Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 60341-60347 [2018-25602]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 83, Number 227 (Monday, November 26, 2018)]
[Rules and Regulations]
[Pages 60341-60347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-25602]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE71


Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting amendments (``Final Rule'') to its margin 
requirements for uncleared swaps for swap dealers (``SD'') and major 
swap participants (``MSP'') for which there is no prudential regulator 
(``CFTC Margin Rule''). The Commission is adopting these amendments in 
light of the rules recently adopted by the Board of Governors of the 
Federal Reserve System (``Board''), the Federal Deposit Insurance 
Corporation (``FDIC''), and the Office of the Comptroller of the 
Currency (``OCC'') (collectively, the

[[Page 60342]]

``QFC Rules'') that impose restrictions on certain uncleared swaps and 
uncleared security-based swaps and other financial contracts. 
Specifically, the Commission is amending the definition of ``eligible 
master netting agreement'' in the CFTC Margin Rule to ensure that 
master netting agreements of firms subject to the CFTC Margin Rule are 
not excluded from the definition of ``eligible master netting 
agreement'' based solely on such agreements' compliance with the QFC 
Rules. The Commission also is amending the CFTC Margin Rule such that 
any legacy uncleared swap (i.e., an uncleared swap entered into before 
the applicable compliance date of the CFTC Margin Rule) that is not now 
subject to the margin requirements of the CFTC Margin Rule will not 
become so subject if it is amended solely to comply with the QFC Rules. 
These amendments are consistent with amendments that the Board, FDIC, 
OCC, the Farm Credit Administration (``FCA''), and the Federal Housing 
Finance Agency (``FHFA'' and, together with the Board, FDIC, OCC, and 
FCA, the ``Prudential Regulators''), jointly published in the Federal 
Register on October 10, 2018.

DATES: This final rule is effective December 26, 2018.

FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, (202) 418-
5213, [email protected]; Frank Fisanich, Chief Counsel, (202) 418-5949, 
[email protected]; or Jacob Chachkin, Special Counsel, (202) 418-5496, 
[email protected], Division of Swap Dealer and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. The CFTC Margin Rule

    Section 731 of the Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') \1\ added a new section 4s to the Commodity 
Exchange Act (``CEA'') \2\ setting forth various requirements for SDs 
and MSPs. Section 4s(e) of the CEA directs the Commission to adopt 
rules establishing minimum initial and variation margin requirements on 
all swaps \3\ that are (i) entered into by an SD or MSP for which there 
is no Prudential Regulator \4\ (collectively, ``covered swap entities'' 
or ``CSEs'') and (ii) not cleared by a registered derivatives clearing 
organization (``uncleared swaps'').\5\ To offset the greater risk to 
the SD or MSP \6\ and the financial system arising from the use of 
uncleared swaps, these requirements must (i) help ensure the safety and 
soundness of the SD or MSP and (ii) be appropriate for the risk 
associated with the uncleared swaps held as an SD or MSP.\7\
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    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ 7 U.S.C. 1 et seq.
    \3\ For the definition of swap, see section 1a(47) of the CEA 
and Commission regulation 1.3. 7 U.S.C. 1a(47) and 17 CFR 1.3. It 
includes, among other things, an interest rate swap, commodity swap, 
credit default swap, and currency swap.
    \4\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a 
Prudential Regulator must meet the margin requirements for uncleared 
swaps established by the applicable Prudential Regulator. 7 U.S.C. 
6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining the term 
``Prudential Regulator'' to include the Board; the OCC; the FDIC; 
the FCA; and the FHFA). The definition further specifies the 
entities for which these agencies act as Prudential Regulators. The 
Prudential Regulators published final margin requirements in 
November 2015. See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential Margin Rule'').
    \5\ See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission regulation 
23.151, the Commission further defined this statutory language to 
mean all swaps that are not cleared by a registered derivatives 
clearing organization or a derivatives clearing organization that 
the Commission has exempted from registration as provided under the 
CEA. 17 CFR 23.151.
    \6\ For the definitions of SD and MSP, see section 1a of the CEA 
and Commission regulation 1.3. 7 U.S.C. 1a and 17 CFR 1.3.
    \7\ 7 U.S.C. 6s(e)(3)(A).
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    To this end, the Commission promulgated the CFTC Margin Rule in 
January 2016,\8\ establishing requirements for a CSE to collect and 
post initial margin \9\ and variation margin \10\ for uncleared swaps. 
These requirements vary based on the type of counterparty to such 
swaps.\11\ These requirements generally apply only to uncleared swaps 
entered into on or after the compliance date applicable to a particular 
CSE and its counterparty (``covered swap'').\12\ An uncleared swap 
entered into prior to a CSE's applicable compliance date for a 
particular counterparty (``legacy swap'') is generally not subject to 
the margin requirements in the CFTC Margin Rule.\13\
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    \8\ Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The CFTC Margin 
Rule, which became effective April 1, 2016, is codified in part 23 
of the Commission's regulations. 17 CFR 23.150-23.159, 23.161.
    \9\ Initial margin, as defined in Commission regulation 23.151 
(17 CFR 23.151), is the collateral (calculated as provided by Sec.  
23.154 of the Commission's regulations) that is collected or posted 
in connection with one or more uncleared swaps. Initial margin is 
intended to secure potential future exposure following default of a 
counterparty (i.e., adverse changes in the value of an uncleared 
swap that may arise during the period of time when it is being 
closed out), while variation margin is provided from one 
counterparty to the other in consideration of changes that have 
occurred in the mark-to-market value of the uncleared swap. See CFTC 
Margin Rule, 81 FR at 664 and 683.
    \10\ Variation margin, as defined in Commission regulation 
23.151 (17 CFR 23.151), is the collateral provided by a party to its 
counterparty to meet the performance of its obligation under one or 
more uncleared swaps between the parties as a result of a change in 
the value of such obligations since the trade was executed or the 
last time such collateral was provided.
    \11\ See Commission regulations 23.152 and 23.153, 17 CFR 23.152 
and 23.153. For example, the CFTC Margin Rule does not require a CSE 
to collect margin from, or post margin to, a counterparty that is 
neither a swap entity nor a financial end user (each as defined in 
17 CFR 23.151). Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e), 
each counterparty to an uncleared swap must be an eligible contract 
participant (``ECP''), as defined in section 1a(18) of the CEA, 7 
U.S.C. 1a(18).
    \12\ Pursuant to Commission regulation 23.161, compliance dates 
for the CFTC Margin Rule are staggered such that SDs must come into 
compliance in a series of phases over four years. The first phase 
affected SDs and their counterparties, each with the largest 
aggregate outstanding notional amounts of uncleared swaps and 
certain other financial products. These SDs began complying with 
both the initial and variation margin requirements of the CFTC 
Margin Rule on September 1, 2016. The second phase began March 1, 
2017, and required SDs to comply with the variation margin 
requirements of Commission regulation 23.153 with all relevant 
counterparties not covered in the first phase. See 17 CFR 23.161. On 
each September 1 thereafter ending with September 1, 2020, SDs will 
begin to comply with the initial margin requirements with 
counterparties with successively lesser outstanding notional 
amounts.
    \13\ See CFTC Margin Rule, 81 FR at 651 and Commission 
regulation 23.161. 17 CFR 23.161.
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    To the extent that more than one uncleared swap is executed between 
a CSE and its covered counterparty, the CFTC Margin Rule permits the 
netting of required margin amounts of each swap under certain 
circumstances.\14\ In particular, the CFTC Margin Rule, subject to 
certain limitations, permits a CSE to calculate initial margin and 
variation margin, respectively, on an aggregate net basis across 
uncleared swaps that are executed under the same eligible master 
netting agreement (``EMNA'').\15\ Moreover, the CFTC Margin Rule 
permits swap counterparties to identify one or more separate netting 
portfolios (i.e., a specified group of uncleared swaps the margin 
obligations of which will be netted only against each other) under the 
same EMNA, including having separate netting portfolios for covered 
swaps and legacy swaps.\16\ A netting

[[Page 60343]]

portfolio that contains only legacy swaps is not subject to the initial 
and variation margin requirements set out in the CFTC Margin Rule.\17\ 
However, if a netting portfolio contains any covered swaps, the entire 
netting portfolio (including all legacy swaps) is subject to such 
requirements.\18\
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    \14\ See CFTC Margin Rule, 81 FR at 651 and Commission 
regulations 23.152(c) and 23.153(d). 17 CFR 23.152(c) and 23.153(d).
    \15\ Id. The term EMNA is defined in Commission regulation 
23.151. 17 CFR 23.151. Generally, an EMNA creates a single legal 
obligation for all individual transactions covered by the agreement 
upon an event of default following certain specified permitted 
stays. For example, an International Swaps and Derivatives 
Association (``ISDA'') form Master Agreement may be an EMNA, if it 
meets the specified requirements in the EMNA definition.
    \16\ See CFTC Margin Rule, 81 FR at 651 and Commission 
regulations 23.152(c)(2)(ii) and 23.153(d)(2)(ii). 17 CFR 
23.152(c)(2)(ii) and 23.153(d)(2)(ii).
    \17\ Id.
    \18\ Id.
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    A legacy swap may lose its legacy treatment under the CFTC Margin 
Rule, causing it to become a covered swap and causing any netting 
portfolio in which it is included to be subject to the requirements of 
the CFTC Margin Rule. For reasons discussed in the CFTC Margin Rule, 
the Commission elected not to extend the meaning of legacy swaps to 
include (1) legacy swaps that are amended in a material or nonmaterial 
manner; (2) novations of legacy swaps; and (3) new swaps that result 
from portfolio compression of legacy swaps.\19\ Therefore, and as 
relevant here, a legacy swap that is amended after the applicable 
compliance date may become a covered swap subject to the initial and 
variation margin requirements in the CFTC Margin Rule. In that case, 
netting portfolios that were intended to contain only legacy swaps and, 
thus, not be subject to the CFTC Margin Rule may become so subject.
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    \19\ See CFTC Margin Rule, 81 FR at 675. The Commission notes 
that certain limited relief has been given from this standard. See 
CFTC Staff Letter No. 17-52 (Oct. 27. 2017), available at https://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/17-52.pdf.
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B. The QFC Rules

    In late 2017, as part of the broader regulatory reform effort 
following the financial crisis to promote U.S. financial stability and 
increase the resolvability and resiliency of U.S. global systemically 
important banking institutions (``U.S. GSIBs'') \20\ and the U.S. 
operations of foreign global systemically important banking 
institutions (together with U.S. GSIBS, ``GSIBs''), the Board, FDIC, 
and OCC adopted the QFC Rules. The QFC Rules establish restrictions on 
and requirements for uncleared qualified financial contracts \21\ 
(collectively, ``Covered QFCs'') of GSIBs, the subsidiaries of U.S. 
GSIBs, and certain other very large OCC-supervised national banks and 
Federal savings associations (collectively, ``Covered QFC 
Entities'').\22\ They are designed to help ensure that a failed 
company's passage through a resolution proceeding--such as bankruptcy 
or the special resolution process created by the Dodd-Frank Act--would 
be more orderly, thereby helping to mitigate destabilizing effects on 
the rest of the financial system.\23\ Two aspects of the QFC Rules help 
achieve this goal.\24\
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    \20\ See 12 CFR 217.402 (defining global systemically important 
banking institution).
    \21\ Qualified financial contract (``QFC'') is defined in 
section 210(c)(8)(D) of the Dodd-Frank Act to mean any securities 
contract, commodity contract, forward contract, repurchase 
agreement, swap agreement, and any similar agreement that the FDIC 
determines by regulation, resolution, or order to be a qualified 
financial contract. 12 U.S.C. 5390(c)(8)(D).
    \22\ See, e.g., 12 CFR 252.82(c) (defining Covered QFC). See 
also 82 FR 42882 (Sep. 12, 2017) (for the Board's QFC Rule). See 
also 82 FR 50228 (Oct. 30, 2017) (for FDIC's QFC Rule). See also 82 
FR 56630 (Nov. 29, 2017) (for the OCC's QFC Rule). The effective 
date of the Board's QFC Rule is November 13, 2017, and the effective 
date for the OCC's QFC Rule and the substance of the FDIC's QFC Rule 
is January 1, 2018. The QFC Rules include a phased-in conformance 
period for a Covered QFC Entity, beginning on January 1, 2019 and 
ending on January 1, 2020, that varies depending upon the 
counterparty type of the Covered QFC Entity. See, e.g., 12 CFR 
252.82(f).
    \23\ See, e.g., Board's QFC Rule at 42883. In particular, the 
QFC Rules seek to facilitate the orderly resolution of a failed GSIB 
by limiting the ability of the firm's Covered QFC counterparties to 
terminate such contracts immediately upon entry of the GSIB or one 
of its affiliates into resolution. Given the large volume of QFCs to 
which covered entities are a party, the exercise of default rights 
en masse as a result of the failure or significant distress of a 
covered entity could lead to failure and a disorderly resolution if 
the failed firm were forced to sell off assets, which could spread 
contagion by increasing volatility and lowering the value of similar 
assets held by other firms, or to withdraw liquidity that it had 
provided to other firms.
    \24\ Id.
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    First, the QFC Rules generally require the Covered QFCs of Covered 
QFC Entities to contain contractual provisions explicitly providing 
that any default rights or restrictions on the transfer of the Covered 
QFC are limited to the same extent as they would be pursuant to the 
Federal Deposit Insurance Act (``FDI Act'')\25\ and Title II of the 
Dodd-Frank Act. Requiring these points to be stated as explicit 
contractual provisions in the Covered QFCs is expected to reduce the 
risk that the relevant limitations on default rights or transfer 
restrictions would be challenged by a court in a foreign 
jurisdiction.\26\
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    \25\ 12 U.S.C. 1811 et seq.
    \26\ See, e.g., Board's QFC Rule at 42883 and 42890 and 12 CFR 
252.83(b).
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    Second, the QFC Rules generally prohibit Covered QFCs from allowing 
counterparties to Covered QFC Entities to exercise default rights 
related, directly or indirectly, to the entry into resolution of an 
affiliate of the Covered QFC Entity (``cross-default rights'').\27\ 
This is to ensure that if an affiliate of a solvent Covered QFC Entity 
fails, the counterparties of that solvent Covered QFC Entity cannot 
terminate their contracts with it based solely on the failure of its 
affiliate.\28\
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    \27\ See, e.g., Board's QFC Rule at 42883 and 12 CFR 252.84(b). 
Covered QFC Entities are similarly generally prohibited from 
entering into Covered QFCs that would restrict the transfer of a 
credit enhancement supporting the Covered QFC from the Covered QFC 
Entity's affiliate to a transferee upon the entry into resolution of 
the affiliate. See, e.g., Board's QFC Rule at 42890 and 12 CFR 
252.84(b)(2).
    \28\ Id.
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    Covered QFC Entities are required to enter into amendments to 
certain pre-existing Covered QFCs to explicitly provide for these 
requirements and to ensure that Covered QFCs entered into after the 
applicable compliance date for the rule explicitly provide for the 
same.\29\
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    \29\ See, e.g., 12 CFR 252.82(a) and (c). The QFC Rules require 
a Covered QFC Entity to conform Covered QFCs (i) entered into, 
executed, or to which it otherwise becomes a party on or after 
January 1, 2019 or (ii) entered into, executed, or to which it 
otherwise became a party before January 1, 2019, if the Covered QFC 
Entity or any affiliate that is a Covered QFC Entity also enters, 
executes, or otherwise becomes a party to a new Covered QFC with the 
counterparty to the pre-existing Covered QFC or a consolidated 
affiliate of the counterparty on or after January 1, 2019.
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C. Interaction of CFTC Margin Rule and QFC Rules

    As noted above, the current definition of EMNA in Commission 
regulation 23.151 allows for certain specified permissible stays of 
default rights of the CSE. Specifically, consistent with the QFC Rules, 
the current definition provides that such rights may be stayed pursuant 
to a special resolution regime such as Title II of the Dodd-Frank Act, 
the FDI Act, and substantially similar foreign resolution regimes.\30\ 
However, the current EMNA definition does not explicitly recognize 
certain restrictions on the exercise of a CSE's cross-default rights 
required under the QFC Rules.\31\ Therefore, a pre-existing EMNA that 
is amended in order to become compliant with the QFC Rules or a new 
master netting agreement that conforms to the QFC Rules will not meet 
the current definition of EMNA, and a CSE that is a counterparty under 
such a master netting agreement--one that does not meet the definition 
of EMNA--would be required to measure its exposures from covered swaps 
on a gross basis, rather than aggregate net basis, for purposes of the 
CFTC Margin Rule.\32\ Further, if a legacy swap were amended to comply

[[Page 60344]]

with the QFC Rules,\33\ it would become a covered swap subject to 
initial and variation margin requirements under the CFTC Margin 
Rule.\34\
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    \30\ 17 CFR 23.151.
    \31\ Id.
    \32\ See CFTC Margin Rule, 81 FR at 651 and Commission 
regulations 23.152(c) and 23.153(d). 17 CFR 23.152(c) and 23.153(d).
    \33\ Covered QFC Entities must conform to the requirements of 
the QFC Rules for Covered QFCs entered into on or after January 1, 
2019 and, in some instances, Covered QFCs entered into before that 
date.\33\ To do so, a Covered QFC Entity may need to amend the 
contractual provisions of its pre-existing Covered QFCs.
    \34\ Note, therefore, that such amendment would affect all 
parties to the legacy swap, not only the Covered QFC Entity subject 
to the QFC Rules.
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II. Proposal

    On May 23, 2018, the Commission published a Notice of Proposed 
Rulemaking (``Proposal'') \35\ to amend Commission regulations 23.151 
and 23.161 to protect CSEs and their counterparties from being 
disadvantaged because their master netting agreements do not satisfy 
the definition of an EMNA, solely because such agreements' comply with 
the QFC Rules or because such agreements would have to be amended to 
achieve compliance. Specifically, the Commission proposed to (i) revise 
the definition of EMNA in Commission regulation 23.151 such that a 
master netting agreement that meets the requirements of the QFC Rules 
may be an EMNA and (ii) amend Commission regulation 23.161 such that a 
legacy swap will not be a covered swap under the CFTC Margin Rule if it 
is amended solely to conform to the QFC Rules.
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    \35\ 83 FR 23842 (May 23, 2018).
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    The Commission requested comments on the Proposal and also 
solicited comments on the impact of the Proposal on small entities, the 
Commission's cost benefit considerations, and any anti-competitive 
effects of the Proposal. The comment period for the Proposal ended on 
July 23, 2018.

III. Summary of Comments

    The Commission received four relevant comments in response to the 
Proposal--from the Institute of International Bankers (``IIB''), ISDA, 
Navient Corporation (``Navient''), and NEX Group plc (``NEX''), 
respectively.\36\ Though these comments raised issues unrelated to the 
Proposal or suggested additions that would go beyond the scope of the 
Proposal,\37\ the comments were generally supportive of the aims of the 
Proposal.
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    \36\ The Commission also received one comment that was not 
relevant to the Proposal. All of the comments are available at 
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2878.
    \37\ Navient requested relief from covered swap status arising 
from certain amendments to legacy swaps involving special purpose 
vehicles created for securitization purposes (``Securitization 
SPVs'') and more generally requested an exemption from the CFTC 
Margin Rule for certain Securitization SPVs. NEX requested relief 
from covered swap status for legacy swaps which are compressed in a 
multilateral portfolio compression exercise. ISDA and IIB requested 
the Commission, in conjunction with the Prudential Regulators, more 
generally provide broad guidance on amendments to legacy swaps, 
including that amendments required by domestic or foreign regulatory 
or legislative developments (e.g., reforms of benchmark interest 
rates) will not cause them to become covered swaps. These requests 
for additional changes and exemptions to the CFTC Margin Rule are 
outside of the scope of the Proposal, as the Proposal relates solely 
to changes to the CFTC Margin Rule in relation to the requirements 
of the QFC Rules. However, as the Commission continues to assess 
industry developments such as interest rate benchmark reform, it 
will take into account any associated implementation ramifications 
surrounding the treatment of legacy swaps under the CFTC Margin 
Rule.
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    Navient and NEX were supportive of the Commission's Proposal in 
full. ISDA was supportive of the Commission's proposal to revise the 
definition of EMNA. IIB did not comment on this aspect of the Proposal. 
ISDA and IIB were appreciative of the proposal on the treatment of 
legacy swaps impacted by the QFC Rules, but, on balance, thought broad 
guidance on the treatment of amendments to legacy swaps more generally 
was a better alternative to the proposed limited amendment of the CFTC 
Margin Rule relating to the QFC Rules. Such broad guidance requested by 
ISDA and IIB is outside of the scope of the Proposal.

IV. Final Rule

    After consideration of relevant comments, the Commission is 
adopting this Final Rule as proposed.
    Accordingly, the Commission is adding a new paragraph (2)(ii) to 
the definition of ``eligible master netting agreement'' in Commission 
regulation 23.151 and making other minor related changes to that 
definition such that a master netting agreement may be an EMNA even 
though 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 any of the following parts of Title 12 of the 
Code of Federal Regulations: Part 47, subpart I of part 252, or part 
382, as applicable. These enumerated provisions contain the relevant 
requirements that have been added by the QFC Rules.
    Further, so that a legacy swap will not be a covered swap under the 
CFTC Margin Rule if it is amended solely to conform to the QFC Rules, 
the Commission is adding a new paragraph (d) to the end of Commission 
regulation 23.161, as shown in the rule text in this document. This 
addition will provide certainty to a CSE and its counterparties about 
the treatment of legacy swaps and any applicable netting arrangements 
in light of the QFC Rules. However, if, in addition to amendments 
required to comply with the QFC Rules, the parties enter into any other 
amendments, the amended legacy swap will be a covered swap in 
accordance with the application of the CFTC Margin Rule.
    This Final Rule is consistent with amendments to the Prudential 
Margin Rule that the Prudential Regulators jointly published in the 
Federal Register on October 10, 2018.\38\ Making amendments to the CFTC 
Margin Rule that are consistent with those of the Prudential Regulators 
furthers the Commission's efforts to harmonize its margin regime with 
the Prudential Regulators' margin regime and is responsive to 
suggestions received as part of the Commission's Project KISS 
initiative.\39\
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    \38\ Margin and Capital Requirements for Covered Swap Entities; 
Final Rule, 83 FR 50805 (Oct. 10, 2018).
    \39\ See Project KISS Initiatives, available at https://comments.cftc.gov/KISS/KissInitiative.aspx. The Commission received 
requests to coordinate revisions to the CFTC Margin Rule with the 
Prudential Regulators. See comments from Credit Suisse (``CS''), the 
Financial Services Roundtable (``FSR''), ISDA, the Managed Funds 
Association (``MFA''), and SIFMA Global Foreign Exchange Division 
(``GFMA''). GFMA requested that the Commission coordinate with the 
Prudential Regulators on proposing or making any changes to the CFTC 
Margin Rule to ensure harmonization and consistency across the 
respective rule sets. In addition, CS, FSR, ISDA, and MFA, as well 
as GFMA requested that the Commission make certain specific changes 
to the CFTC Margin Rule in coordination with the Prudential 
Regulators relating to, for example, initial margin calculations and 
requirements, margin settlement timeframes, netting product sets, 
inter-affiliate margin exemptions, and cross-border margin issues. 
Project KISS suggestions are available at https://comments.cftc.gov/KISS/KissInitiative.aspx.
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V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies, 
in promulgating regulations, to consider whether the rules they propose 
will have a significant economic impact on a substantial number of 
small entities and, if so, to provide a regulatory flexibility analysis 
regarding the economic impact on those entities. In the Proposal, the 
Commission certified that the Proposal would not have a significant 
economic impact on a substantial number of small entities. The 
Commission requested comments with respect to the RFA and received no 
such comments.
    As discussed in the Proposal, this Final Rule only affects certain 
SDs and

[[Page 60345]]

MSPs that are subject to the QFC Rules and their covered 
counterparties, all of which are required to be ECPs.\40\ The 
Commission has previously determined that SDs, MSPs, and ECPs are not 
small entities for purposes of the RFA.\41\ Therefore, the Commission 
finds that this Final Rule will not have a significant economic impact 
on a substantial number of small entities, as defined in the RFA.
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    \40\ See supra, n.12.
    \41\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and 
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001) 
(ECPs).
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    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that this Final Rule will not 
have a significant economic impact on a substantial number of small 
entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \42\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. The Commission may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid Office of Management 
and Budget control number. As discussed in the Proposal, this Final 
Rule contains no requirements subject to the PRA.
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    \42\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Considerations

    The Commission received no comments with regard to its preliminary 
cost-benefit considerations in the Proposal. Section 15(a) of the CEA 
requires the Commission to consider the costs and benefits of its 
actions before promulgating a regulation under the CEA. Section 15(a) 
further specifies that the costs and benefits shall be evaluated in 
light of the following five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission considers the costs and 
benefits resulting from its discretionary determinations with respect 
to the section 15(a) considerations.
    This Final Rule prevents certain CSEs and their counterparties from 
being disadvantaged because their master netting agreements do not 
satisfy the definition of an EMNA, solely because such agreements' 
comply with the QFC Rules or because such agreements would have to be 
amended to achieve compliance. It revises the definition of EMNA such 
that a master netting agreement that meets the requirements of the QFC 
Rules may be an EMNA and provides that an amendment to a legacy swap 
solely to conform to the QFC Rules will not cause that swap to be a 
covered swap under the CFTC Margin Rule.
    The Commission notes that the consideration of costs and benefits 
below is based on the understanding that the markets function 
internationally, with many transactions involving United States firms 
taking place across international boundaries; with some Commission 
registrants being organized outside of the United States; with leading 
industry members typically conducting operations both within and 
outside the United States; and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
below discussion of costs and benefits refers to the effects of this 
Final Rule on all activity subject to it, whether by virtue of the 
activity's physical location in the United States or by virtue of the 
activity's connection with or effect on United States commerce under 
CEA section 2(i).\43\ In particular, the Commission notes that some 
persons affected by this rulemaking are located outside of the United 
States.
---------------------------------------------------------------------------

    \43\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The baseline against which the benefits and costs associated with 
this Final Rule is compared is the uncleared swaps markets as they 
exist today, with the QFC Rules in effect.\44\ With this as the 
baseline for this Final Rule, the following are the benefits and costs 
of this Proposal.
---------------------------------------------------------------------------

    \44\ Although, as described above, the QFC Rules will be 
gradually phased in, for purposes of the cost benefit 
considerations, we assume that the affected CSEs are in compliance 
with the QFC Rules.
---------------------------------------------------------------------------

1. Benefits
    As described above, this Final Rule will allow parties whose master 
netting agreements satisfy the proposed revised definition of EMNA to 
continue to calculate initial margin and variation margin, 
respectively, on an aggregate net basis across uncleared swaps that are 
executed under that EMNA. Otherwise, a CSE that is a counterparty under 
a master netting agreement that complies with the QFC Rules and, thus, 
does not satisfy the current definition of EMNA, would be required to 
measure its exposures from covered swaps on a gross basis for purposes 
of the CFTC Margin Rule. In addition, this Final Rule allows legacy 
swaps to maintain their legacy status, notwithstanding that they are 
amended to comply with the QFC Rules. Otherwise, such swaps would 
become covered swaps subject to initial and variation margin 
requirements under the CFTC Margin Rule. This Final Rule provides 
certainty to CSEs and their counterparties about the treatment of 
legacy swaps and any applicable netting arrangements in light of the 
QFC Rules.
2. Costs
    Because this Final Rule (i) will solely expand the definition of 
EMNA to potentially include those master netting agreements that meet 
the requirements of the QFC Rules and allow the amendment of legacy 
swaps solely to conform to the QFC Rules without causing such swaps to 
become covered swaps and (ii) does not require market participants to 
take any action to benefit from these changes, the Commission believes 
that this Final Rule will not impose any additional costs on market 
participants.
3. Section 15(a) Considerations
    In light of the foregoing, the CFTC has evaluated the costs and 
benefits of this Final Rule pursuant to the five considerations 
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
    As noted above, this Final Rule will protect market participants by 
allowing them to comply with the QFC Rules without being disadvantaged 
under the CFTC Margin Rule. This Final Rule will facilitate market 
participants' use of swaps that would be affected by this Final Rule to 
hedge. Without this Final Rule, posting gross margin instead of net 
margin for those swaps would be required, which would raise transaction 
costs and thus likely reduce the use of such swaps for hedging.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    This Final Rule will make the uncleared swap markets more efficient 
by allowing net margining of swap portfolios under master netting 
agreements that comply with the QFC Rules and, thus, do not satisfy the 
current EMNA definition instead of requiring the payment of gross 
margin under such agreements. Also, absent this Final Rule, market 
participants that are required to amend their EMNAs to comply with the 
QFC Rules and, thereafter, required to measure their

[[Page 60346]]

exposure on a gross basis and to post margin on their legacy swaps, 
would be placed at a competitive disadvantage as compared to those 
market participants that are not so required to amend their EMNAs. 
Therefore, this Final Rule may increase the competitiveness of the 
uncleared swaps markets. In addition, this Final Rule furthers the 
Commission's efforts to harmonize its margin regime with the Prudential 
Regulators' margin regime, and therefore may improve the efficiency, 
competitiveness, and financial integrity of markets.
(c) Price Discovery
    This Final Rule permits the payment of net margin instead of gross 
margin on portfolios of swaps affected by this Final Rule, which would 
reduce margining costs to those swaps transactions. Reducing the cost 
to transact these swaps, might lead to more trading, which could 
potentially improve liquidity and benefit price discovery.
(d) Sound Risk Management
    This Final Rule prevents the payment of gross margin on swaps 
affected by this Final Rule, which does not reflect true economic 
counterparty credit risk for swap portfolios transacted with 
counterparties. Therefore, this Final Rule supports sound risk 
management.
(e) Other Public Interest Considerations
    The Commission has not identified an impact on other public 
interest considerations as a result of this Final Rule.

D. Antitrust Laws

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation.\45\ The Commission believes that the public 
interest to be protected by the antitrust laws is generally to protect 
competition. The Commission requested and did not receive any comments 
on whether the Proposal implicated any other specific public interest 
to be protected by the antitrust laws.
---------------------------------------------------------------------------

    \45\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission has considered this Final Rule to determine whether 
it is anticompetitive and has preliminarily identified no 
anticompetitive effects. The Commission requested and did not receive 
any comments on whether the Proposal was anticompetitive and, if it is, 
what the anticompetitive effects are.
    Because the Commission has preliminarily determined that this Final 
Rule is not anticompetitive and has no anticompetitive effects and 
received no comments on its determination, the Commission has not 
identified any less anticompetitive means of achieving the purposes of 
the CEA.

List of Subjects in 17 CFR Part 23

    Capital and margin requirements, Major swap participants, Swap 
dealers, Swaps.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 23 as follows:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
1. The authority citation for part 23 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1,6c, 6p, 6r, 6s, 6t, 
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
    Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b), 
Pub. L. 111-203, 124 Stat. 1641 (2010).


0
2. In Sec.  23.151, revise paragraph (2) in the definition of Eligible 
master netting agreement to read as follows:


Sec.  23.151  Definitions applicable to margin requirements.

* * * * *
    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 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 12 CFR part 47; 12 CFR part 252, subpart I; or 
12 CFR part 382, as applicable;
* * * * *

0
3. In Sec.  23.161, add paragraph (d) to read as follows:


Sec.  23.161  Compliance dates.

* * * * *
    (d) For purposes of determining whether an uncleared swap was 
entered into prior to the applicable compliance date under this 
section, a covered swap entity may disregard amendments to the 
uncleared swap that were entered into solely to comply with the 
requirements of 12 CFR part 47; 12 CFR part 252, subpart I; or 12 CFR 
part 382, as applicable.

    Issued in Washington, DC, on November 19, 2018, by the 
Commission.
Robert Sidman,
Deputy Secretary of the Commission.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix to Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Commission Voting Summary and Chairman's 
Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo, and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    Through the Commission's Project KISS initiative, the Commission 
received suggestions to harmonize its uncleared swap margin rule 
with that of the Prudential Regulators. In response, this final rule 
does so and provides market certainty, specifically with respect to 
amending the CFTC's definition of ``eligible master netting 
agreement'' (EMNA) and amending the CFTC Margin Rule such that any 
legacy swap will not become subject to the CFTC Margin Rule if it is 
amended solely to comply with changes adopted by the Prudential 
Regulators in 2017. The Commission recognizes that the CFTC Margin 
Rule does not provide relief for legacy swaps that might need to be 
amended to meet regulatory changes or requirements,

[[Page 60347]]

and is committed to considering other meritorious requests for 
relief.

[FR Doc. 2018-25602 Filed 11-23-18; 8:45 am]
BILLING CODE 6351-01-P