Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 56950-56956 [2019-22954]
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Federal Register / Vol. 84, No. 206 / Thursday, October 24, 2019 / Proposed Rules
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Signed in Washington, DC, on October 18,
2019.
Alexander N. Fitzsimmons
Acting Deputy Assistant Secretary for Energy
Efficiency, Energy Efficiency and Renewable
Energy.
[FR Doc. 2019–23140 Filed 10–23–19; 8:45 am]
BILLING CODE 6450–01–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 23
RIN 3038–AE89
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 a
proposed amendment to the margin
requirements for uncleared swaps for
swap dealers (‘‘SD’’) and major swap
participants (‘‘MSP’’) for which there is
no prudential regulator (the ‘‘CFTC
Margin Rule’’). As adopted in 2016, the
CFTC Margin Rule, which mandates the
collection and posting of variation
margin and initial margin (‘‘IM’’), takes
effect under a phased compliance
schedule extending from September 1,
2016 to September 1, 2020. The
proposed amendment would extend the
compliance schedule to September 1,
2021, for entities with smaller average
daily aggregate notional amounts of
swaps and certain other financial
products. By extending the compliance
schedule, the proposed amendment
would mitigate the potential market
disruption that could result from such a
large number of entities coming into the
scope of the IM requirements on
September 1, 2020.
DATES: Comments must be received on
or before December 23, 2019.
SUMMARY:
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You may submit comments,
identified by RIN 3038–AE89, 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
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.
ADDRESSES:
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1 17 CFR 145.9. Commission regulations referred
to herein are found at 17 CFR Chapter I.
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Federal Register / Vol. 84, No. 206 / Thursday, October 24, 2019 / Proposed Rules
SUPPLEMENTARY INFORMATION:
I. Background
Section 4s(e) of the Commodity
Exchange Act (‘‘CEA’’) 2 requires the
Commission to adopt rules establishing
minimum initial and variation margin
requirements for 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 by the SD or MSP.7
The Basel Committee on Banking
Supervision (‘‘BCBS’’) and the Board of
the International Organization of
Securities Commissions (‘‘IOSCO’’)
established an international framework
for margin requirements for uncleared
derivatives in September 2013 (the
‘‘BCBS/IOSCO framework’’).8 After the
establishment of the BCBS/IOSCO
framework, on January 6, 2016, the
CFTC, consistent with Section 4s(e),
promulgated rules requiring CSEs to
collect and post initial and variation
27
U.S.C. 1 et seq.
the definition of swap, see section 1a(47) of
the CEA and Commission § 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 mean
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). 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 Regulators’
Margin Rule’’).
5 See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission
§ 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 § 1.3. 7 U.S.C. 1a
and 17 CFR 1.3.
7 7 U.S.C. 6s(e)(3)(A).
8 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (September
2013), available at https://www.bis.org/publ/
bcbs261.pdf.
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margin for uncleared swaps,9 adopting
the implementation schedule set forth
in the BCBS/IOSCO framework,
including the revised implementation
schedule adopted on March 18, 2015.10
II. Proposed Changes to the CFTC
Margin Rule (‘‘Proposal’’)
Covered swap entities are required to
post and collect IM with counterparties
that are SDs, MSPs, or financial end
users with material swap exposure
(‘‘MSE’’) 11 (‘‘covered counterparties’’)
in accordance with a compliance
schedule set forth in Commission
§ 23.161.12 The compliance schedule
comprises five compliance dates, from
September 1, 2016 to September 1,
2020, staggered such that CSEs and
covered counterparties, starting with the
largest average daily aggregate notional
amounts (‘‘AANA’’) of uncleared swaps
and certain other financial products,
and then successively lesser AANA,
come into compliance with the IM
requirements in a series of five phases.
The fourth compliance date,
September 1, 2019, brought within the
scope of compliance CSEs and covered
counterparties each exceeding $750
billion in AANA. On the fifth and last
compliance date (‘‘phase 5’’), September
1, 2020, remaining CSEs and covered
counterparties, including financial end
user counterparties with an MSE
9 See 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. In May 2016, the
Commission amended the CFTC Margin Rule to add
Commission § 23.160, providing rules on its cross
border application. 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).
17 CFR 23.160.
10 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (March 2015),
available at https://www.bis.org/bcbs/publ/
d317.pdf.
11 Commission § 23.151 provides that MSE for an
entity means that the entity and its margin affiliates
have an average daily aggregate notional amount of
uncleared swaps, uncleared security-based swaps,
foreign exchange forwards, and foreign exchange
swaps with all counterparties for June, July or
August of the previous calendar year that exceeds
$8 billion, where such amount is calculated only for
business days. A company is a ‘‘margin affiliate’’ of
another company if: (i) Either company
consolidates the other on a financial statement
prepared in accordance with U.S. Generally
Accepted Accounting Principles, the International
Financial Reporting Standards, or other similar
standards; (ii) both companies are consolidated
with a third company on a financial statement
prepared in accordance with such principles or
standards; or (iii) for a company that is not subject
to such principles or standards, if consolidation as
described in paragraph (1) or (2) of this definition
would have occurred if such principles or standards
had applied. 17 CFR 23.151.
12 See 17 CFR 23.161.
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exceeding $8 billion in AANA, will
come into compliance. As a result of the
large reduction in the compliance
threshold from $750 billion to $8 billion
at the end of the compliance schedule,
a significant number of financial end
user counterparties, including relatively
small counterparties, will be required to
comply with the IM requirements and
implement related operational
processes. According to the CFTC’s
Office of the Chief Economist (‘‘OCE’’),
compared with the first through the
fourth phase of compliance, which
brought approximately 40 entities into
scope, phase 5 would bring
approximately 700 entities, along with
7,000 relationships, which represent the
number of IM agreements that would
have to be in place in phase 5 to carry
out swap transactions.13
Market participants have expressed
concerns regarding the onset of phase 5
given the operational complexity
associated with IM calculation and
third-party segregation of IM
collateral.14 As a large number of
counterparties prepare to meet
applicable IM deadlines, newly in-scope
entities may encounter operational
difficulties because a significant number
of these entities will be engaging the
same limited number of entities that
provide IM required services, involving,
among other things, the preparation of
IM-related documentation, the approval
and implementation of risk-based
models for IM calculation, and custodial
arrangements. The potential for
compliance delays may lead to
disruption in the markets, including the
possibility that some counterparties
could, for a time, be prohibited from
entering into uncleared swaps and
therefore be unable to use swaps to
hedge their financial risk. In recognition
of these difficulties, BCBS/IOSCO
revised its framework to extend the
schedule for compliance with the IM
requirements and provide an additional
phase-in period for smaller
counterparties.15
13 See Initial Margin Phase 5 by Richard Haynes,
Madison Lau, and Bruce Tuckman, Oct. 24, 2018
available at https://www.cftc.gov/sites/default/files/
About/Economic%20Analysis/Initial
%20Margin%20Phase%205%20v5_ada.pdf (‘‘OCE
Initial Margin Phase 5 Study’’).
14 See, e.g., Letter from the Securities Industry
and Financial Markets Association (‘‘SIFMA’’), the
American Bankers Association (‘‘ABA’’), the Global
Foreign Exchange Division of the Global Financial
Markets Association (‘‘GFXD’’), and the Institute of
International Bankers (‘‘IIB’’) (April 5, 2019); Letter
from the Managed Funds Association (June 20,
2019).
15 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (July 2019),
available at https://www.bis.org/bcbs/publ/d475.pdf
(‘‘July 2019 BCBS/IOSCO Margin Framework’’).
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Federal Register / Vol. 84, No. 206 / Thursday, October 24, 2019 / Proposed Rules
The CFTC believes it is appropriate to
amend the CFTC Margin Rule consistent
with the BCBS/IOSCO framework’s
revision.16 The Commission’s Proposal,
which is in line with the revised
framework, would extend the
compliance schedule for the IM
requirements, alleviating the potential
market disruption. The Proposal
represents the Commission’s effort to
undertake coordinated action with
international counterparts to achieve
regulatory harmonization with respect
to uncleared swaps margin.
In proposing the change in the phase
5 compliance date, the Commission also
considered the relatively small amount
of swap activity of the financial end
users that would be subject to the one
year extension. The OCE estimated in
2018 that the average AANA per entity
in phase 5 is $54 billion compared to an
average $12.71 trillion AANA for each
entity in phases 1, 2, and 3 and $1
trillion in phase 4. OCE also estimated
that total AANA for entities that would
be subject to the one year extension is
approximately three percent of the total
AANA across all the phases.17 Given the
relatively small amount of swap activity
of the financial end users in the
extended compliance date group, the
Commission believes the proposed
compliance date extension will have a
muted impact on the systemic risk
mitigating effects of the IM requirements
during the extension period.
Accordingly, the Commission
proposes to amend Commission
§ 23.161(a), which sets forth the
schedule for compliance with the CFTC
Margin Rule, to add a sixth phase of
compliance for certain smaller entities
that are currently subject to phase 5.
The proposed amendment would
require compliance by September 1,
2020, for CSEs and covered
counterparties with an AANA ranging
from $50 billion up to $750 billion. The
compliance date for all other remaining
CSEs and covered counterparties,
including financial end user
counterparties exceeding an MSE of $8
billion in AANA, would be extended to
September 1, 2021.
In addition, the Commission is
proposing non-substantive, conforming
technical changes 18 to Commission
§ 23.161(a) to replace, where applicable,
‘‘between an entity or a margin affiliate
only one time’’ with ‘‘between the entity
and a margin affiliate only one time.’’
The proposed change will conform the
16 See July 2019 BCBS/IOSCO Margin
Framework.
17 See OCE Initial Margin Phase 5 Study at 4–5.
18 For consistency, the proposed changes include
revisions to text in Commission § 23.161(a) relating
to compliance dates that have already passed.
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CFTC Margin Rule to the rule text of the
Prudential Regulators’ Margin Rule,
promoting further harmonization
between both regulators.
The Commission is also proposing to
replace in Commission § 23.161(a),
where applicable, ‘‘shall not count a
swap or a security-based swap that is
exempt pursuant to § 23.150(b)’’ with
‘‘shall not count a swap that is exempt
pursuant to § 23.150(b).’’ This proposed
change will remove the term ‘‘securitybased swap’’ from certain parts of
Commission § 23.161(a). This change is
necessary because, due to a
transcription error, the current rule text
incorrectly indicates that Commission
§ 23.150(b) exempts security-based
swaps from the CFTC Margin Rule.
Section 23.150(b) applies only to swaps.
Notwithstanding this technical change
that eliminates the reference to
Commission § 23.150(b) with respect to
security-based swaps, Commission
§ 23.161(a) will continue to exclude any
security-based swap, for purposes of the
calculation of the various thresholds set
forth in Commission § 23.161(a), that is
exempt pursuant to section 15F(e) of the
Securities Exchange Act, of 1934, as is
the case, prior to this Proposal, under
the current rule text.
Request for comment. The
Commission requests comment
regarding the proposed amendments to
Commission § 23.161. The Commission
specifically requests comment on the
following question:
• Is the proposed rule text relating to
the one-year extension of the final
implementation timeline clear in its
intent and direction to market
participants? Is any further Commission
guidance necessary to avoid any
potential confusion or market
disruption? Please explain.
III. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 19 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. This Proposal contains
no requirements subject to the PRA.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that agencies consider
19 44
PO 00000
U.S.C. 3501 et seq.
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whether the regulations they propose
will have a significant economic impact
on a substantial number of small
entities.20 This Proposal only affects
SDs and MSPs that are subject to the
CFTC Margin Rule and their covered
counterparties, all of which are required
to be eligible contract participants
(‘‘ECPs’’).21 The Commission has
previously determined that SDs, MSPs,
and ECPs are not small entities for
purposes of the RFA.22 Therefore, the
Commission believes that this Proposal
will not have a significant economic
impact on a substantial number of small
entities, as defined in the RFA.
Accordingly, the Chairman, on behalf
of the Commission, hereby certifies
pursuant to 5 U.S.C. 605(b) that this
Proposal will not have a significant
economic impact on a substantial
number of small entities. The
Commission invites comment on the
impact of this Proposal on small
entities.
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. Further,
the Commission reflected upon the
extraterritorial reach of this Proposal
and notes where this reach may be
especially relevant.
This Proposal extends the compliance
schedule for the CFTC Margin Rule and
introduces an additional compliance
date for smaller counterparties.23 The
proposed compliance schedule would
require CSEs and covered
counterparties, with an AANA ranging
20 5
U.S.C. 601 et seq.
counterparty to an uncleared swap must
be an ECP, as the term is defined in section 1a(18)
of the CEA, 7 U.S.C. 1a(18) and Commission § 1.3,
17 CFR 1.3. See 7 U.S.C. 2(e).
22 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).
23 The Commission is also proposing conforming
technical changes to Commission § 23.161(a). Given
the non-substantive nature of these changes, there
are no costs or benefits to be considered.
21 Each
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from $50 billion up to $750 billion, to
exchange IM in phase 5. All remaining
CSEs and covered counterparties,
including financial end user
counterparties exceeding an MSE of $8
billion in AANA, would come into
scope in the proposed additional sixth
phase, beginning September 1, 2021.
As discussed above, the Commission
believes that as a result of the large
number of counterparties that would be
required to comply with the IM
requirements for the first time at the end
of the current compliance schedule,
market disruption may arise. The
markets may be strained given
counterparties’ demand for resources
and services to meet the September
2020 deadline and operationalize the
exchange of IM, involving, among other
things, counterparty onboarding,
approval and implementation of riskbased models for the calculation of IM,
and documentation associated with the
exchange of IM.
The baseline against which the
benefits and costs associated with this
Proposal are compared is the uncleared
swaps markets as they exist today,
including the impact of the current
compliance schedule and the
implementation of phase 5 on
September 1, 2020. With this as the
baseline for this Proposal, the following
are the benefits and costs of this
Proposal.
1. Benefits
As described above, this Proposal will
extend the compliance schedule for the
IM requirements for certain smaller
entities to September 1, 2021. The
Proposal is intended to alleviate the
potential congestion and market
disruption resulting from the large
number of counterparties that would
come into scope under the current
compliance schedule and the strain on
the uncleared swaps markets resulting
from the increased demand for limited
resources and services to set up
operations to comply with the IM
requirements, including counterparty
onboarding, adoption and
implementation of risk-based models to
calculate IM, and documentation
associated with the exchange of IM.
The Proposal would prioritize
applicable IM compliance deadlines in
order to focus on certain financial end
users, SDs, and MSPs that engage in
greater swap trading activity and that
may significantly contribute to systemic
risk in the financial markets, while
providing a 12-month delay for smaller
counterparties, whose swap trading may
not pose the same level of risk, to
prepare for their eventual compliance
with the IM requirements. The Proposal
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therefore would promote the smooth
and orderly transition into IM
compliance.
The Proposal would amend the CFTC
Margin Rule consistent with the revised
BCBS/IOSCO margin framework. The
Proposal therefore promotes
harmonization with international
margin regulatory requirements,
reducing the potential for regulatory
arbitrage.
2. Costs
The Proposal would extend the time
frame for compliance with the IM
requirements for the smallest, in terms
of notional amount, CSEs and covered
counterparties, including SDs and MSPs
and financial end users that exceed an
MSE of $8 billion, by an additional 12
months. Swaps entered into during this
period with the smallest CSEs have the
potential to be treated as legacy swaps
and thus would not be subject to the IM
requirements. The contagion risk
associated with these potentially
uncollateralized legacy swaps is a lesser
concern because these legacy swap
portfolios would be entered into with
counterparties that engage in lower
levels of notional trading.
The Proposal would also delay the
implementation of IM by smaller CSEs.
There may not be as much IM posted to
protect the financial system as would
otherwise be the case. As such, the
probability and severity of financial
contagion may increase.
3. Section 15(a) Considerations
In light of the foregoing, the CFTC has
evaluated the costs and benefits of this
Proposal pursuant to the five
considerations identified in section
15(a) of the CEA as follows:
(a) Protection of Market Participants and
the Public
This Proposal would protect market
participants and the public against the
potential disruption that may be caused
by the large number of counterparties
that would come into scope of the IM
requirements at the end of the current
compliance schedule.
Under the proposed compliance
schedule, fewer counterparties would
come into scope in phase 5 and many
smaller counterparties would be able to
defer compliance until the sixth and last
compliance date on September 1, 2021.
As such, the demand for resources and
services to achieve operational
readiness would be reduced, mitigating
the potential strain on the uncleared
swaps markets.
Also, the Proposal would
appropriately prioritize IM compliance
requirements for those counterparties
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56953
and CSEs that have greater swap trading
activity and potentially pose greater
systemic risk, while giving more time to
smaller counterparties to come into
compliance with the IM requirements.
Inasmuch as this Proposal delays the
implementation of IM for the smallest
CSEs, there may not be as much IM
posted to protect the financial system as
would otherwise be the case.
Consequently, the probability and
severity of financial contagion may be
increased, especially among the smallest
CSEs.
(b) Efficiency, Competitiveness, and
Financial Integrity of Markets
The Proposal would make the
uncleared swaps markets more
streamlined by facilitating
counterparties’ transition into
compliance with the IM requirements.
Counterparties would have additional
time to document their swap
relationships and set up adequate
processes to operationalize the exchange
of IM. As such, the Proposal would
promote fairer competition among
counterparties in the uncleared swaps
markets, as it would remove the
potential incentive of CSEs to prioritize
arrangements with larger counterparties
to the detriment of smaller
counterparties and would help maintain
the current state of market efficiency.
By preventing the market disruption
that would result from the large number
of counterparties that would come into
scope at the end of the current
compliance schedule, the Proposal
promotes the financial integrity of the
markets, reducing the probability of
congestion resulting from the
heightened demand for limited financial
infrastructure resources. On the other
hand, there would be less IM posted
overall, making uncleared swaps
markets more susceptible to financial
contagion where the default of one
counterparty could lead to subsequent
defaults of other counterparties
potentially harming market integrity.
(c) Price Discovery
This Proposal would not harm price
discovery and might help preserve it.
Without the Proposal, counterparties, in
particular smaller counterparties, may
be discouraged from entering or may
even be foreclosed from entering the
uncleared swaps markets because they
may not be able to secure resources and
services in a timely manner to
operationalize the exchange of IM.
These counterparties may thus be shut
out from the uncleared swaps markets,
potentially reducing liquidity and
harming price discovery.
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Federal Register / Vol. 84, No. 206 / Thursday, October 24, 2019 / Proposed Rules
(d) Sound Risk Management
The Proposal would stave off the
potential market disruption that could
result from the large number of
counterparties that would come into the
scope of the IM requirements at the end
of the current compliance schedule. The
extended compliance schedule would
alleviate the potential congestion in
establishing the financial infrastructure
to post IM between in scope entities and
would give counterparties time to
prepare for the exchange of IM and to
establish operational processes tailored
to their uncleared swaps and associated
risks. The additional compliance time
may also improve risk management
practices because there might be some
parties who may prefer to enter into
cleared swaps rather than install
otherwise required financial
infrastructure in a short time frame,
choosing to enter into swaps that are
more standardized but that do not
match their risk management needs as
well.
(e) Other Public Interest Considerations
The Proposal would amend the CFTC
Margin Rule consistent with the revised
BCBS/IOSCO margin framework in
order to promote harmonization with
international margin regulatory
requirements and reduce the potential
for regulatory arbitrage.
khammond on DSKJM1Z7X2PROD with PROPOSALS
4. Request for Comments on CostBenefit Considerations
The Commission invites public
comment on its cost-benefit
considerations, including the section
15(a) factors described above.
Commenters are also invited to submit
any data or other information that they
may have quantifying or qualifying the
costs and benefits of the proposed
amendments with their comment letters.
In particular, the Commission seeks
specific comment on the following:
(a) Has the Commission accurately
identified all 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.
(b) Has the Commission accurately
identified all 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. For
example, is there a potential for
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increased counterparty credit risk in
trades or contagion involving firms that
will get the benefit of the margin
deadline extension that we have
proposed, i.e., with respect to trades
entered into by those entities during the
period between September 2020 and
September 2021? Is it possible to
identify reliably the amount of any such
increase in potential risk? Should the
margin amounts that these firms are
required to post by contract, rather than
by our regulations, be considered as a
risk mitigant during that period?
(c) 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.
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
(including any exemption under section
4(c) or 4c(b) of the CEA), or in requiring
or approving any bylaw, rule, or
regulation of a contract market or
registered futures association
established pursuant to section 17 of the
CEA.24
The Commission believes that the
public interest to be protected by the
antitrust laws is generally to protect
competition. Further, the Commission
preliminarily believes that allowing
parties more time to come into
compliance with the CFTC Margin Rule
by splitting the last compliance phase
into two phases will preserve
competition by encouraging more
participation in the uncleared swaps
markets. The Commission requests
comment on whether this Proposal
implicates any other specific public
interest to be protected by the antitrust
laws.
The Commission has considered this
Proposal to determine whether it is
anticompetitive and has preliminarily
identified no anticompetitive effects.
The Commission requests comment on
whether this Proposal is anticompetitive
and, if it is, what the anticompetitive
effects are.
Because the Commission has
preliminarily determined that this
Proposal is not anticompetitive and has
no anticompetitive effects, the
Commission has not identified any less
anticompetitive means of achieving the
purposes of the CEA. The Commission
24 7
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Frm 00006
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requests comment on whether there are
less anticompetitive means of achieving
the relevant purposes of the CEA that
would otherwise be served by adopting
this Proposal.
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 follows:
PART 23—SWAP DEALERS AND
MAJOR SWAP PARTICIPANTS
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).
2. Amend § 23.161 by revising
paragraphs (a)(1)(iii), (a)(3)(iii),
(a)(4)(iii), (a)(5)(iii), and (a)(6) and
adding paragraph (a)(7) to read as
follows:
■
§ 23.161
Compliance dates.
(a) * * *
(1) * * *
(iii) In calculating the amounts in
paragraphs (a)(1)(i) and (ii) of this
section, an entity shall count the
average daily notional amount of an
uncleared swap, an uncleared securitybased swap, a foreign-exchange forward,
or a foreign exchange swap between the
entity and a margin affiliate only one
time and shall not count a swap that is
exempt pursuant to § 23.150(b) or a
security-based swap that is exempt
pursuant to section 15F(e) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o–10(e)).
*
*
*
*
*
(3) * * *
(iii) In calculating the amounts in
paragraphs (a)(3)(i) and (ii) of this
section, an entity shall count the
average daily notional amount of an
uncleared swap, an uncleared securitybased swap, a foreign-exchange forward,
or a foreign exchange swap between the
entity and a margin affiliate only one
time and shall not count a swap that is
exempt pursuant to § 23.150(b) or a
security-based swap that is exempt
pursuant to section 15F(e) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o–10(e)).
(4) * * *
(iii) In calculating the amounts in
paragraphs (a)(4)(i) and (ii) of this
section, an entity shall count the
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Federal Register / Vol. 84, No. 206 / Thursday, October 24, 2019 / Proposed Rules
average daily notional amount of an
uncleared swap, an uncleared securitybased swap, a foreign-exchange forward,
or a foreign exchange swap between the
entity and a margin affiliate only one
time and shall not count a swap that is
exempt pursuant to § 23.150(b) or a
security-based swap that is exempt
pursuant to section 15F(e) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o–10(e)).
(5) * * *
(iii) In calculating the amounts in
paragraphs (a)(5)(i) and (ii) of this
section, an entity shall count the
average daily notional amount of an
uncleared swap, an uncleared securitybased swap, a foreign-exchange forward,
or a foreign exchange swap between the
entity and a margin affiliate only one
time and shall not count a swap that is
exempt pursuant to § 23.150(b) or a
security-based swap that is exempt
pursuant to section 15F(e) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o–10(e)).
(6) September 1, 2020 for the
requirements in § 23.152 for initial
margin for any uncleared swaps where
both—
(i) The covered swap entity combined
with all its margin affiliates; and
(ii) Its counterparty combined with all
its margin affiliates have an average
daily aggregate notional amount of
uncleared swaps, uncleared securitybased swaps, foreign exchange forwards,
and foreign exchange swaps in March,
April, and May 2020 that exceeds $50
billion, where such amounts are
calculated only for business days; and
where
(iii) In calculating the amounts in
paragraphs (a)(6)(i) and (ii) of this
section, an entity shall count the
average daily notional amount of an
uncleared swap, an uncleared securitybased swap, a foreign exchange forward,
or a foreign exchange swap between the
entity and a margin affiliate only one
time and shall not count a swap that is
exempt pursuant to § 23.150(b) or a
security-based swap that is exempt
pursuant to section 15F(e) of the
Securities Exchange Act of 1934 (15
U.S.C. 78o.10(e)).
(7) September 1, 2021 for the
requirements in § 23.152 for initial
margin for any other covered swap
entity with respect to uncleared swaps
entered into with any other
counterparty.
*
*
*
*
*
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56955
Issued in Washington, DC, on October 16,
2019, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
further align and rationalize uncleared
margin frameworks globally.
Note: The following appendices will not
appear in the Code of Federal Regulations.
I concur with issuing for public comment
the proposed rulemaking (‘‘Proposal’’) to
extend the swaps margining compliance
deadline for certain financial entities that
have smaller swap portfolios.
In general, I am not in favor of extending
compliance deadlines when there has been a
substantial lead-in period for compliance.
The compliance date being extended in the
Proposal was set more than four years earlier.
However, in this instance, there are several
factors that lead me to conclude that the
Proposal will benefit hundreds of entities
with smaller swap portfolios while having
only a small impact on the systemic risk
mitigation benefits of the initial margin
requirements.
Variation and initial margin requirements
for uncleared swaps reduce contagion and
liquidity concerns by ensuring that collateral
is available to cover swap losses if a party
defaults.1 Two types of margin are required.
Variation margin covers current net exposure
from day-to-day price movements for a
portfolio of swaps. The Proposal does not
change variation margin requirements. Initial
margin covers estimated potential future
exposures between the time a default occurs
and when the swaps can be closed out or
hedged.
A CFTC Office of the Chief Economist
(‘‘OCE’’) analysis indicated that
approximately 40 large financial enterprises
are already required to exchange initial
margin for uncleared swaps under
regulations adopted by the CFTC and other
regulators.2 Under the current rule, the so
called ‘‘phase 5’’ entities, entities with
average daily aggregate notional amounts
(‘‘AANA’’) of between $8 billion and $750
billion on a consolidated basis, are required
to have various margining and custodial
agreements in place by September 1, 2020.
The Proposal does not change that deadline
for financial end users that have an AANA
greater than $50 billion. Accordingly, entities
with moderately large swap portfolios would
remain subject to the original compliance
date. Only financial end users with relatively
modest AANA levels would get an extension
of the compliance deadline.
The existing implementation schedule is
consistent with the original Basel Committee
on Banking Supervision (‘‘BCBS’’) and the
Board of the International Organization of
Securities Commissions (‘‘IOSCO’’)
international framework for margin
requirements. In July 2019, BCBS and IOSCO
revised the framework to effectively
recommend an extension of the phase 5
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 Quintenz, Behnam, Stump,
and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2—Supporting Statement of
Commissioner Brian Quintenz
I am pleased to support the Commission’s
proposal to extend the compliance schedule
for uncleared margin to September 1, 2021
for entities with smaller average daily
aggregate notional amounts of activity. As
our own Office of the Chief Economist noted,
phase five would have brought
approximately 700 entities into our margin
regime, implicating around 7,000
relationships that would have to be
negotiated to manage initial margin
arrangements.1 Recognizing the operational
challenges associated with phase 5
implementation, BCBS and IOSCO revised
the uncleared margin framework to include
an additional implementation phase. I am
pleased that the agency, consistent with this
revised international framework, is providing
these smaller counterparties with additional
time to come into compliance. I also support
the recent proposal by the US banking
regulators to similarly extend the compliance
period for smaller firms.
However, much more needs to be done.
First, it is critical that the CFTC, US banking
regulators, the SEC, and our international
counterparts adopt a coordinated approach
with respect to uncleared margin. The
derivatives market is a global market and any
differences in our respective approaches will
result in increased burdens and operational
complexities for firms. This point was
emphasized most recently at the Global
Markets Advisory Committee (GMAC)
meeting. Participants highlighted the
numerous ways in which derivatives
regulators across the globe have implemented
conflicting timing, scope, calculation, and
other requirements for uncleared margin
implementation. I believe we must work with
our regulatory counterparts to eliminate these
cross-border discrepancies. This rulemaking
represents a first step of many more in that
international harmonization effort and I will
continue to support the work of
Commissioner Stump through the GMAC to
1 See Initial Margin Phase 5 by Richard Haynes,
Madison Lau, and Bruce Tuckman, Oct. 24, 2018
available at https://www.cftc.gov/sites/default/files/
About/Economic%20Analysis/Initial
%20Margin%20Phase%205%20v5_ada.pdf.
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Appendix 3—Concurring Statement of
Commissioner Dan M. Berkovitz
1 Basel Committee on Banking Supervision and
the Board of the International Organization of
Securities Commissions ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (September
2013), available at https://www.bis.org/publ/
bcbs261.pdf.
2 See Initial Margin Phase 5 by Richard Haynes,
Madison Lau, and Bruce Tuckman, Oct. 24, 2018
available at https://www.cftc.gov/sites/default/files/
About/Economic%20Analysis/Initial
%20Margin%20Phase%205%20v5_ada.pdf.
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Federal Register / Vol. 84, No. 206 / Thursday, October 24, 2019 / Proposed Rules
deadline in recognition of likely compliance
delays given the large number of entities that
would need to execute margining agreements
to comply with the new initial margin
requirements.3
The Proposal follows the revisions
recommended by BCBS and IOSCO. Other
United States and foreign regulators have
indicated they also intend to adopt
extensions. Consistency with other
regulators, particularly with requirements
like swap margining, helps reduce the
likelihood of regulatory arbitrage.
I am concurring with the Proposal because
the impact on systemic risk mitigation
resulting from the partial one year delay is
muted while the potential impacts on the
hundreds of financial end users with smaller
swap portfolios might be significant if they
are not able to have margining
documentation in place by the original
deadline. This is a data driven conclusion.
While about 40 entities have had to comply
through phase 4, the OCE analysis estimates
that around 700 entities with 7,000 swap
arrangements would be included in phase 5.
Providing more time to hundreds of smaller
users of swaps should help maintain the
hedging capabilities of these market
participants while they negotiate and
establish the necessary margining
arrangements.
The OCE analysis also provides critical
data on the muted impact of the proposed
change on systemic risk mitigation. The
estimated average AANA for phase 5 entities
is $54 billion compared to an average $12.71
trillion AANA for entities in phases 1, 2 and
3, and $1 trillion for entities in phase 4. The
total estimated AANA for entities that would
be subject to the one year extension is
approximately three percent of the total
AANA of entities subject to the margin rules.
In my view, this data is critical to supporting
a one year extension as it indicates that the
likely affect in providing the extension on
systemic risk mitigation will be quite limited.
For these reasons, I concur in the issuance
of the Proposal.
[FR Doc. 2019–22954 Filed 10–23–19; 8:45 am]
BILLING CODE 6351–01–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 240
[Release No. 34–87327; File No. S7–18–19]
Commission Statement on Market
Structure Innovation for Thinly Traded
Securities
Securities and Exchange
Commission.
ACTION: Commission statement.
khammond on DSKJM1Z7X2PROD with PROPOSALS
AGENCY:
This Securities and Exchange
Commission (‘‘Commission’’) statement
SUMMARY:
3 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (July 2019),
available at https://www.bis.org/bcbs/publ/d475.pdf
(‘‘July 2019 BCBS/IOSCO Margin Framework’’).
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17:49 Oct 23, 2019
Jkt 250001
(‘‘Statement’’) is intended to facilitate
the development of proposals that will
improve secondary market trading for
equity securities that trade in lower
volume (‘‘thinly traded securities’’). The
Commission’s interest in considering
proposals for improvement in this
segment of the secondary market
extends to proposals that could include
the suspension or termination of
unlisted trading privileges (‘‘UTP’’) and/
or exemptive relief from Regulation
NMS and other rules under the
Securities Exchange Act of 1934
(‘‘Exchange Act’’).
DATES: The Commission’s statement was
effective October 17, 2019.
ADDRESSES: Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/policy.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7–
18–19 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number S7–18–19. This file number
should be included on the subject line
if email is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s internet website
(https://www.sec.gov/rules/policy.shtml).
Comments are also available for website
viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE, Washington, DC
20549–1090 on official business days
between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be
posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. Studies, memoranda,
or other substantive items may be added
by the Commission or staff to the
comment file. A notification of the
inclusion in the comment file of any
materials will be made available on the
Commission’s website. To ensure direct
electronic receipt of such notifications,
sign up through the ‘‘Stay Connected’’
option at www.sec.gov to receive
notifications by email.
PO 00000
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FOR FURTHER INFORMATION CONTACT:
Cristie March, Senior Special Counsel;
Deborah Flynn, Special Counsel;
Christopher Chow, Special Counsel; or
Liliana Burnett, Attorney-Adviser, at
202–551–5550, in the Division of
Trading and Markets, Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Commission is issuing this
Statement to facilitate the ability of
market participants to develop
innovative proposals for changes in
equity market structure that are
designed to improve trading in thinly
traded securities. Although the
Commission believes that the current
equity market structure generally works
well for securities that trade in higher
volume, the Commission has concerns
that the current ‘‘one-size-fits-all’’
equity market structure, as largely
governed under Regulation NMS,1 may
not be optimal for thinly traded
securities.
The secondary market for thinly
traded securities faces liquidity
challenges that can have a negative
effect on both investors and issuers. In
particular, thinly traded securities,
which are often also smallercapitalization securities, tend to have
wider spreads and less displayed size
relative to securities that trade in greater
volume, often resulting in higher
transaction costs for investors.2
Potential investors in such securities
also may be concerned that they could
encounter difficulties finding the
necessary liquidity to establish or
unwind positions in the stocks.3 A lack
of readily available liquidity also may
discourage potential market makers
from electing to make markets in those
1 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005)
(adopting 17 CFR 242.600 through 242.613
(Regulation NMS)) (‘‘NMS Release’’). ‘‘NMS’’ stands
for the National Market System.
2 See Division of Trading and Markets Data Paper:
Empirical Analysis of Liquidity Demographics and
Market Quality, April 10, 2018, available at https://
www.sec.gov/files/thinly_traded_eqs_data_
summary.pdf, at 1 (summarizing the quoting and
trading characteristics of NMS stocks on the lower
end of the liquidity spectrum).
3 See, e.g., Transcript for Roundtable on Market
Structure for Thinly-Traded Securities, April 23,
2018, available at https://www.sec.gov/spotlight/
equity-market-structure-roundtables/thinly-tradedsecurities-rountable-042318-transcript.txt
(‘‘Transcript’’), at 35; see also Thierry Foucault,
Ohad Kadan & Eugene Kandel, Liquidity Cycles and
Make/Take Fees in Electronic Markets, 68 J. Fin.
299 (2013) (discussing the externality of liquidity
demand increases resulting in the increasing supply
of liquidity, and an exogenous increase in the
supply of liquidity resulting in an increase in the
demand for liquidity).
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]]>Agencies
[Federal Register Volume 84, Number 206 (Thursday, October 24, 2019)]
[Proposed Rules]
[Pages 56950-56956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22954]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AE89
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 a proposed amendment to the margin
requirements for uncleared swaps for swap dealers (``SD'') and major
swap participants (``MSP'') for which there is no prudential regulator
(the ``CFTC Margin Rule''). As adopted in 2016, the CFTC Margin Rule,
which mandates the collection and posting of variation margin and
initial margin (``IM''), takes effect under a phased compliance
schedule extending from September 1, 2016 to September 1, 2020. The
proposed amendment would extend the compliance schedule to September 1,
2021, for entities with smaller average daily aggregate notional
amounts of swaps and certain other financial products. By extending the
compliance schedule, the proposed amendment would mitigate the
potential market disruption that could result from such a large number
of entities coming into the scope of the IM requirements on September
1, 2020.
DATES: Comments must be received on or before December 23, 2019.
ADDRESSES: You may submit comments, identified by RIN 3038-AE89, 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 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.
[[Page 56951]]
SUPPLEMENTARY INFORMATION:
I. Background
Section 4s(e) of the Commodity Exchange Act (``CEA'') \2\ requires
the Commission to adopt rules establishing minimum initial and
variation margin requirements for 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 by the SD or MSP.\7\
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\2\ 7 U.S.C. 1 et seq.
\3\ For the definition of swap, see section 1a(47) of the CEA
and Commission Sec. 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 mean 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). 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 Regulators' Margin Rule'').
\5\ See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission Sec. 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 Sec. 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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The Basel Committee on Banking Supervision (``BCBS'') and the Board
of the International Organization of Securities Commissions (``IOSCO'')
established an international framework for margin requirements for
uncleared derivatives in September 2013 (the ``BCBS/IOSCO
framework'').\8\ After the establishment of the BCBS/IOSCO framework,
on January 6, 2016, the CFTC, consistent with Section 4s(e),
promulgated rules requiring CSEs to collect and post initial and
variation margin for uncleared swaps,\9\ adopting the implementation
schedule set forth in the BCBS/IOSCO framework, including the revised
implementation schedule adopted on March 18, 2015.\10\
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\8\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
\9\ See 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. In May 2016, the Commission amended the CFTC Margin Rule to
add Commission Sec. 23.160, providing rules on its cross border
application. 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). 17 CFR 23.160.
\10\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (March 2015), available at https://www.bis.org/bcbs/publ/d317.pdf.
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II. Proposed Changes to the CFTC Margin Rule (``Proposal'')
Covered swap entities are required to post and collect IM with
counterparties that are SDs, MSPs, or financial end users with material
swap exposure (``MSE'') \11\ (``covered counterparties'') in accordance
with a compliance schedule set forth in Commission Sec. 23.161.\12\
The compliance schedule comprises five compliance dates, from September
1, 2016 to September 1, 2020, staggered such that CSEs and covered
counterparties, starting with the largest average daily aggregate
notional amounts (``AANA'') of uncleared swaps and certain other
financial products, and then successively lesser AANA, come into
compliance with the IM requirements in a series of five phases.
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\11\ Commission Sec. 23.151 provides that MSE for an entity
means that the entity and its margin affiliates have an average
daily aggregate notional amount of uncleared swaps, uncleared
security-based swaps, foreign exchange forwards, and foreign
exchange swaps with all counterparties for June, July or August of
the previous calendar year that exceeds $8 billion, where such
amount is calculated only for business days. A company is a ``margin
affiliate'' of another company if: (i) Either company consolidates
the other on a financial statement prepared in accordance with U.S.
Generally Accepted Accounting Principles, the International
Financial Reporting Standards, or other similar standards; (ii) both
companies are consolidated with a third company on a financial
statement prepared in accordance with such principles or standards;
or (iii) for a company that is not subject to such principles or
standards, if consolidation as described in paragraph (1) or (2) of
this definition would have occurred if such principles or standards
had applied. 17 CFR 23.151.
\12\ See 17 CFR 23.161.
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The fourth compliance date, September 1, 2019, brought within the
scope of compliance CSEs and covered counterparties each exceeding $750
billion in AANA. On the fifth and last compliance date (``phase 5''),
September 1, 2020, remaining CSEs and covered counterparties, including
financial end user counterparties with an MSE exceeding $8 billion in
AANA, will come into compliance. As a result of the large reduction in
the compliance threshold from $750 billion to $8 billion at the end of
the compliance schedule, a significant number of financial end user
counterparties, including relatively small counterparties, will be
required to comply with the IM requirements and implement related
operational processes. According to the CFTC's Office of the Chief
Economist (``OCE''), compared with the first through the fourth phase
of compliance, which brought approximately 40 entities into scope,
phase 5 would bring approximately 700 entities, along with 7,000
relationships, which represent the number of IM agreements that would
have to be in place in phase 5 to carry out swap transactions.\13\
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\13\ See Initial Margin Phase 5 by Richard Haynes, Madison Lau,
and Bruce Tuckman, Oct. 24, 2018 available at https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf (``OCE Initial Margin
Phase 5 Study'').
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Market participants have expressed concerns regarding the onset of
phase 5 given the operational complexity associated with IM calculation
and third-party segregation of IM collateral.\14\ As a large number of
counterparties prepare to meet applicable IM deadlines, newly in-scope
entities may encounter operational difficulties because a significant
number of these entities will be engaging the same limited number of
entities that provide IM required services, involving, among other
things, the preparation of IM-related documentation, the approval and
implementation of risk-based models for IM calculation, and custodial
arrangements. The potential for compliance delays may lead to
disruption in the markets, including the possibility that some
counterparties could, for a time, be prohibited from entering into
uncleared swaps and therefore be unable to use swaps to hedge their
financial risk. In recognition of these difficulties, BCBS/IOSCO
revised its framework to extend the schedule for compliance with the IM
requirements and provide an additional phase-in period for smaller
counterparties.\15\
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\14\ See, e.g., Letter from the Securities Industry and
Financial Markets Association (``SIFMA''), the American Bankers
Association (``ABA''), the Global Foreign Exchange Division of the
Global Financial Markets Association (``GFXD''), and the Institute
of International Bankers (``IIB'') (April 5, 2019); Letter from the
Managed Funds Association (June 20, 2019).
\15\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf (``July 2019 BCBS/IOSCO Margin
Framework'').
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[[Page 56952]]
The CFTC believes it is appropriate to amend the CFTC Margin Rule
consistent with the BCBS/IOSCO framework's revision.\16\ The
Commission's Proposal, which is in line with the revised framework,
would extend the compliance schedule for the IM requirements,
alleviating the potential market disruption. The Proposal represents
the Commission's effort to undertake coordinated action with
international counterparts to achieve regulatory harmonization with
respect to uncleared swaps margin.
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\16\ See July 2019 BCBS/IOSCO Margin Framework.
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In proposing the change in the phase 5 compliance date, the
Commission also considered the relatively small amount of swap activity
of the financial end users that would be subject to the one year
extension. The OCE estimated in 2018 that the average AANA per entity
in phase 5 is $54 billion compared to an average $12.71 trillion AANA
for each entity in phases 1, 2, and 3 and $1 trillion in phase 4. OCE
also estimated that total AANA for entities that would be subject to
the one year extension is approximately three percent of the total AANA
across all the phases.\17\ Given the relatively small amount of swap
activity of the financial end users in the extended compliance date
group, the Commission believes the proposed compliance date extension
will have a muted impact on the systemic risk mitigating effects of the
IM requirements during the extension period.
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\17\ See OCE Initial Margin Phase 5 Study at 4-5.
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Accordingly, the Commission proposes to amend Commission Sec.
23.161(a), which sets forth the schedule for compliance with the CFTC
Margin Rule, to add a sixth phase of compliance for certain smaller
entities that are currently subject to phase 5. The proposed amendment
would require compliance by September 1, 2020, for CSEs and covered
counterparties with an AANA ranging from $50 billion up to $750
billion. The compliance date for all other remaining CSEs and covered
counterparties, including financial end user counterparties exceeding
an MSE of $8 billion in AANA, would be extended to September 1, 2021.
In addition, the Commission is proposing non-substantive,
conforming technical changes \18\ to Commission Sec. 23.161(a) to
replace, where applicable, ``between an entity or a margin affiliate
only one time'' with ``between the entity and a margin affiliate only
one time.'' The proposed change will conform the CFTC Margin Rule to
the rule text of the Prudential Regulators' Margin Rule, promoting
further harmonization between both regulators.
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\18\ For consistency, the proposed changes include revisions to
text in Commission Sec. 23.161(a) relating to compliance dates that
have already passed.
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The Commission is also proposing to replace in Commission Sec.
23.161(a), where applicable, ``shall not count a swap or a security-
based swap that is exempt pursuant to Sec. 23.150(b)'' with ``shall
not count a swap that is exempt pursuant to Sec. 23.150(b).'' This
proposed change will remove the term ``security-based swap'' from
certain parts of Commission Sec. 23.161(a). This change is necessary
because, due to a transcription error, the current rule text
incorrectly indicates that Commission Sec. 23.150(b) exempts security-
based swaps from the CFTC Margin Rule. Section 23.150(b) applies only
to swaps. Notwithstanding this technical change that eliminates the
reference to Commission Sec. 23.150(b) with respect to security-based
swaps, Commission Sec. 23.161(a) will continue to exclude any
security-based swap, for purposes of the calculation of the various
thresholds set forth in Commission Sec. 23.161(a), that is exempt
pursuant to section 15F(e) of the Securities Exchange Act, of 1934, as
is the case, prior to this Proposal, under the current rule text.
Request for comment. The Commission requests comment regarding the
proposed amendments to Commission Sec. 23.161. The Commission
specifically requests comment on the following question:
Is the proposed rule text relating to the one-year
extension of the final implementation timeline clear in its intent and
direction to market participants? Is any further Commission guidance
necessary to avoid any potential confusion or market disruption? Please
explain.
III. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \19\ 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. This Proposal contains no requirements
subject to the PRA.
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\19\ 44 U.S.C. 3501 et seq.
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B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities.\20\ This
Proposal only affects SDs and MSPs that are subject to the CFTC Margin
Rule and their covered counterparties, all of which are required to be
eligible contract participants (``ECPs'').\21\ The Commission has
previously determined that SDs, MSPs, and ECPs are not small entities
for purposes of the RFA.\22\ Therefore, the Commission believes that
this Proposal will not have a significant economic impact on a
substantial number of small entities, as defined in the RFA.
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\20\ 5 U.S.C. 601 et seq.
\21\ Each counterparty to an uncleared swap must be an ECP, as
the term is defined in section 1a(18) of the CEA, 7 U.S.C. 1a(18)
and Commission Sec. 1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
\22\ 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 Proposal will not have
a significant economic impact on a substantial number of small
entities. The Commission invites comment on the impact of this Proposal
on small entities.
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.
Further, the Commission reflected upon the extraterritorial reach of
this Proposal and notes where this reach may be especially relevant.
This Proposal extends the compliance schedule for the CFTC Margin
Rule and introduces an additional compliance date for smaller
counterparties.\23\ The proposed compliance schedule would require CSEs
and covered counterparties, with an AANA ranging
[[Page 56953]]
from $50 billion up to $750 billion, to exchange IM in phase 5. All
remaining CSEs and covered counterparties, including financial end user
counterparties exceeding an MSE of $8 billion in AANA, would come into
scope in the proposed additional sixth phase, beginning September 1,
2021.
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\23\ The Commission is also proposing conforming technical
changes to Commission Sec. 23.161(a). Given the non-substantive
nature of these changes, there are no costs or benefits to be
considered.
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As discussed above, the Commission believes that as a result of the
large number of counterparties that would be required to comply with
the IM requirements for the first time at the end of the current
compliance schedule, market disruption may arise. The markets may be
strained given counterparties' demand for resources and services to
meet the September 2020 deadline and operationalize the exchange of IM,
involving, among other things, counterparty onboarding, approval and
implementation of risk-based models for the calculation of IM, and
documentation associated with the exchange of IM.
The baseline against which the benefits and costs associated with
this Proposal are compared is the uncleared swaps markets as they exist
today, including the impact of the current compliance schedule and the
implementation of phase 5 on September 1, 2020. With this as the
baseline for this Proposal, the following are the benefits and costs of
this Proposal.
1. Benefits
As described above, this Proposal will extend the compliance
schedule for the IM requirements for certain smaller entities to
September 1, 2021. The Proposal is intended to alleviate the potential
congestion and market disruption resulting from the large number of
counterparties that would come into scope under the current compliance
schedule and the strain on the uncleared swaps markets resulting from
the increased demand for limited resources and services to set up
operations to comply with the IM requirements, including counterparty
onboarding, adoption and implementation of risk-based models to
calculate IM, and documentation associated with the exchange of IM.
The Proposal would prioritize applicable IM compliance deadlines in
order to focus on certain financial end users, SDs, and MSPs that
engage in greater swap trading activity and that may significantly
contribute to systemic risk in the financial markets, while providing a
12-month delay for smaller counterparties, whose swap trading may not
pose the same level of risk, to prepare for their eventual compliance
with the IM requirements. The Proposal therefore would promote the
smooth and orderly transition into IM compliance.
The Proposal would amend the CFTC Margin Rule consistent with the
revised BCBS/IOSCO margin framework. The Proposal therefore promotes
harmonization with international margin regulatory requirements,
reducing the potential for regulatory arbitrage.
2. Costs
The Proposal would extend the time frame for compliance with the IM
requirements for the smallest, in terms of notional amount, CSEs and
covered counterparties, including SDs and MSPs and financial end users
that exceed an MSE of $8 billion, by an additional 12 months. Swaps
entered into during this period with the smallest CSEs have the
potential to be treated as legacy swaps and thus would not be subject
to the IM requirements. The contagion risk associated with these
potentially uncollateralized legacy swaps is a lesser concern because
these legacy swap portfolios would be entered into with counterparties
that engage in lower levels of notional trading.
The Proposal would also delay the implementation of IM by smaller
CSEs. There may not be as much IM posted to protect the financial
system as would otherwise be the case. As such, the probability and
severity of financial contagion may increase.
3. Section 15(a) Considerations
In light of the foregoing, the CFTC has evaluated the costs and
benefits of this Proposal pursuant to the five considerations
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
This Proposal would protect market participants and the public
against the potential disruption that may be caused by the large number
of counterparties that would come into scope of the IM requirements at
the end of the current compliance schedule.
Under the proposed compliance schedule, fewer counterparties would
come into scope in phase 5 and many smaller counterparties would be
able to defer compliance until the sixth and last compliance date on
September 1, 2021. As such, the demand for resources and services to
achieve operational readiness would be reduced, mitigating the
potential strain on the uncleared swaps markets.
Also, the Proposal would appropriately prioritize IM compliance
requirements for those counterparties and CSEs that have greater swap
trading activity and potentially pose greater systemic risk, while
giving more time to smaller counterparties to come into compliance with
the IM requirements.
Inasmuch as this Proposal delays the implementation of IM for the
smallest CSEs, there may not be as much IM posted to protect the
financial system as would otherwise be the case. Consequently, the
probability and severity of financial contagion may be increased,
especially among the smallest CSEs.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
The Proposal would make the uncleared swaps markets more
streamlined by facilitating counterparties' transition into compliance
with the IM requirements. Counterparties would have additional time to
document their swap relationships and set up adequate processes to
operationalize the exchange of IM. As such, the Proposal would promote
fairer competition among counterparties in the uncleared swaps markets,
as it would remove the potential incentive of CSEs to prioritize
arrangements with larger counterparties to the detriment of smaller
counterparties and would help maintain the current state of market
efficiency.
By preventing the market disruption that would result from the
large number of counterparties that would come into scope at the end of
the current compliance schedule, the Proposal promotes the financial
integrity of the markets, reducing the probability of congestion
resulting from the heightened demand for limited financial
infrastructure resources. On the other hand, there would be less IM
posted overall, making uncleared swaps markets more susceptible to
financial contagion where the default of one counterparty could lead to
subsequent defaults of other counterparties potentially harming market
integrity.
(c) Price Discovery
This Proposal would not harm price discovery and might help
preserve it. Without the Proposal, counterparties, in particular
smaller counterparties, may be discouraged from entering or may even be
foreclosed from entering the uncleared swaps markets because they may
not be able to secure resources and services in a timely manner to
operationalize the exchange of IM. These counterparties may thus be
shut out from the uncleared swaps markets, potentially reducing
liquidity and harming price discovery.
[[Page 56954]]
(d) Sound Risk Management
The Proposal would stave off the potential market disruption that
could result from the large number of counterparties that would come
into the scope of the IM requirements at the end of the current
compliance schedule. The extended compliance schedule would alleviate
the potential congestion in establishing the financial infrastructure
to post IM between in scope entities and would give counterparties time
to prepare for the exchange of IM and to establish operational
processes tailored to their uncleared swaps and associated risks. The
additional compliance time may also improve risk management practices
because there might be some parties who may prefer to enter into
cleared swaps rather than install otherwise required financial
infrastructure in a short time frame, choosing to enter into swaps that
are more standardized but that do not match their risk management needs
as well.
(e) Other Public Interest Considerations
The Proposal would amend the CFTC Margin Rule consistent with the
revised BCBS/IOSCO margin framework in order to promote harmonization
with international margin regulatory requirements and reduce the
potential for regulatory arbitrage.
4. Request for Comments on Cost-Benefit Considerations
The Commission invites public comment on its cost-benefit
considerations, including the section 15(a) factors described above.
Commenters are also invited to submit any data or other information
that they may have quantifying or qualifying the costs and benefits of
the proposed amendments with their comment letters. In particular, the
Commission seeks specific comment on the following:
(a) Has the Commission accurately identified all 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.
(b) Has the Commission accurately identified all 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. For example, is
there a potential for increased counterparty credit risk in trades or
contagion involving firms that will get the benefit of the margin
deadline extension that we have proposed, i.e., with respect to trades
entered into by those entities during the period between September 2020
and September 2021? Is it possible to identify reliably the amount of
any such increase in potential risk? Should the margin amounts that
these firms are required to post by contract, rather than by our
regulations, be considered as a risk mitigant during that period?
(c) 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.
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 (including any exemption under section 4(c) or 4c(b)
of the CEA), or in requiring or approving any bylaw, rule, or
regulation of a contract market or registered futures association
established pursuant to section 17 of the CEA.\24\
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\24\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. Further, the
Commission preliminarily believes that allowing parties more time to
come into compliance with the CFTC Margin Rule by splitting the last
compliance phase into two phases will preserve competition by
encouraging more participation in the uncleared swaps markets. The
Commission requests comment on whether this Proposal implicates any
other specific public interest to be protected by the antitrust laws.
The Commission has considered this Proposal to determine whether it
is anticompetitive and has preliminarily identified no anticompetitive
effects. The Commission requests comment on whether this Proposal is
anticompetitive and, if it is, what the anticompetitive effects are.
Because the Commission has preliminarily determined that this
Proposal is not anticompetitive and has no anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the CEA. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the CEA that would otherwise be served by adopting this
Proposal.
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 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. Amend Sec. 23.161 by revising paragraphs (a)(1)(iii), (a)(3)(iii),
(a)(4)(iii), (a)(5)(iii), and (a)(6) and adding paragraph (a)(7) to
read as follows:
Sec. 23.161 Compliance dates.
(a) * * *
(1) * * *
(iii) In calculating the amounts in paragraphs (a)(1)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign-exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o-10(e)).
* * * * *
(3) * * *
(iii) In calculating the amounts in paragraphs (a)(3)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign-exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o-10(e)).
(4) * * *
(iii) In calculating the amounts in paragraphs (a)(4)(i) and (ii)
of this section, an entity shall count the
[[Page 56955]]
average daily notional amount of an uncleared swap, an uncleared
security-based swap, a foreign-exchange forward, or a foreign exchange
swap between the entity and a margin affiliate only one time and shall
not count a swap that is exempt pursuant to Sec. 23.150(b) or a
security-based swap that is exempt pursuant to section 15F(e) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o-10(e)).
(5) * * *
(iii) In calculating the amounts in paragraphs (a)(5)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign-exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o-10(e)).
(6) September 1, 2020 for the requirements in Sec. 23.152 for
initial margin for any uncleared swaps where both--
(i) The covered swap entity combined with all its margin
affiliates; and
(ii) Its counterparty combined with all its margin affiliates have
an average daily aggregate notional amount of uncleared swaps,
uncleared security-based swaps, foreign exchange forwards, and foreign
exchange swaps in March, April, and May 2020 that exceeds $50 billion,
where such amounts are calculated only for business days; and where
(iii) In calculating the amounts in paragraphs (a)(6)(i) and (ii)
of this section, an entity shall count the average daily notional
amount of an uncleared swap, an uncleared security-based swap, a
foreign exchange forward, or a foreign exchange swap between the entity
and a margin affiliate only one time and shall not count a swap that is
exempt pursuant to Sec. 23.150(b) or a security-based swap that is
exempt pursuant to section 15F(e) of the Securities Exchange Act of
1934 (15 U.S.C. 78o.10(e)).
(7) September 1, 2021 for the requirements in Sec. 23.152 for
initial margin for any other covered swap entity with respect to
uncleared swaps entered into with any other counterparty.
* * * * *
Issued in Washington, DC, on October 16, 2019, by the
Commission.
Robert Sidman,
Deputy 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 Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Supporting Statement of Commissioner Brian Quintenz
I am pleased to support the Commission's proposal to extend the
compliance schedule for uncleared margin to September 1, 2021 for
entities with smaller average daily aggregate notional amounts of
activity. As our own Office of the Chief Economist noted, phase five
would have brought approximately 700 entities into our margin
regime, implicating around 7,000 relationships that would have to be
negotiated to manage initial margin arrangements.\1\ Recognizing the
operational challenges associated with phase 5 implementation, BCBS
and IOSCO revised the uncleared margin framework to include an
additional implementation phase. I am pleased that the agency,
consistent with this revised international framework, is providing
these smaller counterparties with additional time to come into
compliance. I also support the recent proposal by the US banking
regulators to similarly extend the compliance period for smaller
firms.
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\1\ See Initial Margin Phase 5 by Richard Haynes, Madison Lau,
and Bruce Tuckman, Oct. 24, 2018 available at https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf.
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However, much more needs to be done. First, it is critical that
the CFTC, US banking regulators, the SEC, and our international
counterparts adopt a coordinated approach with respect to uncleared
margin. The derivatives market is a global market and any
differences in our respective approaches will result in increased
burdens and operational complexities for firms. This point was
emphasized most recently at the Global Markets Advisory Committee
(GMAC) meeting. Participants highlighted the numerous ways in which
derivatives regulators across the globe have implemented conflicting
timing, scope, calculation, and other requirements for uncleared
margin implementation. I believe we must work with our regulatory
counterparts to eliminate these cross-border discrepancies. This
rulemaking represents a first step of many more in that
international harmonization effort and I will continue to support
the work of Commissioner Stump through the GMAC to further align and
rationalize uncleared margin frameworks globally.
Appendix 3--Concurring Statement of Commissioner Dan M. Berkovitz
I concur with issuing for public comment the proposed rulemaking
(``Proposal'') to extend the swaps margining compliance deadline for
certain financial entities that have smaller swap portfolios.
In general, I am not in favor of extending compliance deadlines
when there has been a substantial lead-in period for compliance. The
compliance date being extended in the Proposal was set more than
four years earlier. However, in this instance, there are several
factors that lead me to conclude that the Proposal will benefit
hundreds of entities with smaller swap portfolios while having only
a small impact on the systemic risk mitigation benefits of the
initial margin requirements.
Variation and initial margin requirements for uncleared swaps
reduce contagion and liquidity concerns by ensuring that collateral
is available to cover swap losses if a party defaults.\1\ Two types
of margin are required. Variation margin covers current net exposure
from day-to-day price movements for a portfolio of swaps. The
Proposal does not change variation margin requirements. Initial
margin covers estimated potential future exposures between the time
a default occurs and when the swaps can be closed out or hedged.
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\1\ Basel Committee on Banking Supervision and the Board of the
International Organization of Securities Commissions ``Margin
requirements for non-centrally cleared derivatives,'' (September
2013), available at https://www.bis.org/publ/bcbs261.pdf.
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A CFTC Office of the Chief Economist (``OCE'') analysis
indicated that approximately 40 large financial enterprises are
already required to exchange initial margin for uncleared swaps
under regulations adopted by the CFTC and other regulators.\2\ Under
the current rule, the so called ``phase 5'' entities, entities with
average daily aggregate notional amounts (``AANA'') of between $8
billion and $750 billion on a consolidated basis, are required to
have various margining and custodial agreements in place by
September 1, 2020. The Proposal does not change that deadline for
financial end users that have an AANA greater than $50 billion.
Accordingly, entities with moderately large swap portfolios would
remain subject to the original compliance date. Only financial end
users with relatively modest AANA levels would get an extension of
the compliance deadline.
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\2\ See Initial Margin Phase 5 by Richard Haynes, Madison Lau,
and Bruce Tuckman, Oct. 24, 2018 available at https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf.
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The existing implementation schedule is consistent with the
original Basel Committee on Banking Supervision (``BCBS'') and the
Board of the International Organization of Securities Commissions
(``IOSCO'') international framework for margin requirements. In July
2019, BCBS and IOSCO revised the framework to effectively recommend
an extension of the phase 5
[[Page 56956]]
deadline in recognition of likely compliance delays given the large
number of entities that would need to execute margining agreements
to comply with the new initial margin requirements.\3\
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\3\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf (``July 2019 BCBS/IOSCO Margin
Framework'').
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The Proposal follows the revisions recommended by BCBS and
IOSCO. Other United States and foreign regulators have indicated
they also intend to adopt extensions. Consistency with other
regulators, particularly with requirements like swap margining,
helps reduce the likelihood of regulatory arbitrage.
I am concurring with the Proposal because the impact on systemic
risk mitigation resulting from the partial one year delay is muted
while the potential impacts on the hundreds of financial end users
with smaller swap portfolios might be significant if they are not
able to have margining documentation in place by the original
deadline. This is a data driven conclusion. While about 40 entities
have had to comply through phase 4, the OCE analysis estimates that
around 700 entities with 7,000 swap arrangements would be included
in phase 5. Providing more time to hundreds of smaller users of
swaps should help maintain the hedging capabilities of these market
participants while they negotiate and establish the necessary
margining arrangements.
The OCE analysis also provides critical data on the muted impact
of the proposed change on systemic risk mitigation. The estimated
average AANA for phase 5 entities is $54 billion compared to an
average $12.71 trillion AANA for entities in phases 1, 2 and 3, and
$1 trillion for entities in phase 4. The total estimated AANA for
entities that would be subject to the one year extension is
approximately three percent of the total AANA of entities subject to
the margin rules. In my view, this data is critical to supporting a
one year extension as it indicates that the likely affect in
providing the extension on systemic risk mitigation will be quite
limited.
For these reasons, I concur in the issuance of the Proposal.
[FR Doc. 2019-22954 Filed 10-23-19; 8:45 am]
BILLING CODE 6351-01-P
