Margin and Capital Requirements for Covered Swap Entities, 27564-27596 [2011-10432]
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Federal Register / Vol. 76, No. 91 / Wednesday, May 11, 2011 / Proposed Rules
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 45
[Docket No. OCC–2011–0008]
RIN 1557–AD43
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
12 CFR Part 237
[Docket No. R–1415]
RIN 7100 AD74
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 324
RIN 3064–AD79
FARM CREDIT ADMINISTRATION
12 CFR Part 624
RIN 3052–AC69
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1221
RIN 2590–AA45
Margin and Capital Requirements for
Covered Swap Entities
Office of the Comptroller of the
Currency, Treasury (OCC); Board of
Governors of the Federal Reserve
System (Board); Federal Deposit
Insurance Corporation (FDIC); Farm
Credit Administration (FCA); and the
Federal Housing Finance Agency
(FHFA).
ACTION: Notice of proposed rulemaking.
AGENCY:
The OCC, Board, FDIC, FCA,
and FHFA (collectively, the Agencies)
are requesting comment on a proposal to
establish minimum margin and capital
requirements for registered swap
dealers, major swap participants,
security-based swap dealers, and major
security-based swap participants for
which one of the Agencies is the
prudential regulator. This proposed rule
implements sections 731 and 764 of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, which require
the Agencies to adopt rules jointly to
establish capital requirements and
initial and variation margin
requirements for such entities on all
non-cleared swaps and non-cleared
security-based swaps in order to offset
the greater risk to such entities and the
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SUMMARY:
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financial system arising from the use of
swaps and security-based swaps that are
not cleared.
DATES: Comments should be received on
or before June 24, 2011.
ADDRESSES: Interested parties are
encouraged to submit written comments
jointly to all of the Agencies.
Commenters are encouraged to use the
title ‘‘Margin and Capital Requirements
for Covered Swap Entities’’ to facilitate
the organization and distribution of
comments among the Agencies.
Commenters are also encouraged to
identify the number of the specific
question for comment to which they are
responding.
Office of the Comptroller of the
Currency: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by the
Federal eRulemaking Portal or e-mail, if
possible. Please use the title ‘‘Margin
and Capital Requirements’’ to facilitate
the organization and distribution of the
comments. You may submit comments
by any of the following methods:
• Federal eRulemaking Portal—
‘‘Regulations.gov’’: Go to https://
www.regulations.gov. Select ‘‘Document
Type’’ of ‘‘Proposed Rules,’’ and in the
‘‘Enter Keyword or ID Box,’’ enter Docket
ID ‘‘OCC–2011–0008,’’ and click
‘‘Search.’’ On ‘‘View By Relevance’’ tab at
the bottom of screen, in the ‘‘Agency’’
column, locate the Proposed Rule for
the OCC, in the ‘‘Action’’ column, click
on ‘‘Submit a Comment’’ or ‘‘Open
Docket Folder’’ to submit or view public
comments and to view supporting and
related materials for this rulemaking
action.
• Click on the ‘‘Help’’ tab on the
Regulations.gov home page to get
information on using Regulations.gov,
including instructions for submitting or
viewing public comments, viewing
other supporting and related materials,
and viewing the docket after the close
of the comment period.
• E-mail:
regs.comments@occ.treas.gov.
• Mail: Office of the Comptroller of
the Currency, 250 E Street, SW., Mail
Stop 2–3, Washington, DC 20219.
• Fax: (202) 874–5274.
• Hand Delivery/Courier: 250 E
Street, SW., Mail Stop 2–3, Washington,
DC 20219.
Instructions: You must include ‘‘OCC’’
as the agency name and ‘‘Docket ID
OCC–2011–0008’’ in your comment. In
general, OCC will enter all comments
received into the docket and publish
them on the Regulations.gov Web site
without change, including any business
or personal information that you
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provide such as name and address
information, e-mail addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
proposed rulemaking by any of the
following methods:
• Viewing Comments Electronically:
Go to https://www.regulations.gov. Select
‘‘Document Type’’ of ‘‘Public
Submissions,’’ and in the ‘‘Enter
Keyword or ID Box,’’ enter Docket ID
‘‘OCC–2011–0008,’’ and click ‘‘Search.’’
Comments will be listed under ‘‘View
By Relevance’’ tab at the bottom of
screen. If comments from more than one
agency are listed, the ‘‘Agency’’ column
will indicate which comments were
received by the OCC.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC, 250 E Street,
SW., Washington, DC. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 874–4700. Upon arrival, visitors
will be required to present valid
government-issued photo identification
and submit to security screening in
order to inspect and photocopy
comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
Board of Governors of the Federal
Reserve System
You may submit comments, identified
by Docket No. R–1415 and RIN 7100
AD74, by any of the following methods:
• Agency Web Site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include the docket number in the
subject line of the message.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Address to Jennifer J. Johnson,
Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
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Federal Register / Vol. 76, No. 91 / Wednesday, May 11, 2011 / Proposed Rules
All public comments will be made
available on the Board’s Web site at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical
reasons. Accordingly, comments will
not be edited to remove any identifying
or contact information. Public
comments may also be viewed
electronically or in paper in Room MP–
500 of the Board’s Martin Building (20th
and C Streets, NW.) between 9 a.m. and
5 p.m. on weekdays.
Federal Deposit Insurance
Corporation: You may submit
comments, identified by RIN number,
by any of the following methods:
• Agency Web Site: https://
www.fdic.gov/regulations/laws/federal/
propose.html. Follow instructions for
submitting comments on the Agency
Web site.
• E-mail: Comments@FDIC.gov.
Include the RIN number on the subject
line of the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
• Hand Delivery: Comments may be
hand delivered to the guard station at
the rear of the 550 17th Street Building
(located on F Street) on business days
between 7 a.m. and 5 p.m.
Instructions: All comments received
must include the agency name and RIN
for this rulemaking and will be posted
without change to https://www.fdic.gov/
regulations/laws/federal/propose.html,
including any personal information
provided.
Federal Housing Finance Agency: You
may submit your written comments on
the proposed rulemaking, identified by
regulatory information number (RIN)
2590–AA45, by any of the following
methods:
• E-mail: Comments to Alfred M.
Pollard, General Counsel, may be sent
by e-mail at RegComments@fhfa.gov.
Please include ‘‘RIN 2590–AA45’’ in the
subject line of the message.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments. If
you submit your comment to the
Federal eRulemaking Portal, please also
send it by e-mail to FHFA at
RegComments@fhfa.gov to ensure
timely receipt by the Agency. Please
include ‘‘RIN 2590–AA45’’ in the subject
line of the message.
• U.S. Mail, United Parcel Service,
Federal Express, or Other Mail Service:
The mailing address for comments is:
Alfred M. Pollard, General Counsel,
Attention: Comments/RIN 2590–AA45,
Federal Housing Finance Agency,
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Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552.
• Hand Delivery/Courier: The hand
delivery address is: Alfred M. Pollard,
General Counsel, Attention: Comments/
RIN 2590–AA45, Federal Housing
Finance Agency, Fourth Floor, 1700 G
Street, NW., Washington, DC 20552. A
hand-delivered package should be
logged at the Guard Desk, First Floor, on
business days between 9 a.m. and 5 p.m.
All comments received by the
deadline will be posted for public
inspection without change, including
any personal information you provide,
such as your name and address, on the
FHFA Web site at https://www.fhfa.gov.
Copies of all comments timely received
will be available for public inspection
and copying at the address above on
government-business days between the
hours of 10 a.m. and 3 p.m. To make an
appointment to inspect comments
please call the Office of General Counsel
at (202) 414–6924.
Farm Credit Administration: We offer
a variety of methods for you to submit
your comments. For accuracy and
efficiency reasons, commenters are
encouraged to submit comments by email or through the FCA’s Web site. As
facsimiles (fax) are difficult for us to
process and achieve compliance with
section 508 of the Rehabilitation Act, we
are no longer accepting comments
submitted by fax. Regardless of the
method you use, please do not submit
your comments multiple times via
different methods. You may submit
comments by any of the following
methods:
• E-mail: Send us an e-mail at regcomm@fca.gov.
• FCA Web site: https://www.fca.gov.
Select ‘‘Public Commenters,’’ then
‘‘Public Comments,’’ and follow the
directions for ‘‘Submitting a Comment.’’
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail: Gary K. Van Meter, Acting
Director, Office of Regulatory Policy,
Farm Credit Administration, 1501 Farm
Credit Drive, McLean, VA 22102–5090.
You may review copies of all
comments we receive at our office in
McLean, Virginia or on our Web site at
https://www.fca.gov. Once you are in the
Web site, select ‘‘Public Commenters,’’
then ‘‘Public Comments,’’ and follow the
directions for ‘‘Reading Submitted
Public Comments.’’ We will show your
comments as submitted, including any
supporting data provided, but for
technical reasons we may omit items
such as logos and special characters.
Identifying information that you
provide, such as phone numbers and
addresses, will be publicly available.
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However, we will attempt to remove email addresses to help reduce Internet
spam.
FOR FURTHER INFORMATION CONTACT:
OCC: Michael Sullivan, Market RAD
(202) 874–3978, Kurt Wilhelm, Director,
Financial Markets Group (202) 874–
4479, Jamey Basham, Assistant Director,
Legislative and Regulatory Activities
Division (202) 874–5090, or Ron
Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities
Division (202) 874–5090, Office of the
Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.
Board: Sean D. Campbell, Deputy
Associate Director, Division of Research
and Statistics, (202) 452–3761, Michael
Gibson, Senior Associate Director,
Division of Research and Statistics,
(202) 452–2495, or Jeremy R. Newell,
Senior Attorney, Legal Division, (202)
452–3239, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551.
FDIC: Bobby R. Bean, Chief, Policy
Section, (202) 898–6705, John Feid,
Senior Capital Markets Specialist, (202)
898–8649, Division of Risk Management
Supervision, Thomas F. Hearn, Counsel,
(202) 898–6967, or Ryan K. Clougherty,
Senior Attorney, (202) 898–3843, Legal
Division, Federal Deposit Insurance
Corporation, 550 17th Street, NW.,
Washington, DC 20429.
FHFA: Robert Collender, Principal
Policy Analyst, Office of Policy Analysis
and Research, (202) 343–1510,
Robert.Collender@fhfa.gov, Peggy
Balsawer, Assistant General Counsel,
Office of General Counsel, (202) 343–
1529, Peggy.Balsawer@fhfa.gov. or
James Carley, Senior Associate Director,
Division of FHLBank Regulation, (202)
408–2507, James.Carley@fhfa.gov,
Federal Housing Finance Agency,
Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552. The telephone
number for the Telecommunications
Device for the Hearing Impaired is (800)
877–8339.
FCA: William G. Dunn, Acting
Associate Director, Finance and Capital
Markets Team, Office of Regulatory
Policy, Farm Credit Administration,
McLean, VA 22102–5090, (703) 883–
4414, TTY (703) 883–4434, Joseph T.
Connor, Associate Director for Policy
and Analysis, Office of Secondary
Market Oversight, Farm Credit
Administration, McLean, VA 22102–
5090, (703) 883–4280, TTY (703) 883–
4434, or Rebecca S. Orlich, Senior
Counsel, Office of General Counsel,
Farm Credit Administration, McLean,
VA 22102–5090, (703) 883–4020, TTY
(703) 883–4020.
SUPPLEMENTARY INFORMATION:
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Federal Register / Vol. 76, No. 91 / Wednesday, May 11, 2011 / Proposed Rules
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I. Background
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (the
Dodd-Frank Act) was enacted on July
21, 2010.1 Title VII of the Dodd-Frank
Act established a comprehensive new
regulatory framework for derivatives,
which the Act generally characterizes as
‘‘swaps’’ (which are defined in section
721 of the Dodd-Frank Act to include
interest rate swaps, commodity-based
swaps, and broad-based credit swaps)
and ‘‘security-based swaps’’ (which are
defined in section 761 of the DoddFrank Act to include single-name and
narrow-based credit swaps and equitybased swaps).2
As part of this new regulatory
framework, sections 731 and 764 of the
Dodd-Frank Act add a new section 4s to
the Commodity Exchange Act and a new
section 15F to the Securities Exchange
Act of 1934, respectively, which require
the registration and regulation of swap
dealers and major swap participants and
security-based swap dealers and major
security-based swap participants
(collectively, swap entities).3 For certain
types of swap entities that are
prudentially regulated by one of the
Agencies,4 sections 731 and 764 of the
1 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, 124 Stat. 1376
(2010).
2 See 7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68). Swaps
and security-based swaps are sometimes referred to
herein collectively as ‘‘derivatives.’’
3 See 7 U.S.C. 6s; 15 U.S.C. 78o–8. Section 731
of the Dodd-Frank Act requires swap dealers and
major swap participants to register with the
Commodity Futures Trading Commission (the
‘‘CFTC’’), which is vested with primary
responsibility for the oversight of the swaps market
under title 7 of the Dodd Frank Act. Section 764
of the Dodd-Frank Act requires security-based swap
dealers and major security-based swap participants
to register with the Securities and Exchange
Commission (the ‘‘SEC’’), which is vested with
primary responsibility for the oversight of the
security-based swaps market under title 7 of the
Dodd-Frank Act. Section 713(d)(1) of the DoddFrank Act requires the CFTC and SEC to issue joint
rules further defining the terms swap dealer, major
swap participant, security-based swap dealer, and
major security-based swap participant. The CFTC
and SEC issued a joint notice of proposed
rulemaking with respect to these definitions in
December, 2010. See 75 FR 80,174 (Dec. 21, 2010)
(proposed rule).
4 Section 1a(39) of the Commodities Exchange Act
defines the term ‘‘prudential regulator’’ for purposes
of the capital and margin requirements applicable
to swap dealers, major swap participants, securitybased swap dealers and major security-based swap
participants. The Board is the prudential regulator
for any swap entity that is (i) a State-chartered bank
that is a member of the Federal Reserve System, (ii)
a State-chartered branch or agency of a foreign
bank, (iii) a foreign bank which does not operate an
insured branch, (iv) an organization operating
under section 25A of the Federal Reserve Act (an
Edge corporation) or having an agreement with the
Board under section 25 of the Federal Reserve Act
(an Agreement corporation), and (v) a bank holding
company, a foreign bank that is treated as a bank
holding company under section 8(a) of the
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Dodd-Frank Act require the Agencies to
adopt rules jointly for swap entities
under their respective jurisdictions
imposing (i) capital requirements and
(ii) initial and variation margin
requirements on all non-cleared swaps
and non-cleared security-based swaps.5
Swap entities that are prudentially
regulated by the Agencies and therefore
subject to the proposed rule are referred
to herein as ‘‘covered swap entities.’’
Sections 731 and 764 of the DoddFrank Act require the CFTC and SEC to
separately adopt rules imposing capital
and margin requirements for swap
entities for which there is no prudential
regulator.6 The Dodd-Frank Act requires
the CFTC, SEC, and the Agencies to
establish and maintain, to the maximum
extent practicable, capital and margin
requirements that are comparable, and
to consult with each other periodically
International Banking Act of 1978, or a savings and
loan holding company (on or after the transfer date
established under section 311 of the Dodd-Frank
Act), or a subsidiary of such a company or foreign
bank (other than a subsidiary for which the OCC or
FDIC is the prudential regulator or that is required
to be registered with the CFTC or SEC as a swap
dealer or major swap participant or a security-based
swap dealer or major security-based swap
participant, respectively). The OCC is the
prudential regulator for any swap entity that is a
national bank, a Federally chartered branch or
agency of a foreign bank, or a Federal savings
association. The FDIC is the prudential regulator for
any swap entity that is (i) a State-chartered bank
that is not a member of the Federal Reserve System
or (ii) a State savings association. The FCA is the
prudential regulator for any swap entity that is an
institution chartered under the Farm Credit Act of
1971, as amended. FHFA is the prudential regulator
for any swap entity that is a ‘‘regulated entity’’ under
the Federal Housing Enterprises Financial Safety
and Soundness Act of 1992 (i.e., the Federal
National Mortgage Association and its affiliates, the
Federal Home Loan Mortgage Corporation and its
affiliates, and the Federal Home Loan Banks). See
7 U.S.C. 1a(39).
5 See 7 U.S.C. 6s(e)(2)(A); 15 U.S.C. 78o–
8(e)(2)(A). Section 6(s)(e)(1)(A) directs registered
swap dealers and major swap participants for which
there is a prudential regulator to comply with
margin and capital rules issued by the prudential
regulators, while section 6(s)(e)(1)(B) directs
registered swap dealers and major swap
participants for which there is not a prudential
regulator to comply with margin and capital rules
issued by the CFTC and SEC. Section 78o–8(e)(1)
generally parallels section 6s(e)(1), except that
section 78o–8(e)(1)(A) refers to registered securitybased swap dealers and major security-based swap
participants for which ‘‘there is not a prudential
regulator.’’ The Agencies construe the ‘‘not’’ in
section 78o–8(e)(1)(A) to have been included by
mistake, in conflict with section 78o–8(e)(2)(A), and
of no substantive meaning. Otherwise, registered
security-based swap dealers and major securitybased swap participants for which there is not a
prudential regulator could be subject to multiple
capital and margin rules, and institutions regulated
by the prudential regulators and registered as
security-based swap dealers and major securitybased swap participants might not be subject to any
capital and margin requirements under section 78o–
8(e).
6 See 7 U.S.C. 6s(e)(2)(B); 15 U.S.C. 78o–
8(e)(2)(B).
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(but no less than annually) regarding
these requirements.7
The capital and margin standards for
swap entities imposed under sections
731 and 764 of the Dodd-Frank Act are
intended to offset the greater risk to the
swap entity and the financial system
arising from the use of swaps and
security-based swaps that are not
cleared.8 Sections 731 and 764 of the
Dodd-Frank Act require that the capital
and margin requirements imposed on
swap entities must, to offset such risk,
(i) help ensure the safety and soundness
of the swap entity and (ii) be
appropriate for the greater risk
associated with the non-cleared swaps
and non-cleared security-based swaps
held as a swap entity.9 In addition,
Sections 731 and 764 of the Dodd-Frank
Act require the Agencies, in establishing
capital rules for covered swap entities,
to take into account the risks associated
with other types, classes or categories of
swaps or security-based swaps engaged
in, and the other activities conducted by
that person that are not otherwise
subject to regulation applicable to that
person by virtue of the status of the
person as a swap dealer or a major swap
participant.10 Sections 731 and 764
become effective not less than 60 days
after publication of the final rule or
regulation implementing these
sections.11
The capital and margin requirements
that must be established with respect to
7 See 7 U.S.C. 6s(e)(2)(A); 6s(e)(3)(D); 15 U.S.C.
78o–8(e)(2)(A), 78o–8(e)(3)(D). Staff of the Agencies
have consulted with staff of the CFTC and SEC in
developing the proposed rule.
8 See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o–
8(e)(3)(A).
9 See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o–
8(e)(3)(A). In addition, Section 1201 of Housing and
Economic Recovery Act of 2008 (Pub. L. 110–289,
122 Stat. 2654) requires the Director of FHFA, when
promulgating regulations relating to the Federal
Home Loan Banks, to consider the following
differences between the Federal Home Loan Banks
and the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac): cooperative ownership
structure; mission of providing liquidity to
members; affordable housing and community
development mission; capital structure; and joint
and several liability. See section 1201 Public Law
110–289, 122 Stat. 2782–83 (amending 12 U.S.C.
4513). The Director of FHFA also may consider any
other differences that are deemed appropriate. For
purposes of this proposed rule, FHFA considered
the differences as they relate to the above factors.
FHFA requests comments from the public about
whether differences related to these factors should
result in any revisions to the proposal.
10 See 7 U.S.C. 6s(e)(2)(C); 15 U.S.C. 78o–
8(e)(2)(C). In addition, the margin requirements
imposed by the Agencies must permit the use of
noncash collateral, as the Agencies determine to be
consistent with (i) preserving the financial integrity
of the markets trading swaps and security-based
swaps and (ii) preserving the stability of the U.S.
financial system. See 7 U.S.C. 6s(e)(3)(C); 15 U.S.C.
78o–8(e)(3)(C).
11 See Dodd Frank Act §§ 754, 774.
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non-cleared derivatives under sections
731 and 764 of the Dodd-Frank Act
complement changes made elsewhere in
the Act that require all sufficiently
standardized swaps and security-based
swaps be cleared through a derivatives
clearing organization or clearing
agency.12 This clearing mandate reflects
the consensus of the G–20 leaders: ‘‘All
standardized over-the-counter
derivatives contracts should be traded
on exchanges or electronic trading
platforms, where appropriate, and
cleared through central counterparties
by end of 2012 at the latest.’’ 13
In the derivatives clearing process,
central counterparties (CCPs) manage
the credit risk through a range of
controls and methods, including a
margining regime that imposes both
initial margin and variation margin
requirements on parties to cleared
transactions.14 Thus, the mandatory
clearing requirement established by the
Dodd-Frank Act for swaps and securitybased swaps will effectively require any
party to any transaction subject to the
clearing mandate to post initial and
variation margin to the CCP in
connection with that transaction.
However, if a particular swap or
security-based swap is not cleared
because it is not subject to the
mandatory clearing requirement (or
because one of the parties to a particular
swap or security-based swap is eligible
for, and uses, an exemption from the
mandatory clearing requirement), that
swap or security-based swap will be a
12 See 7 U.S.C. 2(h); 15 U.S.C. 78c–3. Certain
types of counterparties (e.g., counterparties that are
not financial entities and are using swaps or
security-based swaps to hedge or mitigate
commercial risks) are exempt from this mandatory
clearing requirement and may elect not to clear a
swap or security-based swap that would otherwise
be subject to the clearing requirement.
13 G–20 Leaders, June 2010 Toronto Summit
Declaration, ¶ 25. The dealer community has also
recognized the importance of clearing—beginning
in 2009, in an effort led by the Federal Reserve
Bank of New York, the dealer community agreed to
increase central clearing for certain credit
derivatives and interest rate derivatives. See Press
Release, Federal Reserve Bank of New York, New
York Fed Welcomes Further Industry Commitments
on Over-the-Counter Derivatives press release (June
2, 2009), available at https://www.newyorkfed.org/
newsevents/news/markets/2009/ma090602.html.
14 CCPs interpose themselves between
counterparties to a derivative transaction, becoming
the buyer to the seller and the seller to the buyer
and, in the process, taking on the credit risk that
each party poses to the other. For example, when
a derivatives contract between two parties that are
members of a CCP is executed and submitted for
clearing, it is typically replaced by two new
contracts—separate contracts between the CCP and
each of the two original counterparties. At that
point, the original counterparties are no longer
counterparties to each other; instead, each faces the
CCP as its counterparty, and the CCP assumes the
counterparty credit risk of each of the original
counterparties.
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‘‘non-cleared’’ swap or security-based
swap and will be subject to the capital
and margin requirements for such
transactions established under sections
731 and 764 of the Dodd-Frank Act.
The comprehensive derivativesrelated provisions of title VII of the
Dodd-Frank Act, including sections 731
and 764, are intended in general to
reduce risk, increase transparency,
promote market integrity within the
financial system, and, in particular,
address a number of weaknesses in the
regulation and structure of the
derivatives markets that were revealed
during the financial crisis experienced
in 2008 and 2009. During the financial
crisis, the opacity of derivatives
transactions among dealer banks and
between dealer banks and their
counterparties created uncertainty about
whether market participants were
significantly exposed to the risk of a
default by a swap counterparty. By
imposing a regulatory margin
requirement on non-cleared swaps, the
Dodd-Frank Act will reduce the
uncertainty around the possible
exposures arising from non-cleared
swaps.
The recent financial crisis also
revealed that some participants in the
derivatives markets had used
derivatives to take on excessive risks. By
imposing a minimum margin
requirement on non-cleared derivatives,
sections 731 and 764 of the Dodd-Frank
Act will reduce the ability of firms to
take on excessive risks through swaps
without sufficient financial resources to
make good on their contracts. Because
the Dodd-Frank Act requires that the
margin requirements be based on the
risks posed by the non-cleared
derivatives and derivatives
counterparties, firms that take
significant risks through derivatives will
face more stringent margin requirements
with respect to non-cleared derivatives,
while firms that take lower risks will
face less stringent margin requirements.
II. Overview of Proposed Rule
A. Margin Requirements
The Agencies have generally adopted
a risk-based approach in proposing rules
to establish initial and variation margin
requirements for covered swap entities,
consistent with the statutory
requirement that these rules help ensure
the safety and soundness of the covered
swap entity and be appropriate for the
risk to the financial system associated
with non-cleared swaps and non-cleared
security-based swaps held by covered
swap entities. As a result, the proposed
rule takes into account the relative risk
of a covered swap entity’s activities in
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27567
establishing both (i) the minimum
amount of initial and variation margin
that it must collect from its
counterparties and (ii) the frequency
with which a covered swap entity must
calculate and collect variation margin
from its counterparty.
In implementing this risk-based
approach, the proposed rule
distinguishes among four separate types
of derivatives counterparties: (i)
Counterparties that are themselves swap
entities; (ii) counterparties that are highrisk financial end users of derivatives;
(iii) counterparties that are low-risk
financial end users of derivatives; and
(iv) counterparties that are nonfinancial
end users of derivatives.15 These
categories reflect the Agencies’
preliminary belief that distinctions can
be made between types of derivatives
counterparties that are useful in
distinguishing the risks posed by each
type.
The proposed rule’s initial and
variation margin requirements generally
apply only to the collection of minimum
margin amounts by a covered swap
entity from its counterparties; they do
not contain specific requirements as to
the amount of initial or variation margin
that a covered swap entity must post to
its counterparties.16 This approach,
which emphasizes the collection rather
than the posting of margin, is based
primarily on the Agencies’ preliminary
view that imposing requirements with
respect to the minimum amount of
margin to be collected (but not posted)
is a critical aspect of offsetting the
greater risk to the covered swap entity
and the financial system arising from
the covered swap entity’s holdings of
swaps and security-based swaps that are
not cleared and helps ensure the safety
and soundness of the covered swap
entity. The proposed rule’s approach
would also assure that swap entities
transacting with one another will
effectively be collecting and posting
margin with respect to those
transactions as a result of the margin
collection requirements imposed on
each.
With respect to initial margin, the
proposed rule permits a covered swap
entity to select from two alternatives to
calculate its initial margin requirements.
A covered swap entity may calculate its
initial margin requirements using a
standardized ‘‘lookup’’ table that
15 See proposed rule §§ __.2(b), (g), (h), (i), (n), (r)
and (y) for the various constituent definitions that
identify these four types of swap counterparties.
16 Section __.11 of the proposed rule adopted by
FHFA and FCA (but not the other Agencies)
requires that their regulated entities collect initial
and variation margin from swap entities, as
described in section III.K of this notice.
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specifies the minimum initial margin
that must be collected, expressed as a
percentage of the notional amount of the
swap or security-based swap. These
percentages depend on the broad asset
class of the swap or security-based
swap.17 Alternatively, a covered swap
entity may calculate its minimum initial
margin requirements using an internal
margin model that meets certain criteria
and that has been approved by the
relevant prudential regulator.18
A covered swap entity adopting the
first alternative generally must collect at
least the amount of initial margin
required under the standardized look-up
table, regardless of the relative risk of its
counterparty. A covered swap entity
adopting the second alternative
generally must collect at least the
amount of initial margin required under
its initial margin model. Both
alternatives permit a covered swap
entity to adopt a threshold amount
below which it need not collect initial
margin from certain types of
counterparties.19 Under the proposed
rule, the maximum threshold amount
permitted varies based on the relative
risk posed by the counterparty, as
determined by counterparty type.
With respect to variation margin, the
proposed rule generally requires a
covered swap entity to collect variation
margin periodically in an amount that is
at least equal to the increase in the value
of the swap to the covered swap
entity.20 As with initial margin, a
covered swap entity may adopt a
threshold amount below which it need
not collect variation margin from certain
types of lower-risk counterparties.21
Consistent with the approach taken to
initial margin, the maximum threshold
amount permitted for variation margin
varies based on the relative risk of the
counterparty, as determined by
counterparty type. In addition, the
frequency with which a covered swap
entity must periodically recalculate and
collect variation margin under the
proposed rule also varies based on the
relative risk of the counterparty, as
determined by counterparty type, and
generally decreases as the relative risk
of the counterparty type decreases.22
The proposed rule’s margin
provisions establish only minimum
requirements with respect to initial
margin and variation that must be
collected. Nothing in the proposed rule
is intended to prevent or discourage a
17 See
proposed rule, Appendix A.
proposed rule §§ __.2(l), __.3(a), __.8.
19 See proposed rule §§ __.2(m), __.3(a)(2).
20 See proposed rule §§ __.2(z), __.4(a).
21 See proposed rule §§ __.2(bb), __.4(a)(2).
22 See proposed rule § __.4(b).
18 See
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covered swap entity from collecting
margin in amounts greater than is
required under the proposed rule.
The proposed rule also specifies the
types of collateral that are eligible to be
collected to satisfy both the initial and
variation margin requirements. Eligible
collateral is generally limited to (i)
immediately available cash funds and
(ii) certain high-quality, highly-liquid
U.S. government and agency obligations
and, in the case of initial margin only,
certain government-sponsored
enterprise obligations, subject to
specified minimum ‘‘haircuts’’ for
purposes of determining their value for
margin purposes.23
Separate from the proposed rule’s
requirements with respect to the
collection of initial and variation
margin, the proposed rule also requires
a covered swap entity to ensure that its
counterparty segregates the initial
margin that the covered swap entity
posts when engaging in swap or
security-based swap transactions with
another swap entity.24 The Agencies
have proposed a requirement that
segregation of initial margin be
mandatory, not optional, for swap
transactions by a covered swap entity
with another swap entity in order to (i)
offset the greater risk to the covered
swap entity and the financial system
arising from the use of swaps and
security-based swaps that are not
cleared and (ii) protect the safety and
soundness of the covered swap entity.
B. Capital Requirements
Sections 731 and 764 of the DoddFrank Act also require the Agencies to
issue, in addition to margin rules, joint
rules on capital for covered swap
entities for which they are the
prudential regulator.25 The Board, FDIC,
and OCC (collectively, the banking
agencies) have had risk-based capital
rules in place for banks to address overthe-counter derivatives since 1989 when
the banking agencies implemented their
risk-based capital adequacy standards
(general banking risk-based capital
rules) 26 based on the first Basel
Accord.27 The general banking riskproposed rule § __.6.
proposed rule § __.7. The Agencies note
that sections 724 and 763 of Dodd-Frank Act
require a swap entity to offer its swap and securitybased swap counterparties the option of requiring
segregation of initial margin they post to the swap
entity.
25 7 U.S.C. 6s(e)(2); 15 U.S.C. 78o–8(e)(2).
26 See 54 FR 4186 (January 27, 1989). The general
banking risk-based capital rules are codified at 12
CFR part 3, Appendix A (OCC); 12 CFR parts 208
and 225, Appendix A (Board); and 12 CFR part 325,
Appendix A (FDIC).
27 The Basel Committee on Banking Supervision
(BCBS) developed the first international banking
23 See
24 See
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Sfmt 4702
based capital rules have been amended
and supplemented over time to take into
account developments in the derivatives
market. These supplements include the
addition of the market risk amendment
to the first Basel Accord which requires
banks and bank holding companies
meeting certain thresholds to calculate
their capital requirements for trading
positions through models approved by
their primary Federal supervisor.28 In
addition, certain large, complex banks
and bank holding companies are subject
to the banking agencies’ advanced riskbased capital standards (advanced
approaches rules), based on the
advanced approaches of the Basel II
Accord.29
FHFA’s predecessor agencies used a
similar methodology to frame the riskbased capital rules applicable to those
entities now regulated by FHFA. The
FCA’s risk-based capital regulations for
Farm Credit System institutions, except
for the Federal Agricultural Mortgage
Corporation (Farmer Mac), have been in
place since 1988 and were updated in
2005.30 The FCA’s risk-based capital
regulations for Farmer Mac have been in
place since 2001 and were updated in
2006.31
The Basel Committee on Banking
Supervision has recently revised and
enhanced its capital framework for
internationally active banks,32 and the
banking agencies expect to propose
these changes in the United States in the
near future through a separate notice of
proposed rulemaking.
As described in section III.J below, the
proposed rule requires a covered swap
entity to comply with regulatory capital
capital framework in 1988, entitled International
Convergence of Capital Measurement and Capital
Standards.
28 61 FR 47358 (September 6, 1996). The banking
agencies’ market risk capital rules are at 12 CFR
part 3, Appendix B (OCC); 12 CFR part 208,
Appendix E and 12 CFR part 225, Appendix E
(Board); and 12 CFR part 325, Appendix C (FDIC).
The rules apply to banks and bank holding
companies with trading activity (on a worldwide
consolidated basis) that equals 10 percent or more
of the institution’s total assets, or $1 billion or
more.
29 See BCBS, International Convergence of
Capital Measurement and Capital Standards: A
Revised Framework (2006). The banking agencies
implemented the advanced approaches of the Basel
II Accord in 2007. See 72 FR 69288 (December 7,
2010). The advanced approaches rules are codified
at 12 CFR part 3, Appendix C (OCC); 12 CFR part
208, Appendix F and 12 CFR part 225, Appendix
G (Board); and 12 CFR part 325, Appendix D
(FDIC).
30 See 53 FR 40.033 (Oct. 13, 1988); 70 FR 35.336
(June 17, 2005); 12 CFR part 615 subpart H.
31 See 66 FR 19,048 (April 12, 2001); 71 FR 77,247
(Dec. 26, 2006); 12 CFR part 652.
32 See BCBS, Basel III: A Global Regulatory
Framework for More Resilient Banks and Banking
Systems (2010), available at https://www.bis.org/
publ.bcbs189.htm.
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rules already made applicable to that
covered swap entity as part of its
prudential regulatory regime. As
discussed further below, given that
these existing regulatory capital rules
already specifically take into account
and address the unique risks arising
from derivatives transactions and
activities, the Agencies are proposing to
rely on these existing rules, subject to
the future notice of proposed
rulemaking described above, as
appropriate and sufficient to offset the
greater risk to the covered swap entity
and the financial system arising from
the use of swaps and security-based
swaps that are not cleared and to protect
the safety and soundness of the covered
swap entity.33
III. Section-by-Section Summary of
Proposed Rule
A. Section __.1: Authority, Purpose and
Scope
Section __.1 of the proposed rule
specifies the scope of swap and
security-based swap transactions to
which the margin requirements apply. It
provides that the margin requirements
apply to all non-cleared swaps and
security-based swaps into which a
covered swap entity enters, regardless of
the type of transaction or the nature of
the counterparty. It also provides that
the margin requirements apply only to
swap and security-based swap
transactions that are entered into on or
after the date on which the proposed
rule becomes effective.
1. Treatment of Pre-Effective Date
Derivatives
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The Agencies note that it is possible
that a covered swap entity may enter
into swap or security-based swap
transactions on or after the proposed
rule’s effective date pursuant to the
same master netting agreement with a
counterparty that governs existing
swaps or security-based swaps entered
into prior to the effective date. As
discussed below, the proposed rules
permit a covered swap entity to (i)
calculate initial margin requirements for
33 For the duration of the conservatorships of
Fannie Mae and Freddie Mac (together, the
Enterprises), FHFA has directed that their existing
regulatory capital requirements would not be
binding. However, FHFA continues to closely
monitor the Enterprises’ activities. Such
monitoring, coupled with the unique financial
support available to the Enterprises from the United
States Treasury and the likelihood that FHFA will
promulgate new risk-based capital rules in due
course to apply to the Enterprises (or their
successors) once the conservatorships have ended,
lead to FHFA’s preliminary view that the reference
to existing capital rules is sufficient to address the
risks discussed in the text above as to the
Enterprises.
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swaps and security-based swaps under
a qualifying master netting agreement
with the counterparty on a portfolio
basis in certain circumstances, if it is
using an initial margin model to do so,
and (ii) calculate variation margin
requirements under the proposed rule
on an aggregate, net basis under a
qualifying master netting agreement
with the counterparty. Applying the
new margin rules in such a way would,
in some cases, have the effect of
applying the margin rules retroactively
to pre-effective-date swaps under the
master agreement. Accordingly, in the
case of initial margin, a covered swap
entity using an initial margin model
would be permitted, at its option, to
calculate the initial margin
requirements on a portfolio basis but
include only post-effective-date
derivatives in the relevant portfolio.34
With respect to variation margin, the
Agencies expect that the covered swap
entity will comply with the margin
requirements with respect to all swaps
and security-based swaps governed by a
master agreement, regardless of the date
on which they were entered into,
consistent with current industry
practice. The Agencies request comment
on (i) what, if any, practical difficulties
might be raised by the proposed
approach to application of the margin
requirements under master agreements
governing both pre- and post-effectivedate swaps and security-based swaps
and (ii) whether there are alternative
approaches that might better address the
issues raised by such master
agreements.
2. Treatment of Derivatives With
Commercial End User Counterparties
Following passage of the Dodd-Frank
Act, various observers expressed
concerns regarding whether sections
731 and 764 of the Dodd-Frank Act
authorize or require the CFTC, SEC, and
Agencies to establish margin
requirements with respect to
transactions between a covered swap
entity and a ‘‘commercial end user’’ (i.e.,
a nonfinancial counterparty that engages
in derivatives activities to hedge
commercial risk),35 and have argued
34 See proposed rule § __.8(b). The covered swap
entity would not be permitted to selectively
incorporate only certain pre-effective-date
derivatives.
35 Although the term ‘‘commercial end user’’ is not
defined in the Dodd-Frank Act, it is generally
understood to mean a company that is eligible for
the exception to the mandatory clearing
requirement for swaps and security-based swaps
under section 2(h)(7) of the Commodity Exchange
Act and section 3C(g) of the Securities Exchange
Act, respectively. This exception is generally
available to a person that (i) is not a financial entity,
(ii) is using the swap to hedge or mitigate
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27569
that swaps and security-based swap
transactions with these types of
counterparties should be excluded from
the scope of margin requirements
imposed under sections 731 and 764
because commercial firms engaged in
hedging activities pose a reduced risk to
their counterparties and the stability of
the U.S. financial system. In addition,
statements in the legislative history of
sections 731 and 764 suggest that
Congress did not intend, in enacting
these sections, to impose margin
requirements on nonfinancial end users
engaged in hedging activities, even in
cases where they entered into swaps or
security-based swaps with swap
entities.36
In formulating the proposed rule, the
Agencies have carefully considered
these concerns and statements. The
plain language of sections 731 and 764
provides that the Agencies adopt rules
for covered swap entities imposing
margin requirements on all non-cleared
swaps. Those sections do not, by their
terms, exclude a swap with a
counterparty that is a commercial end
user.
Importantly, those sections also
provide that the Agencies adopt margin
requirements that (i) help ensure the
safety and soundness of the covered
swap entity and (ii) are appropriate for
the risk associated with the non-cleared
swaps and non-cleared security-based
swaps it holds as a swap entity. Thus,
the statute requires the Agencies to take
a risk-based approach to establishing
margin requirements.
The proposed rule follows this
statutory framework and proposes a
risk-based approach to imposing margin
requirements in which nonfinancial end
users are categorized as lower-risk
counterparties than financial end users.
In particular, the proposed rule permits
covered swap entities to adopt, where
appropriate, initial and variation margin
thresholds below which a covered swap
entity is not required to collect initial
and/or variation margin from
counterparties that are end users
because of the lesser risk posed by these
types of counterparties to covered swap
entities and financial stability with
respect to exposures below these
thresholds. The Agencies note that this
threshold-based approach is consistent
with current market practices with
respect to nonfinancial end users, in
which derivatives dealers view the
commercial risk, and (iii) has notified the CFTC or
SEC how it generally meets its financial obligations
with respect to non-cleared swaps or security-based
swaps, respectively. See 7 U.S.C. 2(h)(7) and 15
U.S.C. 78c–3(g).
36 See, e.g., 156 Cong. Rec. S5904 (daily ed. July
15, 2010) (statement of Sen. Lincoln).
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question of whether and to what extent
to require margin from their
counterparties as a credit decision.37
Under the proposed rule, a covered
swap entity would not be required to
collect initial or variation margin from
a nonfinancial end user counterparty as
long as the covered swap entity’s
exposures to the nonfinancial end user
were below the credit exposure limits
that the covered swap entity has
established under appropriate credit
processes and standards. The Agencies
preliminarily believe that this approach
is consistent with the statutory
requirement that the margin
requirements be risk-based, and is
appropriate in light of the minimal risks
that nonfinancial end users pose to the
safety and soundness of covered swap
entities and U.S. financial stability,
particularly in cases of relatively small
margin exposures.
To the extent that a covered swap
entity has adopted an initial margin
threshold amount or a variation margin
threshold amount for a nonfinancial end
user counterparty but the cumulative
required initial margin or variation
margin, respectively, for transactions
with that end user exceeds the initial
margin threshold amount or variation
margin threshold amount, respectively,
the covered swap entity would be
required to collect the excess amount.
The Agencies preliminarily believe that
this approach is appropriate for the
greater risk posed by such
counterparties where margin exposures
are relatively large.
The Agencies request comment on the
appropriateness of the proposed rule’s
approach to a covered swap entity’s
transactions with nonfinancial end
users and whether there are alternative
approaches that would better achieve
the objective of sections 731 and 764 of
the Dodd-Frank Act. In particular, the
Agencies note that under other
provisions of the Dodd-Frank Act,
nonfinancial end users that engage in
derivatives to hedge their commercial
risks are exempt from the requirement
that all designated swaps and securitybased swaps be cleared by a derivatives
clearing organization or clearing agency,
respectively. A major consequence of
clearing a swap or security-based swap
is a requirement that each party to the
transaction post initial margin and
37 In the case of a nonfinancial end user with a
strong credit profile, under current market practices
a derivatives dealer would not require margin—in
essence, it would extend unsecured credit to the
end user with respect to the underlying exposure.
For counterparties with a weak credit profile, a
derivatives dealer would likely make a different
credit decision and require the counterparty to post
margin.
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variation margin to the derivatives
clearing organization or clearing agency,
and the exemption from the clearing
requirement permits a nonfinancial end
user taking advantage of the exemption
to avoid posting margin to such central
CCPs. Although the Dodd-Frank Act
does not contain an express exemption
from the margin requirement of sections
731 and 764 of the Dodd-Frank Act that
is similar to the exemption for
commercial end users from the
mandatory clearing requirements of
sections 723 and 763 of the Dodd-Frank
Act, the Agencies note that the proposed
rule’s approach to margin requirements
for derivatives with nonfinancial end
users could be viewed as lessening the
effectiveness of the clearing requirement
exemption for these nonfinancial end
users as concerns margin.
In particular, the Agencies request
comment on the following questions:
Question 1(a). Does the nonfinancial
end user exemption from the mandatory
clearing requirement suggest or require
that swaps and security-based swaps
involving a nonfinancial end user
should or must be exempt from initial
margin and variation margin
requirements for non-cleared swaps and
security-based swaps? 1(b) If so, upon
what statutory basis would such an
exemption rely? 1(c) Should that
determination vary based on whether a
particular non-cleared swap or noncleared security-based swap is subject to
the mandatory clearing regime or not
(i.e., whether the nonfinancial end user
is actually using the clearing
exemption)?
Question 2. Should counterparties
that are small financial institutions
using derivatives to hedge their risks be
treated in the same manner as
nonfinancial end users for purposes of
the margin requirements?
3. Effective Date
Section __.1 of the proposed rule
provides that the proposed rule shall be
effective with respect to any swap or
security-based swap to which a covered
swap entity becomes a party on or after
the date that is 180 days following
publication of the final rule in the
Federal Register. The Agencies request
comment regarding the appropriateness
of this 180-day period.
The Agencies expect that covered
swap entities are likely to need to make
a number of changes to their current
derivatives business operations in order
to achieve compliance with the
proposed rules, including potential
changes to internal risk management
and other systems, trading
documentation, collateral arrangements,
and operational technology and
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infrastructure. In addition, the Agencies
expect that covered swap entities that
wish to calculate initial margin using an
initial margin model will need sufficient
time to develop such models and obtain
regulatory approval for their use. The
Agencies request comment on the
following implementation questions:
Question 3(a). What changes to
internal risk management and other
systems, trading documentation,
collateral arrangements, operational
technology and infrastructure or other
aspects of a covered swap entity’s
derivatives operations will likely need
to be made as part of the
implementation of the proposed rule,
and how much time will likely be
required to make such changes? 3(b) Is
the proposed rule’s 180-day period
sufficient?
Question 4(a). How much time will
covered swap entities that wish to
calculate initial margin using an initial
margin model need to develop such
models? 4(b) Is the proposed rule’s 180day period sufficient?
B. Section __.2: Definitions
Section __.2 of the proposed rule
provides definitions of the key terms
used in the proposed rule. In particular,
§ __.2 (i) defines the four types of swap
and security-based swap counterparties
that form the basis of the proposed
rule’s risk-based approach to margin
requirements and (ii) provides other key
operative terms that are needed to
calculate the amount of initial and
variation margin required under other
sections of the proposed rule.
1. Counterparty Definitions
The four types of counterparties
defined in the proposed rule are (in
order of highest to lowest risk): (i) Swap
entities; (ii) high-risk financial end
users; (iii) low-risk financial end users;
and (iv) nonfinancial end users.
a. ‘‘Swap entities’’
The proposed rule defines ‘‘swap
entity’’ as any entity that is required to
register as a swap dealer, major swap
participant, security-based swap dealer
or major security-based swap
participant.38 Non-cleared swaps
transactions with counterparties that are
themselves swap entities pose risk to
the financial system because swap
entities are large players in swap and
security-based swap markets and
therefore have the potential to generate
systemic risk through their swap
activities. Because of their
interconnectedness and large presence
in the market, the failure of a single
38 See
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swap entity could cause severe stress
throughout the financial system.39
Accordingly, it is the preliminary view
of the Agencies that all non-cleared
swap transactions with swap entities
should require margin.
b. ‘‘Financial end users’’ and
‘‘nonfinancial end users’’
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Non-cleared swap transactions with
end users (i.e., those counterparties that
are not themselves swap entities) can
also pose risks to covered swap entities.
Among end users, financial end users
are considered more risky than
nonfinancial end users because the
profitability and viability of financial
end users is more tightly linked to the
health of the financial system than
nonfinancial end users. Because
financial counterparties are more likely
to default during a period of financial
stress, they pose greater systemic risk
and risk to the safety and soundness of
the covered swap entity. Section __.2 of
the proposed rule defines a financial
end user as any counterparty, other than
a swap entity, that is: (i) A commodity
pool (as defined in section 1a(5) of the
Commodity Exchange Act (7 U.S.C.
1a(5))); (ii) a private fund (as defined in
section 202(a) of the Investment
Advisors Act of 1940 (15 U.S.C. 80–b–
2(a))); (iii) an employee benefit plan (as
defined in paragraphs (3) and (32) of
section 3 of the Employee Retirement
Income and Security Act of 1974 (29
U.S.C. 1002)); (iv) a person
predominantly engaged in activities that
are in the business of banking, or in
activities that are financial in nature, as
defined in section 4(k) of the Bank
Holding Company of 1956 (12 U.S.C.
1843(k)); 40 (v) a person that would be a
commodity pool or private fund if it
were organized under the laws of the
United States or any State thereof; and
(vi) any other person that one of the
Agencies may designate with respect to
39 This is consistent with the Dodd-Frank Act’s
requirement that the Agencies set margin and
capital requirements appropriate for the risk to the
financial system associated with non-cleared swaps
held as a swap dealer or major swap participant. 7
U.S.C. 6(e)(3)(A); 15 U.S.C. 78o–8(e)(3)(A).
40 Although the proposed rule does not define a
person predominantly engaged in activities that are
in the business of banking, or in activities that are
financial in nature, as defined in section 4(k) of the
Bank Holding Company of 1956 (12 U.S.C. 1843(k)),
the Agencies note that the Board has recently issued
a proposed rule for comment defining a similar
term for purposes of Title I of the Dodd-Frank Act.
See 76 FR 7,731 (Feb. 11, 2011) (proposed rule).
The Agencies request comment on whether they
should apply the same methodology as is adopted
for purposes of Title I of the Dodd-Frank Act for
purposes of this clause of the proposed rule’s
definition of a financial end user, or whether an
alternative methodology is appropriate.
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covered swap entities for which it is the
prudential regulator.41
The proposed definition of a
counterparty that is a financial end user
also includes any government of any
foreign country or any political
subdivision, agency, or instrumentality
thereof.42 The Agencies note that these
types of sovereign counterparties do not
fit easily into the proposed rule’s
categories of financial and nonfinancial
end users. In comparing the
characteristics of sovereign
counterparties with those of financial
and nonfinancial end users, the
Agencies preliminarily believe that the
financial condition of a sovereign will
tend to be closely linked with the
financial condition of its domestic
banking system, through common
effects of the business cycle on both
government finances and bank losses, as
well as through the safety net that many
sovereigns provide to banks. Such a
tight link with the health of its domestic
banking system, and by extension with
the broader global financial system,
makes a sovereign counterparty similar
to a financial end user both in the
nature of the systemic risk and the risk
to the safety and soundness of the
covered swap entity. As a result, the
Agencies propose to treat sovereign
counterparties as financial end users for
purposes of the proposed rule’s margin
requirements.
The proposed rule defines a
nonfinancial end user as any
counterparty that is an end user but is
not a financial end user.
c. ‘‘High-risk financial end user’’ and
‘‘low-risk financial end user’’
A financial end user counterparty
whose derivatives activities are
relatively limited and pose little or no
risk is classified as a low-risk financial
end user; other end user counterparties
are classified as high-risk financial end
users. The likelihood of a financial end
user counterparty’s failure with respect
to a covered swap entity during stressed
market conditions increases with,
among other things, the size and
riskiness of its derivatives activity, and
the potential impact to the covered
swap entity’s safety and soundness
increases with the size of its non-cleared
swaps exposure to the end user
counterparty. Accordingly, the proposed
rule is structured so that a covered swap
41 See proposed rule § __.2(h). This definition of
‘‘financial end user’’ is based upon, and
substantially similar to, the definition of a
‘‘financial entity’’ that is ineligible to use the end
user exemption from the mandatory clearing
requirements of sections 723 and 763 of the DoddFrank Act. See 7 U.S.C. 2(h)(7); 15 U.S.C. 78c–3(g).
42 See proposed rule § __.2(h)(6).
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entity would generally be required to
reduce its counterparty exposure
through more stringent margin
collection requirements with respect to
non-cleared derivatives with financial
end user counterparties having greater
and riskier derivatives activities.
Section __.2 of the proposed rule
deems a financial end user counterparty
to be a low-risk financial end user only
if it meets all of the following three
criteria:
• Its swaps or security-based swaps
fall below a specified ‘‘significant swaps
exposure’’ threshold;
• It predominantly uses swaps to
hedge or mitigate the risks of its
business activities, including balance
sheet, interest rate, or other risk arising
from the business of the counterparty;
and
• It is subject to capital requirements
established by a prudential regulator or
state insurance regulator.43
With respect to the first criterion, the
definition of ‘‘significant swaps
exposure’’ under the proposed rule is
very similar to the definition of
‘‘substantial counterparty exposure’’
proposed by the CFTC and SEC for
purposes of establishing what level of
swap and security-based swap
counterparty exposure would require a
person to register as a major swap
participant or major security-based
swap participant under the Commodity
Exchange Act or the Securities
Exchange Act, respectively, except that
the threshold amounts are established at
half the level that would require
registration as a major swap participant
or major security-based swap
participant.44 The proposed rule’s
definition is thus intended to capture
persons that, while not having
derivatives positions rising to the level
requiring margin requirements and
comprehensive regulation as a major
swap participant, nonetheless have
substantial activity in the market and
are more likely to pose greater risk to
covered swap entities with which they
transact than persons with only minor
activity in the market. The Agencies
request comment on whether this
definition of significant swaps exposure
is appropriate, or whether an alternative
threshold amount or definition would
be more consistent with the purposes of
sections 731 and 764 of the Dodd-Frank
Act.
The second criterion of the proposed
definition of a low-risk financial end
user references the purpose for which
the financial end user enters into swaps
or security-based swaps. This criterion
43 See
44 See
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proposed rule § __.2(n).
75 FR 80,174 (Dec. 10, 2010).
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generally mirrors the description of
hedging-related swaps and securitybased swaps that are excluded for
purposes of determining whether a
person maintains a substantial position
in swaps or security-based swaps and
therefore meets the definition of a major
swap participant or major securitybased swap participant under the
Commodity Exchange Act and
Securities Exchange Act, respectively.45
This distinction reflects the fact that
persons using derivatives
predominantly to hedge or mitigate risks
arising from their business, rather than
to speculate for profit, are likely to pose
less risk to the covered swap entity (e.g.,
because losses on a hedging-related
swap will usually be accompanied by
offsetting gains on the related position
that it hedges).
The third criterion of the proposed
definition of low-risk financial end user
references whether the financial end
user is subject to regulatory capital
requirements. This criterion also
generally mirrors the description of
certain financial companies that are
excluded from one prong of the
definition of a major swap participant or
major security-based swap participant
under the Commodity Exchange Act and
the Securities Exchange Act,
respectively.46 This distinction reflects
the fact that financial end users that are
subject to regulatory capital
requirements are likely to pose less risk
as counterparties (e.g., because the
requirements ensure that minimum
amounts of capital will be available to
absorb any losses on their derivatives
transactions).
The Agencies request comment on
whether the proposed rule’s
categorization of various types of
counterparties by risk, and the key
definitions used to implement this riskbased approach, are appropriate, or
whether alternative approaches or
definitions would better reflect the
purposes of sections 731 and 764 of the
Dodd-Frank Act.
Question 5. Do the definitions
adequately identify financial end user
counterparties that are high-risk and
low-risk?
Question 6(a). Should nonfinancial
end users also be separated into highrisk and low-risk categories for purposes
of the margin requirements? 6(b) If so,
on what basis (e.g., in a manner similar
to the classification of high-risk and
low-risk financial end users)? 6(c) If so,
how should the margin requirement
45 See 7 U.S.C. 1a(33)(A)(i)(I); 15 U.S.C.
78c(a)(67)(a)(ii)(I).
46 See 7 U.S.C. 1a(33)(A)(iii)(I); 15 U.S.C.
78c(a)(67)(a)(ii)(III)(aa).
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apply differently to such high-risk and
low-risk nonfinancial end users?
Question 7(a). Is the classification of
sovereign counterparties as financial
end users appropriate in light of the
risks posed by these counterparties? 7(b)
If not, what other classification would
be appropriate, and why?
Question 8(a). Should sovereign
counterparties receive their own distinct
counterparty classification that is
different from those classifications in
the proposed rule? 8(b) If so, why? 8(c)
How should the permitted
uncollateralized exposures to a
sovereign counterparty differ from those
that are allowed for financial or
nonfinancial end users?
Question 9. Is it appropriate to
distinguish between financial and nonfinancial counterparties for the purpose
of this risk-based approach?
Question 10. What other factors or
tests should be used to determine the
relative risk of an end user
counterparty?
Question 11(a). Does the proposed
rule require greater clarity with respect
to the treatment of U.S. Federal, state, or
municipal government counterparties?
11(b) If so, how should such
counterparties be treated?
Question 12. Should a counterparty
that is a bank holding company or
nonbank financial firm subject to
enhanced prudential standards under
Section 165 of the Dodd-Frank Act be
treated similarly to swap entity
counterparties?
The Agencies also request comment
on the other definitions included in the
proposed rule, including those
discussed in further detail below.
C. Section __.3: Initial Margin
Section __.3 of the proposed rules
specifies the manner in which a covered
swap entity must calculate the initial
margin requirement applicable to its
swaps and security-based swaps. These
initial margin requirements apply only
to the amount of initial margin that a
covered swap entity is required to
collect from its counterparties; they do
not address whether, or in what
amounts, a covered swap entity must
post initial margin to a derivatives
counterparty. Except as described below
in the summary of § __.6 of the proposed
rule, the posting of initial margin by a
covered swap entity to a counterparty is
generally left to the mutual agreement of
the covered swap entity and its
counterparty. In the case where a
covered swap entity enters into a swap
with a counterparty that itself is a swap
entity, its counterparty is likely to be
subject to a regulatory margin
requirement under section 731 or
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section 764 requiring it to collect margin
from its counterparties. Thus, both
parties to a non-cleared swap between
two swap entities will have to collect
and post margin as required by the SEC,
CFTC or their prudential regulator, as
applicable.47
1. Calculation Alternatives
The proposed rule permits a covered
swap entity to select from two
alternatives for calculating its initial
margin requirements. In all cases, the
initial margin amount required under
the proposed rule is a minimum
requirement; covered swap entities are
not precluded from collecting additional
initial margin (whether by contract or
subsequent agreement with the
counterparty) when they believe it is
appropriate or preferable to do so.
Under the first alternative, a covered
swap entity may calculate its initial
margin requirements using a
standardized ‘‘lookup’’ table that
specifies the minimum initial margin
that must be collected as a percentage of
the swap or security-based swap
notional amount, which percentage
varies depending on the broad asset
class of the swap or security-based
swap.48 If the covered swap entity has
entered into more than one swap or
security-based swap with a counterparty
(i.e., a portfolio of swaps), the aggregate
minimum initial margin required on
those swaps and security-based swaps
would be determined by summing the
minimum initial margin requirement for
each individual swap.
In many cases, however, the use of a
standardized table may not accurately
reflect the risk of a portfolio of swaps or
security-based swaps, because the
swaps or security-based swaps
themselves vary in ways not reflected by
the standardized table or because no
reduction in required initial margin to
reflect offsetting exposures,
diversification, and other hedging
benefits is permitted, as discussed
below. For this reason, the proposed
rule includes a second alternative.
Under the second alternative, a
covered swap entity may calculate its
minimum initial margin requirements
47 Separately, in the case of institutions regulated
by FHFA and FCA, the effect of § __.11 of the
proposed rule, when combined with the margin
requirements contained in other parts of the
proposed rule, would also be to effectively require
both parties to a non-cleared swap or non-cleared
security-based swap between a swap entity and an
institution regulated by FHFA or FCA to both
collect and post initial margin.
48 See proposed rule §§ __.2(k)(1), __.3(a).
Although the Agencies intend to specify a
particular percentage in the final rule, the proposed
rule provides a potential range of percentages for
comment.
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using an internal margin model that
meets certain criteria and has been
approved by the relevant prudential
regulator.49 Specifically, the covered
swap entity must collect at least the
amount of initial margin that is required
under its internal model calculations
(subject to any applicable initial margin
threshold amount, as described below).
The Agencies request comment on
whether the use of internal models or
Appendix A is appropriate for the
calculation of initial margin
requirements. In particular, the
Agencies request comment on the
following questions:
Question 13. As an alternative to
Appendix A, should the rule allow an
alternative calculation method that
would link the margin on a non-cleared
swap or non-cleared security-based
swap to the margin required by a
derivatives clearing organization for a
cleared swap or cleared security-based
swap whose terms and conditions
closely resemble the terms and
conditions of the non-cleared swap or
non-cleared security-based swap?
Question 14. Would there be enough
similarity between cleared and noncleared swaps or security-based swaps
to make this approach workable?
Question 15. With respect to either
alternative for calculating initial margin
requirements, should swap or securitybased swap positions that pose no
counterparty risk to the covered swap
entity, such as a sold call option with
the full premium paid at inception of
the trade, be excluded from the initial
margin calculation?
The Agencies also request comment
on whether offsetting exposures,
diversification, and other hedging
benefits of multiple derivatives
transactions can or should be more
accurately represented in Appendix A’s
standardized table. The Agencies note
that although the use of an initial
margin model will allow for significant
recognition of offsetting exposures,
diversification, and other hedging
benefits of swap and security-based
swap positions that are conducted
under a qualifying master netting
agreement, Appendix A’s standardized
table is based upon gross notional
amounts and recognizes no offsetting
exposures, diversification, or other
hedging benefits. In particular, the gross
notional amount may not accurately
reflect the size or riskiness of the actual
position in many circumstances. For
example, with respect to a swap
49 See
portfolio containing (i) a one year pay
fixed and receive floating interest rate
swap with a notional value of $10
million and (ii) a two year pay floating
and receive fixed interest rate swap with
a notional value of $10 million, an
initial margin model would recognize
that much of the risk of the one year
swap is offset by the risk of the two year
swap—changes in the level of interest
rates that increase the value of the one
year swap will simultaneously decrease
the value of the two year swap. Under
Appendix A, however, the gross
notional interest rate swap position
would be $20 million and the initial
margin on the portfolio would be twice
the initial margin of either $10 million
swap even though the trades are, in fact,
risk reducing.
The Agencies are concerned that the
use of gross notional amounts alone in
determining initial margin may not
adequately recognize offsetting
exposures, diversification, and other
hedging benefits that are well
understood as in the above example.
This lack of recognition might lead to
large disparities between a firm that
uses a model to set initial margin and
a firm that uses the standardized initial
margin requirements. These disparities
may give rise to significant competitive
inequities between firms that do and do
not adopt an approved initial margin
model.
The Agencies request comment on
possible changes to the standardized
method of calculating initial margin
requirements to better reflect the effect
of offsets and hedging when swaps and
security-based swaps are conducted
under a qualifying master netting
agreement. In particular, the Agencies
seek comment on the following
questions:
Question 16. Would calculating the
standardized initial margin for a
particular risk category by separately
calculating the initial margin required
on the long positions and short
positions and then using only the higher
of these two amounts adequately
account for offsetting exposures,
diversification, and other hedging
benefits within a standardized initial
margin framework?
Question 17. Would the method
described above systematically
overestimate or underestimate offsetting
exposures, diversification, and other
hedging benefits? Is this method prone
to manipulation or other gaming
concerns?
Question 18. Should the Agencies
consider some degree of offset across
risk categories? If so how should these
offsets be determined?
Question 19. Would adjusting the
gross notional amount of swap positions
in a particular risk category (e.g.,
commodity, credit, equity, or foreign
exchange/interest rate) by a net-to-gross
ratio or a netting factor in a manner that
is similar to the method used for
adjusting potential future exposure
calculations for purposes of the Federal
banking agencies’ risk-based capital
rules adequately capture offsetting
exposures, diversification, and other
hedging benefits?
Question 20. Would adjustment of
gross notional amounts with a net-togross ratio or a netting factor
systematically overestimate or
underestimate offsetting exposures,
diversification, and other hedging
benefits?
Question 21. Are there additional
methods that could be used in
conjunction with a standardized lookup
initial margin table that adequately
recognize offsetting exposures,
diversification, and other hedging
benefits?
Question 22(a). Are such methods
transparent and implementable? 22(b)
Can they be generalized across multiple
risk categories and swap types?
As an alternative, the Agencies
request comment on whether Appendix
A should be revised to adopt a method
that more fully reflects the offsetting of
positions at default. For example, such
a method might rely on a calculation of
an adjusted gross notional amount that
would reduce the amount of initial
margin required when a counterparty
has many offsetting trades under a
qualifying master netting agreement. To
calculate the adjusted gross notional
amount for an asset class, one would
first calculate the net notional to gross
notional ratio. This netting factor would
be the absolute value of the difference
between the long notional contracts and
the short notional contracts divided by
the total gross notional amount of the
contracts. This value would then be
used as a type of correlation factor
among the contracts. The adjusted gross
notional amount would then be
calculated as follows, where n is the
gross notional value of trades in an asset
class and ‘‘NF’’ is the netting factor:
proposed rule §§ __.2(k)(2), __.3(a).
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The adjusted gross notional amount,
rather than the gross notional amount,
would then be used to calculate initial
margin using Appendix A.
When the netting factor is zero, initial
margin would still be required to be
collected, and when the net to gross
ratio is one (all positions are one way)
the netting factor is also one so that the
adjusted gross notional is equal to the
gross notional. This method would
allow offsetting transactions that reduce
risk to reduce initial margin, but would
not allow the offset to ever be perfect,
so that initial margin would always be
required to be collected. The adjusted
gross notional method would be applied
to the initial margin calculation by
using gross notional amounts within an
asset class. The Agencies seek comment
on these methods, as well as alternative
methods for calculating initial margin
requirements under Appendix A and
potential ways in which Appendix A
might better capture the offsetting
exposures, diversification, and other
hedging benefits.
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2. Initial Margin Thresholds
As part of the proposed rule’s initial
margin requirements, a covered swap
entity using either alternative is also
permitted to establish, for
counterparties that are low-risk
financial end users or nonfinancial end
users, a credit exposure limit below
which it need not collect initial
margin.50 A covered swap entity is not
permitted to establish an initial margin
threshold amount for a counterparty
that is either (i) a covered swap entity
itself or (ii) a high-risk financial end
user.51
This credit exposure limit is defined
in the proposed rule as the initial
margin threshold amount.52 The
maximum initial margin threshold
amount that a covered swap entity may
establish varies based on the relative
risk of the counterparty, as determined
by counterparty type (e.g., financial
versus nonfinancial end user). With
respect to a counterparty that is a lowrisk financial end user, the proposed
rule limits the maximum initial margin
50 See proposed rule §§ __.2(m), __.3(a). A
covered swap entity that has established an initial
margin threshold amount for a counterparty need
only collect initial margin if the required amount
exceeds the initial margin threshold amount, and in
such cases is only required to collect the excess
amount.
51 See proposed rule § __.2(m)(1).
52 See proposed rule § __.2(m).
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threshold amount that a covered swap
entity may establish for a particular
counterparty to the lower of (i) a range
of $15 to $45 million or (ii) a range of
0.1 to 0.3 percent of the covered swap
entity’s tier 1 capital.53 Although the
Agencies have proposed a range of
specific maximum initial margin
threshold amounts for a counterparty
that is a low-risk financial end user, the
Agencies’ preliminary view is that the
midpoint of each range would in each
case be an appropriate amount. With
respect to counterparties that are
nonfinancial end users, the proposed
rule does not place a specific limit on
the maximum initial margin threshold
amount that a covered swap entity may
establish.
The proposed rule allows
uncollateralized exposures below the
initial margin threshold amount for
certain counterparties because taking
uncollateralized credit exposure to
counterparties is a long established
business practice at the firms regulated
by the Agencies. When well managed,
taking on credit exposure does not
automatically lead to unacceptable
levels of systemic risk. Credit exposure
can arise from a number of activities
that regulated firms are permitted to
engage in with a counterparty—making
a loan, opening a committed line of
credit, providing payments processing
or transaction services, or engaging in
swaps transactions. Although the
proposal permits such credit exposure
in certain circumstances, the proposed
rule seeks to ensure that initial margin
is collected in amounts that are
appropriate to the risks posed by
counterparties that are low-risk
financial end users or nonfinancial end
users.
The proposed rule requires that any
credit exposure limit that a covered
swap entity establishes as an initial
threshold amount for a counterparty (i)
53 Although the Agencies intend to specify
particular amounts in the final rule, the proposed
rule provides a potential range of numbers for
comment. Since tier 1 capital is not a concept that
is applicable to covered swap entities for which
FHFA or the FCA is the prudential regulator, the
thresholds as applied to such entities instead
reference (i) in the case of covered swap entities for
which FHFA is the prudential regulator, the term
‘‘total capital,’’ as separately defined within the
proposed regulatory text of FHFA’s proposed rule,
and (ii) in the case of covered swap entities for
which the FCA is the prudential regulator, the term
‘‘applicable core surplus or core capital (or
successor high quality capital requirement),’’ as
separately defined within the proposed regulatory
text of the FCA’s proposed rule.
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appropriately take into account and
address the credit risk posed by the
counterparty and the risks of such
swaps and security-based swaps and (ii)
be reviewed, monitored, and approved
in accordance with the swap entity’s
credit processes. Threshold amounts
that are established in accordance with
these standards are unlikely to generate
meaningful risk to the safety and
soundness of the covered swap entity
and do not pose systemic risk.54 In
addition, in the case of counterparties
that are low-risk financial end users,
which the Agencies preliminarily
believe pose greater risk than
nonfinancial end users, the proposed
rule imposes additional restrictions by
limiting the maximum initial margin
threshold amount that a covered swap
entity may establish.
The Agencies expect that covered
swap entities will establish initial
margin threshold amounts only when
they have meaningfully evaluated the
creditworthiness of the counterparty
and have made a credit and risk
management decision to expose
themselves to the unsecured credit of
the counterparty pursuant to their
generally applicable credit approval
processes. The Agencies also expect that
covered swap entities will monitor
initial margin threshold amounts and
adjust them downward to reflect any
deterioration in the credit quality of the
counterparty or other increase in the
risks the counterparties’ swaps and
security-based swaps pose. Under the
proposed rule, even where an initial
margin threshold amount is established,
the covered swap entity must still
calculate the initial margin amount for
the counterparty pursuant to § __.3 of
the proposed rule and, to the extent that
the initial margin amount exceeds the
initial margin threshold amount that has
been established, collect initial margin
equal to the excess amount.
For those counterparties that pose the
greatest threat to systemic stability by
virtue of their interconnectedness and
the size of their uncollateralized and
potential outward exposures—namely,
other swap entities and high-risk
financial end users—the proposed rule
54 The Agencies also note that the categories of
counterparties for which the proposed rule permits
a covered swap entity to establish an initial margin
threshold amount are roughly aligned with the
Dodd-Frank Act exemption of non-financial end
users from the Dodd-Frank Act mandatory clearing
requirement. See 7 U.S.C. 2(h)(7); 15 U.S.C. 78c–
3(g).
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does not permit any exposure to remain
uncollateralized; the threshold amount
is effectively zero. It is the preliminary
view of the Agencies that the potential
systemic risk from other swap entities
should lead to an amount of initial
margin being actually collected. Margin
should also be collected for all noncleared swaps and non-cleared securitybased swaps with high-risk financial
end users because, as previously
discussed, they are more likely to
default during periods of financial stress
and thus pose greater systemic risk and
risk to the safety and soundness of the
covered swap entity.
The Agencies request comment
regarding whether it is appropriate to
permit covered swap entities to
establish initial margin threshold
amounts for certain counterparties in
the manner proposed. In particular, the
Agencies request comment on the
following questions:
Question 23(a). Does the maximum
initial margin threshold amount
proposed for counterparties that are
low-risk financial end users strike an
appropriate balance between traditional
credit extension practices and the
potential for systemic risk or risk to the
safety and soundness of a covered swap
entity? 23(b) Should threshold amounts
for nonfinancial end users be subject to
a similar limit? 23(c) If so, at what
maximum amount or amounts? 23(d) Do
the derivatives activities and exposures
of nonfinancial end users have the
potential to create systemic risk, either
individually or in aggregate?
Question 24. Is it appropriate for the
threshold amounts to be capped at a
fixed dollar amount?
Question 25. Should the rule also
place a limit on the threshold amounts
that a covered swap entity establishes
for all counterparties in the aggregate?
Question 26(a). Is it appropriate for
the threshold amounts to be determined
by reference to the tier 1 or other
measure of capital of a covered swap
entity? 26(b) What other measures might
be used to determine appropriate
threshold amounts?
Question 27(a). Should the various
threshold amounts be subject to an
automatic adjustment for inflation on a
periodic basis? 27(b) If so, what type of
adjustment would be appropriate?
3. Minimum Transfer Amount
In addition, the proposed rule
provides for a minimum transfer
amount for the collection of margin by
covered swap entities, under which a
covered swap entity need not collect
initial margin from any individual
counterparty otherwise required under
the proposed rule until the required
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cumulative amount is $100,000 or
more.55
4. Alternative Approach to Initial
Margin Requirements
The Agencies also request comment
on several alternative approaches to
implementation of the initial margin
requirements.
First, the Agencies request comment
on whether the proposed rule should be
augmented by (i) imposing a separate,
additional requirement that a covered
swap entity post initial margin to any
counterparty that is an end user,
including both financial and
nonfinancial end users and (ii) requiring
the covered swap entity to ensure that
any such initial margin posted is
segregated at a third-party custodian. In
particular, the Agencies request
comment on the following questions:
Question 28. Would requiring a
covered swap entity to post initial
margin to end user counterparties
reduce systemic risk (e.g., by reducing
leverage in the financial system or
reducing systemic vulnerability to the
failure of a covered swap entity)?
Question 29. Are there alternatives
that address those risks more efficiently
or with greater transparency?
Question 30. Would requiring a
covered swap entity to post initial
margin to end user counterparties raise
any concerns with respect to the safety
and soundness of the covered swap
entity, taking into consideration the
requirement that initial margin be
segregated and held with a third party
custodian?
Question 31. Would requiring a
covered swap entity to post initial
margin to end user counterparties
remove one or more incentives for that
covered swap entity to choose, where
possible, to structure a transaction so
that it need not be cleared through a
CCP in order to avoid pledging initial
margin?
Question 32. Would this approach be
consistent with the statutory factors the
Agencies are directed to take into
account under sections 731 and 764 of
the Dodd-Frank Act?
Second, the Agencies request
comment on whether the proposed rule
should be augmented by (i) imposing a
separate, additional requirement that a
covered swap entity post initial margin
55 See proposed rule § __.3(c). The minimum
transfer amount only affects the timing of margin
collection; it does not change the amount of margin
that must be collected once the $100,000 threshold
is crossed. For example, if the initial margin
requirement were to increase from $50,000 to
$110,000, the covered swap entity would be
required to collect the entire $110,000 (subject to
application of any applicable initial margin
threshold amount).
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to any end user counterparty that is a
systemically significant financial
institution under Title I of Dodd-Frank
Act, and (ii) requiring the covered swap
entity to ensure that any such initial
margin posted is segregated at a thirdparty custodian. In particular, the
Agencies request comment on the
following questions:
Question 33. Would requiring a
covered swap entity to post initial
margin to systemically-significant end
user counterparties reduce systemic risk
(e.g., by reducing leverage in the
financial system or reducing systemic
vulnerability to the failure of a covered
swap entity)?
Question 34. Are there alternatives
that address those risks more efficiently
or with greater transparency?
Question 35. Would requiring a
covered swap entity to post initial
margin to systemically-significant end
user counterparties raise any concerns
with respect to the safety and soundness
of the covered swap entity, taking into
consideration the requirement that
initial margin be segregated and held
with a third party custodian?
Question 36. Would requiring a
covered swap entity to post initial
margin to systemically-significant end
user counterparties remove one or more
incentives for that covered swap entity
to choose, where possible, to structure
a transaction so that it need not be
cleared through a CCP in order to avoid
pledging initial margin?
Question 37. Would this approach be
consistent with the statutory factors the
Agencies are directed to take into
account under sections 731 and 764 of
the Dodd-Frank Act?
Third, the Agencies request comment
on whether the proposed rule should
establish a distinct category of covered
swap entities that, because of the
relatively small size of the derivatives
activities and the lesser risk they pose
to U.S. financial stability, would be
subject to less stringent initial margin
requirement. In particular, such an
approach would (i) permit such ‘‘lowrisk’’ covered swap entities to establish
larger initial or additional margin
threshold amounts (e.g., for
counterparties that are swap entities)
and (ii) not require such ‘‘low-risk’’
covered swap entities to comply with
the segregation requirements of § __.7 of
the proposed rule. Such low-risk
covered swap entities could be defined
by identifying a particular threshold
amount of derivatives activities below
which one would be considered a lowrisk covered swap entity. For example,
under this approach, a low-risk covered
swap entity might be defined as a
covered swap entity whose total
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positions in swaps and security-based
swaps are below the applicable
thresholds established by the SEC and
CFTC for determining whether a firm is
a major swap participant or major
security-based swap participant,
respectively. In particular, the Agencies
request comment on the following
questions:
Question 38. Would establishing a
category of low-risk covered swap entity
and subjecting that category to less
stringent initial margin requirements
enhance or reduce systemic risk?
Question 39. Would establishing a
category of low-risk covered swap entity
and subjecting that category to less
stringent initial margin requirements
raise any concerns with respect to the
safety and soundness of such an entity?
Question 40. If the Agencies adopted
such an approach, how should a lowrisk covered swap entity be defined?
Should the definition reference the
thresholds established by the SEC and
CFTC for determining whether a firm is
a major swap participant or major
security-based swap participant, or
some variant of those thresholds?
Question 41. What less stringent
initial margin requirements should
apply to such low-risk covered swap
entities? What, if any, segregation
requirement should apply to such lowrisk covered swap entities?
Question 42. Would such an approach
encourage covered swap entities to
separate their derivatives activities into
multiple entities so as to avail
themselves of the exemption?
Question 43. Would this approach be
consistent with the statutory factors the
Agencies are directed to take into
account under sections 731 and 764 of
the Dodd-Frank Act?
D. Section __.4: Variation Margin
Section __.4 of the proposed rules
specifies the manner in which a covered
swap entity must calculate the variation
margin requirement applicable to swaps
and security-based swaps it enters into.
As with initial margin requirements, (i)
these variation margin requirements
apply only to collection of variation
margin by covered swap entities from
their counterparties, and not to the
posting of variation margin to their
counterparties,56 and (ii) establish only
a minimum amount of variation margin
that must be collected, leaving covered
swap entities free to collect larger
amounts if they so choose. Consistent
with current practice, covered swap
56 As described in section III.K of this notice,
FHFA’s and the FCA’s proposed rules contain an
additional provision that will have a different effect
with respect to entities regulated by FHFA and the
FCA.
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entities and their counterparties would
remain free to negotiate the extent to
which a covered swap entity may be
required to post variation margin to a
counterparty (other than a swap entity
that is itself subject to margin
requirements).
The proposed rule generally requires
a covered swap entity to collect
variation margin from its counterparties
on a periodic basis.57 The amount of
variation margin that is required to be
periodically collected must be equal to
or greater than (i) the cumulative markto-market change in value to the covered
swap entity of a swap or security-based
swap, as measured from the date it is
entered into, less (ii) the value of all
variation margin previously collected
but not returned by the covered swap
entity with respect to such swap or
security-based swap.58
1. Variation Margin Thresholds and
Minimum Transfer Amounts
Similar to the initial margin
requirement under § __.3 of the
proposed rule, § __.4 permits a covered
swap entity to establish, for certain
counterparties that are end users, a
credit exposure limit that acts as a
variation margin threshold below which
it need not collect variation margin.59
Although the variation margin threshold
is separate from, and may be applied
independently from, the initial margin
threshold with respect to qualifying
counterparties, the variation margin
threshold amount that a covered swap
entity may establish for counterparties
that are low-risk financial end users is
subject to the same specified maximum
amount that governs initial margin
threshold amounts for such
counterparties. As with initial margin
threshold amounts, a covered swap
entity may not establish a variation
margin threshold amount for
counterparties that are swap entities or
high-risk financial end users.
In addition, the proposed rule’s
variation margin requirements contain
provisions similar to those governing
initial margin with respect to minimum
transfer amounts.
proposed rule § __.4(a).
proposed rule defines this required
amount as the ‘‘variation margin amount.’’ See
proposed rule § __.2(bb). In the case of swap or
security-based swap that is out-of-the-money or inthe-money to a covered swap entity at the time it
enters into the transaction, that amount is also
included within the definition of variation margin
amount and subject to the variation margin
requirements.
59 See proposed rule §§ __.2(bb), __.4(a).
57 See
2. Aggregate Calculation of Variation
Margin Requirements Under a
Qualifying Master Netting Agreement
The proposed rule permits a covered
swap entity to calculate variation
margin requirements on an aggregate
basis across all swap or security-based
swap transactions with a counterparty
that are executed under the same
qualifying master netting agreement.60
The proposed rule defines a qualifying
master netting agreement as a legally
enforceable agreement to offset positive
and negative mark-to-market values of
one or more swaps or security-based
swaps that meet a number of specific
criteria designed to ensure that these
offset rights are fully enforceable,
documented and monitored by the
covered swap entity.61 The Agencies
request comment regarding whether
permitting the aggregate calculation of
variation margin requirements is
appropriate and, if so, whether the
proposed rule’s definition of qualifying
master netting agreement raises
practical or implementation difficulties
or is inconsistent with current market
practices.
3. Frequency of Variation Margin
Calculation and Collection
The proposed rule also specifies the
minimum frequency with which a
covered swap entity must calculate and
collect initial margin. Consistent with
the approach of the proposed rule
generally, the minimum frequency
varies based on the systemic and safety
and soundness risk of the counterparty
type. Covered swap entities must
calculate and collect variation margin
from counterparties that are themselves
swap entities or financial end users at
least once per business day, and from
counterparties that are nonfinancial end
users at least once per week. The
Agencies request comment on whether
the proposed rule’s approach to the
frequency with which the variation
margin requirements must be met is
consistent with current market
practices, and whether alternative
approaches to imposing variation
margin requirements would better
reflect the purposes of section 731 and
764 of the Dodd-Frank Act.
58 The
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proposed rule § __.4(d).
proposed rule § __.2(t). The proposed rule’s
definition of qualifying master netting agreement
generally mirrors the definition given to that term
in the Federal banking agencies’ risk-based capital
rules applicable to derivatives positions held by
insured depository institutions and bank holding
companies. See, e.g., 12 CFR part 225, App. G.I.2.
60 See
61 See
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4. Counterparty Refusal to Provide
Required Variation Margin
Section __.4(e) of the proposed rule
addresses potential circumstances in
which a counterparty may refuse to
provide required variation margin to a
covered swap entity. Specifically, it
provides that a covered swap entity
shall not be deemed to have violated its
regulatory obligation to collect required
variation margin from a counterparty if
the counterparty has refused or
otherwise failed to provide the required
variation margin to the covered swap
entity and the covered swap entity has
either (i) made the necessary efforts to
attempt to collect the required variation
margin, including the timely initiation
and continued pursuit of formal dispute
resolution mechanisms, or has
otherwise demonstrated upon request to
the satisfaction of the relevant Agency
that it has made appropriate efforts to
collect the required variation margin, or
(ii) commenced termination of the swap
or security-based based swap with the
counterparty.62 The Agencies note that,
in each such case, the covered swap
entity will have been required, under
§ __.5 of the proposed rule, to obtain the
contractual right to collect such
variation margin as is necessary to
permit it to comply with the
requirements of § __.4 of the proposed
rule and set out valuation dispute
resolution procedures.
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5. Alternative Approach to Variation
Margin Requirements
The Agencies also request comment
on several alternative approaches to
implementation of the variation margin
requirements.
First, the Agencies request comment
on whether the proposed rule should be
augmented by imposing a separate,
additional requirement that a covered
swap entity post variation margin to any
counterparty that is an end user,
including both financial and
nonfinancial end users. In particular,
the Agencies request comment on the
following questions:
Question 44. Would requiring a
covered swap entity to post variation
margin to end user counterparties
reduce systemic risk (e.g., by reducing
leverage in the financial system or
reducing systemic vulnerability to the
failure of a covered swap entity)?
62 See proposed rule § __.4(e). The Agencies note
that there is no similar reference to appropriate
efforts in the proposed rule initial margin
requirements; since initial margin is collected at the
time a swap or security-based swap is entered into,
a covered swap entity can and must collect any
required initial margin as prerequisite to executing
the transaction.
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Question 45. Are there alternatives
that address those risks more efficiently
or with greater regulatory transparency?
Question 46. Would requiring a
covered swap entity to post variation
margin to end user counterparties raise
any concerns with respect to the safety
and soundness of the covered swap
entity?
Question 47. Would requiring a
covered swap entity to post variation
margin to end user counterparties
remove one or more incentives for that
covered swap entity to choose, where
possible, to structure a transaction so
that it need not be cleared through a
CCP in order to avoid pledging variation
margin?
Question 48. Would this approach be
consistent with the statutory factors the
Agencies are directed to take into
account under sections 731 and 764 of
the Dodd-Frank Act?
Second, the Agencies request
comment on whether the proposed rule
should be augmented by imposing a
separate, additional requirement that a
covered swap entity post variation
margin to any end user counterparty
that is a systemically significant
financial institution under Title I of
Dodd-Frank Act. In particular, the
Agencies request comment on the
following questions:
Question 49. Would requiring a
covered swap entity to post variation
margin to systemically-significant end
user counterparties reduce systemic risk
(e.g., by reducing leverage in the
financial system or reducing systemic
vulnerability to the failure of a covered
swap entity)?
Question 50. Are there alternatives
that address those risks more efficiently
or with greater regulatory transparency?
Question 51. Would requiring a
covered swap entity to post variation
margin to systemically-significant end
user counterparties raise any concerns
with respect to the safety and soundness
of the covered swap entity?
Question 52. Would requiring a
covered swap entity to post variation
margin to systemically-significant end
user counterparties remove one or more
incentives for that covered swap entity
to choose, where possible, to structure
a transaction so that it need not be
cleared through a CCP in order to avoid
pledging variation margin?
Question 53. Would this approach be
consistent with the statutory factors the
Agencies are directed to take into
account under sections 731 and 764 of
the Dodd-Frank Act?
Third, the Agencies request comment
on whether the proposed rule should
establish a distinct category of swap
entities that, because of the relatively
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27577
small size of the derivatives activities
and the lesser risk they pose to U.S.
financial stability, would be subject to
less stringent variation margin
requirement. In particular, such an
approach would permit such ‘‘low- risk’’
covered swap entities to establish larger
variation margin threshold amounts.
Such low-risk covered swap entities
could be defined as described in section
III.C.4 of this notice. In particular, the
Agencies request comment on the
following questions:
Question 54. Would establishing a
category of low-risk covered swap entity
and subjecting such an entity to less
stringent variation margin requirements
enhance or reduce systemic risk?
Question 55. Would establishing a
category of low-risk covered swap entity
and subjecting such an entity to less
stringent variation margin requirements
raise any concerns with respect to the
safety and soundness of such an entity?
Question 56. If the Agencies adopted
such an approach, how should a lowrisk covered swap entity be defined?
What less stringent variation margin
requirements should apply to such low
risk covered swap entities?
Question 57. Would such an approach
encourage covered swap entities to
separate their derivatives activities into
multiple entities so as to avail
themselves of the exemption?
Question 58. Would this approach be
consistent with the statutory factors the
Agencies are directed to take into
account under sections 731 and 764 of
the Dodd-Frank Act?
E. Section __.5: Documentation of
Margin Matters
The proposed rule requires a covered
swap entity to execute trading
documentation with each counterparty
that includes credit support
arrangements that grant the covered
swap entity the contractual right to
collect initial margin and variation
margin in such amounts, in such form,
and such circumstances as are required
by the initial margin and variation
margin requirements set forth in the
proposed rule.63 The trading
documentation must also specify (i) the
methods, procedures, rules, and inputs
for determining the value of each swap
or security-based swap for purposes of
calculating variation margin
requirements and (ii) the procedures by
which any disputes concerning the
valuation of swaps or security-based
swaps, or the valuation of assets
63 See
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collected or posted as initial margin or
variation margin, may be resolved.64
F. Section __.6: Eligible Collateral
The proposed rule specifies the types
of collateral that are eligible to be
collected to satisfy either the initial
margin or variation margin
requirements. Under the proposed rule,
eligible collateral is limited to: (i)
Immediately available cash funds
(denominated in either U.S. dollars or in
the currency in which payment
obligations under the swap are required
to be settled); (ii) any obligation which
is a direct obligation of, or fully
guaranteed as to principal and interest
by, the United States; (iii) with respect
to initial margin only, any senior debt
obligations of the Federal National
Mortgage Association, the Federal Home
Loan Mortgage Corporation, the Federal
Home Loan Banks and Farmer Mac; and
(iv) with respect to initial margin only,
any obligation that is an ‘‘insured
obligation,’’ as that term is defined in 12
U.S.C. 2277a(3), of the Farm Credit
System banks.65 Other than
immediately-available cash funds, all
types of eligible collateral are subject to
discounts or minimum ‘‘haircuts’’ for
purposes of determining their value for
margin purposes, which haircuts are
identified in Appendix B of the
proposed rule.66 Because the value of
noncash collateral may vary, the
proposed rule requires covered swap
entities to monitor the value of noncash
collateral previously collected to satisfy
initial or variation margin requirements
and, to the extent the value of such
noncash collateral has decreased, to
collect additional collateral with a
sufficient value to ensure that all
applicable initial and variation margin
requirements remain satisfied.67 The
proposed rule also prohibits a covered
swap entity from collecting, as required
initial margin or variation margin,
64 See
id.
proposed rule § _6(a). An obligation will be
considered to be fully guaranteed as to principal
and interest by the United States if the guarantee
commits the full faith and credit of the United
States for the repayment of principal and interest
on the obligation. ‘‘Insured obligations’’ of Farm
Credit System banks are consolidated and Systemwide obligations issued by Farm Credit System
banks. These obligations are insured by the Farm
Credit System Insurance Corporation out of funds
in the Farm Credit Insurance Fund. Should the
Farm Credit Insurance Fund ever be exhausted,
Farm Credit System banks are jointly and severally
liable for payment on insured obligations.
66 See proposed rule § _6(b). With respect to these
haircuts, although the Agencies intend to specify
particular haircut amounts in the final rule, the
proposed rule provides a potential range of haircuts
for comment.
67 See proposed rule § _6(d).
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65 See
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collateral that is an obligation of the
counterparty pledging such collateral.68
The proposed rule does not allow for
the use of non-cash collateral, other
than the limited types of highly-liquid,
high-quality debt securities described
above, to satisfy the margin
requirements. The appropriateness of
using non-cash collateral to fulfill
margin requirements is complicated by
procyclical considerations. During a
period of financial stress, the value of
non-cash collateral pledged as margin
may also come under stress just as
counterparties default and the non-cash
collateral is required to offset the cost of
replacing defaulted swap positions. In
addition, given the infinite variety of
potential types of noncash collateral, it
is extremely difficult to establish
accurate haircuts by regulation. Also, for
nonfinancial end users, who are the
most likely type of counterparty to wish
to post noncash collateral, the proposed
rules provide credit exposure
thresholds, under which a covered swap
entity may determine the extent to
which available noncash collateral
appropriately reduces the covered swap
entity’s credit risk, consistent with its
credit underwriting expertise. Similarly,
counterparties that wish to rely on other
non-cash assets to meet margin
requirements could pledge those assets
with a bank or group of banks in a
separate arrangement, such as a secured
financing facility, and could draw cash
from that arrangement to meet margin
requirements.
The Agencies request comment on
whether the proposed rule’s list of
eligible noncash collateral for initial
margin and variation margin is
appropriate in scope. In particular, the
Agencies request comment on the
following questions:
Question 59(a). Should the types of
eligible collateral listed be broadened to
include other types of assets (e.g.
securities backed by high-quality
mortgages or issued with a third-party
guarantee)? 59(b) If so, how might the
systemic risk issue described above be
effectively mitigated?
Question 60(a). Should the types of
eligible collateral listed be broadened to
include immediately-available cash
funds denominated in foreign currency,
even where such currency is not the
currency in which payment obligations
under the swap are required to be
settled? 60(b) If so, which currencies
(e.g., those accepted by a derivatives
clearing organization as initial margin
for a cleared swap)? 60(c) If so, what
haircut, if any, should apply to such
foreign currency?
68 See
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Question 61. What criteria and factors
could be used to determine the set of
acceptable non-cash collateral?
Question 62. How could appropriate
haircuts be determined for valuing these
assets for margin purposes?
Question 63(a). Should the types of
eligible collateral listed be broadened to
include foreign sovereign debt
securities? 63(b) If so, which foreign
sovereign debt securities (e.g., those
accepted by a derivatives clearing
organization as initial margin for a
cleared swap)? 63(c) If so, what haircut,
if any, should apply?
Question 64(a). Should fixed income
securities issued by a well-known
seasoned issuer that has a high credit
standing, are unsubordinated,
historically display low volatility, are
traded in highly liquid markets, and
have valuations that are readily
calculated be added to the list of eligible
collateral for initial margin? 64(b) If so,
how should the concept of a ‘‘high credit
standing’’ be defined in a way that does
not reference credit ratings?
G. Section __.7: Segregation of Collateral
The proposed rule provides that each
covered swap entity must require each
derivative’s counterparty that it faces
that is a swap entity to segregate any
funds or collateral that the covered
swap entity has posted as initial margin
for a non-cleared swap or non-cleared
security-based swap transaction at an
independent, third-party custodian.69
This independent, third-party custodian
must be prohibited by contract from (i)
rehypothecating or otherwise
transferring any initial margin it holds
for the covered swap entity and (ii)
reinvesting any initial margin held by
the custodian in any asset that would
not qualify as eligible collateral for
initial margin under the proposed
rule.70 The custodian must also be
located in a jurisdiction that applies the
same insolvency regime to the custodian
as would apply to the covered swap
entity.71 This segregation requirement
applies only to initial margin, not
variation margin, and does not apply to
transactions with a counterparty that is
an end user of any type.72
proposed rule § _7(a).
proposed rule §§ _7(b), (c).
71 See proposed rule § _7(d).
72 The proposed rule does not apply the
segregation requirement to variation margin because
variation margin is generally used to offset the
current exposure arising from actual changes in the
market value of the derivative position, rather than
to secure potential exposure arising from future
changes in the market value of the derivative
position. Under section __.11 of FHFA’s and the
FCA’s proposed rules, entities regulated by FHFA
and the FCA that are end users would have to
require that any initial margin and variation margin
they post to swap entities be segregated.
69 See
70 See
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The Agencies’ preliminary view is
that requiring covered swap entities to
ensure segregation of initial margin is
necessary to (i) offset the greater risk to
the covered swap entity and the
financial system arising from the use of
swaps and security-based swaps that are
not cleared and (ii) protect the safety
and soundness of the covered swap
entity. In developing this proposal, the
Agencies have taken into account the
fact that the failure of a covered swap
entity could pose significant systemic
risks to the financial system and losses
borne by the financial system in such a
failure could have significant
consequences. The consequences could
be magnified if the initial margin posted
to the failing swap entity cannot be
quickly recovered by the nondefaulting
party during a period of financial stress
when the liquidity value of the funds is
high. Moreover, swap entities typically
have roughly offsetting exposures with
one another. As a result, it is to be
expected that the amount of initial
margin required to be posted by two
swap entities will be similar. If swap
entities exchange similar amounts of
initial margin and these funds are
available for general use and
rehypothecation by the swap entities,
then the net effect is as if little initial
margin was exchanged. To the extent
that initial margin requirements are
intended to constrain risk-taking, a lack
of segregation will weaken their effect.73
Swap entities that engage in cleared
swap transactions will be required to
post initial margin to the CCP.
Consequently, the initial margin that is
posted on cleared transactions will not
be available for rehypothecation by
swap entities. Allowing for
rehypothecation of initial margin by
swap entities would create an incentive
for swap entities to engage in noncleared transactions even though other
provisions of Dodd-Frank Act are
intended to promote central clearing of
73 For example, if dealer A and dealer B entered
into a swap with each other under which each was
required to collect $100 from the other in initial
margin without segregation, each would collect
$100 in initial margin from the other and no net
initial margin would be exchanged. In the case of
a bankruptcy of dealer B, dealer A would be
permitted to set off the $100 loss that may be
incurred in replacing the swap against the $100 in
initial margin it ‘‘collected’’ from dealer B, but then
would face the potential loss of the $100 in initial
margin it provided to dealer B, for which it would
only have a claim in bankruptcy. If instead the
initial margin for such a swap had been segregated,
dealer A would be permitted to set off the $100 loss
that may be incurred in replacing the swap against
the $100 in initial margin that dealer B pledged to
dealer A at a third-party custodian, and dealer A
could also recover the $100 in initial margin that
it pledged to dealer B at a third-party custodian,
with the result that dealer A would incur no loss
upon dealer B’s bankruptcy.
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swaps. However, the segregation of
initial margin is likely to significantly
reduce the availability of liquid assets to
covered swap entities to meet payment
obligations, as liquid assets held or
pledged as the initial margin would be
unavailable to the swap entity for other
purposes. The requirement to segregate
initial margin could result in covered
swap entities having to seek alternative
methods of funding. The loss in
liquidity could be severe, and could
require covered swap entities to raise
liquidity through other sources.
The Agencies are concerned that not
requiring segregation at the outset may
cause covered swap entities that incur a
severe loss due to credit or market
events to face liquidity challenges
because their counterparties may
require segregation immediately after
the loss, depleting the covered swap
entity’s liquid assets before it can raise
additional funds through other means.74
Requiring swap entities to segregate at
the outset addresses this concern at the
time a swap entity suffers a loss, but
depletes the liquid assets at the
inception of the swap transaction—a
time when the swap entity is more
likely to be able to raise additional
liquid funds. The Agencies request
comment on whether the proposed
segregation requirement is appropriate,
or whether an alternative approach
would better reflect the purposes of
sections 731 and 764 of the Dodd-Frank
Act. In particular, the Agencies request
comment on the following questions:
Question 65(a). Is it necessary to
require segregation of initial margin in
order to address the systemic risk issues
discussed above? 65(b) What
alternatives to segregation would
effectively address these systemic risk
issues? 65(c) As an alternative to
requiring segregation at the outset,
should the Agencies impose rules that
provide additional time for a swap
dealer to raise funds without requiring
segregation?
Question 66(a). What are the potential
operational, liquidity and credit costs of
requiring segregation of initial margin
by swap entities? 66(b) What would be
the expected liquidity impact and cost
of the proposed segregation requirement
on market participants? How can the
impact of the proposed rule on the
74 Although the agreements between the
counterparties might not allow for requests for
segregation after a swap transaction has been
confirmed, as a practical matter counterparties
might refuse to enter into any additional
transactions with a financially-stressed swaps entity
absent an accommodation to segregate some amount
of initial margin for the existing portfolio of swaps
between the two parties.
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liquidity and costs of swaps market
participants be mitigated?
Question 67. Is segregation of initial
margin and not variation margin
sufficient to achieve the purposes of
sections 731 and 764 of the Dodd-Frank
Act? If not, how might such purposes be
achieved?
Question 68(a). Are the limitations
placed on rehypothecation and
reinvestment under the proposed rule
appropriate or necessary? 68(b) What
additional or alternative limitations may
be appropriate? 68(c) Should certain
forms of rehypothecation (e.g., the
lending of securities pledged as
collateral) or additional types of
reinvestment be permitted?
Question 69(a). Is the proposed rule’s
requirement that the custodian must be
located in a jurisdiction that applies the
same insolvency regime to the custodian
as would apply to the covered swap
entity necessary or appropriate? 69(b)
What additional or alternative
requirements regarding the location of
the custodian may be appropriate?
H. Section __.8: Approved Initial Margin
Models
Section __.8 of the proposed rule
contains modeling standards that an
initial margin model must meet in order
for a covered swap entity to calculate
initial margin under such a model.
Generally, the modeling standards are
consistent with current regulatory rules
and best practices for such models in
the context of risk-based capital rules
applicable to insured depository
institutions and bank holding
companies, and are no less conservative
than those generally used by derivatives
clearing organizations and clearing
agencies.75 As a result, the Agencies
preliminarily believe that these
modeling standards should ensure that
a non-cleared swap does not pose a
greater systemic risk than a cleared
swap. In particular, because non-cleared
swaps are expected to be less liquid
than cleared swaps, the proposed rule
specifies a minimum time horizon for
the initial margin model of 10 business
days, compared with a typical
requirement of 3 to 5 business days used
by derivatives CCPs.76
The proposed rule permits a covered
swap entity to use an internal initial
margin model that reflects offsetting
exposures, diversification, and other
hedging benefits within four broad risk
categories (commodity, credit, equity,
75 This conservative approach also incorporates
the practices associated with model validation,
independent review and other qualitative
requirements associated with the use of internal
models for regulatory capital purposes.
76 See proposed rule § __.8(d)(1).
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foreign exchange/interest rates) when
calculating initial margin for a
particular counterparty if the relevant
swaps or security-based swaps are
executed under the same qualifying
master netting agreement.77 The
proposed rule does not permit an initial
margin model to reflect offsetting
exposures, diversification, or other
hedging benefits across broad risk
categories.78 It is the preliminary view
of the Agencies that the correlations of
exposures across broad risk categories
are not stable enough to be incorporated
into a regulatory margin requirement.
The Agencies request comment on
whether the standards for initial margin
models specified in the proposed rule
are sufficient to ensure the integrity of
initial margin calculations using such a
model. In particular, the Agencies
request comment on the following
questions:
Question 70(a). Should such models
be limited to models based on value-atrisk concepts, or are other models
appropriate to measure initial margin?
70(b) If so, how should those models
apply and be incorporated into the
various aspects of the proposed rule?
Question 71(a). Should offsetting
exposures, diversification, and other
hedging benefits be recognized more
broadly across substantially dissimilar
asset classes? 71(b) If so, what limits, if
any, would be placed on the recognition
of offsetting exposures, diversification,
and other hedging benefits, and how
could these be measured, monitored and
validated on an ongoing and consistent
basis across substantially dissimilar
asset classes?
Question 72(a). Should the minimum
time horizon vary across swaps? 72(b)
For example, should it vary based on
the broad asset classes: commodity,
credit, equity, and foreign exchange/
interest rate? 72(c) If so, how should the
horizons differ and what would be the
basis for the different horizons?
1. Stress Calibration
In addition to a time horizon of 10
trading days, the proposed rule requires
the initial margin model to be calibrated
to a period of financial stress.79
Calibration to a stress period ensures
that the resulting initial margin
requirement is robust to a period of
financial stress during which swap
entities and financial counterparties are
more likely to default. Such calibration
also reduces the systemic risk associated
with any increase in margin
requirements that might occur in
77 See
proposed rule § __.8(b).
78 Id.
79 See
proposed rule § __.8(d)(11).
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response to a large increase in volatility
during a period of financial stress.
The Agencies request comment on
whether the proposed requirement that
an initial margin model take into
account financial stress is appropriate
given the purpose the initial margin
model is intended to serve. In
particular, the Agencies request
comment on the following questions:
Question 73. Can initial margin
models be robustly calibrated to a stress
period in a transparent and consistent
manner?
Question 74. Are there any other
systemic risk implications of requiring
that initial margin be calibrated to a
period of financial stress rather than to
a recent or normal historical period?
Question 75. Is the proposed
prudential standard for initial margin of
a 99th percentile price move over a 10day horizon, calibrated using historical
data incorporating a period of
significant financial stress, appropriate?
Question 76. Is a 10-day horizon
sufficient to cover the likely liquidation
period on non-cleared swaps?
Question 76. Will the requirement to
calibrate to a period of significant
financial stress reduce the potential
procyclicality of the margin requirement
sufficiently? For example, would a
minimum margin requirement as a
backstop to the modeled initial margin
amounts be a prudent approach to
addressing procyclicality concerns?
Question 77. Is ‘‘period of significant
financial stress’’ a well-understood
concept? How might it be clarified?
Question 78. What would be the
benefits and costs of replacing the
requirement to calibrate the initial
margin model using a period of
significant financial stress with a
requirement to calibrate the initial
margin model using a longer historical
data sample (such as 10 years), as an
alternative way to reduce the potential
procyclicality of the margin
requirement?
Question 79. Should market
participants be able to comply with the
requirement to calibrate the initial
margin requirement to a historical
period of significant financial stress for
newer products with little, if any,
market history? If so, how?
require for similar transactions.80 This
benchmarking requirement is intended
to insure that any initial margin amount
produced by an initial margin model is
subject to a readily observable
minimum. It will also have the effect of
limiting the extent to which the use of
initial margin models might
disadvantage the movement of certain
types of derivatives to CCPs by setting
lower initial margin amounts for noncleared transactions than for similar
cleared transactions.
The Agencies request comment on the
proposed requirement for covered swap
entities to benchmark any initial margin
model to a model used by a derivatives
clearing organization or clearing agency
model for calculating initial margin, as
well as the following questions:
Question 80. What are the operational
costs associated with the benchmarking
exercise?
Question 81. Can portfolio effects be
captured during the benchmarking
exercise?
Question 82. How would a banking
organization fulfill the requirement in
the event that a derivatives clearing
organization or clearing agency does not
clear a similar derivative transaction?
2. Benchmarking
I. Section __.9: Application of Margin
Requirements to Certain Foreign
Covered Swap Entities
Section __.9 of the proposed rule
addresses the manner in which the
proposed rule’s margin requirements
apply to certain foreign covered swap
entities. In the absence of § __.9, the
proposed rule’s margin requirements
would apply to all of a covered swap
entity’s non-cleared swap and noncleared security-based swap
transactions, without regard to whether
(i) the covered swap entity is organized
under U.S. or foreign law or (ii) the
covered swap entity’s counterparty is
located inside or outside of the United
States. However, the potential
application of the margin rules to
foreign covered swap entities, or to
transactions by U.S. covered swap
entities with foreign counterparties,
raises several important questions. First,
the potential application of the
proposed rule to activities conducted by
a foreign covered swap entity wholly
outside of the United States raises
questions regarding the permissible
territorial scope of the proposed rule.81
The proposed rule requires that an
initial margin model used for
calculating initial margin requirements
be benchmarked periodically against
observable margin standards to ensure
that the initial margin required is not
less than what a derivatives clearing
organization or a clearing agency would
proposed rule § __.8(d)(14).
2(i) of the Commodity Exchange Act, as
amended by section 722 of the Dodd-Frank Act,
provides that the provisions of the Commodity
Exchange Act relating to swaps ‘‘shall not apply to
activities outside of the United States unless those
activities * * * have a direct and significant
connection with activities in, or effect on,
commerce of the United States.’’
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81 Section
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Second, to the extent that the proposed
margin requirements apply to
transactions involving foreign covered
swap entities or foreign counterparties,
such application could subject these
transactions to multiple, and potentially
conflicting, margin requirements
established by U.S. and foreign
regulators. Third, the potentially
different treatment of U.S. covered swap
entities and foreign covered swap
entities raises questions of competitive
equality among the two types of firms.
With respect to U.S. covered swap
entities, the Agencies propose to apply
the margin requirements to U.S. covered
swap entities’ swap and security-based
swap transactions without regard to
whether the counterparty is located
inside or outside the United States. This
approach acknowledges that the foreign
swap and security-based swap
transactions of a U.S. covered swap
entity pose no lesser risk to the covered
swap entity’s safety and soundness and
to financial stability based on the
location of the counterparty. The
proposed rule applies that same
approach to covered swap entities that
are foreign subsidiaries and offices of
U.S. firms.
With respect to foreign covered swap
entities, the Agencies propose to
exclude certain qualifying foreign
derivative transactions of such entities
from application of the proposed rule’s
margin requirements. Specifically, § __.9
of the proposed rule provides that the
proposed rule’s margin requirements
would not apply to any ‘‘foreign noncleared swap or foreign non-cleared
security-based swap’’ of a ‘‘foreign
covered swap entity,’’ as those terms are
defined in § __.9 of the proposed rule.82
This proposed approach limits the
extra-territorial application of the
margin requirements while preserving,
to the extent possible, competitive
equality among U.S. and foreign firms in
the United States.
For these purposes, the proposed rule
defines a ‘‘foreign non-cleared swap or
foreign non-cleared security-based
swap’’ as a non-cleared swap or noncleared security-based swap with
respect to which: (i) The counterparty to
the foreign covered swap entity is not a
company organized under the laws of
the United States or any State, not a
branch or office of a company organized
under the laws of the United States or
any State, and not a person resident in
the United States; and (ii) performance
of the counterparty’s obligations to the
foreign covered swap entity under the
swap or security-based swap has not
been guaranteed by an affiliate of the
82 See
proposed rule § __.9(a).
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counterparty that is a company
organized under the laws of the United
States or any State, a branch of a
company organized under the laws of
the United States or any State, or a
person resident in the United States.83
As a result, foreign swaps and securitybased swaps would generally only
include transactions where the
counterparty is not organized under
U.S. law or otherwise located in the
United States, and no U.S. affiliate of
the counterparty has guaranteed the
counterparty’s obligations under the
transaction.84
The additional requirement that no
U.S. affiliate guarantee the
counterparty’s obligation is intended to
exclude instances where such an
affiliate has, through a guarantee,
effectively assumed ultimate
responsibility for the performance of the
counterparty’s obligations under the
transaction. In particular, the Agencies
are concerned that without such a
requirement, swaps and security-based
swaps with a U.S. counterparty could be
structured, through the use of an
overseas affiliate, in a manner that
would evade application of the
proposed margin requirements to U.S.
transactions. Transactions guaranteed
by a U.S. affiliate would also have direct
and significant connection with
activities in, and effect on, commerce of
the United States.
The proposed rule defines a ‘‘foreign
covered swap entity’’ as a covered swap
entity that: (i) Is not a company
organized under the laws of the United
States or any State; (ii) is not a branch
or office of a company organized under
the laws of the United States or any
State; (iii) is not a U.S. branch, agency
or subsidiary of a foreign bank; and (iv)
is not controlled, directly or indirectly,
by a company that is organized under
the laws of the United States or any
State.85 Accordingly, only a covered
swap entity that is organized under
foreign law and not controlled, directly
or indirectly, by a U.S. company would
be eligible for treatment as a foreign
covered swap entity for these purposes;
neither a foreign branch of a U.S.
insured depository institution nor a
foreign subsidiary of a U.S. company
would be considered a foreign covered
swap entity under the proposed rule. In
cases where a U.S. company has a
foreign subsidiary that is a covered
swap entity, the proposed rule would
proposed rule § __.9(b).
the proposed rule, swap and securitybased swaps with U.S. counterparties are subject to
the proposed rule’s margin requirements regardless
of whether the covered swap entity is U.S. or
foreign.
85 See proposed rule § __.9(c).
83 See
84 Under
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treat that foreign subsidiary in the same
manner as a U.S. covered swap entity
for purposes of the margin requirements
because the U.S. parent company’s
ownership of the subsidiary is likely to
expose the U.S parent company, as a
result of legal, contractual or
reputational factors, to the risks of the
foreign subsidiary’s derivatives
activities. Transactions of a foreign
subsidiary of a U.S. company would
also have direct and significant
connection with activities in, and effect
on, commerce of the United States.
Similarly, neither a U.S. branch of a
foreign bank nor a U.S. subsidiary of a
foreign company would be a foreign
covered swap entity under the proposed
rule.
The Agencies request comment on the
proposed rule’s application to the U.S.
and foreign swap and security-based
swap activities of U.S. covered swap
entities and foreign swap entities,
respectively. In particular, the Agencies
request comment on the following
questions:
Question 83. Does the proposed rule’s
treatment of the swap and securitybased swap transactions of foreign
covered swap entities appropriately
limit application of the margin
requirements in a manner consistent
with the territorial scope of sections 731
and 764 of the Dodd-Frank Act?
Question 84(a). Is the proposed rule’s
treatment of the foreign swap and
security-based swap transactions of U.S.
covered swap entities appropriate? 84(b)
Should such transactions be subject to
the same exclusion that has been
proposed for the foreign swap and
security-based swap transactions of
foreign covered swap entities? 84(c) If
so, why?
Question 85(a). Should the proposed
rule expand the definition of foreign
covered swap entity to include (i) the
foreign subsidiaries of U.S. companies
or (ii) the foreign branches of U.S.
insured depository institutions? 85(b) If
so, why? 85(c) How could the potential
risks to the U.S. parent company or
insured depository institution related to
its subsidiary or branch’s activity be
limited or eliminated? 85(d) Is this
operationally feasible?
Question 86. What impact is the
proposed rule’s treatment of the foreign
swap and security-based swap
transactions of U.S. covered swap
entities likely to have on the structure,
management, and/or competitiveness of
U.S. covered swap entities?
Question 87(a). Is the proposed rule’s
definition of a foreign swap or securitybased swap transaction appropriate?
87(b) In particular, is the requirement
that no U.S. affiliate guarantee the
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foreign counterparty’s obligations under
the swap or security-based swap
transaction appropriate? 87(c) Would an
alternative definition more
appropriately differentiate between U.S.
and foreign counterparties for these
purposes? 87(d) If so, what should that
definition be?
Question 88(a). Is the proposed rule’s
definition of a foreign covered swap
entity appropriate? 88(b) Would an
alternative definition more
appropriately differentiate between U.S.
and foreign counterparties for these
purposes? 88(c) If so, what should that
definition be?
Question 89(a). Is the proposed rule’s
application of the margin requirements
to all U.S. swaps and security-based
swaps of a covered swap entity,
regardless of whether that covered swap
entity is U.S. or foreign, appropriate?
89(b) Should the proposed rule treat
such transactions differently? 89(c) If so,
how?
Question 90. What impact is the
proposed rule’s treatment of the swap
and security-based swap transactions of
foreign covered swap entities likely to
have on the structure, management,
and/or competitiveness of foreign
covered swap entities?
J. Section __.10: Capital
The proposed rule generally requires
a covered swap entity to comply with
regulatory capital rules already made
applicable to that covered swap entity
as part of its prudential regulatory
regime, as follows:
• In the case of insured depository
institutions, the capital adequacy
guidelines that are applicable to the
covered entity and have been adopted
by the appropriate Federal banking
agency under section 38 of the Federal
Deposit Insurance Act (12 U.S.C.
1831o);
• In the case of a bank holding
company or savings and loan holding
company (on or after the transfer
established under Section 311 of the
Dodd-Frank Act), the capital adequacy
guidelines applicable to bank holding
companies under the Board’s Regulation
Y (12 CFR part 225);
• In the case of a foreign bank or the
U.S. branch or agency of a foreign bank,
the capital rules that are made
applicable to such covered entity
pursuant to § 225.2(r)(3) of the Board’s
Regulation Y (12 CFR 225.2(r)(3);
• In the case of an Edge corporation
or an Agreement corporation, the capital
adequacy guidelines that are made
applicable to an Edge corporation
engaged in banking pursuant to
§ 211.12(c)(2) of the Board’s Regulation
K (12 CFR 211.12(c)(2);
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• In the case of any ‘‘regulated entity’’
under the Federal Housing Enterprises
Financial Safety and Soundness Act of
1992 (i.e., Fannie Mae and its affiliates,
Freddie Mac and its affiliates, and the
Federal Home Loan Banks), the riskbased capital level or such other amount
applicable to the covered swap entity as
required by the Director of FHFA
pursuant to 12 U.S.C. 4611;
• In the case of Farmer Mac, the
capital adequacy regulations set forth in
12 CFR part 652; and
• In the case of any Farm Credit
System institution (other than Farmer
Mac), the capital regulations set forth in
12 CFR part 615.86
The Agencies have preliminarily
determined that compliance with these
regulatory capital requirements is
sufficient to offset the greater risk to the
swap entity and the financial system
arising from the use of non-cleared
swaps, helps ensure the safety and
soundness of the covered swap entity,
and is appropriate for the greater risk
associated with the non-cleared swaps
and non-cleared security-based swaps
held as a covered swap entity. In
particular, the Agencies note that the
capital rules incorporated by reference
into the proposed rule already address,
in a risk-sensitive and comprehensive
manner, the safety and soundness risks
posed by a covered swap entity’s
derivatives positions.87 In addition, the
proposed rule § __.10.
example, under the banking agencies’
capital adequacy standards for banks and bank
holding companies based on the first Basel Accord,
interest-rate, exchange-rate, commodity, and equitylinked derivative contracts that are not traded on an
exchange are subject to a capital charge based on
type of contract, remaining maturity, and the risk
category of the counterparty to the contract. See 12
CFR part 3, Appendix A § 3(b)(7) (OCC); 12 CFR
parts 208 and 225, Appendix A § III.E (Board); 12
CFR part 325, Appendix A § II.E (FDIC). As another
example, under the bank agencies’ advanced riskbased capital adequacy standards based on the
advanced approaches of the Basel II Accord
(‘‘advanced approaches’’), banks and bank holding
companies that use the advanced approaches
determine capital requirements for over-the-counter
derivatives based on a formula that takes into
account collateral in mitigating counterparty credit
risk. See 12 CFR part 3, Appendix C, part IV (OCC);
12 CFR part 208, Appendix F, part IV and 12 CFR
part 225, Appendix G, part IV (Board); and 12 CFR
part 325, Appendix D, part IV (FDIC). The FCA’s
capital requirements for FCS institutions other than
Farmer Mac expressly address derivatives
transactions. See 12 CFR 615.5201 and 615.5212.
The FCA’s capital requirements for Farmer Mac
indirectly address derivatives transactions in the
operational risk component of the statutorily
mandated risk-based capital stress test model. See
12 CFR part 652 Subpart B Appendix A. The FCA,
through the Office of Secondary Market Oversight,
closely monitors and supervises all aspects of
Farmer Mac’s derivatives activities, and the FCA
believes existing requirements and supervision are
sufficient to ensure safe and sound operations in
this area. However, the FCA is considering
enhancements to the model and in the future may
86 See
87 For
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Agencies preliminarily believe that
these capital rules sufficiently take into
account and address the risks associated
with the derivatives positions that a
covered swap entity holds and the other
activities conducted by a covered swap
entity.88
The Agencies request comment
regarding whether application of these
capital regimes is appropriate.
Question 91. Is an alternative or
additional capital requirement
appropriate for some or all of the
covered swap entities subject to the
proposed rule?
Question 92. Are there particular
issues or concerns raised in the context
of foreign banks or their U.S. branches
and agencies that would be better
addressed through a different approach
to the capital requirement for such
entities?
K. Section __.11: Special Requirements
for Transactions Between Swap Entities
and Regulated Entities
FHFA and FCA (but not the other
Agencies) are proposing an additional
provision, § __.11 of FHFA’s and FCA’s
proposed rules. Proposed § __.11 would
require that any entity that is regulated
by FHFA or FCA, but is not itself a
covered swap entity, collect initial
margin and variation margin from its
counterparty when entering into a noncleared swap or non-cleared securitybased swap with a swap entity.89
Regulated entities subject to this
provision include the Federal Home
Loan Banks, Fannie Mae and its
affiliates, Freddie Mac and its affiliates,
and all Farm Credit System institutions
including Farmer Mac (collectively,
regulated entities, and each a regulated
entity). Regulated entities that are swap
entities would be subject to §§ 1 through
9 of the proposed rule by virtue of being
covered swap entities. This section also
does not apply to swaps entered into
between regulated entities and end
users.
Proposed § __.11 is consistent with
the risk-based approach to margin
revise the model to more specifically address
derivatives transactions.
88 See footnote 33, supra, for a discussion of the
basis for FHFA’s preliminary view that the
reference to existing statutory authority is sufficient
to address the risks discussed in the text above as
to the Enterprises notwithstanding their current
conservatorship status.
89 See FCA and FHFA proposed rule § __.11. FCA
and FHFA note that in sections III.C and III.D of this
notice of proposed rulemaking, the Agencies have
requested comment on alternative approaches to
margin requirements, including whether covered
swap entities should be required to post margin to
end users. In the event such an alternative approach
is adopted as part of a final rule, as to both initial
and variation margin requirements, FCA and FHFA
note that this proposed § __.11 may not need to be
adopted as part of that final rule.
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proposed by the Agencies and parallels
the requirements that swap entities
collect initial and variation margin from
their counterparties. Moreover, this
approach recognizes that a default by a
swap counterparty to a regulated entity
could adversely affect the safe and
sound operations of the regulated entity.
The requirement reflects current
practice in that the regulated entities
generally obtain collateral to secure
their swaps exposure to swap dealer
counterparties, although current
practice generally does not include
posting of initial margin by or to any
counterparty.
FHFA and FCA are proposing these
provisions pursuant to each agency’s
role as safety and soundness regulator
for its respective regulated entities, and
each agency’s authority to ensure that
the regulated entities operate in a safe
and sound manner, including that they
maintain adequate capital and internal
controls, that their activities foster
liquid, efficient, competitive and
resilient national finance markets for
housing, agriculture, and rural markets,
and that they carry out their public
policy missions through authorized
activities.90
Section __.11(a)(1) of the proposed
rule requires a regulated entity to collect
initial margin when it enters into a swap
transaction with a swap entity. The
proposal provides that the amount of
initial margin the regulated entity must
collect shall be in accordance with
§ __.3 of the proposed rule, which
permits the use of either an initial
margin model or the use of a
standardized ‘‘look up’’ table specifying
the minimum initial margin that must
be collected as a percentage of the
notional amount of the transaction. The
minimum initial margin levels set out in
Appendix A apply only in the absence
of an initial margin model. FHFA and
FCA, however, seek comment on
whether a minimum initial margin
requirement should apply as a backstop
even to modeled initial margin amounts,
as a prudent approach to address
concerns about procyclicality and
competitive pressures to reduce margin
requirements. If not, how should such
concerns be addressed?
Section __.11(a)(1) of the proposed
rule permits a regulated entity to use its
initial margin model to determine initial
margin and provides that if the
regulated entity does not have an initial
margin model, it may engage a third
party to calculate initial margin on its
behalf, provided that the third party is
itself independent of the swap entity
that is the counterparty to the
90 See
12 U.S.C. 2154, 2248, 2252, 4513, 4526.
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transaction. Any initial margin model
used to determine margin posted to a
regulated entity must meet all of the
requirements of § __.8 of the proposed
rule. FHFA and FCA preliminarily
believe that permitting a swap entity to
use its own model to calculate the
amount of initial margin it would be
required to post to a regulated entity
may introduce a conflict of interest to
the transaction. That concern could be
addressed by establishing a process
through which the regulated entity
could verify the reasonableness of the
counterparty’s model calculation. FHFA
and FCA each seeks comment on
whether it should allow its regulated
entities to use the counterparty’s model
to calculate initial margin, and if so,
what provisions should be included to
mitigate conflicts of interest.
Section __.11(a)(2) of the proposed
rule requires that a regulated entity
collect variation margin daily from the
swap entity in accordance with the
requirements of § __.4 of the proposed
rule, which permits the amounts of
variation margin posted to be adjusted
to account for qualifying master netting
agreements and applies a minimum
transfer amount of $100,000.
Section __.11(b) of the proposed rule
requires that any regulated entity
entering into a non-cleared swap or a
non-cleared security-based swap with a
swap entity must execute trading
documentation with such counterparty
in accordance with § __.5 of the
proposed rule. Section __.11(c) of the
proposed rule provides that any
collateral that a regulated entity is
required to collect as initial or variation
margin must meet the eligible collateral
requirements of § __.6 of the proposed
rule. That section applies the same
eligibility requirements to the regulated
entities that are required of the swap
entities.
Section __.11(d) of the proposed rule
provides that a regulated entity must
require that any initial margin it posts
to a counterparty be held by an
independent custodian. That provision
is consistent with the requirement in
§ __.7 of the proposed rule that a
covered swap entity require segregation
with an independent custodian of any
initial margin that it posts to another
swap entity. Section __.11(d) of the
proposed rule applies this segregation
requirement to variation margin as well
as initial margin and thereby reflects
current practice of at least some of the
regulated entities. FHFA and FCA seek
comments on whether such a
requirement should be applied to
variation margin and if it is not applied,
how the regulated entities would be
protected in the event variation margin
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is posted to a swap entity that
subsequently fails.
IV. Quantitative Impact of Margin
Requirements
The proposed rule would apply the
initial margin and variation margin
requirements to non-cleared swaps and
security-based swaps that are entered
into by a covered swap entity after the
effective date, which is proposed to be
180 days after publication of a final rule
in the Federal Register. The proposed
rule would not require an immediate or
retroactive application of initial margin
or variation margin for any derivative
transaction entered into prior to the
effective date of the final rule.
Because the requirements would not
be applied retroactively, no new initial
margin or variation margin requirements
would be imposed on derivatives
transactions entered into prior to the
effective date until such time as those
transactions are rolled-over or renewed.
The only requirements that would apply
to a pre-effective date covered derivative
would be the initial margin and
variation margin requirements to which
the parties to the transaction had
previously agreed to by contract.
The new requirements will have an
impact on the costs of engaging in new
swap transactions. In particular, the
proposed rule sets out requirements for
initial and variation margin that
represent a significant change from
current industry practice in many
circumstances. Assessing the
quantitative impact of the proposed
requirements is particularly difficult in
light of the wide ranging and as yet
undetermined changes that are
occurring to the derivatives market as a
result of regulatory reform. Specifically
there is significant uncertainty with
respect to (i) which entities would be
classified as swap entities; (ii) the extent
to which existing derivatives would be
rolled-over or renewed; and (iii) the
extent to which derivatives currently
traded on an over-the-counter basis will
move to central clearing by a CCP. In
addition, there are a number of specific
and technical aspects of the proposed
rule, such as number and composition
of counterparties that would be
classified as high-risk financial end
users, low-risk financial end users, and
nonfinancial end users, respectively,
that are difficult to assess without a
large amount of highly detailed data on
the size of derivative positions as well
as the underlying rationale for
maintaining those positions. These and
other complicating factors make it
difficult to make precise statements
about the quantitative impact of the
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margin rule specified under the
proposed rule.
Accordingly, the Agencies request
commenters to provide their own
detailed quantitative impact analyses.
The Agencies encourage commenters to
include the following elements in their
analyses categorized between swaps
entities, high-risk financial end users,
low-risk financial end users, and
nonfinancial end users: (i) Required
initial margin if internal models were
applied; (ii) required initial margin if
the standardized chart in Appendix A
were applied; (iii) required variation
margin; (iv) the expected costs of, or
additional liquidity required by, the
initial margin and variation margin
requirements; and (v) the potential
benefits of the initial margin and
variation margin requirements to
covered swap entities, their
counterparties, and financial stability.
The analyses should also (i) address
operational and other business related
costs associated with implementing the
proposed rule and (ii) take into
consideration and disclose the expected
effect of the likely clearing of certain
derivative transactions through CCPs in
the future.
In order to better understand the
effect that broader clearing requirements
will have on the impact of the proposed
rules, the Agencies also request
comment on the levels of covered
derivatives, including the roll-over or
renewal of prior derivatives that would
become covered under the proposed
rule, that can be expected over the
following time horizons after the
effective date: (i) 1 year, (ii) 3 years, and
(iii) 5 years. To maximize the usefulness
of such comments, the Agencies request
that commenters break down such
projections by covered derivatives that
are likely to be cleared and uncleared,
as well as by product class.
srobinson on DSKHWCL6B1PROD with MISCELLANEOUS
V. Request for Comments
The Agencies are interested in
receiving comments on all aspects of the
proposed rule.
VI. Solicitation of Comments on Use of
Plain Language
Section 722 of the Gramm-LeachBliley Act, Public Law 106–102, section
722, 113 Stat. 1338, 1471 (Nov. 12,
1999), requires the OCC, Board and
FDIC to use plain language in all
proposed and final rules published after
January 1, 2000. The OCC, Board and
FDIC invite your comments on how to
make this proposal easier to understand.
For example:
• Have we organized the material to
suit your needs? If not, how could this
material be better organized?
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• Are the requirements in the
proposed regulation clearly stated? If
not, how could the regulation be more
clearly stated?
• Does the proposed regulation
contain language or jargon that is not
clear? If so, which language requires
clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the regulation
easier to understand? If so, what
changes to the format would make the
regulation easier to understand?
• What else could we do to make the
regulation easier to understand?
VII. Administrative Law Matters
A. Paperwork Reduction Act Analysis
Request for Comment on Proposed
Information Collection
Certain provisions of the proposed
rule contain ‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act of 1995
(‘‘PRA’’), 44 U.S.C. 3501–3521. In
accordance with the requirements of the
PRA, the Agencies may not conduct or
sponsor, and the respondent is not
required to respond to, an information
collection unless it displays a currently
valid Office of Management and Budget
(OMB) control number. The information
collection requirements contained in
this joint notice of proposed rulemaking
have been submitted by the FDIC, OCC,
and FHFA to OMB for approval under
section 3506 of the PRA and § 1320.11
of OMB’s implementing regulations (5
CFR part 1320). The Board reviewed the
proposed rule under the authority
delegated to the Board by OMB.
Comments are invited on:
(a) Whether the collections of
information are necessary for the proper
performance of the agencies’ functions,
including whether the information has
practical utility;
(b) The accuracy of the estimates of
the burden of the information
collections, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collections on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
All comments will become a matter of
public record. Commenters may submit
comments on aspects of this notice that
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may affect disclosure requirements and
burden estimates at the addresses listed
in the ADDRESSES section of this
Supplementary Information. A copy of
the comments may also be submitted to
the OMB desk officer for the agencies:
By mail to U.S. Office of Management
and Budget, 725 17th Street, NW.,
#10235, Washington, DC 20503 or by
facsimile (202–395–5806).
Title of Information Collection:
Margin and Capital Requirements for
Certain Swap Entities.
Frequency of Response: Eventgenerated and annual.
Affected Public: The affected public of
the FDIC, OCC, and Board is assigned
generally in accordance with the entities
covered by the scope and authority
section of their respective proposed
rule. The affected public of FHFA
generally would be those third parties
not regulated by a prudential regulator
that request prior written approval of an
initial margin model for use by a
regulated entity.
FDIC: Any FDIC-insured statechartered bank that is not a member of
the Federal Reserve System or FDICinsured state-chartered savings
association that is registered as a swap
dealer, major swap participant, securitybased swap dealer, or major securitybased swap participant.
OCC: Any national bank, Federal
savings association, or Federal branch or
agency of a foreign bank that is
registered as a swap dealer, major swap
participant, security-based swap dealer,
or major security-based swap
participant.
Board: Any state member bank (as
defined in 12 CFR 208.2(g)), bank
holding company (as defined in 12
U.S.C. 1842), savings and loan holding
company (as defined in 12 U.S.C. 1467a,
(on or after the transfer established
under Section 311 of the Dodd-Frank
Act)12 U.S.C. 5411), foreign banking
organization (as defined in 12 CFR
211.21(o)), state branch or state agency
of a foreign bank (as defined in 12
U.S.C. 3101(b)(11) and (12)), or Edge or
agreement corporation (as defined in 12
CFR 211.1(c)(2) and (3)) that is
registered as a swap dealer, major swap
participant, security-based swap dealer,
or major security-based swap
participant.
FHFA: With respect to any regulated
entity as defined in section 1303(20) of
the Federal Housing Enterprises
Financial Safety and Soundness Act of
1992 (12 U.S.C. 4502(20)), the proposed
rule would not contain any collection of
information pursuant to the PRA.
However, the provisions in proposed
§ __.11(e) allowing a third party that is
not subject to regulation by a prudential
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regulator to request prior written
approval of an initial margin model for
use by a regulated entity, would be a
collection of information under the
PRA.
Abstract: The notice sets forth
proposed margin and capital
requirements with respect to noncleared swaps and non-cleared securitybased swaps for covered swap entities.
The information requirements in joint
regulations proposed by the Agencies
are found in §§ __.2(t)(3), _.2(t)(4),
_.4(e)(2)(i), __5, __.6(d)(2)(i), __.8(c)(1),
__.8(c)(2), __8(c)(3), __8(d)(3), __8(d)(8),
__.8(d)(9), __.8(d)(10), __.8(d)(12),
__.8(e)(1), __.8(f)(2), __.8(f)(3), __.8(f)(4),
and __.8(g). Compliance with the
information collections found in
sections __.2(t)(3) and _.2(t)(4) would be
mandatory for any covered swap entity
wishing to take a qualifying master
netting agreement into account for
purposes of calculating initial margin or
variation margin. Compliance with the
information collections found in
§§ __.4(e)(2)(i), __.5, and _.6(d)(2)(i)
would be mandatory for all covered
swap entities. Compliance with the
information collections found in
§§ __.8(c)(1), __.8(c)(2), __.8(c)(3),
__.8(d)(3), __.8(d)(8), __.8(d)(9),
__.8(d)(10), __.8(d)(12), __.8(e)(1),
__.8(f)(2), __.8(f)(3), __.8(f)(4), and
__.8(g) would be mandatory for all
covered swap entities wishing to use an
initial margin model to calculate initial
margin requirements.
In addition, § __.11(e) of FHFA’s
proposed rule contains an information
collection that would be for all third
parties that are not subject to regulation
by a prudential regulator and that
request prior written approval of an
initial margin model for use by an
FHFA-regulated entity.
srobinson on DSKHWCL6B1PROD with MISCELLANEOUS
Section-by-Section Analysis
Section _.2 defines terms used in the
proposed rule, including the definition
of ‘‘qualifying master netting agreement’’
contained in § __2(t). Sections __.2(t)(3)
and __.2(t)(4) provide that, with respect
to a qualifying master netting
agreement, a covered swap entity must
(i) conduct sufficient legal review of the
agreement to conclude with a wellfounded basis that the agreement meets
specified criteria and (ii) establish and
maintain procedures for monitoring
relevant changes in law. The term
‘‘qualifying master netting agreement’’ is
used elsewhere in the proposed rule to
specify instances in which a covered
swap entity may (i) calculate variation
margin on an aggregate basis across
multiple swaps and security-based
swaps and (ii) calculate initial margin
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requirements under an initial margin
model on a portfolio basis.
Section _.4 requires that on and after
the date on which a covered swap entity
enters into a non-cleared swap or noncleared security-based swap, the
covered swap entity shall collect
variation margin from the counterparty
to such swap or security-based swap in
specified amounts. Section __.4(e)(2)(i)
requires that, in cases where a
counterparty refuses to provide required
variation margin, a covered swap entity
demonstrated upon request to the
satisfaction of the relevant Agency that
it has made appropriate efforts to collect
the required variation margin unless it
has otherwise made the necessary
efforts to attempt to collect the required
variation margin, including the timely
initiation and continued pursuit of
formal dispute resolution mechanisms.
Section __.5 requires a covered swap
entity to execute trading documentation
with each counterparty that (i) includes
credit support arrangements that grant
the covered swap entity the contractual
right to collect initial margin and
variation margin in such amounts, in
such form, and such circumstances as
are required by the initial margin and
variation margin requirements set forth
in the proposed rule and (ii) meets other
specified criteria.
Section __.6 establishes certain forms
of eligible collateral that a covered swap
entity shall collect for initial margin and
variation margin required pursuant to
this part and requires a covered swap
entity to monitor the market value of
any eligible collateral it has collected to
satisfy initial margin or variation margin
required by this part and, to the extent
that the market value of such collateral
has declined, collect such additional
eligible collateral as is necessary to
bring itself into compliance with the
margin requirements of this part.
Section __.6(d)(2)(i) requires that, in
cases where a counterparty refuses to
provide required additional margin, a
covered swap entity demonstrated upon
request to the satisfaction of the relevant
Agency that it has made appropriate
efforts to collect the required additional
margin unless it has otherwise made the
necessary efforts to attempt to collect
the required additional margin,
including the timely initiation and
continued pursuit of formal dispute
resolution mechanisms.
Section __.8 establishes standards for
initial margin models. These standards
include:
• A requirement that the covered
swap entity receive prior approval from
the relevant Agency based on
demonstration that the initial margin
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27585
model meets specific requirements
(§§ __.8(c)(1) and __.8(c)(2));
• A requirement that a covered swap
entity notify the relevant Agency in
writing before extending use of the
model to additional product types,
making certain changes to the initial
margin model, or making material
changes to modeling assumptions
(§ __.8(c)(3));
• A variety of quantitative
requirements, including requirements
that the covered swap entity validate
and demonstrate the reasonableness of
its process for modeling and measuring
hedging benefits, demonstrate to the
satisfaction of the relevant Agency that
the omission of any risk factor from the
calculation of its initial margin is
appropriate, demonstrate to the
satisfaction of the relevant Agency that
any conversion of initial margin
calculated using a different holding
period is appropriate, periodically
review and, as necessary, revise the data
used to calibrate the initial margin
model to ensure that the data
incorporate an appropriate period of
significant financial stress (§§ __.8(d)(3),
__.8(d)(8), __.8(d)(9), __.8(d)10),
__.8(d)(12));
• A requirement that a covered swap
entity review its initial margin model
annually (§ __.8(e));
• A requirement that the covered
swap entity validate its initial margin
model initially and on an ongoing basis,
describe to the relevant Agency any
remedial actions being taken, and report
internal audit findings regarding the
effectiveness of the initial margin model
to the covered swap entity’s board of
directors or a committee thereof
(§§ __.8(f)(2), __.8(f)(3), and __.8(f)(4));
and
• A requirement that the covered
swap entity adequately document all
material aspects of its initial margin
model (§ __.8(g)).
Section __.11(e) of FHFA’s proposed
rule applies § __.8 of the proposed rule,
the information collection of which is
described above, to any third party that
is not subject to regulation by a
prudential regulator and requests prior
written approval of an initial margin
model for use by an FHFA-regulated
entity.
Estimated Paperwork Burden
Estimated Burden Per Response:
§ __.2—Definitions, § __.5—
Documentation of margin matters, and
§ __.8(g)—Documentation:
recordkeeping—5 hours.
§ __.4(e)(2)(i)—Variation margin and
§ __.6(d)(2)(i)—Eligible collateral:
recordkeeping—4 hours.
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§ __.8(c) and (d)—Initial margin
model: reporting—240 hours.
§ __.8(e)—Periodic review and § __.8
(f)—Control, oversight and validation
mechanisms: recordkeeping—40 hours.
§ __.11(e)—Special requirements for
transactions between swap entities and
regulated entities: Initial margin models:
recordkeeping—220 hours.
FDIC
Number of Respondents: 3.
Total Estimated Annual Burden: 867
hours.
OCC
Number of Respondents: 20.
Total Estimated Annual Burden:
5,780 hours.
Board
Number of Respondents: 30.
Total Estimated Annual Burden:
8,670 hours.
srobinson on DSKHWCL6B1PROD with MISCELLANEOUS
FHFA
Number of Respondents: 2.
Total Estimated Annual Burden: 440
hours.
FCA: The FCA collects information
from Farm Credit System institutions,
which are Federal instrumentalities, in
the FCA’s capacity as their safety and
soundness regulator, and, therefore,
OMB approval is not required for this
collection.
B. Initial Regulatory Flexibility Act
Analysis
In accordance with section 3(a) of the
Regulatory Flexibility Act, 5 U.S.C. 601
et seq. (RFA), the Agencies are
publishing an initial regulatory
flexibility analysis for the proposed
rule. The RFA requires an agency to
provide an initial regulatory flexibility
analysis with the proposed rule or to
certify that the proposed rule will not
have a significant economic impact on
a substantial number of small entities.
The Agencies welcome comment on all
aspects of the initial regulatory
flexibility analysis. A final regulatory
flexibility analysis will be conducted
after consideration of comments
received during the public comment
period.
1. Statement of the objectives of the
proposal. As required by section 4s of
the Commodity Exchange Act (7 U.S.C.
6(s)) and section 15F of the Securities
Exchange Act (15 U.S.C. 78o–8), the
Agencies are proposing new regulations
to establish rules imposing (i) capital
requirements and (ii) initial and
variation margin requirements on all
non-cleared swaps into which the
covered swap entities enter.
2. Small entities affected by the
proposal. This proposal may have an
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effect predominantly on two types of
small entities: (i) Financial institutions
that are swap entities that are subject to
the proposed rule’s capital and margin
requirements; and (ii) counterparties
that engage in derivatives transactions
with swap entities that are subject to the
proposed rule’s margin requirements.
With respect to financial institutions
that are swap entities that are subject to
the proposed rule’s margin requirement,
a financial institution generally is
considered small if it has assets of $175
million or less.91 Based on 2010 Call
Report data, approximately 4,200
depository institutions had total
domestic assets of $175 million or less.
Of this number, however, the Agencies
do not expect that any is likely to be a
swap entity that is subject to the
proposed rule’s capital and margin
requirements. With respect to
counterparties that engage in derivatives
transactions with swap entities that are
subject to the proposed rule’s margin
requirements, the number of such
counterparties and the extent to which
certain types of companies are likely to
be counterparties are unknown.
However, of the 4,200 depository
institutions described above, fewer than
250 are party to non-cleared derivative
contracts.
3. Compliance requirements. With
respect to the initial margin and
variation margin requirements, the
Agencies’ proposed rule does not apply
directly to counterparties that engage in
derivatives transactions with swap
entities. However, because the proposed
rule requires a covered swap entity to
collect a minimum amount of margin
(subject to a threshold in some cases)
from all counterparties, including small
entities, the margin requirements may
affect the amount of margin that
counterparties that are small entities are
required to post to dealer counterparties
when transacting in the derivatives
markets. Accordingly, the Agencies
expect any economic impact on
counterparties that are small entities to
be negative to the extent that swap
entities currently do not collect initial
margin or variation margin from those
counterparties but would be required to
do so under the proposed rule.
4. Other Federal rules. The Agencies
believe that no Federal rules duplicate,
overlap, or conflict with the proposed
rule.
5. Significant alternatives to the
proposed rule. As discussed above, the
Agencies have requested comment on
91 U.S. Small Business Administration, Table of
Small Business Size Standards Matched to North
American Industry Classification System Codes,
available at https://www.sba.gov/sites/default/files/
Size_Standards_Table.pdf.
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the impact of the margin requirements
on end users from which swap entities
may be required to collect initial margin
and/or variation margin and have
solicited comment on any approaches
that would reduce the burden on all
counterparties, including small entities.
In addition, the Agencies have proposed
to reduce the effect of the proposed rule
on counterparties to covered swap
entities, including small entities,
through the implementation of initial
margin threshold amounts and variation
margin threshold amounts. The
Agencies have also requested comment
on a variety of alternative approaches to
implementing margin requirements with
respect to swaps and security-based
swaps with counterparties that are end
users. The Agencies welcome comment
on any significant alternatives that
would minimize the impact of the
proposal on small entities.
FCA: Pursuant to section 605(b) of the
Regulatory Flexibility Act, 5 U.S.C. 601
et seq., FCA hereby certifies that the
proposed rule will not have a significant
economic impact on a substantial
number of small entities. Each of the
banks in the Farm Credit System,
considered together with its affiliated
associations, has assets and annual
income in excess of the amounts that
would qualify them as small entities;
nor does the Federal Agricultural
Mortgage Corporation meet the
definition of ‘‘small entity.’’ Therefore,
System institutions are not ‘‘small
entities’’ as defined in the Regulatory
Flexibility Act.
FHFA: FHFA believes that the
proposed rule, if promulgated as a final
rule, would not have a significant
economic impact on a substantial
number of small entities, since none of
FHFA’s regulated entities come within
the meaning of small entities as defined
in the Regulatory Flexibility Act (see 5
U.S.C. 601(6)), and would not
substantially affect any business that its
regulated entities might do with small
entities.
C. OCC Unfunded Mandates Reform Act
of 1995 Determination
Section 202 of the Unfunded
Mandates Reform Act of 1995, Public
Law 104–4 (Unfunded Mandates Act)
requires that an agency prepare a
budgetary impact statement before
promulgating a rule that includes a
Federal mandate that may result in
expenditure by State, local, and tribal
governments, in the aggregate, or by the
private sector, of $100 million (adjusted
for inflation) or more in any one year.
The current inflation-adjusted
expenditure threshold is $126.4 million.
If a budgetary impact statement is
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required, section 205 of the UMRA also
requires an agency to identify and
consider a reasonable number of
regulatory alternatives before
promulgating a rule. The OCC has
determined this proposed rule is likely
to result in the expenditure by the
private sector of $126.4 million or more.
Therefore, the OCC has prepared a
budgetary impact analysis and
identified and considered alternative
approaches. The full text of the OCC’s
analyses under the Unfunded Mandates
Act is available at: https://
www.regulations.gov, Docket ID OCC–
2011–0008.
Text of the Proposed Common Rules
(All Agencies)
The text of the proposed common
rules appears below:
PART [ ]—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
__.1 Authority, purpose, and scope.
ll.2 Definitions.
ll.3 Initial margin.
ll.4 Variation margin.
ll.5 Documentation of margin matters.
ll.6 Eligible collateral.
ll.7 Segregation of collateral.
ll.8 Initial margin models.
ll.9 Application of margin requirements
to certain foreign covered swap entities.
ll.10 Capital.
Appendix A to Part [ ]—Standardized
Minimum Initial Margin Requirements for
Non-cleared Swaps and Non-cleared
Security-based Swaps
Appendix B to Part [ ]—Margin Values for
Noncash Collateral
§ ll.1 Authority, purpose, and scope.
[Reserved]
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§ ll.2
Definitions.
(a) Clearing agency has the meaning
specified in section 3(a)(23) of the
Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(23)).
(b) Counterparty means, with respect
to any swap or security-based swap to
which a covered swap entity is a party,
the counterparty to such swap or
security-based swap, other than a
counterparty that is a derivatives
clearing organization or clearing agency.
(c) [Reserved]
(d) Derivatives clearing organization
has the meaning specified in section
1a(15) of the Commodity Exchange Act
(7 U.S.C. 1a(15)).
(e) Eligible collateral means collateral
described in § ll.6.
(f) Effective date means [DATE THAT
IS 180 DAYS AFTER PUBLICATION OF
THE FINAL RULE IN THE FEDERAL
REGISTER].
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(g) End user means a counterparty
that is not a swap entity.
(h) Financial end user means any
counterparty that is an end user that
is—
(1) A commodity pool as defined in
section 1a(5) of the Commodity
Exchange Act (7 U.S.C. 1a(5));
(2) A private fund as defined in
section 202(a) of the Investment
Advisors Act of 1940 (15 U.S.C. 80–b–
2(a));
(3) An employee benefit plan as
defined in paragraphs (3) and (32) of
section 3 of the Employee Retirement
Income and Security Act of 1974 (29
U.S.C. 1002);
(4) A person predominantly engaged
in activities that are in the business of
banking, or in activities that are
financial in nature, as defined in section
4(k) of the Bank Holding Company of
1956 (12 U.S.C. 1843(k));
(5) A person that would be a financial
end user described in paragraph (h)(1)
or (h)(2) of this section, if it were
organized under the laws of the United
States or any State thereof;
(6) A government of any foreign
country or a political subdivision,
agency, or instrumentality thereof; or
(7) Any other person that [Agency]
may designate.
(i) High-risk financial end user means
a counterparty that is a financial end
user but is not a low-risk financial end
user.
(j) Initial margin means eligible
collateral that is pledged in connection
with entering into a swap or securitybased swap by a party thereto to secure
the performance of its obligations to its
counterparty under one or more swaps
or security-based swaps.
(k) Initial margin collection amount
means—
(1) In the case of a covered swap
entity that does not have an initial
margin model, the amount of initial
margin with respect to a swap or
security-based swap that is required
under Appendix A of this part; and
(2) In the case of a covered swap
entity that does have an initial margin
model, the amount of initial margin
with respect to a swap or security-based
swap that is required under the initial
margin model.
(l) Initial margin model means an
internal risk management model that—
(1) Has been developed and designed
to identify an appropriate, risk-based
amount of initial margin that the
covered swap entity must collect with
respect to one or more swaps or
security-based swaps to which the
covered swap entity is a party; and
(2) Has been approved by [Agency]
pursuant to § ll.8 of this part.
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(m) Initial margin threshold amount
means a credit exposure limit that has
been established by a covered swap
entity with respect to its swaps and
security-based swaps with a
counterparty, that appropriately takes
into account and addresses the credit
risk posed by the counterparty and the
risks of such swaps and security-based
swaps, and that has been reviewed,
monitored and approved in accordance
with the covered swap entity’s credit
processes, except that in no case shall
the threshold amount be greater than—
(1) Zero, if the counterparty is either
a swap entity or a high-risk financial
end user; or
(2) The lesser of [$15 to $45] million
and [0.1 to 0.3] percent of the covered
swap entity’s [capital metric], if the
counterparty is a low-risk financial end
user.
(n) Low-risk financial end user means
a counterparty that is a financial end
user and makes the following
representations to a covered swap entity
in connection with entering into a swap
or security-based swap with the covered
swap entity—
(1) The counterparty does not have a
significant swaps exposure;
(2) The counterparty predominantly
uses swaps or security-based swaps to
hedge or mitigate the risks of its
business activities, including balance
sheet, interest rate, or other risk arising
from the business of the counterparty;
and
(3) The counterparty is subject to
capital requirements established by a
prudential regulator or state insurance
regulator.
(o) Margin means initial margin and
variation margin.
(p) Non-cleared swap means a swap
that is not a cleared swap, as that term
is defined in section 1a(7) of the
Commodity Exchange Act (7 U.S.C.
1a(7)).
(q) Non-cleared security-based swap
means a security-based swap that is not,
directly or indirectly, submitted to and
cleared by a clearing agency registered
with the SEC.
(r) Nonfinancial end user means any
counterparty that is an end user but is
not a financial end user.
(s) Prudential regulator has the
meaning specified in section 1a(39) of
the Commodity Exchange Act (7 U.S.C.
1a(39)).
(t) Qualifying master netting
agreement means an agreement
governing one or more swaps or
security-based swaps to which a
covered swap entity is a party that
satisfies the following criteria—
(1) The agreement creates a single
legal obligation for all individual
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transactions covered by the agreement
upon an event of default, including
bankruptcy, insolvency, or similar
proceeding, of the counterparty;
(2) The agreement provides the
covered swap entity the right to
accelerate, terminate, and close-out on a
net basis all transactions under the
agreement and to liquidate or set off
collateral promptly upon an event of
default, including upon an event of
bankruptcy, insolvency, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions;
(3) The covered swap entity has
conducted sufficient legal review to
conclude with a well-founded basis
(and maintains sufficient written
documentation of that legal review)
that—
(i) The agreement meets the
requirements of paragraph (t)(2) of this
definition; and
(ii) In the event of a legal challenge
(including one resulting from default or
from bankruptcy, insolvency, or similar
proceeding) the relevant court and
administrative authorities would find
the agreement to be legal, valid, binding,
and enforceable under the law of the
relevant jurisdictions;
(4) The covered swap entity
establishes and maintains procedures to
monitor possible changes in relevant
law and to ensure that the agreement
continues to satisfy the requirements of
this definition; and
(5) The agreement does not contain a
provision that permits a non-defaulting
counterparty to make a lower payment
than it would make otherwise under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate of the
defaulter is a net creditor under the
agreement.
(u) Security-based swap has the
meaning specified in section 3(a)(68) of
the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(68)).
(v) Significant swaps exposure
means—
(1) Swap positions that equal or
exceed any of the following
thresholds—
(i) $2.5 billion in daily average
aggregate uncollateralized outward
exposure; or
(ii) $4 billion in daily average
aggregate uncollateralized outward
exposure plus daily average aggregate
potential outward exposure; or
(2) Security-based swap positions that
equal or exceed any of the following
thresholds—
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(i) $1 billion in daily average
aggregate uncollateralized outward
exposure; or
(ii) $2 billion in daily average
aggregate uncollateralized outward
exposure plus daily average aggregate
potential outward exposure.
(3) For purposes of this definition—
(i) The terms daily average aggregate
uncollateralized outward exposure and
daily average aggregate potential
outward exposure, when used with
respect to swaps, each has the meaning
specified for that term in [17 CFR
1.3(uuu)] for purposes of calculating
substantial counterparty exposure under
that regulation.
(ii) The terms daily average aggregate
uncollateralized outward exposure and
daily average aggregate potential
outward exposure, when used with
respect to security-based swaps, each
has the meaning specified for that term
in [15 CFR 240.3a67–5] for purposes of
calculating substantial counterparty
exposure under that regulation.
(w) State insurance regulator means
an insurance authority of a State that is
engaged in the supervision of insurance
companies under State insurance law.
(x) Swap has the meaning specified in
section 1a(47) of the Commodity
Exchange Act (7 U.S.C. 1a(47)).
(y) Swap entity means a securitybased swap dealer as defined in section
3(a)(71) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(71)), a major
security-based swap participant as
defined in section 3(a)(67) of the
Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(67)), a swap dealer as
defined in section 1a(49) of the
Commodity Exchange Act (7 U.S.C.
1a(49)), or a major swap participant as
defined in section 1a(33) of the
Commodity Exchange Act (7 U.S.C.
1a(33)).
(z) Variation margin means eligible
collateral pledged or paid on an
intraday, daily or other periodic basis by
one party to a swap or security-based
swap to its counterparty to offset a
change in the value of one or more
swaps or security-based swaps between
the parties, as calculated in accordance
with the contractual terms of such
swaps or security-based swaps.
(aa) Variation margin amount means
the cumulative mark-to-market change
in value to a covered swap entity of a
swap or security-based swap, as
measured from the date it is entered into
(or, in the case of swap or security-based
swap that has a current positive or
negative value to a covered swap entity
on the date it is entered into, such
positive or negative value plus any
cumulative mark-to-market change in
value to the covered swap entity of a
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swap or security-based swap after such
date), less the value of all variation
margin previously collected but not
returned by the covered swap entity
(expressed as a positive amount) with
respect to such swap or security-based
swap.
(bb) Variation margin threshold
amount means a credit exposure limit
that has been established by a covered
swap entity with respect to its swaps
and security-based swaps with a
counterparty, that appropriately takes
into account and addresses the credit
risk posed by the counterparty and the
risks of such swaps and security-based
swaps, and that has been reviewed,
monitored and approved in accordance
with the covered swap entity’s credit
processes, except that in no case shall
the threshold amount be greater than—
(1) Zero, if the counterparty is a either
a swap entity or a high-risk financial
end user; or
(2) The lesser of [$15 to 45] million
and [0.1 to 0.3]% of the covered swap
entity’s [capital metric], if the
counterparty is a low-risk financial end
user.
§ __.3
Initial margin.
(a) General. A covered swap entity
shall collect initial margin with respect
to any non-cleared swap or non-cleared
security-based swap from the
counterparty to such swap or securitybased swap in an amount that is no less
than the greater of—
(1) Zero; or
(2) The initial margin collection
amount for such swap or security-based
swap less the initial margin threshold
amount for the counterparty (not
including any portion of the initial
margin threshold amount being applied
to other swaps or security-based swaps
with the counterparty), as applicable.
(b) Timing. A covered swap entity
shall, with respect to any non-cleared
swap or non-cleared security-based
swap to which it is a party, comply with
the initial margin requirements
described in paragraph (a) for a period
beginning on or before the date it enters
into such swap or security-based swap
and ending on the date the non-cleared
swap or non-cleared security-based
swap is terminated or expires.
(c) Minimum Transfer Amount.
Notwithstanding anything else in this
section, a covered swap entity is not
required to collect initial margin
pursuant to this section with respect to
a particular counterparty unless and
until the total amount of initial margin
that is required pursuant to this section
to be collected, but has not yet been
collected, with respect to the
counterparty is greater than $100,000.
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§ __.4
Variation margin.
(a) General. On and after the date on
which a covered swap entity enters into
a non-cleared swap or non-cleared
security-based swap, the covered swap
entity shall, to the extent the variation
margin amount for such swap or
security-based swap is positive, collect
variation margin from the counterparty
to such swap or security-based swap in
an amount that is no less than the
greater of—
(1) Zero; or
(2) The variation margin amount for
such swap or security-based swap less
the variation margin threshold amount
for the counterparty (not including any
portion of the variation margin
threshold amount being applied to other
swaps or security-based swaps with the
counterparty), as applicable.
(b) Frequency. A covered swap entity
shall comply with the variation margin
requirements described in paragraph (a)
of this section—
(1) No less than once per business day
with respect to a counterparty that is a
swap entity or a financial end user; and
(2) No less than once per week with
respect to a counterparty that is a
nonfinancial end user.
(c) Minimum transfer amount.
Notwithstanding anything else in this
section, a covered swap entity is not
required to collect variation margin
pursuant to this section unless and until
the total amount of variation margin that
is required pursuant to this section to be
collected, but has not yet been collected,
with respect to the counterparty is
greater than $100,000.
(d) Netting arrangements. To the
extent that one or more non-cleared
swaps or non-cleared security-based
swaps are executed pursuant to a
qualifying master netting agreement
between a covered swap entity and its
counterparty, a covered swap entity may
calculate and comply with the variation
margin requirements of this paragraph
on an aggregate basis with respect to all
swaps and security-based swaps
governed by such agreement, so long as
the covered swap entity complies with
these variation margin requirements
with respect to all swaps and securitybased swaps governed by such
agreement regardless of whether the
swaps and security-based swaps were
entered into on or after the effective
date.
(e) A covered swap entity shall not be
deemed to have violated its obligation
under paragraph (a) of this section to
collect variation margin from a
counterparty if—
(1) The counterparty has refused or
otherwise failed to provide the required
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variation margin to the covered swap
entity; and
(2) The covered swap entity has—
(i) Made the necessary efforts to
attempt to collect the required variation
margin, including the timely initiation
and continued pursuit of formal dispute
resolution mechanisms, or has
otherwise demonstrated upon request to
the satisfaction of [Agency] that it has
made appropriate efforts to collect the
required variation margin; or
(ii) Commenced termination of the
swap or security-based swap with the
counterparty.
§ __.5
Documentation of margin matters.
A covered swap entity shall execute
trading documentation with each
counterparty regarding credit support
arrangements that—
(a) Provides the covered swap entity
with the contractual right to collect
initial margin and variation margin in
such amounts, in such form, and under
such circumstances as are required by
this part; and
(b) Specifies—
(1) The methods, procedures, rules,
and inputs for determining the value of
each swap or security-based swap for
purposes of calculating variation margin
requirements; and
(2) The procedures by which any
disputes concerning the valuation of
swaps or security-based swaps, or the
valuation of assets collected or posted as
initial margin or variation margin, may
be resolved.
§ __.6
Eligible collateral.
(a) A covered swap entity shall collect
initial margin and variation margin
required pursuant to this part solely in
the form of one or more of the following
types of eligible collateral—
(1) Immediately available cash funds
that are denominated in—
(i) U.S. dollars; or
(ii) The currency in which payment
obligations under the swap are required
to be settled;
(2) Any obligation which is a direct
obligation of, or fully guaranteed as to
principal and interest by, the United
States; and
(3) With respect to initial margin
only—
(i) Any senior debt obligation of the
Federal National Mortgage Association,
the Federal Home Loan Mortgage
Corporation, the Federal Home Loan
Banks and the Federal Agricultural
Mortgage Corporation; and
(ii) Any obligation that is an ‘‘insured
obligation,’’ as that term is defined in 12
U.S.C. 2277a(3), of a Farm Credit
System bank.
(b) The value of any eligible collateral
described in paragraphs (a)(2) or (a)(3)
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of this section, for purposes of satisfying
the initial margin or variation margin
requirements of this part shall be subject
to, and limited by, the discounts
described in Appendix B of this part.
(c) A covered swap entity may not
collect, as initial margin or variation
margin required by this part, any
collateral that is an obligation of the
counterparty pledging such collateral.
(d) A covered swap entity shall
monitor the market value of any eligible
collateral it has collected to satisfy
initial margin or variation margin
required by this part and, to the extent
that the market value of such collateral
has declined, shall collect such
additional eligible collateral as is
necessary to bring itself into compliance
with the margin requirements of this
part. A covered swap entity shall not be
deemed to have violated its obligation
under this paragraph (d) to collect
additional eligible collateral from a
counterparty if—
(1) The counterparty has refused or
otherwise failed to provide the required
additional eligible collateral to the
covered swap entity; and
(2) The covered swap entity—
(i) Has made the necessary efforts to
attempt to collect the required
additional eligible collateral, including
the timely initiation and continued
pursuit of formal dispute resolution
mechanisms, or has otherwise
demonstrated upon request to the
satisfaction of [Agency] that it has made
appropriate efforts to collect the
required additional eligible collateral; or
(ii) Has commenced termination of
the swap or security-based swap with
the counterparty.
(e) A covered swap entity may collect
initial margin and variation margin that
is not required pursuant to this part in
any form of collateral.
§ __.7
Segregation of collateral.
A covered swap entity that enters into
a non-cleared swap or non-cleared
security-based swap with a swap entity
and posts initial margin to the swap
entity with respect to that swap or
security-based swap shall require that—
(a) All funds or other property the
covered swap entity provides as initial
margin are held by a third-party
custodian that is independent of the
covered swap entity and the
counterparty;
(b) The independent custodian is
prohibited by contract from
rehypothecating or otherwise
transferring any initial margin held by
the custodian;
(c) The independent custodian is
prohibited by contract from reinvesting
any initial margin held by the custodian
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in any asset that would not qualify as
eligible collateral under § __.6 for
purposes of satisfying the initial margin
requirements of this part; and
(d) The independent custodian is
located in a jurisdiction that applies the
same insolvency regime to the
independent custodian as would apply
to the covered swap entity.
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§ __.8
Initial margin models.
(a) General adequacy of initial margin
model. Unless a covered swap entity’s
initial margin model conforms to the
requirements of this section, the covered
swap entity shall calculate all initial
margin collection amounts pursuant to
Appendix A of this part.
(b) Applicability to swaps and
security-based swaps. Any initial
margin model that a covered swap
entity wishes to use to calculate the
amount of initial margin required to be
collected for a single swap or securitybased swap transaction or a portfolio of
swap and/or security-based swap
transactions with a given counterparty
pursuant to § __.3 must meet each
requirement of this section. An initial
margin model may be designed to
calculate initial margin for a portfolio of
swaps and/or security-based swaps only
if all such swaps and/or security-based
swaps are governed by the same
qualifying master netting agreement. To
the extent that a qualifying master
netting agreement between a covered
swap entity and its counterparty
governs swaps or security-based swaps
that were entered into before, on, and
after the effective date, the covered
swap entity may use its initial margin
model to calculate the amount of initial
margin required to be collected
pursuant to § __.3 either—
(1) With respect to only those swaps
and/or security-based swaps
transactions entered into on and after
the effective date; or
(2) With respect to all swaps and/or
security-based swaps transactions
governed by such qualifying master
netting agreement, regardless of whether
they were entered into before, on, or
after the effective date.
(c) Requirements for initial margin
model.
(1) A covered swap entity must obtain
the prior written approval of [Agency]
before using any initial margin model to
calculate the initial margin required in
this part.
(2) A covered swap entity must
demonstrate that the initial margin
model satisfies all of the requirements of
this section on an ongoing basis.
(3) A covered swap entity must
promptly notify [Agency] in writing
prior to:
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(i) Extending the use of an initial
margin model that [Agency] has
approved under this section to an
additional product type;
(ii) Making any change to any initial
margin model approved by [Agency]
under this section that would result in
a material change in the covered swap
entity’s assessment of initial margin
requirements; or
(iii) Making any material change to
modeling assumptions used by the
initial margin model.
(4) [The Agency] may rescind its
approval of the use of any initial margin
model, in whole or in part, or may
impose additional conditions or
requirements if [Agency] determines
that the initial margin model no longer
complies with this section.
(d) Quantitative requirements.
(1) The covered entity’s initial margin
model must calculate an amount of
initial margin that is equal to the
potential future exposure of the swap,
security-based swap or portfolio of
swaps and/or security-based swaps.
Potential future exposure is an estimate
of the one-tailed 99 percent confidence
interval for an increase in the value of
the swap, security-based swap or
portfolio of swaps and/or security-based
swaps due to an instantaneous price
shock that is equivalent to a movement
in all material underlying risk factors,
including prices, rates, and spreads,
over a holding period equal to the
shorter of ten business days or the
maturity of the swap or security-based
swap. If a covered swap entity elects to
calculate initial margin using an initial
margin model on a portfolio of swaps
and/or security-based swaps under the
same qualifying master netting
agreement, the covered entity must
calculate an amount of initial margin for
that portfolio each time a new swap or
security-based swap is added to that
portfolio and collect any incremental
initial margin collection amount that is
required.
(2) The covered swap entity’s initial
margin model must use risk factors
sufficient to measure all material price
risks inherent in the swap transactions
for which initial margin is being
calculated. The risk categories must
include, but should not be limited to,
foreign exchange/interest rate risk,
credit risk, equity risk, and commodity
risk, as appropriate. For material
exposures in the major currencies and
markets, modeling techniques must
capture spread and basis risk and must
incorporate a sufficient number of
segments of the yield curve to capture
differences in volatility and imperfect
correlation of rates along the yield
curve.
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(3) The initial margin model may
calculate initial margin for a portfolio of
swaps and/or security-based swaps and
reflect offsetting exposures,
diversification, and other hedging
benefits for swaps and security-based
swaps that are governed by the same
qualifying master netting agreement by
incorporating empirical correlations
within the following four broad risk
categories, provided the covered swap
entity validates and demonstrates the
reasonableness of its process for
modeling and measuring hedging
benefits: Commodity, credit, equity, and
foreign exchange/interest rate. Offsetting
exposures, diversification, and other
hedging benefits under a qualifying
master netting agreement may be
recognized by the initial margin model
within each broad risk category, but not
across broad risk categories.
(4) If the initial margin model does
not explicitly reflect offsetting
exposures, diversification, and hedging
benefits within a broad risk category,
the covered swap entity must calculate
an amount of initial margin separately
for each subset of swaps and securitybased swaps for which offsetting
exposures, diversification, and other
hedging benefits are explicitly
recognized by the initial margin model.
The sum of the initial margin amounts
calculated for each subset of swaps and
security-based swaps within a broad
risk category will be used to determine
the aggregate initial margin due from the
counterparty for the portfolio of swaps
and security-based swaps within the
broad risk category.
(5) The sum of the initial margins
calculated for each broad risk category
will be used to determine the aggregate
initial margin due from the
counterparty.
(6) The initial margin model may not
permit the calculation of any initial
margin collection amount to be subject
to offset by, or otherwise take into
account, any initial margin that may be
owed or otherwise payable by the
covered swap entity to the counterparty.
(7) The initial margin model must
include all material risks arising from
the nonlinear price characteristics of
options positions or positions with
embedded optionality and the
sensitivity of the market value of the
positions to changes in the volatility of
the underlying rates, prices, or other
material risk factors. As an example, a
covered swap entity with a large or
complex options portfolio must measure
the volatility of options positions or
positions with embedded optionality by
different maturities and/or strike prices,
where material.
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(8) The covered swap entity may not
omit any risk factor from the calculation
of its initial margin that the covered
swap entity uses in its initial margin
model unless it has previously
demonstrated to the satisfaction of
[Agency] that such omission is
appropriate.
(9) The covered swap entity may not
incorporate any proxy or approximation
used to capture the risks of the covered
swap entity’s actual swap or securitybased swap transactions unless it has
previously demonstrated to the
satisfaction of [Agency] that such proxy
or approximation is appropriate.
(10) The covered swap entity may
calculate initial margin over the holding
period directly or it may convert an
initial margin calculated using a
different holding period. A covered
swap entity may not convert its initial
margin calculation in such a manner
unless it has previously demonstrated to
the satisfaction of [Agency] that such
conversion is appropriate.
(11) All data used to calibrate the
initial margin model must be based on
a historical observation period of at least
one year and must incorporate a period
of significant financial stress
appropriate to the swap and/or securitybased swap transactions to which the
initial margin model is applied.
(12) The covered swap entity must
review and, as necessary, revise the data
used to calibrate the initial margin
model at least monthly, and more
frequently as market conditions warrant,
to ensure that the data incorporate a
period of significant financial stress
appropriate to the swap and/or securitybased swap transactions to which the
initial margin model is applied.
(13) The level of sophistication of the
initial margin model must be
commensurate with the complexity of
the swap and/or security-based swap
transactions to which they are applied.
In calculating an initial margin
collection amount, the initial margin
model may make use of any of the
generally accepted approaches for
modeling the risk of a single instrument
or portfolio of instruments.
(14) The covered swap entity must
periodically benchmark the initial
margin model against observable margin
standards to ensure that the initial
margin required is not less than what a
derivatives clearing organization or a
clearing agency would require for
similar transactions.
(15) [The Agency] may require a
covered swap entity using an initial
margin model to collect a greater
amount of initial margin than that
determined by the covered swap entity’s
initial margin model.
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(e) Periodic review. A covered swap
entity must periodically, but no less
frequently than annually, review its
initial margin model in light of
developments in financial markets and
modeling technologies, and enhance the
initial margin model as appropriate to
ensure that the initial margin model
continues to meet the requirements for
approval in this section.
(f) Control, oversight, and validation
mechanisms.
(1) The covered swap entity must
have a risk control unit that reports
directly to senior management and is
independent from the business trading
units.
(2) The covered swap entity must
validate its initial margin model
initially and on an ongoing basis. The
covered swap entity’s validation process
must be independent of the
development, implementation, and
operation of the initial margin model, or
the validation process must be subjected
to an independent review of its
adequacy and effectiveness. The
validation process must include:
(i) An evaluation of the conceptual
soundness of (including developmental
evidence supporting) the initial margin
model;
(i) An ongoing monitoring process
that includes verification of processes
and benchmarking by comparing the
covered swap entity’s initial margin
model outputs (estimation of initial
margin) with relevant alternative
internal and external data sources or
estimation techniques; and
(ii) An outcomes analysis process that
includes backtesting of the initial
margin model.
(3) If the validation process reveals
any significant problems with the initial
margin model, the covered swap entity
must notify [Agency] of the problems,
describe to [Agency] any remedial
actions being taken, and adjust the
initial margin model to insure an
appropriately conservative amount of
required initial margin is being
calculated.
(4) The covered swap entity must
have an internal audit function
independent of business-line
management that at least annually
assesses the effectiveness of the controls
supporting the covered swap entity’s
initial margin model measurement
systems, including the activities of the
business trading units and independent
risk control unit, compliance with
policies and procedures, and calculation
of the covered swap entity’s initial
margin requirements under this part. At
least annually, the internal audit
function must report its findings to the
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27591
covered swap entity’s board of directors
or a committee thereof.
(g) Documentation. The covered swap
entity must adequately document all
material aspects of its initial margin
model, including management and
valuation of swap and/or security-based
swap transactions to which they apply,
the control, oversight, and validation of
the initial margin model, any review
processes and the results of such
processes.
§ __.9 Application of margin requirements
to certain foreign covered swap entities.
(a) The requirements of §§ __.3
through __.8 shall not apply to any
foreign non-cleared swap or foreign
non-cleared security-based swap of a
foreign covered swap entity.
(b) For purposes of this section, a
foreign non-cleared swap or foreign
non-cleared security-based swap is any
non-cleared swap or non-cleared
security-based swap transaction with
respect to which—
(1) The counterparty to the foreign
covered swap entity is—
(i) Not an entity organized under the
laws of the United States or any State;
(ii) Not a branch or office of an entity
organized under the laws of the United
States or any State; and
(iii) Not a person resident in the
United States; and
(2) Performance of the counterparty’s
obligations to the foreign covered swap
entity under the swap or security-based
swap has not been guaranteed by an
affiliate of the counterparty that is—
(i) An entity organized under the laws
of the United States or any State;
(ii) A branch or office of an entity
organized under the laws of the United
States or any State; or
(iii) A person resident in the United
States.
(c) For purposes of this section, a
foreign covered swap entity is any
covered swap entity that is—
(1) Not a company organized under
the laws of the United States or any
State;
(2) Not a branch or office of a
company organized under the laws of
the United States or any State;
(3) Not a U.S. branch, agency or
subsidiary of a foreign bank; and
(4) Not controlled, directly or
indirectly, by a company that is
organized under the laws of the United
States or any State.
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Capital.
STANDARDIZED MINIMUM INITIAL MARGIN
REQUIREMENTS FOR NONCLEARED SWAPS AND NON-CLEARED
SECURITY-BASED SWAPS—Continued
[Reserved]
Appendix A to Part [ ]—Standardized
Minimum Initial Margin Requirements
for Non-cleared Swaps and Noncleared Security-based Swaps.
STANDARDIZED MINIMUM INITIAL MARGIN
REQUIREMENTS FOR NONCLEARED SWAPS AND NON-CLEARED
SECURITY-BASED SWAPS
Asset Class
Credit: 0–2 year duration ......
Initial margin
requirement
(% of notional
exposure)
STANDARDIZED MINIMUM INITIAL MARGIN
REQUIREMENTS FOR NONCLEARED SWAPS AND NON-CLEARED
SECURITY-BASED SWAPS—Continued
Initial margin
requirement
(% of notional
exposure)
Asset Class
Credit: 2–5 year duration ......
Credit: 5+ year duration ........
Commodity ............................
Equity ....................................
Foreign Exchange/Currency
Interest Rate: 0–2 year duration.
[2–8]
[5–15]
[10–20]
[10–20]
[3–9]
[0–2]
[1–3]
Initial margin
requirement
(% of notional
exposure)
Asset Class
Interest Rate: 2–5 year duration.
Interest rate: 5+ year duration
Other .....................................
.
[1–3]
[2–6]
[10–20]
Appendix B to Part [ ]—Margin Values
for Noncash Collateral.
MARGIN VALUES FOR NONCASH COLLATERAL
Margin value
(% of market value)
duration (years)
0–5
U.S. Treasuries and Fully Guaranteed Agencies:
Bills/Notes/Bonds/Inflation Indexed ..................................................................................................
Zero Coupon, STRIPs ......................................................................................................................
Senior Debt Obligations of FHFA Regulated Entities and the Federal Agricultural Mortgage Corporation, and Insured Obligations of Farm Credit System Banks:
Bills/Notes/Bonds ..............................................................................................................................
Zero Coupon .....................................................................................................................................
Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et
seq., 93a, 161, 1818, 3907, 3090, and 15
U.S.C. 78o–10(e).
[END OF COMMON TEXT]
Adoption of the Common Rule Text
The proposed adoption of the
common rules by the agencies, as
modified by agency-specific text, is set
forth below:
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
List of Subjects in 12 CFR Part 45
12 CFR Chapter I
Administrative practice and
procedure, Capital, Margin
requirements, National banks, Reporting
and recordkeeping requirements, Risk.
srobinson on DSKHWCL6B1PROD with MISCELLANEOUS
Authority and Issuance
For the reasons stated in the Common
Preamble, the Office of the Comptroller
of the Currency proposes to amend
chapter I of Title 12, Code of Federal
Regulations as follows:
PART 45—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
1. The authority citation for part 45 is
added to read as follows:
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2. Part 45 is added as set forth at the
end of the Common Preamble.
3. Part 45 is amended by:
a. Removing ‘‘[Agency]’’ wherever it
appears and adding in its place ‘‘the
OCC’’;
b. Removing ‘‘[The Agency]’’ wherever
it appears and adding in its place ‘‘The
OCC’’; and
c. Removing ‘‘[capital metric]’’
wherever it appears and adding in its
place ‘‘Tier 1 capital’’.
4. Section 45.1 is added to read as
follows:
§ 45.1
Authority, purpose, and scope.
(a) Authority. This part is issued
under the authority of 7 U.S.C. 6s(e), 12
U.S.C. 1 et seq., 93a, 161, 1818, 3907,
3090, and 15 U.S.C. 78o–10(e).
(b) Purpose. Section 4s of the
Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities
Exchange Act of 1934 (15 U.S.C. 78o–8)
require the OCC to establish capital and
margin requirements for any national
bank, Federal savings association, or
Federal branch or agency of a foreign
banks that is registered as a swap dealer,
major swap participant, security-based
swap dealer, or major security-based
swap participant with respect to all non-
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5–10
>10
[98–100]
[97–99]
[95–99]
[94–98]
[94–98]
[90–94]
[96–100]
[95–99]
[94–98]
[93–97]
[93–97]
[89–93]
cleared swaps and non-cleared securitybased swaps. This regulation
implements section 4s of the
Commodity Exchange Act and section
15F of the Securities Exchange Act of
1934 by defining terms used in the
statute and related terms, establishing
capital and margin requirements, and
explaining the statutes’ requirements.
(c) Scope. This part establishes
minimum capital and margin
requirements for each covered swap
entity subject to this part with respect
to all non-cleared swaps and noncleared security-based swaps. This part
applies to any non-cleared swap or noncleared security-based swap entered
into by a covered swap entity on or after
[INSERT DATE THAT IS 180 DAYS
AFTER PUBLICATION OF THE FINAL
RULE IN THE FEDERAL REGISTER].
Nothing in this part is intended to
prevent a covered swap entity from
collecting margin in amounts greater
than are required under this part.
5. Paragraph (c) of § 45.2 is added to
read as follows:
§ 45.2
Definitions.
*
*
*
*
*
(c) Covered swap entity means any
national bank, Federal savings
association, or Federal branch and
agency of a foreign bank that is a swap
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entity, or any other entity that the OCC
determines.
*
*
*
*
*
6. Section 45.10 is added to read as
follows:
§ 45.10
Capital.
A covered swap entity shall comply
with:
(a) In the case of a covered swap
entity that is a national bank, the
minimum capital requirements in 12
CFR part 3;
(b) In the case of a covered swap
entity that is a Federal savings
association, the minimum capital
requirements in 12 CFR part 567; and
(c) In the case of a covered swap
entity that is a Federal branch or agency
of a foreign bank, the capital adequacy
guidelines that are applicable as
generally provided under 12 CFR 28.14.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
List of Subjects in 12 CFR Part 237
12 CFR Chapter II
Administrative practice and
procedure, Banks and banking, Capital,
Foreign banking, Holding companies,
Margin requirements, Reporting and
recordkeeping requirements, Risk.
Authority and Issuance
For the reasons set forth in the
Supplementary Information, the Board
of Governors of the Federal Reserve
System proposes to add the text of the
common rule as set forth at the end of
the Supplementary Information as part
237 to 12 CFR chapter II as follows:
PART 237—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES (REGULATION KK)
7. The authority citation for part 237
is added to read as follows:
srobinson on DSKHWCL6B1PROD with MISCELLANEOUS
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–
10(e), 12 U.S.C. 221 et seq., 12 U.S.C. 1818,
12 U.S.C. 1841 et seq., and 12 U.S.C. 3103
et seq.
8. Part 237 is added as set forth at the
end of the Common Preamble.
9. Part 237 is amended by:
a. Removing ‘‘[Agency]’’ wherever it
appears and adding in its place ‘‘the
Board’’;
b. Removing ‘‘[The Agency]’’ wherever
it appears and adding in its place ‘‘The
Board’’; and
c. Removing ‘‘[capital metric]’’
wherever it appears and adding in its
place ‘‘tier 1 capital’’.
10. Section 237.1 is added to read as
follows:
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§ 237.1
Authority, purpose, and scope.
(a) Authority. This part (Regulation
KK) is issued by the Board of Governors
of the Federal Reserve System (Board)
under section 4s(e) of the Commodity
Exchange Act (7 U.S.C. 6s(e)) and
section 15F(e) of the Securities
Exchange Act of 1934 (15 U.S.C. 78o–
10(e)), as well as under the Federal
Reserve Act, as amended (12 U.S.C. 221
et seq.); section 8 of the Federal Deposit
Insurance Act, as amended (12 U.S.C.
1818); the Bank Holding Company Act
of 1956, as amended (12 U.S.C. 1841 et
seq.); and the International Banking Act
of 1978, as amended (12 U.S.C. 3101 et
seq.).
(b) Purpose. Section 4s of the
Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities
Exchange Act of 1934 (15 U.S.C. 78o–8)
require the Board to establish capital
and margin requirements for any state
member bank (as defined in 12 CFR
208.2(g)), bank holding company (as
defined in 12 U.S.C. 1842), savings and
loan holding company (as defined in 12
U.S.C. 1467a (on or after the transfer
established under Section 311 of the
Dodd-Frank Act) 12 U.S.C. 5411)),
foreign banking organization (as defined
in 12 CFR 211.21(o)), state branch or
state agency of a foreign bank (as
defined in 12 U.S.C. 3101(b)(11) and
(12)), or Edge or agreement corporation
(as defined in 12 CFR 211.1(c)(2) and
(3)) that is registered as a swap dealer,
major swap participant, security-based
swap dealer, or major security-based
swap participant with respect to all noncleared swaps and non-cleared securitybased swaps. This regulation
implements section 4s of the
Commodity Exchange Act and section
15F of the Securities Exchange Act of
1934 by defining terms used in the
statute and related terms, establishing
capital and margin requirements, and
explaining the statutes’ requirements.
(c) Scope. This part establishes
minimum capital and margin
requirements for each covered swap
entity subject to this part with respect
to all non-cleared swaps and noncleared security-based swaps. This part
applies to any non-cleared swap or noncleared security-based swap entered
into by a covered swap entity on or after
[INSERT DATE THAT IS 180 DAYS
AFTER PUBLICATION OF THE FINAL
RULE IN THE FEDERAL REGISTER].
Nothing in this part is intended to
prevent a covered swap entity from
collecting margin in amounts greater
than are required under this part.
11. Paragraph (c) of § 237.2 is added
to read as follows:
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§ 237.2
27593
Definitions.
*
*
*
*
*
(c) Covered swap entity means any
state member bank (as defined in 12
CFR 208.2(g)), bank holding company
(as defined in 12 U.S.C. 1842), savings
and loan holding company (as defined
in 12 U.S.C. 1467a (on or after the
transfer established under Section 311
of the Dodd-Frank Act) 12 U.S.C. 5411)),
foreign banking organization (as defined
in 12 CFR 211.21(o)), any state branch
or state agency of a foreign bank (as
defined in 12 U.S.C. 3101(b)(11) and
(12)), or Edge or agreement corporation
(as defined in 12 CFR 211.1(c)(2) and
(3)) that is a swap entity, or any other
entity that the Board determines.
*
*
*
*
*
12. Section 237.10 is added to read as
follows:
§ 237.10
Capital.
A covered swap entity shall comply
with:
(a) In the case of a covered swap
entity that is a state member bank (as
defined in 12 CFR 208.2(g)), the capital
adequacy guidelines that are applicable
to the covered swap entity and have
been adopted by the Board under
section 38 of the Federal Deposit
Insurance Act (12 U.S.C. 1831o);
(b) In the case of a covered swap
entity that is a bank holding company
(as defined in 12 U.S.C. 1842) or a
savings and loan holding company (as
defined in 12 U.S.C. 1467a), the capital
adequacy guidelines applicable to bank
holding companies under the Board’s
Regulation Y (12 CFR part 225);
(c) In the case of a covered swap
entity that is foreign banking
organization (as defined in 12 CFR
211.21(o)) or any state branch or state
agency of a foreign bank (as defined in
12 U.S.C. 3101(b)(11) and (12)), the
capital rules that are made applicable to
such covered swap entity pursuant to
§ 225.2(r)(3) of the Board’s Regulation Y
(12 CFR 225.2(r)(3)); and
(d) In the case of a covered swap
entity that is an Edge or agreement
corporation (as defined in 12 CFR
211.1(c)(2) and (3)), the capital
adequacy guidelines that are made
applicable to an Edge corporation
engaged in banking pursuant to
§ 211.12(c)(2) of the Board’s Regulation
K (12 CFR 211.12(c)(2)).
FEDERAL DEPOSIT INSURANCE
CORPORATION
List of Subjects in 12 CFR Part 324
12 CFR Chapter III
Banks, Reporting and recordkeeping
requirements, Holding companies,
Savings associations.
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Authority and Issuance
For the reasons set forth in the
Supplementary Information, the Federal
Deposit Insurance Corporation proposes
to add the text of the common rule as
set forth at the end of the
Supplementary Information as part 324
to chapter III of Title 12, Code of Federal
Regulations, modified as follows:
PART 324—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
13. The authority citation for part 324
is added to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–
10(e), and 12 U.S.C. 1818 and 12 U.S.C.
1819(a)(Tenth).
14. Part 324 is added as set forth at
the end of the Common Preamble.
15. Part 324 is amended by:
a. Removing ‘‘[Agency]’’ wherever it
appears and adding in its place ‘‘the
FDIC’’;
b. Removing ‘‘[The Agency]’’ wherever
it appears and adding in its place ‘‘The
FDIC’’; and
c. Removing ‘‘[capital metric]’’
wherever it appears and adding in its
place ‘‘tier 1 capital’’.
16. Section 324.1 is added to read as
follows:
srobinson on DSKHWCL6B1PROD with MISCELLANEOUS
§ ll.1
Authority, purpose, and scope.
(a) Authority. This part is issued by
the Federal Deposit Insurance
Corporation (FDIC) under section 4s(e)
of the Commodity Exchange Act (7
U.S.C. 6s(e)), section 15F(e) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o–10(e)), and section 8 of the
Federal Deposit Insurance Act (12
U.S.C. 1818).
(b) Purpose. Section 4s of the
Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities
Exchange Act of 1934 (15 U.S.C. 78o–8)
require the FDIC to establish capital and
margin requirements for any FDICinsured state-chartered bank that is not
a member of the Federal Reserve System
or FDIC-insured state-chartered savings
association that is registered as a swap
dealer, major swap participant, securitybased swap dealer, or major securitybased swap participant with respect to
all non-cleared swaps and non-cleared
security-based swaps. This part
implements section 4s of the
Commodity Exchange Act and section
15F of the Securities Exchange Act of
1934 by defining terms used in the
statutes and related terms, establishing
capital and margin requirements, and
explaining the statutes’ requirements.
(c) Scope. This part establishes
minimum capital and margin
requirements for each covered swap
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entity subject to this part with respect
to all non-cleared swaps and noncleared security-based swaps. This part
applies to any non-cleared swap or noncleared security-based swap entered
into by a covered swap entity on or after
[INSERT DATE THAT IS 180 DAYS
AFTER PUBLICATION OF THE FINAL
RULE IN THE FEDERAL REGISTER].
Nothing in this part is intended to
prevent a covered swap entity from
collecting margin in amounts greater
than are required under this part.
17. Paragraph (c) of § 324.2 is added
to read as follows:
*
*
*
*
*
(c) Covered swap entity means any
FDIC-insured state-chartered bank that
is not a member of the Federal Reserve
System or FDIC-insured state-chartered
savings association that is a swap entity,
or any other entity that the FDIC
determines.
*
*
*
*
*
18. Section 324.10 is added to read as
follows:
§ ll.10
Capital requirement.
A covered swap entity shall comply
with the capital adequacy guidelines
that are applicable to the covered swap
entity and have been adopted by the
FDIC under section 38 of the Federal
Deposit Insurance Act (12 U.S.C.
1831o).
FARM CREDIT ADMINISTRATION
List of Subjects in 12 CFR Part 624
Agriculture, Banks, Banking, Credit,
Rural areas.
Authority and Issuance
For the reasons set forth in the
Supplementary Information, the Farm
Credit Administration proposes to add
the text of the common rule as set forth
at the end of the Supplementary
Information as part 624 to chapter VI of
Title 12, Code of Federal Regulations,
modified as follows:
PART 624—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
19. The authority citation for part 624
is added to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–
10(e), and secs. 4.3, 5.9, 5.17, and 8.32 of the
Farm Credit Act (12 U.S.C. 2154, 12 U.S.C.
2243, 12 U.S.C. 2252, and 12 U.S.C. 2279bb–
1).
20. Part 624 is added as set forth at
the end of the Common Preamble.
21. Part 624 is amended by:
a. Removing ‘‘[Agency]’’ wherever it
appears and adding in its place ‘‘the
FCA’’;
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Fmt 4701
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a. Removing ‘‘[The Agency]’’ wherever
it appears and adding in its place ‘‘The
FCA’’; and
c. Removing ‘‘[capital metric]’’
wherever it appears and adding in its
place ‘‘core surplus or core capital, as
applicable’’.
22. Section 624.1 is added to read as
follows:
§ 624.1
Authority, purpose, and scope.
(a) Authority. This part is issued by
the Farm Credit Administration (FCA)
under section 4s(e) of the Commodity
Exchange Act (7 U.S.C. 6s(e)), section
15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o–10(e)), and sections
4.3, 5.9, 5.17, and 8.32 of the Farm
Credit Act (12 U.S.C. 2154, 12 U.S.C.
2243, 12 U.S.C. 2252, and 12 U.S.C.
2279bb–1).
(b) Purpose. Section 4s of the
Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities
Exchange Act of 1934 (15 U.S.C. 78o–8)
require the FCA to establish capital and
margin requirements for any System
institution, including the Federal
Agricultural Mortgage Corporation,
chartered under the Farm Credit Act of
1971, as amended (12 U.S.C. 2001 et
seq.) that is registered as a swap dealer,
major swap participant, security-based
swap dealer, or major security-based
swap participant with respect to all noncleared swaps and non-cleared securitybased swaps. This regulation
implements section 4s of the
Commodity Exchange Act and section
15F of the Securities Exchange Act of
1934 by defining terms used in the
statute and related terms, establishing
capital and margin requirements, and
explaining the statute’s requirements.
(c) Scope. This part establishes
minimum capital and margin
requirements for each covered swap
entity subject to this part with respect
to all non-cleared swaps and noncleared security-based swaps. This part
applies to any non-cleared swap or noncleared security-based swap entered
into by a covered swap entity on or after
[INSERT DATE THAT IS 180 DAYS
AFTER PUBLICATION OF THE FINAL
RULE IN THE FEDERAL REGISTER].
Nothing in this part is intended to
prevent a covered swap entity from
collecting margin in amounts greater
than are required under this part.
23. Paragraph (c) of § 624.2 is added
to read as follows:
§ 624.2
Definitions.
*
*
*
*
*
(c) Covered swap entity means any
institution chartered under the Farm
Credit Act of 1971, as amended (12
U.S.C. 2001 et seq.) that is a swap entity,
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or any other entity that the FCA
determines.
*
*
*
*
*
24. Section 624.10 is added to read as
follows:
§ 624.10
Capital requirement.
A covered swap entity shall comply
with:
(a) In the case of the Federal
Agricultural Mortgage Corporation, the
capital adequacy regulations set forth in
12 CFR part 652; and
(b) In the case of any Farm Credit
System institution other than the
Federal Agricultural Mortgage
Corporation, the capital regulations set
forth in 12 CFR part 615.
25. Section 624.11 is added to read as
follows:
srobinson on DSKHWCL6B1PROD with MISCELLANEOUS
§ 624.11 Special requirements for
transactions between swap entities and
System institutions.
(a) Margin requirements. To the extent
that a System institution, including the
Federal Agricultural Mortgage
Corporation, that is not a covered swap
entity enters into a non-cleared swap or
a non-cleared security-based swap with
a swap entity, the System institution
shall:
(1) Collect initial margin from the
swap entity in an amount and at such
times as would be in accordance with
the requirements of § 624.3, provided
that for purposes of this § 624.10 any
reference to ‘‘initial margin model’’ in
the definition of ‘‘initial margin
collection amount’’ shall mean:
(i) The System institution’s initial
margin model, if any, or
(ii)(A) If the System institution does
not have an initial margin model, an
initial margin model used by a third
party to calculate initial margin on
behalf of the System institution in
accordance with § 624.3, provided that
the third party is itself independent of
the swap entity that is the counterparty
in the transaction at issue.
(B) The amounts of initial margin
collected under this paragraph (a) may
be adjusted for minimum transfer
amounts as allowed under § 624.3(c).
(2) Collect variation margin daily from
the swap entity in an amount that
would be in accordance with the
requirements in §§ 624.4(a) and
624.4(e). The amounts of variation
margin collected under this paragraph
may be adjusted as allowed for
minimum transfer amounts under
§ 624.4(c) and for qualifying master
netting agreements under § 624.4(d).
(b) Documentation. To the extent that
a System institution enters into a noncleared swap or a non-cleared securitybased swap with a swap entity, the
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18:23 May 10, 2011
Jkt 223001
System institution shall execute trading
documentation with such swap entity in
accordance with the requirements of
§ 624.5.
(c) Collateral. Any initial or variation
margin that a System institution is
required to collect from a swap entity
under paragraph (a) of this section shall
meet the eligible collateral requirements
of § 624.6.
(d) Segregation. A System institution
shall require that any funds or other
property that it posts to a swap entity as
initial or variation margin be held by a
third-party custodian that is
independent of the swap entity and the
System institution, is located in a
jurisdiction that applies the same
insolvency regime to the third-party
custodian as would apply to the System
institution, and is subject to the
rehypothecation, reinvestment, and
other transfer restrictions of § 624.7
(e) Initial margin models. To the
extent the initial margin collection
amount that the System institution is
required to collect from a swap entity
under paragraph (a)(1) of this section is
calculated by the System institution
using an initial margin model, such
model must meet all the requirements of
§ 624.8, provided that the appropriate
prudential regulator responsible for
making or rescinding any approvals to
the extent required or allowed under
§ 624.8 shall be:
(1) In the case where the initial
margin model is that of a third party
that is subject to regulation by a
prudential regulator, the prudential
regulator having such jurisdiction; or
(2) In the case where the initial
margin model is that of either the
System institution or a third party that
is not subject to regulation by a
prudential regulator, the FCA.
FEDERAL HOUSING FINANCE
AGENCY
List of Subjects in 12 CFR Part 1221
Government-sponsored enterprises,
Mortgages, Securities.
Authority and Issuance
For the reasons stated in the
and under
the authority of 7 U.S.C. 6s(e), 15 U.S.C.
78o–10(e), and 12 U.S.C. 4526, the
Federal Housing Finance Agency
proposes to add the text of the common
rule as set forth at the end of the
SUPPLEMENTARY INFORMATION as part
1221 of subchapter B of chapter XII of
title 12 of the Code of Federal
Regulations, modified as follows:
SUPPLEMENTARY INFORMATION,
PO 00000
Frm 00033
Fmt 4701
Sfmt 4702
27595
CHAPTER XII—FEDERAL HOUSING
FINANCE AGENCY
SUBCHAPTER B—ENTITY REGULATIONS
PART 1221—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
26. The authority citation for part
1221 is added to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–
10(e), 12 U.S.C. 4513 and 12 U.S.C. 4526(a).
27. Part 1221 is added as set forth at
the end of the Common Preamble.
28. Part 1221 is amended by:
a. Removing ‘‘[Agency]’’ wherever it
appears and adding in its place ‘‘FHFA’’;
b. Removing ‘‘[The Agency]’’ wherever
it appears and adding in its place
‘‘FHFA’’; and
c. Removing ‘‘[capital metric]’’
wherever it appears and adding in its
place ‘‘total capital’’.
29. Section 1221.1 is added to read as
follows:
§ 1221.1
Authority, purpose, and scope.
(a) Authority. This part is issued by
the Federal Housing Finance Authority
(FHFA) under section 4s(e) of the
Commodity Exchange Act (7 U.S.C.
6s(e)), section 15F(e) of the Securities
Exchange Act of 1934 (15 U.S.C. 78o–
10(e)), 12 U.S.C. 4513 and 12 U.S.C.
4526(a).
(b) Purpose. Section 4s of the
Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities
Exchange Act of 1934 (15 U.S.C. 78o–8)
require FHFA to establish capital and
margin requirements for any regulated
entity that is registered as a swap dealer,
major swap participant, security-based
swap dealer, or major security-based
swap participant with respect to all noncleared swaps and non-cleared securitybased swaps. This regulation
implements section 4s of the
Commodity Exchange Act and section
15F of the Securities Exchange Act of
1934 by defining terms used in the
statute and related terms, establishing
capital and margin requirements, and
explaining the statute’s requirements.
(c) Scope. This part establishes
minimum capital and margin
requirements for each covered swap
entity subject to this part with respect
to all non-cleared swaps and noncleared security-based swaps. This part
applies to any non-cleared swap or noncleared security-based swap entered
into by a covered swap entity on or after
[INSERT DATE THAT IS 180 DAYS
AFTER PUBLICATION OF THE FINAL
RULE IN THE FEDERAL REGISTER].
Nothing in this part is intended to
prevent a covered swap entity from
E:\FR\FM\11MYP3.SGM
11MYP3
27596
Federal Register / Vol. 76, No. 91 / Wednesday, May 11, 2011 / Proposed Rules
collecting margin in amounts greater
than is required under this part.
30. Section 1221.2 is amended as
follows:
a. Add paragraph (c);
b. Redesignate paragraphs (z), (aa) and
(bb) as paragraphs (bb), (cc), and (dd),
respectively;
c. Redesignate paragraphs (u) through
(y) as (v) through (z); and
d. Add new paragraphs (u) and (aa).
§ 1221.2
Definitions.
*
*
*
*
*
(c) Covered swap entity means any
regulated entity that is a swap entity, or
any other entity that FHFA determines.
*
*
*
*
*
(u) Regulated entity means any
regulated entity as defined in section
1303(20) of the Federal Housing
Enterprises Financial Safety and
Soundness Act of 1992 (12 U.S.C.
4502(20)).
*
*
*
*
*
(aa) Total capital means:
(1) In the case of any Federal Home
Loan Bank, ‘‘total capital’’ as such term
is defined in 12 CFR 1229.1; and
(2) In the case of the Federal National
Mortgage Association, the Federal Home
Loan Mortgage Corporation, or any of
their respective affiliates, ‘‘total capital’’
as such term is defined in 12 CFR
1750.11.
*
*
*
*
*
31. Section 1221.10 is added to read
as follows:
§ 1221.10
Capital.
A covered swap entity shall comply
with the risk-based capital level or such
other amount applicable to the covered
swap entity as required by the Director
of FHFA pursuant to 12 U.S.C. 4611.
32. Section 1221.11 is added to read
as follows:
§ 1221.11 Special requirements for
transactions between swap entities and
regulated entities.
srobinson on DSKHWCL6B1PROD with MISCELLANEOUS
(a) Margin requirements. To the extent
that a regulated entity that is not a
covered swap entity enters into a noncleared swap or a non-cleared securitybased swap with a swap entity, the
regulated entity shall:
VerDate Mar<15>2010
18:23 May 10, 2011
Jkt 223001
(1) Collect initial margin from the
swap entity in an amount and at such
times as would be in accordance with
the requirements of § 1221.3, provided
that for purposes of this section any
reference to ‘‘initial margin model’’ in
the definition of ‘‘initial margin
collection amount’’ shall mean:
(i) The regulated entity’s initial
margin model, if any, or
(ii) (A) If the regulated entity does not
have an initial margin model, an initial
margin model used by a third party to
calculate initial margin on behalf of the
regulated entity in accordance with
§ 1121.3, provided that the third party is
itself independent of the swap entity
that is the counterparty in the
transaction at issue.
(B) The amounts of initial margin
collected under this paragraph may be
adjusted for minimum transfer amounts
as allowed under § 1221.3(c).
(2) Collect variation margin daily from
the swap entity in an amount that
would be in accordance with the
requirements in § 1221.4(a) and
§ 1221.4(e). The amounts of variation
margin collected under this paragraph
may be adjusted as allowed for
minimum transfer amounts under
§ 1221.4(c) and for qualifying master
netting agreements under § 1221.4(d).
(b) Documentation. To the extent that
a regulated entity enters into a noncleared swap or a non-cleared securitybased swap with a swap entity, the
regulated entity shall execute trading
documentation with such swap entity in
accordance with the requirements of
§ 1221.5.
(c) Collateral. Any initial or variation
margin that a regulated entity is
required to collect from a swap entity
under paragraph (a) of this section shall
meet the eligible collateral requirements
of § 1221.6.
(d) Segregation. A regulated entity
shall require that any funds or other
property that it posts to a swap entity as
initial or variation margin be held by a
third-party custodian that is
independent of the swap entity and the
regulated entity, is located in a
jurisdiction that applies the same
insolvency regime to the third-party
PO 00000
Frm 00034
Fmt 4701
Sfmt 9990
custodian as would apply to the
regulated entity, and is subject to the
rehypothecation, reinvestment, and
other transfer restrictions of § 1221.7.
(e) Initial margin models. To the
extent the initial margin collection
amount that the regulated entity is
required to collect from a swap entity
under paragraph (a)(1) of this section is
calculated by the regulated entity using
an initial margin model, such model
must meet all the requirements of
§ 1221.8, provided that the appropriate
prudential regulator responsible for
making or rescinding any approvals or
taking other action to the extent
required or allowed under § 1221.8 shall
be:
(1) In the case where the initial
margin model is that of a third party
that is subject to regulation by a
prudential regulator, the prudential
regulator having such jurisdiction; or
(2) In the case where the initial
margin model is that of either the
regulated entity or a third party that is
not subject to regulation by a prudential
regulator, FHFA.
Dated: April 11, 2011.
John Walsh,
Acting Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, April 12, 2011.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 12th of April
2011.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: April 11, 2011.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
Dated: April 11, 2011.
Edward J. DeMarco,
Acting Director, Federal Housing Finance
Agency.
[FR Doc. 2011–10432 Filed 5–10–11; 8:45 am]
BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;
6705–01–P; 8070–01–P
E:\FR\FM\11MYP3.SGM
11MYP3
]]>Agencies
[Federal Register Volume 76, Number 91 (Wednesday, May 11, 2011)]
[Proposed Rules]
[Pages 27564-27596]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10432]
[[Page 27563]]
Vol. 76
Wednesday,
No. 91
May 11, 2011
Part IV
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 45
Board of Governors of the Federal Reserve System
12 CFR Part 237
Federal Deposit Insurance Corporation
12 CFR Part 324
Farm Credit Administration
12 CFR Part 624
Federal Housing Finance Agency
12 CFR Part 1221
-----------------------------------------------------------------------
Margin and Capital Requirements for Covered Swap Entities; Proposed
Rule
Federal Register / Vol. 76 , No. 91 / Wednesday, May 11, 2011 /
Proposed Rules
[[Page 27564]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 45
[Docket No. OCC-2011-0008]
RIN 1557-AD43
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
12 CFR Part 237
[Docket No. R-1415]
RIN 7100 AD74
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AD79
FARM CREDIT ADMINISTRATION
12 CFR Part 624
RIN 3052-AC69
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1221
RIN 2590-AA45
Margin and Capital Requirements for Covered Swap Entities
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Farm Credit Administration (FCA);
and the Federal Housing Finance Agency (FHFA).
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (collectively, the
Agencies) are requesting comment on a proposal to establish minimum
margin and capital requirements for registered swap dealers, major swap
participants, security-based swap dealers, and major security-based
swap participants for which one of the Agencies is the prudential
regulator. This proposed rule implements sections 731 and 764 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, which
require the Agencies to adopt rules jointly to establish capital
requirements and initial and variation margin requirements for such
entities on all non-cleared swaps and non-cleared security-based swaps
in order to offset the greater risk to such entities and the financial
system arising from the use of swaps and security-based swaps that are
not cleared.
DATES: Comments should be received on or before June 24, 2011.
ADDRESSES: Interested parties are encouraged to submit written comments
jointly to all of the Agencies. Commenters are encouraged to use the
title ``Margin and Capital Requirements for Covered Swap Entities'' to
facilitate the organization and distribution of comments among the
Agencies. Commenters are also encouraged to identify the number of the
specific question for comment to which they are responding.
Office of the Comptroller of the Currency: Because paper mail in
the Washington, DC area and at the OCC is subject to delay, commenters
are encouraged to submit comments by the Federal eRulemaking Portal or
e-mail, if possible. Please use the title ``Margin and Capital
Requirements'' to facilitate the organization and distribution of the
comments. You may submit comments by any of the following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
https://www.regulations.gov. Select ``Document Type'' of ``Proposed
Rules,'' and in the ``Enter Keyword or ID Box,'' enter Docket ID ``OCC-
2011-0008,'' and click ``Search.'' On ``View By Relevance'' tab at the
bottom of screen, in the ``Agency'' column, locate the Proposed Rule
for the OCC, in the ``Action'' column, click on ``Submit a Comment'' or
``Open Docket Folder'' to submit or view public comments and to view
supporting and related materials for this rulemaking action.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting or viewing public comments, viewing other supporting and
related materials, and viewing the docket after the close of the
comment period.
E-mail: regs.comments@occ.treas.gov.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 2-3, Washington, DC 20219.
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2011-0008'' in your comment. In general, OCC will enter
all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, e-mail addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this proposed rulemaking by any of the following methods:
Viewing Comments Electronically: Go to https://www.regulations.gov. Select ``Document Type'' of ``Public
Submissions,'' and in the ``Enter Keyword or ID Box,'' enter Docket ID
``OCC-2011-0008,'' and click ``Search.'' Comments will be listed under
``View By Relevance'' tab at the bottom of screen. If comments from
more than one agency are listed, the ``Agency'' column will indicate
which comments were received by the OCC.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 250 E Street, SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid
government-issued photo identification and submit to security screening
in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board of Governors of the Federal Reserve System
You may submit comments, identified by Docket No. R-1415 and RIN
7100 AD74, by any of the following methods:
Agency Web Site: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Address to Jennifer J. Johnson, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551.
[[Page 27565]]
All public comments will be made available on the Board's Web site
at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between
9 a.m. and 5 p.m. on weekdays.
Federal Deposit Insurance Corporation: You may submit comments,
identified by RIN number, by any of the following methods:
Agency Web Site: https://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency Web site.
E-mail: Comments@FDIC.gov. Include the RIN number on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
Instructions: All comments received must include the agency name
and RIN for this rulemaking and will be posted without change to https://www.fdic.gov/regulations/laws/federal/propose.html, including any
personal information provided.
Federal Housing Finance Agency: You may submit your written
comments on the proposed rulemaking, identified by regulatory
information number (RIN) 2590-AA45, by any of the following methods:
E-mail: Comments to Alfred M. Pollard, General Counsel,
may be sent by e-mail at RegComments@fhfa.gov. Please include ``RIN
2590-AA45'' in the subject line of the message.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at RegComments@fhfa.gov to ensure timely receipt by the
Agency. Please include ``RIN 2590-AA45'' in the subject line of the
message.
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA45, Federal
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington,
DC 20552.
Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA45,
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552. A hand-delivered package should be logged at the
Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.
All comments received by the deadline will be posted for public
inspection without change, including any personal information you
provide, such as your name and address, on the FHFA Web site at https://www.fhfa.gov. Copies of all comments timely received will be available
for public inspection and copying at the address above on government-
business days between the hours of 10 a.m. and 3 p.m. To make an
appointment to inspect comments please call the Office of General
Counsel at (202) 414-6924.
Farm Credit Administration: We offer a variety of methods for you
to submit your comments. For accuracy and efficiency reasons,
commenters are encouraged to submit comments by e-mail or through the
FCA's Web site. As facsimiles (fax) are difficult for us to process and
achieve compliance with section 508 of the Rehabilitation Act, we are
no longer accepting comments submitted by fax. Regardless of the method
you use, please do not submit your comments multiple times via
different methods. You may submit comments by any of the following
methods:
E-mail: Send us an e-mail at reg-comm@fca.gov.
FCA Web site: https://www.fca.gov. Select ``Public
Commenters,'' then ``Public Comments,'' and follow the directions for
``Submitting a Comment.''
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Gary K. Van Meter, Acting Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
You may review copies of all comments we receive at our office in
McLean, Virginia or on our Web site at https://www.fca.gov. Once you are
in the Web site, select ``Public Commenters,'' then ``Public
Comments,'' and follow the directions for ``Reading Submitted Public
Comments.'' We will show your comments as submitted, including any
supporting data provided, but for technical reasons we may omit items
such as logos and special characters. Identifying information that you
provide, such as phone numbers and addresses, will be publicly
available. However, we will attempt to remove e-mail addresses to help
reduce Internet spam.
FOR FURTHER INFORMATION CONTACT: OCC: Michael Sullivan, Market RAD
(202) 874-3978, Kurt Wilhelm, Director, Financial Markets Group (202)
874-4479, Jamey Basham, Assistant Director, Legislative and Regulatory
Activities Division (202) 874-5090, or Ron Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities Division (202) 874-5090, Office
of the Comptroller of the Currency, 250 E Street, SW., Washington, DC
20219.
Board: Sean D. Campbell, Deputy Associate Director, Division of
Research and Statistics, (202) 452-3761, Michael Gibson, Senior
Associate Director, Division of Research and Statistics, (202) 452-
2495, or Jeremy R. Newell, Senior Attorney, Legal Division, (202) 452-
3239, Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551.
FDIC: Bobby R. Bean, Chief, Policy Section, (202) 898-6705, John
Feid, Senior Capital Markets Specialist, (202) 898-8649, Division of
Risk Management Supervision, Thomas F. Hearn, Counsel, (202) 898-6967,
or Ryan K. Clougherty, Senior Attorney, (202) 898-3843, Legal Division,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
FHFA: Robert Collender, Principal Policy Analyst, Office of Policy
Analysis and Research, (202) 343-1510, Robert.Collender@fhfa.gov, Peggy
Balsawer, Assistant General Counsel, Office of General Counsel, (202)
343-1529, Peggy.Balsawer@fhfa.gov. or James Carley, Senior Associate
Director, Division of FHLBank Regulation, (202) 408-2507,
James.Carley@fhfa.gov, Federal Housing Finance Agency, Fourth Floor,
1700 G Street, NW., Washington, DC 20552. The telephone number for the
Telecommunications Device for the Hearing Impaired is (800) 877-8339.
FCA: William G. Dunn, Acting Associate Director, Finance and
Capital Markets Team, Office of Regulatory Policy, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4414, TTY (703) 883-
4434, Joseph T. Connor, Associate Director for Policy and Analysis,
Office of Secondary Market Oversight, Farm Credit Administration,
McLean, VA 22102-5090, (703) 883-4280, TTY (703) 883-4434, or Rebecca
S. Orlich, Senior Counsel, Office of General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.
SUPPLEMENTARY INFORMATION:
[[Page 27566]]
I. Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act) was enacted on July 21, 2010.\1\ Title VII of the Dodd-
Frank Act established a comprehensive new regulatory framework for
derivatives, which the Act generally characterizes as ``swaps'' (which
are defined in section 721 of the Dodd-Frank Act to include interest
rate swaps, commodity-based swaps, and broad-based credit swaps) and
``security-based swaps'' (which are defined in section 761 of the Dodd-
Frank Act to include single-name and narrow-based credit swaps and
equity-based swaps).\2\
---------------------------------------------------------------------------
\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\2\ See 7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68). Swaps and
security-based swaps are sometimes referred to herein collectively
as ``derivatives.''
---------------------------------------------------------------------------
As part of this new regulatory framework, sections 731 and 764 of
the Dodd-Frank Act add a new section 4s to the Commodity Exchange Act
and a new section 15F to the Securities Exchange Act of 1934,
respectively, which require the registration and regulation of swap
dealers and major swap participants and security-based swap dealers and
major security-based swap participants (collectively, swap
entities).\3\ For certain types of swap entities that are prudentially
regulated by one of the Agencies,\4\ sections 731 and 764 of the Dodd-
Frank Act require the Agencies to adopt rules jointly for swap entities
under their respective jurisdictions imposing (i) capital requirements
and (ii) initial and variation margin requirements on all non-cleared
swaps and non-cleared security-based swaps.\5\ Swap entities that are
prudentially regulated by the Agencies and therefore subject to the
proposed rule are referred to herein as ``covered swap entities.''
---------------------------------------------------------------------------
\3\ See 7 U.S.C. 6s; 15 U.S.C. 78o-8. Section 731 of the Dodd-
Frank Act requires swap dealers and major swap participants to
register with the Commodity Futures Trading Commission (the
``CFTC''), which is vested with primary responsibility for the
oversight of the swaps market under title 7 of the Dodd Frank Act.
Section 764 of the Dodd-Frank Act requires security-based swap
dealers and major security-based swap participants to register with
the Securities and Exchange Commission (the ``SEC''), which is
vested with primary responsibility for the oversight of the
security-based swaps market under title 7 of the Dodd-Frank Act.
Section 713(d)(1) of the Dodd-Frank Act requires the CFTC and SEC to
issue joint rules further defining the terms swap dealer, major swap
participant, security-based swap dealer, and major security-based
swap participant. The CFTC and SEC issued a joint notice of proposed
rulemaking with respect to these definitions in December, 2010. See
75 FR 80,174 (Dec. 21, 2010) (proposed rule).
\4\ Section 1a(39) of the Commodities Exchange Act defines the
term ``prudential regulator'' for purposes of the capital and margin
requirements applicable to swap dealers, major swap participants,
security-based swap dealers and major security-based swap
participants. The Board is the prudential regulator for any swap
entity that is (i) a State-chartered bank that is a member of the
Federal Reserve System, (ii) a State-chartered branch or agency of a
foreign bank, (iii) a foreign bank which does not operate an insured
branch, (iv) an organization operating under section 25A of the
Federal Reserve Act (an Edge corporation) or having an agreement
with the Board under section 25 of the Federal Reserve Act (an
Agreement corporation), and (v) a bank holding company, a foreign
bank that is treated as a bank holding company under section 8(a) of
the International Banking Act of 1978, or a savings and loan holding
company (on or after the transfer date established under section 311
of the Dodd-Frank Act), or a subsidiary of such a company or foreign
bank (other than a subsidiary for which the OCC or FDIC is the
prudential regulator or that is required to be registered with the
CFTC or SEC as a swap dealer or major swap participant or a
security-based swap dealer or major security-based swap participant,
respectively). The OCC is the prudential regulator for any swap
entity that is a national bank, a Federally chartered branch or
agency of a foreign bank, or a Federal savings association. The FDIC
is the prudential regulator for any swap entity that is (i) a State-
chartered bank that is not a member of the Federal Reserve System or
(ii) a State savings association. The FCA is the prudential
regulator for any swap entity that is an institution chartered under
the Farm Credit Act of 1971, as amended. FHFA is the prudential
regulator for any swap entity that is a ``regulated entity'' under
the Federal Housing Enterprises Financial Safety and Soundness Act
of 1992 (i.e., the Federal National Mortgage Association and its
affiliates, the Federal Home Loan Mortgage Corporation and its
affiliates, and the Federal Home Loan Banks). See 7 U.S.C. 1a(39).
\5\ See 7 U.S.C. 6s(e)(2)(A); 15 U.S.C. 78o-8(e)(2)(A). Section
6(s)(e)(1)(A) directs registered swap dealers and major swap
participants for which there is a prudential regulator to comply
with margin and capital rules issued by the prudential regulators,
while section 6(s)(e)(1)(B) directs registered swap dealers and
major swap participants for which there is not a prudential
regulator to comply with margin and capital rules issued by the CFTC
and SEC. Section 78o-8(e)(1) generally parallels section 6s(e)(1),
except that section 78o-8(e)(1)(A) refers to registered security-
based swap dealers and major security-based swap participants for
which ``there is not a prudential regulator.'' The Agencies construe
the ``not'' in section 78o-8(e)(1)(A) to have been included by
mistake, in conflict with section 78o-8(e)(2)(A), and of no
substantive meaning. Otherwise, registered security-based swap
dealers and major security-based swap participants for which there
is not a prudential regulator could be subject to multiple capital
and margin rules, and institutions regulated by the prudential
regulators and registered as security-based swap dealers and major
security-based swap participants might not be subject to any capital
and margin requirements under section 78o-8(e).
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Sections 731 and 764 of the Dodd-Frank Act require the CFTC and SEC
to separately adopt rules imposing capital and margin requirements for
swap entities for which there is no prudential regulator.\6\ The Dodd-
Frank Act requires the CFTC, SEC, and the Agencies to establish and
maintain, to the maximum extent practicable, capital and margin
requirements that are comparable, and to consult with each other
periodically (but no less than annually) regarding these
requirements.\7\
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\6\ See 7 U.S.C. 6s(e)(2)(B); 15 U.S.C. 78o-8(e)(2)(B).
\7\ See 7 U.S.C. 6s(e)(2)(A); 6s(e)(3)(D); 15 U.S.C. 78o-
8(e)(2)(A), 78o-8(e)(3)(D). Staff of the Agencies have consulted
with staff of the CFTC and SEC in developing the proposed rule.
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The capital and margin standards for swap entities imposed under
sections 731 and 764 of the Dodd-Frank Act are intended to offset the
greater risk to the swap entity and the financial system arising from
the use of swaps and security-based swaps that are not cleared.\8\
Sections 731 and 764 of the Dodd-Frank Act require that the capital and
margin requirements imposed on swap entities must, to offset such risk,
(i) help ensure the safety and soundness of the swap entity and (ii) be
appropriate for the greater risk associated with the non-cleared swaps
and non-cleared security-based swaps held as a swap entity.\9\ In
addition, Sections 731 and 764 of the Dodd-Frank Act require the
Agencies, in establishing capital rules for covered swap entities, to
take into account the risks associated with other types, classes or
categories of swaps or security-based swaps engaged in, and the other
activities conducted by that person that are not otherwise subject to
regulation applicable to that person by virtue of the status of the
person as a swap dealer or a major swap participant.\10\ Sections 731
and 764 become effective not less than 60 days after publication of the
final rule or regulation implementing these sections.\11\
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\8\ See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-8(e)(3)(A).
\9\ See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-8(e)(3)(A). In
addition, Section 1201 of Housing and Economic Recovery Act of 2008
(Pub. L. 110-289, 122 Stat. 2654) requires the Director of FHFA,
when promulgating regulations relating to the Federal Home Loan
Banks, to consider the following differences between the Federal
Home Loan Banks and the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac): cooperative ownership structure; mission of providing
liquidity to members; affordable housing and community development
mission; capital structure; and joint and several liability. See
section 1201 Public Law 110-289, 122 Stat. 2782-83 (amending 12
U.S.C. 4513). The Director of FHFA also may consider any other
differences that are deemed appropriate. For purposes of this
proposed rule, FHFA considered the differences as they relate to the
above factors. FHFA requests comments from the public about whether
differences related to these factors should result in any revisions
to the proposal.
\10\ See 7 U.S.C. 6s(e)(2)(C); 15 U.S.C. 78o-8(e)(2)(C). In
addition, the margin requirements imposed by the Agencies must
permit the use of noncash collateral, as the Agencies determine to
be consistent with (i) preserving the financial integrity of the
markets trading swaps and security-based swaps and (ii) preserving
the stability of the U.S. financial system. See 7 U.S.C.
6s(e)(3)(C); 15 U.S.C. 78o-8(e)(3)(C).
\11\ See Dodd Frank Act Sec. Sec. 754, 774.
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The capital and margin requirements that must be established with
respect to
[[Page 27567]]
non-cleared derivatives under sections 731 and 764 of the Dodd-Frank
Act complement changes made elsewhere in the Act that require all
sufficiently standardized swaps and security-based swaps be cleared
through a derivatives clearing organization or clearing agency.\12\
This clearing mandate reflects the consensus of the G-20 leaders: ``All
standardized over-the-counter derivatives contracts should be traded on
exchanges or electronic trading platforms, where appropriate, and
cleared through central counterparties by end of 2012 at the latest.''
\13\
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\12\ See 7 U.S.C. 2(h); 15 U.S.C. 78c-3. Certain types of
counterparties (e.g., counterparties that are not financial entities
and are using swaps or security-based swaps to hedge or mitigate
commercial risks) are exempt from this mandatory clearing
requirement and may elect not to clear a swap or security-based swap
that would otherwise be subject to the clearing requirement.
\13\ G-20 Leaders, June 2010 Toronto Summit Declaration, ] 25.
The dealer community has also recognized the importance of
clearing--beginning in 2009, in an effort led by the Federal Reserve
Bank of New York, the dealer community agreed to increase central
clearing for certain credit derivatives and interest rate
derivatives. See Press Release, Federal Reserve Bank of New York,
New York Fed Welcomes Further Industry Commitments on Over-the-
Counter Derivatives press release (June 2, 2009), available at
https://www.newyorkfed.org/newsevents/news/markets/2009/ma090602.html.
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In the derivatives clearing process, central counterparties (CCPs)
manage the credit risk through a range of controls and methods,
including a margining regime that imposes both initial margin and
variation margin requirements on parties to cleared transactions.\14\
Thus, the mandatory clearing requirement established by the Dodd-Frank
Act for swaps and security-based swaps will effectively require any
party to any transaction subject to the clearing mandate to post
initial and variation margin to the CCP in connection with that
transaction.
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\14\ CCPs interpose themselves between counterparties to a
derivative transaction, becoming the buyer to the seller and the
seller to the buyer and, in the process, taking on the credit risk
that each party poses to the other. For example, when a derivatives
contract between two parties that are members of a CCP is executed
and submitted for clearing, it is typically replaced by two new
contracts--separate contracts between the CCP and each of the two
original counterparties. At that point, the original counterparties
are no longer counterparties to each other; instead, each faces the
CCP as its counterparty, and the CCP assumes the counterparty credit
risk of each of the original counterparties.
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However, if a particular swap or security-based swap is not cleared
because it is not subject to the mandatory clearing requirement (or
because one of the parties to a particular swap or security-based swap
is eligible for, and uses, an exemption from the mandatory clearing
requirement), that swap or security-based swap will be a ``non-
cleared'' swap or security-based swap and will be subject to the
capital and margin requirements for such transactions established under
sections 731 and 764 of the Dodd-Frank Act.
The comprehensive derivatives-related provisions of title VII of
the Dodd-Frank Act, including sections 731 and 764, are intended in
general to reduce risk, increase transparency, promote market integrity
within the financial system, and, in particular, address a number of
weaknesses in the regulation and structure of the derivatives markets
that were revealed during the financial crisis experienced in 2008 and
2009. During the financial crisis, the opacity of derivatives
transactions among dealer banks and between dealer banks and their
counterparties created uncertainty about whether market participants
were significantly exposed to the risk of a default by a swap
counterparty. By imposing a regulatory margin requirement on non-
cleared swaps, the Dodd-Frank Act will reduce the uncertainty around
the possible exposures arising from non-cleared swaps.
The recent financial crisis also revealed that some participants in
the derivatives markets had used derivatives to take on excessive
risks. By imposing a minimum margin requirement on non-cleared
derivatives, sections 731 and 764 of the Dodd-Frank Act will reduce the
ability of firms to take on excessive risks through swaps without
sufficient financial resources to make good on their contracts. Because
the Dodd-Frank Act requires that the margin requirements be based on
the risks posed by the non-cleared derivatives and derivatives
counterparties, firms that take significant risks through derivatives
will face more stringent margin requirements with respect to non-
cleared derivatives, while firms that take lower risks will face less
stringent margin requirements.
II. Overview of Proposed Rule
A. Margin Requirements
The Agencies have generally adopted a risk-based approach in
proposing rules to establish initial and variation margin requirements
for covered swap entities, consistent with the statutory requirement
that these rules help ensure the safety and soundness of the covered
swap entity and be appropriate for the risk to the financial system
associated with non-cleared swaps and non-cleared security-based swaps
held by covered swap entities. As a result, the proposed rule takes
into account the relative risk of a covered swap entity's activities in
establishing both (i) the minimum amount of initial and variation
margin that it must collect from its counterparties and (ii) the
frequency with which a covered swap entity must calculate and collect
variation margin from its counterparty.
In implementing this risk-based approach, the proposed rule
distinguishes among four separate types of derivatives counterparties:
(i) Counterparties that are themselves swap entities; (ii)
counterparties that are high-risk financial end users of derivatives;
(iii) counterparties that are low-risk financial end users of
derivatives; and (iv) counterparties that are nonfinancial end users of
derivatives.\15\ These categories reflect the Agencies' preliminary
belief that distinctions can be made between types of derivatives
counterparties that are useful in distinguishing the risks posed by
each type.
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\15\ See proposed rule Sec. Sec. ----.2(b), (g), (h), (i), (n),
(r) and (y) for the various constituent definitions that identify
these four types of swap counterparties.
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The proposed rule's initial and variation margin requirements
generally apply only to the collection of minimum margin amounts by a
covered swap entity from its counterparties; they do not contain
specific requirements as to the amount of initial or variation margin
that a covered swap entity must post to its counterparties.\16\ This
approach, which emphasizes the collection rather than the posting of
margin, is based primarily on the Agencies' preliminary view that
imposing requirements with respect to the minimum amount of margin to
be collected (but not posted) is a critical aspect of offsetting the
greater risk to the covered swap entity and the financial system
arising from the covered swap entity's holdings of swaps and security-
based swaps that are not cleared and helps ensure the safety and
soundness of the covered swap entity. The proposed rule's approach
would also assure that swap entities transacting with one another will
effectively be collecting and posting margin with respect to those
transactions as a result of the margin collection requirements imposed
on each.
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\16\ Section ----.11 of the proposed rule adopted by FHFA and
FCA (but not the other Agencies) requires that their regulated
entities collect initial and variation margin from swap entities, as
described in section III.K of this notice.
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With respect to initial margin, the proposed rule permits a covered
swap entity to select from two alternatives to calculate its initial
margin requirements. A covered swap entity may calculate its initial
margin requirements using a standardized ``lookup'' table that
[[Page 27568]]
specifies the minimum initial margin that must be collected, expressed
as a percentage of the notional amount of the swap or security-based
swap. These percentages depend on the broad asset class of the swap or
security-based swap.\17\ Alternatively, a covered swap entity may
calculate its minimum initial margin requirements using an internal
margin model that meets certain criteria and that has been approved by
the relevant prudential regulator.\18\
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\17\ See proposed rule, Appendix A.
\18\ See proposed rule Sec. Sec. ----.2(l), ----.3(a), ----.8.
---------------------------------------------------------------------------
A covered swap entity adopting the first alternative generally must
collect at least the amount of initial margin required under the
standardized look-up table, regardless of the relative risk of its
counterparty. A covered swap entity adopting the second alternative
generally must collect at least the amount of initial margin required
under its initial margin model. Both alternatives permit a covered swap
entity to adopt a threshold amount below which it need not collect
initial margin from certain types of counterparties.\19\ Under the
proposed rule, the maximum threshold amount permitted varies based on
the relative risk posed by the counterparty, as determined by
counterparty type.
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\19\ See proposed rule Sec. Sec. ----.2(m), ----.3(a)(2).
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With respect to variation margin, the proposed rule generally
requires a covered swap entity to collect variation margin periodically
in an amount that is at least equal to the increase in the value of the
swap to the covered swap entity.\20\ As with initial margin, a covered
swap entity may adopt a threshold amount below which it need not
collect variation margin from certain types of lower-risk
counterparties.\21\ Consistent with the approach taken to initial
margin, the maximum threshold amount permitted for variation margin
varies based on the relative risk of the counterparty, as determined by
counterparty type. In addition, the frequency with which a covered swap
entity must periodically recalculate and collect variation margin under
the proposed rule also varies based on the relative risk of the
counterparty, as determined by counterparty type, and generally
decreases as the relative risk of the counterparty type decreases.\22\
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\20\ See proposed rule Sec. Sec. ----.2(z), ----.4(a).
\21\ See proposed rule Sec. Sec. ----.2(bb), ----.4(a)(2).
\22\ See proposed rule Sec. ----.4(b).
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The proposed rule's margin provisions establish only minimum
requirements with respect to initial margin and variation that must be
collected. Nothing in the proposed rule is intended to prevent or
discourage a covered swap entity from collecting margin in amounts
greater than is required under the proposed rule.
The proposed rule also specifies the types of collateral that are
eligible to be collected to satisfy both the initial and variation
margin requirements. Eligible collateral is generally limited to (i)
immediately available cash funds and (ii) certain high-quality, highly-
liquid U.S. government and agency obligations and, in the case of
initial margin only, certain government-sponsored enterprise
obligations, subject to specified minimum ``haircuts'' for purposes of
determining their value for margin purposes.\23\
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\23\ See proposed rule Sec. ----.6.
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Separate from the proposed rule's requirements with respect to the
collection of initial and variation margin, the proposed rule also
requires a covered swap entity to ensure that its counterparty
segregates the initial margin that the covered swap entity posts when
engaging in swap or security-based swap transactions with another swap
entity.\24\ The Agencies have proposed a requirement that segregation
of initial margin be mandatory, not optional, for swap transactions by
a covered swap entity with another swap entity in order to (i) offset
the greater risk to the covered swap entity and the financial system
arising from the use of swaps and security-based swaps that are not
cleared and (ii) protect the safety and soundness of the covered swap
entity.
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\24\ See proposed rule Sec. ----.7. The Agencies note that
sections 724 and 763 of Dodd-Frank Act require a swap entity to
offer its swap and security-based swap counterparties the option of
requiring segregation of initial margin they post to the swap
entity.
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B. Capital Requirements
Sections 731 and 764 of the Dodd-Frank Act also require the
Agencies to issue, in addition to margin rules, joint rules on capital
for covered swap entities for which they are the prudential
regulator.\25\ The Board, FDIC, and OCC (collectively, the banking
agencies) have had risk-based capital rules in place for banks to
address over-the-counter derivatives since 1989 when the banking
agencies implemented their risk-based capital adequacy standards
(general banking risk-based capital rules) \26\ based on the first
Basel Accord.\27\ The general banking risk-based capital rules have
been amended and supplemented over time to take into account
developments in the derivatives market. These supplements include the
addition of the market risk amendment to the first Basel Accord which
requires banks and bank holding companies meeting certain thresholds to
calculate their capital requirements for trading positions through
models approved by their primary Federal supervisor.\28\ In addition,
certain large, complex banks and bank holding companies are subject to
the banking agencies' advanced risk-based capital standards (advanced
approaches rules), based on the advanced approaches of the Basel II
Accord.\29\
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\25\ 7 U.S.C. 6s(e)(2); 15 U.S.C. 78o-8(e)(2).
\26\ See 54 FR 4186 (January 27, 1989). The general banking
risk-based capital rules are codified at 12 CFR part 3, Appendix A
(OCC); 12 CFR parts 208 and 225, Appendix A (Board); and 12 CFR part
325, Appendix A (FDIC).
\27\ The Basel Committee on Banking Supervision (BCBS) developed
the first international banking capital framework in 1988, entitled
International Convergence of Capital Measurement and Capital
Standards.
\28\ 61 FR 47358 (September 6, 1996). The banking agencies'
market risk capital rules are at 12 CFR part 3, Appendix B (OCC); 12
CFR part 208, Appendix E and 12 CFR part 225, Appendix E (Board);
and 12 CFR part 325, Appendix C (FDIC). The rules apply to banks and
bank holding companies with trading activity (on a worldwide
consolidated basis) that equals 10 percent or more of the
institution's total assets, or $1 billion or more.
\29\ See BCBS, International Convergence of Capital Measurement
and Capital Standards: A Revised Framework (2006). The banking
agencies implemented the advanced approaches of the Basel II Accord
in 2007. See 72 FR 69288 (December 7, 2010). The advanced approaches
rules are codified at 12 CFR part 3, Appendix C (OCC); 12 CFR part
208, Appendix F and 12 CFR part 225, Appendix G (Board); and 12 CFR
part 325, Appendix D (FDIC).
---------------------------------------------------------------------------
FHFA's predecessor agencies used a similar methodology to frame the
risk-based capital rules applicable to those entities now regulated by
FHFA. The FCA's risk-based capital regulations for Farm Credit System
institutions, except for the Federal Agricultural Mortgage Corporation
(Farmer Mac), have been in place since 1988 and were updated in
2005.\30\ The FCA's risk-based capital regulations for Farmer Mac have
been in place since 2001 and were updated in 2006.\31\
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\30\ See 53 FR 40.033 (Oct. 13, 1988); 70 FR 35.336 (June 17,
2005); 12 CFR part 615 subpart H.
\31\ See 66 FR 19,048 (April 12, 2001); 71 FR 77,247 (Dec. 26,
2006); 12 CFR part 652.
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The Basel Committee on Banking Supervision has recently revised and
enhanced its capital framework for internationally active banks,\32\
and the banking agencies expect to propose these changes in the United
States in the near future through a separate notice of proposed
rulemaking.
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\32\ See BCBS, Basel III: A Global Regulatory Framework for More
Resilient Banks and Banking Systems (2010), available at https://www.bis.org/publ.bcbs189.htm.
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As described in section III.J below, the proposed rule requires a
covered swap entity to comply with regulatory capital
[[Page 27569]]
rules already made applicable to that covered swap entity as part of
its prudential regulatory regime. As discussed further below, given
that these existing regulatory capital rules already specifically take
into account and address the unique risks arising from derivatives
transactions and activities, the Agencies are proposing to rely on
these existing rules, subject to the future notice of proposed
rulemaking described above, as appropriate and sufficient to offset the
greater risk to the covered swap entity and the financial system
arising from the use of swaps and security-based swaps that are not
cleared and to protect the safety and soundness of the covered swap
entity.\33\
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\33\ For the duration of the conservatorships of Fannie Mae and
Freddie Mac (together, the Enterprises), FHFA has directed that
their existing regulatory capital requirements would not be binding.
However, FHFA continues to closely monitor the Enterprises'
activities. Such monitoring, coupled with the unique financial
support available to the Enterprises from the United States Treasury
and the likelihood that FHFA will promulgate new risk-based capital
rules in due course to apply to the Enterprises (or their
successors) once the conservatorships have ended, lead to FHFA's
preliminary view that the reference to existing capital rules is
sufficient to address the risks discussed in the text above as to
the Enterprises.
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III. Section-by-Section Summary of Proposed Rule
A. Section ----.1: Authority, Purpose and Scope
Section ----.1 of the proposed rule specifies the scope of swap and
security-based swap transactions to which the margin requirements
apply. It provides that the margin requirements apply to all non-
cleared swaps and security-based swaps into which a covered swap entity
enters, regardless of the type of transaction or the nature of the
counterparty. It also provides that the margin requirements apply only
to swap and security-based swap transactions that are entered into on
or after the date on which the proposed rule becomes effective.
1. Treatment of Pre-Effective Date Derivatives
The Agencies note that it is possible that a covered swap entity
may enter into swap or security-based swap transactions on or after the
proposed rule's effective date pursuant to the same master netting
agreement with a counterparty that governs existing swaps or security-
based swaps entered into prior to the effective date. As discussed
below, the proposed rules permit a covered swap entity to (i) calculate
initial margin requirements for swaps and security-based swaps under a
qualifying master netting agreement with the counterparty on a
portfolio basis in certain circumstances, if it is using an initial
margin model to do so, and (ii) calculate variation margin requirements
under the proposed rule on an aggregate, net basis under a qualifying
master netting agreement with the counterparty. Applying the new margin
rules in such a way would, in some cases, have the effect of applying
the margin rules retroactively to pre-effective-date swaps under the
master agreement. Accordingly, in the case of initial margin, a covered
swap entity using an initial margin model would be permitted, at its
option, to calculate the initial margin requirements on a portfolio
basis but include only post-effective-date derivatives in the relevant
portfolio.\34\ With respect to variation margin, the Agencies expect
that the covered swap entity will comply with the margin requirements
with respect to all swaps and security-based swaps governed by a master
agreement, regardless of the date on which they were entered into,
consistent with current industry practice. The Agencies request comment
on (i) what, if any, practical difficulties might be raised by the
proposed approach to application of the margin requirements under
master agreements governing both pre- and post-effective-date swaps and
security-based swaps and (ii) whether there are alternative approaches
that might better address the issues raised by such master agreements.
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\34\ See proposed rule Sec. ----.8(b). The covered swap entity
would not be permitted to selectively incorporate only certain pre-
effective-date derivatives.
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2. Treatment of Derivatives With Commercial End User Counterparties
Following passage of the Dodd-Frank Act, various observers
expressed concerns regarding whether sections 731 and 764 of the Dodd-
Frank Act authorize or require the CFTC, SEC, and Agencies to establish
margin requirements with respect to transactions between a covered swap
entity and a ``commercial end user'' (i.e., a nonfinancial counterparty
that engages in derivatives activities to hedge commercial risk),\35\
and have argued that swaps and security-based swap transactions with
these types of counterparties should be excluded from the scope of
margin requirements imposed under sections 731 and 764 because
commercial firms engaged in hedging activities pose a reduced risk to
their counterparties and the stability of the U.S. financial system. In
addition, statements in the legislative history of sections 731 and 764
suggest that Congress did not intend, in enacting these sections, to
impose margin requirements on nonfinancial end users engaged in hedging
activities, even in cases where they entered into swaps or security-
based swaps with swap entities.\36\
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\35\ Although the term ``commercial end user'' is not defined in
the Dodd-Frank Act, it is generally understood to mean a company
that is eligible for the exception to the mandatory clearing
requirement for swaps and security-based swaps under section 2(h)(7)
of the Commodity Exchange Act and section 3C(g) of the Securities
Exchange Act, respectively. This exception is generally available to
a person that (i) is not a financial entity, (ii) is using the swap
to hedge or mitigate commercial risk, and (iii) has notified the
CFTC or SEC how it generally meets its financial obligations with
respect to non-cleared swaps or security-based swaps, respectively.
See 7 U.S.C. 2(h)(7) and 15 U.S.C. 78c-3(g).
\36\ See, e.g., 156 Cong. Rec. S5904 (daily ed. July 15, 2010)
(statement of Sen. Lincoln).
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In formulating the proposed rule, the Agencies have carefully
considered these concerns and statements. The plain language of
sections 731 and 764 provides that the Agencies adopt rules for covered
swap entities imposing margin requirements on all non-cleared swaps.
Those sections do not, by their terms, exclude a swap with a
counterparty that is a commercial end user.
Importantly, those sections also provide that the Agencies adopt
margin requirements that (i) help ensure the safety and soundness of
the covered swap entity and (ii) are appropriate for the risk
associated with the non-cleared swaps and non-cleared security-based
swaps it holds as a swap entity. Thus, the statute requires the
Agencies to take a risk-based approach to establishing margin
requirements.
The proposed rule follows this statutory framework and proposes a
risk-based approach to imposing margin requirements in which
nonfinancial end users are categorized as lower-risk counterparties
than financial end users. In particular, the proposed rule permits
covered swap entities to adopt, where appropriate, initial and
variation margin thresholds below which a covered swap entity is not
required to collect initial and/or variation margin from counterparties
that are end users because of the lesser risk posed by these types of
counterparties to covered swap entities and financial stability with
respect to exposures below these thresholds. The Agencies note that
this threshold-based approach is consistent with current market
practices with respect to nonfinancial end users, in which derivatives
dealers view the
[[Page 27570]]
question of whether and to what extent to require margin from their
counterparties as a credit decision.\37\
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\37\ In the case of a nonfinancial end user with a strong credit
profile, under current market practices a derivatives dealer would
not require margin--in essence, it would extend unsecured credit to
the end user with respect to the underlying exposure. For
counterparties with a weak credit profile, a derivatives dealer
would likely make a different credit decision and require the
counterparty to post margin.
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Under the proposed rule, a covered swap entity would not be
required to collect initial or variation margin from a nonfinancial end
user counterparty as long as the covered swap entity's exposures to the
nonfinancial end user were below the credit exposure limits that the
covered swap entity has established under appropriate credit processes
and standards. The Agencies preliminarily believe that this approach is
consistent with the statutory requirement that the margin requirements
be risk-based, and is appropriate in light of the minimal risks that
nonfinancial end users pose to the safety and soundness of covered swap
entities and U.S. financial stability, particularly in cases of
relatively small margin exposures.
To the extent that a covered swap entity has adopted an initial
margin threshold amount or a variation margin threshold amount for a
nonfinancial end user counterparty but the cumulative required initial
margin or variation margin, respectively, for transactions with that
end user exceeds the initial margin threshold amount or variation
margin threshold amount, respectively, the covered swap entity would be
required to collect the excess amount. The Agencies preliminarily
believe that this approach is appropriate for the greater risk posed by
such counterparties where margin exposures are relatively large.
The Agencies request comment on the appropriateness of the proposed
rule's approach to a covered swap entity's transactions with
nonfinancial end users and whether there are alternative approaches
that would better achieve the objective of sections 731 and 764 of the
Dodd-Frank Act. In particular, the Agencies note that under other
provisions of the Dodd-Frank Act, nonfinancial end users that engage in
derivatives to hedge their commercial risks are exempt from the
requirement that all designated swaps and security-based swaps be
cleared by a derivatives clearing organization or clearing agency,
respectively. A major consequence of clearing a swap or security-based
swap is a requirement that each party to the transaction post initial
margin and variation margin to the derivatives clearing organization or
clearing agency, and the exemption from the clearing requirement
permits a nonfinancial end user taking advantage of the exemption to
avoid posting margin to such central CCPs. Although the Dodd-Frank Act
does not contain an express exemption from the margin requirement of
sections 731 and 764 of the Dodd-Frank Act that is similar to the
exemption for commercial end users from the mandatory clearing
requirements of sections 723 and 763 of the Dodd-Frank Act, the
Agencies note that the proposed rule's approach to margin requirements
for derivatives with nonfinancial end users could be viewed as
lessening the effectiveness of the clearing requirement exemption for
these nonfinancial end users as concerns margin.
In particular, the Agencies request comment on the following
questions:
Question 1(a). Does the nonfinancial end user exemption from the
mandatory clearing requirement suggest or require that swaps and
security-based swaps involving a nonfinancial end user should or must
be exempt from initial margin and variation margin requirements for
non-cleared swaps and security-based swaps? 1(b) If so, upon what
statutory basis would such an exemption rely? 1(c) Should that
determination vary based on whether a particular non-cleared swap or
non-cleared security-based swap is subject to the mandatory clearing
regime or not (i.e., whether the nonfinancial end user is actually
using the clearing exemption)?
Question 2. Should counterparties that are small financial
institutions using derivatives to hedge their risks be treated in the
same manner as nonfinancial end users for purposes of the margin
requirements?
3. Effective Date
Section ----.1 of the proposed rule provides that the proposed rule
shall be effective with respect to any swap or security-based swap to
which a covered swap entity becomes a party on or after the date that
is 180 days following publication of the final rule in the Federal
Register. The Agencies request comment regarding the appropriateness of
this 180-day period.
The Agencies expect that covered swap entities are likely to need
to make a number of changes to their current derivatives business
operations in order to achieve compliance with the proposed rules,
including potential changes to internal risk management and other
systems, trading documentation, collateral arrangements, and
operational technology and infrastructure. In addition, the Agencies
expect that covered swap entities that wish to calculate initial margin
using an initial margin model will need sufficient time to develop such
models and obtain regulatory approval for their use. The Agencies
request comment on the following implementation questions:
Question 3(a). What changes to internal risk management and other
systems, trading documentation, collateral arrangements, operational
technology and infrastructure or other aspects of a covered swap
entity's derivatives operations will likely need to be made as part of
the implementation of the proposed rule, and how much time will likely
be required to make such changes? 3(b) Is the proposed rule's 180-day
period sufficient?
Question 4(a). How much time will covered swap entities that wish
to calculate initial margin using an initial margin model need to
develop such models? 4(b) Is the proposed rule's 180-day period
sufficient?
B. Section ----.2: Definitions
Section ----.2 of the proposed rule provides definitions of the key
terms used in the proposed rule. In particular, Sec. ----.2 (i)
defines the four types of swap and security-based swap counterparties
that form the basis of the proposed rule's risk-based approach to
margin requirements and (ii) provides other key operative terms that
are needed to calculate the amount of initial and variation margin
required under other sections of the proposed rule.
1. Counterparty Definitions
The four types of counterparties defined in the proposed rule are
(in order of highest to lowest risk): (i) Swap entities; (ii) high-risk
financial end users; (iii) low-risk financial end users; and (iv)
nonfinancial end users.
a. ``Swap entities''
The proposed rule defines ``swap entity'' as any entity that is
required to register as a swap dealer, major swap participant,
security-based swap dealer or major security-based swap
participant.\38\ Non-cleared swaps transactions with counterparties
that are themselves swap entities pose risk to the financial system
because swap entities are large players in swap and security-based swap
markets and therefore have the potential to generate systemic risk
through their swap activities. Because of their interconnectedness and
large presence in the market, the failure of a single
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swap entity could cause severe stress throughout the financial
system.\39\ Accordingly, it is the preliminary view of the Agencies
that all non-cleared swap transactions with swap entities should
require margin.
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\38\ See proposed rule Sec. ----.2(y).
\39\ This is consistent with the Dodd-Frank Act's requirement
that the Agencies set margin and capital requirements appropriate
for the risk to the financial system associated with non-cleared
swaps held as a swap dealer or major swap participant. 7 U.S.C.
6(e)(3)(A); 15 U.S.C. 78o-8(e)(3)(A).
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b. ``Financial end users'' and ``nonfinancial end users''
Non-cleared swap transactions with end users (i.e., those
counterparties that are not themselves swap entities) can also pose
risks to covered swap entities. Among end users, financial end users
are considered more risky than nonfinancial end users because the
profitability and viability of financial end users is more tightly
linked to the health of the financial system than nonfinancial end
users. Because financial counterparties are more likely to default
during a period of financial stress, they pose greater systemic risk
and risk to the safety and soundness of the covered swap entity.
Section ----.2 of the proposed rule defines a financial end user as any
counterparty, other than a swap entity, that is: (i) A commodity pool
(as defined in section 1a(5) of the Commodity Exchange Act (7 U.S.C.
1a(5))); (ii) a private fund (as defined in section 202(a) of the
Investment Advisors Act of 1940 (15 U.S.C. 80-b-2(a))); (iii) an
employee benefit plan (as defined in paragraphs (3) and (32) of section
3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C.
1002)); (iv) a person predominantly engaged in activities that are in
the business of banking, or in activities that are financial in nature,
as defined in section 4(k) of the Bank Holding Company of 1956 (12
U.S.C. 1843(k)); \40\ (v) a person that would be a commodity pool or
private fund if it were organized under the laws of the United States
or any State thereof; and (vi) any other person that one of the
Agencies may designate with respect to covered swap entities for which
it is the prudential regulator.\41\
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\40\ Although the proposed rule does not define a person
predominantly engaged in activities that are in the business of
banking, or in activities that are financial in nature, as defined
in section 4(k) of the Bank Holding Company of 1956 (12 U.S.C.
1843(k)), the Agencies note that the Board has recently issued a
proposed rule for comment defining a similar term for purposes of
Title I of the Dodd-Frank Act. See 76 FR 7,731 (Feb. 11, 2011)
(proposed rule). The Agencies request comment on whether they should
apply the same methodology as is adopted for purposes of Title I of
the Dodd-Frank Act for purposes of this clause of the proposed
rule's definition of a financial end user, or whether an alternative
methodology is appropriate.
\41\ See proposed rule Sec. ----.2(h). This definition of
``financial end user'' is based upon, and substantially similar to,
the definition of a ``financial entity'' that is ineligible to use
the end user exemption from the mandatory clearing requirements of
sections 723 and 763 of the Dodd-Frank Act. See 7 U.S.C. 2(h)(7); 15
U.S.C. 78c-3(g).
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The proposed definition of a counterparty that is a financial end
user also includes any government of any foreign country or any
political subdivision, agency, or instrumentality thereof.\42\ The
Agencies note that these types of sovereign counterparties do not fit
easily into the proposed rule's categories of financial and
nonfinancial end users. In comparing the characteristics of sovereign
counterparties with those of fin
