Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 56392-56397 [2019-22955]
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Federal Register / Vol. 84, No. 204 / Tuesday, October 22, 2019 / Proposed Rules
Trade Commission, 600 Pennsylvania
Avenue NW, Washington, DC 20580.
SUPPLEMENTARY INFORMATION:
I. Comment Period Extension
On July 25, 2019, the Commission
published in the Federal Register a
Request for Public Comment on the
Federal Trade Commission’s
Implementation of the COPPA Rule (84
FR 35842), with an October 23, 2019
deadline for filing comments (‘‘the
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COPPA Rule in 2013. Interested parties
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on ‘‘The Future of the COPPA Rule’’ on
October 7, 2019.
The Commission agrees that allowing
additional time for filing comments on
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more complete record. The Commission
has therefore decided to extend the
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December 9, 2019. A 45-day extension
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confidentiality request that meets the
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By direction of the Commission.
April J. Tabor,
Acting Secretary.
[FR Doc. 2019–22940 Filed 10–21–19; 8:45 am]
BILLING CODE 6750–01–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 23
RIN 3038–AE77
Margin Requirements for Uncleared
Swaps for Swap Dealers and Major
Swap Participants
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is seeking comment on
proposed amendments to the margin
requirements for uncleared swaps for
swap dealers (‘‘SD’’) and major swap
participants (‘‘MSP’’) for which there is
no prudential regulator. The proposed
amendments would add the European
Stability Mechanism (‘‘ESM’’) to the list
of entities that are expressly excluded
from the definition of financial end user
and correct an erroneous cross-reference
in the Commission’s regulations.
DATES: Comments must be received on
or before December 23, 2019.
ADDRESSES: You may submit comments,
identified by RIN 3038–AE77, by any of
the following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this rulemaking and
follow the instructions on the Public
Comment Form.
• Mail: Send to Christopher
Kirkpatrick, Secretary of the
Commission, Commodity Futures
SUMMARY:
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Federal Register / Vol. 84, No. 204 / Tuesday, October 22, 2019 / Proposed Rules
Trading Commission, Three Lafayette
Center, 1155 21st Street NW,
Washington, DC 20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail, above.
Please submit your comments using
only one of these methods. Submissions
through the CFTC Comments Portal are
encouraged.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
comments.cftc.gov. You should submit
only information that you wish to make
available publicly. If you wish the
Commission to consider information
that you believe is exempt from
disclosure under the Freedom of
Information Act (‘‘FOIA’’), a petition for
confidential treatment of the exempt
information may be submitted according
to the procedures established in § 145.9
of the Commission’s regulations.1
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from https://comments.cftc.gov that it
may deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the FOIA.
FOR FURTHER INFORMATION CONTACT:
Joshua B. Sterling, Director, 202–418–
6056, jsterling@cftc.gov; Thomas J.
Smith, Deputy Director, 202–418–5495,
tsmith@cftc.gov; Warren Gorlick,
Associate Director, 202–418–5195,
wgorlick@cftc.gov; Carmen MoncadaTerry, Special Counsel, 202–418–5795,
cmoncada-terry@cftc.gov; or Rafael
Martinez, Senior Financial Risk Analyst,
202–418–5462, rmartinez@cftc.gov,
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
In January 2016, the Commission
adopted §§ 23.150 through 23.161
(collectively, ‘‘CFTC Margin Rule’’) to
implement section 4s(e) of the
Commodity Exchange Act (‘‘CEA’’),2
1 17 CFR 145.9. Commission regulations referred
to herein are found at 17 CFR chapter I.
2 See Margin Requirements for Uncleared Swaps
for Swap Dealers and Major Swap Participants, 81
FR 636 (Jan. 6, 2016) (‘‘Final Margin Rule’’); Margin
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which requires SDs and MSPs for which
there is not a prudential regulator
(‘‘CSEs’’) to meet minimum initial and
variation margin requirements adopted
by the Commission by rule or
regulation.3
Consistent with the administration of
swap regulation, the Commission’s
Division of Swap Dealer and
Intermediary Oversight (‘‘DSIO’’), on an
ongoing basis, reviews rules subject to
its oversight, no-action letters and other
grants of relief. In conducting that
exercise, DSIO identified a no-action
letter, further discussed below, whose
codification would provide greater
certainty to the marketplace concerning
the scope and application of the CFTC
Margin Rule and allow for its effective
implementation. DSIO also identified a
typographical error in Commission
§ 23.157 that without correction would
cause confusion in the application of
the CFTC Margin Rule.
A. No-Action Letter
In July 2017, the ESM submitted a
letter to the Commission requesting that
SDs be relieved from the CFTC Margin
Rule when entering into swap
transactions with the ESM. The ESM
represented that it was similar to the
multilateral development banks that are
listed in Commission § 23.151
(including the International Bank for
Reconstruction and Development, the
Asian Development Bank, and the
European Investment Bank), which are
excluded from the definition of
financial end user and whose swaps are
exempt from the CFTC Margin Rule.
DSIO granted no-action relief, stating
that it would not recommend
enforcement action if an SD subject to
the CFTC Margin Rule did not comply
with that rule solely in respect of
uncleared swaps between the SD and
the ESM.4
Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants—Cross-Border
Application of the Margin Requirements, 81 FR
34818 (May 31, 2016).
3 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 of Governors of the Federal
Reserve System; the Office of the Comptroller of the
Currency; the Federal Deposit Insurance
Corporation; the Farm Credit Administration; and
the Federal Housing Finance Agency, and
specifying 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).
4 See CFTC Letter No. 17–34, Commission
§§ 23.150 through 23.159, and 23.161; No-Action
Position with Respect to Uncleared Swaps with the
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II. Proposed Regulations
A. Amendment of Commission
§ 23.151—Definition of Financial End
User
The CFTC Margin Rule applies to
swap transactions between CSEs and
counterparties that are SDs, MSPs or
financial end users. Commission
§ 23.151 defines the term ‘‘financial end
user’’ 5 and expressly carves out from
the definition sovereign entities,
multilateral development banks, the
Bank for International Settlements,
entities exempt from the definition of
financial entity pursuant to section
2(h)(7)(C)(iii) of the Act and
implementing regulations, affiliates that
qualify for the exemption from clearing
pursuant to section 2(h)(7)(D) of the Act,
and eligible treasury affiliates that the
Commission exempts from the
requirements of Commission §§ 23.150
through 23.161 by rule.6 The
Commission proposes to revise the
definition of financial end user to
further exclude the ESM.
The proposed amendment would
codify CFTC Letter No. 17–34, which
provides relief from the CFTC Margin
Rule with respect to uncleared swaps
between SDs and the ESM. In granting
relief, DSIO stated that the ESM, like
multilateral development banks
excluded from the financial end user
definition, had a lower risk profile,
posing less counterparty risk to an SD
and less systemic risk to the financial
system. While not explicitly finding that
the ESM was a multilateral development
bank, DSIO recognized that its function
and credit profile justified the relief.7
The Commission proposes to amend
the definition of financial end user in
Commission § 23.151 by adding the
ESM to the list of entities that are
expressly excluded from the definition.
As described in CFTC Letter No. 17–34,
the ESM is an intergovernmental
financial institution that provides
financial assistance for national or
regional development to Euro area
member states that are in or are
threatened by severe financial distress,
European Stability Mechanism (July 24, 2017)
(‘‘CFTC Letter No. 17–34’’), available at https://
www.cftc.gov/sites/default/files/idc/groups/public/
@lrlettergeneral/documents/letter/17-34.pdf.
5 See 17 CFR 23.151.
6 See id.
7 The Commission notes that the Basel Committee
on Banking Supervision ascribes to the ESM a 0%
risk weight. The ESM has been included in the list
of entities receiving a 0% risk weight in the
document entitled ‘‘Basel II: International
Convergence of Capital Measurement and Capital
Standards: A Revised Framework—Comprehensive
Version, June 2006.’’ See BIS, Risk Weight for the
European Stability Mechanism (ESM) and European
Financial Stability Facility (EFSF), https://
www.bis.org/publ/bcbs_nl17.htm.
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similar to entities listed as multilateral
development banks in Commission
§ 23.151, which are excluded from the
definition of financial end user. To
accomplish its policy goals, the ESM
utilizes several financial assistance
instruments, including loans in various
forms which can be used for multiple
purposes and are offered only subject to
bespoke specified conditions, including
economic reforms. The ESM regularly
enters the international capital markets
to fund these loans. It enters into
uncleared swaps with SDs to hedge the
interest rate and currency risks it faces
as a result of entering into and funding
these loans and to hedge risks
associated with its invested contributed
capital.
The Commission notes that,
contemporaneously with the issuance of
this proposal, DSIO staff is issuing a
revised no-action letter to phase out the
relief provided under CFTC Letter No.
17–34, which would instead be
provided under Commission § 23.151.
To allow adequate time for submission
and review of comments, and
finalization of the proposed amendment
to § 23.151, the revised no-action letter
will provide relief until the earlier of: (i)
April 14, 2020 at 11:59 p.m. (Eastern
Time); or (ii) the effective date of final
Commission action on this rule
proposal.
Based on the foregoing, the
Commission proposes to exclude the
ESM from the definition of a financial
end user, which provides clarity and
certainty to CSEs that uncleared swaps
entered into with the ESM are not
subject to the CFTC Margin Rule. The
Commission believes that this approach
is appropriate as activities conducted by
the ESM, like activities conducted by
multilateral development banks that are
excluded from the financial end user
definition, generally have a different
purpose in the financial system. These
types of entities are established by
governments and their financial
activities are designed to further
governmental purposes. As such, the
ESM, like multilateral development
banks, has a lower risk profile and poses
less counterparty risk to an SD and less
systemic risk to the financial system.
The Commission also believes that
this proposed rule will encourage
international comity and continued
cooperation between the Commission
and EU authorities. In this regard, the
Commission notes that the European
Stability Mechanism is exempt from the
European Market Infrastructure
Regulation or EMIR’s margin rules for
OTC derivatives contracts not cleared by
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a central counterparty.8 The proposed
rule acknowledges the unique interests
of the EU authorities in the ESM by
excluding the ESM from the CFTC’s
margin requirements for uncleared
swaps. The principles of international
comity counsel mutual respect for the
important interests of foreign
sovereigns.9
Accordingly, paragraph (2)(iii) of the
definition of financial end user in
Commission § 23.151 would be
amended by replacing ‘‘The Bank for
International Settlements’’ with ‘‘The
Bank for International Settlements and
the European Stability Mechanism.’’
Request for comment: The
Commission requests comment
regarding the proposed amendment to
Commission § 23.151. The Commission
specifically requests comment on the
following question:
• Are there any other risk factors or
issues pertaining to the ESM’s business
model that the Commission should
consider in finalizing this rulemaking?
B. Amendment of Commission
§ 23.157—Correction of Cross-Reference
Commission § 23.157 requires initial
margin collected from or posted by a
CSE to be held by one or more
independent custodians. The CSE must
enter into a custodial agreement with
each custodian that holds the initial
margin collateral. In particular,
paragraph (c)(1) of Commission § 23.157
provides that the custodial agreement
must prohibit the custodian from
rehypothecating, repledging, reusing, or
otherwise transferring the collateral
except that cash collateral may be held
in a general deposit account with the
custodian if the funds in the account are
used to purchase an asset described in
Commission § 23.156(a)(1)(iv) through
(xii).
Commission staff has determined that
the cross-reference to ‘‘§ 23.156(a)(1)(iv)
through (xii)’’ in paragraph (c)(1) is
erroneous. First, the existing crossreference incorrectly refers to nonexisting paragraphs. Second, the
existing cross-reference excludes
treasury securities and U.S. Government
agency securities, which are included in
8 See Regulation (EU) No 648/2012 of the
European Parliament and the Council of the
European Union of July 4, 2012.
9 See Restatement (Third) of Foreign Relations
Law of the United States sec. 403 (Am. Law Inst.
2018) (the Restatement). The Restatement provides
that even where a country has a basis for
jurisdiction, it should not prescribe law with
respect to a person or activity in another country
when the exercise of such jurisdiction is
unreasonable. See Restatement section 403(1).
Notably, the Restatement recognizes that, in the
exercise of international comity, reciprocity is an
appropriate consideration in determining whether
to exercise jurisdiction extraterritorially.
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the list of eligible collateral set forth in
Commission § 23.156(a)(1), and which
the Commission intended to include as
eligible assets into which cash collateral
can be converted.10 The correct crossreference should be § 23.156(a)(1)(ii)
through (x). The Commission is
proposing an amendment to
Commission § 23.157(c)(1) to remove
the erroneous cross-reference to
‘‘§ 23.156(a)(1)(iv) through (xii)’’ and
replace it with the corrected crossreference ‘‘§ 23.156(a)(1)(ii) through
(x).’’
Request for comment: The
Commission requests comment
regarding the proposed amendment to
Commission § 23.157.
III. Administrative Compliance
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires Federal agencies to
consider whether the rules they propose
will have a significant economic impact
on a substantial number of small entities
and, if so, provide a regulatory
flexibility analysis respecting the
impact.11 Whenever an agency
publishes a general notice of proposed
rulemaking for any rule, pursuant to the
notice-and-comment provisions of the
Administrative Procedure Act,12 a
regulatory flexibility analysis or
certification typically is required.13 The
Commission previously has established
certain definitions of ‘‘small entities’’ to
be used in evaluating the impact of its
regulations on small entities in
accordance with the RFA.14 The
proposed amendments only affect
certain SDs and MSPs and their
counterparties, which must be eligible
contract participants (‘‘ECPs’’).15 The
Commission has previously established
10 In the Final Margin Rule, the Commission
explained that its intent was to exclude
‘‘immediately available cash funds,’’ which is one
form of eligible collateral in Commission
§ 23.156(a)(1), because allowing such eligible
collateral to be held in the form of a deposit liability
of the custodian bank would be incompatible with
Commission § 23.157(c)’s prohibition against
rehypothecation of collateral. See Final Margin
Rule, 81 FR at 671. However, the Commission
expressly stated that the custodian could use the
cash funds to purchase other forms of eligible
collateral. See id.
11 5 U.S.C. 601 et seq.
12 5 U.S.C. 553. The Administrative Procedure
Act is found at 5 U.S.C. 500 et seq.
13 See 5 U.S.C. 601(2), 603, 604, and 605.
14 See Registration of Swap Dealers and Major
Swap Participants, 77 FR 2613 (Jan. 19, 2012); 47
FR 18618 (Apr. 30, 1982).
15 Pursuant to section 2(e) of the CEA, 7 U.S.C.
2(e), each counterparty to an uncleared swap must
be an ECP, as defined in section 1a(18) of the CEA,
7 U.S.C. 1a(18).
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that SDs, MSPs and ECPs are not small
entities for purposes of the RFA.16
Accordingly, the Chairman, on behalf
of the Commission, hereby certifies
pursuant to 5 U.S.C. 605(b) that the
proposed alternatives 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’’) 17 imposes certain
requirements on Federal agencies,
including the Commission, in
connection with their conducting or
sponsoring any collection of
information, as defined by the PRA. The
Commission may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
Office of Management and Budget
control number. The proposed rules
contain no requirements subject to the
PRA.
C. Cost-Benefit Considerations
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.
In addition, the Commission notes
that the consideration of costs and
benefits below is based on the
understanding that the markets function
internationally, with many transactions
involving U.S. firms taking place across
international boundaries; with some
Commission registrants being organized
outside of the United States; with
leading industry members typically
conducting operations both within and
outside the United States; and with
industry members commonly following
substantially similar business practices
wherever located. Where the
Commission does not specifically refer
to matters of location, the below
16 See Further Definition of ‘‘Swap Dealer,’’
‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap
Participant,’’ ‘‘Major Security-Based Swap
Participant’’ and ‘‘Eligible Contract Participant,’’ 77
FR 30596, 30701 (May 23, 2012).
17 44 U.S.C. 3501 et seq.
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discussion of costs and benefits refers to
the effects of the proposed rules on all
activities subject to the proposal,
whether by virtue of the activity’s
physical location in the United States or
by virtue of the activities’ connection
with or effect on U.S. commerce under
CEA section 2(i).18
1. Baseline and Rule Summary
The baseline for the Commission’s
consideration of the costs and benefits
of this proposed rulemaking is the CFTC
Margin Rule. The Commission
recognizes that to the extent market
participants have relied on CFTC Letter
No. 17–34, the actual costs and benefits
of the proposed amendment to
Commission § 23.151, as realized in the
market, may not be as significant. The
proposed amendment would revise the
definition of financial end user in
Commission § 23.151 to exclude the
ESM from the definition. The
amendment would codify CFTC Letter
No. 17–34 and confirm that swaps with
the ESM as a counterparty are not
subject to the CFTC Margin Rule. As a
result, CSEs facing the ESM as
counterparties would not be required to
exchange margin with the ESM,
resulting in the collection of lesser
amounts of margin to mitigate the risk
of uncleared swaps. Nevertheless, the
Commission believes that the proposed
amendment is reasonable because the
ESM’s activity in the swaps market, as
of the date of this proposal, is so limited
that any potential unmargined exposure
is unlikely to result in substantial
systemic risk.19 In addition, the
Commission notes that the ESM is an
intergovernmental financial institution
established by the EU, and its stated
purpose of supporting member states in
financial distress serves to manage and
reduce risk to the EU financial system.
The Commission is also proposing to
amend Commission § 23.157(c)(1) to
remove the erroneous cross-reference to
‘‘§ 23.156(a)(1)(iv) through (xii)’’ and to
replace it with the corrected crossreference ‘‘§ 23.156(a)(1)(ii) through
(x).’’ The Commission believes that
custodial banks will benefit from being
able to convert cash posted as initial
margin into treasury and U.S.
Government agency securities as was
originally intended by the Commission.
18 See
7 U.S.C. 2(i).
review of data from the swap data
repositories indicates that the ESM engages in
limited swap trading activity.
19 Recent
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56395
2. Section 15(a) Considerations
a. Protection of Market Participants and
Public
The proposed amendment to
Commission § 23.151 would formalize
CFTC Letter No. 17–34 and would
confirm that swaps with the ESM as a
counterparty are not subject to the CFTC
Margin Rule. As discussed above, given
the limited activity of the ESM in the
swaps markets, the Commission
believes that the unmargined exposure
resulting from swaps between CSEs and
the ESM is unlikely to result in
significant risk to the financial system.
Inasmuch as margin is posted to protect
counterparties against credit risk, the
creditworthiness of the ESM is critical
to this analysis. The ESM has
maintained high capital levels and has
ultimate backing from the European
Union.20 Consequently, at this time, the
Commission is comfortable that the
ESM does not pose substantial
counterparty credit risk. Thus, the
Commission preliminarily believes that
there would be no material impact on
market participants and the general
public relative to the status quo
baseline.
b. Efficiency, Competitiveness, and
Financial Integrity of Markets
The Commission preliminarily
believes that the efficiency,
competitiveness, and financial integrity
of markets would not be significantly
impacted by removing the requirement
to post and collect margin in swap
transactions with the ESM. One of the
main functions of the ESM is to provide
emergency assistance to members states
of the European Union.21 Given the
nature of its operations, the ESM would
be motivated to choose sensible,
creditworthy counterparties thereby
containing the credit risk exposure that
the ESM may incur in swaps
transactions.
20 CFTC Letter No. 17–34 states that ‘‘[w]ith
respect to its credit risk, as part of its emergency
procedure, the ESM’s member states have
irrevocably agreed to contribute a total of
approximately Ö624 billion in additional capital
should the ESM face financial distress. Further, the
ESM is subject to limits on its lending and
borrowing, and the ESM’s property, funding, and
assets in its member states are immune from search,
requisition, confiscation, expropriation, or any
other form of seizure, taking, or foreclosure. In
addition, to the extent necessary to carry out its
activities, all property, funding, and assets of the
ESM are free from restrictions, regulations, controls,
and moratoria of any nature. The combined
application of these rules and limits is effective in
keeping the ESM’s total liabilities well below its
available capital.’’
21 See CFTC Letter No. 17–34.
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Federal Register / Vol. 84, No. 204 / Tuesday, October 22, 2019 / Proposed Rules
c. Price Discovery
The proposed amendment to
Commission § 23.151, which codifies
CFTC Letter No. 17–34, would relieve
the ESM and its counterparties from the
CFTC Margin Rule, as the ESM would
no longer be classified as a financial end
user. The codification of the no-action
relief as a rule would formalize a noaction position held by DSIO, promoting
transparency concerning the
applicability of the CFTC Margin Rule.
Because there would not be a legal
requirement that margin be posted in
swap transactions with the ESM, such
transactions would likely be for prices
that deviate from similar swap
transactions with financial end users
but be in line with swaps with nonfinancial entities. As a result, swaps
entered into with the ESM could
increase, which could enhance, or at
least not harm, the price discovery
process.
d. Sound Risk Management
The ESM is an intergovernmental
financial institution established by the
EU and its financial activities are
designed to advance EU objectives. The
ESM’s purpose is to manage the
potential for systemic risk by providing
support to member states that are in
distress. The exposures posed by the
ESM are therefore relatively unique.
Relief from the CFTC Margin Rule may
result in CSEs being more inclined to
enter into swaps with the ESM,
benefiting from the overall
diversification of their swap portfolios,
which is consistent with sound risk
management.
e. Other Public Interest Considerations
As discussed above, the Commission
believes that the proposed amendment
to Commission § 23.151 is also
warranted based on the interests of
comity and the Commission’s
continuing cross-border coordination
with EU authorities, such as the 2016
EC–CFTC Agreement, which has
fostered cooperation and mutual respect
between the CFTC and EU authorities.
3. Request for Comment
The Commission invites comment on
its preliminary consideration of the
costs and benefits associated with the
proposed changes to Commission
§§ 23.151 and 23.157, especially with
respect to the five factors the
Commission is required to consider
under CEA section 15(a). In addressing
these areas and any other aspect of the
Commission’s preliminary cost-benefit
considerations, the Commission
encourages commenters to submit any
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16:25 Oct 21, 2019
Jkt 250001
data or other information they may have
quantifying and/or qualifying the costs
and benefits of the proposal. The
Commission also specifically requests
comment on the following questions:
• Has the Commission accurately
identified the benefits of this proposal?
Are there other benefits to the
Commission, market participants, and/
or the public that may result from the
adoption of this proposal that the
Commission should consider? Please
provide specific examples and
explanations of any such benefits.
• Has the Commission accurately
identified the costs of this proposal? Are
there additional costs to the
Commission, market participants, and/
or the public that may result from the
adoption of this proposal that the
Commission should consider? Please
provide specific examples and
explanations of any such costs.
• Does this proposal impact the
section 15(a) factors in any way that is
not described above? Please provide
specific examples and explanations of
any such impact.
• Whether, and the extent to which,
any specific foreign requirement(s) may
affect the costs and benefits of the
proposal. If so, please identify the
relevant foreign requirement(s) and any
monetary or other quantitative estimates
of the potential magnitude of those costs
and benefits.
D. Antitrust Considerations
Section 15(b) of the CEA requires the
Commission to take into consideration
the public interest to be protected by the
antitrust laws and endeavor to take the
least anticompetitive means of
achieving the objectives of the CEA, in
issuing any order or adopting any
Commission rule or regulation. The
Commission does not anticipate that the
proposed changes discussed herein will
result in anti-competitive behavior. The
Commission requests comment
regarding whether the proposed changes
could be deemed anti-competitive.
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 proposes to amend
17 CFR part 23 as set forth below:
PART 23—SWAP DEALERS AND
MAJOR SWAP PARTICIPANTS
1. The authority citation for part 23
continues to read as follows:
■
PO 00000
Frm 00007
Fmt 4702
Sfmt 4702
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).
2. In § 23.151, revise paragraph (2)(iii)
of the definition of ‘‘Financial end user’’
to read as follows:
■
§ 23.151 Definitions applicable to margin
requirements.
*
*
*
*
*
Financial end user * * *
(2) * * *
(iii) The Bank for International
Settlements and the European Stability
Mechanism;
*
*
*
*
*
3. In § 23.157, revise paragraph (c)(1)
to read as follows:
■
§ 23.157
*
*
Custodial arrangements.
*
*
*
(c) * * *
(1) Prohibits the custodian from
rehypothecating, repledging, reusing, or
otherwise transferring (through
securities lending, securities borrowing,
repurchase agreement, reverse
repurchase agreement or other means)
the collateral held by the custodian
except that cash collateral may be held
in a general deposit account with the
custodian if the funds in the account are
used to purchase an asset described in
§ 23.156(a)(1)(ii) through (x), such asset
is held in compliance with this section,
and such purchase takes place within a
time period reasonably necessary to
consummate such purchase after the
cash collateral is posted as initial
margin; and
*
*
*
*
*
Issued in Washington, DC, on October 16,
2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to Margin Requirements for
Uncleared Swaps for Swap Dealers and
Major Swap Participants—Commission
Voting Summary and Commissioners’
Statements
Appendix 1—Commission Voting
Summary
On this matter, Chairman Tarbert and
Commissioners Behnam, Stump, and
Berkovitz voted in the affirmative.
Commissioner Quintenz voted in the
negative.
E:\FR\FM\22OCP1.SGM
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Federal Register / Vol. 84, No. 204 / Tuesday, October 22, 2019 / Proposed Rules
Appendix 2—Dissenting Statement of
Commissioner Brian D. Quintenz to the
Proposed Exclusion for the European
Stability Mechanism From the
Commission’s Margin Requirements for
Uncleared Swaps
In March 2018, I articulated my approach
to our current regulatory relationship with
our European counterparts in light of their
refusal to stand by or re-affirm their 2016
commitments in the CFTC’s and European
Commission’s common approach to the
regulation of cross-border central
counterparties (CCPs) (CFTC–EC CCP
Agreement).1 Specifically, the absence of the
agreement’s re-affirmation directly implied
the agreement’s abrogation by the European
Market Infrastructure Regulation 2.2 (EMIR
2.2).2 I therefore vowed that I would either
object to or vote against any relief provided
to or requested by European Union
authorities until the agreement’s clarity was
restored. While the possibility still exists for
a successful outcome to EMIR 2.2 that fully
respects the CFTC’s ultimate authority over
U.S. CCPs, still no assurance has been given
to remove that doubt.
I therefore dissent from today’s proposed
rule to exempt the European Stability
Mechanism from the Commission’s margin
requirements for uncleared swaps.
The ESM plays an important role within
Europe—an intergovernmental organization
of the EU’s Eurozone member states that
provides financial assistance to those
countries. The rule the CFTC is proposing to
issue today would codify CFTC staff noaction relief permitting the ESM, unlike other
financial entities, to enter into uncleared
swaps with Commission-registered swap
dealers without complying with the CFTC’s
margin regulations.3 In proposing this rule,
the CFTC has directed precious staff
resources to provide legal certainty to an EU
agency so that it may access CFTCsupervised swap dealers with significantly
greater flexibility than numerous U.S. firms.
Yet, we are taking this step while, and as I
stated at last month’s Global Markets
Advisory Committee meeting, the proposed
implementation of EMIR 2.2 has actually
increased the likelihood of the CCP
Agreement’s nullification.4 It is entirely
1 Keynote Address of Commissioner Brian
Quintenz before FIA Annual Meeting, Boca Raton,
Florida (March 14, 2018), https://www.cftc.gov/
PressRoom/SpeechesTestimony/opaquintenz9; and
Joint Statement from CFTC Chairman Timothy
Massad and European Commissioner Jonathan Hill,
CFTC and the European Commission: Common
approach for transatlantic CCPs (Feb. 10, 2016),
https://www.cftc.gov/PressRoom/PressReleases/
pr7342-16.
2 The proposed implementation of EMIR 2.2 by
ESMA is available at, https://www.esma.europa.eu/
press-news/esma-news/esma-consults-tieringcomparable-compliance-and-fees-under-emir-22.
3 CFTC Letter 17–34 (July 24, 2017), https://
www.cftc.gov/LawRegulation/CFTCStaffLetters/
index.htm.
4 Opening Statement of Commissioner Brian
Quintenz before the CFTC Global Markets Advisory
Committee Meeting (Sept. 24, 2019), https://
www.cftc.gov/PressRoom/SpeechesTestimony/
quintenzstatement092419. See also a similar
Opening Statement by Commissioner Quintenz
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16:25 Oct 21, 2019
Jkt 250001
unclear if any of the five U.S. CCPs currently
authorized to access the EU 5 will ultimately
be treated as domestic EU firms and forced
to follow EU rules.
Subjecting a U.S. CCP to the same level of
EU regulation as an EU CCP would
unilaterally render null and void an
agreement originally based on regulatory
deference and mutual respect between two
authorities. Even subjecting them to a reapplication process under new or different
criteria could nullify the 2016 agreement.
And yet that re-application process is
precisely the current expectation.
The CFTC–EC CCP Agreement promoted
cross-border markets and regulatory
efficiency because the CFTC and the
European Commission agreed on where and
how to defer to each other’s regulatory
regimes. A rule like the one proposed today,
or the relief provided by CFTC staff to Eurex
Clearing last December (to which I similarly
objected) 6 provides special accommodations
to an EU institution by relying on the CFTC’s
trust in our EU counterparts. Such trust
continues to be misplaced until the EU can
provide assurance that the CFTC–EC CCP
Agreement will be upheld.
Appendix 3—Supporting Statement of
Commissioner Dan M. Berkovitz on the
Proposed Rule Excluding the European
Stability Mechanism From Definition of
Financial End User
I support the proposed regulation that
would add the European Stability
Mechanism (‘‘ESM’’) to the list of
governmental entities excluded from the
definition of financial end user in the
Commission’s margin regulations. The
Commission has recognized for many years
that entities established by governments like
the ESM should be exempted from some of
our regulatory requirements for financial
entities. These entities serve a governmental
purpose that is not to speculate or profit from
derivatives and therefor are less likely to
engage in activities that would bring risk to
the United States. The ESM, an
intergovernmental entity designed to assist
EU member states in financial distress,
would likely reduce systemic risk in the
European Union. If the 2008 financial crisis
is any guide, reducing financial distress in
one region of the world is likely to benefit
the rest of the world, including the United
States.
In addition, comity is an important
consideration when regulating entities
established by a foreign government for a
governmental purpose. The proposal will
facilitate international comity and should
encourage further cooperation. Showing
reciprocal, mutual respect for the important
before the June 12, 2019 meeting of the CFTC’s
Market Risk Advisory Committee, https://
www.cftc.gov/PressRoom/SpeechesTestimony/
quintenzstatement061219.
5 CME, ICE Clear Credit, ICE Clear US,
Minneapolis Grain Exchange, and Nodal Clear.
6 Statement of Commissioner Brian Quintenz on
Staff No-Action Relief for Eurex Clearing AG
(December 20, 2018), https://www.cftc.gov/
PressRoom/SpeechesTestimony/
quintenzstatement122018.
PO 00000
Frm 00008
Fmt 4702
Sfmt 4702
56397
interests of other sovereigns is an important
step to harmonizing regulation and
facilitating global markets where appropriate.
[FR Doc. 2019–22955 Filed 10–21–19; 8:45 am]
BILLING CODE 6351–01–P
DEPARTMENT OF JUSTICE
28 CFR Part 28
[Docket Number OAG–164; AG Order No.
4537–2019]
RIN 1105–AB56
DNA-Sample Collection From
Immigration Detainees
Office of the Attorney General,
Department of Justice.
ACTION: Proposed rule.
AGENCY:
The Department of Justice is
proposing to amend regulations that
require DNA-sample collection from
individuals who are arrested, facing
charges, or convicted, and from nonUnited States persons who are detained
under the authority of the United States.
The amendment would strike a
provision authorizing the Secretary of
Homeland Security to exempt from the
sample-collection requirement certain
aliens from whom collection of DNA
samples is not feasible because of
operational exigencies or resource
limitations. This will restore the
Attorney General’s plenary legal
authority to authorize and direct all
relevant Federal agencies, including the
Department of Homeland Security, to
collect DNA samples from individuals
who are arrested, facing charges, or
convicted, and from non-United States
persons who are detained under the
authority of the United States.
DATES: Written and electronic comments
must be sent or submitted on or before
November 12, 2019. Comments received
by mail will be considered timely if they
are postmarked on or before the last day
of the comment period. The electronic
Federal Docket Management System
will accept electronic comments until
Midnight Eastern Time at the end of that
day.
ADDRESSES: Comments may be mailed to
Regulations Docket Clerk, Office of
Legal Policy, Department of Justice, 950
Pennsylvania Avenue NW, Room 4234,
Washington, DC 20530. To ensure
proper handling, please reference
Docket No. OAG–164 on your
correspondence. You may submit
comments electronically or view an
electronic version of this proposed rule
at https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
David J. Karp, Senior Counsel, Office of
SUMMARY:
E:\FR\FM\22OCP1.SGM
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]]>Agencies
[Federal Register Volume 84, Number 204 (Tuesday, October 22, 2019)]
[Proposed Rules]
[Pages 56392-56397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22955]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AE77
Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is seeking comment on proposed amendments to the margin
requirements for uncleared swaps for swap dealers (``SD'') and major
swap participants (``MSP'') for which there is no prudential regulator.
The proposed amendments would add the European Stability Mechanism
(``ESM'') to the list of entities that are expressly excluded from the
definition of financial end user and correct an erroneous cross-
reference in the Commission's regulations.
DATES: Comments must be received on or before December 23, 2019.
ADDRESSES: You may submit comments, identified by RIN 3038-AE77, by any
of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures
[[Page 56393]]
Trading Commission, Three Lafayette Center, 1155 21st Street NW,
Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods.
Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
---------------------------------------------------------------------------
\1\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I.
---------------------------------------------------------------------------
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.
FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, 202-418-
6056, [email protected]; Thomas J. Smith, Deputy Director, 202-418-
5495, [email protected]; Warren Gorlick, Associate Director, 202-418-
5195, [email protected]; Carmen Moncada-Terry, Special Counsel, 202-
418-5795, [email protected]; or Rafael Martinez, Senior Financial
Risk Analyst, 202-418-5462, [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
In January 2016, the Commission adopted Sec. Sec. 23.150 through
23.161 (collectively, ``CFTC Margin Rule'') to implement section 4s(e)
of the Commodity Exchange Act (``CEA''),\2\ which requires SDs and MSPs
for which there is not a prudential regulator (``CSEs'') to meet
minimum initial and variation margin requirements adopted by the
Commission by rule or regulation.\3\
---------------------------------------------------------------------------
\2\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (``Final
Margin Rule''); Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants--Cross-Border Application of the
Margin Requirements, 81 FR 34818 (May 31, 2016).
\3\ 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 of
Governors of the Federal Reserve System; the Office of the
Comptroller of the Currency; the Federal Deposit Insurance
Corporation; the Farm Credit Administration; and the Federal Housing
Finance Agency, and specifying 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).
---------------------------------------------------------------------------
Consistent with the administration of swap regulation, the
Commission's Division of Swap Dealer and Intermediary Oversight
(``DSIO''), on an ongoing basis, reviews rules subject to its
oversight, no-action letters and other grants of relief. In conducting
that exercise, DSIO identified a no-action letter, further discussed
below, whose codification would provide greater certainty to the
marketplace concerning the scope and application of the CFTC Margin
Rule and allow for its effective implementation. DSIO also identified a
typographical error in Commission Sec. 23.157 that without correction
would cause confusion in the application of the CFTC Margin Rule.
A. No-Action Letter
In July 2017, the ESM submitted a letter to the Commission
requesting that SDs be relieved from the CFTC Margin Rule when entering
into swap transactions with the ESM. The ESM represented that it was
similar to the multilateral development banks that are listed in
Commission Sec. 23.151 (including the International Bank for
Reconstruction and Development, the Asian Development Bank, and the
European Investment Bank), which are excluded from the definition of
financial end user and whose swaps are exempt from the CFTC Margin
Rule. DSIO granted no-action relief, stating that it would not
recommend enforcement action if an SD subject to the CFTC Margin Rule
did not comply with that rule solely in respect of uncleared swaps
between the SD and the ESM.\4\
---------------------------------------------------------------------------
\4\ See CFTC Letter No. 17-34, Commission Sec. Sec. 23.150
through 23.159, and 23.161; No-Action Position with Respect to
Uncleared Swaps with the European Stability Mechanism (July 24,
2017) (``CFTC Letter No. 17-34''), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-34.pdf.
---------------------------------------------------------------------------
II. Proposed Regulations
A. Amendment of Commission Sec. 23.151--Definition of Financial End
User
The CFTC Margin Rule applies to swap transactions between CSEs and
counterparties that are SDs, MSPs or financial end users. Commission
Sec. 23.151 defines the term ``financial end user'' \5\ and expressly
carves out from the definition sovereign entities, multilateral
development banks, the Bank for International Settlements, entities
exempt from the definition of financial entity pursuant to section
2(h)(7)(C)(iii) of the Act and implementing regulations, affiliates
that qualify for the exemption from clearing pursuant to section
2(h)(7)(D) of the Act, and eligible treasury affiliates that the
Commission exempts from the requirements of Commission Sec. Sec.
23.150 through 23.161 by rule.\6\ The Commission proposes to revise the
definition of financial end user to further exclude the ESM.
---------------------------------------------------------------------------
\5\ See 17 CFR 23.151.
\6\ See id.
---------------------------------------------------------------------------
The proposed amendment would codify CFTC Letter No. 17-34, which
provides relief from the CFTC Margin Rule with respect to uncleared
swaps between SDs and the ESM. In granting relief, DSIO stated that the
ESM, like multilateral development banks excluded from the financial
end user definition, had a lower risk profile, posing less counterparty
risk to an SD and less systemic risk to the financial system. While not
explicitly finding that the ESM was a multilateral development bank,
DSIO recognized that its function and credit profile justified the
relief.\7\
---------------------------------------------------------------------------
\7\ The Commission notes that the Basel Committee on Banking
Supervision ascribes to the ESM a 0% risk weight. The ESM has been
included in the list of entities receiving a 0% risk weight in the
document entitled ``Basel II: International Convergence of Capital
Measurement and Capital Standards: A Revised Framework--
Comprehensive Version, June 2006.'' See BIS, Risk Weight for the
European Stability Mechanism (ESM) and European Financial Stability
Facility (EFSF), https://www.bis.org/publ/bcbs_nl17.htm.
---------------------------------------------------------------------------
The Commission proposes to amend the definition of financial end
user in Commission Sec. 23.151 by adding the ESM to the list of
entities that are expressly excluded from the definition. As described
in CFTC Letter No. 17-34, the ESM is an intergovernmental financial
institution that provides financial assistance for national or regional
development to Euro area member states that are in or are threatened by
severe financial distress,
[[Page 56394]]
similar to entities listed as multilateral development banks in
Commission Sec. 23.151, which are excluded from the definition of
financial end user. To accomplish its policy goals, the ESM utilizes
several financial assistance instruments, including loans in various
forms which can be used for multiple purposes and are offered only
subject to bespoke specified conditions, including economic reforms.
The ESM regularly enters the international capital markets to fund
these loans. It enters into uncleared swaps with SDs to hedge the
interest rate and currency risks it faces as a result of entering into
and funding these loans and to hedge risks associated with its invested
contributed capital.
The Commission notes that, contemporaneously with the issuance of
this proposal, DSIO staff is issuing a revised no-action letter to
phase out the relief provided under CFTC Letter No. 17-34, which would
instead be provided under Commission Sec. 23.151. To allow adequate
time for submission and review of comments, and finalization of the
proposed amendment to Sec. 23.151, the revised no-action letter will
provide relief until the earlier of: (i) April 14, 2020 at 11:59 p.m.
(Eastern Time); or (ii) the effective date of final Commission action
on this rule proposal.
Based on the foregoing, the Commission proposes to exclude the ESM
from the definition of a financial end user, which provides clarity and
certainty to CSEs that uncleared swaps entered into with the ESM are
not subject to the CFTC Margin Rule. The Commission believes that this
approach is appropriate as activities conducted by the ESM, like
activities conducted by multilateral development banks that are
excluded from the financial end user definition, generally have a
different purpose in the financial system. These types of entities are
established by governments and their financial activities are designed
to further governmental purposes. As such, the ESM, like multilateral
development banks, has a lower risk profile and poses less counterparty
risk to an SD and less systemic risk to the financial system.
The Commission also believes that this proposed rule will encourage
international comity and continued cooperation between the Commission
and EU authorities. In this regard, the Commission notes that the
European Stability Mechanism is exempt from the European Market
Infrastructure Regulation or EMIR's margin rules for OTC derivatives
contracts not cleared by a central counterparty.\8\ The proposed rule
acknowledges the unique interests of the EU authorities in the ESM by
excluding the ESM from the CFTC's margin requirements for uncleared
swaps. The principles of international comity counsel mutual respect
for the important interests of foreign sovereigns.\9\
---------------------------------------------------------------------------
\8\ See Regulation (EU) No 648/2012 of the European Parliament
and the Council of the European Union of July 4, 2012.
\9\ See Restatement (Third) of Foreign Relations Law of the
United States sec. 403 (Am. Law Inst. 2018) (the Restatement). The
Restatement provides that even where a country has a basis for
jurisdiction, it should not prescribe law with respect to a person
or activity in another country when the exercise of such
jurisdiction is unreasonable. See Restatement section 403(1).
Notably, the Restatement recognizes that, in the exercise of
international comity, reciprocity is an appropriate consideration in
determining whether to exercise jurisdiction extraterritorially.
---------------------------------------------------------------------------
Accordingly, paragraph (2)(iii) of the definition of financial end
user in Commission Sec. 23.151 would be amended by replacing ``The
Bank for International Settlements'' with ``The Bank for International
Settlements and the European Stability Mechanism.''
Request for comment: The Commission requests comment regarding the
proposed amendment to Commission Sec. 23.151. The Commission
specifically requests comment on the following question:
Are there any other risk factors or issues pertaining to
the ESM's business model that the Commission should consider in
finalizing this rulemaking?
B. Amendment of Commission Sec. 23.157--Correction of Cross-Reference
Commission Sec. 23.157 requires initial margin collected from or
posted by a CSE to be held by one or more independent custodians. The
CSE must enter into a custodial agreement with each custodian that
holds the initial margin collateral. In particular, paragraph (c)(1) of
Commission Sec. 23.157 provides that the custodial agreement must
prohibit the custodian from rehypothecating, repledging, reusing, or
otherwise transferring the collateral except that cash collateral may
be held in a general deposit account with the custodian if the funds in
the account are used to purchase an asset described in Commission Sec.
23.156(a)(1)(iv) through (xii).
Commission staff has determined that the cross-reference to ``Sec.
23.156(a)(1)(iv) through (xii)'' in paragraph (c)(1) is erroneous.
First, the existing cross-reference incorrectly refers to non-existing
paragraphs. Second, the existing cross-reference excludes treasury
securities and U.S. Government agency securities, which are included in
the list of eligible collateral set forth in Commission Sec.
23.156(a)(1), and which the Commission intended to include as eligible
assets into which cash collateral can be converted.\10\ The correct
cross-reference should be Sec. 23.156(a)(1)(ii) through (x). The
Commission is proposing an amendment to Commission Sec. 23.157(c)(1)
to remove the erroneous cross-reference to ``Sec. 23.156(a)(1)(iv)
through (xii)'' and replace it with the corrected cross-reference
``Sec. 23.156(a)(1)(ii) through (x).''
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\10\ In the Final Margin Rule, the Commission explained that its
intent was to exclude ``immediately available cash funds,'' which is
one form of eligible collateral in Commission Sec. 23.156(a)(1),
because allowing such eligible collateral to be held in the form of
a deposit liability of the custodian bank would be incompatible with
Commission Sec. 23.157(c)'s prohibition against rehypothecation of
collateral. See Final Margin Rule, 81 FR at 671. However, the
Commission expressly stated that the custodian could use the cash
funds to purchase other forms of eligible collateral. See id.
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Request for comment: The Commission requests comment regarding the
proposed amendment to Commission Sec. 23.157.
III. Administrative Compliance
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires Federal agencies
to consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis respecting the impact.\11\
Whenever an agency publishes a general notice of proposed rulemaking
for any rule, pursuant to the notice-and-comment provisions of the
Administrative Procedure Act,\12\ a regulatory flexibility analysis or
certification typically is required.\13\ The Commission previously has
established certain definitions of ``small entities'' to be used in
evaluating the impact of its regulations on small entities in
accordance with the RFA.\14\ The proposed amendments only affect
certain SDs and MSPs and their counterparties, which must be eligible
contract participants (``ECPs'').\15\ The Commission has previously
established
[[Page 56395]]
that SDs, MSPs and ECPs are not small entities for purposes of the
RFA.\16\
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\11\ 5 U.S.C. 601 et seq.
\12\ 5 U.S.C. 553. The Administrative Procedure Act is found at
5 U.S.C. 500 et seq.
\13\ See 5 U.S.C. 601(2), 603, 604, and 605.
\14\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613 (Jan. 19, 2012); 47 FR 18618 (Apr. 30,
1982).
\15\ Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e), each
counterparty to an uncleared swap must be an ECP, as defined in
section 1a(18) of the CEA, 7 U.S.C. 1a(18).
\16\ See Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based
Swap Participant'' and ``Eligible Contract Participant,'' 77 FR
30596, 30701 (May 23, 2012).
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the proposed alternatives
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'') \17\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget control number. The proposed rules contain no requirements
subject to the PRA.
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\17\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Considerations
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.
In addition, the Commission notes that the consideration of costs
and benefits below is based on the understanding that the markets
function internationally, with many transactions involving U.S. firms
taking place across international boundaries; with some Commission
registrants being organized outside of the United States; with leading
industry members typically conducting operations both within and
outside the United States; and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to the effects of the
proposed rules on all activities subject to the proposal, whether by
virtue of the activity's physical location in the United States or by
virtue of the activities' connection with or effect on U.S. commerce
under CEA section 2(i).\18\
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\18\ See 7 U.S.C. 2(i).
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1. Baseline and Rule Summary
The baseline for the Commission's consideration of the costs and
benefits of this proposed rulemaking is the CFTC Margin Rule. The
Commission recognizes that to the extent market participants have
relied on CFTC Letter No. 17-34, the actual costs and benefits of the
proposed amendment to Commission Sec. 23.151, as realized in the
market, may not be as significant. The proposed amendment would revise
the definition of financial end user in Commission Sec. 23.151 to
exclude the ESM from the definition. The amendment would codify CFTC
Letter No. 17-34 and confirm that swaps with the ESM as a counterparty
are not subject to the CFTC Margin Rule. As a result, CSEs facing the
ESM as counterparties would not be required to exchange margin with the
ESM, resulting in the collection of lesser amounts of margin to
mitigate the risk of uncleared swaps. Nevertheless, the Commission
believes that the proposed amendment is reasonable because the ESM's
activity in the swaps market, as of the date of this proposal, is so
limited that any potential unmargined exposure is unlikely to result in
substantial systemic risk.\19\ In addition, the Commission notes that
the ESM is an intergovernmental financial institution established by
the EU, and its stated purpose of supporting member states in financial
distress serves to manage and reduce risk to the EU financial system.
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\19\ Recent review of data from the swap data repositories
indicates that the ESM engages in limited swap trading activity.
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The Commission is also proposing to amend Commission Sec.
23.157(c)(1) to remove the erroneous cross-reference to ``Sec.
23.156(a)(1)(iv) through (xii)'' and to replace it with the corrected
cross-reference ``Sec. 23.156(a)(1)(ii) through (x).'' The Commission
believes that custodial banks will benefit from being able to convert
cash posted as initial margin into treasury and U.S. Government agency
securities as was originally intended by the Commission.
2. Section 15(a) Considerations
a. Protection of Market Participants and Public
The proposed amendment to Commission Sec. 23.151 would formalize
CFTC Letter No. 17-34 and would confirm that swaps with the ESM as a
counterparty are not subject to the CFTC Margin Rule. As discussed
above, given the limited activity of the ESM in the swaps markets, the
Commission believes that the unmargined exposure resulting from swaps
between CSEs and the ESM is unlikely to result in significant risk to
the financial system. Inasmuch as margin is posted to protect
counterparties against credit risk, the creditworthiness of the ESM is
critical to this analysis. The ESM has maintained high capital levels
and has ultimate backing from the European Union.\20\ Consequently, at
this time, the Commission is comfortable that the ESM does not pose
substantial counterparty credit risk. Thus, the Commission
preliminarily believes that there would be no material impact on market
participants and the general public relative to the status quo
baseline.
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\20\ CFTC Letter No. 17-34 states that ``[w]ith respect to its
credit risk, as part of its emergency procedure, the ESM's member
states have irrevocably agreed to contribute a total of
approximately [euro]624 billion in additional capital should the ESM
face financial distress. Further, the ESM is subject to limits on
its lending and borrowing, and the ESM's property, funding, and
assets in its member states are immune from search, requisition,
confiscation, expropriation, or any other form of seizure, taking,
or foreclosure. In addition, to the extent necessary to carry out
its activities, all property, funding, and assets of the ESM are
free from restrictions, regulations, controls, and moratoria of any
nature. The combined application of these rules and limits is
effective in keeping the ESM's total liabilities well below its
available capital.''
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b. Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission preliminarily believes that the efficiency,
competitiveness, and financial integrity of markets would not be
significantly impacted by removing the requirement to post and collect
margin in swap transactions with the ESM. One of the main functions of
the ESM is to provide emergency assistance to members states of the
European Union.\21\ Given the nature of its operations, the ESM would
be motivated to choose sensible, creditworthy counterparties thereby
containing the credit risk exposure that the ESM may incur in swaps
transactions.
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\21\ See CFTC Letter No. 17-34.
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[[Page 56396]]
c. Price Discovery
The proposed amendment to Commission Sec. 23.151, which codifies
CFTC Letter No. 17-34, would relieve the ESM and its counterparties
from the CFTC Margin Rule, as the ESM would no longer be classified as
a financial end user. The codification of the no-action relief as a
rule would formalize a no-action position held by DSIO, promoting
transparency concerning the applicability of the CFTC Margin Rule.
Because there would not be a legal requirement that margin be posted in
swap transactions with the ESM, such transactions would likely be for
prices that deviate from similar swap transactions with financial end
users but be in line with swaps with non-financial entities. As a
result, swaps entered into with the ESM could increase, which could
enhance, or at least not harm, the price discovery process.
d. Sound Risk Management
The ESM is an intergovernmental financial institution established
by the EU and its financial activities are designed to advance EU
objectives. The ESM's purpose is to manage the potential for systemic
risk by providing support to member states that are in distress. The
exposures posed by the ESM are therefore relatively unique. Relief from
the CFTC Margin Rule may result in CSEs being more inclined to enter
into swaps with the ESM, benefiting from the overall diversification of
their swap portfolios, which is consistent with sound risk management.
e. Other Public Interest Considerations
As discussed above, the Commission believes that the proposed
amendment to Commission Sec. 23.151 is also warranted based on the
interests of comity and the Commission's continuing cross-border
coordination with EU authorities, such as the 2016 EC-CFTC Agreement,
which has fostered cooperation and mutual respect between the CFTC and
EU authorities.
3. Request for Comment
The Commission invites comment on its preliminary consideration of
the costs and benefits associated with the proposed changes to
Commission Sec. Sec. 23.151 and 23.157, especially with respect to the
five factors the Commission is required to consider under CEA section
15(a). In addressing these areas and any other aspect of the
Commission's preliminary cost-benefit considerations, the Commission
encourages commenters to submit any data or other information they may
have quantifying and/or qualifying the costs and benefits of the
proposal. The Commission also specifically requests comment on the
following questions:
Has the Commission accurately identified the benefits of
this proposal? Are there other benefits to the Commission, market
participants, and/or the public that may result from the adoption of
this proposal that the Commission should consider? Please provide
specific examples and explanations of any such benefits.
Has the Commission accurately identified the costs of this
proposal? Are there additional costs to the Commission, market
participants, and/or the public that may result from the adoption of
this proposal that the Commission should consider? Please provide
specific examples and explanations of any such costs.
Does this proposal impact the section 15(a) factors in any
way that is not described above? Please provide specific examples and
explanations of any such impact.
Whether, and the extent to which, any specific foreign
requirement(s) may affect the costs and benefits of the proposal. If
so, please identify the relevant foreign requirement(s) and any
monetary or other quantitative estimates of the potential magnitude of
those costs and benefits.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
objectives of the CEA, in issuing any order or adopting any Commission
rule or regulation. The Commission does not anticipate that the
proposed changes discussed herein will result in anti-competitive
behavior. The Commission requests comment regarding whether the
proposed changes could be deemed anti-competitive.
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 proposes to amend 17 CFR part 23 as set forth below:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
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)(iii) of the definition of
``Financial end user'' to read as follows:
Sec. 23.151 Definitions applicable to margin requirements.
* * * * *
Financial end user * * *
(2) * * *
(iii) The Bank for International Settlements and the European
Stability Mechanism;
* * * * *
0
3. In Sec. 23.157, revise paragraph (c)(1) to read as follows:
Sec. 23.157 Custodial arrangements.
* * * * *
(c) * * *
(1) Prohibits the custodian from rehypothecating, repledging,
reusing, or otherwise transferring (through securities lending,
securities borrowing, repurchase agreement, reverse repurchase
agreement or other means) the collateral held by the custodian except
that cash collateral may be held in a general deposit account with the
custodian if the funds in the account are used to purchase an asset
described in Sec. 23.156(a)(1)(ii) through (x), such asset is held in
compliance with this section, and such purchase takes place within a
time period reasonably necessary to consummate such purchase after the
cash collateral is posted as initial margin; and
* * * * *
Issued in Washington, DC, on October 16, 2019, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Commission Voting Summary and
Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Behnam,
Stump, and Berkovitz voted in the affirmative. Commissioner Quintenz
voted in the negative.
[[Page 56397]]
Appendix 2--Dissenting Statement of Commissioner Brian D. Quintenz to
the Proposed Exclusion for the European Stability Mechanism From the
Commission's Margin Requirements for Uncleared Swaps
In March 2018, I articulated my approach to our current
regulatory relationship with our European counterparts in light of
their refusal to stand by or re-affirm their 2016 commitments in the
CFTC's and European Commission's common approach to the regulation
of cross-border central counterparties (CCPs) (CFTC-EC CCP
Agreement).\1\ Specifically, the absence of the agreement's re-
affirmation directly implied the agreement's abrogation by the
European Market Infrastructure Regulation 2.2 (EMIR 2.2).\2\ I
therefore vowed that I would either object to or vote against any
relief provided to or requested by European Union authorities until
the agreement's clarity was restored. While the possibility still
exists for a successful outcome to EMIR 2.2 that fully respects the
CFTC's ultimate authority over U.S. CCPs, still no assurance has
been given to remove that doubt.
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\1\ Keynote Address of Commissioner Brian Quintenz before FIA
Annual Meeting, Boca Raton, Florida (March 14, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz9; and Joint
Statement from CFTC Chairman Timothy Massad and European
Commissioner Jonathan Hill, CFTC and the European Commission: Common
approach for transatlantic CCPs (Feb. 10, 2016), https://www.cftc.gov/PressRoom/PressReleases/pr7342-16.
\2\ The proposed implementation of EMIR 2.2 by ESMA is available
at, https://www.esma.europa.eu/press-news/esma-news/esma-consults-tiering-comparable-compliance-and-fees-under-emir-22.
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I therefore dissent from today's proposed rule to exempt the
European Stability Mechanism from the Commission's margin
requirements for uncleared swaps.
The ESM plays an important role within Europe--an
intergovernmental organization of the EU's Eurozone member states
that provides financial assistance to those countries. The rule the
CFTC is proposing to issue today would codify CFTC staff no-action
relief permitting the ESM, unlike other financial entities, to enter
into uncleared swaps with Commission-registered swap dealers without
complying with the CFTC's margin regulations.\3\ In proposing this
rule, the CFTC has directed precious staff resources to provide
legal certainty to an EU agency so that it may access CFTC-
supervised swap dealers with significantly greater flexibility than
numerous U.S. firms. Yet, we are taking this step while, and as I
stated at last month's Global Markets Advisory Committee meeting,
the proposed implementation of EMIR 2.2 has actually increased the
likelihood of the CCP Agreement's nullification.\4\ It is entirely
unclear if any of the five U.S. CCPs currently authorized to access
the EU \5\ will ultimately be treated as domestic EU firms and
forced to follow EU rules.
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\3\ CFTC Letter 17-34 (July 24, 2017), https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm.
\4\ Opening Statement of Commissioner Brian Quintenz before the
CFTC Global Markets Advisory Committee Meeting (Sept. 24, 2019),
https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement092419. See also a similar Opening Statement by
Commissioner Quintenz before the June 12, 2019 meeting of the CFTC's
Market Risk Advisory Committee, https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement061219.
\5\ CME, ICE Clear Credit, ICE Clear US, Minneapolis Grain
Exchange, and Nodal Clear.
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Subjecting a U.S. CCP to the same level of EU regulation as an
EU CCP would unilaterally render null and void an agreement
originally based on regulatory deference and mutual respect between
two authorities. Even subjecting them to a re-application process
under new or different criteria could nullify the 2016 agreement.
And yet that re-application process is precisely the current
expectation.
The CFTC-EC CCP Agreement promoted cross-border markets and
regulatory efficiency because the CFTC and the European Commission
agreed on where and how to defer to each other's regulatory regimes.
A rule like the one proposed today, or the relief provided by CFTC
staff to Eurex Clearing last December (to which I similarly
objected) \6\ provides special accommodations to an EU institution
by relying on the CFTC's trust in our EU counterparts. Such trust
continues to be misplaced until the EU can provide assurance that
the CFTC-EC CCP Agreement will be upheld.
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\6\ Statement of Commissioner Brian Quintenz on Staff No-Action
Relief for Eurex Clearing AG (December 20, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement122018.
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Appendix 3--Supporting Statement of Commissioner Dan M. Berkovitz on
the Proposed Rule Excluding the European Stability Mechanism From
Definition of Financial End User
I support the proposed regulation that would add the European
Stability Mechanism (``ESM'') to the list of governmental entities
excluded from the definition of financial end user in the
Commission's margin regulations. The Commission has recognized for
many years that entities established by governments like the ESM
should be exempted from some of our regulatory requirements for
financial entities. These entities serve a governmental purpose that
is not to speculate or profit from derivatives and therefor are less
likely to engage in activities that would bring risk to the United
States. The ESM, an intergovernmental entity designed to assist EU
member states in financial distress, would likely reduce systemic
risk in the European Union. If the 2008 financial crisis is any
guide, reducing financial distress in one region of the world is
likely to benefit the rest of the world, including the United
States.
In addition, comity is an important consideration when
regulating entities established by a foreign government for a
governmental purpose. The proposal will facilitate international
comity and should encourage further cooperation. Showing reciprocal,
mutual respect for the important interests of other sovereigns is an
important step to harmonizing regulation and facilitating global
markets where appropriate.
[FR Doc. 2019-22955 Filed 10-21-19; 8:45 am]
BILLING CODE 6351-01-P
