Margin and Capital Requirements for Covered Swap Entities; Final Rule, 50805-50813 [2018-22021]
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50805
Rules and Regulations
Federal Register
Vol. 83, No. 196
Wednesday, October 10, 2018
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 45
[Docket No. OCC–2018–0003]
RIN 1557–AE29
FEDERAL RESERVE SYSTEM
12 CFR Part 237
[Docket No. R–1596]
RIN 7100–AE96
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 349
RIN 3064–AE70
FARM CREDIT ADMINISTRATION
12 CFR Part 624
RIN 3052–AD28
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1221
RIN 2590–AA92
Margin and Capital Requirements for
Covered Swap Entities; Final Rule
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: Final rule.
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AGENCY:
The Board, OCC, FDIC, FCA,
and FHFA (each an Agency and,
collectively, the Agencies) are adopting
amendments to their rules establishing
minimum margin requirements for
SUMMARY:
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registered swap dealers, major swap
participants, security-based swap
dealers, and major security-based swap
participants (Swap Margin Rule). These
amendments conform the Swap Margin
Rule to rules recently adopted by the
Board, the OCC, and the FDIC that
impose restrictions on certain qualified
financial contracts, including certain
non-cleared swaps subject to the Swap
Margin Rule (the QFC Rules).
Specifically, the final amendments to
the Swap Margin Rule conform the
definition of ‘‘Eligible Master Netting
Agreement’’ to the definition of
‘‘Qualifying Master Netting Agreement’’
in the QFC Rules. The amendment to
the Swap Margin Rule ensures that
netting agreements of firms subject to
the Swap Margin Rule are not excluded
from the definition of ‘‘Eligible Master
Netting Agreement’’ based solely on
their compliance with the QFC Rules.
The amendment also ensures that
margin amounts required for noncleared swaps covered by agreements
that otherwise constitute Eligible Master
Netting Agreements can continue to be
calculated on a net portfolio basis,
notwithstanding changes to those
agreements that will be made in some
instances by firms revising their netting
agreements to achieve compliance with
the QFC Rules. In addition, for any noncleared swaps that were ‘‘entered into’’
before the compliance dates of the Swap
Margin Rules—and which are
accordingly grandfathered from
application of the rule’s margin
requirements—the amendments state
that any changes to netting agreements
that are required to conform to the QFC
Rules will not render grandfathered
swaps covered by that netting agreement
as ‘‘new’’ swaps subject to the Swap
Margin Rule.
DATES: The final rule is effective
November 9, 2018.
FOR FURTHER INFORMATION CONTACT:
OCC: Allison Hester-Haddad,
Counsel, Chief Counsel’s Office, (202)
649–5490, for persons who are deaf or
hearing impaired, TTY (202) 649–5597,
Office of the Comptroller of the
Currency, 400 7th Street SW,
Washington, DC 20219.
Board: Peter Clifford, Manager, 202–
785–6057, or Christopher Powell,
Supervisory Financial Analyst, 202–
452–3442, or Kelly Tomera, Financial
Analyst, (202) 912–7861, Division of
Supervision and Regulation; Patricia
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Yeh, Senior Counsel, (202) 452–3089, or
Jason Shafer, Senior Attorney, (202)
728–5811, Legal Division, Board of
Governors of the Federal Reserve
System, 20th and C Streets NW,
Washington, DC 20551.
FDIC: Irina Leonova, Senior Policy
Analyst, Capital Markets Branch,
Division of Risk Management
Supervision, (202) 898–3843, ileonova@
fdic.gov; Phillip E. Sloan, Counsel, Legal
Division, psloan@fdic.gov, (703) 562–
6137, Federal Deposit Insurance
Corporation, 550 17th Street NW,
Washington, DC 20429.
FCA: J.C. Floyd, Associate Director,
Finance & Capital Markets Team,
Timothy T. Nerdahl, Senior Policy
Analyst, Jeremy R. Edelstein, Senior
Policy Analyst, Office of Regulatory
Policy, (703) 883–4414, TTY (703) 883–
4056, or Richard A. Katz, Senior
Counsel, Office of General Counsel,
(703) 883–4020, TTY (703) 883–4056,
Farm Credit Administration, 1501 Farm
Credit Drive, McLean, VA 22102–5090.
FHFA: Ron Sugarman, Principal
Policy Analyst, Office of Policy Analysis
and Research, (202) 649–3208,
Ron.Sugarman@fhfa.gov, or James
Jordan, Assistant General Counsel,
Office of General Counsel, (202) 649–
3075, James.Jordan@fhfa.gov, Federal
Housing Finance Agency, Constitution
Center, 400 7th St. SW, Washington, DC
20219. The telephone number for the
Telecommunications Device for the
Hearing Impaired is (800) 877–8339.
I. Background
A. The Swap Margin Rule
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (DoddFrank 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 Dodd-Frank Act generally
characterizes as ‘‘swaps’’ (swap is
defined in section 721 of the DoddFrank Act to include, among other
things, an interest rate swap, commodity
swap, equity swap, and credit default
swap) and ‘‘security-based swaps’’
(security-based swap is defined in
section 761 of the Dodd-Frank Act to
include a swap based on a single
security or loan or on a narrow-based
1 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, 124 Stat. 1376
(2010).
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security index).2 For the remainder of
this preamble, the term ‘‘swaps’’ refers
to swaps and security-based swaps
unless the context requires otherwise.
Sections 731 and 764 of the DoddFrank Act required the Office of the
Comptroller of the Currency (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) (collectively, the Agencies) to
adopt rules jointly that establish capital
and margin requirements for swap
entities 3 that are prudentially regulated
by one of the Agencies (covered swap
entities),4 to offset the greater risk to the
2 See
7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68).
7 U.S.C. 6s; 15 U.S.C. 78o–10. Sections 731
and 764 of the Dodd-Frank Act added a new section
4s to the Commodity Exchange Act of 1936, as
amended, and a new section, section 15F, to the
Securities Exchange Act of 1934, as amended,
respectively, which require registration with the
Commodity Futures Trading Commission (CFTC) of
swap dealers and major swap participants and the
U.S. Securities and Exchange Commission (SEC) of
security-based swap dealers and major securitybased swap participants (each a swap entity and,
collectively, swap entities). The CFTC is vested
with primary responsibility for the oversight of the
swaps market under Title VII of the Dodd-Frank
Act. The SEC is vested with primary responsibility
for the oversight of the security-based swaps market
under Title VII of the Dodd-Frank Act. Section
712(d)(1) of the Dodd-Frank Act requires the CFTC
and SEC to issue joint rules further defining the
terms swap, security-based swap, swap dealer,
major swap participant, security-based swap dealer,
and major security-based swap participant. The
CFTC and SEC issued final joint rulemakings with
respect to these definitions in May 2012 and August
2012, respectively. See 77 FR 30596 (May 23, 2012);
77 FR 39626 (July 5, 2012) (correction of footnote
in the Supplementary Information accompanying
the rule); and 77 FR 48207 (August 13, 2012). 17
CFR part 1; 17 CFR parts 230, 240 and 241.
4 Section 1a(39) of the Commodity Exchange Act
of 1936, as amended, defines the term ‘‘prudential
regulator’’ for purposes of the 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 of 1913, as amended, or having
an agreement with the Board under section 25 of
the Federal Reserve Act, or (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, as amended, 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 the 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 securitybased swap participant, respectively). The OCC is
the prudential regulator for any swap entity that is
(i) a national bank, (ii) a federally chartered branch
or agency of a foreign bank, or (iii) a Federal savings
association. The FDIC is the prudential regulator for
any swap entity that is (i) a State-chartered bank
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3 See
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covered swap entity and the financial
system arising from swaps that are not
cleared by a registered derivatives
clearing organization or a registered
clearing agency (non-cleared swaps).5
On November 30, 2015, the Agencies
published a joint final rule (Swap
Margin Rule) to establish minimum
margin and capital requirements for
covered swap entities.6
In the Swap Margin Rule, the
Agencies adopted a risk-based approach
for initial and variation margin
requirements for covered swap entities.7
To implement the risk-based approach,
the Agencies established requirements
for a covered swap entity to collect and
post initial margin for non-cleared
swaps with a counterparty that is either:
(1) A financial end user with material
swaps exposure,8 or (2) a swap entity.9
A covered swap entity must collect and
post variation margin for non-cleared
swaps with all swap entities and
financial end user counterparties, even
if such financial end users do not have
material swaps exposure.10 Other
counterparties, including nonfinancial
end users, are not subject to specific,
numerical minimum requirements for
initial and variation margin.11
The effective date for the Swap
Margin Rule was April 1, 2016, but the
Agencies established a phase-in
compliance schedule for the initial
margin and variation margin
requirements.12 On or after March 1,
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. The 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, as
amended (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)(3)(A); 15 U.S.C. 78o–
10(e)(3)(A).
6 80 FR 74840 (November 30, 2015).
7 80 FR 74843.
8 ‘‘Material swaps exposure’’ for an entity means
that the entity and its affiliates have an average
daily aggregate notional amount of non-cleared
swaps, non-cleared security-based swaps, foreign
exchange forwards, and foreign exchange swaps
with all counterparties for June, July, and August
of the previous calendar year that exceeds $8
billion, where such amount is calculated only for
business days. See § ll.2 of the Swap Margin
Rule.
9 See §§ ll.3 and ll.4 of the Swap Margin
Rule.
10 Id.
11 Id.
12 The applicable compliance date for a covered
swap entity is based on the average daily aggregate
notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps of
the covered swap entity and its counterparty
(accounting for their respective affiliates) for each
business day in March, April and May of that year.
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2017, all covered swap entities were
required to comply with the variation
margin requirements for non-cleared
swaps with other swap entities and
financial end user counterparties. By
September 1, 2020, all covered swap
entities will be required to comply with
the initial margin requirements for noncleared swaps with all financial end
users with a material swaps exposure
and all swap entities.
The Swap Margin Rule’s requirements
apply only to a non-cleared swap
entered into on or after the applicable
compliance date (covered swap); a noncleared swap entered into prior to a
covered swap entity’s applicable
compliance date (legacy swap) is
generally not subject to the margin
requirements in the Swap Margin
Rule.13 However, the compliance date
provisions of the Swap Margin Rule
contain no safe harbor from the rule’s
application to a legacy swap that is later
amended or novated on or after the
applicable compliance date.14
Whether a non-cleared swap is
deemed to be a legacy swap or a covered
swap also affects the treatment of a
covered swap entity’s netting portfolios.
The Swap Margin Rule permits a
covered swap entity to (1) calculate
initial margin requirements for covered
swaps under an eligible master netting
agreement (EMNA) with a counterparty
on a portfolio basis in certain
circumstances, if it does so using an
initial margin model; and (2) calculate
variation margin on an aggregate net
basis under an EMNA.15 In addition, the
Swap Margin Rule permits swap
counterparties to identify one or more
separate netting portfolios under an
EMNA, including netting sets of covered
swaps and netting sets of non-cleared
swaps that are not subject to margin
requirements.16 Specifically, a netting
portfolio that contains only legacy
swaps is not subject to the margin
requirements set out in the Swap
Margin Rule.17 However, if a netting
The applicable compliance dates for initial margin
requirements, and the corresponding average daily
notional thresholds, are: September 1, 2016, $3
trillion; September 1, 2017, $2.25 trillion;
September 1, 2018, $1.5 trillion; September 1, 2019,
$0.75 trillion; and September 1, 2020, all swap
entities and counterparties. See § ll.1(e) of the
Swap Margin Rule.
13 See § ll.1(e) of the Swap Margin Rule.
14 See 80 FR 74850–51 (discussing commenters’
requests for addition of three safe-harbors to the
Swap Margin Rule and the Agencies’ rationale for
rejecting those requests).
15 See §§ l.2 and l.5 of the Swap Margin Rule.
16 Typically, this is accomplished by using a
separate Credit Support Annex for each netting set,
subject to the terms of a single master netting
agreement.
17 See §§ ll.2 and ll.5 of the Swap Margin
Rule.
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portfolio contains any covered swaps,
the entire netting portfolio is subject to
the margin requirements of the Swap
Margin Rule.18
B. The QFC Rules
As part of the broader regulatory
reform effort following the financial
crisis to increase the resolvability and
resiliency of U.S. global systemically
important banking institutions 19 (U.S.
GSIBs) and the U.S. operations of
foreign GSIBs (together, GSIBs),20 the
Board, the OCC, and the FDIC adopted
final rules that establish restrictions on
and requirements for certain noncleared swaps and other financial
contracts (collectively, Covered QFCs)
of GSIBs and their subsidiaries (the QFC
Rules).21
Subject to certain exemptions, the
QFC Rules require U.S. GSIBs, together
with their subsidiaries, and the U.S.
operations of foreign GSIBs (each a
Covered QFC Entity and, collectively,
Covered QFC Entities) to conform
Covered QFCs to the requirements of the
rules.22 The QFC Rules generally
require the Covered QFCs of Covered
QFC Entities to contain contractual
provisions that opt into the ‘‘temporary
stay-and-transfer treatment’’ of the
Federal Deposit Insurance Act (FDI
Act) 23 and title II of the Dodd-Frank
Act, thereby reducing the risk that the
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18 Id.
19 See 12 CFR 217.402 (defining global
systemically important banking institution). The
eight firms currently identified as U.S. GSIBs are
Bank of America Corporation, The Bank of New
York Mellon Corporation, Citigroup Inc., Goldman
Sachs Group, Inc., JP Morgan Chase & Co., Morgan
Stanley Inc., State Street Corporation, and Wells
Fargo & Company.
20 The U.S. operations of 21 foreign GSIBs are
currently subject to the Board’s QFC Rule.
21 The QFC Rules are codified as follows: 12 CFR
part 47 (OCC’s QFC Rule); 12 CFR part 252, subpart
I (Board’s QFC Rule); 12 CFR part 382 (FDIC’s QFC
Rule). The QFC Rules include a phased-in
conformance period for a Covered QFC Entity that
varies depending upon the counterparty type of the
Covered QFC Entity. The first conformance date is
January 1, 2019, and applies to Covered QFCs with
GSIBs. The QFC Rules provide Covered QFC
Entities an additional six months or one year to
conform its Covered QFCs with other types of
counterparties.
The Board’s QFC Rule applies to U.S. GSIBs and
their subsidiaries, as well as other U.S. operations
of foreign GSIBs, with the exception of banks
regulated by the FDIC or OCC, Federal branches, or
Federal agencies. The FDIC’s QFC Rule applies to
GSIB subsidiaries that are state savings associations
and state-chartered banks that are not members of
the Federal Reserve System. The OCC’s QFC Rule
applies to national bank subsidiaries and Federal
savings association subsidiaries of GSIBs, and
Federal branches and agencies of foreign GSIBs.
22 To the extent a U.S. GSIB, any of its
subsidiaries, or the U.S. operations of a foreign
GSIB include a swap entity for which one of the
Agencies is a prudential regulator, a Covered QFC
Entity may be a covered swap entity.
23 12 U.S.C. 1811 et seq.
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stay-and-transfer treatment would be
challenged by a Covered QFC Entity’s
counterparty or a court in a foreign
jurisdiction.24 The temporary stay-andtransfer treatment is part of the special
resolution framework for failed financial
firms created by the FDI Act and title II
of the Dodd-Frank Act. The stay-andtransfer treatment provides that the
rights of a failed insured depository
institution’s or financial company’s
counterparties to terminate, liquidate, or
net certain qualified financial contracts
on account of the appointment of the
FDIC as receiver for the entity (or the
insolvency or financial condition of the
entity for which the FDIC has been
appointed receiver) are temporarily
stayed when the entity enters a
resolution proceeding to allow for the
transfer of the failed firm’s Covered
QFCs to a solvent party.25 The QFC
Rules also generally prohibit Covered
QFCs from allowing the exercise of
default rights related, directly or
indirectly, to the entry into resolution of
an affiliate of the Covered QFC Entity
(cross-default rights).26
C. The Definitions of Qualifying Master
Netting Agreement
As part of the QFC Rules, the Federal
banking agencies amended the
definition of qualifying master netting
agreement (QMNA) in their capital and
liquidity rules to prevent the QFC Rules
from having disruptive effects on the
treatment of netting sets of Boardregulated firms, OCC-regulated firms,
and FDIC-regulated firms.27 The FCA
plans to propose several technical and
clarifying amendments to its capital
regulations, including a revision to the
definition of QMNA so it continues to
be identical to both the definition in the
regulations of the Federal banking
agencies’ regulatory capital and
liquidity rules, and the amended
definition of EMNA in this
rulemaking.28
The amendments to the Federal
banking agencies’ capital and liquidity
rules were necessary because the
24 12 CFR part 47; 12 CFR part 252, subpart I; 12
CFR part 382.
25 12 U.S.C. 1821(e)(10)(B), 5390(c)(10)(B). Title II
of the Dodd-Frank Act also provides the FDIC with
the power to enforce Covered QFCs (and other
contracts) of subsidiaries and affiliates of the
financial company for which the FDIC has been
appointed receiver. 12 U.S.C. 5390(c)(16); 12 CFR
380.12.
26 See supra note 24.
27 82 FR 42882, 42915; 82 FR 50228, 50258; 82
FR 56630, 56659.
28 See FCA’s Fall 2018 Unified Agenda
(www.RegInfo.gov). The FCA’s Tier 1/Tier 2 Capital
Framework’s existing definition of QMNA is
identical to the previous definition of QMNA used
in the Federal banking agencies’ capital and
liquidity rules.
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50807
previous QMNA definition did not
recognize some of the new close-out
restrictions on Covered QFCs imposed
by the QFC Rules.29 Pursuant to the
previous definition of QMNA, a banking
organization’s rights under a QMNA
generally could not be stayed or avoided
in the event of its counterparty’s default.
However, the definition of QMNA
permitted certain exceptions to this
general prohibition to accommodate
certain restrictions on the exercise of
default rights that are important to the
prudent resolution of a banking
organization, including a limited stay
under a special resolution regime, such
as title II of the Dodd-Frank Act, the FDI
Act, and comparable foreign resolution
regimes. The previous QMNA definition
did not explicitly recognize all the
restrictions on the exercise of crossdefault rights.30 Therefore, a master
netting agreement that complies with
the QFC Rules by limiting the rights of
a Covered QFC Entity’s counterparty to
close out against the Covered QFC
Entity would not meet the previous
QMNA definition. A failure to meet the
definition of QMNA would result in a
banking organization subject to one of
the Federal banking agencies’ capital
and liquidity rules losing the ability to
net offsetting exposures under its
applicable capital and liquidity
requirements when its counterparty is a
Covered QFC Entity. If netting were not
permitted, the banking organization
would be required to calculate its
capital and liquidity requirements
relating to certain Covered QFCs on a
gross basis rather than on a net basis,
which would typically result in higher
capital and liquidity requirements. The
Federal banking agencies do not believe
that such an outcome would accurately
reflect the risks posed by the affected
Covered QFCs.
The amendments to the QMNA
definition maintain the netting
treatment for these contracts under the
Federal banking agencies’ capital and
liquidity rules. The amendments permit
a master netting agreement to meet the
definition of QMNA even if it limits the
banking organization’s right to
accelerate, terminate, and close-out on a
net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default of a counterparty that is a
Covered QFC Entity to the extent
necessary for the Covered QFC Entity to
comply fully with the QFC Rules. The
amended definition of QMNA continues
29 12 CFR 3.2 (2017); 12 CFR 50.3 (2017); 12 CFR
217.2 (2017); 12 CFR 249.3 (2017); 12 CFR 324.2;
12 CFR 329.3.
30 See, e.g., 12 CFR 252.84(b)(1).
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to recognize that default rights may be
stayed if the defaulting counterparty is
in resolution under the Dodd-Frank Act,
the FDI Act, a substantially similar law
applicable to government-sponsored
enterprises, or a substantially similar
foreign law, or where the agreement is
subject by its terms to, or incorporates,
any of those laws. By recognizing these
required restrictions on the ability of a
banking organization to exercise closeout rights when its counterparty is a
Covered QFC Entity, the amended
definition allows a master netting
agreement that includes such
restrictions to continue to meet the
definition of QMNA under the Federal
banking agencies’ capital and liquidity
rules.
II. Discussion of the Final Rule
On February 21, 2018, the Agencies
published a request for comment on a
proposed rule to amend the definition of
EMNA in the Swap Margin Rule and to
clarify the impact of the amendment on
legacy swaps.31 The Agencies are
adopting the proposed rule as final
without change. The final amendment
clarifies that a master netting agreement
meets the definition of EMNA under the
Swap Margin Rule when the agreement
limits the right to accelerate, terminate,
and close-out on a net basis all
transactions under the agreement and to
liquidate or set-off collateral promptly
upon an event of default of the
counterparty to the extent necessary for
the counterparty to comply with the
requirements of the QFC Rules. This
final rule text is identical to the
corresponding text used in the amended
definition of QMNA in the Federal
banking agencies’ capital and liquidity
rules.
In addition, the Agencies are adopting
as proposed the amendment to the Swap
Margin Rule that provides that
amendments made to an EMNA that a
firm enters into solely to comply with
the QFC Rules will not be taken into
account for purposes of determining the
date on which swaps subject to that
agreement were entered into. This
amendment establishes that a legacy
swap will not be deemed a covered
swap under the Swap Margin Rule if it
is amended solely to comply with one
of the QFC Rules. For example, to
comply with the restrictions on Covered
QFCs, a Covered QFC Entity may
directly amend the contractual
provisions of its Covered QFCs or,
alternatively, cause its Covered QFCs to
be subject to the International Swaps
and Derivatives Association 2015
Resolution Stay Protocol (Universal
31 83
FR 7413 (February 21, 2018).
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Protocol) or the U.S. Protocol, as
defined in the QFC Rules. The Swap
Margin Rule amendment will provide
certainty to a covered swap entity and
its counterparties about the treatment of
legacy swaps and any applicable netting
arrangements in light of the QFC Rules.
The Agencies received five
substantive comments on the proposal.
All five substantive comments generally
supported the proposed amendment
clarifying the treatment of legacy swaps,
while two of the comments also
specifically expressed support for the
proposed amendment to the definition
of EMNA. Two comments raised issues
unrelated to the proposal.32
As described below, three of the
comments also recommended
alternative approaches to clarify the
treatment of legacy swaps. One
comment stated that it supported the
proposed amendment on the treatment
of a legacy swap after it is amended to
comply with a QFC Rule because such
an amendment does not change the
economic nature of the original
transaction and therefore would not
require such legacy swap to become
subject to margin requirements.
The three comments that
recommended alternatives to the
proposed amendment on the treatment
of legacy swaps urged the Agencies to
issue guidance that clarifies certain
‘‘non-material’’ amendments will not
result in a legacy swap becoming subject
to margin requirements rather than
adopting the proposed amendment.
Specifically, a comment requested that
the Agencies, in consultation with
global authorities, issue guidance that
provides clarity on the circumstances
under which a legacy swap is
considered a new swap. This comment
also recommended that such guidance
should make clear that non-material
amendments (i.e., administrative
amendments, contract-intrinsic events,
risk-reducing amendments, and
amendments required by regulation or
legislation) would not cause a legacy
swap to be treated as a new swap
subject to the Swap Margin Rule. This
same commenter also recommended
that in the near term the Agencies
should clarify the effect of amendments
to legacy swaps related to: (i) Ring
fencing of derivative transactions into
non-bank entities; (ii) interest rate
benchmark reform, such as the
32 A comment urging a change to the inter-affiliate
provisions of the Swap Margin Rule and a comment
requesting that the Agencies clarify that a legacy
swap that is amended or novated not be subject to
margin requirements if it is entered into by special
purpose vehicles for purposes of a certain
securitization transaction are outside the scope of
the proposal.
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movement away from LIBOR; and (iii)
novations or other amendments
necessitated by the United Kingdom
leaving the European Union. Another
comment recommended that, instead of
adopting the proposal as a final rule, the
Agencies issue principles-based
guidance that clarifies that certain
amendments to legacy swaps, including
risk-reducing amendments and
amendments made to satisfy other
regulatory requirements, do not require
such legacy swap to become a covered
swap, and therefore, subject to margin
requirements. This comment requested
that, if the Agencies decide to adopt the
proposed amendments to the Swap
Margin Rule, the amendment should be
described as a ‘‘safe harbor’’ that is
intended to provide clarity to the
industry and, thus, should not imply
that other immaterial amendments
would cause a legacy swap to become
subject to margin requirements.
The Agencies are adopting the
amendment to the Swap Margin Rule as
proposed. Under the final rule, revisions
to a master netting agreement that
comply with the QFC Rules will not
cause the agreement to fall out of the
Swap Margin Rule’s EMNA definition.
The Agencies’ approach provides clarity
and certainty to swap market
participants as to the effect of changes
required by the QFC Rules. Further
changes requested by the commenters
are not within the scope of the
Agencies’ proposal, so the Agencies are
not making revisions to address those
comments. As explained in the
preamble to the Swap Margin Rule, the
Agencies declined to include language
requested by commenters in the rule
that would classify certain new swap
transactions as being ‘‘entered into prior
to the compliance date.’’ The Agencies
noted that doing so could create
significant incentives to engage in
amendments and novations for the
purpose of evading the margin
requirement. The Agencies further
explained that limiting the extension to
‘‘material’’ amendments or ‘‘legitimate’’
novations would be difficult to effect
within the final rule because the
specific motivation for an amendment
or novation is generally not observable,
and such classifications would make the
process of identifying those swaps to
which the rule applies overly complex
and non-transparent.33
As the Agencies continue to assess
industry developments such as interest
rate benchmark reform, the Agencies
will take into account any associated
implementation ramifications
33 See
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surrounding the treatment of legacy
swaps under the Swap Margin Rule.
III. Regulatory Analysis
A. Paperwork Reduction Act
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OCC: In accordance with 44 U.S.C.
3512, the OCC may not conduct or
sponsor, and a respondent is not
required to respond to, an information
collection unless it displays a currently
valid OMB control number. The OCC
reviewed the final rule and concluded
that it contains no requirements subject
to the PRA.
Board: In accordance with section
3512 of the Paperwork Reduction Act of
1995 (PRA) (44 U.S.C. 3501–3521), the
Board may not conduct or sponsor, and
a 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 Board reviewed the final
rule under the authority delegated to it
by OMB. The rule contained no
requirements subject to the PRA, and
the Board received no comments on its
PRA analysis in the proposed rule. The
final rule adopts the proposed rule as
proposed, and contains no requirements
subject to the PRA.
FDIC: In accordance with the
requirements of the PRA, the FDIC may
not conduct or sponsor, and a
respondent is not required to respond
to, an information collection unless it
displays a currently valid OMB control
number. The FDIC reviewed the final
rule and concludes that it contains no
requirements subject to the PRA.
Therefore, no submission will be made
to OMB for review.
FCA: The FCA has determined that
the final rule does not involve a
collection of information pursuant to
the Paperwork Reduction Act for Farm
Credit System institutions because Farm
Credit System institutions are Federally
chartered instrumentalities of the
United States and instrumentalities of
the United States are specifically
excepted from the definition of
‘‘collection of information’’ contained in
44 U.S.C. 3502(3).
FHFA: The final rule amendments do
not contain any collections of
information pursuant to the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501
et seq.). Therefore, FHFA has not
submitted any information to the Office
of Management and Budget for review.
B. Final Regulatory Flexibility Analysis
OCC: In general, the Regulatory
Flexibility Act (RFA) (5 U.S.C. 601 et
seq.) requires that in connection with a
rulemaking, an agency prepare and
make available for public comment a
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regulatory flexibility analysis that
describes the impact of the rule on small
entities. Under section 605(b) of the
RFA, this analysis is not required if an
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small entities
and publishes its certification and a
brief explanatory statement in the
Federal Register along with its rule.
The OCC currently supervises
approximately 886 small entities.34
Among these 886 small entities, 61
might be affected by the final rule if the
small entities are a party to a QFC that
falls within the scope of the QFC Rules
and must be amended to comply with
those rules. Because the OCC assumes
that the standards set forth in the final
rule will be implemented by OCCsupervised small entities before any of
them are required to comply with the
QFC Rules, the OCC believes that the
final rule will not result in savings—or
more than de minimis costs—for OCCsupervised entities. Therefore, the OCC
certifies that the final rule will not have
a significant economic impact on a
substantial number of small OCCregulated entities.
Board: The Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (the ‘‘RFA’’),
generally requires that an agency
prepare and make available for public
comment an initial regulatory flexibility
analysis in connection with a notice of
proposed rulemaking.35 The Board
solicited public comment on this rule in
a notice of proposed rulemaking 36 and
has since considered the potential
impact of this final rule on small
entities in accordance with section 604
of the RFA. Based on the Board’s
analysis, and for the reasons stated
below, the Board certifies that the final
rule will not have a significant
economic impact on a substantial
number of small entities.
1. Statement of the need for, and
objectives of, the final rule. As described
above, the final rule amends the
definition of Eligible Master Netting
Agreement in the Swap Margin Rule so
that it remains harmonized with the
34 The OCC bases its estimate of the number of
small entities on the SBA’s size thresholds for
commercial banks and savings institutions, and
trust companies, which are $550 million and $38.5
million, respectively. Consistent with the General
Principles of Affiliation 13 CFR 121.103(a), the OCC
counts the assets of affiliated financial institutions
when determining if we should classify an OCCsupervised institution as a small entity. The OCC
uses December 31, 2017, to determine size because
a ‘‘financial institution’s assets are determined by
averaging the assets reported on its four quarterly
financial statements for the preceding year.’’ See
footnote 8 of the U.S. Small Business
Administration’s Table of Size Standards.
35 See 5 U.S.C. 603(a).
36 See 83 FR 7413 (February 21, 2018).
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50809
amended definition of ‘‘Qualifying
Master Netting Agreement’’ in the
Federal banking agencies’ regulatory
capital and liquidity rules. The final
rule also makes clear that a legacy swap
(i.e., a non-cleared swap entered into
before the applicable compliance date)
that is not subject to the requirements of
the Swap Margin Rule will not be
deemed a covered swap under the Swap
Margin Rule if it is amended solely to
conform to the QFC Rules.
2. Summary of the significant issues
raised by public comment on the
Board’s initial analysis, the Board’s
assessment of such issues, and a
statement of any changes made as a
result of such comments. Commenters
did not raise any issues in response to
the initial RFA analysis. The Chief
Counsel for the Advocacy of the Small
Business Administration (‘‘SBA’’) did
not file any comments in response to the
proposed rule.
3. Description and estimate of number
of small entities to which the final rule
will apply. This final rule applies to
financial institutions that are covered
swap entities (CSEs) that are subject to
the requirements of the Swap Margin
Rule. Under SBA regulations, the
finance and insurance sector includes
commercial banking, savings
institutions, credit unions, other
depository credit intermediation and
credit card issuing entities (financial
institutions). With respect to financial
institutions that are CSEs under the
Swap Margin Rule, a financial
institution generally is considered small
if it has assets of $550 million or less.37
CSEs would be considered financial
institutions for purposes of the RFA in
accordance with SBA regulations. The
Board does not expect that any CSE is
likely to be a small financial institution,
because a small financial institution is
unlikely to engage in the level of swap
activity that would require it to register
as a swap dealer or a major swap
participant with the CFTC or a securitybased swap dealer or security-based
major swap participant with the SEC.38
None of the current Board-regulated
CSEs are small entities.
37 See 13 CFR 121.201 (effective December 2,
2014); see also 13 CFR 121.103(a)(6) (noting factors
that the SBA considers in determining whether an
entity qualifies as a small business, including
receipts, employees, and other measures of its
domestic and foreign affiliates).
38 The CFTC has published a list of provisionally
registered swap dealers as of October 17, 2017 that
does not include any small financial institutions.
See https://www.cftc.gov/LawRegulation/
DoddFrankAct/registerswapdealer. The SEC has not
yet imposed a registration requirement on entities
that meet the definition of security-based swap
dealer or major security-based swap participant.
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4. Description of the projected
reporting, recordkeeping and other
compliance requirements of the final
rule. The Board does not believe the
final rule will result in any new
reporting, recordkeeping or other
compliance requirements.
5. Significant alternatives to the final
rule. In light of the foregoing, the Board
does not believe that this final rule
would have a significant economic
impact on a substantial number of small
entities and therefore there are no
significant alternatives to the final rule
that would reduce the impact on small
entities.
FDIC: The Regulatory Flexibility Act
(RFA), 5 U.S.C. 601 et seq., requires an
agency to provide a final regulatory
flexibility analysis with a final rule,
unless the agency certifies that the rule
will not have a significant economic
impact on a substantial number of small
entities (defined by the Small Business
Administration for purposes of the RFA
to include banking entities with total
assets of $550 million or less).
According to data from recent
Consolidated Reports of Income and
Condition (CALL Report),39 the FDIC
supervised 3,603 institutions. Of those,
2,885 are considered ‘‘small,’’ according
to the terms of the Regulatory Flexibility
Act. This final rule directly applies to
covered swap entities (which includes
persons registered with the CFTC as
swap dealers or major swap participants
pursuant to the Commodity Exchange
Act of 1936 and persons registered with
the SEC as security-based swap dealers
and major security-based swap
participants under the Securities
Exchange Act of 1934) that are subject
to the requirements of the Swap Margin
Rule. The FDIC has identified 101 swap
dealers and major swap participants
that, as of May 17, 2018, have registered
as swap entities.40 None of these
institutions are supervised by the FDIC.
39 FDIC
CALL Reports, March 31, 2018.
the SEC had adopted a regulation that
would require registration of security-based swap
dealers and major security-based swap participants,
as of June 18, 2018, there was no date established
as the compliance date and no SEC-published list
of any such entities that so registered. Accordingly,
no security-based swap dealers and major securitybased swap participants have been identified as
swap entities by the FDIC. In identifying the 101
institutions referred to in the text, the FDIC used
the list of swap dealers set forth, on June 18, 2018
(providing data as of May 17, 2018) at https://
www.cftc.gov/LawRegulation/DoddFrankAct/
registerswapdealer.html. Major swap participants,
among others, are required to apply for registration
through a filing with the National Futures
Association. Accordingly, the FDIC reviewed the
National Futures Association https://
www.nfa.futures.org/members/sd/ to
determine whether there were registered major
swap participants. As of June 18, 2018, there were
no Major Swaps Participants listed on this link.
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As discussed previously, the final rule
clarifies that a master netting agreement
meets the definition of EMNA under the
Swap Margin Rule when the agreement
limits the right to accelerate, terminate,
and close-out on a net basis all
transactions under the agreement and to
liquidate or set-off collateral promptly
upon an event of default of the
counterparty to the extent necessary for
the counterparty to comply with the
requirements of the QFC Rules. Without
adoption of the final rule, covered
entities would be required to calculate
capital and liquidity requirements
relating to certain Covered QFCs on a
gross basis rather than on a net basis,
which would typically result in higher
capital and liquidity requirements.
Therefore, this rule is expected to
benefit any potential covered swap
entity.
The Swap Margin Rule implements
sections 731 and 764 of the Dodd-Frank
Act, as amended by the Terrorism Risk
Insurance Program Reauthorization Act
of 2015 (‘‘TRIPRA’’). TRIPRA excludes
non-cleared swaps entered into for
hedging purposes by a financial
institution with total assets of $10
billion or less from the requirements of
the Swap Margin Rule. Given this
exclusion, a non-cleared swap between
a covered swap entity and a small FDICsupervised entity that is used to hedge
a commercial risk of the small entity
will not be subject to the Swap Margin
Rule. The FDIC believes that it is
unlikely that any small entity it
supervises will engage in non-cleared
swaps for purposes other than hedging.
Given that no FDIC-supervised small
entities are covered swap entities, that
the potential effects are expected to be
beneficial to covered swap entities, and
that it is unlikely that FDIC-supervised
small entities enter into non-cleared
swaps for purposes other than hedging,
this final rule is not expected to have a
significant economic impact on a
substantial number of small entities
supervised by the FDIC. For these
reasons, the FDIC certifies that the final
rule will not have a significant
economic impact on a substantial
number of small entities, within the
meaning of those terms as used in the
RFA. Accordingly, a regulatory
flexibility analysis is not required.
FCA: Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), FCA hereby certifies that the
final 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
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would qualify them as small entities;
nor does the Federal Agricultural
Mortgage Corporation meet the
definition of ‘‘small entity.’’ Therefore,
Farm Credit System institutions are not
‘‘small entities’’ as defined in the
Regulatory Flexibility Act.
FHFA: The Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) requires that a
regulation that has a significant
economic impact on a substantial
number of small entities, small
businesses, or small organizations must
include an initial regulatory flexibility
analysis describing the regulation’s
impact on small entities. FHFA need not
undertake such an analysis if the agency
has certified the regulation will not have
a significant economic impact on a
substantial number of small entities. 5
U.S.C. 605(b). FHFA has considered the
impact of the final rule under the
Regulatory Flexibility Act, and certifies
that the final rule does not have a
significant economic impact on a
substantial number of small entities
because the final rule is applicable only
to FHFA’s regulated entities, which are
not small entities for purposes of the
Regulatory Flexibility Act.
C. Use of Plain Language
Section 722 of the Gramm-LeachBliley Act requires the U.S. banking
agencies to use plain language in
proposed and final rulemakings.41 The
Agencies received no comment on these
matters and believe that the final rule is
written plainly and clearly.
D. OCC Unfunded Mandates Reform Act
of 1995 Determination
Section 202 of the Unfunded
Mandates Reform Act of 1995
(Unfunded Mandates Act) (2 U.S.C.
1532) requires that the OCC prepare a
budgetary impact statement before
promulgating a rule that includes any
Federal mandate that may result in the
expenditure by State, local, and Tribal
governments, in the aggregate, or by the
private sector, of $100 million or more
in any one year. If a budgetary impact
statement is required, section 205 of the
Unfunded Mandates Act also requires
the OCC to identify and consider a
reasonable number of regulatory
alternatives before promulgating a rule.
The OCC has determined that the
proposed rule does not impose any new
mandates and will not result in
expenditures by State, local, and Tribal
governments, or by the private sector of
$100 million or more in any one year.
Accordingly, the OCC has not prepared
a budgetary impact statement or
41 12
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12 CFR Part 1221
specifically addressed the regulatory
alternatives considered.
E. Riegle Community Development and
Regulatory Improvement Act of 1994
The Riegle Community Development
and Regulatory Improvement Act of
1994 (RCDRIA) requires that each
Federal banking agency, in determining
the effective date and administrative
compliance requirements for new
regulations that impose additional
reporting, disclosure, or other
requirements on insured depository
institutions, consider, consistent with
principles of safety and soundness and
the public interest, any administrative
burdens that such regulations would
place on depository institutions,
including small depository institutions,
and customers of depository
institutions, as well as the benefits of
such regulations. In addition, new
regulations and amendments to
regulations that impose additional
reporting, disclosures, or other new
requirements on insured depository
institutions generally must take effect
on the first day of a calendar quarter
that begins on or after the date on which
the regulations are published in final
form.42 Each Federal banking agency
has determined that the final rule would
not impose additional reporting,
disclosure, or other requirements;
therefore the requirements of the
RCDRIA do not apply.
List of Subjects
12 CFR Part 45
Administrative practice and
procedure, Capital, Margin
Requirements, National banks, Federal
savings associations, Reporting and
recordkeeping requirements, Risk.
12 CFR Part 237
Administrative practice and
procedure, Banks and banking, Capital,
Foreign banking, Holding companies,
Margin requirements, Reporting and
recordkeeping requirements, Risk.
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12 CFR Part 349
Administrative practice and
procedure, Banks, Holding companies,
Margin Requirements, Capital,
Reporting and recordkeeping
requirements, Savings associations,
Risk.
12 CFR Part 624
Accounting, Agriculture, Banks,
Banking, Capital, Cooperatives, Credit,
Margin requirements, Reporting and
recordkeeping requirements, Risk, Rural
areas, Swaps.
42 12
U.S.C. 4802.
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Government-sponsored enterprises,
Mortgages, Securities.
DEPARTMENT OF THE TREASURY
OFFICE OF THE COMPTROLLER OF
THE CURRENCY
12 CFR Chapter I
Authority and Issuance
For the reasons stated in the
preamble, the Office of the Comptroller
of the Currency amends part 45 of
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
continues to read as follows:
■
Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et
seq., 12 U.S.C. 93a, 161, 481, 1818, 3907,
3909, 5412(b)(2)(B), and 15 U.S.C. 78o–10(e).
2. Section 45.1 is amended by adding
paragraph (e)(7) to read as follows:
■
§ 45.1 Authority, purpose, scope,
exemptions and compliance dates.
*
*
*
*
*
(e) * * *
(7) For purposes of determining the
date on which a non-cleared swap or a
non-cleared security-based swap was
entered into, a Covered Swap Entity will
not take into account amendments to
the non-cleared swap or the non-cleared
security-based swap that were entered
into solely to comply with the
requirements of part 47, Subpart I of
part 252 or part 382 of Title 12, as
applicable.
*
*
*
*
*
■ 3. Section 45.2 is amended by revising
paragraph (2) of the definition of
Eligible master netting agreement to
read as follows:
§ 45.2
Definitions.
*
*
*
*
*
Eligible master netting agreement
* * *
(2) The agreement provides the
covered swap entity the right to
accelerate, terminate, and close-out on a
net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case:
(i) Any exercise of rights under the
agreement will not be stayed or avoided
under applicable law in the relevant
jurisdictions, other than:
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50811
(A) In receivership, conservatorship,
or resolution under the Federal Deposit
Insurance Act (12 U.S.C. 1811 et seq.),
Title II of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(12 U.S.C. 5381 et seq.), the Federal
Housing Enterprises Financial Safety
and Soundness Act of 1992, as amended
(12 U.S.C. 4617), or the Farm Credit Act
of 1971, as amended (12 U.S.C. 2183
and 2279cc), or laws of foreign
jurisdictions that are substantially
similar to the U.S. laws referenced in
this paragraph (2)(i)(A) in order to
facilitate the orderly resolution of the
defaulting counterparty; or
(B) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i)(A) of
this definition; and
(ii) The agreement may limit the right
to accelerate, terminate, and close-out
on a net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default of the counterparty to the extent
necessary for the counterparty to
comply with the requirements of part
47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
*
*
*
*
*
BOARD OF GOVENORS OF THE
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the
preamble, the Board of Governors of the
Federal Reserve System amends 12 CFR
part 237 to read as follows:
PART 237—SWAPS MARGIN AND
SWAPS PUSH-OUT
4. The authority citation for part 237
continues to read as follows:
■
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–
10(e), 15 U.S.C. 8305, 12 U.S.C. 221 et seq.,
12 U.S.C. 343–350, 12 U.S.C. 1818, 12 U.S.C.
1841 et seq., 12 U.S.C. 3101 et seq., and 12
U.S.C. 1461 et seq.
Subpart A—Margin and Capital
Requirements for Covered Swap
Entities (Regulation KK)
5. Section 237.1 paragraph (e)(7) is
added to read as follows:
■
§ 237.1 Authority, purpose, scope,
exemptions and compliance dates.
*
*
*
*
*
(e) * * *
(7) For purposes of determining the
date on which a non-cleared swap or a
non-cleared security-based swap was
entered into, a Covered Swap Entity will
not take into account amendments to
the non-cleared swap or the non-cleared
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security-based swap that were entered
into solely to comply with the
requirements of part 47, Subpart I of
part 252 or part 382 of Title 12, as
applicable.
*
*
*
*
*
■ 6. Section 237.2 is amended by
revising paragraph (2) of the definition
of Eligible master netting agreement to
read as follows:
§ 237.2
Definitions
*
*
*
*
Eligible master netting agreement
* * *
(2) The agreement provides the
covered swap entity the right to
accelerate, terminate, and close-out on a
net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case,
(i) Any exercise of rights under the
agreement will not be stayed or avoided
under applicable law in the relevant
jurisdictions, other than:
(A) In receivership, conservatorship,
or resolution under the Federal Deposit
Insurance Act (12 U.S.C. 1811 et seq.),
Title II of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(12 U.S.C. 5381 et seq.), the Federal
Housing Enterprises Financial Safety
and Soundness Act of 1992, as amended
(12 U.S.C. 4617), or the Farm Credit Act
of 1971, as amended (12 U.S.C. 2183
and 2279cc), or laws of foreign
jurisdictions that are substantially
similar to the U.S. laws referenced in
this paragraph (2)(i)(A) in order to
facilitate the orderly resolution of the
defaulting counterparty; or
(B) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i)(A) of
this definition; and
(ii) The agreement may limit the right
to accelerate, terminate, and close-out
on a net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default of the counterparty to the extent
necessary for the counterparty to
comply with the requirements of part
47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
*
*
*
*
*
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*
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the
preamble, the Federal Deposit Insurance
VerDate Sep<11>2014
16:31 Oct 09, 2018
Jkt 247001
Corporation amends 12 CFR part 349 as
follows:
PART 349—DERIVATIVES
Subpart A—Margin and Capital
Requirements for Covered Swap
Entities
7. The authority citation for subpart A
continues 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), 12 U.S.C. 1813(q), 1818,
1819, and 3108.
8. Section 349.1 is amended by adding
paragraph (e)(7) as follows:
■
§ 349.1 Authority, purpose, scope,
exemptions and compliance dates.
*
*
*
*
*
(e) * * *
(7) For purposes of determining the
date on which a non-cleared swap or a
non-cleared security-based swap was
entered into, a Covered Swap Entity will
not take into account amendments to
the non-cleared swap or the non-cleared
security-based swap that were entered
into solely to comply with the
requirements of part 47, Subpart I of
part 252 or part 382 of Title 12, as
applicable.
*
*
*
*
*
■ 9. Section 349.2 is amended by
revising of the definition of Eligible
master netting agreement to read as
follows:
§ 349.2
Definitions.
*
*
*
*
*
Eligible master netting agreement
means a written, legally enforceable
agreement provided that:
(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default following any
stay permitted by paragraph (2) of this
definition, including upon an event of
receivership, conservatorship,
insolvency, liquidation, 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
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case,
(i) Any exercise of rights under the
agreement will not be stayed or avoided
under applicable law in the relevant
jurisdictions, other than:
(A) In receivership, conservatorship,
or resolution under the Federal Deposit
PO 00000
Frm 00008
Fmt 4700
Sfmt 4700
Insurance Act (12 U.S.C. 1811 et seq.),
Title II of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(12 U.S.C. 5381 et seq.), the Federal
Housing Enterprises Financial Safety
and Soundness Act of 1992, as amended
(12 U.S.C. 4617), or the Farm Credit Act
of 1971, as amended (12 U.S.C. 2183
and 2279cc), or laws of foreign
jurisdictions that are substantially
similar to the U.S. laws referenced in
this paragraph (2)(i)(A) in order to
facilitate the orderly resolution of the
defaulting counterparty; or
(B) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i)(A) of
this definition; and
(ii) The agreement may limit the right
to accelerate, terminate, and close-out
on a net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default of the counterparty to the extent
necessary for the counterparty to
comply with the requirements of part
47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
(3) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make 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); and
(4) A covered swap entity that relies
on the agreement for purposes of
calculating the margin required by this
part must:
(i) Conduct sufficient legal review to
conclude with a well-founded basis
(and maintain sufficient written
documentation of that legal review) that:
(A) The agreement meets the
requirements of paragraph (2) of this
definition; and
(B) In the event of a legal challenge
(including one resulting from default or
from receivership, conservatorship,
insolvency, liquidation, 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; and
(ii) Establish and maintain written
procedures to monitor possible changes
in relevant law and to ensure that the
agreement continues to satisfy the
requirements of this definition.
*
*
*
*
*
FARM CREDIT ADMINISTRATION
Authority and Issuance
For the reasons set forth in the
preamble, the Farm Credit
E:\FR\FM\10OCR1.SGM
10OCR1
Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Rules and Regulations
Administration amends chapter VI of
title 12, Code of Federal Regulations, as
follows:
PART 624—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
10. The authority citation for part 624
continues to read as follows:
■
Authority: 7 U.S.C 6s(e), 15 U.S.C. 78o–
10(e), 12 U.S.C. 2154, 12 U.S.C. 2243, 12
U.S.C. 2252, 12 U.S.C. 2279bb–1.
11. Section 624.1 is amended by
adding paragraph (e)(7) to read as
follow:
■
§ 624.1 Authority, purpose, scope,
exemptions and compliance dates.
*
*
*
*
*
(e) * * *
(7) For purposes of determining the
date on which a non-cleared swap or a
non-cleared security-based swap was
entered into, a Covered Swap Entity will
not take into account amendments to
the non-cleared swap or the non-cleared
security-based swap that were entered
into solely to comply with the
requirements of part 47, Subpart I of
part 252 or part 382 of Title 12, as
applicable.
*
*
*
*
*
■ 12. Section 624.2 is amended by
revising paragraph (2) of the definition
of Eligible master netting agreement to
read as follows:
§ 624.2
Definitions.
daltland on DSKBBV9HB2PROD with RULES
*
*
*
*
*
Eligible master netting agreement
* * *
(2) The agreement provides the
covered swap entity the right to
accelerate, terminate, and close-out on a
net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case,
(i) Any exercise of rights under the
agreement will not be stayed or avoided
under applicable law in the relevant
jurisdictions, other than:
(A) In receivership, conservatorship,
or resolution under the Federal Deposit
Insurance Act (12 U.S.C. 1811 et seq.),
Title II of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(12 U.S.C. 5381 et seq.), the Federal
Housing Enterprises Financial Safety
and Soundness Act of 1992, as amended
(12 U.S.C. 4617), or the Farm Credit Act
of 1971, as amended (12 U.S.C. 2183
and 2279cc), or laws of foreign
jurisdictions that are substantially
VerDate Sep<11>2014
16:31 Oct 09, 2018
Jkt 247001
similar to the U.S. laws referenced in
this paragraph (2)(i)(A) in order to
facilitate the orderly resolution of the
defaulting counterparty; or
(B) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i)(A) of
this definition; and
(ii) The agreement may limit the right
to accelerate, terminate, and close-out
on a net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default of the counterparty to the extent
necessary for the counterparty to
comply with the requirements of part
47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
*
*
*
*
*
FEDERAL HOUSING FINANCE
AGENCY
Authority and Issuance
For the reasons set forth in the
preamble, the Federal Housing Finance
Agency amends chapter XII of title 12,
Code of Federal Regulations, as follows:
PART 1221—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
13. The authority citation for part
1221 continues 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).
14. Section 1221.1 is amended by
adding paragraph (e)(7) to read as
follows:
■
§ 1221.1 Authority, purpose, scope,
exemptions and compliance dates.
*
*
*
*
*
(e) * * *
(7) For purposes of determining the
date on which a non-cleared swap or a
non-cleared security-based swap was
entered into, a Covered Swap Entity will
not take into account amendments to
the non-cleared swap or the non-cleared
security-based swap that were entered
into solely to comply with the
requirements of part 47, Subpart I of
part 252 or part 382 of Title 12, as
applicable.
*
*
*
*
*
■ 15. Section 1221.2 is amended by
revising paragraph (2) of the definition
of Eligible master netting agreement to
read as follows:
§ 1221.2
Definitions.
*
*
*
*
*
Eligible master netting agreement
* * *
(2) The agreement provides the
covered swap entity the right to
accelerate, terminate, and close-out on a
PO 00000
Frm 00009
Fmt 4700
Sfmt 9990
50813
net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default, including upon an event of
receivership, conservatorship,
insolvency, liquidation, or similar
proceeding, of the counterparty,
provided that, in any such case,
(i) Any exercise of rights under the
agreement will not be stayed or avoided
under applicable law in the relevant
jurisdictions, other than:
(A) In receivership, conservatorship,
or resolution under the Federal Deposit
Insurance Act (12 U.S.C. 1811 et seq.),
Title II of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
(12 U.S.C. 5381 et seq.), the Federal
Housing Enterprises Financial Safety
and Soundness Act of 1992, as amended
(12 U.S.C. 4617), or the Farm Credit Act
of 1971, as amended (12 U.S.C. 2183
and 2279cc), or laws of foreign
jurisdictions that are substantially
similar to the U.S. laws referenced in
this paragraph (2)(i)(A) in order to
facilitate the orderly resolution of the
defaulting counterparty; or
(B) Where the agreement is subject by
its terms to, or incorporates, any of the
laws referenced in paragraph (2)(i)(A) of
this definition; and
(ii) The agreement may limit the right
to accelerate, terminate, and close-out
on a net basis all transactions under the
agreement and to liquidate or set-off
collateral promptly upon an event of
default of the counterparty to the extent
necessary for the counterparty to
comply with the requirements of part
47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
*
*
*
*
*
Dated: September 18, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, September 19, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC, on September
19, 2018.
Federal Deposit Insurance Corporation.
Valerie Jean Best,
Assistant Executive Secretary.
Dated: September 11, 2018.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
Dated: September 17, 2018.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2018–22021 Filed 10–9–18; 8:45 am]
BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;
8070–01–-P; 6705–01–P
E:\FR\FM\10OCR1.SGM
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]]>Agencies
[Federal Register Volume 83, Number 196 (Wednesday, October 10, 2018)]
[Rules and Regulations]
[Pages 50805-50813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22021]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
========================================================================
Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 /
Rules and Regulations
[[Page 50805]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 45
[Docket No. OCC-2018-0003]
RIN 1557-AE29
FEDERAL RESERVE SYSTEM
12 CFR Part 237
[Docket No. R-1596]
RIN 7100-AE96
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 349
RIN 3064-AE70
FARM CREDIT ADMINISTRATION
12 CFR Part 624
RIN 3052-AD28
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1221
RIN 2590-AA92
Margin and Capital Requirements for Covered Swap Entities; Final
Rule
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: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Board, OCC, FDIC, FCA, and FHFA (each an Agency and,
collectively, the Agencies) are adopting amendments to their rules
establishing minimum margin requirements for registered swap dealers,
major swap participants, security-based swap dealers, and major
security-based swap participants (Swap Margin Rule). These amendments
conform the Swap Margin Rule to rules recently adopted by the Board,
the OCC, and the FDIC that impose restrictions on certain qualified
financial contracts, including certain non-cleared swaps subject to the
Swap Margin Rule (the QFC Rules). Specifically, the final amendments to
the Swap Margin Rule conform the definition of ``Eligible Master
Netting Agreement'' to the definition of ``Qualifying Master Netting
Agreement'' in the QFC Rules. The amendment to the Swap Margin Rule
ensures that netting agreements of firms subject to the Swap Margin
Rule are not excluded from the definition of ``Eligible Master Netting
Agreement'' based solely on their compliance with the QFC Rules. The
amendment also ensures that margin amounts required for non-cleared
swaps covered by agreements that otherwise constitute Eligible Master
Netting Agreements can continue to be calculated on a net portfolio
basis, notwithstanding changes to those agreements that will be made in
some instances by firms revising their netting agreements to achieve
compliance with the QFC Rules. In addition, for any non-cleared swaps
that were ``entered into'' before the compliance dates of the Swap
Margin Rules--and which are accordingly grandfathered from application
of the rule's margin requirements--the amendments state that any
changes to netting agreements that are required to conform to the QFC
Rules will not render grandfathered swaps covered by that netting
agreement as ``new'' swaps subject to the Swap Margin Rule.
DATES: The final rule is effective November 9, 2018.
FOR FURTHER INFORMATION CONTACT:
OCC: Allison Hester-Haddad, Counsel, Chief Counsel's Office, (202)
649-5490, for persons who are deaf or hearing impaired, TTY (202) 649-
5597, Office of the Comptroller of the Currency, 400 7th Street SW,
Washington, DC 20219.
Board: Peter Clifford, Manager, 202-785-6057, or Christopher
Powell, Supervisory Financial Analyst, 202-452-3442, or Kelly Tomera,
Financial Analyst, (202) 912-7861, Division of Supervision and
Regulation; Patricia Yeh, Senior Counsel, (202) 452-3089, or Jason
Shafer, Senior Attorney, (202) 728-5811, Legal Division, Board of
Governors of the Federal Reserve System, 20th and C Streets NW,
Washington, DC 20551.
FDIC: Irina Leonova, Senior Policy Analyst, Capital Markets Branch,
Division of Risk Management Supervision, (202) 898-3843,
[email protected]; Phillip E. Sloan, Counsel, Legal Division,
[email protected], (703) 562-6137, Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC 20429.
FCA: J.C. Floyd, Associate Director, Finance & Capital Markets
Team, Timothy T. Nerdahl, Senior Policy Analyst, Jeremy R. Edelstein,
Senior Policy Analyst, Office of Regulatory Policy, (703) 883-4414, TTY
(703) 883-4056, or Richard A. Katz, Senior Counsel, Office of General
Counsel, (703) 883-4020, TTY (703) 883-4056, Farm Credit
Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
FHFA: Ron Sugarman, Principal Policy Analyst, Office of Policy
Analysis and Research, (202) 649-3208, [email protected], or James
Jordan, Assistant General Counsel, Office of General Counsel, (202)
649-3075, [email protected], Federal Housing Finance Agency,
Constitution Center, 400 7th St. SW, Washington, DC 20219. The
telephone number for the Telecommunications Device for the Hearing
Impaired is (800) 877-8339.
I. Background
A. The Swap Margin Rule
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(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 Dodd-Frank Act generally characterizes as
``swaps'' (swap is defined in section 721 of the Dodd-Frank Act to
include, among other things, an interest rate swap, commodity swap,
equity swap, and credit default swap) and ``security-based swaps''
(security-based swap is defined in section 761 of the Dodd-Frank Act to
include a swap based on a single security or loan or on a narrow-based
[[Page 50806]]
security index).\2\ For the remainder of this preamble, the term
``swaps'' refers to swaps and security-based swaps unless the context
requires otherwise.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
Sections 731 and 764 of the Dodd-Frank Act required the Office of
the Comptroller of the Currency (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) (collectively, the Agencies) to adopt rules
jointly that establish capital and margin requirements for swap
entities \3\ that are prudentially regulated by one of the Agencies
(covered swap entities),\4\ to offset the greater risk to the covered
swap entity and the financial system arising from swaps that are not
cleared by a registered derivatives clearing organization or a
registered clearing agency (non-cleared swaps).\5\ On November 30,
2015, the Agencies published a joint final rule (Swap Margin Rule) to
establish minimum margin and capital requirements for covered swap
entities.\6\
---------------------------------------------------------------------------
\3\ See 7 U.S.C. 6s; 15 U.S.C. 78o-10. Sections 731 and 764 of
the Dodd-Frank Act added a new section 4s to the Commodity Exchange
Act of 1936, as amended, and a new section, section 15F, to the
Securities Exchange Act of 1934, as amended, respectively, which
require registration with the Commodity Futures Trading Commission
(CFTC) of swap dealers and major swap participants and the U.S.
Securities and Exchange Commission (SEC) of security-based swap
dealers and major security-based swap participants (each a swap
entity and, collectively, swap entities). The CFTC is vested with
primary responsibility for the oversight of the swaps market under
Title VII of the Dodd-Frank Act. The SEC is vested with primary
responsibility for the oversight of the security-based swaps market
under Title VII of the Dodd-Frank Act. Section 712(d)(1) of the
Dodd-Frank Act requires the CFTC and SEC to issue joint rules
further defining the terms swap, security-based swap, swap dealer,
major swap participant, security-based swap dealer, and major
security-based swap participant. The CFTC and SEC issued final joint
rulemakings with respect to these definitions in May 2012 and August
2012, respectively. See 77 FR 30596 (May 23, 2012); 77 FR 39626
(July 5, 2012) (correction of footnote in the Supplementary
Information accompanying the rule); and 77 FR 48207 (August 13,
2012). 17 CFR part 1; 17 CFR parts 230, 240 and 241.
\4\ Section 1a(39) of the Commodity Exchange Act of 1936, as
amended, defines the term ``prudential regulator'' for purposes of
the 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 of 1913, as amended, or having an agreement
with the Board under section 25 of the Federal Reserve Act, or (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, as amended, 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 the 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 (i) a
national bank, (ii) a federally chartered branch or agency of a
foreign bank, or (iii) 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. The 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, as amended (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)(3)(A); 15 U.S.C. 78o-10(e)(3)(A).
\6\ 80 FR 74840 (November 30, 2015).
---------------------------------------------------------------------------
In the Swap Margin Rule, the Agencies adopted a risk-based approach
for initial and variation margin requirements for covered swap
entities.\7\ To implement the risk-based approach, the Agencies
established requirements for a covered swap entity to collect and post
initial margin for non-cleared swaps with a counterparty that is
either: (1) A financial end user with material swaps exposure,\8\ or
(2) a swap entity.\9\ A covered swap entity must collect and post
variation margin for non-cleared swaps with all swap entities and
financial end user counterparties, even if such financial end users do
not have material swaps exposure.\10\ Other counterparties, including
nonfinancial end users, are not subject to specific, numerical minimum
requirements for initial and variation margin.\11\
---------------------------------------------------------------------------
\7\ 80 FR 74843.
\8\ ``Material swaps exposure'' for an entity means that the
entity and its affiliates have an average daily aggregate notional
amount of non-cleared swaps, non-cleared security-based swaps,
foreign exchange forwards, and foreign exchange swaps with all
counterparties for June, July, and August of the previous calendar
year that exceeds $8 billion, where such amount is calculated only
for business days. See Sec. __.2 of the Swap Margin Rule.
\9\ See Sec. Sec. __.3 and __.4 of the Swap Margin Rule.
\10\ Id.
\11\ Id.
---------------------------------------------------------------------------
The effective date for the Swap Margin Rule was April 1, 2016, but
the Agencies established a phase-in compliance schedule for the initial
margin and variation margin requirements.\12\ On or after March 1,
2017, all covered swap entities were required to comply with the
variation margin requirements for non-cleared swaps with other swap
entities and financial end user counterparties. By September 1, 2020,
all covered swap entities will be required to comply with the initial
margin requirements for non-cleared swaps with all financial end users
with a material swaps exposure and all swap entities.
---------------------------------------------------------------------------
\12\ The applicable compliance date for a covered swap entity is
based on the average daily aggregate notional amount of non-cleared
swaps, foreign exchange forwards and foreign exchange swaps of the
covered swap entity and its counterparty (accounting for their
respective affiliates) for each business day in March, April and May
of that year. The applicable compliance dates for initial margin
requirements, and the corresponding average daily notional
thresholds, are: September 1, 2016, $3 trillion; September 1, 2017,
$2.25 trillion; September 1, 2018, $1.5 trillion; September 1, 2019,
$0.75 trillion; and September 1, 2020, all swap entities and
counterparties. See Sec. __.1(e) of the Swap Margin Rule.
---------------------------------------------------------------------------
The Swap Margin Rule's requirements apply only to a non-cleared
swap entered into on or after the applicable compliance date (covered
swap); a non-cleared swap entered into prior to a covered swap entity's
applicable compliance date (legacy swap) is generally not subject to
the margin requirements in the Swap Margin Rule.\13\ However, the
compliance date provisions of the Swap Margin Rule contain no safe
harbor from the rule's application to a legacy swap that is later
amended or novated on or after the applicable compliance date.\14\
---------------------------------------------------------------------------
\13\ See Sec. __.1(e) of the Swap Margin Rule.
\14\ See 80 FR 74850-51 (discussing commenters' requests for
addition of three safe-harbors to the Swap Margin Rule and the
Agencies' rationale for rejecting those requests).
---------------------------------------------------------------------------
Whether a non-cleared swap is deemed to be a legacy swap or a
covered swap also affects the treatment of a covered swap entity's
netting portfolios. The Swap Margin Rule permits a covered swap entity
to (1) calculate initial margin requirements for covered swaps under an
eligible master netting agreement (EMNA) with a counterparty on a
portfolio basis in certain circumstances, if it does so using an
initial margin model; and (2) calculate variation margin on an
aggregate net basis under an EMNA.\15\ In addition, the Swap Margin
Rule permits swap counterparties to identify one or more separate
netting portfolios under an EMNA, including netting sets of covered
swaps and netting sets of non-cleared swaps that are not subject to
margin requirements.\16\ Specifically, a netting portfolio that
contains only legacy swaps is not subject to the margin requirements
set out in the Swap Margin Rule.\17\ However, if a netting
[[Page 50807]]
portfolio contains any covered swaps, the entire netting portfolio is
subject to the margin requirements of the Swap Margin Rule.\18\
---------------------------------------------------------------------------
\15\ See Sec. Sec. _.2 and _.5 of the Swap Margin Rule.
\16\ Typically, this is accomplished by using a separate Credit
Support Annex for each netting set, subject to the terms of a single
master netting agreement.
\17\ See Sec. Sec. __.2 and __.5 of the Swap Margin Rule.
\18\ Id.
---------------------------------------------------------------------------
B. The QFC Rules
As part of the broader regulatory reform effort following the
financial crisis to increase the resolvability and resiliency of U.S.
global systemically important banking institutions \19\ (U.S. GSIBs)
and the U.S. operations of foreign GSIBs (together, GSIBs),\20\ the
Board, the OCC, and the FDIC adopted final rules that establish
restrictions on and requirements for certain non-cleared swaps and
other financial contracts (collectively, Covered QFCs) of GSIBs and
their subsidiaries (the QFC Rules).\21\
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\19\ See 12 CFR 217.402 (defining global systemically important
banking institution). The eight firms currently identified as U.S.
GSIBs are Bank of America Corporation, The Bank of New York Mellon
Corporation, Citigroup Inc., Goldman Sachs Group, Inc., JP Morgan
Chase & Co., Morgan Stanley Inc., State Street Corporation, and
Wells Fargo & Company.
\20\ The U.S. operations of 21 foreign GSIBs are currently
subject to the Board's QFC Rule.
\21\ The QFC Rules are codified as follows: 12 CFR part 47
(OCC's QFC Rule); 12 CFR part 252, subpart I (Board's QFC Rule); 12
CFR part 382 (FDIC's QFC Rule). The QFC Rules include a phased-in
conformance period for a Covered QFC Entity that varies depending
upon the counterparty type of the Covered QFC Entity. The first
conformance date is January 1, 2019, and applies to Covered QFCs
with GSIBs. The QFC Rules provide Covered QFC Entities an additional
six months or one year to conform its Covered QFCs with other types
of counterparties.
The Board's QFC Rule applies to U.S. GSIBs and their
subsidiaries, as well as other U.S. operations of foreign GSIBs,
with the exception of banks regulated by the FDIC or OCC, Federal
branches, or Federal agencies. The FDIC's QFC Rule applies to GSIB
subsidiaries that are state savings associations and state-chartered
banks that are not members of the Federal Reserve System. The OCC's
QFC Rule applies to national bank subsidiaries and Federal savings
association subsidiaries of GSIBs, and Federal branches and agencies
of foreign GSIBs.
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Subject to certain exemptions, the QFC Rules require U.S. GSIBs,
together with their subsidiaries, and the U.S. operations of foreign
GSIBs (each a Covered QFC Entity and, collectively, Covered QFC
Entities) to conform Covered QFCs to the requirements of the rules.\22\
The QFC Rules generally require the Covered QFCs of Covered QFC
Entities to contain contractual provisions that opt into the
``temporary stay-and-transfer treatment'' of the Federal Deposit
Insurance Act (FDI Act) \23\ and title II of the Dodd-Frank Act,
thereby reducing the risk that the stay-and-transfer treatment would be
challenged by a Covered QFC Entity's counterparty or a court in a
foreign jurisdiction.\24\ The temporary stay-and-transfer treatment is
part of the special resolution framework for failed financial firms
created by the FDI Act and title II of the Dodd-Frank Act. The stay-
and-transfer treatment provides that the rights of a failed insured
depository institution's or financial company's counterparties to
terminate, liquidate, or net certain qualified financial contracts on
account of the appointment of the FDIC as receiver for the entity (or
the insolvency or financial condition of the entity for which the FDIC
has been appointed receiver) are temporarily stayed when the entity
enters a resolution proceeding to allow for the transfer of the failed
firm's Covered QFCs to a solvent party.\25\ The QFC Rules also
generally prohibit Covered QFCs from allowing the exercise of default
rights related, directly or indirectly, to the entry into resolution of
an affiliate of the Covered QFC Entity (cross-default rights).\26\
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\22\ To the extent a U.S. GSIB, any of its subsidiaries, or the
U.S. operations of a foreign GSIB include a swap entity for which
one of the Agencies is a prudential regulator, a Covered QFC Entity
may be a covered swap entity.
\23\ 12 U.S.C. 1811 et seq.
\24\ 12 CFR part 47; 12 CFR part 252, subpart I; 12 CFR part
382.
\25\ 12 U.S.C. 1821(e)(10)(B), 5390(c)(10)(B). Title II of the
Dodd-Frank Act also provides the FDIC with the power to enforce
Covered QFCs (and other contracts) of subsidiaries and affiliates of
the financial company for which the FDIC has been appointed
receiver. 12 U.S.C. 5390(c)(16); 12 CFR 380.12.
\26\ See supra note 24.
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C. The Definitions of Qualifying Master Netting Agreement
As part of the QFC Rules, the Federal banking agencies amended the
definition of qualifying master netting agreement (QMNA) in their
capital and liquidity rules to prevent the QFC Rules from having
disruptive effects on the treatment of netting sets of Board-regulated
firms, OCC-regulated firms, and FDIC-regulated firms.\27\ The FCA plans
to propose several technical and clarifying amendments to its capital
regulations, including a revision to the definition of QMNA so it
continues to be identical to both the definition in the regulations of
the Federal banking agencies' regulatory capital and liquidity rules,
and the amended definition of EMNA in this rulemaking.\28\
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\27\ 82 FR 42882, 42915; 82 FR 50228, 50258; 82 FR 56630, 56659.
\28\ See FCA's Fall 2018 Unified Agenda (www.RegInfo.gov). The
FCA's Tier 1/Tier 2 Capital Framework's existing definition of QMNA
is identical to the previous definition of QMNA used in the Federal
banking agencies' capital and liquidity rules.
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The amendments to the Federal banking agencies' capital and
liquidity rules were necessary because the previous QMNA definition did
not recognize some of the new close-out restrictions on Covered QFCs
imposed by the QFC Rules.\29\ Pursuant to the previous definition of
QMNA, a banking organization's rights under a QMNA generally could not
be stayed or avoided in the event of its counterparty's default.
However, the definition of QMNA permitted certain exceptions to this
general prohibition to accommodate certain restrictions on the exercise
of default rights that are important to the prudent resolution of a
banking organization, including a limited stay under a special
resolution regime, such as title II of the Dodd-Frank Act, the FDI Act,
and comparable foreign resolution regimes. The previous QMNA definition
did not explicitly recognize all the restrictions on the exercise of
cross-default rights.\30\ Therefore, a master netting agreement that
complies with the QFC Rules by limiting the rights of a Covered QFC
Entity's counterparty to close out against the Covered QFC Entity would
not meet the previous QMNA definition. A failure to meet the definition
of QMNA would result in a banking organization subject to one of the
Federal banking agencies' capital and liquidity rules losing the
ability to net offsetting exposures under its applicable capital and
liquidity requirements when its counterparty is a Covered QFC Entity.
If netting were not permitted, the banking organization would be
required to calculate its capital and liquidity requirements relating
to certain Covered QFCs on a gross basis rather than on a net basis,
which would typically result in higher capital and liquidity
requirements. The Federal banking agencies do not believe that such an
outcome would accurately reflect the risks posed by the affected
Covered QFCs.
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\29\ 12 CFR 3.2 (2017); 12 CFR 50.3 (2017); 12 CFR 217.2 (2017);
12 CFR 249.3 (2017); 12 CFR 324.2; 12 CFR 329.3.
\30\ See, e.g., 12 CFR 252.84(b)(1).
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The amendments to the QMNA definition maintain the netting
treatment for these contracts under the Federal banking agencies'
capital and liquidity rules. The amendments permit a master netting
agreement to meet the definition of QMNA even if it limits the banking
organization's right to accelerate, terminate, and close-out on a net
basis all transactions under the agreement and to liquidate or set-off
collateral promptly upon an event of default of a counterparty that is
a Covered QFC Entity to the extent necessary for the Covered QFC Entity
to comply fully with the QFC Rules. The amended definition of QMNA
continues
[[Page 50808]]
to recognize that default rights may be stayed if the defaulting
counterparty is in resolution under the Dodd-Frank Act, the FDI Act, a
substantially similar law applicable to government-sponsored
enterprises, or a substantially similar foreign law, or where the
agreement is subject by its terms to, or incorporates, any of those
laws. By recognizing these required restrictions on the ability of a
banking organization to exercise close-out rights when its counterparty
is a Covered QFC Entity, the amended definition allows a master netting
agreement that includes such restrictions to continue to meet the
definition of QMNA under the Federal banking agencies' capital and
liquidity rules.
II. Discussion of the Final Rule
On February 21, 2018, the Agencies published a request for comment
on a proposed rule to amend the definition of EMNA in the Swap Margin
Rule and to clarify the impact of the amendment on legacy swaps.\31\
The Agencies are adopting the proposed rule as final without change.
The final amendment clarifies that a master netting agreement meets the
definition of EMNA under the Swap Margin Rule when the agreement limits
the right to accelerate, terminate, and close-out on a net basis all
transactions under the agreement and to liquidate or set-off collateral
promptly upon an event of default of the counterparty to the extent
necessary for the counterparty to comply with the requirements of the
QFC Rules. This final rule text is identical to the corresponding text
used in the amended definition of QMNA in the Federal banking agencies'
capital and liquidity rules.
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\31\ 83 FR 7413 (February 21, 2018).
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In addition, the Agencies are adopting as proposed the amendment to
the Swap Margin Rule that provides that amendments made to an EMNA that
a firm enters into solely to comply with the QFC Rules will not be
taken into account for purposes of determining the date on which swaps
subject to that agreement were entered into. This amendment establishes
that a legacy swap will not be deemed a covered swap under the Swap
Margin Rule if it is amended solely to comply with one of the QFC
Rules. For example, to comply with the restrictions on Covered QFCs, a
Covered QFC Entity may directly amend the contractual provisions of its
Covered QFCs or, alternatively, cause its Covered QFCs to be subject to
the International Swaps and Derivatives Association 2015 Resolution
Stay Protocol (Universal Protocol) or the U.S. Protocol, as defined in
the QFC Rules. The Swap Margin Rule amendment will provide certainty to
a covered swap entity and its counterparties about the treatment of
legacy swaps and any applicable netting arrangements in light of the
QFC Rules.
The Agencies received five substantive comments on the proposal.
All five substantive comments generally supported the proposed
amendment clarifying the treatment of legacy swaps, while two of the
comments also specifically expressed support for the proposed amendment
to the definition of EMNA. Two comments raised issues unrelated to the
proposal.\32\
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\32\ A comment urging a change to the inter-affiliate provisions
of the Swap Margin Rule and a comment requesting that the Agencies
clarify that a legacy swap that is amended or novated not be subject
to margin requirements if it is entered into by special purpose
vehicles for purposes of a certain securitization transaction are
outside the scope of the proposal.
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As described below, three of the comments also recommended
alternative approaches to clarify the treatment of legacy swaps. One
comment stated that it supported the proposed amendment on the
treatment of a legacy swap after it is amended to comply with a QFC
Rule because such an amendment does not change the economic nature of
the original transaction and therefore would not require such legacy
swap to become subject to margin requirements.
The three comments that recommended alternatives to the proposed
amendment on the treatment of legacy swaps urged the Agencies to issue
guidance that clarifies certain ``non-material'' amendments will not
result in a legacy swap becoming subject to margin requirements rather
than adopting the proposed amendment. Specifically, a comment requested
that the Agencies, in consultation with global authorities, issue
guidance that provides clarity on the circumstances under which a
legacy swap is considered a new swap. This comment also recommended
that such guidance should make clear that non-material amendments
(i.e., administrative amendments, contract-intrinsic events, risk-
reducing amendments, and amendments required by regulation or
legislation) would not cause a legacy swap to be treated as a new swap
subject to the Swap Margin Rule. This same commenter also recommended
that in the near term the Agencies should clarify the effect of
amendments to legacy swaps related to: (i) Ring fencing of derivative
transactions into non-bank entities; (ii) interest rate benchmark
reform, such as the movement away from LIBOR; and (iii) novations or
other amendments necessitated by the United Kingdom leaving the
European Union. Another comment recommended that, instead of adopting
the proposal as a final rule, the Agencies issue principles-based
guidance that clarifies that certain amendments to legacy swaps,
including risk-reducing amendments and amendments made to satisfy other
regulatory requirements, do not require such legacy swap to become a
covered swap, and therefore, subject to margin requirements. This
comment requested that, if the Agencies decide to adopt the proposed
amendments to the Swap Margin Rule, the amendment should be described
as a ``safe harbor'' that is intended to provide clarity to the
industry and, thus, should not imply that other immaterial amendments
would cause a legacy swap to become subject to margin requirements.
The Agencies are adopting the amendment to the Swap Margin Rule as
proposed. Under the final rule, revisions to a master netting agreement
that comply with the QFC Rules will not cause the agreement to fall out
of the Swap Margin Rule's EMNA definition. The Agencies' approach
provides clarity and certainty to swap market participants as to the
effect of changes required by the QFC Rules. Further changes requested
by the commenters are not within the scope of the Agencies' proposal,
so the Agencies are not making revisions to address those comments. As
explained in the preamble to the Swap Margin Rule, the Agencies
declined to include language requested by commenters in the rule that
would classify certain new swap transactions as being ``entered into
prior to the compliance date.'' The Agencies noted that doing so could
create significant incentives to engage in amendments and novations for
the purpose of evading the margin requirement. The Agencies further
explained that limiting the extension to ``material'' amendments or
``legitimate'' novations would be difficult to effect within the final
rule because the specific motivation for an amendment or novation is
generally not observable, and such classifications would make the
process of identifying those swaps to which the rule applies overly
complex and non-transparent.\33\
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\33\ See 80 FR 78450-51.
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As the Agencies continue to assess industry developments such as
interest rate benchmark reform, the Agencies will take into account any
associated implementation ramifications
[[Page 50809]]
surrounding the treatment of legacy swaps under the Swap Margin Rule.
III. Regulatory Analysis
A. Paperwork Reduction Act
OCC: In accordance with 44 U.S.C. 3512, the OCC may not conduct or
sponsor, and a respondent is not required to respond to, an information
collection unless it displays a currently valid OMB control number. The
OCC reviewed the final rule and concluded that it contains no
requirements subject to the PRA.
Board: In accordance with section 3512 of the Paperwork Reduction
Act of 1995 (PRA) (44 U.S.C. 3501-3521), the Board may not conduct or
sponsor, and a 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 Board reviewed the final rule
under the authority delegated to it by OMB. The rule contained no
requirements subject to the PRA, and the Board received no comments on
its PRA analysis in the proposed rule. The final rule adopts the
proposed rule as proposed, and contains no requirements subject to the
PRA.
FDIC: In accordance with the requirements of the PRA, the FDIC may
not conduct or sponsor, and a respondent is not required to respond to,
an information collection unless it displays a currently valid OMB
control number. The FDIC reviewed the final rule and concludes that it
contains no requirements subject to the PRA. Therefore, no submission
will be made to OMB for review.
FCA: The FCA has determined that the final rule does not involve a
collection of information pursuant to the Paperwork Reduction Act for
Farm Credit System institutions because Farm Credit System institutions
are Federally chartered instrumentalities of the United States and
instrumentalities of the United States are specifically excepted from
the definition of ``collection of information'' contained in 44 U.S.C.
3502(3).
FHFA: The final rule amendments do not contain any collections of
information pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.). Therefore, FHFA has not submitted any information to the
Office of Management and Budget for review.
B. Final Regulatory Flexibility Analysis
OCC: In general, the Regulatory Flexibility Act (RFA) (5 U.S.C. 601
et seq.) requires that in connection with a rulemaking, an agency
prepare and make available for public comment a regulatory flexibility
analysis that describes the impact of the rule on small entities. Under
section 605(b) of the RFA, this analysis is not required if an agency
certifies that the rule will not have a significant economic impact on
a substantial number of small entities and publishes its certification
and a brief explanatory statement in the Federal Register along with
its rule.
The OCC currently supervises approximately 886 small entities.\34\
Among these 886 small entities, 61 might be affected by the final rule
if the small entities are a party to a QFC that falls within the scope
of the QFC Rules and must be amended to comply with those rules.
Because the OCC assumes that the standards set forth in the final rule
will be implemented by OCC-supervised small entities before any of them
are required to comply with the QFC Rules, the OCC believes that the
final rule will not result in savings--or more than de minimis costs--
for OCC-supervised entities. Therefore, the OCC certifies that the
final rule will not have a significant economic impact on a substantial
number of small OCC-regulated entities.
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\34\ The OCC bases its estimate of the number of small entities
on the SBA's size thresholds for commercial banks and savings
institutions, and trust companies, which are $550 million and $38.5
million, respectively. Consistent with the General Principles of
Affiliation 13 CFR 121.103(a), the OCC counts the assets of
affiliated financial institutions when determining if we should
classify an OCC-supervised institution as a small entity. The OCC
uses December 31, 2017, to determine size because a ``financial
institution's assets are determined by averaging the assets reported
on its four quarterly financial statements for the preceding year.''
See footnote 8 of the U.S. Small Business Administration's Table of
Size Standards.
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Board: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (the
``RFA''), generally requires that an agency prepare and make available
for public comment an initial regulatory flexibility analysis in
connection with a notice of proposed rulemaking.\35\ The Board
solicited public comment on this rule in a notice of proposed
rulemaking \36\ and has since considered the potential impact of this
final rule on small entities in accordance with section 604 of the RFA.
Based on the Board's analysis, and for the reasons stated below, the
Board certifies that the final rule will not have a significant
economic impact on a substantial number of small entities.
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\35\ See 5 U.S.C. 603(a).
\36\ See 83 FR 7413 (February 21, 2018).
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1. Statement of the need for, and objectives of, the final rule. As
described above, the final rule amends the definition of Eligible
Master Netting Agreement in the Swap Margin Rule so that it remains
harmonized with the amended definition of ``Qualifying Master Netting
Agreement'' in the Federal banking agencies' regulatory capital and
liquidity rules. The final rule also makes clear that a legacy swap
(i.e., a non-cleared swap entered into before the applicable compliance
date) that is not subject to the requirements of the Swap Margin Rule
will not be deemed a covered swap under the Swap Margin Rule if it is
amended solely to conform to the QFC Rules.
2. Summary of the significant issues raised by public comment on
the Board's initial analysis, the Board's assessment of such issues,
and a statement of any changes made as a result of such comments.
Commenters did not raise any issues in response to the initial RFA
analysis. The Chief Counsel for the Advocacy of the Small Business
Administration (``SBA'') did not file any comments in response to the
proposed rule.
3. Description and estimate of number of small entities to which
the final rule will apply. This final rule applies to financial
institutions that are covered swap entities (CSEs) that are subject to
the requirements of the Swap Margin Rule. Under SBA regulations, the
finance and insurance sector includes commercial banking, savings
institutions, credit unions, other depository credit intermediation and
credit card issuing entities (financial institutions). With respect to
financial institutions that are CSEs under the Swap Margin Rule, a
financial institution generally is considered small if it has assets of
$550 million or less.\37\ CSEs would be considered financial
institutions for purposes of the RFA in accordance with SBA
regulations. The Board does not expect that any CSE is likely to be a
small financial institution, because a small financial institution is
unlikely to engage in the level of swap activity that would require it
to register as a swap dealer or a major swap participant with the CFTC
or a security-based swap dealer or security-based major swap
participant with the SEC.\38\ None of the current Board-regulated CSEs
are small entities.
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\37\ See 13 CFR 121.201 (effective December 2, 2014); see also
13 CFR 121.103(a)(6) (noting factors that the SBA considers in
determining whether an entity qualifies as a small business,
including receipts, employees, and other measures of its domestic
and foreign affiliates).
\38\ The CFTC has published a list of provisionally registered
swap dealers as of October 17, 2017 that does not include any small
financial institutions. See https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer. The SEC has not yet imposed a
registration requirement on entities that meet the definition of
security-based swap dealer or major security-based swap participant.
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[[Page 50810]]
4. Description of the projected reporting, recordkeeping and other
compliance requirements of the final rule. The Board does not believe
the final rule will result in any new reporting, recordkeeping or other
compliance requirements.
5. Significant alternatives to the final rule. In light of the
foregoing, the Board does not believe that this final rule would have a
significant economic impact on a substantial number of small entities
and therefore there are no significant alternatives to the final rule
that would reduce the impact on small entities.
FDIC: The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires an agency to provide a final regulatory flexibility analysis
with a final rule, unless the agency certifies that the rule will not
have a significant economic impact on a substantial number of small
entities (defined by the Small Business Administration for purposes of
the RFA to include banking entities with total assets of $550 million
or less).
According to data from recent Consolidated Reports of Income and
Condition (CALL Report),\39\ the FDIC supervised 3,603 institutions. Of
those, 2,885 are considered ``small,'' according to the terms of the
Regulatory Flexibility Act. This final rule directly applies to covered
swap entities (which includes persons registered with the CFTC as swap
dealers or major swap participants pursuant to the Commodity Exchange
Act of 1936 and persons registered with the SEC as security-based swap
dealers and major security-based swap participants under the Securities
Exchange Act of 1934) that are subject to the requirements of the Swap
Margin Rule. The FDIC has identified 101 swap dealers and major swap
participants that, as of May 17, 2018, have registered as swap
entities.\40\ None of these institutions are supervised by the FDIC.
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\39\ FDIC CALL Reports, March 31, 2018.
\40\ While the SEC had adopted a regulation that would require
registration of security-based swap dealers and major security-based
swap participants, as of June 18, 2018, there was no date
established as the compliance date and no SEC-published list of any
such entities that so registered. Accordingly, no security-based
swap dealers and major security-based swap participants have been
identified as swap entities by the FDIC. In identifying the 101
institutions referred to in the text, the FDIC used the list of swap
dealers set forth, on June 18, 2018 (providing data as of May 17,
2018) at https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html. Major swap participants, among others, are
required to apply for registration through a filing with the
National Futures Association. Accordingly, the FDIC reviewed the
National Futures Association https://www.nfa.futures.org/members/sd/ to determine whether there were registered major swap
participants. As of June 18, 2018, there were no Major Swaps
Participants listed on this link.
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As discussed previously, the final rule clarifies that a master
netting agreement meets the definition of EMNA under the Swap Margin
Rule when the agreement limits the right to accelerate, terminate, and
close-out on a net basis all transactions under the agreement and to
liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of the QFC Rules. Without adoption of the final
rule, covered entities would be required to calculate capital and
liquidity requirements relating to certain Covered QFCs on a gross
basis rather than on a net basis, which would typically result in
higher capital and liquidity requirements. Therefore, this rule is
expected to benefit any potential covered swap entity.
The Swap Margin Rule implements sections 731 and 764 of the Dodd-
Frank Act, as amended by the Terrorism Risk Insurance Program
Reauthorization Act of 2015 (``TRIPRA''). TRIPRA excludes non-cleared
swaps entered into for hedging purposes by a financial institution with
total assets of $10 billion or less from the requirements of the Swap
Margin Rule. Given this exclusion, a non-cleared swap between a covered
swap entity and a small FDIC-supervised entity that is used to hedge a
commercial risk of the small entity will not be subject to the Swap
Margin Rule. The FDIC believes that it is unlikely that any small
entity it supervises will engage in non-cleared swaps for purposes
other than hedging.
Given that no FDIC-supervised small entities are covered swap
entities, that the potential effects are expected to be beneficial to
covered swap entities, and that it is unlikely that FDIC-supervised
small entities enter into non-cleared swaps for purposes other than
hedging, this final rule is not expected to have a significant economic
impact on a substantial number of small entities supervised by the
FDIC. For these reasons, the FDIC certifies that the final rule will
not have a significant economic impact on a substantial number of small
entities, within the meaning of those terms as used in the RFA.
Accordingly, a regulatory flexibility analysis is not required.
FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.), FCA hereby certifies that the final 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, Farm Credit System institutions are not
``small entities'' as defined in the Regulatory Flexibility Act.
FHFA: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.)
requires that a regulation that has a significant economic impact on a
substantial number of small entities, small businesses, or small
organizations must include an initial regulatory flexibility analysis
describing the regulation's impact on small entities. FHFA need not
undertake such an analysis if the agency has certified the regulation
will not have a significant economic impact on a substantial number of
small entities. 5 U.S.C. 605(b). FHFA has considered the impact of the
final rule under the Regulatory Flexibility Act, and certifies that the
final rule does not have a significant economic impact on a substantial
number of small entities because the final rule is applicable only to
FHFA's regulated entities, which are not small entities for purposes of
the Regulatory Flexibility Act.
C. Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the U.S. banking
agencies to use plain language in proposed and final rulemakings.\41\
The Agencies received no comment on these matters and believe that the
final rule is written plainly and clearly.
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\41\ 12 U.S.C. 4809(a).
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D. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded
Mandates Act) (2 U.S.C. 1532) requires that the OCC prepare a budgetary
impact statement before promulgating a rule that includes any Federal
mandate that may result in the expenditure by State, local, and Tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires the
OCC to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. The OCC has determined that
the proposed rule does not impose any new mandates and will not result
in expenditures by State, local, and Tribal governments, or by the
private sector of $100 million or more in any one year. Accordingly,
the OCC has not prepared a budgetary impact statement or
[[Page 50811]]
specifically addressed the regulatory alternatives considered.
E. Riegle Community Development and Regulatory Improvement Act of 1994
The Riegle Community Development and Regulatory Improvement Act of
1994 (RCDRIA) requires that each Federal banking agency, in determining
the effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on insured depository institutions, consider, consistent
with principles of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and customers of
depository institutions, as well as the benefits of such regulations.
In addition, new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on insured
depository institutions generally must take effect on the first day of
a calendar quarter that begins on or after the date on which the
regulations are published in final form.\42\ Each Federal banking
agency has determined that the final rule would not impose additional
reporting, disclosure, or other requirements; therefore the
requirements of the RCDRIA do not apply.
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\42\ 12 U.S.C. 4802.
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List of Subjects
12 CFR Part 45
Administrative practice and procedure, Capital, Margin
Requirements, National banks, Federal savings associations, Reporting
and recordkeeping requirements, Risk.
12 CFR Part 237
Administrative practice and procedure, Banks and banking, Capital,
Foreign banking, Holding companies, Margin requirements, Reporting and
recordkeeping requirements, Risk.
12 CFR Part 349
Administrative practice and procedure, Banks, Holding companies,
Margin Requirements, Capital, Reporting and recordkeeping requirements,
Savings associations, Risk.
12 CFR Part 624
Accounting, Agriculture, Banks, Banking, Capital, Cooperatives,
Credit, Margin requirements, Reporting and recordkeeping requirements,
Risk, Rural areas, Swaps.
12 CFR Part 1221
Government-sponsored enterprises, Mortgages, Securities.
DEPARTMENT OF THE TREASURY
OFFICE OF THE COMPTROLLER OF THE CURRENCY
12 CFR Chapter I
Authority and Issuance
For the reasons stated in the preamble, the Office of the
Comptroller of the Currency amends part 45 of chapter I of title 12,
Code of Federal Regulations, as follows:
PART 45--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
0
1. The authority citation for part 45 continues to read as follows:
Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et seq., 12 U.S.C. 93a,
161, 481, 1818, 3907, 3909, 5412(b)(2)(B), and 15 U.S.C. 78o-10(e).
0
2. Section 45.1 is amended by adding paragraph (e)(7) to read as
follows:
Sec. 45.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(7) For purposes of determining the date on which a non-cleared
swap or a non-cleared security-based swap was entered into, a Covered
Swap Entity will not take into account amendments to the non-cleared
swap or the non-cleared security-based swap that were entered into
solely to comply with the requirements of part 47, Subpart I of part
252 or part 382 of Title 12, as applicable.
* * * * *
0
3. Section 45.2 is amended by revising paragraph (2) of the definition
of Eligible master netting agreement to read as follows:
Sec. 45.2 Definitions.
* * * * *
Eligible master netting agreement * * *
(2) The agreement provides the covered swap entity the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set-off collateral promptly
upon an event of default, including upon an event of receivership,
conservatorship, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case:
(i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5381 et seq.), the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (2)(i)(A) in order to facilitate the
orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
(ii) The agreement may limit the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
* * * * *
BOARD OF GOVENORS OF THE FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the preamble, the Board of Governors
of the Federal Reserve System amends 12 CFR part 237 to read as
follows:
PART 237--SWAPS MARGIN AND SWAPS PUSH-OUT
0
4. The authority citation for part 237 continues to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 15 U.S.C. 8305,
12 U.S.C. 221 et seq., 12 U.S.C. 343-350, 12 U.S.C. 1818, 12 U.S.C.
1841 et seq., 12 U.S.C. 3101 et seq., and 12 U.S.C. 1461 et seq.
Subpart A--Margin and Capital Requirements for Covered Swap
Entities (Regulation KK)
0
5. Section 237.1 paragraph (e)(7) is added to read as follows:
Sec. 237.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(7) For purposes of determining the date on which a non-cleared
swap or a non-cleared security-based swap was entered into, a Covered
Swap Entity will not take into account amendments to the non-cleared
swap or the non-cleared
[[Page 50812]]
security-based swap that were entered into solely to comply with the
requirements of part 47, Subpart I of part 252 or part 382 of Title 12,
as applicable.
* * * * *
0
6. Section 237.2 is amended by revising paragraph (2) of the definition
of Eligible master netting agreement to read as follows:
Sec. 237.2 Definitions
* * * * *
Eligible master netting agreement * * *
(2) The agreement provides the covered swap entity the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set-off collateral promptly
upon an event of default, including upon an event of receivership,
conservatorship, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case,
(i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5381 et seq.), the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (2)(i)(A) in order to facilitate the
orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
(ii) The agreement may limit the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
* * * * *
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the preamble, the Federal Deposit
Insurance Corporation amends 12 CFR part 349 as follows:
PART 349--DERIVATIVES
Subpart A--Margin and Capital Requirements for Covered Swap
Entities
0
7. The authority citation for subpart A continues 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), 12 U.S.C. 1813(q), 1818, 1819,
and 3108.
0
8. Section 349.1 is amended by adding paragraph (e)(7) as follows:
Sec. 349.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(7) For purposes of determining the date on which a non-cleared
swap or a non-cleared security-based swap was entered into, a Covered
Swap Entity will not take into account amendments to the non-cleared
swap or the non-cleared security-based swap that were entered into
solely to comply with the requirements of part 47, Subpart I of part
252 or part 382 of Title 12, as applicable.
* * * * *
0
9. Section 349.2 is amended by revising of the definition of Eligible
master netting agreement to read as follows:
Sec. 349.2 Definitions.
* * * * *
Eligible master netting agreement means a written, legally
enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default following any stay permitted by paragraph (2) of this
definition, including upon an event of receivership, conservatorship,
insolvency, liquidation, 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 receivership,
conservatorship, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case,
(i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5381 et seq.), the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (2)(i)(A) in order to facilitate the
orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
(ii) The agreement may limit the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
(3) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it otherwise would make 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); and
(4) A covered swap entity that relies on the agreement for purposes
of calculating the margin required by this part must:
(i) Conduct sufficient legal review to conclude with a well-founded
basis (and maintain sufficient written documentation of that legal
review) that:
(A) The agreement meets the requirements of paragraph (2) of this
definition; and
(B) In the event of a legal challenge (including one resulting from
default or from receivership, conservatorship, insolvency, liquidation,
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; and
(ii) Establish and maintain written procedures to monitor possible
changes in relevant law and to ensure that the agreement continues to
satisfy the requirements of this definition.
* * * * *
FARM CREDIT ADMINISTRATION
Authority and Issuance
For the reasons set forth in the preamble, the Farm Credit
[[Page 50813]]
Administration amends chapter VI of title 12, Code of Federal
Regulations, as follows:
PART 624--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
0
10. The authority citation for part 624 continues to read as follows:
Authority: 7 U.S.C 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 2154,
12 U.S.C. 2243, 12 U.S.C. 2252, 12 U.S.C. 2279bb-1.
0
11. Section 624.1 is amended by adding paragraph (e)(7) to read as
follow:
Sec. 624.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(7) For purposes of determining the date on which a non-cleared
swap or a non-cleared security-based swap was entered into, a Covered
Swap Entity will not take into account amendments to the non-cleared
swap or the non-cleared security-based swap that were entered into
solely to comply with the requirements of part 47, Subpart I of part
252 or part 382 of Title 12, as applicable.
* * * * *
0
12. Section 624.2 is amended by revising paragraph (2) of the
definition of Eligible master netting agreement to read as follows:
Sec. 624.2 Definitions.
* * * * *
Eligible master netting agreement * * *
(2) The agreement provides the covered swap entity the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set-off collateral promptly
upon an event of default, including upon an event of receivership,
conservatorship, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case,
(i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5381 et seq.), the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (2)(i)(A) in order to facilitate the
orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
(ii) The agreement may limit the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
* * * * *
FEDERAL HOUSING FINANCE AGENCY
Authority and Issuance
For the reasons set forth in the preamble, the Federal Housing
Finance Agency amends chapter XII of title 12, Code of Federal
Regulations, as follows:
PART 1221--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP
ENTITIES
0
13. The authority citation for part 1221 continues 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).
0
14. Section 1221.1 is amended by adding paragraph (e)(7) to read as
follows:
Sec. 1221.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(7) For purposes of determining the date on which a non-cleared
swap or a non-cleared security-based swap was entered into, a Covered
Swap Entity will not take into account amendments to the non-cleared
swap or the non-cleared security-based swap that were entered into
solely to comply with the requirements of part 47, Subpart I of part
252 or part 382 of Title 12, as applicable.
* * * * *
0
15. Section 1221.2 is amended by revising paragraph (2) of the
definition of Eligible master netting agreement to read as follows:
Sec. 1221.2 Definitions.
* * * * *
Eligible master netting agreement * * *
(2) The agreement provides the covered swap entity the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set-off collateral promptly
upon an event of default, including upon an event of receivership,
conservatorship, insolvency, liquidation, or similar proceeding, of the
counterparty, provided that, in any such case,
(i) Any exercise of rights under the agreement will not be stayed
or avoided under applicable law in the relevant jurisdictions, other
than:
(A) In receivership, conservatorship, or resolution under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C.
5381 et seq.), the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign
jurisdictions that are substantially similar to the U.S. laws
referenced in this paragraph (2)(i)(A) in order to facilitate the
orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this
definition; and
(ii) The agreement may limit the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set-off collateral promptly upon an event of default of
the counterparty to the extent necessary for the counterparty to comply
with the requirements of part 47, Subpart I of part 252 or part 382 of
Title 12, as applicable;
* * * * *
Dated: September 18, 2018.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, September 19, 2018.
Ann E. Misback,
Secretary of the Board.
Dated at Washington, DC, on September 19, 2018.
Federal Deposit Insurance Corporation.
Valerie Jean Best,
Assistant Executive Secretary.
Dated: September 11, 2018.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
Dated: September 17, 2018.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2018-22021 Filed 10-9-18; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 8070-01--P; 6705-01-P
