2020-27508
Federal Register, Volume 86 Issue 14 (Monday, January 25, 2021)
[Federal Register Volume 86, Number 14 (Monday, January 25, 2021)]
[Rules and Regulations]
[Pages 6850-6860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27508]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AF06
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 amending the margin requirements for uncleared swaps
(``Final Rule'') for swap dealers (``SD'') and major swap participants
(``MSP'') for which there is not a prudential regulator (``CFTC Margin
Rule''). The Final Rule amends the CFTC Margin Rule to permit the
application of a minimum transfer amount (``MTA'') of up to $50,000 for
each separately managed account (``SMA'') of a legal entity that is a
counterparty to an SD or MSP in an uncleared swap transaction and to
permit the application of separate MTAs for initial margin (``IM'') and
variation margin (``VM'').
DATES: This Final Rule is effective February 24, 2021.
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]; Liliya Bozhanova, Special Counsel, 202-418-
6232, [email protected]; or Carmen Moncada-Terry, Special Counsel,
202-418-5795, [email protected], Market Participants Division,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory and Regulatory Background
In January 2016, the Commission adopted Regulations 23.150 through
23.161, namely the CFTC Margin Rule,\1\ to implement section 4s(e) of
the Commodity Exchange Act (``CEA''),\2\ which requires SDs and MSPs
for which there is not a prudential regulator \3\ (``covered swap
entity'' or ``CSE'') to meet minimum IM and VM requirements adopted by
the Commission by rule or regulation.
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\1\ 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 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). Commission regulations are found at 17 CFR part 1 et seq.
(2017), and may be accessed through the Commission's website,
https://www.cftc.gov.
\2\ 7 U.S.C. 6s(e) (capital and margin requirements).
\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 specifies the entities for which
these agencies act as prudential regulators.
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Regulations 23.152 and 23.153 require CSEs to collect or post, each
business day, VM \4\ for uncleared swap transactions with each
counterparty that is an SD, MSP, or financial end user,\5\ and IM \6\
for uncleared swap transactions for each counterparty that is an SD,
MSP, or a financial end user that has material swaps exposure.\7\ IM
posted or collected by a CSE must be held by one or more custodians
that are not affiliated with the CSE or the counterparty.\8\ VM posted
or collected by a CSE is not required to be maintained with a
custodian.\9\
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\4\ VM (or variation margin), as defined in Regulation 23.151,
is the collateral provided by a party to its counterparty to meet
the performance of its obligation under one or more uncleared swaps
between the parties as a result of a change in the value of such
obligations since the trade was executed or the last time such
collateral was provided. 17 CFR 23.151.
\5\ See definition of ``financial end user'' in Regulation
23.151. In general, the definition covers entities involved in
regulated financial activity, including banks, brokers,
intermediaries, advisers, asset managers, collective investment
vehicles, and insurers. 17 CFR 23.151.
\6\ IM (or initial margin) is the collateral (calculated as
provided by Sec. 23.154 of the Commission's regulations) that is
collected or posted in connection with one or more uncleared swaps
pursuant to Sec. 23.152. IM is intended to secure potential future
exposure following default of a counterparty (i.e., adverse changes
in the value of an uncleared swap that may arise during the period
of time when it is being closed out). See CFTC Margin Rule, 81 FR at
683.
\7\ 17 CFR 23.152; 17 CFR 23.153.
\8\ See 17 CFR 23.157(a).
\9\ Regulation 23.157 does not require VM to be maintained in a
custodial account. 17 CFR 23.157.
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To alleviate the operational burdens associated with making de
minimis margin transfers without resulting in an unacceptable level of
uncollateralized credit risk, Regulations 23.152(b)(3) and 23.153(c)
provide that a CSE is not required to collect or post IM or VM with a
counterparty until the combined amount of such IM and VM, as computed
under Regulations 23.154 and 23.155 respectively, exceeds an MTA of
$500,000.\10\ The term MTA (or minimum transfer amount) is further
defined in Regulation 23.151 as a combined amount of IM and VM, not
exceeding $500,000, under which no exchange of IM or VM is
required.\11\ Once the MTA is exceeded, the SD or MSP must collect or
post the full
[[Page 6851]]
amount of both IM and VM required to be exchanged with the
counterparty.\12\
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\10\ 17 CFR 23.152(b)(3); 17 CFR 23.153(c); 81 FR at 653.
\11\ 17 CFR 23.151 (defining the term ``minimum transfer
amount'').
\12\ See 17 CFR 23.152(b)(3); 17 CFR 23.153(c).
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During the implementation of the CFTC Margin Rule, market
participants identified certain operational and compliance burdens
associated with the application of the MTA. To mitigate these burdens,
the Division of Swap Dealer and Intermediary Oversight (``DSIO'') staff
issued two no-action letters.\13\
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\13\ Pursuant to a Commission plan of reorganization, DSIO was
renamed Market Participants Division (``MPD'') effective November 8,
2020.
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B. DSIO No-Action Letter No. 17-12 Addressing the Application of MTA to
SMAs
In February 2017, DSIO staff issued a no-action letter in response
to a request for relief from the Securities Industry and Financial
Markets Association's Asset Management Group (``SIFMA AMG'').\14\ Staff
stated that based on SIFMA AMG's representations, it would not
recommend enforcement action against an SD that does not comply with
the MTA requirements of Regulations 23.152(b)(3) or 23.153(c) with
respect to the swaps of a legal entity that is the owner of multiple
SMAs, provided that, among other conditions, the SD applies an MTA no
greater than $50,000 to each SMA.
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\14\ CFTC Letter No. 17-12, Regulations 23.152(b)(3) and
23.153(c): No-Action Position
for Minimum Transfer Amount with respect to Separately Managed
Accounts (Feb. 13, 2017) (``Letter 17-12''), https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-12.pdf.
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SIFMA AMG sought no-action relief on behalf of members--asset
management firms whose clients include large institutional investors,
such as pension plans and endowments, that hire asset managers to
exercise investment discretion over portions of the clients' assets for
management in SMAs--that enter into uncleared swaps with SDs that are
registered with the Commission and are subject to the CFTC Margin
Rule.\15\ SIFMA AMG requested relief that would permit SDs entering
into swaps with SMAs to treat each SMA separately for the purposes of
applying the MTA.
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\15\ Id.
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SIFMA AMG argued that the application of the MTA at the SMA owner
or legal entity level presented significant practical challenges for
SMAs that trade uncleared swaps with a single SD. SIFMA AMG stated that
each SMA is governed by an investment management agreement that grants
asset managers authority over a portion of their client's assets. An SD
may face the same legal entity as a counterparty through multiple SMAs
administered by different asset managers. Each SMA that trades
derivatives typically has its own payment netting set corresponding to
each International Swaps and Derivatives Association (``ISDA'') master
agreement and credit support annex (``CSA'') used by an asset
manager.\16\ Because the SMAs exist independently from each other, with
their assets held, transferred, and returned separately at the account
level, SIFMA AMG asserted that it is impractical for asset managers to
collectively calculate the MTA across the SMAs of a single owner and to
move collateral, in the aggregate, across the accounts.
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\16\ The ISDA master agreement is a standard contract published
by ISDA commonly used in over-the-counter derivatives transactions
that governs the rights and obligations of parties to a derivatives
transaction. A CSA sets forth the terms of the collateral
arrangement for the derivatives transaction.
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C. DSIO No-Action Letter No. 19-25 Concerning the Application of
Separate MTAs for IM and VM
In December 2019, DSIO staff issued an additional no-action letter
concerning the application of the MTA in response to a request for
relief from ISDA on behalf of its member SDs.\17\ DSIO stated that
based on ISDA's representations, it would not recommend enforcement
action against an SD or MSP that does not combine IM and VM amounts for
the purposes of Regulations 23.152(b)(3) and 23.153(c). More
specifically, the no-action position covers SDs or MSPs that apply
separate MTAs for IM and VM obligations on uncleared swap transactions
with each swap counterparty, provided that the combined MTA for IM and
VM with respect to that counterparty does not exceed $500,000.
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\17\ CFTC Letter No. 19-25, Regulations 23.151, 23.152, and
23.153--Staff Time-Limited No-Action Position Regarding Application
of Minimum Transfer Amount under the Uncleared Margin Rules (Dec. 6,
2019) (``Letter 19-25''), https://www.cftc.gov/csl/19-25/download.
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In its request for no-action relief, ISDA stated that separate MTAs
for IM and VM better reflect the operational requirements and the legal
structure of the Commission's regulations, noting that the CFTC Margin
Rule requires IM to be segregated with an unaffiliated third party,
while not imposing similar segregation requirements with respect to VM.
ISDA asserted that, as a result, distinct workflows have been
established for the settlement of IM through custodians and tri-party
agents that are completely separate from the settlement process for VM.
D. Market Participant Feedback and Proposal
Swap market participants, including a subcommittee established by
the CFTC's Global Markets Advisory Committee (``GMAC Subcommittee''),
expressed support for the adoption of regulations consistent with the
no-action letters, noting that Letter 19-25, in particular, is time-
limited and, more generally, the codification of no-action positions
can be beneficial in that it can provide certainty to market
participants with respect to the application of the Commission's
regulations.\18\
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\18\ 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 (May 2020), https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download
(``GMAC Subcommittee Report'' or ``Report''). The Global Markets
Advisory Committee (``GMAC'') established the GMAC Subcommittee to
consider issues raised by the implementation of margin requirements
for non-cleared swaps, to identify challenges associated with
forthcoming implementation phases, and to make recommendations
through a report. The GMAC Subcommittee issued the GMAC Subcommittee
Report recommending various actions, including the codification of
Letters 17-12 and 19-25. The GMAC adopted the Report and recommended
to the Commission that it consider adopting the Report's
recommendations.
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Consistent with this feedback, the Commission has expressed the
view that adopting regulations in accordance with the terms of no-
action letters, where feasible, can facilitate efforts by market
participants to take the operation of the Commission's regulations into
account in planning their uncleared swap activities. Accordingly, based
on its experience implementing the CFTC Margin Rule and the
administration of Letters 17-12 and 19-25, the Commission decided to
issue a notice of proposed rulemaking (``Proposal'') to amend the CFTC
Margin Rule consistent with the staff positions set forth in those no-
action letters, and to request comments on the Proposal.\19\
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\19\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 85 FR 59470 (Sept. 22, 2020).
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II. Final Rule
The Commission received six comment letters, all of which expressed
support for the Proposal.\20\ Commenters
[[Page 6852]]
generally noted that the proposed amendments represent practical
solutions that ease the operational burden of compliance with the CFTC
Margin Rule without materially increasing systemic risk. Two commenters
also noted that while consistent approaches to derivatives regulation
are desirable, the Commission should adopt the proposed amendments even
if the prudential regulators do not adopt similar changes.\21\ Several
commenters highlighted the importance of the regulatory certainty that
the adoption of regulations consistent with existing no-action relief
would bring.\22\
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\20\ Comments were submitted by the following entities: American
Council of Life Insurers (``ACLI''); Futures Industry Association
(``FIA''); Investment Company Institute (``ICI''); ISDA, Global
Foreign Exchange Division (``GFXD'') of the Global Financial Markets
Association (``GFMA''), and Securities Industry and Financial
Markets Association (``SIFMA'') in a joint letter (``ISDA/GFMA/
SIFMA''); Managed Funds Association (``MFA''); and SIFMA AMG. The
comment letters are available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=4155.
\21\ See ACLI at 1; FIA at 4.
\22\ See ISDA/GFMA/SIFMA at 2; SIFMA AMG at 4.
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The comments confirm the rationale articulated for the Proposal. As
such, the Commission is adopting the amendments to Regulations 23.151,
23.152(b)(3), 23.153(c) and 23.158(a), as proposed.
A. Application of MTA to SMAs
The Commission is adopting the proposed amendment to the definition
of MTA in Regulation 23.151 to allow a CSE to apply an MTA of up to
$50,000 to each SMA owned by a counterparty with whom the CSE enters
into uncleared swaps. The amendment is consistent with the terms of
Letter 17-12, which provides that DSIO would not recommend enforcement
action if an SD applies an MTA no greater than $50,000 to each SMA of a
legal entity, subject to certain conditions.
As discussed in the Proposal, when the Commission adopted the CFTC
Margin Rule, it rejected the notion that SMAs of a legal entity should
be treated separately from each other in applying certain aspects of
the margin requirements for uncleared swaps.\23\ However, after
implementing the margin requirements for several years, and in
particular, administering the application of the MTA, including the
staff's issuance of Letter 17-12, the Commission believes that
separately treating SMAs, at least with respect to the application of
the MTA, is appropriate from an operational perspective.
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\23\ See 81 FR at 653 (rejecting commenters' request to extend
to each separate account of a fund or plan its own initial margin
threshold, while acknowledging that separate managers acting for the
same fund or plan may not take steps to inform the fund or plan of
their uncleared swap exposures on behalf of their principal on a
frequent basis).
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The Commission notes, as discussed in the Proposal, that certain
owners of SMAs, such as pension funds, in administering investments for
beneficiaries, may engage in collateral management exercises and may
have the capability to aggregate collateral across their SMAs. As such,
a beneficial owner may be able to aggregate the MTA across its SMAs
that trade with a particular CSE and centralize the management of
collateral for the SMAs, which may result in increased netting among
the SMAs and the CSE, and more efficient collateral management.
However, the Commission points out that other SMA owners may not have
such capability because, as noted in the GMAC Subcommittee Report, the
SMA owners may not be able to coordinate trading activity across their
SMAs, given that they typically grant full investment discretion to
their asset managers and do not employ a centralized collateral manager
in-house.\24\
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\24\ GMAC Subcommittee Report at 16.
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In theory, while asset managers could coordinate with each other
the calculation of the MTA across SMAs under their management, the
Commission believes that accepted market practice may preclude the
sharing of information among asset managers. In this regard, the
Commission notes that the GMAC Subcommittee Report stated that owners
of SMAs typically prohibit information sharing among their SMAs and
require asset managers to keep trading information confidential, with
the result that asset managers lack transparency and control over the
assets of the SMA owner other than the specific assets under their
management.
The Commission requested comment on the feasibility of coordination
among asset managers. Several commenters, consistent with the GMAC
Subcommittee Report's findings, indicated that confidentiality
requirements and logistical impediments prevent asset managers from
aggregating IM and VM obligations across SMAs for purposes of
determining whether the MTA threshold has been exceeded, rendering the
application of a single MTA across SMAs impractical.\25\ Commenters
further asserted that the ability to apply a separate MTA to each SMA
is critical for asset managers that provide services to clients through
an SMA structure.\26\
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\25\ See ICI at 6; ISDA/GFMA/SIFMA at 2; SIFMA AMG at 3. See
also MFA at 3 (noting that the amendment to the MTA definition would
eliminate the significant burden of requiring multiple asset
managers running SMAs for the same SMA owner to coordinate the
calculation of the MTA among them).
\26\ See, e.g., ICI at 6.
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Likewise, the Commission believes that confidentiality requirements
may also preclude communications between a CSE and individual asset
managers of SMAs of an owner concerning the owner's overall trading
activity. As discussed in the GMAC Subcommittee Report, a duty of
confidentiality to the legal entity may prevent a CSE from sharing
information across the asset managers of SMAs of a legal entity.\27\ As
a result, even though each SMA of an owner may contribute to reaching
the MTA limit, asset managers for the SMAs may only know the amounts of
IM and VM being contributed by SMAs under their management.
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\27\ The Commission notes that Regulation 23.410(c)(1)(i)
prohibits disclosure by an SD or MSP, including a CSE, of
confidential information provided by or on behalf of a counterparty
to the SD or MSP. Nevertheless, Regulation 23.410(c)(2) provides
that the SD or MSP may disclose the counterparty's confidential
information if the disclosure is authorized in writing by the
counterparty.
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In light of the practical challenges that the calculation of the
MTA across SMAs poses, as described above, the Commission is amending
Regulation 23.151 to allow CSEs to apply an MTA of up to $50,000 for
each SMA of a counterparty. The Commission notes, however, that under
this application of the MTA to SMAs, as adopted, an MTA of up to
$50,000 could be applied to an indefinite number of SMAs. This
application of the MTA would effectively replace the aggregate limit of
$500,000 for a particular counterparty's uncollateralized risk for
uncleared swaps with an individual limit of $50,000 for each SMA of
such counterparty. In turn, the counterparty could have an aggregate
amount of uncollateralized risk in excess of $500,000.
This application of the MTA to SMAs could incentivize owners of
SMAs to create separate accounts by formulating trading strategies to
reduce or avoid margin transfers. However, the Commission believes that
the inability to net collateral across separate accounts would stem the
indiscriminate creation of SMAs \28\ because the MTA for SMAs, as
adopted in this Final Rule, is set at a low level (i.e., $50,000), and
any potential benefits resulting from the avoidance of margin transfers
would become less meaningful, as the fragmentation of an owner's
investments among SMAs would reduce the ability to aggregate swaps
positions and net collateral.
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\28\ As further discussed below, the application of the MTA, as
provided in this Final Rule, is only available for separate accounts
of an owner that, consistent with the definition of SMA, as adopted
by the Final Rule, are not subject to collateral agreements that
provide for netting across separate accounts.
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Several commenters agreed with the Commission's view that the
potential
[[Page 6853]]
risk of an increase in the amount of uncollateralized margin is
mitigated by, among other safeguards, the low MTA thresholds and the
limitations on netting across separate accounts.\29\ The commenters
further noted that the costs and practical challenges associated with
establishing and maintaining SMAs are significant and would likely
override the benefit of a marginal MTA increase.\30\ One commenter also
argued that it is extremely unlikely that an asset manager could
coordinate its activities with other SMA managers to minimize the SMA
owner's margin requirements, given that asset managers typically
exercise discretion over a portion of the SMA's assets and maintain
confidentiality with respect to the SMA's trading activity.\31\ Another
commenter pointed out that the requirement that the SMAs' asset
managers must be granted authority over assets under their management
under the investment management agreement \32\ creates practical as
well as cost challenges that would further disincentivize the creation
of unnecessary SMAs.\33\
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\29\ See ICI at 7; MFA at 3; SIFMA AMG at 4.
\30\ See ICI at 7, MFA at 3.
\31\ See ICI at 7.
\32\ As further discussed below, the Final Rule defines the term
SMA as an account managed by an asset manager pursuant to a specific
grant of authority to such asset manager under an investment
management agreement between the counterparty and the asset manager
with respect to a specified portion of the counterparty's assets.
\33\ See SIFMA AMG at 4.
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The Commission further notes that there are other provisions in the
CEA and the Commission's regulations that would mitigate the increase
in uncollateralized credit risk resulting from the absence of an
aggregate limit in the MTA. Specifically, section 4s(j)(2) of the CEA
requires CSEs to adopt a robust and professional risk management system
adequate for the management of their swap activities,\34\ and
Regulation 23.600 \35\ mandates that CSEs establish a risk management
program to monitor and manage risks associated with their swap
activities that includes, among other things, a description of risk
tolerance limits.
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\34\ See 7 U.S.C. 6s(j).
\35\ 17 CFR 23.600.
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The Commission is also amending Regulation 23.151 to add a
definition for the term SMA. The new definition of SMA uses the
definition of the term set forth in Letter 17-12. As adopted, the term
SMA is defined as an account of a counterparty to a CSE that is managed
by an asset manager pursuant to a specific grant of authority to such
asset manager under an investment management agreement between the
counterparty and the asset manager, with respect to a specified portion
of the counterparty's assets.\36\ The definition requires that the
swaps of the SMA (i) be entered into between the counterparty and the
CSE by the asset manager pursuant to authority granted by the
counterparty to the asset manager through an investment management
agreement; and (ii) be subject to a master netting agreement that does
not provide for the netting of IM or VM obligations across all SMAs of
the counterparty that have swaps outstanding with the CSE.
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\36\ The definition of the term SMA, as adopted, refers to the
aggregate account of a counterparty managed by an asset manager
under the investment management agreement, and not to fund or pool
sleeves overseen by sub-advisers.
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The definition of SMA is designed to limit the application of the
MTA, as prescribed by the Final Rule, to SMAs that have dedicated
netting sets under the SMAs' ISDA master agreements and CSAs, or are
otherwise precluded from netting collateral across SMAs, and that are
administered by asset managers with authority that is limited to assets
specifically under their management. The Commission notes that the
limited authority of asset managers over the assets of a legal entity
and the practical inability to net collateral payments across SMAs pose
obstacles in the calculation and aggregation of the MTA across SMAs
that this Final Rule is designed to address.
B. Application of Separate MTAs for IM and VM
The Commission is revising the margin documentation requirements
outlined in Regulation 23.158(a), consistent with Letter 19-25, to
recognize that a CSE can apply separate MTAs for IM and VM with each
counterparty in determining whether IM or VM or both must be posted or
collected with a counterparty under Regulation 23.152 (requiring CSEs
to exchange IM with a counterparty) or Regulation 23.153 (requiring
CSEs to exchange VM with a counterparty). Regulation 23.158(a), as
amended, states that if a CSE and its counterparty agree to have
separate MTAs for IM and VM, the MTAs corresponding to IM and VM must
be specified in the margin documentation required by Regulation 23.158,
and the MTAs, on a combined basis, must not exceed the MTA specified in
Regulation 23.151.
The Commission believes that the amendment to Regulation 23.158(a)
accommodates a widespread market practice that facilitates the
implementation of the CFTC margin requirements. In administering the
application of the MTA, including the issuance of Letter 19-25, the
Commission has recognized that, as a practical matter, CSEs and their
counterparties maintain separate settlement workflows for IM and VM and
agree to separate MTAs in each of their IM and VM CSAs, which,
combined, do not exceed $500,000. These separate settlement workflows
for IM and VM reflect, from an operational perspective, the different
segregation requirements applicable to IM and VM under the CFTC Margin
Rule.\37\
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\37\ See 17 CFR 23.157 (requiring IM to be segregated with an
independent custodian. The CFTC Margin Rule does not impose similar
segregation requirements with respect to VM).
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The Commission acknowledges that the amendment to Regulation
23.158(a) may result in the exchange of less margin than the amount
that would be exchanged if the MTA were computed on an aggregate
basis.\38\ However, the Commission notes that because the total amount
of combined IM and VM that would not be exchanged would generally not
exceed $500,000, the differences in the total margin exchanged would
not be material and would not result in an unacceptable level of credit
risk. While the MTA as applied to SMAs, pursuant to the amendments to
Regulation 23.151, may result in an aggregate MTA that exceeds
$500,000, the Commission nonetheless believes that the increased level
of uncollateralized risk that might result from the application of the
MTA to SMAs will be mitigated because the MTA levels applicable to SMAs
are set at a very low level (i.e., $50,000), which would reduce the
incentive for SMA owners to create additional SMAs to avoid the
transfer of margin given the inability to net collateral across SMAs,
as provided by the Final Rule.
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\38\ Letter 19-25 describes the application of separate MTAs for
IM and VM with the following illustration: An SD and a counterparty
agree to a $300,000 IM MTA and a $200,000 VM MTA. If the margin
calculations set forth in Commission regulations 23.154 (for IM) and
23.155 (for VM) require the SD to post $400,000 of IM with the
counterparty and $150,000 of VM with the counterparty, the SD will
be required to post $400,000 of IM with the counterparty (assuming
that the $50 million IM threshold amount, defined in Commission
regulation 23.151, for the counterparty has been exceeded). The SD,
however, will not be obligated to post any VM with the counterparty
as the $150,000 requirement is less than the $200,000 MTA. By
contrast, in the absence of relief, the SD would have been required
to post $550,000 (the full amount of both IM and VM), given that the
combined amount of IM and VM exceeds the MTA of $500,000.
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The Commission believes, consistent with the views expressed by
DSIO staff in issuing Letter 19-25, that the application of separate
MTAs for IM and VM, subject to certain conditions, will
[[Page 6854]]
reduce the cost and burdens associated with the transfer of small
margin balances, without undermining the Commission's objective of
requiring swap counterparties to protect themselves by mitigating their
credit and market risks. The Commission further notes that similar
applications of the MTA are permitted in certain foreign jurisdictions,
including the European Union.\39\ The amendment to Regulation 23.158(a)
therefore promotes consistent regulatory standards across
jurisdictions, in line with the statutory mandate set forth in the
Dodd-Frank Act \40\ and reduces the need for market participants to
create and implement IM and VM settlement flows tailored to different
jurisdictions.
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\39\ See Commission Delegated Regulation (EU) 2016/2251
Supplementing Regulation (EU) No. 648/2012 of the European
Parliament and of the Council of July 4, 2012 on OTC Derivatives,
Central Counterparties and Trade Repositories with Regard to
Regulatory Technical Standards for Risk-Mitigation Techniques for
OTC Derivative Contracts Not Cleared by a Central Counterparty (Oct.
4, 2016), Article 25(4), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R2251&from=EN.
\40\ See section 752 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010),
calling on the CFTC to consult and coordinate on the establishment
of consistent international standards with respect to the regulation
of swaps.
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A number of commenters confirmed the Commission's understanding
that the application of separate MTAs for IM and VM facilitates
compliance with the CFTC Margin Rule.\41\ Commenters noted that if swap
counterparties were required to apply a single combined MTA, they would
need to implement significant changes to the documentation and
operational processes.\42\ In particular, ICI noted that in the absence
of Letter 19-25 and this Final Rule, counterparties would have to
reconcile two operational processes: Margin calculation protocols that
account for a combined MTA and separate workflows that exist for IM and
VM settlement in light of the Commission's segregation requirements,
which differentiate treatment for IM and VM. \43\
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\41\ See ACLI at 2; MFA at 4; SIFMA AMG at 4.
\42\ See e.g., ACLI at 2.
\43\ See ICI at 8.
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Several commenters expressed support for extending the application
of separate MTAs for IM and VM to SMAs for which an MTA of up to
$50,000 would be applicable, noting that the stated rationale for
proposing the revisions to Regulation 23.158(a) applies equally to SMAs
and that allowing such application would establish a consistent
regulatory approach to applying MTA thresholds.\44\ In addition, noting
some ambiguity, SIFMA AMG urged the Commission to confirm that the
ability to apply separate MTAs for IM and VM would extend to SMAs.\45\
In response, the Commission confirms that the amendments to Regulations
23.151 and 23.158(a), as adopted, permit a CSE to apply separate MTAs
for IM and VM with each counterparty, or an SMA of a counterparty,
provided the MTAs, on a combined basis, do not exceed the respective
limits set by Regulation 23.151. The Commission notes that the text of
the amendment to Regulation 23.158(a) refers to Regulation 23.151,
which, as amended, defines MTA and provides for the application of an
MTA of up to $50,000 for each SMA of a counterparty, thus allowing for
the application of separate amounts of IM and VM to the MTA of an SMA,
as provided in amended Regulation 23.151.
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\44\ See ICI at 9; MFA at 4.
\45\ See SIFMA AMG at 4.
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C. Conforming Changes
Consistent with the amendment to the definition of MTA in
Regulation 23.151, the Commission is adopting conforming changes to
Regulations 23.152(b)(3) and 23.153(c) by replacing ``$500,000'' with
``the minimum transfer amount, as the term is defined in 23.151.'' The
changes replace the reference to $500,000 in current Regulations
23.152(b)(3) and 23.153(c), which effectively limits the MTA to
$500,000, with a reference to the revised definition of MTA, which
allows for the application of an MTA of up to $50,000 for each SMA.
III. Administrative Compliance
The Regulatory Flexibility Act (``RFA'') requires Federal agencies
to consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities.\46\ As
discussed in the Proposal, the amendments being adopted herein only
affect certain SDs and MSPs and their counterparties, which must be
eligible contract participants (``ECPs'').\47\ The Commission has
previously established that SDs, MSPs and ECPs are not small entities
for purposes of the RFA.\48\ Therefore, the Commission believes that
the 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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\46\ 5 U.S.C. 601 et seq.
\47\ Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e), each
counterparty to an uncleared swap must be an ECP, as defined in
section 1a(18) of the CEA, 7 U.S.C. 1a(18).
\48\ See Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ```Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant,'' 77 FR
30596, 30701 (May 23, 2012).
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the Final Rule will not have
a significant economic impact on a substantial number of small
entities.
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \49\ 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. The Final Rule, as adopted, contains no
requirements subject to the PRA.
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\49\ 44 U.S.C. 3501 et seq.
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B. Cost-Benefit Considerations
Section 15(a) of the CEA \50\ 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.
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\50\ 7 U.S.C. 19(a).
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The Commission is amending Regulation 23.151 consistent with Letter
17-12. The Commission is revising the definition of MTA in Regulation
23.151 to permit CSEs to apply an MTA of up to $50,000 for each SMA of
a counterparty that enters into uncleared swaps with a CSE. The
Commission also is amending Regulation 23.151 to add a definition for
the term SMA (or separately managed account). The Commission is also
revising Regulation 23.158(a) consistent with Letter 19-25 to state
that if a CSE and its counterparty agree to have separate MTAs for IM
and VM, the respective amounts of MTA must be reflected in the margin
documentation required by Regulation 23.158(a). Finally, the Commission
is adopting conforming
[[Page 6855]]
changes to Regulations 23.152(b)(3) and 23.153(c) to incorporate the
change to the definition of MTA in Regulation 23.151.
The baseline for the Commission's consideration of the costs and
benefits of this Final Rule is the CFTC Margin Rule. The Commission
recognizes that to the extent market participants have relied on
Letters 17-12 and 19-25, the actual costs and benefits of the
amendments, as realized in the market, may not be as significant.
The Commission notes that the consideration of costs and benefits
below is based on the understanding that the markets function
internationally, with many transactions involving 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
following discussion of costs and benefits refers to the effects of the
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 activities in, or effect
on, U.S. commerce under section 2(i) of the CEA.\51\
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\51\ 7 U.S.C. 2(i).
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As previously discussed, the Commission received six comment
letters expressing support for the Proposal. Commenters generally noted
that the proposed amendments are beneficial for market participants and
characterized them as helpful and practical accommodations that reflect
the realities of the marketplace and facilitate compliance with the
CFTC Margin Rule. Several commenters elaborated on specific benefits of
the amendments, noting for instance that the amendments would eliminate
burdens associated with the application of a single MTA across SMAs of
a counterparty, provide regulatory certainty and contribute to global
consistency in regulatory standards. Some commenters also addressed
concerns that the Commission had raised in the Proposal, pointing out
mitigating factors.\52\
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\52\ See e.g., ICI at 7 and MFA at 3 (addressing the concern
that permitting the application of a reduced, individualized MTA, as
proposed, to an indefinite number of SMAs may incentivize SMA owners
to create additional separate accounts).
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1. Benefits
The amendments to Regulation 23.151 allow CSEs to apply an MTA of
up to $50,000 to SMAs of a counterparty. Under the current
requirements, a CSE must apply the MTA with respect to each
counterparty to an uncleared transaction. As a result, in the context
of a counterparty that has multiple SMAs through which uncleared swaps
are traded, with each SMA potentially giving rise to IM and VM
obligations, the amounts of IM and VM attributable to the SMAs of the
counterparty must be aggregated to determine whether the MTA has been
exceeded, which would require the exchange of IM or VM.
As previously discussed, because the assets of SMAs are separately
held, transferred, and returned at the account level, and CSEs and SMA
asset managers do not share trading information across SMAs,
aggregation of IM and VM obligations across SMAs for the purpose of
determining whether the MTA has been exceeded may be impractical,
hindering efforts to comply with the CFTC Margin Rule. The Commission
acknowledges, however, the possibility that, in certain contexts, an
owner of SMAs, such as a pension fund that administers investments for
beneficiaries, may be set up to perform collateral management exercises
and may have the capability to aggregate collateral across SMAs.
Nevertheless, according to industry feedback, the only practical
alternative to fully ensure compliance with the margin requirements is
to set the MTA for each SMA at zero, so that trading by a given SMA
does not result in an inadvertent breach of the aggregate MTA threshold
without the exchange of the required margin.
The amendments to Regulation 23.151, by allowing the application of
an MTA of up to $50,000 for each SMA of a counterparty, will ease the
operational burdens and transactional costs associated with managing
frequent transfers of small amounts of collateral that counterparties
would incur if the MTA for SMAs were to be set at zero. In addition,
the amendments give flexibility to CSEs, owners of SMAs, and asset
managers to negotiate MTA levels within the regulatory limits that
match the risks of the SMAs and their investment strategies, and the
uncleared swaps being traded.
Furthermore, because the amendments to Regulation 23.151 simplify
the application of the MTA in the SMA context, thereby reducing the
operational burden, market participants may be encouraged to
participate in the uncleared swap markets through managed accounts, and
account managers may also make their services more readily available to
clients. As a result, trading in the uncleared swap markets may
increase, promoting competition and liquidity.
The amendment of Regulation 23.158(a) could likewise lead to
efficiencies in the application of the MTA. The amendment, as adopted,
states that if a CSE and its counterparty agree to have separate MTAs
for IM and VM, the respective amounts of MTA must be reflected in the
margin documentation required by Regulation 23.158(a). CSEs will thus
be able to maintain separate margin settlement workflows for IM and VM
to address the differing segregation treatments for IM and VM under the
CFTC Margin Rule.
The Commission notes that the application of separate MTAs for IM
and VM has been adopted in other jurisdictions, including the European
Union, and the practice is widespread. The amendments, by aligning the
CFTC with other jurisdictions with respect to the application of the
MTA, advance the CFTC's goal of promoting consistent international
standards, in line with the statutory mandate set forth in the Dodd-
Frank Act.
Finally, the amendments, as adopted, provide certainty to market
participants who may have relied on Letters 17-12 and 19-25, and could
thereby facilitate their efforts to take the operation of the
Commission's regulations into account in the planning of their
uncleared swap activities.
2. Costs
The amendments to Regulation 23.151 could result in a CSE applying
an MTA that exceeds, in the aggregate, the current MTA limit of
$500,000. That is because the amendments, as adopted, permit the
application of an MTA of up to $50,000 for each SMA of a counterparty,
without limiting the number of SMAs to which the $50,000 threshold may
be applied. The amendments thus could incentivize SMA owners to
increase the number of separate accounts in order to benefit from the
higher MTA limit. As a result, the collection and posting of margin for
some SMAs may be delayed, since margin will not need to be exchanged
until the MTA threshold is exceeded, which could result in the exchange
of less collateral to mitigate the risk of uncleared swaps.
The amendment to Regulation 23.158(a), as adopted, states that if a
CSE and its counterparty agree to have separate MTAs for IM and VM, the
respective amounts of MTA must be reflected in the margin documentation
[[Page 6856]]
required by Regulation 23.158(a). The amendment recognizes that CSEs
can apply separate MTAs for IM and VM for determining whether
Regulations 23.152(b)(3) and 23.153(c) require the exchange of IM or
VM. The Commission acknowledges that the application of separate IM and
VM MTAs may result in the exchange of a lower amount of total margin
between a CSE and its counterparty to mitigate the risk of their
uncleared swaps than the amount that would be exchanged if the IM and
VM MTA were computed on an aggregate basis.\53\ The Commission notes
that this cost may be mitigated because the application of separate IM
and VM MTAs could also result in the exchange of higher rather than
lower amounts of margin.\54\
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\53\ Supra note 38 (explaining how the application of separate
MTAs for IM and VM could result in the exchange of lower amounts of
margin than if IM and VM MTA were computed on an aggregate basis).
\54\ The following illustration explains how the application of
separate MTAs for IM and VM could result in the exchange of higher
amounts of margin than if IM and VM MTA were computed on an
aggregate basis: An SD and a counterparty agree to $300,000 IM MTA,
and $200,000 VM MTA. If the margin calculations set forth in
Commission regulations 23.154 (for IM), and 23.155 (for VM) require
the SD to post $200,000 of IM with the counterparty and $250,000 of
VM with the counterparty, the SD would not be required to post IM
with the counterparty as the $200,000 requirement is less than the
$300,000 MTA. However, the SD would be required to post $250,000 in
VM as the VM required exceeds the $200,000 VM MTA, even though the
total amount of margin owed is below the $500,000 MTA set forth in
Commission regulations 23.152(b)(3) and 23.153(c). Letter 19-25 at
4.
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While the Commission recognizes that the uncollateralized exposure
that may result from amending Regulations 23.151 and 23.158(a), in line
with Letters 17-12 and 19-25, could increase credit risk associated
with uncleared swaps, the Commission believes that a number of
safeguards exist to mitigate this risk. The Commission notes that the
amendments, as adopted, set the MTA at low levels. When the MTA is
applied to a counterparty, the sum of the IM and VM MTAs must not
exceed $500,000. When the MTA is applied to an SMA of a counterparty,
the sum of the IM and VM MTAs must not exceed $50,000. In particular
with respect to the application of the MTA to SMAs, the low level of
the MTA may dampen the incentive to create additional SMAs to benefit
from the potentially higher MTA threshold given the inability to net
collateral across SMAs under the Final Rule. Several commenters
confirmed the Commission's assessment and some added that the burdens
and costs of creating and maintaining separate accounts would likely
override the benefits of any marginal increase in MTA.\55\ Also, the
Commission notes that other regulatory safeguards exist that would
limit the potential increase in the credit exposure, including section
4s(j)(2) of the CEA,\56\ which mandates that CSEs adopt a robust and
professional risk management system adequate for the management of day-
to-day swap activities, and Regulation 23.600,\57\ which requires CSEs,
in establishing a risk management program for the monitoring and
management of risk related to their swap activities, to account for
credit risk and to set risk tolerance limits.
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\55\ See ICI at 7; MFA at 3; SIFMA AMG at 3.
\56\ 7 U.S.C. 6s(j)(2).
\57\ 17 CFR 23.600.
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3. Section 15(a) Considerations
In light of the foregoing, the CFTC has evaluated the costs and
benefits of the Final Rule pursuant to the five considerations
identified in section 15(a) of the CEA as follows:
a. Protection of Market Participants and Public
As discussed above, the amendments to Regulations 23.151 and
23.158(a), which address the application of the MTA to SMAs and the
application of separate MTAs for IM and VM, remove practical burdens in
the application of the MTA, facilitating the implementation of the CFTC
Margin Rule, with minimal impact on the protection of market
participants and the public in general. Although the amendments, as
adopted, could result in larger amounts of MTA being applied to
uncleared swaps, potentially resulting in the exchange of reduced
margin to offset the risk of uncleared swaps, the impact is likely to
be negligible relative to the size of the uncleared swap positions. The
Commission notes that the MTA thresholds are set at low levels. In
addition, CSEs are required to monitor and manage risk associated with
their swaps, in particular credit risk, and to set tolerance levels as
part of the risk management program mandated by Regulation 23.600. To
meet the risk tolerance levels, a CSE may contractually limit the MTA
or the number of SMAs for a particular counterparty with whom the CSE
enters into uncleared swap transactions.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
By amending Regulation 23.151 to allow CSEs to apply an MTA of up
to $50,000 for each SMA of a counterparty, the Commission eliminates
burdens and practical challenges associated with the computation and
aggregation of the MTA across multiple SMAs. In addition, the new MTA
threshold for SMAs could have the effect of delaying how soon margin
would be exchanged, as the aggregate MTA for SMAs is no longer limited
to $500,000.
The simplification of the process for applying the MTA to SMAs and
the reduced cost that may be realized from the deferral of margin
obligations may encourage market participants to enter into uncleared
swaps through accounts managed by asset managers and also encourage
asset managers to accept more clients. The amendments to Regulation
23.151 could therefore foster competitiveness by encouraging increased
participation in the uncleared swap markets.
The amendment to Regulation 23.158(a) states that if a CSE and its
counterparty agree to have separate MTAs for IM and VM, the respective
amounts of MTA must be reflected in the margin documentation required
by Regulation 23.158(a). The amendment recognizes that CSEs can apply
separate MTAs for IM and VM, enabling CSEs to accommodate the different
segregation treatments for IM and VM under the CFTC's margin
requirements and to more efficiently comply with the CFTC Margin Rule.
The amendments to Regulations 23.151 and 23.158(a) could have the
overall effect of permitting larger amounts of MTA being applied to
uncleared swaps, resulting in the collection and posting of less
collateral to offset the risk of uncleared swaps, which could undermine
the integrity of the markets. The Commission, however, believes that
the uncollateralized swap exposure will be limited given that the MTA
thresholds are set at low levels, and there are other built-in
regulatory safeguards, such as the requirement that CSEs establish a
risk management program under Regulation 23.600 that provides for the
implementation of internal risk parameters for the monitoring and
management of swap risk.
The Commission also notes that the amendments provide certainty to
market participants who may have relied on Letters 17-12 and 19-25, and
thereby facilitate their efforts to take the operation of the
Commission's regulations into account in planning their uncleared swap
activities.
c. Price Discovery
The amendments to Regulations 23.151 and 23.158(a) simplify the
process for applying the MTA, reducing the burden and cost of
implementation. Given these cost savings, CSEs and
[[Page 6857]]
other market participants may be encouraged to increase their
participation in the uncleared swap markets. As a result, trading in
uncleared swaps may increase, leading to increased liquidity and
enhanced price discovery.
d. Sound Risk Management
Because the amendments to Regulations 23.151 and 23.158(a) permit
the application of larger amounts of MTA, less margin may be collected
and posted to offset the risk of uncleared swaps. Nevertheless, the
Commission believes that the risk is mitigated because the regulatory
MTA thresholds are set at low levels, and CSEs are required to have a
risk management program that provides for the implementation of
internal risk management parameters for the monitoring and management
of swap risk.
The Commission also notes that the amendments simplify the
application of the MTA, reducing the burden and cost of implementation,
without leading to an unacceptable level of uncollateralized credit
risk. Such reduced burden and cost could encourage market participants
to increase their participation in the uncleared swap markets,
potentially facilitating improved risk management for counterparties
using uncleared swaps to hedge risks. Moreover, by facilitating
compliance with certain aspects of the Commission's regulations, the
Commission allows market participants to focus their efforts on
monitoring and ensuring compliance with other substantive aspects of
the CFTC Margin Rule, thus promoting balanced and sound risk
management.
e. Other Public Interest Considerations
The amendment to Regulation 23.158(a) addresses the application of
separate MTAs for IM and VM, contributing to the CFTC's alignment with
other jurisdictions, such as the European Union, which advances the
CFTC's efforts to achieve consistent international standards. The
CFTC's alignment with other jurisdictions with respect to the
application of the MTA will benefit CSEs that are global market
participants by eliminating the need to establish different settlement
workflows tailored to each jurisdiction in which they operate.
C. 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, as well as the policies and purposes 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.\58\
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\58\ 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 the Proposal implicated any other specific
public interest to be protected by the antitrust laws and received no
comments.
The Commission has considered the 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 17 CFR Part 23
Swaps, Swap dealers, Major swap participants, Capital and margin
requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 23 as set forth below:
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.
0
2. Amend Sec. 23.151 by:
0
a. Revising the definition of ``minimum transfer amount''; and
0
b. Adding in alphabetical order a definition for ``separately managed
account''.
The revision and addition read as follows:
Sec. 23.151 Definitions applicable to margin requirements.
* * * * *
Minimum transfer amount means a combined initial and variation
margin amount under which no actual transfer of funds is required. The
minimum transfer amount shall be $500,000. Where a counterparty to a
covered swap entity owns two or more separately managed accounts, a
minimum transfer amount of up to $50,000 may be applied for each
separately managed account.
* * * * *
Separately managed account means an account of a counterparty to a
covered swap entity that meets the following requirements:
(1) The account is managed by an asset manager and governed by an
investment management agreement, pursuant to which the counterparty
grants the asset manager authority with respect to a specified amount
of the counterparty's assets;
(2) Swaps are entered into between the counterparty and the covered
swap entity by the asset manager on behalf of the account pursuant to
authority granted by the counterparty through an investment management
agreement; and
(3) The swaps of such account are subject to a master netting
agreement that does not provide for the netting of initial or variation
margin obligations across all such accounts of the counterparty that
have swaps outstanding with the covered swap entity.
* * * * *
0
3. Amend Sec. 23.152 by revising paragraph (b)(3) to read as follows:
Sec. 23.152 Collection and posting of initial margin.
* * * * *
(b) * * *
(3) Minimum transfer amount. A covered swap entity is not required
to collect or to post initial margin pursuant to Sec. Sec. 23.150
through 23.161 with respect to a particular counterparty unless and
until the combined amount of initial margin and variation margin that
is required pursuant to Sec. Sec. 23.150 through 23.161 to be
collected or posted and that has not been collected or posted with
respect to the counterparty is greater than the minimum transfer
amount, as the term is defined in Sec. 23.151.
* * * * *
0
4. Amend Sec. 23.153 by revising paragraph (c) to read as follows:
Sec. 23.153 Collection and posting of variation margin.
* * * * *
(c) Minimum transfer amount. A covered swap entity is not required
to collect or to post variation margin pursuant to Sec. Sec. 23.150
through 23.161 with respect to a particular counterparty unless and
until the combined amount of initial margin and variation margin
[[Page 6858]]
that is required pursuant to Sec. Sec. 23.150 through 23.161 to be
collected or posted and that has not been collected or posted with
respect to the counterparty is greater than the minimum transfer
amount, as the term is defined in Sec. 23.151.
* * * * *
0
5. Amend Sec. 23.158 by revising paragraph (a) to read as follows:
Sec. 23.158 Margin documentation.
(a) General requirement. Each covered swap entity shall execute
documentation with each counterparty that complies with the
requirements of Sec. 23.504 and that complies with this section, as
applicable. For uncleared swaps between a covered swap entity and a
counterparty that is a swap entity or a financial end user, the
documentation shall provide the covered swap entity with the
contractual right and obligation to exchange initial margin and
variation margin in such amounts, in such form, and under such
circumstances as are required by Sec. Sec. 23.150 through 23.161. With
respect to the minimum transfer amount, if a covered swap entity and a
counterparty that is a swap entity or a financial end user agree to
have separate minimum transfer amounts for initial and variation
margin, the documentation shall specify the amounts to be allocated for
initial margin and variation margin. Such amounts, on a combined basis,
must not exceed the minimum transfer amount, as the term is defined in
Sec. 23.151.
* * * * *
Issued in Washington, DC, on December 9, 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--Voting Summary and Chairman's and
Commissioners' Statements
Appendix 1--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 Dawn D. Stump
Overview
I am pleased to support the final rulemaking that the Commission
is adopting with respect to the ``minimum transfer amount''
provisions of its margin requirements for uncleared swaps.
This rulemaking addresses recommendations that the Commission
has received from its Global Markets Advisory Committee (``GMAC''),
which I am proud to sponsor, and is based on a comprehensive report
prepared by GMAC's Subcommittee on Margin Requirements for Non-
Cleared Swaps (``GMAC Margin Subcommittee'').\59\ It demonstrates
the value added to the Commission's policymaking by its Advisory
Committees, in which market participants and other interested
parties come together to provide us with their perspectives and
potential solutions to practical problems.
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\59\ 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 (April 2020), available at
https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download.
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The rulemaking we are adopting makes two changes to the
Commission's uncleared margin rules, which have much to commend
them--indeed, we did not receive any comment letters opposing them.
These rule changes further objectives that I have commented on
before:
The need to tailor our rules to assure that they are
workable for those required to comply with them; and
the benefits of codifying relief that has been issued
by our Staff and re-visiting our rules, where appropriate.
A Different Universe Is Coming Into Scope of the Uncleared Margin Rules
The Commission's uncleared margin rules for swap dealers, like
the Framework of the Basel Committee on Banking Supervision and the
Board of the International Organization of Securities Commissions
(``BCBS/IOSCO'') \60\ on which they are based, were designed
primarily to ensure the exchange of margin between the largest, most
systemic, and interconnected financial institutions for their
uncleared swap transactions with one another. Today, these
institutions and transactions are subject to uncleared margin
requirements that have taken effect since the rules were adopted.
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\60\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf.
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Pursuant to the phased implementation schedule of the
Commission's rules and the BCBS/IOSCO Framework, though, a different
universe of market participants--presenting unique considerations--
will soon be coming into scope of the margin rules. It is only now,
as we enter the final phases of the implementation schedule, that
the Commission's uncleared margin rules will apply to a significant
number of financial end-users, and we have a responsibility to make
sure they are fit for that purpose. Accordingly, now is the time we
must thoughtfully consider whether the regulatory parameters that we
have designed for the largest financial institutions in the earlier
phases of margin implementation need to be tailored to account for
the practical and operational challenges posed by the exchange of
margin when one of the counterparties is a pension plan, endowment,
insurance provider, mortgage service provider, or other financial
end-user.
This rulemaking regarding the minimum transfer amount (``MTA'')
does exactly that. The Commission's uncleared margin rules provide
that a swap dealer is not required to collect or post initial margin
(``IM'') or variation margin (``VM'') with a counterparty until the
combined amount of such IM and VM exceeds the MTA of $500,000. Yet,
the application of the MTA presents a significant operational
challenge for institutional investors that typically hire asset
managers to exercise investment discretion over portions of their
assets in separately managed accounts (``SMAs'') for purposes of
diversification. As a practical matter, neither the owner of the
SMA, the manager of the assets in the SMA, nor the swap dealer that
is a counterparty to the SMA is in a position to readily determine
when the MTA has been exceeded on an aggregate basis (or to assure
that it is not).
To address this challenge, the Commission is amending the
definition of MTA in its margin rules to allow a swap dealer to
apply an MTA of up to $50,000 to each SMA owned by a counterparty
with which the swap dealer enters into uncleared swaps. As noted in
the release, any potential increase in uncollateralized credit risk
as a result would be mitigated both by the conditions set out in the
rules we are adopting, as well as existing safeguards in the
Commodity Exchange Act (``CEA'') and the Commission's
regulations.\61\
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\61\ Specifically, CEA Section 4s(j)(2), 7 U.S.C. 6s(j)(2),
requires swap dealers to adopt a robust risk management system
adequate for the management of their swap activities, and CFTC Rule
23.600, 17 CFR 23.600, requires swap dealers to establish a risk
management program to monitor and manage risks associated with their
swap activities.
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This is a sensible approach and an appropriate refinement to
make the Commission's uncleared margin rules workable for SMAs given
the realities of the modern investment management environment. As I
have stated before, no matter how well-intentioned a rule may be, if
it is not workable, it cannot deliver on its intended purpose.\62\
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\62\ Statement of Commissioner Dawn D. Stump Regarding Final
Rule: Cross-Border Application of the Registration Thresholds and
Certain Requirements Applicable to Swap Dealers and Major Swap
Participants (July 23, 2020), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement072320.
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The Benefits of Codifying Staff Relief and Re-Visiting Our Rules
Application of MTA to SMAs: The rule change that I have
discussed above regarding the application of the MTA to SMAs would
codify no-action relief in Letter No. 17-12 that our Staff issued in
2017.\63\ The Commission's Staff often has occasion to issue relief
or take other action in the form
[[Page 6859]]
of no-action letters, interpretative letters, or advisories on
various issues and in various circumstances. This affords the
Commission a chance to observe how the Staff action operates in
real-time, and to evaluate lessons learned. With the benefit of this
time and experience, the Commission should then consider whether
codifying such Staff action into rules is appropriate.\64\
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\63\ CFTC Letter No. 17-12, Commission Regulations 23.152(b)(3)
and 23.153(c): No-Action Position for Minimum Transfer Amount with
respect to Separately Managed Accounts (February 13, 2017),
available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-12.pdf.
\64\ See comments of Commissioner Dawn D. Stump during Open
Commission Meeting on January 30, 2020, at 183 (noting that after
several years of no-action relief regarding trading on swap
execution facilities (``SEFs''), ``we have the benefit of time and
experience and it is time to think about codifying some of that
relief. . . . [T]he SEFs, the market participants, and the
Commission have benefited from this time and we have an obligation
to provide more legal certainty through codifying these provisions
into rules.''), available at https://www.cftc.gov/sites/default/files/2020/08/1597339661/openmeeting_013020_Transcript.pdf.
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As I have said before, ``[i]t is simply good government to re-
visit our rules and assess whether certain rules need to be updated,
evaluate whether rules are achieving their objectives, and identify
rules that are falling short and should be withdrawn or improved.''
\65\ Experience with the Staff no-action relief in Letter No. 17-12
supports our rule change to tailor the application of the MTA under
the Commission's uncleared margin rules in the SMA context.
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\65\ Statement of Commissioner Dawn D. Stump for CFTC Open
Meeting on: (1) Final Rule on Position Limits and Position
Accountability for Security Futures Products; and (2) Proposed Rule
on Public Rulemaking Procedures (Part 13 Amendments) (September 16,
2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement091619.
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Separate MTAs for IM and VM: The second rule change regarding
the MTA that we are adopting similarly would codify existing Staff
no-action relief in recognition of market realities. Consistent with
Staff no-action Letter No. 19-25,\66\ it would recognize that a swap
dealer may apply separate MTAs for IM and VM with each counterparty,
provided that the MTAs corresponding to IM and VM are specified in
the margin documentation required under the Commission's
regulations, and that the MTAs, on a combined basis, do not exceed
the prescribed MTA.
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\66\ CFTC Letter No. 19-25, Commission Regulations 23.151,
23.152, and 23.153--Staff Time-Limited No-Action Position Regarding
Application of Minimum Transfer Amount under the Uncleared Margin
Rules (December 6, 2019), available at https://www.cftc.gov/csl/19-25/download.
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Staff's no-action relief, and the Commission's rule amendments
to codify that relief, take into account the separate settlement
workflows that swap counterparties maintain to reflect, from an
operational perspective, the different regulatory treatment of IM
and VM.\67\ And given that the total amount of combined IM and VM
exchanged would not exceed the prescribed MTA, separate MTAs for IM
and VM would not materially increase the amount of credit risk at a
given time. Under Letter No. 19-25 and this codification, swap
dealers and their counterparties can manage MTA in an operationally
practicable way that aligns with the market standard.
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\67\ Under the Commission's uncleared margin rules, IM posted or
collected by a swap dealer must be held by one or more custodians
that are not affiliated with the swap dealer or the counterparty,
whereas VM posted or collected by a swap dealer is not required to
be segregated with an independent custodian. See 17 CFR 23.157.
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There Remains Unfinished Business
While I am pleased with the steps the Commission is taking,
there remains unfinished business in the implementation of uncleared
margin requirements. The report of the GMAC Margin Subcommittee
recommended several actions, beyond those that we are adopting, to
address the hurdles associated with the application of uncleared
margin requirements to end-users. Having been present for the
development of the Dodd-Frank Act, I recall that the concerns
expressed by many lawmakers at the time focused on the application
of the new requirements to end-users. The unique challenges with
respect to uncleared margin that caused uneasiness back in 2009-2010
are now much more immediate as the margin requirements are being
phased in to apply to these end-users. As the calendar turns into
the new year, I look forward to continuing to work together to
address the other recommendations included in the GMAC Margin
Subcommittee's report regarding applying the uncleared margin rules
to financial end-users. The need to do so will only become more
urgent as time marches on.
Conclusion
To be clear, these changes to the uncleared margin rules are not
a ``roll-back'' of the margin requirements that apply today to the
largest financial institutions in their swap transactions with one
another. Rather, they reflect a thoughtful refinement of our rules
to take account of specific circumstances in which the rules impose
substantial practical and operational challenges (i.e., they are not
workable) when applied to financial end-users that are now coming
within the scope of their mandates.
I am very appreciative of the many people whose efforts have
contributed to bringing this rulemaking to fruition. First, the
members of the GMAC, and especially the GMAC Margin Subcommittee,
who devoted a tremendous amount of time to provide us with a high-
quality report on complex margin issues during the turmoil at the
start of the pandemic. Second, Chairman Tarbert and my fellow
Commissioners for working with me on these important issues. And
finally, the Staff of the Market Participants Division, whose
tireless efforts have enabled us to advance these initiatives to
assure that our uncleared margin rules are workable for all, thereby
enhancing compliance consistent with our oversight responsibilities
under the CEA.
Appendix 3--Statement of Commissioner Dan M. Berkovitz
I. Introduction
I support today's two final rules that make tailored amendments
to the CFTC's Margin Rule.\1\ The Margin Rule requires swap dealers
(``SDs'') and major swap participants (``MSPs'') for which there is
no prudential regulator to post and collect, each business day,
initial and variation margin for uncleared swap transactions with
each counterparty that is an SD, MSP, or a financial end user with
material swaps exposure (``MSE'').\2\ The Margin Rule is a lynchpin
of the Dodd-Frank reforms for swaps markets, and critical to
mitigating risks in the financial system that might otherwise arise
from uncleared swaps.\3\ I support the final rules because they
provide targeted, operational improvements to the Margin Rule;
include backstops to deter any potential abuse; and are unlikely to
increase risk to the U.S. financial system.
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\1\ Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (``Margin Rule'').
\2\ Although addressed in the final rules, there are currently
no registered MSPs.
\3\ Section 4s(e) of the Commodity Exchange Act (``CEA''), as
amended by the Dodd-Frank Act, requires the Commission to adopt
rules for minimum initial and variation margin for uncleared swaps
entered into by SDs and MSPs for which there is no prudential
regulator.
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The two final rules address: (1) The definition of MSE and an
alternative method for calculating initial margin (``MSE and Initial
Margin Final Rule''); and (2) the application of the minimum
transfer amount (``MTA'') for initial and variation margin (``MTA
Final Rule''). The final rules align Commission requirements with
international frameworks developed by the Basel Committee on Banking
Supervision and the International Organization of Securities
Commissions (``BCBS/IOSCO''),\4\ and incorporate recommendations
made to the CFTC's Global Markets Advisory Committee.\5\ The final
rules also build off existing CFTC staff no-action letters that in
some cases have been in place since 2017, and that have operated
with no apparent detrimental effects.
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\4\ BCBS/IOSCO, Margin requirements for non-centrally cleared
derivatives (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf. The BCBS/IOSCO framework was originally promulgated in
2013 and later revised in 2015.
\5\ 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 (Apr. 2020), available at
https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download.
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II. MSE and Initial Margin Final Rule
The MSE and Initial Margin Final Rule amends the definition of
MSE to align it with the BCBS/IOSCO framework, including the method
for calculating the average daily aggregate notional amount
(``AANA'') of swaps. The final rule provides for calculations based
on the average of the last business day in each month of a three-
month period. The Commission previously raised concerns that this
method of AANA calculation could potentially become less
representative of an entity's true AANA and swaps exposure,
potentially through the use of ``window dressing'' to artificially
reduce AANA during the measurement period.\6\
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\6\ See Margin Rule, 81 FR at 645.
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The MSE and Initial Margin Final Rule includes an important new
provision to
[[Page 6860]]
address this issue. The final rule explicitly prohibits any
``[a]ctivities not carried out in the regular course of business and
willfully designed to circumvent calculation at month-end to evade
meeting the definition of material swaps exposure . . . .'' \7\ The
addition of this language to the final rule's regulatory text will
help ensure that CFTC efforts at international harmonization will
not come at the expense of the safety and soundness of the U.S.
financial system.\8\ I thank the Chairman and the CFTC staff for
working with my office to include this provision.
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\7\ MSE and Initial Margin Final Rule at new Sec. 23.151
(defining ``Material Swaps Exposure'').
\8\ The preamble to the MSE and Initial Margin Final Rule also
notes an analysis by the CFTC's Office of the Chief Economist
indicating that the new month-end AANA calculation method captures
substantially the same entities and total number of entities as the
Commission's previous daily AANA calculation method. As with any
rulemaking, the Commission is free in the future to periodically
review its data and confirm that the new AANA calculation method is
performing as expected.
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The MSE and Initial Margin Final Rule will also allow SDs and
MSPs for which there is no prudential regulator (``Covered Swap
Entities'' or ``CSEs'') to rely on the initial margin calculations
of the more sophisticated counterparties with whom they transact
swaps to manage their risks. This flexibility is limited to
circumstances where a CSE enters into uncleared swaps with an SD,
MSP, or swap entity to hedge its customer-facing swaps. This
amendment to the Commission's existing rules could help promote
liquidity and competition in swaps markets by increasing choice for
end-users that are CSE customers.
The MSE and Initial Margin Final Rule provides helpful direction
regarding the scope of hedging swaps for purposes of relying on a
CSE counterparty's initial margin calculations. As set forth in the
preamble to the final rule, a hedging swap must be consistent
(although not identical) with the statutory definition of ``bona
fide hedging transaction or position'' in CEA section
4a(c)(2)(B).\9\ The final rule also makes clear that existing
Commission regulations require a CSE that relies on its
counterparty's initial margin calculations to also take steps to
``monitor, identify, and address potential shortfalls in the amounts
of [initial margin] generated by the counterparty on whose [initial
margin] model the CSE is relying.'' \10\
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\9\ 7 U.S.C. 6a(c)(2).
\10\ MSE and Initial Margin Final Rule at section II(B).
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III. MTA Final Rule
To reduce operational burdens associated with de minimis margin
transfers, the Margin Rule provides that a CSE is not required to
collect or post margin until the combined amount of initial margin
and variation margin that is required to be collected or posted and
that has not been collected or posted with respect to the
counterparty exceeds $500,000--the MTA.\11\ This MTA level, in part,
helps limit the amount of a counterparty's uncollateralized,
uncleared swaps exposure and mitigate any systemic risk arising from
such swaps.
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\11\ 17 CFR 23.151.
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The MTA Final Rule addresses the application of the $500,000 MTA
level to a counterparty's ``separately managed accounts,'' as well
as the use of separate MTAs for initial and variation margin.\12\
The MTA Final Rule codifies separate treatment for separately
managed accounts and permits an MTA of $50,000 for each such account
of a counterparty. This approach responds to practical limits on the
ability of asset managers, for example, to aggregate initial and
variation margin obligations across multiple separately managed
accounts owned by the same counterparty. The MTA Final Rule also
provides that if certain entities agree to separate MTAs for initial
margin and variation margin, the respective amounts of MTA must be
reflected in their required margin documentation.
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\12\ Both aspects of the MTA Final Rule were the subject of CFTC
staff no-action letters issued in 2017 and 2019, respectively.
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These new provisions balance concerns over operational
inefficiencies and practical challenges in the Commission's MTA
rules against concerns that they may result in the exchange of less
total margin than would be the case under the Commission's current
requirements. Comments in response to the proposed rule noted the
difficulties that would be associated with creating numerous
separately managed accounts solely to evade the comparatively low
$50,000 MTA for separately managed accounts. The MTA Final Rule also
defines separately managed account so that the swaps of such account
are not subject to a netting of initial or variation margin
obligations. This potentially provides further disincentive to
create separately managed accounts solely for the purpose of evading
the $50,000 MTA level for such accounts.
IV. Conclusion
Mitigating systemic risk to the U.S. financial system was a
primary objective of the Dodd-Frank Act in 2010, and of subsequent
Commission rulemakings to implement Dodd-Frank, including the Margin
Rule adopted in 2016. The Commission must remain committed to the
Margin Rule and vigilant for any large pool of uncollateralized,
uncleared swaps exposure. Today's targeted final rules, which codify
existing practices, include embedded backstops, and provide tailored
operational enhancements to the Margin Rule, are unlikely to present
systemic risks.
I thank staff of the Market Participants Division for their work
on these final rules.
[FR Doc. 2020-27508 Filed 1-22-21; 8:45 am]
BILLING CODE 6351-01-P