2020-23473
Federal Register, Volume 85 Issue 217 (Monday, November 9, 2020)
[Federal Register Volume 85, Number 217 (Monday, November 9, 2020)]
[Rules and Regulations]
[Pages 71246-71251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23473]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AF03
Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is adopting amendments to the margin requirements for
uncleared swaps for swap dealers (``SD'') and major swap participants
(``MSP'') for which there is not a prudential regulator (the ``CFTC
Margin Rule''). Specifically, the CFTC Margin Rule mandated the
collection and posting of variation margin and initial margin (``IM'')
under a phased compliance schedule extending from September 1, 2016, to
September 1, 2020. The Commission is hereby amending the compliance
schedule to further delay the compliance date for entities with smaller
average daily aggregate notional amounts (``AANA'') of swaps and
certain other financial products (the ``Smaller Portfolio Group'') from
September 1, 2021, to September 1, 2022, to avoid market disruption due
to the large number of entities being required to comply by September
1, 2021, as a result of the adoption of the interim final rule (``Final
Rule'').
DATES: This final rule is effective December 9, 2020.
FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, 202-418-
6056, [email protected]; Thomas J. Smith, Deputy Director, 202-418-
5495, [email protected]; Warren Gorlick, Associate Director, 202-418-
5195, [email protected]; or Carmen Moncada-Terry, Special Counsel, 202-
418-5795, [email protected], Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
Section 4s(e) of the Commodity Exchange Act (``CEA'') \1\ requires
the Commission to adopt rules establishing minimum initial and
variation margin requirements for all swaps \2\ that are (i) entered
into by an SD or MSP for which there is not a prudential regulator \3\
(collectively, ``covered swap entities'' or ``CSEs'') and (ii) not
cleared by a registered derivatives clearing organization (``uncleared
swaps'').\4\ To offset the greater risk to the SD \5\ or MSP \6\ and
the financial system arising from the use of uncleared swaps, these
requirements must (i) help ensure the safety and soundness of the SD or
MSP and (ii) be appropriate for the risk associated with the uncleared
swaps held by the SD or MSP.\7\
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\1\ 7 U.S.C. 6s(e) (capital and margin requirements).
\2\ CEA section 1a(47), 7 U.S.C. 1a(47) (swap definition);
Commission regulation 1.3, 17 CFR 1.3 (further definition of a
swap). A swap includes, among other things, an interest rate swap,
commodity swap, credit default swap, and currency swap.
\3\ CEA section 1a(39), 7 U.S.C. 1a(39) (defining the term
``prudential regulator'' to include the Board of Governors of the
Federal Reserve System; the Office of the Comptroller of the
Currency; the Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency). The
definition of prudential regulator further specifies the entities
for which these agencies act as prudential regulators. The
prudential regulators published final margin requirements in
November 2015. See generally Margin and Capital Requirements for
Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential
Margin Rule''). The Prudential Margin Rule is similar to the CFTC
Margin Rule, including with respect to the CFTC's phasing-in of
margin requirements, as discussed below.
\4\ CEA section 4s(e)(2)(B)(ii), 7 U.S.C. 6s(e)(2)(B)(ii). In
Commission regulation 23.151, the Commission further defined the
term uncleared swap to mean a swap that is not cleared by a
registered derivatives clearing organization or by a derivatives
clearing organization that the Commission has exempted from
registration as provided under the CEA. 17 CFR 23.151.
\5\ CEA section 1a(49), 7 U.S.C. 1a(49) (swap dealer
definition); Commission regulation 1.3 (further definition of swap
dealer).
\6\ CEA section 1a(32), 7 U.S.C. 1a(32) (major swap participant
definition); Commission regulation 1.3 (further definition of major
swap participant).
\7\ CEA section 4s(e)(3)(A), 7 U.S.C. 6s(e)(3)(A).
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The Basel Committee on Banking Supervision and the International
Organization of Securities Commissions (``BCBS/IOSCO'') established an
international framework for margin requirements for uncleared
derivatives in September 2013 (the ``BCBS/IOSCO Framework'').\8\ After
the establishment of the BCBS/IOSCO Framework, on January 6, 2016, the
CFTC, consistent with Section 4s(e), promulgated rules requiring CSEs
to collect and post initial and variation margin for uncleared
swaps,\9\ adopting the implementation schedule set forth in the BCBS/
IOSCO Framework, including the revised implementation schedule adopted
on March 18, 2015.\10\
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\8\ See generally BCBS and IOSCO, Margin requirements for non-
centrally cleared derivatives (Sept. 2013), https://www.bis.org/publ/bcbs261.pdf.
\9\ See generally Margin Requirements for Uncleared Swaps for
Swap Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
The CFTC Margin Rule, which became effective April 1, 2016, is
codified in part 23 of the Commission's regulations. 17 CFR 23.150-
23.159, 23.161. In May 2016, the Commission amended the CFTC Margin
Rule to add Commission regulation 23.160, 17 CFR 23.160, providing
rules on its cross-border application. See generally Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants--Cross-Border Application of the Margin Requirements,
81 FR 34818 (May 31, 2016).
\10\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (March 2015), https://www.bis.org/bcbs/publ/d317.pdf.
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In July 2019, BCBS/IOSCO further revised the framework to extend
the implementation schedule to September 1, 2021.\11\ Consistent with
this revision to the international framework, the Commission
promulgated the April 2020 Final Rule,\12\ which amended the
[[Page 71247]]
compliance schedule for the IM requirements under the CFTC Margin Rule
by splitting the last phase of compliance into two compliance phases
beginning on September 1, 2020, and September 1, 2021,
respectively.\13\
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\11\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (July 2019), https://www.bis.org/bcbs/publ/d475.pdf (``2019 BCBS/IOSCO Margin Framework'').
\12\ On April 9, 2020, the Commission published in the Federal
Register a final rule extending the September 1, 2020 compliance
date by one year to September 1, 2021, for the Smaller Portfolio
Group, which were required to comply with IM requirements in the
last phase of compliance, to reduce the potential market disruption
that could result from the large number of entities that would come
into the scope of compliance on September 1, 2020, absent the
amendment of the compliance schedule (``April 2020 Final Rule'').
\13\ See generally Margin Requirements for Uncleared Swaps for
Swap Dealers and Major Swap Participants, 85 FR 19878 (April 9,
2020).
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The World Health Organization declared the coronavirus disease 2019
(``COVID-19'') outbreak a global pandemic on March 11, 2020.\14\ On
March 13, 2020, President Donald J. Trump declared a national emergency
due to the COVID-19 pandemic.\15\ The disease has impacted individuals
across the world and severely disrupted domestic and international
business, and adversely impacted the global economy.
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\14\ WHO Director-General's opening remarks at the media
briefing on COVID-19 (March 11, 2020), https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020.
\15\ Proclamation on Declaring a National Emergency Concerning
the Novel Coronavirus Disease (COVID-19) Outbreak (March 13, 2020),
https://www.whitehouse.gov/presidential-actions/proclamation-declaring-national-emergency-concerning-novel-coronavirus-disease-covid-19-outbreak/.
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In response to significant concerns regarding the COVID-19
outbreak, BCBS/IOSCO decided to amend its margin policy framework to
further extend the implementation schedule for the margin requirements
for non-centrally cleared derivatives by one year.\16\ BCBS/IOSCO, in a
joint statement, stated that the extension would provide additional
operational capacity for firms to respond to the immediate impact of
COVID-19 and at the same time facilitate firms' diligent efforts to
comply with the requirements by the revised deadlines.\17\
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\16\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (April 2020), https://www.bis.org/bcbs/publ/d499.htm (``2020 BCBS/IOSCO Margin Framework'') and Press
Release, April 3, 2020, https://www.bis.org/press/p200403a.htm
(``April 2020 BCBS/IOSCO Press Release'').
\17\ Basel Committee and IOSCO announce deferral of final
implementation phases of the margin requirements for non-centrally
cleared derivatives (April 3, 2020), https://www.bis.org/press/p200403a.htm.
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After taking into consideration the revised BCBS/IOSCO
implementation schedule, in May 2020, the Commission amended the IM
compliance schedule for certain entities by one year (``IFR Extension
Group''), which otherwise would have been required to comply with the
IM requirements beginning on September 1, 2020, to extend the
compliance date to September 1, 2021.\18\ The Commission accomplished
this change by means of an interim final rule (``IFR'') \19\ in order
to address the immediate impact of the COVID-19 pandemic on the IFR
Extension Group in an expedited and timely manner; however, the
Commission did not extend the compliance date for the Smaller Portfolio
Group, which is still September 1, 2021, the same day as the revised
IFR Extension Group compliance date.
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\18\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 85 FR 41346 (July 10, 2020). A
Global Markets Advisory Committee (``GMAC'') subcommittee also
encouraged the adoption of the BCBS/IOSCO recommendation to extend
the implementation schedule given the circumstances brought about by
the COVID-19 pandemic. See Recommendations to Improve Scoping and
Implementation of Initial Margin Requirements for Non-Cleared Swaps,
Report to the CFTC's Global Markets Advisory Committee by the
Subcommittee on Margin Requirements for Non-Cleared Swaps, at 3 (May
2020), https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download. The GMAC adopted the
subcommittee's report and recommended to the Commission that it
consider adopting the report's recommendations. The GMAC
subcommittee was not tasked to respond to the COVID-19 pandemic.
Rather, its establishment pre-dates the pandemic's impact, and its
directive was to address the ongoing challenges involving the
implementation of the CFTC margin requirements during the last
stages of the compliance schedule. See CFTC Commissioner Stump
Announces New GMAC Subcommittee on Margin Requirements for Non-
Cleared Swaps (Oct. 28, 2019), https://www.cftc.gov/PressRoom/PressReleases/8064-19.
\19\ Subsequently, on July 10, 2020, to mitigate the operational
challenges faced by certain entities subject to the CFTC Margin Rule
as a result of the COVID-19 pandemic, the Commission published in
the Federal Register an interim final rule extending the September
1, 2020 compliance date for the IFR Extension Group to September 1,
2021.
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As a result of the IFR, the IFR Extension Group and the Smaller
Portfolio Group are effectively consolidated into one phase and will be
required to begin compliance at the same time on September 1, 2021. The
IFR Extension Group and the Smaller Portfolio Group will face the same
issues that the April 2020 Final Rule intended to address, including
the limited number of entities that provide IM required services. In
recognition of this concern, the Commission, after adopting the IFR
extending the IFR Extension Group compliance date to September 1, 2021,
approved a notice of proposed rulemaking to amend and extend the IM
compliance schedule for the Smaller Portfolio Group to September 1,
2022 (``Proposal'').\20\
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\20\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 85 FR 41463 (July 10, 2020).
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II. Final Rule
The Commission is adopting the Final Rule to amend the CFTC Margin
Rule to extend the compliance schedule for the IM requirements for the
Smaller Portfolio Group. As a result of this rule amendment, the
compliance date of September 1, 2021, applicable to the Smaller
Portfolio Group, will be delayed by one year, and entities in this
group will now be required to comply with the IM requirements in a
final sixth phase beginning on September 1, 2022. As stated in the
Proposal, the extension of the schedule for compliance with the IM
requirements is consistent with the 2020 BCBS/IOSCO Margin Framework
and similar action undertaken by the U.S. prudential regulators and the
Commission's international counterparts.\21\
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\21\ The U.S. prudential regulators (i.e., the Board of
Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, and the Office of the Comptroller of the
Currency) recently issued an interim final rule to revise their
margin compliance schedule consistent with the revised BCBS/IOSCO
implementation schedule. See Margin and Capital Requirements for
Covered Swap Entities, 85 FR 39464 (July 1, 2020). In addition, the
European Securities and Markets Authority (ESMA), the European
Banking Authority (EBA) and the European Insurance and Occupational
Pensions Authority (EIOPA), collectively known as the European
Supervisory Authorities (ESAs), submitted, for endorsement by the
European Commission, joint draft Regulatory Technical Standards
(RTS) proposing changes to the European Union margin rules to
effectively implement the 2020 BCBS/IOSCO Margin Framework's
implementation schedule revisions. See Final Report, EMIR RTS on
Various Amendments to the Bilateral Margin Requirements in View of
the International Framework (May 4, 2020), https://www.esma.europa.eu/sites/default/files/library/esas_2020_09_-_final_report_-_bilateral_margin_amendments.pdf.
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The Commission received one comment letter expressing support for
the Proposal to extend the CFTC compliance schedule for the Smaller
Portfolio Group. \22\ This comment letter, which was a joint industry
letter submitted by eleven trade associations, stated that deferral of
the Smaller Portfolio Group compliance date is necessary to facilitate
orderly preparation for the exchange of regulatory IM between CSEs and
covered counterparties expected to come into the scope of the IM
[[Page 71248]]
requirements in the last phases of compliance. The comment letter went
on to note that given the disruptive nature of the pandemic,
notwithstanding robust business continuity plans, efforts to prepare
for the final phases of regulatory IM have been disrupted due to
personnel, systems, and other issues, and, therefore, the commenters
appreciate the additional time afforded to market participants in the
Proposal.
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\22\ Comment letter no. 62694 from the International Swaps and
Derivatives Association, the Securities Industry and Financial
Markets Association, SIFMA Asset Management Group, the Global
Financial Markets Association, the Global Foreign Exchange Division
of GFMA, Managed Funds Association, Investment Adviser Association,
the Institute of International Bankers, the Investment Company
Institute, the U.S. Chamber's Center for Capital Markets
Competitiveness (CCMC) and the American Council of Life Insurers
(Aug. 5, 2020), https://comments.cftc.gov/Handlers/PdfHandler.ashx?id=29412.
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Covered swap entities are required to post and collect IM with
counterparties that are SDs, MSPs, or financial end users with material
swap exposure (``MSE'') \23\ (``covered counterparties'') in accordance
with a phased compliance schedule set forth in Commission regulation
23.161.\24\ The compliance schedule, which originally extended from
September 1, 2016 to September 1, 2020, and comprised five phases,
brings into compliance with the IM requirements CSEs and covered
counterparties on staggered dates, starting with entities with the
largest AANA of uncleared swaps and certain other financial products,
and then progressively with successively lesser AANA.
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\23\ Commission regulation 23.151 provides that MSE for an
entity means that the entity and its margin affiliates have an
average daily aggregate notional amount of uncleared swaps,
uncleared security-based swaps, foreign exchange forwards, and
foreign exchange swaps with all counterparties for June, July or
August of the previous calendar year that exceeds $8 billion, where
such amount is calculated only for business days. A company is a
``margin affiliate'' of another company if: (i) Either company
consolidates the other on a financial statement prepared in
accordance with U.S. Generally Accepted Accounting Principles, the
International Financial Reporting Standards, or other similar
standards; (ii) both companies are consolidated with a third company
on a financial statement prepared in accordance with such principles
or standards; or (iii) for a company that is not subject to such
principles or standards, if consolidation as described in paragraph
(1) or (2) of this definition would have occurred if such principles
or standards had applied. 17 CFR 23.151.
\24\ 17 CFR 23.161.
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The April 2020 Final Rule split the fifth and last phase of
compliance into two phases, extending the compliance date for the
Smaller Portfolio Group to September 1, 2021. Subsequently, the IFR
extended the IFR Extension Group's September 1, 2020 compliance date to
September 1, 2021, and as a result, the IFR Extension Group and Smaller
Portfolio Group would be required to begin IM compliance on the same
day absent the Commission's adoption of this Final Rule.
Absent the Commission's adoption of the Proposal in this Final
Rule, the onset of the compliance phase starting on September 1, 2021,
would result in a very large number of entities coming into compliance
simultaneously, because the AANA threshold for compliance with the IM
requirements would be significantly reduced. Specifically, entities in
the fourth phase were subject to a $750 billion AANA threshold, and
beginning on September 1, 2021, under the schedule being revised by the
Final Rule, entities will come within the scope of IM compliance if
their AANA exceeds $8 billion. According to the CFTC's Office of the
Chief Economist (``OCE''), compared with the first through fourth phase
of compliance, which brought fewer than 40 entities into scope, the two
groups now subject to the September 1, 2021 compliance date will bring
into scope approximately 670 entities, along with 7,500 swap trading
relationships.\25\ This means that approximately 670 entities may have
to amend or enter into up to 7,500 new sets of credit support or other
IM agreements in order to continue to engage in swap transactions.
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\25\ Richard Haynes, Madison Lau, & Bruce Tuckman, Initial
Margin Phase 5, at 4-7 (Oct. 24, 2018), https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf (``OCE Initial Margin
Phase 5 Study''). The OCE Study defines ``a `relationship' as an
entity and a swap dealer, where the entity is an aggregation of
related affiliates.''
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The Commission adopted the April 2020 Final Rule, which postponed
the compliance date for the Smaller Portfolio Group, to address
concerns that the large number of counterparties preparing to meet the
September 1, 2020 deadline would seek to engage the same limited number
of entities that provide IM required services, involving, among other
things, the preparation of IM-related documentation, the approval and
implementation of risk-based models for IM calculation, and in some
cases the establishment of custodial arrangements. In the preamble to
the April 2020 Final Rule, the Commission stated that compliance delays
could lead to disruption in the markets; for example, some
counterparties could, for a time, be restricted from entering into
uncleared swaps and therefore might be unable to use swaps to hedge
their financial risk.
Because the IFR moved the compliance date for the IFR Extension
Group to the same date as the Smaller Portfolio Group in response to
the COVID-19 pandemic, both groups would face, absent the Commission's
adoption of this Final Rule, effectively the same issues that the April
2020 Final Rule intended to address, including the limited number of
entities that provide IM-required services. The Commission is adopting
the Final Rule to further delay the compliance date for the Smaller
Portfolio Group entities to alleviate the potential market disruption
described above, consistent with the rationale for the Commission's
adoption of the April 2020 Final Rule.
The Final Rule will align the CFTC Margin Rule with the 2020 BCBS/
IOSCO Margin Framework and is in line with similar efforts by the U.S.
prudential regulators and international counterparts.\26\ The Final
Rule will thus advance the Commission's goal of achieving regulatory
harmonization with respect to uncleared swaps margin and may help
reduce regulatory arbitrage.
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\26\ See supra note 19.
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The Commission notes that the Smaller Portfolio Group comprises
entities with a relatively small amount of swap activity. The OCE
estimates that the average AANA per entity subject to the original
September 1, 2020 compliance date is about $59 billion, compared to an
average $10.6 trillion AANA for each entity in the earlier phases 1, 2,
and 3 and $1 trillion in phase 4. OCE also estimates that the total
AANA for the Smaller Portfolio Group would be approximately four
percent of the total AANA across all the phases.\27\ Given the
relatively small amount of swap activity of entities in the Smaller
Portfolio Group, the Commission believes that delaying compliance with
the IM requirements by one year for such group will have a muted impact
on the systemic risk mitigating effects of the IM requirements. In
addition, the Commission notes that the potential for systemic risk
also is reduced because the Final Rule does not relieve Smaller
Portfolio Group firms from their existing obligations to cover their
current exposure on a daily basis through mandated variation margin
payments once such firms have reached the minimum transfer amount, as
this term is defined in the Commission's rules.\28\
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\27\ The methodology for calculating AANA is described in the
OCE Initial Margin Phase 5 Study at 3.
\28\ 17 CFR 23.151.
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Although the impact of Smaller Portfolio Group swap activity on
systemic risk is likely to be muted during the one year delay, the
Commission notes that the time limited risk for the additional year
should not be interpreted as dismissive of the longer term regulatory
implications of this swap activity. The Commission believes that the
exchange of IM by entities with relatively small portfolios
[[Page 71249]]
supports the health and stability of the overall financial system.
III. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \29\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget control number. This Final Rule, as adopted, contains no
requirements subject to the PRA.
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\29\ 44 U.S.C. 3501 et seq.
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B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies, in
promulgating regulations, consider whether the regulations they propose
will have a significant economic impact on a substantial number of
small entities, and, if so, to provide a flexibility analysis regarding
the economic impact on those entities.\30\ In the Proposal, the
Commission certified that it would not have a significant economic
impact on a substantial number of small entities. The Commission
requested comments with respect to the RFA and received no comments.
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\30\ 5 U.S.C. 601 et seq.
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As discussed in the Proposal, the Final Rule only affects SDs and
MSPs that are subject to the CFTC Margin Rule and their covered
counterparties, all of which are required to be eligible contract
participants (``ECPs'').\31\ The Commission has previously determined
that SDs, MSPs, and ECPs are not small entities for purposes of the
RFA.\32\ Therefore, the Commission believes that this Final Rule will
not have a significant economic impact on a substantial number of small
entities, as defined in the RFA.
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\31\ Each counterparty to an uncleared swap must be an ECP, as
the term is defined in section 1a(18) of the CEA, 7 U.S.C. 1a(18)
and Commission regulation 1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
\32\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001)
(ECPs).
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that this Final Rule will not
have a significant economic impact on a substantial number of small
entities.
C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA. Section 15(a) further specifies that the costs and
benefits shall be evaluated in light of the following five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the section 15(a) considerations.
Further, the Commission has considered the extraterritorial reach of
the Final Rule and notes where this reach may be especially relevant.
This Final Rule extends the compliance schedule for the CFTC Margin
Rule for CSEs and covered counterparties in the Smaller Portfolio
Group, including financial end user counterparties exceeding the MSE
threshold of $8 billion in AANA. As a result of the Commission's
adoption of this Final Rule, these entities will come into scope in a
final sixth phase, which will begin on September 1, 2022.
As discussed above, the Commission believes that with the earlier
adoption of the IFR and the resulting reapplication of the same
compliance deadline for both the Smaller Portfolio Group and the IFR
Extension Group, the resulting large number of counterparties that
would have been required to comply with the IM requirements for the
first time on September 1, 2021, absent the Final Rule, could have
caused certain market disruptions. Some CSEs and covered counterparties
would have been strained given the demand for resources and services to
meet the September 2021 deadline and operationalize the exchange of IM,
involving, among other things, counterparty onboarding, approval and
implementation of risk-based models for the calculation of IM, and
documentation associated with the exchange of IM.
The baseline against which the benefits and costs associated with
this Final Rule are compared is the uncleared swaps markets as they
exist today, including the impact of the compliance schedule being
amended herein, which would have required IM compliance by September 1,
2021. With this as the baseline, the following are the benefits and
costs of this Final Rule.
The Commission sought comment on all aspects of the cost and
benefit considerations in the Proposal but received no substantive
comments.
1. Benefits
As described above, this Final Rule extends the compliance schedule
for the IM requirements for the Smaller Portfolio Group to September 1,
2022. The extension benefits entities in the Smaller Portfolio Group by
allowing them to trade uncleared swaps more easily and cheaply over
this period. It also benefits entities in the IFR Extension Group by
making it easier for them to obtain the resources needed to comply with
the IM requirements. This Final Rule is specifically intended to
alleviate the potential market disruption resulting from the large
number of counterparties that would have come into scope on September
1, 2021, under the compliance schedule being amended, and the strain on
the uncleared swaps markets resulting from the increased demand for
limited resources and services to set up operations to comply with the
IM requirements, including counterparty onboarding, adoption and
implementation of risk-based models to calculate IM, and documentation
associated with the exchange of IM. In contrast with the CFTC's
existing requirements mandating that the entities in the Smaller
Portfolio Group comply with the IM requirements at the same time as
entities in the IFR Extension Group, the Final Rule reduces the
potential for bottlenecks by creating a one-year separation in the
applicable compliance dates for the two categories of entities.
The Final Rule provides a 12-month delay for smaller counterparties
that comprise the Smaller Portfolio Group to September 1, 2022, whose
swap trading may not pose the same level of risk as entities in the IFR
Extension Group, to prepare for their compliance with the IM
requirements. The Final Rule therefore promotes the smooth and orderly
transition into IM compliance for both the IFR Extension Group and the
Smaller Portfolio Group.
The Final Rule amends the CFTC Margin Rule consistent with the 2020
BCBS/IOSCO Margin Framework and the prudential regulators' June 2020
IFR amending the IM compliance schedule. The Final Rule therefore
promotes harmonization with international and domestic margin
regulatory requirements, thereby reducing the potential for regulatory
arbitrage.
[[Page 71250]]
2. Costs
The Final Rule extends the time frame for compliance with the IM
requirements for the smallest, in terms of notional amount, CSEs and
covered counterparties, including SDs and MSPs and financial end users
that exceed an MSE of $8 billion, by an additional 12 months. Uncleared
swaps entered into during this period with the smallest CSEs may be
treated as legacy swaps not subject to the IM requirements. As IM might
not be required to be collected on some of these swaps,\33\ the one-
year compliance delay may increase the level of counterparty credit
risk to the financial system. While potentially meaningful, in the
Commission's view this risk is a relatively lesser concern because
these legacy swap portfolios would be entered into with counterparties
that engage in lower levels of notional trading.
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\33\ While all entities that are covered by the Commission's
margin requirements are required to exchange variation margin, the
Commission notes that some entities may not be required to post and
collect IM, as certain thresholds must be met before the posting and
collection of IM are required.
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3. Section 15(a) Considerations
In light of the foregoing, the CFTC has evaluated the costs and
benefits of this Final Rule pursuant to the five considerations
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
This Final Rule will protect market participants and the public
against the potential disruption that may have been caused by the large
number of counterparties that would have come into the scope of the IM
requirements on September 1, 2021, under the compliance schedule being
amended by this Final Rule.
Under the revised compliance schedule set forth in the Final Rule,
fewer counterparties will come into scope by September 1, 2021, and
many small counterparties will be able to defer compliance until the
last compliance date on September 1, 2022. As such, the demand for
resources and services to achieve operational readiness will be
reduced, mitigating the potential strain on the uncleared swaps
markets.
Inasmuch as this Final Rule delays the implementation of IM for the
smallest CSEs, there may not be as much IM posted to protect the
financial system as would otherwise be the case.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
The Final Rule is expected to make the uncleared swaps markets more
efficient by facilitating counterparties' transition into compliance
with the IM requirements, thus avoiding inefficiencies in the
documentation and implementation process. Counterparties will have
additional time to document their swap relationships and set up
adequate processes to operationalize the exchange of IM. As such, the
Final Rule could promote more even competition among counterparties in
the uncleared swaps markets, as the one-year delay period may remove
the potential incentive for CSEs to prioritize arrangements with larger
counterparties to the detriment of smaller counterparties and may thus
help maintain the current state of market efficiency.
By preventing the market disruption that would have resulted from
the large number of counterparties that would have come into scope by
September 1, 2021, and the use of finite financial infrastructure
resources, the Final Rule promotes the financial integrity of the
markets. On the other hand, for a one-year period, there will be less
IM posted overall, making uncleared swaps markets more susceptible to
financial contagion where the default of one counterparty could lead to
subsequent defaults of other counterparties, potentially harming market
integrity.
(c) Price Discovery
This Final Rule may enhance or negatively impact price discovery.
Absent the Final Rule, counterparties, in particular smaller
counterparties, may have been discouraged from trading uncleared swaps
because they may not have been able to secure resources and services in
a timely manner to operationalize the exchange of IM. The resultant
reduction in uncleared swaps trading may have reduced liquidity and
harmed price discovery. Conversely, the delay in implementation of the
IM requirements for the Smaller Portfolio Group may cause those
counterparties to adjust the pricing of their swaps to incorporate
additional risks that would otherwise have been covered by IM. These
additional adjustments could result in pricing differentiations between
swaps entered into by some Smaller Portfolio Group entities and
entities already subject to the margin requirements. As a result, the
ability of entities in the Smaller Portfolio Group to compare realized
trade prices may be reduced, harming effective market price discovery
by these entities.
(d) Sound Risk Management
As discussed above, the Final Rule will delay the compliance date
for the Smaller Portfolio Group by one year. As a result, swaps entered
into during the one-year period will not be subject to the IM
requirements, potentially increasing the level of counterparty credit
risk to the financial system. At the same time, the Final Rule will
reduce the potential market disruption that could have resulted from
the large number of counterparties that would have come into the scope
of the IM requirements at the end of the compliance schedule being
amended, which would have required compliance by September 1, 2021. The
delayed compliance schedule will alleviate the potential disruption in
establishing the financial infrastructure for the exchange of IM
between in-scope entities and will give counterparties time to prepare
for IM compliance and to establish operational processes tailored to
their uncleared swaps and associated risks. In addition, to the extent
some entities would have been precluded from trading swaps during that
one-year period, the rule allows those firms to continue their current
risk management practices.
(e) Other Public Interest Considerations
The Final Rule promotes harmonization with international and
domestic margin regulatory requirements, reducing the potential for
regulatory arbitrage. The Final Rule amends the CFTC Margin Rule
consistent with the 2020 BCBS/IOSCO Margin Framework, and the
prudential regulators' June 2020 IFR amending the IM compliance
schedule.
D. Antitrust Laws
Section 15(b) of the CEA requires the Commission to ``take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of this Act, 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 this Act.'' \34\
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\34\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requested comment on whether this Proposal implicates any other
specific public
[[Page 71251]]
interest to be protected by the antitrust laws and received no
comments.
The Commission has considered this Final Rule to determine whether
it is anticompetitive and has identified no anticompetitive effects.
The Commission requested comments on whether the Proposal was
anticompetitive and, if so, what the anticompetitive effects were, and
received no comments.
Because the Commission has determined that this Final Rule is not
anticompetitive and has no anticompetitive effects, the Commission has
not identified any less anticompetitive means of achieving the purposes
of the CEA.
List of Subjects in 17 CFR Part 23
Capital and margin requirements, Major swap participants, Swap
dealers, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 23 as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1,6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).
0
2. Amend Sec. 23.161 by revising paragraph (a)(7) as follows:
Sec. 23.161 Compliance dates.
(a) * * *
(7) September 1, 2022 for the requirements in Sec. 23.152 for
initial margin for any other covered swap entity for uncleared swaps
entered into with any other counterparty.
* * * * *
Issued in Washington, DC, on October 20, 2020, by the
Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Commission Voting Summary and
Commissioner's Statement
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 Commissioner Brian Quintenz
I support today's final rule that extends the last phase of
compliance for initial margin requirements to September 1, 2022. In
light of the unprecedented economic and social impacts of COVID-19
and the potential market disruption that could result from a large
number of entities coming into scope on September 1, 2021, I
strongly support an additional one year deferral for these firms. As
I have noted previously, given the large number of firms covered by
the final compliance phases, the estimated 7,000 initial margin
relationships that need to be negotiated, and the small overall
percentage of swap activity these firms represent, a one year delay
for these firms is appropriate in order to facilitate an efficient,
orderly transition for the market into the uncleared margin regime.
In addition, today's final rule also ensures the Commission is
consistent with the BCBS-IOSCO recommended margin framework and with
actions taken by U.S. prudential regulators to extend the margin
compliance schedule.\1\
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\1\ See Basel Committee on Banking Supervision and Board of the
International Organization of Securities Commissions, Margin
Requirements for Non[hyphen]Centrally Cleared Derivatives (Apr.
2020), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD651.pdf.
[FR Doc. 2020-23473 Filed 11-6-20; 8:45 am]
BILLING CODE 6351-01-P