2020-14390
Federal Register, Volume 85 Issue 141 (Wednesday, July 22, 2020)
[Federal Register Volume 85, Number 141 (Wednesday, July 22, 2020)]
[Rules and Regulations]
[Pages 44170-44183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14390]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 50
RIN 3038-AE92
Exemption From the Swap Clearing Requirement for Certain
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is adopting amendments to Commission regulation 50.52, which exempts
certain affiliated entities within a corporate group from the swap
clearing requirement under the applicable provision of the Commodity
Exchange Act (CEA or Act). These amendments concern the anti-evasionary
condition that swaps subject to the clearing requirement entered into
with unaffiliated counterparties either be cleared or be eligible for
an exception to or exemption from the clearing requirement.
Specifically, the amendments make permanent certain temporary
alternative compliance frameworks intended to make this anti-evasionary
condition workable for international corporate groups in the absence of
foreign clearing regimes determined to be comparable to CFTC
requirements.
DATES: The effective date for this final rule is August 21, 2020.
FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director,
Division of Clearing and Risk, at 202-418-5684 or [email protected];
Melissa A. D'Arcy, Special Counsel, Division of Clearing and Risk, at
202-418-5086 or [email protected]; or Stephen A. Kane, Office of the
Chief Economist, at 202-418-5911 or [email protected], in each case at the
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Swap Clearing Requirement
B. Commission Regulation 50.52
II. The Proposal To Amend Regulation 50.52
A. The Commission's Proposal To Revise the Alternative
Compliance Frameworks
B. Comments Received
C. Trade Execution Requirement
III. Final Rule
[[Page 44171]]
A. Amendments to Commission Regulation 50.52
B. Commission's Section 4(c) Authority
C. Effective Date and Compliance Date
IV. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. Swap Clearing Requirement
Part 50 of the Commission's regulations implements the swap
clearing requirement under section 2(h) of the CEA and certain
exceptions and exemptions thereto. The swap clearing requirement under
section 2(h)(1)(A) of the CEA states that if the Commission requires a
swap to be cleared, then it is unlawful for any person to engage in
that swap unless the swap is submitted for clearing to a derivatives
clearing organization (DCO) that is registered under the CEA or a DCO
that the Commission has exempted from registration.
The Commission has adopted swap clearing requirement determinations
for certain classes of interest rate swaps and credit default swaps.\1\
Swaps that are subject to the Commission's swap clearing requirement
are described in Commission regulation 50.4 (Clearing Requirement).
Part 50 of the Commission's regulations also includes a number of
exceptions to and exemptions from the Clearing Requirement. Certain of
these exceptions or exemptions are based on statutory principles (e.g.,
the end-user exception),\2\ and others were adopted pursuant to the
Commission's public interest exemption authority (e.g., the exemption
for cooperatives).\3\
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\1\ Clearing Requirement Determination Under Section 2(h) of the
CEA, 77 FR 74284 (Dec. 13, 2012) and Clearing Requirement
Determination Under Section 2(h) of the CEA for Interest Rate Swaps,
81 FR 71202 (Oct. 14, 2016).
\2\ See End-User Exception to the Clearing Requirement for
Swaps, 77 FR 42560 (Jul. 19, 2012).
\3\ See Clearing Exemption for Certain Swaps Entered Into by
Cooperatives, 78 FR 52286 (Aug. 22, 2013).
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In April 2013 the Commission adopted a limited exemption from the
Clearing Requirement for certain affiliated entities pursuant to its
public interest authority (Inter-Affiliate Exemption).\4\ The Inter-
Affiliate Exemption is subject to certain conditions that limit the
availability of the exemption and are designed to ensure that the
Clearing Requirement is not circumvented. When the Commission adopted
the Inter-Affiliate Exemption, it concluded that, an exemption subject
to certain conditions is appropriate for the transactions at issue,
promotes responsible financial innovation and fair competition, and is
consistent with the public interest.\5\ These conditions are an
important element of the Inter-Affiliate Exemption and continue to be
an area of the Commission's focus. This final rule amends certain
regulatory provisions in Commission regulation 50.52 relating to the
conditions of electing the Inter-Affiliate Exemption.
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\4\ Clearing Exemption for Swaps Between Certain Affiliated
Entities, 78 FR 21750 (Apr. 11, 2013).
\5\ Id. at 21754.
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B. Commission Regulation 50.52
Commission regulation 50.52 governs the eligibility and compliance
requirements for market participants electing not to clear inter-
affiliate swaps pursuant to the Inter-Affiliate Exemption. This
regulation has been in effect since June 2013, and Commission staff has
monitored the election and availability of the Inter-Affiliate
Exemption over time. Certain assumptions about the global adoption of
swap clearing mandates were not realized, and the Commission's
conditions to the Inter-Affiliate Exemption that were adopted and
implemented in 2013 no longer serve the function intended.\6\ This
final rule amends those conditions to the Inter-Affiliate Exemption in
order to reflect current regulatory practices.
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\6\ Some non-U.S. jurisdictions are still in the process of
adopting their domestic mandatory clearing regimes, some non-U.S.
jurisdictions may never implement clearing for swaps, and a number
of non-U.S. regimes vary significantly in terms of product and
participant scope from the Commission's Clearing Requirement.
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1. Eligible Affiliate Counterparties
First, to qualify for the Inter-Affiliate Exemption, each
counterparty to a swap must meet the definition of an ``eligible
affiliate counterparty'' set forth in Commission regulation 50.52(a).
The terms of the exempted swap must comply with a documentation
requirement and be subject to a centralized risk management program.
The election of the Inter-Affiliate Exemption, as well as how the
requirements of the exemption are met, must be reported to a
Commission-registered swap data repository. Finally, the Inter-
Affiliate Exemption generally requires each eligible affiliate
counterparty to clear swaps executed with unaffiliated counterparties
(i.e., outward-facing swaps), if the swaps are covered by the
Commission's Clearing Requirement and do not otherwise qualify for an
exception to or exemption from the Clearing Requirement (Outward-Facing
Swaps Condition).\7\
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\7\ Commission regulation 50.52(b)(4)(i).
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The Commission continues to believe that it is necessary to impose
risk-mitigating conditions on inter-affiliate swaps to uphold the
Clearing Requirement, deter evasion, and help protect against systemic
risk to the U.S. As the Commission stated in the adopting release
issuing the Inter-Affiliate Exemption, entities that are affiliated
with each other are separate legal entities notwithstanding their
affiliation.\8\ As separate legal entities, affiliates generally are
not legally responsible for each other's contractual obligations. This
legal reality becomes readily apparent when one or more affiliate(s)
become insolvent. Affiliates, as separate legal entities, are managed
in bankruptcy as separate estates, and the trustee for each debtor
estate has a duty to the creditors of the affiliate, not the corporate
family, the parent of the affiliates, or the corporate family's
creditors.
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\8\ Clearing Exemption for Swaps Between Certain Affiliated
Entities, 78 FR 21750, at 21752-21753 (Apr. 11, 2013).
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2. Outward-Facing Swaps Condition
The Outward-Facing Swaps Condition requires that an eligible
affiliate counterparty relying on the Inter-Affiliate Exemption clear
any swap covered by the Clearing Requirement (i.e., an interest rate or
credit default swap identified in Commission regulation 50.4) that is
entered into with an unaffiliated counterparty, unless the swap
qualifies for an exception or exemption from the Clearing Requirement
under part 50. This provision applies to any eligible affiliate
counterparty electing the Inter-Affiliate Exemption, including an
eligible affiliate counterparty located outside of the United States.
The Outward-Facing Swaps Condition is intended to prevent swap
market participants from using the Inter-Affiliate Exemption to evade
the Clearing Requirement or to transfer risk to U.S. firms by entering
into uncleared swaps with non-U.S. affiliates in jurisdictions that do
not have mandatory clearing regimes comparable to the Commission's
clearing requirement regime. Such evasion could be accomplished if the
non-U.S. affiliate enters into a swap with an unaffiliated party also
located outside of the U.S. and that swap is related on a back-to-back
or matched book basis with the swap executed with the affiliated party
located in the U.S. In the adopting release to the Inter-Affiliate
Exemption,
[[Page 44172]]
the Commission noted that section 2(h)(4)(A) of the CEA requires the
Commission to prescribe rules to prevent evasion of the Clearing
Requirement.\9\
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\9\ Clearing Exemption for Swaps Between Certain Affiliated
Entities, 78 FR 21750, at 21761 (Apr. 11, 2013). The Commission also
notes that Commission regulation 1.6 makes it unlawful to conduct
activities outside the United States, including entering into
agreements, contracts, and transactions and structuring entities, to
willfully evade or attempt to evade any provision of Title VII of
the Dodd-Frank Wall Street Reform and Consumer Protection Act,
including the swap clearing requirement under section 2(h)(1) of the
CEA. Any such evasionary conduct will be subject to the relevant
provisions of Title VII. In determining whether a transaction or
entity structure is designed to evade, the Commission considers the
extent to which there is a legitimate business purpose for such
structure. 77 FR 48208, at 48301 (Aug. 13, 2012).
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The Commission did not propose and is not adopting any substantive
changes to the definition of ``eligible affiliate counterparty'' or the
Outward-Facing Swaps Condition. The final rule today adopts changes to
the alternative conditions for complying with the Outward-Facing Swaps
Condition.
II. The Proposal To Amend Commission Regulation 50.52
A. The Commission's Proposal To Revise the Alternative Compliance
Frameworks
On December 23, 2019, the Commission published a notice of proposed
rulemaking (the Proposal) to amend Commission regulation 50.52.\10\ The
Commission proposed changes that would establish the same conditions
and requirements to comply with the Inter-Affiliate Exemption as those
provided for in current no-action relief granted to eligible affiliate
counterparties under CFTC Letter No. 17-66.\11\ The Commission
requested comments from market participants about their experiences
electing and complying with conditions of the Inter-Affiliate Exemption
and on all other aspects of the Proposal.
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\10\ Exemption From the Swap Clearing Requirement for Certain
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 84 FR 70446 (Dec. 23, 2019).
\11\ CFTC Letter No. 17-66 (Dec. 14, 2017), available at https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm. See also,
previously granted relief under CFTC Letter Nos. 14-135 (Nov. 7,
2014), 15-63 (Nov. 17, 2015), 16-81 (Nov. 28, 2016), and 16-84 (Dec.
15, 2016). CFTC Letter No. 17-66 expires on the earlier of (i)
December 31, 2020 at 11:59 p.m. (Eastern Time); or (ii) the
effective date of amendments to Commission regulation 50.52.
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The revisions outlined in the Proposal would effectively codify
CFTC Letter No. 17-66 by reinstating and revising the two alternative
compliance frameworks set forth in Commission regulations
50.52(b)(4)(ii) and (iii) (together, the Alternative Compliance
Frameworks) and make additional minor changes. The Alternative
Compliance Frameworks were adopted for a limited time period and
expired on March 11, 2014.
Under the Proposal, the Commission regulation subsections
50.52(b)(4)(ii)(A) and 50.52(b)(4)(ii)(B), which both expired on March
11, 2014, would be reinstated and combined in revised subsection
50.52(b)(4)(ii). The Commission proposed to delete the expiration date,
expand the list of jurisdictions in which one of the counterparties may
be located and still comply with the Alternative Compliance Frameworks,
and streamline the variation margining requirement. As explained in the
Proposal, eligible affiliate counterparties continue to rely on the
Alternative Compliance Frameworks made available through no-action
relief. Deleting the March 11, 2014 expiration date reinstates this
portion of the Alternative Compliance Framework. Revised Commission
regulation 50.52(b)(4)(ii) permits non-U.S. eligible affiliate
counterparties located in Australia, Canada, Hong Kong, Mexico,
Switzerland, or the United Kingdom, to comply with this Alternative
Compliance Framework, as well as eligible affiliate counterparties
located in the European Union, Japan, or Singapore. Finally, for the
reasons discussed below, the variation margin requirement in revised
Commission regulation 50.52(b)(4)(ii) does not include the option to
pay and collect full variation margin daily on all swaps entered into
between the eligible affiliate counterparty located in the listed
jurisdictions and an unaffiliated counterparty, because market
participants have not relied on this provision.
Under the Proposal, the Commission did not revise the five percent
test, described below, other than to delete the expiration date, modify
the jurisdictions in which an eligible affiliate counterparty may be
located for purposes of complying with that provision, and streamline
the variation margining requirement. The five percent test is a
provision in the Alternative Compliance Framework that permitted (until
its expiration on March 11, 2014), an eligible affiliate counterparty
located in the U.S. to comply with certain variation margin provisions
in lieu of clearing, with respect to a swap executed opposite an
eligible affiliate counterparty located in a non-U.S. jurisdiction
other than the European Union, Japan, or Singapore.\12\ According to
this test, the aggregate notional value of swaps included in a class of
swaps identified by Commission regulation 50.4 (classes of swaps
covered by the Clearing Requirement) executed between an eligible
affiliate counterparty located in the U.S. and an eligible affiliate
counterparty located in a non-U.S. jurisdiction other than the European
Union, Japan, or Singapore may not exceed five percent of the aggregate
notional value of all swaps included in a class of swaps identified by
Commission regulation 50.4 that are executed by the U.S. eligible
affiliate counterparty. If the five percent threshold was exceeded, the
Alternative Compliance Framework was unavailable under existing
Commission regulation 50.52(b)(4)(iii), in connection with swaps with
eligible affiliate counterparties located in a non-U.S. jurisdiction
other than the European Union, Japan, or Singapore.
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\12\ Commission regulation 50.52(b)(4)(iii).
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Eligible affiliates in certain jurisdictions have been granted
relief through CFTC staff letters with respect to the Alternative
Compliance Framework under Commission regulation 50.52(b)(4)(ii), but
CFTC staff had not issued no-action relief to remove those
jurisdictions from the category of ``other jurisdictions'' contemplated
by Commission regulation 50.52(b)(4)(iii). The Commission made these
amendments in the Proposal to no longer categorize those jurisdictions
as ``other jurisdictions,'' in order to appropriately broaden the
availability of the Alternative Compliance Framework while maintaining
protections against evasion of the Clearing Requirement.
As the Commission explained in the Proposal, the five percent test
establishes a relative limit on the amount of uncleared swaps
activity--activity that would otherwise be subject to the Commission's
Clearing Requirement--that any one U.S. eligible affiliate counterparty
may conduct with its affiliated counterparties in certain ``other
jurisdictions.'' In other words, the U.S. affiliate cannot enter into
swaps that total (in aggregate) more than five percent of all of its
swaps that are subject to the Commission's Clearing Requirement, with
affiliates in the ``other jurisdictions.'' The five percent test has
the practical effect of limiting the relative notional amount of
uncleared swaps activity that affiliates conduct in jurisdictions that
are not identified in Commission regulation 50.52(b)(4)(ii). The
Commission continues to believe that limiting the relative notional
amount of uncleared
[[Page 44173]]
swaps executed in jurisdictions that have not established or
implemented clearing regimes, along with conditioning relief on the use
of variation margin, protects the eligible affiliate counterparty
located in the United States from exposure to the risks associated with
material swaps exposure in jurisdictions that do not have their own
domestic clearing regime. The changes adopted today will decrease the
number of ``other jurisdictions'' and as a result market participants
may increase the notional amount of swap activity in those
jurisdictions while still remaining below the five percent limit. The
Commission did not receive any comments regarding this change.
Furthermore, the Commission believes that the revised five percent test
facilitates effective risk management among affiliated entities while
protecting U.S. affiliates from transferring unmitigated risk into the
U.S. from other jurisdictions.
Finally, under the Proposal, the variation margin requirement in
revised Commission regulation 50.52(b)(4)(iii) did not include the
option to pay and collect full variation margin daily on all swaps
entered into between the eligible affiliate counterparty located in the
listed jurisdictions and an unaffiliated counterparty, because market
participants have not been electing this option.
The Proposal did not include any changes to the requirement that
any swaps that are exempted from the Clearing Requirement under the
Inter-Affiliate Exemption must be subject to a centralized risk
management program.\13\ Also, all swaps exempted from the Clearing
Requirement pursuant to the Inter-Affiliate Exemption will continue to
be subject to the reporting requirements outlined in Commission
regulation 50.52(c)-(d) and part 45 of the Commission's regulations.
The Commission relies on these reporting requirements to monitor the
number of entities electing the Inter-Affiliate Exemption, as well as
the number of inter-affiliate swaps for which the exemption is claimed.
As discussed in greater detail below, data on the election of the
Inter-Affiliate Exemption has been considered by the Commission and
supports its belief that this final rule to reinstate the Alternative
Compliance Frameworks will not increase opportunities for affiliated
entities to evade the Clearing Requirement.
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\13\ Commission regulation 50.52(b)(3).
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B. Comments Received
The Commission received one comment letter in response to the
Proposal from the International Swaps and Derivatives Association, Inc.
(ISDA). ISDA supported the Proposal and stated that the revisions would
provide legal certainty to market participants operating under
Commission staff no-action relief. ISDA suggested two changes to the
Proposal: (1) A modification to the variation margin requirements in
the Proposal; and (2) a clarification related to the Commission's swap
trade execution requirement under section 2(h)(8) of the CEA (Trade
Execution Requirement).
ISDA recommended that the Commission allow eligible affiliate
counterparties exchanging variation margin payments with other eligible
affiliate counterparties under the Alternative Compliance Frameworks to
comply with non-U.S. uncleared margin requirements that have been
deemed comparable by the Commission. The Commission has issued
comparability determinations regarding uncleared swap margin regimes
for swap dealers and major swaps participants in Japan, the European
Union, Australia, and the United Kingdom (by staff no-action relief as
a former member of the European Union).\14\ In ISDA's view, the
Commission should allow eligible affiliate counterparties to rely on
these comparability determinations in order to satisfy any variation
margin requirements under the Alternative Compliance Frameworks. ISDA
did not suggest a specific change to the regulatory text under
Commission regulation 50.52, but argued that applying the comparability
determinations in this context would be consistent with the
Commission's efforts and policies relating to cross-border swaps
activities.
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\14\ Comparability Determination for Japan: Margin Requirements
for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81
FR 63376 (Sept. 15, 2016); Amendment to Comparability Determination
for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 84 FR 12074 (Apr. 1, 2019);
Comparability Determination for the European Union: Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants, 82 FR 48394 (Oct. 18, 2017); and Comparability
Determination for Australia: Margin Requirements for Uncleared Swaps
for Swap Dealers and Major Swap Participants, 84 FR 12908 (Apr. 3,
2019). See also CFTC Letter No. 19-08, available at: https://www.cftc.gov/csl/19-08/download.
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For a number of reasons, the Commission declines to adopt any
changes to the variation margin requirements under the Alternative
Compliance Frameworks, other than the amendments that were considered
in the Proposal. In response to ISDA's request, the Commission notes
that while it has adopted uncleared margin comparability determinations
for certain jurisdictions (but not all jurisdictions in which an
eligible affiliate counterparty may be located), the application of a
non-U.S. jurisdiction's uncleared margin regime would not be
appropriate for counterparties electing the Inter-Affiliate Exemption.
First, changing the Commission's approach to the variation margin
requirements for counterparties using the Alternative Compliance
Frameworks would require at least some counterparties to alter their
existing variation margining practices with respect to inter-affiliate
swaps. Eligible affiliate counterparties have been relying on the
Alternative Compliance Frameworks in practice for approximately seven
years and imposing a new standard for the variation margin requirement
for certain entities would represent a significant change from a well-
established status quo that the Commission believes has been working
well over that period of time.
As discussed below, the condition requiring eligible affiliate
counterparties to pay and collect variation margin provides risk-
mitigating benefits and acts as a protection against accumulating
uncollateralized risks in affiliated counterparties that do not clear
their outward-facing swaps. The variation margin condition under the
Inter-Affiliate Exemption also serves a distinct purpose in preventing
the transfer of risk back to the United States. Permitting
counterparties to comply with a non-U.S. uncleared margin regime in
some instances may eliminate the risk-mitigation effects of the
variation margin condition in the Alternative Compliance Frameworks
because there may not necessarily be corresponding variation margin
requirements under the non-U.S. jurisdiction's uncleared margin regime.
For instance, the Japanese inter-affiliate regime does not require
counterparties to inter-affiliate swaps to pay or collect variation
margin. If the Commission applied its findings from its comparability
determination with respect to Japan in the Alternative Compliance
Frameworks, then the eligible affiliate counterparties would not be
required to pay or collect any variation margin on their swaps with
other eligible affiliate counterparties.
The Commission understands that each non-U.S. jurisdiction may have
a different treatment of inter-affiliate derivative transactions that
is tailored to its own legal framework and market conditions. The
Commission recognized
[[Page 44174]]
this point and looked at the broader market framework in its
comparability determinations with respect to margin requirements for
uncleared swaps for swap dealers and major swap participants.\15\ The
comparability determinations analyze the uncleared margin regimes using
broad, outcomes-based measures to assess compliance with the CFTC's
margin requirements. The variation margin requirements included in the
Alternative Compliance Frameworks can be distinguished from the
analysis undertaken in the comparability determinations with respect to
the uncleared margin regimes because the variation margin requirements
under the Alternative Compliance Framework are more specifically
designed to protect against the evasion of the Clearing Requirement and
the transfer of risk back to the United States. The variation margin
required under the Alternative Compliance Frameworks provides assurance
that counterparties electing the Inter-Affiliate Exemption are not
entering into uncollateralized uncleared outward-facing swaps that
would otherwise be subject to the Clearing Requirement without taking
important risk-mitigating precautions.
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\15\ See Amendment to Comparability Determination for Japan:
Margin Requirements for Uncleared Swaps for Swap Dealers and Major
Swap Participants, 84 FR 12074, at 12078 (Apr. 1, 2019).
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For these reasons, the Commission believes the Alternative
Compliance Frameworks serve a unique risk mitigating function that
protects against evasion of the Clearing Requirement and guards against
systemic risks to the United States that could arise from uncleared
swaps entered into by eligible affiliate counterparties. Accordingly,
the Commission will not apply its comparability determinations to the
variation margin requirements under revised Commission regulation
50.52(b)(4).
ISDA's comment letter also asked the Commission for confirmation
that the eligible affiliate counterparties electing the Inter-Affiliate
Exemption would be eligible for an automatic exemption from the Trade
Execution Requirement. ISDA cited to Commission statements in 2013 in
which the Commission determined that swaps between certain affiliated
entities electing the Inter-Affiliate Exemption would not be subject to
the Trade Execution Requirement.\16\ The Commission reaffirms its
previous statement in this final rule. However, the Commission is not
making any findings or determinations related to the Trade Execution
Requirement at this time. A further discussion of the Trade Execution
Requirement is included below.
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\16\ Process for a Designated Contract Market or Swap Execution
Facility To Make a Swap Available to Trade, Swap Transaction
Compliance and Implementation Schedule, and Trade Execution
Requirement Under the Commodity Exchange Act, 78 FR 33606, at n. 1
(June 4, 2013).
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After considering ISDA's comment letter and the Commission's
experience administering the Inter-Affiliate Exemption, the Commission
is adopting amendments to Commission regulation 50.52 as proposed.
Adopting these revisions provides legal certainty to swaps market
participants and increases the flexibility offered to counterparties
electing not to clear inter-affiliate swaps, while also guarding
against the unmitigated transfer of risk into U.S. markets.
C. Trade Execution Requirement
The Inter-Affiliate Exemption provides relief from the Commission's
Clearing Requirement. The Commission's Trade Execution Requirement is
related to the Clearing Requirement because it applies to a subset of
swaps that are subject to a clearing requirement determination under
Commission regulation 50.4. The Trade Execution Requirement applies to
swaps that have been made available to trade and requires that the
counterparties execute a swap in accordance with the execution methods
described in Commission regulation 37.9(a)(2).\17\
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\17\ Under Commission regulation 37.9(a)(2), swaps subject to
the Trade Execution Requirement that are not block trades must be
executed on an order book, as defined in Commission regulation
37.3(a)(3) or a request for quote system, as defined in Commission
regulation 37.9(a)(3) in conjunction with an order book. For the
current list of swaps that are subject to the Trade Execution
Requirement, see Swaps Made Available To Trade, available at:
https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf.
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In the Proposal, the Commission stated that it was ``not
considering any changes with regard to the trade execution requirement
because those are the subject of another ongoing rulemaking.'' \18\ The
Commission did not request comment regarding the Trade Execution
Requirement and did not include a policy position in the Proposal.
Therefore, the application of the Trade Execution Requirement is beyond
the scope of this final rule.
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\18\ Exemption From the Swap Clearing Requirement for Certain
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 84 FR 70446, at 70447 (Dec. 23, 2019).
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The Commission continues to evaluate its 2018 proposal related to
swap execution facilities and the Trade Execution Requirement (SEF
Proposal).\19\ Under the SEF Proposal, the Commission proposed to
exempt swaps relying on the Inter-Affiliate Exemption from the Trade
Execution Requirement.\20\ Because the SEF proposal addresses a broader
set of exemptions from the Trade Execution Requirement (i.e., more than
swap transactions relying on the Inter-Affiliate Exemption from the
Clearing Requirement), the Commission believes a final rule
comprehensively addressing the Trade Execution Requirement is
preferable to making a limited determination in this context.
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\19\ Swap Execution Facilities and Trade Execution Requirement,
83 FR 61946 (Nov. 30, 2018).
\20\ Id. at 62038.
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In addition, Commission staff has provided no-action relief from
the Trade Execution Requirement to eligible affiliate counterparties
executing inter-affiliate swaps with other eligible affiliate
counterparties, even if the Inter-Affiliate Exemption is not
elected.\21\ ISDA's comment to the Proposal included a request that the
Commission adopt relief similar to the no-action relief provided in
CFTC Letter No. 17-67. CFTC Letter No. 17-67 was not subject to any
discussion in the Proposal and continues to be the staff's position.
The Commission may address separately no-action relief from the Trade
Execution Requirement for eligible affiliated entities.
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\21\ CFTC Letter No. 17-67, available at: https://www.cftc.gov/csl/17-67/download.
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III. Final Rule
A. Amendments to Commission Regulation 50.52
The Commission has considered the comment from ISDA and is adopting
the amendments to Commission regulation 50.52 as proposed.
The Commission is inserting a new definition for the term ``United
States'' under Commission regulation 50.52(a)(2)(iii). The Commission
received no comments on this definition and is adopting the change as
proposed.
The Commission is deleting references to the March 11, 2014
expiration date in Commission regulations 50.52(b)(4)(ii) and (iii) as
proposed. This will reinstate the Alternative Compliance Frameworks as
an option available in the Commission's regulations for complying with
the Outward-Facing Swaps Condition.
The Commission is deleting Commission regulation 50.52(b)(4)(ii)(B)
as proposed. This regulation permitted certain affiliate counterparties
to comply with the Alternative Compliance Framework, provided,
[[Page 44175]]
among other conditions, that neither eligible affiliate counterparty is
affiliated with an entity that is a swap dealer or major swap
participant. In the Proposal, the Commission noted that it had reviewed
swap data and found that entities that elected to comply with the
Alternative Compliance Framework were financial entities or affiliated
with swap dealers and did not rely on this provision of the Alternative
Compliance Framework. In response to the Proposal, no commenter
addressed this point or reported having relied on this provision
without being so affiliated. Thus, the Commission believes it is
appropriate to delete it.
The Commission is deleting Commission regulation
50.52(b)(4)(iii)(A) as proposed. Similar to the point above, the
Commission noted in the Proposal that it was not aware of any eligible
affiliate counterparty that has opted to use this provision, and
requested comment on whether any market participant relied on this
provision in the past, or intended to rely on this provision if it were
reinstated. Since the Commission received no reports of use of this
provision or other comments, it believes it is appropriate to delete
it.
The Commission is adopting the revisions to the lists of
jurisdictions included or excluded from Commission regulations
50.52(b)(4)(ii) and (iii) as proposed. The only comment on this point,
from ISDA, supported the Commission's effort to provide legal certainty
to market participants who have been operating under no-action relief
pursuant to a series of CFTC staff letters.
Commission regulation 50.52(b)(4)(ii), as reinstated and revised,
will permit each eligible affiliate counterparty, or a third party that
directly or indirectly holds a majority interest in both eligible
affiliate counterparties, to pay and collect full variation margin
daily on all of the eligible affiliate counterparties' swaps with other
eligible affiliate counterparties, if at least one of the eligible
affiliate counterparties is located in Australia, Canada, the European
Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, or the United
Kingdom.\22\ Under this provision, eligible affiliate counterparties
electing the exemption must pay and collect variation margin on swaps
with all other eligible affiliate counterparties with whom they enter
into swaps. The variation margin requirement does not extend beyond
these swaps to include swaps between counterparties not electing the
exemption.
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\22\ The Commission is expanding the list of jurisdictions under
Commission regulation 50.52(b)(4)(ii) to include the United Kingdom
as a separate jurisdiction from the European Union, in order to
codify the no-action relief issued in preparation for the United
Kingdom's withdrawal from the European Union, commonly referred to
as ``Brexit.'' CFTC Letter No. 19-09 (Apr. 5, 2019), available at
https://www.cftc.gov/csl/19-09/download.
---------------------------------------------------------------------------
Commission regulation 50.52(b)(4)(iii), as reinstated and revised,
will permit each eligible affiliate counterparty, or a third party that
directly or indirectly holds a majority interest in both eligible
affiliate counterparties, to pay and collect full variation margin
daily on all of the eligible affiliate counterparties' swaps with other
eligible affiliate counterparties, if the eligible affiliate
counterparty that is located in the United States enters into swaps,
included in the class of Commission regulation 50.4 swaps, with
eligible affiliate counterparties located in jurisdictions other than
Australia, Canada, the European Union, Hong Kong, Japan, Mexico,
Singapore, Switzerland, or the United Kingdom. However, if relying on
this provision, the aggregate notional value of swaps with such
counterparties included in the class of Commission regulation 50.4
swaps may not exceed five percent of the aggregate notional value of
all swaps included in the class of Commission regulation 50.4 swaps
entered into by the eligible affiliate counterparty located in the U.S.
As noted above, the eligible affiliate counterparties electing the
exemption must pay and collect variation margin on swaps with all other
eligible affiliate counterparties with whom they enter into swaps.
The Commission is adopting the revisions to the variation margining
requirements under Commission regulation 50.52(b)(4)(ii)-(iii) as
proposed. The Commission sought comment from market participants about
the two different variation margining options offered in current
Commission regulations 50.52(b)(4)(ii)(A)(1) and (2), and Commission
regulations 50.52(b)(4)(iii)(A) and (B). In particular, the Commission
asked commenters whether compliance with the Outward-Facing Swaps
Condition via the Alternative Compliance Frameworks was consistent or
inconsistent with margin requirements in non-U.S. jurisdictions.\23\
The Commission did not receive an independent analysis of the
comparability between the Alternative Compliance Frameworks and margin
requirements in non-U.S. jurisdictions. ISDA's comment letter requested
that the Commission apply the uncleared margin requirement
comparability determinations to the margin requirements in the
Alternative Compliance Framework. As discussed above, the Commission is
not implementing that change.
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\23\ Exemption From the Swap Clearing Requirement for Certain
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 84 FR 70446, at 70452 (Dec. 23, 2019).
---------------------------------------------------------------------------
The Commission believes that amendments to Commission regulation
50.52(b)(4) adopted in this final rule provide an exemption from the
Clearing Requirement in a manner that is demonstrated to be workable,
while imposing conditions necessary to ensure that the Inter-Affiliate
Exemption is not used to evade the Clearing Requirement and that inter-
affiliate swaps exempted from required clearing meet certain risk-
mitigating conditions to protect the U.S. financial system. In
addition, the Commission believes that these amendments provide
flexibility to eligible affiliate counterparties electing the Inter-
Affiliate Exemption and increase legal certainty for the reasons stated
above.
B. Commission's Section 4(c) Authority
In the Proposal, the Commission requested comment on whether the
amendments to Commission regulation 50.52 were an appropriate exercise
of the Commission's authority under section 4(c) of the CEA and whether
they were in the public interest. The Commission received no comments
regarding the Commission's use of its section 4(c) authority in this
context.
The Commission continues to believe that its use of section 4(c)
authority, which was used to adopt the Inter-Affiliate Exemption
pursuant to section 4(c)(1) of the CEA, is appropriate to provide
certain eligible affiliate counterparties with a limited exemption from
the Clearing Requirement. Section 4(c)(1) of the CEA grants the
Commission the authority to exempt any transaction or class of
transactions, including swaps, from certain provisions of the CEA,
including the Commission's Clearing Requirement, in order to ``promote
responsible economic or financial innovation and fair competition.''
Section 4(c)(2) of the CEA further provides that the Commission may not
grant exemptive relief unless it determines that: (1) The exemption is
appropriate for the transaction and consistent with the public
interest; (2) the exemption is consistent with the purposes of the CEA;
(3) the transaction will be entered into solely between ``appropriate
persons''; and (4) the exemption will not have a material adverse
effect on the ability of the
[[Page 44176]]
Commission or any contract market to discharge its regulatory or self-
regulatory responsibilities under the CEA. In enacting section 4(c),
Congress noted that the purpose of the provision is to give the
Commission a means of providing certainty and stability to existing and
emerging markets so that financial innovation and market development
can proceed in an effective and competitive manner.\24\
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\24\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, at
3213.
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The Commission believes that the Inter-Affiliate Exemption,
including the Alternative Compliance Frameworks, as modified by this
final rule, is consistent with the public interest and the purposes of
the CEA. As the Commission noted in the adopting release for the Inter-
Affiliate Exemption final rulemaking, inter-affiliate swaps fulfill an
important risk management role within corporate groups.\25\ These swaps
may be beneficial to the entity as a whole. These amendments to the
Outward-Facing Swaps Condition and the Alternative Compliance
Frameworks will permit the variation margin provisions under revised
Commission regulations 50.52(b)(4)(ii) and (iii) to be used in
connection with swaps with eligible affiliate counterparties located in
any non-U.S. jurisdiction, not only those located in the European
Union, Japan, or Singapore. Pursuant to staff no-action relief, as
discussed above, these provisions have been in use since 2013.
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\25\ Clearing Exemption for Swaps Between Certain Affiliated
Entities, 78 FR 21750, at 21754 (Apr. 11, 2013) (citing to
commenters and the proposal in support of the conclusion that
``inter-affiliate transactions provide an important risk management
role within corporate groups'' and that ``swaps entered into between
corporate affiliates, if properly risk-managed, may be beneficial to
the entity as a whole.'').
---------------------------------------------------------------------------
Based on the Commission's review of recent data reported to the
Depository Trust & Clearing Corporation's swap data repository, DTCC
Data Repository (U.S.) LLC, the Alternative Compliance Framework
provisions under Commission regulation 50.52(b)(4)(ii) appear to be
working. The Commission has identified approximately 55 entities
located in Australia, Canada, the European Union, Hong Kong, Japan,
Mexico, Singapore, Switzerland, or the United Kingdom that elected the
Inter-Affiliate Exemption between January 1, 2019 to December 31,
2019.\26\ The Commission believes that these entities chose to, or
could have, complied with the Alternative Compliance Framework under
Commission regulation 50.52(b)(4)(ii) because of the jurisdiction in
which they are organized. Based on the same data set from January 1,
2019 to December 31, 2019, the Commission identified 16 entities
located in jurisdictions other than Australia, Canada, the European
Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, the United
Kingdom, or the United States that elected the Inter-Affiliate
Exemption and chose to, or could have, complied with the Alternative
Compliance Framework under Commission regulation 50.52(b)(4)(iii).
During the same time period, the data showed that approximately 110
U.S. entities elected the Inter-Affiliate Exemption.
---------------------------------------------------------------------------
\26\ The Commission notes that although current Commission
regulation 50.52 does not permit entities to comply with either of
the Alternative Compliance Frameworks because they have expired, the
relief provided by staff no-action letters means that market
participants have continued to use and report swaps activity in
compliance with the Alternative Compliance Frameworks.
---------------------------------------------------------------------------
The Commission believes that adopting amendments to the Alternative
Compliance Frameworks, including reinstating the provisions and
extending the availability of the first framework under Commission
regulation 50.52(b)(4)(ii) to eligible affiliate counterparties located
in Australia, Canada, the European Union, Hong Kong, Japan, Mexico,
Singapore, Switzerland, and the United Kingdom, while correspondingly
narrowing the availability of the second framework under Commission
regulation 50.52(b)(4)(iii), is appropriate for purposes of swaps
between affiliated entities, promotes responsible financial innovation
and fair competition, and is consistent with the public interest.
In this regard, the Commission considered whether the availability
of the Alternative Compliance Frameworks might result in fewer
affiliated counterparties clearing their outward-facing swaps and the
significance of any such reduction in terms of the use of inter-
affiliate swaps as a risk management tool. Generally speaking, it is
difficult to estimate whether the final rule will reduce central
clearing of outward-facing swaps. Among other factors, the application
of mandatory clearing and the availability of central clearing for
particular types of swaps vary by jurisdiction. Also, market
participants' response to the final rule may depend on which of their
swaps are eligible for the Inter-Affiliate Exemption. Despite this
uncertainty, the Commission believes that there may be a significant
number of affiliated counterparties that will continue to engage in
uncleared swaps activity as permitted under the amended Alternative
Compliance Frameworks, subject to the conditions imposed by this final
rule.\27\
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\27\ Based on a recent review of swap data reflecting use of the
Inter-Affiliate Exemption, the Commission estimates that over 70
eligible affiliate counterparties located outside of the United
States may elect to comply with one of the reinstated Alternative
Compliance Frameworks thereby choosing not to clear their outward-
facing swaps and rather to pay and collect variation margin on all
swaps with other eligible affiliate counterparties instead. These
entities include affiliates of swap dealers that are active in
multiple jurisdictions.
---------------------------------------------------------------------------
Swap dealers electing the exemption use inter-affiliate swaps as an
important risk management tool within corporate groups, and these
affiliated groups are subject to a range of regulatory and other
controls as part of their swap activities in the United States and in
other jurisdictions. This includes the requirement to maintain a risk
management program that takes into account risks posed by the swap
dealer's affiliates and is integrated into the risk management of the
broader corporate group.\28\ In addition, the conditions to the Inter-
Affiliate Exemption itself require the swaps covered by the exemption
to be subject to a centralized risk management program. In sum, in
considering whether the amendments in this final rule promote
responsible financial innovation and fair competition and are
consistent with the public interest, the Commission took the factors
discussed above into account--i.e., the value of inter-affiliate swaps
as a risk management tool, the extent to which the Alternative
Compliance Frameworks foster this use of inter-affiliate swaps, and the
potential for more elections not to clear outward-facing swaps.
---------------------------------------------------------------------------
\28\ Commission regulation 23.600(c)(ii).
---------------------------------------------------------------------------
The Commission continues to believe that the amendments to the
Outward-Facing Swaps Condition and Alternative Compliance Frameworks
will be available only to ``appropriate persons.'' Section 4(c)(3) of
the CEA includes within the term ``appropriate person'' a number of
specified categories of persons, including such other persons that the
Commission determines to be appropriate in light of their financial or
other qualifications, or the applicability of appropriate regulatory
protections. In the 2013 Inter-Affiliate Exemption final rulemaking,
the Commission found that eligible contract participants (ECPs) are
appropriate persons within the scope of section 4(c)(3)(K) of the
CEA.\29\ The Commission noted that the elements of the ECP definition
(as set forth in section 1a(18)(A) of the CEA and Commission regulation
1.3(m))
[[Page 44177]]
generally are more restrictive than the comparable elements of the
enumerated ``appropriate person'' definition. Given that only ECPs are
permitted to enter into uncleared swaps, there is no risk that a non-
ECP or a person who does not satisfy the requirements for an
``appropriate person'' could enter into an uncleared swap using the
Inter-Affiliate Exemption. Consistent with its finding in the 2013
Inter-Affiliate Exemption final rulemaking, the Commission reaffirms
that the class of persons eligible to rely on the Inter-Affiliate
Exemption is limited to ``appropriate persons'' within the scope of
section 4(c)(3) of the CEA.
---------------------------------------------------------------------------
\29\ Clearing Exemption for Swaps Between Certain Affiliated
Entities, 78 FR 21750, at 21754 (Apr. 11, 2013).
---------------------------------------------------------------------------
Finally, the Commission expects, based on its past experiences and
the comment received, that the amendments to Commission regulation
50.52 will not have a material effect on the ability of the Commission
to discharge its regulatory responsibilities. The Inter-Affiliate
Exemption continues to be limited in scope and the Commission receives
information regarding the election and use of exempt swaps between
eligible affiliated entities because they are reported to a swap data
repository. In fact, the Commission hopes that future changes to part
45 reporting requirements may improve the Commission's ability to
ascertain quickly which swaps are subject to the Inter-Affiliate
Exemption versus other available exemptions or exceptions to the
Clearing Requirement.\30\ As the Commission has done in the past, it
will monitor swap counterparties' elections of the Inter-Affiliate
Exemption and swap activity through reported data. The Commission's
special call, anti-fraud, and anti-evasion authorities are unaffected
by these amendments and remain in place. The Commission may exercise
its special call, anti-fraud, or anti-evasion authorities in response
to concerns about the use of the Inter-Affiliate Exemption. For all of
these reasons, the Commission remains confident that it can discharge
its regulatory responsibilities under the CEA.
---------------------------------------------------------------------------
\30\ See generally, Swap Data Recordkeeping and Reporting
Requirements, 85 FR 21578 (Apr. 17, 2020).
---------------------------------------------------------------------------
C. Effective Date and Compliance Date
This final rule will be effective 30 days after publication in the
Federal Register. Compliance with the revised Alternative Compliance
Frameworks will be required on the effective date. Eligible affiliate
counterparties entering into a swap on or after the effective date and
claiming the Inter-Affiliate Exemption must comply with the revised
Alternative Compliance Frameworks in Commission regulation 50.52.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires agencies to consider
whether the rules they issue will have a significant economic impact on
a substantial number of small entities and, if so, to provide a
regulatory flexibility analysis regarding the impact on those
entities.\31\ Each Federal agency is required to conduct an initial and
final regulatory flexibility analysis for each rule of general
applicability for which the agency issues a general notice of proposed
rulemaking.\32\
---------------------------------------------------------------------------
\31\ 5 U.S.C. 601 et seq.
\32\ Id.
---------------------------------------------------------------------------
As discussed in the Proposal, the amendments to the Inter-Affiliate
Exemption will not affect any small entities, as the RFA uses that
term. Pursuant to section 2(e) of the CEA, only ECPs may enter into
swaps, unless the swap is listed on a DCM. The Commission has
previously determined that ECPs are not small entities for purposes of
the RFA.\33\ The amendments to the Inter-Affiliate Exemption will
affect only market participants that qualify as ECPs. All persons that
are not ECPs are required to execute their swaps on a DCM, and all
contracts executed on a DCM must be cleared by a DCO, as required by
statute and regulation, not by operation of any Clearing Requirement.
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the amendments adopted in
this final rule will not have a significant economic impact on a
substantial number of small entities.
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\33\ 66 FR 20740, at 20743 (Apr. 25, 2001).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) \34\ imposes certain
requirements on federal agencies, including the Commission, in
connection with conducting or sponsoring any collection of information
as defined by the PRA. Under the PRA, an agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number from
the Office of Management and Budget (OMB).
---------------------------------------------------------------------------
\34\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------
This final rule will not require a new collection of information
from any persons or entities. The Commission is not amending any
reporting requirements related to the Inter-Affiliate Exemption in this
final rule. The reporting requirement and collection of information
related to the Inter-Affiliate Exemption, under Commission regulations
50.52(c) and (d), has been assigned control number 3038-0104 by OMB and
will continue to be reviewed periodically.
C. Cost-Benefit Considerations
1. Statutory and Regulatory Background
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 or issuing certain orders. 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; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations (collectively referred to herein as the Section 15(a)
Factors). The Commission considers the costs and benefits resulting
from its discretionary determination to adopt this final rulemaking
with respect to each of the Section 15(a) Factors below.
The regulatory baseline for the Commission's consideration of the
costs and benefits of this final rule is the regulatory status quo. The
regulatory status quo is determined by the Commission's existing
regulations governing the Clearing Requirement and the Inter-Affiliate
Exemption in part 50 of the Commission's regulations. The Commission
recognizes, however, that to the extent that market participants have
relied upon relevant Commission staff no-action relief, the actual
costs and benefits of this final rule, as realized in the market, may
not be as significant. For example, the Alternative Compliance
Frameworks in current Commission regulation 50.52 expired on March 11,
2014. As a practical matter, market participants have continued to
comply with the Inter-Affiliate Exemption using the Alternative
Compliance Frameworks because a series of staff no-action letters
stated that staff would not recommend that the Commission commence an
enforcement action against entities using the Alternative Compliance
Frameworks. Thus, the costs and benefits considered below are likely to
be different than those faced by a current swap counterparty electing
the Inter-Affiliate Exemption.
The Commission notes that the consideration of costs and benefits
[[Page 44178]]
below is based on the understanding that the markets function
internationally, with many transactions involving U.S. 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 the amended regulations, 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 U.S. commerce
under section 2(i) of the CEA.\35\ In particular, the Commission notes
that a significant number of entities affected by this final rule are
located outside of the United States.
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\35\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------
The Commission sought comments on all aspects of the cost and
benefit considerations in the Proposal. In particular, the Commission
requested that commenters provide any data or other information that
would be useful in quantifying costs and benefits of the Proposal. The
Commission also requested specific comments on two alternatives
considered by the Commission: (i) Adopting modified Alternative
Compliance Frameworks including expiration dates; and (ii) making no
amendments to the Outward-Facing Swaps Condition. The Commission
received no comments in response to the Proposal that discussed cost
and benefit considerations. Despite this fact, the Commission has
endeavored to assess the costs and benefits of the amendments adopted
by this final rule in quantitative terms wherever possible.
In the sections that follow, the Commission considers the costs and
benefits of adopting this final rule, and the impact on the Section
15(a) Factors of adopting the final rule.
2. Considerations of the Costs and Benefits of the Commission's Action
a. Costs
The Commission believes that there will be some costs associated
with adopting the final rule, as compared to the regulatory baseline.
Under this final rule, eligible affiliate counterparties could increase
their counterparty credit risk by electing to comply with one of the
Alternative Compliance Frameworks instead of choosing to clear any
outward-facing swap. Clearing, along with the Commission's requirements
related to swap clearing, mitigates counterparty credit risk in the
following ways: (1) A futures commission merchant guarantees the
performance of a customer and in so doing, takes steps to monitor and
mitigate the risk of a counterparty default; (2) a clearinghouse
collects sufficient initial margin to cover potential future exposures
and regularly collects and pays variation margin to cover current
exposures; (3) a clearinghouse has rules, and enforcement mechanisms to
ensure the rules are followed, to mark a swap to market and to require
that margin be posted in a timely fashion; (4) a clearinghouse
facilitates netting within portfolios of swaps and among
counterparties; and (5) a clearinghouse holds collateral in a guaranty
fund in order to mutualize the remaining tail risk not covered by
initial margin contributions among clearing members.\36\ The risk-
mitigating benefits of clearing outward-facing swaps will not be
realized if the affiliated counterparties elect to use the Alternative
Compliance Frameworks. This final rule may produce a marginal increase
in systemic risk and related costs because certain outward-facing swaps
that were required to be cleared may now remain uncleared as long as
the affiliated counterparties exchange variation margin daily under the
Alternative Compliance Frameworks.
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\36\ See Clearing Requirement Determination Under Section 2(h)
of the CEA for Interest Rate Swaps, 81 FR 71230 (Oct. 14, 2016).
---------------------------------------------------------------------------
Moreover, there may be an increased risk of contagion and systemic
risk to the financial system that results from permitting additional
market participants to use the Alternative Clearing Frameworks to avoid
clearing certain swaps subject to the Clearing Requirement. Swap
clearing mitigates risk on a transaction level, as outlined above, and
it also provides protection against risk transfer throughout the
financial system. While counterparty credit risk between affiliated
entities represents a slightly lower risk to the overall financial
system than counterparty credit risk between non-affiliated entities,
it is still the case that clearing provides the most complete
protection against counterparty credit risk. Systemic risk, and the
costs associated with it, is minimized to the extent that affiliated
counterparties exchange variation margin as a condition to the
Alternative Compliance Frameworks.\37\
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\37\ Requiring counterparties to exchange variation margin daily
is one effective risk management tool that prevents swap market
participants from accumulating uncollateralized risk.
---------------------------------------------------------------------------
Swap market participants could experience overall increases in the
costs of clearing under the final rule. Fewer entities may choose to
clear swaps in order to comply with the Outward-Facing Swaps Condition
once the Alternative Compliance Frameworks are available.\38\ Certain
entities that had become members of a clearinghouse to clear outward-
facing swaps may no longer need those relationships. The decrease in
clearing activity could result in decreased liquidity in non-U.S.
markets and at clearinghouses where eligible counterparties previously
cleared outward-facing swaps. Collectively, these changes could make
clearing swaps more expensive in those less liquid markets.
---------------------------------------------------------------------------
\38\ As a practical matter, many market participants relied on
Commission staff no-action relief to comply with the Outward-Facing
Swaps Condition through modified alternative compliance frameworks.
However, for purposes of this analysis of costs, the Commission
assumes that the Alternative Compliance Frameworks have expired.
---------------------------------------------------------------------------
Finally, the availability of the modified Alternative Compliance
Frameworks may increase costs to any third party creditor of an entity
using an Alternative Compliance Framework instead of clearing its
outward-facing swaps. While the variation margin requirements under the
Alternative Compliance Frameworks mitigate the buildup of credit risk
within a corporate group that uses a centralized risk management
structure, it is still possible that requiring affiliated
counterparties to exchange variation margin instead of clearing
outward-facing swaps could produce additional risk to external
creditors and/or third parties. As noted above, clearing provides the
most complete protection against counterparty credit risk, even though
that risk, when it is between affiliated entities, represents a
slightly lower risk to the overall financial system than when between
non-affiliates.
In addition, the combination of reinstating the Alternative
Compliance Frameworks while expanding the number of jurisdictions
excluded from the five percent limitation may cause market participants
to alter their swaps trading behavior. To the extent that affiliated
entities under current requirements face a choice between clearing the
outward-facing swap and satisfying some other exception or exemption
from the Clearing Requirement, they may have a different internal
calculation under the final rule
[[Page 44179]]
for determining whether to engage in a swap or shift risk among
affiliated entities depending on whether the swap would cause it to
exceed the five percent test under new Commission regulation
50.52(b)(4)(iii). The new limitations and geographical restrictions in
the final rule may incentivize affiliated entities to transition their
swaps to counterparties located in swaps markets which do not have
local clearing mandates or well-developed clearing infrastructures.
Swaps entered into with counterparties in those locations may pose
higher systemic risks and costs related to those risks could increase.
b. Benefits
The Commission believes that there will be significant benefits
associated with adopting this final rule, as compared to the regulatory
baseline. The final rule amendments to Commission regulation 50.52 will
permit eligible affiliate counterparties to use the Alternative
Compliance Frameworks. Swap counterparties will benefit from this
additional flexibility in their inter-affiliate swap risk management.
In addition to this qualitative benefit, the Commission expects that
there will be cost saving benefits for certain entities as well.
Affiliated counterparties that elect to comply with one of the
Alternative Compliance Frameworks and exchange variation margin may
experience cost savings if their variation margining practices are less
expensive than clearing the outward-facing swap. The costs of clearing
an outward-facing swap would include initial margin (paid to either a
futures commission merchant or the clearinghouse) and clearing fees.
This final rule does not specify the methods or calculations required
for affiliated entities exchanging variation margin daily on all swaps
with other eligible affiliate counterparties. Therefore, the level of
these cost savings may differ from entity to entity, and from swap to
swap.
Certain corporate entities might be incentivized by the new
availability of the Alternative Compliance Frameworks to increase their
inter-affiliate swap activity (or to start entering into swaps between
affiliates). An increase in inter-affiliate swap activity between
eligible entities complying with the conditions to the Inter-Affiliate
Exemption could result in enhanced centralized risk management for
those entities. The availability of, and improvements to, centralized
risk management systems can produce long-term cost savings driven by
efficiency, resiliency, and stability. Entities that increase or start
to engage in inter-affiliate swaps may experience cost savings across
their swaps books because they can use inter-affiliate swap
transactions to shift swaps activity to the jurisdictions with more
liquid markets (resulting in lower costs).
As discussed in the Proposal, the Commission estimated the number
of entities that have used or potentially would use the Alternative
Compliance Frameworks adopted in this final rule under Commission
regulation 50.52(b)(4)(ii) and (iii).\39\ Since the Commission
published the Proposal, Commission staff continued to examine swap data
reported to the Depository Trust & Clearing Corporation's swap data
repository, DTCC Data Repository (U.S.) LLC. The Commission's most
recent data indicate that approximately 55 entities might elect to use
the revised Alternative Compliance Framework under Commission
regulation 50.52(b)(4)(ii) and as many as 16 entities might elect to
use the revised Alternative Compliance Framework under Commission
regulation 50.52(b)(4)(iii). Although historical data has limited
benefit in predicting future use, the Commission notes that the number
of entities that it estimates have used, or potentially would use, the
Alternative Compliance Frameworks is similar to the data the Commission
has collected in the past.
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\39\ See Exemption From the Swap Clearing Requirement for
Certain Affiliated Entities--Alternative Compliance Frameworks for
Anti-Evasionary Measures, 84 FR 70446, at 70454 and 70457 (Dec. 23,
2019).
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Besides the difficulty in determining which entities might use the
revised Alternative Compliance Frameworks, the estimate of the benefit
to each entity is further complicated by the differing costs and
capital structures related to each entity. Further, the Commission
realizes that there may be even higher numbers of entities in the
future that would benefit from this final rule and elect to satisfy the
requirements in the Alternative Compliance Framework rather than clear
an outward-facing swap.
3. Alternative of Allowing Eligible Affiliate Counterparties To Rely on
Comparability Determinations in Order To Satisfy Any Variation Margin
Requirements Under the Alternative Compliance Frameworks
The Commission considered the alternative of allowing eligible
affiliate counterparties to rely on comparability determinations to
satisfy the Alternative Compliance Frameworks. The Commission
understands that each non-U.S. jurisdiction may have different
requirements for inter-affiliate derivative transactions that are
customized to its own market structure and legal framework. The
Commission acknowledges this, and in conducting its comparability
determination uses a holistic, outcomes-based approach. The
Commission's comparability determinations do not require identical
margin rules, including affiliated variation margin requirements. The
variation margin required under the Alternative Compliance Frameworks
provides important risk-mitigating safeguards that protect market
participants and the public and are a sound risk management practice
that helps reduce the buildup of credit exposure between affiliates.
The design of the Commission's variation margin requirements under the
Alternative Compliance Framework is to guard against evasion of the
Clearing Requirement and the transmission of losses back to the United
States. Thus, the Commission will not apply its comparability
determinations to the variation margin requirements under revised
Commission regulation 50.52(b)(4).
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
In revising the Outward-Facing Swaps Condition and Alternative
Compliance Frameworks, the Commission considered various ways to
appropriately protect affiliated entities, third parties in the swaps
market, and the public. The Commission seeks to ensure that the final
rule prevents swap market participants from evading the Commission's
Clearing Requirement and/or transferring excessive risk to an
affiliated U.S. entity through the use of uncleared inter-affiliate
swaps. The Commission is permitting eligible affiliate counterparties
to elect not to clear an outward-facing swap subject to the Clearing
Requirement, but only if eligible affiliates pay and collect daily
variation margin on swaps.
The Commission also considered the potential effects on the public
of providing this alternative to clearing outward-facing swaps subject
to the Clearing Requirement. In particular, the Commission considered
the extent to which the Alternative Compliance Frameworks might result
in fewer affiliated counterparties clearing their outward-facing swaps.
One difficulty in estimating the effect of this final rule is the fact
that the application of mandatory clearing and the availability of
central clearing for particular types of swaps vary by jurisdiction.
Also, many market participants enter into swaps
[[Page 44180]]
and other financial instruments in multiple jurisdictions, which may
give them the ability to adjust their financial and risk management
activity in response to variations in regulatory requirements.
In the face of this uncertainty, the Commission believes that, even
if the change in clearing activity and business for clearinghouses is
uncertain, there may be a significant number of affiliated
counterparties that will continue to engage in swaps activity permitted
under the Alternative Compliance Frameworks.\40\ The Commission
understands that the swap dealers conduct their swaps activities using
affiliates in various jurisdictions. Swap dealers engage in inter-
affiliate swaps in order to distribute risk among their affiliates.
Thus, inter-affiliate swaps are an important part of prudent risk
management, and a significant number of swap dealers and other market
participants engage in inter-affiliate swaps. This inter-affiliate
swaps activity is subject to a range of regulatory and other controls.
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\40\ Based on a recent review of swap data reflecting use of the
Inter-Affiliate Exemption, the Commission estimates that over 70
eligible affiliate counterparties located outside of the United
States may elect to comply with one of the reinstated Alternative
Compliance Frameworks thereby choosing not to clear their outward-
facing swaps and rather to pay and collect variation margin on all
swaps with other eligible affiliate counterparties instead. These
entities include affiliates of swap dealers that are active in
multiple jurisdictions.
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In considering how the final rule would affect the protection of
market participants and the public, the Commission took into account
the value of inter-affiliate swaps as a risk management tool and the
extent to which the Alternative Compliance Frameworks would foster this
use of inter-affiliate swaps. The Commission also considered potential
increases in systemic risk if affiliates elect not to clear outward-
facing swaps and use the Alternative Compliance Frameworks instead. In
view of these factors, the Commission believes that the potential
increases in systemic risk will be mitigated by the controls on the use
of inter-affiliate swaps, their inherent risk management features, and
the conditions set out in the Alternative Compliance Frameworks.
This final rule also would create certain costs that would be borne
by entities electing the Inter-Affiliate Exemption. Under revised
Commission regulation 50.52, entities that choose to comply with an
Alternative Compliance Framework would be required to pay and collect
variation margin on their inter-affiliate swaps, which could be a
significant cost for those entities. However, an entity electing the
Inter-Affiliate Exemption may continue to choose to clear an outward-
facing swap with an unaffiliated counterparty instead of paying and
collecting variation margin on all swaps with other eligible affiliate
counterparties. Therefore, affected entities are free to choose which
of these alternatives is best for them.
b. Efficiency, Competitiveness, and Financial Integrity of Swap Markets
The Commission believes that the amendments to the Inter-Affiliate
Exemption may have some, but not a significant, impact on the
efficiency or competiveness of swaps markets. As noted above, inter-
affiliate swaps are an important risk management tool for affiliated
corporate groups. To the extent that swap dealers may participate more
extensively in swap markets in non-U.S. jurisdictions because they can
use inter-affiliate swaps to manage risk efficiently, the amendments to
the Inter-Affiliate Exemption may increase the efficiency,
competitiveness, and financial integrity of swap markets by increasing
the range of swaps that are available to market participants. The
Commission also believes that the revised Outward-Facing Swaps
Condition and Alternative Compliance Frameworks should discourage
misuse of the Inter-Affiliate Exemption. For example, the Commission
recognizes that internal calculations and swaps portfolio management
are required to comply with the five percent test under Commission
regulation 50.52(b)(4)(iii). If the Commission had not expanded the
list of non-U.S. jurisdictions in which an affiliated counterparty may
be located for purposes of Commission regulation 50.52(b)(4)(ii),
entities may have failed to appropriately calculate the permissible
limits under the five percent test under Commission regulation
50.52(b)(4)(iii). Aligning the scope of jurisdictions included in the
Alternative Compliance Frameworks with the jurisdictions for which the
domestic currency is subject to the Commission's Clearing Requirement
may help to make these calculations and compliance with the provisions
easier. This part of the final rule should promote the financial
integrity of swap markets and financial markets as a whole.
c. Price Discovery
Under Commission regulation 43.2, a ``publicly reportable swap
transaction,'' means, among other things, any executed swap that is an
arms'-length transaction between two parties that results in a
corresponding change in the market risk position between the two
parties.\41\ The Commission generally believes that non-arms'-length
swaps do not contribute to price discovery in the markets, as they are
not publically reported.\42\ Given that inter-affiliate swaps as
defined in this final rule are usually not arms'-length transactions,
the Commission believes that these amendments to the Inter-Affiliate
Exemption will not have a significant effect on price discovery.\43\
However, if the availability of the Alternative Compliance Frameworks
reduces the use of outward-facing swaps, which may or may not be
publicly reported depending on the jurisdiction, there could be a
negative impact on price discovery when outward-facing swaps would
otherwise be publically reported.
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\41\ Commission regulation 43.2. See also Real-Time Public
Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9, 2012).
\42\ Transactions that fall outside the definition of ``publicly
reportable swap transaction''--that is, transactions that are not
arms-length--``do not serve the price discovery objective of CEA
section 2(a)(13)(B).'' Real-Time Public Reporting of Swap
Transaction Data, 77 FR 1182, at 1195 (Jan. 9, 2012). See also id.
at 1187 (discussing ``Swaps Between Affiliates and Portfolio
Compression Exercises''), and also Clearing Exemption for Swaps
Between Certain Affiliated Entities, 78 FR 21750, at 21780 (Apr. 11,
2013).
\43\ The definition of ``publicly reportable swap transaction''
identifies two examples of transactions that fall outside the
definition, including internal swaps between one-hundred percent
owned subsidiaries of the same parent entity. Commission regulation
43.2 (adopted by Real-Time Public Reporting of Swap Transaction
Data, 77 FR 1182, at 1244 (Jan. 9, 2012)). The Commission notes that
the list of examples is not exhaustive.
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d. Sound Risk Management Practices
The conditions of the Inter-Affiliate Exemption do not eliminate
the possibility that risk may impact an entity, its affiliates, and
counterparties of those affiliates.\44\ Without clearing a swap to
mitigate the transmission of risk among affiliates, the risk that any
one affiliate takes on through its swap transactions, and any contagion
that may result through that risk, increases. This makes the risk
mitigation requirements for outward-facing swaps more important as risk
can be transferred more easily between affiliates.
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\44\ The Commission notes that even in the absence of required
clearing or margin requirements for swaps between certain affiliated
entities, such entities may choose to use initial and variation
margin to manage risks that could otherwise be transferred from one
affiliate to another. Similarly, third parties that have entered
into swaps with affiliates also may include variation margin
requirements in their swap agreements.
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Exempting certain inter-affiliate swaps from the Clearing
Requirement creates additional counterparty
[[Page 44181]]
exposure for affiliates.\45\ DCOs have many tools to mitigate risks.
This increased counterparty credit risk among affiliates may increase
the likelihood that a default of one affiliate could cause significant
losses in other affiliated entities. If the default causes other
affiliated entities to default, third parties that have entered into
uncleared swaps or other agreements with those entities also could be
affected.
---------------------------------------------------------------------------
\45\ Clearing Exemption for Swaps Between Certain Affiliated
Entities, 78 FR 21750, at 21780-21781 (Apr. 11, 2013).
---------------------------------------------------------------------------
In 2013, when the Commission finalized the Inter-Affiliate
Exemption, it assessed the risks of inter-affiliate swaps and stated
that the partial internalization of costs among affiliated entities,
combined with the documentation, risk management, reporting, and
treatment of outward-facing swaps requirements for electing the
exception, would mitigate some of the risks associated with uncleared
inter-affiliate swaps.\46\ However, the Commission indicated that these
mitigants are not a perfect substitute for the protections that would
otherwise be provided by clearing, or by a requirement to use more of
the risk management tools that a clearinghouse uses to mitigate
counterparty credit risk (i.e., both initial and variation margin,
futures commission merchants monitoring the credit risk of customers,
clearing member contributions to default funds, etc.).\47\
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\46\ Id.
\47\ Id. at 21778.
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e. Other Public Interest Considerations
The Commission has identified no other public interest
considerations.
D. Antitrust Considerations
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
objectives of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of the CEA.\48\ The Commission believes that the
public interest to be protected by the antitrust laws is generally to
protect competition. The Commission requested comments on whether the
Proposal implicated any other specific public interest to be protected
by the antitrust laws and received no comments.
---------------------------------------------------------------------------
\48\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission has considered this final rule to determine whether
it is anticompetitive and has identified no anticompetitive effects.
The Commission requested comment on whether the Proposal was
anticompetitive and, if it was, what the anticompetitive effects were,
and received no comments.
Because the Commission has determined that the final rule is not
anticompetitive and has no anticompetitive effects, the Commission has
not identified any less anticompetitive means of achieving the purposes
of the CEA.
List of Subjects in 17 CFR Part 50
Business and industry, Clearing, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 50 as set forth below:
PART 50--CLEARING REQUIREMENT AND RELATED RULES
0
1. The authority citation for part 50 is revised to read as follows:
Authority: 7 U.S.C. 2(h), and 7a-1 as amended by Pub. L. 111-
203, 124 Stat. 1376.
0
2. Amend Sec. 50.52 by:
0
a. Revising paragraphs (a)(2)(i) and (ii);
0
b. Adding paragraph (a)(2)(iii); and
0
c. Revising paragraph (b)(4).
The revisions and additions read as follows:
Sec. 50.52 Exemption for swaps between affiliates.
(a) * * *
(2) * * *
(i) A counterparty or third party directly or indirectly holds a
majority ownership interest if it directly or indirectly holds a
majority of the equity securities of an entity, or the right to receive
upon dissolution, or the contribution of, a majority of the capital of
a partnership;
(ii) The term ``eligible affiliate counterparty'' means an entity
that meets the requirements of this paragraph; and
(iii) The term ``United States'' means the United States of
America, its territories and possessions, any State of the United
States, and the District of Columbia.
(b) * * *
(4)(i) Subject to paragraphs (b)(4)(ii) and (iii) of this section,
each eligible affiliate counterparty that enters into a swap, which is
included in a class of swaps identified in Sec. 50.4, with an
unaffiliated counterparty shall:
(A) Comply with the requirements for clearing the swap in section
2(h) of the Act and this part;
(B) Comply with the requirements for clearing the swap under a
foreign jurisdiction's clearing mandate that is comparable, and
comprehensive but not necessarily identical, to the clearing
requirement of section 2(h) of the Act and this part, as determined by
the Commission;
(C) Comply with an exception or exemption under section 2(h)(7) of
the Act or this part;
(D) Comply with an exception or exemption under a foreign
jurisdiction's clearing mandate, provided that:
(1) The foreign jurisdiction's clearing mandate is comparable, and
comprehensive but not necessarily identical, to the clearing
requirement of section 2(h) of the Act and this part, as determined by
the Commission; and
(2) The foreign jurisdiction's exception or exemption is comparable
to an exception or exemption under section 2(h)(7) of the Act or this
part, as determined by the Commission; or
(E) Clear such swap through a registered derivatives clearing
organization or a clearing organization that is subject to supervision
by appropriate government authorities in the home country of the
clearing organization and has been assessed to be in compliance with
the Principles for Financial Market Infrastructures.
(ii) If one of the eligible affiliate counterparties is located in
Australia, Canada, the European Union, Hong Kong, Japan, Mexico,
Singapore, Switzerland, or the United Kingdom and each eligible
affiliate counterparty, or a third party that directly or indirectly
holds a majority interest in both eligible affiliate counterparties,
pays and collects full variation margin daily on all of the eligible
affiliate counterparties' swaps with other eligible affiliate
counterparties, the requirements of paragraph (b)(4)(i) of this section
shall be satisfied.
(iii) If an eligible affiliate counterparty located in the United
States enters into swaps, which are included in a class of swaps
identified in Sec. 50.4, with eligible affiliate counterparties
located in jurisdictions other than Australia, Canada, the European
Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, the United
Kingdom, or the United States, and the aggregate notional value of such
swaps, which are included in a class of swaps identified in Sec. 50.4,
does not exceed five percent of the aggregate notional value of all
swaps, which are included in a class of swaps identified in Sec. 50.4,
in each instance the notional value as measured
[[Page 44182]]
in U.S. dollar equivalents and calculated for each calendar quarter,
entered into by the eligible affiliate counterparty located in the
United States, then the requirements of paragraph (b)(4)(i) of this
section shall be satisfied when each eligible affiliate counterparty,
or a third party that directly or indirectly holds a majority interest
in both eligible affiliate counterparties, pays and collects full
variation margin daily on all of the eligible affiliate counterparties'
swaps with other eligible affiliate counterparties.
* * * * *
Issued in Washington, DC, on June 29, 2020, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Exemption From the Swap Clearing Requirement for Certain
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures--Commission Voting Summary, Chairman's Statement,
and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Supporting Statement of Chairman Heath P. Tarbert
I am pleased to support our final rule codifying the alternative
compliance framework for the Commission's inter-affiliate swap
clearing exemption, which has been in place via the CFTC's staff no-
action relief since 2014. As I previously stated in connection with
the proposed rule, codifying this relief is good policy and good
government.\1\
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\1\ Statement of Chairman Heath P. Tarbert: ``Tripling Down on
Transparency'' n.12 (Dec. 10, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement121019.
---------------------------------------------------------------------------
From a policy perspective, the rule advances the goals of our
swap clearing requirements by making anti-evasionary provisions of
the inter-affiliate exemption workable for cross-border corporate
groups. Stepping back for a moment and looking at the bigger
picture, our clearing and initial margin requirements are meant to
address counterparty credit risk. These measures generally are not
appropriate for credit exposures between members of a single
corporate group, where risk is managed internally on a centralized
basis.\2\
---------------------------------------------------------------------------
\2\ See Clearing Exemption for Swaps Between Certain Affiliated
Entities, 78 FR 21750, 21753 (Apr. 11, 2013) (justifying the inter-
affiliate clearing exemption in view of incentives to avoid
defaulting to affiliates and the common practice of centralized risk
allocation decisions and default remedies, which reduce inter-
affiliate default risk).
---------------------------------------------------------------------------
However, the CFTC has long been concerned that U.S. entities may
misuse the inter-affiliate exemption to evade the clearing
requirements more generally. For example, a U.S. entity may use
back-to-back swaps to interpose a non-U.S. affiliate in the middle
of the U.S. entity's trade with a non-U.S. counterparty, where the
non-U.S. affiliate and counterparty are in jurisdictions that do not
have mandatory clearing regimes comparable to the Commission's. In
this way, the U.S. entity could improperly circumvent the clearing
obligations that would apply if it were trading directly with the
non-U.S. counterparty (because it would be exempted from clearing
the trade with its non-U.S. affiliate, and the non-U.S. affiliate's
back-to-back trade with the non-U.S. counterparty could fall outside
U.S. clearing requirements).
This evasion concern was particularly acute in the early years
of the CFTC's clearing regime, when a number of other jurisdictions
had yet to implement their own clearing requirements in accordance
with the G20 commitments at the 2009 Pittsburgh Summit. Moreover,
section 2(h)(4)(A) of the Commodity Exchange Act requires us to
prescribe rules to prevent evasion of the clearing requirement.
Accordingly, as an anti-evasionary measure, the Commission required
members of a corporate group taking advantage of the inter-affiliate
exemption to clear their outward-facing swaps if such swaps would be
clearing-mandated under CFTC rules, regardless whether the parties
to the outward-facing swap were in fact subject to such rules.\3\
---------------------------------------------------------------------------
\3\ 17 CFR 50.52(b)(4).
---------------------------------------------------------------------------
The ``clearing outward-facing swaps'' condition to the inter-
affiliate exemption is unworkable for many market participants,
however, because of inter-jurisdictional mismatches in clearing
requirements and infrastructures. Accordingly, the CFTC's staff no-
action relief has extended the rule's time-limited alternative
compliance framework allowing affiliates to exchange variation
margin in lieu of clearing outward-facing swaps.\4\
---------------------------------------------------------------------------
\4\ CFTC Letter No. 17-66 (Dec. 14, 2017), https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm; see also previously
granted relief under CFTC Letter Nos. 14-135 (Nov. 7, 2014), 15-63
(Nov. 17, 2015), 16-81 (Nov. 28, 2016), and 16-84 (Dec. 15, 2016).
CFTC Letter No. 17-66 expires on the earlier of (i) December 31,
2020 at 11:59 p.m. (Eastern Time); or (ii) the effective date of
amendments to Commission regulation 50.52.
---------------------------------------------------------------------------
This alternative compliance option has allowed cross-border
corporate groups to attain the risk-mitigating benefits of inter-
affiliate swaps,\5\ while complying with important anti-evasion
measures in a way that is practicable for their global business.
Indeed, the CFTC staff's review of recent swap data indicates that
over 70 eligible affiliate counterparties located outside the United
States rely on the alternative compliance framework under the
available staff no-action relief. By codifying this relief, we are
providing the swaps market with clarity, certainty, and
transparency--consistent with the CFTC's mission, core values, and
strategic objectives.\6\ I commend my fellow Commissioners and the
CFTC's staff for working to finalize the rule before us today, and I
look forward to further efforts to advance these principles and
goals in the near future.
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\5\ See 78 FR at 21754 (citing to commenters and the 2012 inter-
affiliate exemption notice of proposed rulemaking in support of the
conclusion that ``inter-affiliate transactions provide an important
risk management role within corporate groups'' and that ``swaps
entered into between corporate affiliates, if properly risk-managed,
may be beneficial to the entity as a whole'').
\6\ See Draft CFTC 2020-2024 Strategic Plan, 85 FR 29,935 (May
19, 2020), https://www.govinfo.gov/content/pkg/FR-2020-05-19/pdf/2020-10676.pdf.
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Appendix 3--Supporting Statement of Commissioner Brian Quintenz
I support today's final rule providing legal certainty to swap
counterparties electing the inter-affiliate exemption from the
Commission's requirement that certain interest rate swaps and credit
default swaps be cleared. At issue is an important condition of the
exemption that reduces the likelihood that uncollateralized
exposures can build up at a U.S. swap participant.\1\ I support the
policy, made permanent by today's rule, that permits variation
margin to be exchanged by affiliated counterparties in lieu of
clearing swaps with foreign counterparties. This provision
appropriately balances an anti-evasionary measure with providing
flexibility to market participants. The provision has functioned
well since 2013, and it is appropriate to make the provision
permanent after several extensions of the no-action relief.\2\
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\1\ CFTC regulation 50.52(b)(4)(ii)-(iii) (17 CFR
50.52(b)(4)(ii)-(iii)).
\2\ CFTC Letters 14-135, 15-63, 16-81, 16-84, and 17-66.
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I would like to highlight that today's final rule acknowledges
that five additional jurisdictions have enacted swap clearing
requirements since the first version of this rule was issued in
2013.\3\ Today's rule therefore serves as another example of the
Commission appropriately deferring to foreign regulatory regimes in
order to reduce compliance burdens and promote market liquidity
internationally.
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\3\ The first version of the rule had permitted, until 2014,
unlimited variation margining when an affiliate was located in the
E.U., Japan, and Singapore. Today's version expands the list of
eligible jurisdictions to include Australia, Canada, Hong Kong,
Mexico, Switzerland, as well as the U.K.
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Not only do I support today's final rule because it makes a
sound policy permanent, but also because it codifies no-action
relief that has proven workable for market participants. Codifying
no-action relief makes the Commission's regulatory framework more
transparent and simplifies compliance. I would support continuing to
codify other no-action relief, for example with respect to providing
relief from the trade execution requirement for a swap exempted from
the clearing requirement.\4\
---------------------------------------------------------------------------
\4\ CFTC Letter 17-67, proposed to be codified by the
Commission's 2018 proposed revised rules for swap execution
facilities, 83 FR 61,946 (Nov. 30, 2018).
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[[Page 44183]]
Finally, I would like to thank the staff of DCR for their
diligence in completing this rulemaking.
Appendix 4--Concurring Statement of Commissioner Rostin Behnam
I support today's adoption of amendments to the exemption from
the swap clearing requirement for certain affiliated entities within
a corporate group. The amendments that update the conditions for the
exemption incorporate several years of observation and analysis to
build upon its utility within the global regulatory landscape, while
affirming the Commission's appropriate use of its public interest
authority under section 4(c) of the Commodity Exchange Act. It can
be tempting to use somewhat fluid and undeniably desirable
objectives such as the promotion of responsible economic and
financial innovation and fair competition to support all manner of
regulatory changes. And I have not hesitated to highlight my own
concerns for the imprudent use of 4(c) exemptive authority. However,
I am pleased that when it comes to the risks associated with U.S
firms entering into uncleared swaps with non-U.S. affiliates or
evading the clearing requirement altogether, the Commission has
consistently demonstrated that its reliance on the 4(c) authority
provides the checks to ensure that the policy and outcomes remain
legally sound and rational.
I support today's final rule, as I did the proposal, because it
provides legal certainty, benefits from careful analysis and
consideration of the data as well as the global regulatory landscape
as it has developed, and leaves in place critical tools for
Commission monitoring, oversight, and enforcement.\1\ However, I am
mindful that guardrails put firmly in place by today's amendments as
a substitute for clearing outward-facing swaps may produce
additional risk to external creditors and/or third parties, and that
there may be an increased likelihood of risk to the financial system
resulting from the availability of the exemption. While I encouraged
interested parties to comment on this aspect of the exemption--the
alternative compliance framework--the Commission did not receive any
responsive comments.\2\ Without comments, the Commission's findings
and conclusions remain neither vigorously supported nor expressly
undermined, and we will continue to discharge our regulatory
responsibilities, remaining quick to respond as we closely monitor
the data and global regulatory developments to ensure that the
exemption does not add unnecessary and preventable risk to the U.S.
financial system.
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\1\ Exemption from the Swap Clearing Requirement for Certain
Affiliated Entities, 84 FR 70446, 70460-1 (proposed Dec. 23, 2019).
\2\ Id. at 70461.
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I thank staff from the Division of Clearing and Risk for their
thoughtful responses to my questions, and for making edits that
reflect my comments and suggestions.
Appendix 5--Statement of Commissioner Dan M. Berkovitz
I support today's final rule making permanent the alternative
compliance frameworks for certain swaps involving the foreign
affiliates of U.S. firms and their non-U.S. counterparties. The
final rule upholds the Dodd-Frank Act's clearing mandate, deters
evasion, and protects against systemic risk from swaps executed
overseas by foreign affiliates. The final rule, which adopts the
rule as proposed,\1\ codifies existing practice and addresses anti-
evasion provisions governing inter-affiliate swaps that the
Commission first issued in 2013 and later extended through staff no-
action letters.
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\1\ Exemption From the Swap Clearing Requirement for Certain
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 84 FR 70446 (Dec. 23, 2019).
---------------------------------------------------------------------------
Commission regulations provide a limited, conditional ``Inter-
Affiliate Exemption'' from clearing for swaps between certain
affiliate counterparties, including U.S. firms and their foreign
affiliates. Notably, the Inter-Affiliate Exemption includes an
important ``Outward-Facing Swaps Condition'' to prevent U.S. firms
from routing swaps through foreign affiliates to evade the
Commission's clearing requirement.\2\ The Outward-Facing Swaps
Condition allows outward-facing swaps to be cleared pursuant to a
comparable and comprehensive foreign clearing regime.
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\2\ The Outward-Facing Swaps Condition requires the foreign
affiliates of U.S. firms to clear their outward-facing swaps if such
swaps are subject to the Commission's clearing requirement and
entered into with unaffiliated counterparties in foreign
jurisdictions.
---------------------------------------------------------------------------
Where the Commission has not made a comparability determination,
the alternative compliance frameworks permit the foreign affiliate
to exchange full, daily variation margin for the swap with its U.S.
affiliate or its non-U.S. counterparty, rather than clearing the
outward-facing swap. The alternative compliance frameworks preserve
the competitiveness of the foreign affiliates of U.S. firms without
importing significant risks into the U.S. Today's final rule makes
the alternative compliance frameworks permanent, with certain
modifications.\3\
---------------------------------------------------------------------------
\3\ The original alternative compliance frameworks expired in
2014, but have been repeatedly extended through no-action letters.
---------------------------------------------------------------------------
I support the final rule's emphasis on clearing, anti-evasion,
and systemic risk. The final rule also expands the jurisdictions
subject to one of the alternative compliance frameworks to include
additional jurisdictions that have adopted and implemented their
respective domestic clearing mandates. By extending and making
permanent the alternative compliance frameworks, the final rule
addresses the lack of comparability determinations for foreign
clearing regimes, while ensuring the continued operation of anti-
evasion and anti-systemic risk provisions in the Commission's rules.
I thank staff of the Division of Clearing and Risk for their
work on this final rule and for their effective cooperation with my
office.
[FR Doc. 2020-14390 Filed 7-21-20; 8:45 am]
BILLING CODE 6351-01-P