Margin and Capital Requirements for Covered Swap Entities; Final Rule, 50805-50813 [2018-22021]

Download as PDF 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. daltland on DSKBBV9HB2PROD with RULES 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: VerDate Sep<11>2014 16:31 Oct 09, 2018 Jkt 247001 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 PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 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). E:\FR\FM\10OCR1.SGM 10OCR1 50806 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Rules and Regulations 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 daltland on DSKBBV9HB2PROD with RULES 3 See VerDate Sep<11>2014 16:31 Oct 09, 2018 Jkt 247001 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. PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 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. E:\FR\FM\10OCR1.SGM 10OCR1 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Rules and Regulations 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 daltland on DSKBBV9HB2PROD with RULES 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. VerDate Sep<11>2014 16:31 Oct 09, 2018 Jkt 247001 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. PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 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). E:\FR\FM\10OCR1.SGM 10OCR1 50808 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES 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). VerDate Sep<11>2014 16:31 Oct 09, 2018 Jkt 247001 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. PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 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 E:\FR\FM\10OCR1.SGM 80 FR 78450–51. 10OCR1 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Rules and Regulations surrounding the treatment of legacy swaps under the Swap Margin Rule. III. Regulatory Analysis A. Paperwork Reduction Act daltland on DSKBBV9HB2PROD with RULES 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 VerDate Sep<11>2014 16:31 Oct 09, 2018 Jkt 247001 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). PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 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 http://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. E:\FR\FM\10OCR1.SGM 10OCR1 50810 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Rules and Regulations 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/index.html to determine whether there were registered major swap participants. As of June 18, 2018, there were no Major Swaps Participants listed on this link. daltland on DSKBBV9HB2PROD with RULES 40 While VerDate Sep<11>2014 16:31 Oct 09, 2018 Jkt 247001 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 PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 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 E:\FR\FM\10OCR1.SGM U.S.C. 4809(a). 10OCR1 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Rules and Regulations 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. daltland on DSKBBV9HB2PROD with RULES 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. VerDate Sep<11>2014 16:31 Oct 09, 2018 Jkt 247001 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: PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 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 E:\FR\FM\10OCR1.SGM 10OCR1 50812 Federal Register / Vol. 83, No. 196 / Wednesday, October 10, 2018 / Rules and Regulations 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; * * * * * daltland on DSKBBV9HB2PROD with RULES * 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 10OCR1

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]



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Rules and Regulations
                                                Federal Register
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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. 

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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.

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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.
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    \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).
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    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\
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    \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).
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    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\
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    \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.
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    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.
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    \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.
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    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\
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    \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).
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    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\
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    \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.
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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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \35\ See 5 U.S.C. 603(a).
    \36\ See 83 FR 7413 (February 21, 2018).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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 http://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.

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

    \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/index.html to determine whether there were registered major swap 
participants. As of June 18, 2018, there were no Major Swaps 
Participants listed on this link.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 4809(a).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \42\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

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