy treatment under the CFTC Margin
Rule, causing it to become a covered swap and causing any netting
portfolio in which it is included to be subject to the requirements of
the CFTC Margin Rule. For reasons discussed in the CFTC Margin Rule,
the Commission elected not to extend the meaning of legacy swaps to
include (1) legacy swaps that are amended in a material or nonmaterial
manner; (2) novations of legacy swaps; and (3) new swaps that result
from portfolio compression of legacy swaps.\19\ Therefore, and as
relevant here, a legacy swap that is amended after the applicable
compliance date may become a covered swap subject to the initial and
variation margin requirements in the CFTC Margin Rule. In that case,
netting portfolios that were intended to contain only legacy swaps and,
thus, not be subject to the CFTC Margin Rule may become so subject.
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\19\ See CFTC Margin Rule, 81 FR at 675. The Commission notes
that certain limited relief has been given from this standard. See
CFTC Staff Letter No. 17-52 (Oct. 27. 2017), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/17-52.pdf.
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B. The QFC Rules
In late 2017, as part of the broader regulatory reform effort
following the financial crisis to promote U.S. financial stability and
increase the resolvability and resiliency of U.S. global systemically
important banking institutions (``U.S. GSIBs'') \20\ and the U.S.
operations of foreign global systemically important banking
institutions (together with U.S. GSIBS, ``GSIBs''), the Board, FDIC,
and OCC adopted the QFC Rules. The QFC Rules establish restrictions on
and requirements for uncleared qualified financial contracts \21\
(collectively, ``Covered QFCs'') of GSIBs, the subsidiaries of U.S.
GSIBs, and certain other very large OCC-supervised national banks and
Federal savings associations (collectively, ``Covered QFC
Entities'').\22\ They are designed to help ensure that a failed
company's passage through a resolution proceeding--such as bankruptcy
or the special resolution process created by the Dodd-Frank Act--would
be more orderly, thereby helping to mitigate destabilizing effects on
the rest of the financial system.\23\ Two aspects of the QFC Rules help
achieve this goal.\24\
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\20\ See 12 CFR 217.402 (defining global systemically important
banking institution).
\21\ Qualified financial contract (``QFC'') is defined in
section 210(c)(8)(D) of the Dodd-Frank Act to mean any securities
contract, commodity contract, forward contract, repurchase
agreement, swap agreement, and any similar agreement that the FDIC
determines by regulation, resolution, or order to be a qualified
financial contract. 12 U.S.C. 5390(c)(8)(D).
\22\ See, e.g., 12 CFR 252.82(c) (defining Covered QFC). See
also 82 FR 42882 (Sep. 12, 2017) (for the Board's QFC Rule). See
also 82 FR 50228 (Oct. 30, 2017) (for FDIC's QFC Rule). See also 82
FR 56630 (Nov. 29, 2017) (for the OCC's QFC Rule). The effective
date of the Board's QFC Rule is November 13, 2017, and the effective
date for the OCC's QFC Rule and the substance of the FDIC's QFC Rule
is January 1, 2018. The QFC Rules include a phased-in conformance
period for a Covered QFC Entity, beginning on January 1, 2019 and
ending on January 1, 2020, that varies depending upon the
counterparty type of the Covered QFC Entity. See, e.g., 12 CFR
252.82(f).
\23\ See, e.g., Board's QFC Rule at 42883. In particular, the
QFC Rules seek to facilitate the orderly resolution of a failed GSIB
by limiting the ability of the firm's Covered QFC counterparties to
terminate such contracts immediately upon entry of the GSIB or one
of its affiliates into resolution. Given the large volume of QFCs to
which covered entities are a party, the exercise of default rights
en masse as a result of the failure or significant distress of a
covered entity could lead to failure and a disorderly resolution if
the failed firm were forced to sell off assets, which could spread
contagion by increasing volatility and lowering the value of similar
assets held by other firms, or to withdraw liquidity that it had
provided to other firms.
\24\ Id.
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First, the QFC Rules generally require the Covered QFCs of Covered
QFC Entities to contain contractual provisions explicitly providing
that any default rights or restrictions on the transfer of the Covered
QFC are limited to the same extent as they would be pursuant to the
Federal Deposit Insurance Act (``FDI Act'')\25\ and Title II of the
Dodd-Frank Act. Requiring these points to be stated as explicit
contractual provisions in the Covered QFCs is expected to reduce the
risk that the relevant limitations on default rights or transfer
restrictions would be challenged by a court in a foreign
jurisdiction.\26\
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\25\ 12 U.S.C. 1811 et seq.
\26\ See, e.g., Board's QFC Rule at 42883 and 42890 and 12 CFR
252.83(b).
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Second, the QFC Rules generally prohibit Covered QFCs from allowing
counterparties to Covered QFC Entities to exercise default rights
related, directly or indirectly, to the entry into resolution of an
affiliate of the Covered QFC Entity (``cross-default rights'').\27\
This is to ensure that if an affiliate of a solvent Covered QFC Entity
fails, the counterparties of that solvent Covered QFC Entity cannot
terminate their contracts with it based solely on the failure of its
affiliate.\28\
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\27\ See, e.g., Board's QFC Rule at 42883 and 12 CFR 252.84(b).
Covered QFC Entities are similarly generally prohibited from
entering into Covered QFCs that would restrict the transfer of a
credit enhancement supporting the Covered QFC from the Covered QFC
Entity's affiliate to a transferee upon the entry into resolution of
the affiliate. See, e.g., Board's QFC Rule at 42890 and 12 CFR
252.84(b)(2).
\28\ Id.
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Covered QFC Entities are required to enter into amendments to
certain pre-existing Covered QFCs to explicitly provide for these
requirements and to ensure that Covered QFCs entered into after the
applicable compliance date for the rule explicitly provide for the
same.\29\
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\29\ See, e.g., 12 CFR 252.82(a) and (c). The QFC Rules require
a Covered QFC Entity to conform Covered QFCs (i) entered into,
executed, or to which it otherwise becomes a party on or after
January 1, 2019 or (ii) entered into, executed, or to which it
otherwise became a party before January 1, 2019, if the Covered QFC
Entity or any affiliate that is a Covered QFC Entity also enters,
executes, or otherwise becomes a party to a new Covered QFC with the
counterparty to the pre-existing Covered QFC or a consolidated
affiliate of the counterparty on or after January 1, 2019.
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C. Interaction of CFTC Margin Rule and QFC Rules
As noted above, the current definition of EMNA in Commission
regulation 23.151 allows for certain specified permissible stays of
default rights of the CSE. Specifically, consistent with the QFC Rules,
the current definition provides that such rights may be stayed pursuant
to a special resolution regime such as Title II of the Dodd-Frank Act,
the FDI Act, and substantially similar foreign resolution regimes.\30\
However, the current EMNA definition does not explicitly recognize
certain restrictions on the exercise of a CSE's cross-default rights
required under the QFC Rules.\31\ Therefore, a pre-existing EMNA that
is amended in order to become compliant with the QFC Rules or a new
master netting agreement that conforms to the QFC Rules will not meet
the current definition of EMNA, and a CSE that is a counterparty under
such a master netting agreement--one that does not meet the definition
of EMNA--would be required to measure its exposures from covered swaps
on a gross basis, rather than aggregate net basis, for purposes of the
CFTC Margin Rule.\32\ Further, if a legacy swap were amended to comply
[[Page 60344]]
with the QFC Rules,\33\ it would become a covered swap subject to
initial and variation margin requirements under the CFTC Margin
Rule.\34\
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\30\ 17 CFR 23.151.
\31\ Id.
\32\ See CFTC Margin Rule, 81 FR at 651 and Commission
regulations 23.152(c) and 23.153(d). 17 CFR 23.152(c) and 23.153(d).
\33\ Covered QFC Entities must conform to the requirements of
the QFC Rules for Covered QFCs entered into on or after January 1,
2019 and, in some instances, Covered QFCs entered into before that
date.\33\ To do so, a Covered QFC Entity may need to amend the
contractual provisions of its pre-existing Covered QFCs.
\34\ Note, therefore, that such amendment would affect all
parties to the legacy swap, not only the Covered QFC Entity subject
to the QFC Rules.
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II. Proposal
On May 23, 2018, the Commission published a Notice of Proposed
Rulemaking (``Proposal'') \35\ to amend Commission regulations 23.151
and 23.161 to protect CSEs and their counterparties from being
disadvantaged because their master netting agreements do not satisfy
the definition of an EMNA, solely because such agreements' comply with
the QFC Rules or because such agreements would have to be amended to
achieve compliance. Specifically, the Commission proposed to (i) revise
the definition of EMNA in Commission regulation 23.151 such that a
master netting agreement that meets the requirements of the QFC Rules
may be an EMNA and (ii) amend Commission regulation 23.161 such that a
legacy swap will not be a covered swap under the CFTC Margin Rule if it
is amended solely to conform to the QFC Rules.
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\35\ 83 FR 23842 (May 23, 2018).
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The Commission requested comments on the Proposal and also
solicited comments on the impact of the Proposal on small entities, the
Commission's cost benefit considerations, and any anti-competitive
effects of the Proposal. The comment period for the Proposal ended on
July 23, 2018.
III. Summary of Comments
The Commission received four relevant comments in response to the
Proposal--from the Institute of International Bankers (``IIB''), ISDA,
Navient Corporation (``Navient''), and NEX Group plc (``NEX''),
respectively.\36\ Though these comments raised issues unrelated to the
Proposal or suggested additions that would go beyond the scope of the
Proposal,\37\ the comments were generally supportive of the aims of the
Proposal.
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\36\ The Commission also received one comment that was not
relevant to the Proposal. All of the comments are available at
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2878.
\37\ Navient requested relief from covered swap status arising
from certain amendments to legacy swaps involving special purpose
vehicles created for securitization purposes (``Securitization
SPVs'') and more generally requested an exemption from the CFTC
Margin Rule for certain Securitization SPVs. NEX requested relief
from covered swap status for legacy swaps which are compressed in a
multilateral portfolio compression exercise. ISDA and IIB requested
the Commission, in conjunction with the Prudential Regulators, more
generally provide broad guidance on amendments to legacy swaps,
including that amendments required by domestic or foreign regulatory
or legislative developments (e.g., reforms of benchmark interest
rates) will not cause them to become covered swaps. These requests
for additional changes and exemptions to the CFTC Margin Rule are
outside of the scope of the Proposal, as the Proposal relates solely
to changes to the CFTC Margin Rule in relation to the requirements
of the QFC Rules. However, as the Commission continues to assess
industry developments such as interest rate benchmark reform, it
will take into account any associated implementation ramifications
surrounding the treatment of legacy swaps under the CFTC Margin
Rule.
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Navient and NEX were supportive of the Commission's Proposal in
full. ISDA was supportive of the Commission's proposal to revise the
definition of EMNA. IIB did not comment on this aspect of the Proposal.
ISDA and IIB were appreciative of the proposal on the treatment of
legacy swaps impacted by the QFC Rules, but, on balance, thought broad
guidance on the treatment of amendments to legacy swaps more generally
was a better alternative to the proposed limited amendment of the CFTC
Margin Rule relating to the QFC Rules. Such broad guidance requested by
ISDA and IIB is outside of the scope of the Proposal.
IV. Final Rule
After consideration of relevant comments, the Commission is
adopting this Final Rule as proposed.
Accordingly, the Commission is adding a new paragraph (2)(ii) to
the definition of ``eligible master netting agreement'' in Commission
regulation 23.151 and making other minor related changes to that
definition such that a master netting agreement may be an EMNA even
though the agreement limits the right to accelerate, terminate, and
close-out on a net basis all transactions under the agreement and to
liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of any of the following parts of Title 12 of the
Code of Federal Regulations: Part 47, subpart I of part 252, or part
382, as applicable. These enumerated provisions contain the relevant
requirements that have been added by the QFC Rules.
Further, so that a legacy swap will not be a covered swap under the
CFTC Margin Rule if it is amended solely to conform to the QFC Rules,
the Commission is adding a new paragraph (d) to the end of Commission
regulation 23.161, as shown in the rule text in this document. This
addition will provide certainty to a CSE and its counterparties about
the treatment of legacy swaps and any applicable netting arrangements
in light of the QFC Rules. However, if, in addition to amendments
required to comply with the QFC Rules, the parties enter into any other
amendments, the amended legacy swap will be a covered swap in
accordance with the application of the CFTC Margin Rule.
This Final Rule is consistent with amendments to the Prudential
Margin Rule that the Prudential Regulators jointly published in the
Federal Register on October 10, 2018.\38\ Making amendments to the CFTC
Margin Rule that are consistent with those of the Prudential Regulators
furthers the Commission's efforts to harmonize its margin regime with
the Prudential Regulators' margin regime and is responsive to
suggestions received as part of the Commission's Project KISS
initiative.\39\
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\38\ Margin and Capital Requirements for Covered Swap Entities;
Final Rule, 83 FR 50805 (Oct. 10, 2018).
\39\ See Project KISS Initiatives, available at https://comments.cftc.gov/KISS/KissInitiative.aspx. The Commission received
requests to coordinate revisions to the CFTC Margin Rule with the
Prudential Regulators. See comments from Credit Suisse (``CS''), the
Financial Services Roundtable (``FSR''), ISDA, the Managed Funds
Association (``MFA''), and SIFMA Global Foreign Exchange Division
(``GFMA''). GFMA requested that the Commission coordinate with the
Prudential Regulators on proposing or making any changes to the CFTC
Margin Rule to ensure harmonization and consistency across the
respective rule sets. In addition, CS, FSR, ISDA, and MFA, as well
as GFMA requested that the Commission make certain specific changes
to the CFTC Margin Rule in coordination with the Prudential
Regulators relating to, for example, initial margin calculations and
requirements, margin settlement timeframes, netting product sets,
inter-affiliate margin exemptions, and cross-border margin issues.
Project KISS suggestions are available at https://comments.cftc.gov/KISS/KissInitiative.aspx.
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V. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires Federal agencies,
in promulgating regulations, to consider whether the rules they propose
will have a significant economic impact on a substantial number of
small entities and, if so, to provide a regulatory flexibility analysis
regarding the economic impact on those entities. In the Proposal, the
Commission certified that the Proposal would not have a significant
economic impact on a substantial number of small entities. The
Commission requested comments with respect to the RFA and received no
such comments.
As discussed in the Proposal, this Final Rule only affects certain
SDs and
[[Page 60345]]
MSPs that are subject to the QFC Rules and their covered
counterparties, all of which are required to be ECPs.\40\ The
Commission has previously determined that SDs, MSPs, and ECPs are not
small entities for purposes of the RFA.\41\ Therefore, the Commission
finds that this Final Rule will not have a significant economic impact
on a substantial number of small entities, as defined in the RFA.
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\40\ See supra, n.12.
\41\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001)
(ECPs).
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that this Final Rule will not
have a significant economic impact on a substantial number of small
entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \42\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget control number. As discussed in the Proposal, this Final
Rule contains no requirements subject to the PRA.
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\42\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Considerations
The Commission received no comments with regard to its preliminary
cost-benefit considerations in the Proposal. Section 15(a) of the CEA
requires the Commission to consider the costs and benefits of its
actions before promulgating a regulation under the CEA. Section 15(a)
further specifies that the costs and benefits shall be evaluated in
light of the following five broad areas of market and public concern:
(1) Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) considerations.
This Final Rule prevents certain CSEs and their counterparties from
being disadvantaged because their master netting agreements do not
satisfy the definition of an EMNA, solely because such agreements'
comply with the QFC Rules or because such agreements would have to be
amended to achieve compliance. It revises the definition of EMNA such
that a master netting agreement that meets the requirements of the QFC
Rules may be an EMNA and provides that an amendment to a legacy swap
solely to conform to the QFC Rules will not cause that swap to be a
covered swap under the CFTC Margin Rule.
The Commission notes that the consideration of costs and benefits
below is based on the understanding that the markets function
internationally, with many transactions involving United States firms
taking place across international boundaries; with some Commission
registrants being organized outside of the United States; with leading
industry members typically conducting operations both within and
outside the United States; and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to the effects of this
Final Rule on all activity subject to it, whether by virtue of the
activity's physical location in the United States or by virtue of the
activity's connection with or effect on United States commerce under
CEA section 2(i).\43\ In particular, the Commission notes that some
persons affected by this rulemaking are located outside of the United
States.
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\43\ 7 U.S.C. 2(i).
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The baseline against which the benefits and costs associated with
this Final Rule is compared is the uncleared swaps markets as they
exist today, with the QFC Rules in effect.\44\ With this as the
baseline for this Final Rule, the following are the benefits and costs
of this Proposal.
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\44\ Although, as described above, the QFC Rules will be
gradually phased in, for purposes of the cost benefit
considerations, we assume that the affected CSEs are in compliance
with the QFC Rules.
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1. Benefits
As described above, this Final Rule will allow parties whose master
netting agreements satisfy the proposed revised definition of EMNA to
continue to calculate initial margin and variation margin,
respectively, on an aggregate net basis across uncleared swaps that are
executed under that EMNA. Otherwise, a CSE that is a counterparty under
a master netting agreement that complies with the QFC Rules and, thus,
does not satisfy the current definition of EMNA, would be required to
measure its exposures from covered swaps on a gross basis for purposes
of the CFTC Margin Rule. In addition, this Final Rule allows legacy
swaps to maintain their legacy status, notwithstanding that they are
amended to comply with the QFC Rules. Otherwise, such swaps would
become covered swaps subject to initial and variation margin
requirements under the CFTC Margin Rule. This Final Rule provides
certainty to CSEs and their counterparties about the treatment of
legacy swaps and any applicable netting arrangements in light of the
QFC Rules.
2. Costs
Because this Final Rule (i) will solely expand the definition of
EMNA to potentially include those master netting agreements that meet
the requirements of the QFC Rules and allow the amendment of legacy
swaps solely to conform to the QFC Rules without causing such swaps to
become covered swaps and (ii) does not require market participants to
take any action to benefit from these changes, the Commission believes
that this Final Rule will not impose any additional costs on market
participants.
3. Section 15(a) Considerations
In light of the foregoing, the CFTC has evaluated the costs and
benefits of this Final Rule pursuant to the five considerations
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
As noted above, this Final Rule will protect market participants by
allowing them to comply with the QFC Rules without being disadvantaged
under the CFTC Margin Rule. This Final Rule will facilitate market
participants' use of swaps that would be affected by this Final Rule to
hedge. Without this Final Rule, posting gross margin instead of net
margin for those swaps would be required, which would raise transaction
costs and thus likely reduce the use of such swaps for hedging.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
This Final Rule will make the uncleared swap markets more efficient
by allowing net margining of swap portfolios under master netting
agreements that comply with the QFC Rules and, thus, do not satisfy the
current EMNA definition instead of requiring the payment of gross
margin under such agreements. Also, absent this Final Rule, market
participants that are required to amend their EMNAs to comply with the
QFC Rules and, thereafter, required to measure their
[[Page 60346]]
exposure on a gross basis and to post margin on their legacy swaps,
would be placed at a competitive disadvantage as compared to those
market participants that are not so required to amend their EMNAs.
Therefore, this Final Rule may increase the competitiveness of the
uncleared swaps markets. In addition, this Final Rule furthers the
Commission's efforts to harmonize its margin regime with the Prudential
Regulators' margin regime, and therefore may improve the efficiency,
competitiveness, and financial integrity of markets.
(c) Price Discovery
This Final Rule permits the payment of net margin instead of gross
margin on portfolios of swaps affected by this Final Rule, which would
reduce margining costs to those swaps transactions. Reducing the cost
to transact these swaps, might lead to more trading, which could
potentially improve liquidity and benefit price discovery.
(d) Sound Risk Management
This Final Rule prevents the payment of gross margin on swaps
affected by this Final Rule, which does not reflect true economic
counterparty credit risk for swap portfolios transacted with
counterparties. Therefore, this Final Rule supports sound risk
management.
(e) Other Public Interest Considerations
The Commission has not identified an impact on other public
interest considerations as a result of this Final Rule.
D. Antitrust Laws
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\45\ The Commission believes that the public
interest to be protected by the antitrust laws is generally to protect
competition. The Commission requested and did not receive any comments
on whether the Proposal implicated any other specific public interest
to be protected by the antitrust laws.
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\45\ 7 U.S.C. 19(b).
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The Commission has considered this Final Rule to determine whether
it is anticompetitive and has preliminarily identified no
anticompetitive effects. The Commission requested and did not receive
any comments on whether the Proposal was anticompetitive and, if it is,
what the anticompetitive effects are.
Because the Commission has preliminarily determined that this Final
Rule is not anticompetitive and has no anticompetitive effects and
received no comments on its determination, the Commission has not
identified any less anticompetitive means of achieving the purposes of
the CEA.
List of Subjects in 17 CFR Part 23
Capital and margin requirements, Major swap participants, Swap
dealers, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 23 as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1,6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).
0
2. In Sec. 23.151, revise paragraph (2) in the definition of Eligible
master netting agreement to read as follows:
Sec. 23.151 Definitions applicable to margin requirements.
* * * * *
Eligible master netting agreement * * *
(2) The agreement provides the covered swap entity the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set-off collateral promptly
upon an event of default, including upon an event of receivership,
conservatorship, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case,
(i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5381 et seq.), the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph in order to facilitate the orderly
resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
(ii) The agreement may limit the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of 12 CFR part 47; 12 CFR part 252, subpart I; or
12 CFR part 382, as applicable;
* * * * *
0
3. In Sec. 23.161, add paragraph (d) to read as follows:
Sec. 23.161 Compliance dates.
* * * * *
(d) For purposes of determining whether an uncleared swap was
entered into prior to the applicable compliance date under this
section, a covered swap entity may disregard amendments to the
uncleared swap that were entered into solely to comply with the
requirements of 12 CFR part 47; 12 CFR part 252, subpart I; or 12 CFR
part 382, as applicable.
Issued in Washington, DC, on November 19, 2018, by the
Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Commission Voting Summary and Chairman's
Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo, and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
Through the Commission's Project KISS initiative, the Commission
received suggestions to harmonize its uncleared swap margin rule
with that of the Prudential Regulators. In response, this final rule
does so and provides market certainty, specifically with respect to
amending the CFTC's definition of ``eligible master netting
agreement'' (EMNA) and amending the CFTC Margin Rule such that any
legacy swap will not become subject to the CFTC Margin Rule if it is
amended solely to comply with changes adopted by the Prudential
Regulators in 2017. The Commission recognizes that the CFTC Margin
Rule does not provide relief for legacy swaps that might need to be
amended to meet regulatory changes or requirements,
[[Page 60347]]
and is committed to considering other meritorious requests for
relief.
[FR Doc. 2018-25602 Filed 11-23-18; 8:45 am]
BILLING CODE 6351-01-P