Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 27674-27680 [2020-08601]
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Federal Register / Vol. 85, No. 91 / Monday, May 11, 2020 / Rules and Regulations
Hillwood Parkway, Fort Worth, TX
76177; telephone (817) 222–5857.
SUPPLEMENTARY INFORMATION:
Authority for This Rulemaking
The FAA’s authority to issue rules
regarding aviation safety is found in
Title 49 of the United States Code.
Subtitle I, Section 106 describes the
authority of the FAA Administrator.
Subtitle VII, Aviation Programs,
describes in more detail the scope of the
agency’s authority. This rulemaking is
promulgated under the authority
described in Subtitle VII, Part A,
Subpart I, Section 40103. Under that
section, the FAA is charged with
prescribing regulations to assign the use
of airspace necessary to ensure the
safety of aircraft and the efficient use of
airspace. This regulation is within the
scope of that authority as it amends the
Class E airspace extending upward from
700 feet above the surface at
Shenandoah Municipal Airport,
Shenandoah, IA, to support IFR
operations at this airport.
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History
The FAA published a notice of
proposed rulemaking in the Federal
Register (85 FR 7681; February 11,
2020) for Docket No. FAA–2019–0791 to
amend the Class E airspace extending
upward from 700 feet above the surface
at Shenandoah Municipal Airport,
Shenandoah, IA. Interested parties were
invited to participate in this rulemaking
effort by submitting written comments
on the proposal to the FAA. No
comments were received.
Class E airspace designations are
published in paragraph 6005 of FAA
Order 7400.11D, dated August 8, 2019,
and effective September 15, 2019, which
is incorporated by reference in 14 CFR
71.1. The Class E airspace designations
listed in this document will be
published subsequently in the Order.
Availability and Summary of
Documents for Incorporation by
Reference
This document amends FAA Order
7400.11D, Airspace Designations and
Reporting Points, dated August 8, 2019,
and effective September 15, 2019. FAA
Order 7400.11D is publicly available as
listed in the ADDRESSES section of this
document. FAA Order 7400.11D lists
Class A, B, C, D, and E airspace areas,
air traffic service routes, and reporting
points.
The Rule
This amendment to Title 14 Code of
Federal Regulations (14 CFR) part 71 by
amending the Class E airspace
extending upward from 700 feet above
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the surface within a 6.5-mile radius
(increased from a 6.4 mile radius), of
Shenandoah Municipal Airport,
Shenandoah, IA; and removing the
Shenandoah NDB, and associated
extensions from the airspace legal
description.
This action is the result due to an
airspace review caused by the
decommissioning of the Shenandoah
NDB, which provided navigation
information for the instrument
procedures at this airport.
FAA Order 7400.11, Airspace
Designations and Reporting Points, is
published yearly and effective on
September 15.
Regulatory Notices and Analyses
The FAA has determined that this
regulation only involves an established
body of technical regulations for which
frequent and routine amendments are
necessary to keep them operationally
current, is non-controversial and
unlikely to result in adverse or negative
comments. It, therefore: (1) Is not a
‘‘significant regulatory action’’ under
Executive Order 12866; (2) is not a
‘‘significant rule’’ under DOT
Regulatory Policies and Procedures (44
FR 11034; February 26, 1979); and (3)
does not warrant preparation of a
regulatory evaluation as the anticipated
impact is so minimal. Since this is a
routine matter that only affects air traffic
procedures and air navigation, it is
certified that this rule, when
promulgated, does not have a significant
economic impact on a substantial
number of small entities under the
criteria of the Regulatory Flexibility Act.
Environmental Review
The FAA has determined that this
action qualifies for categorical exclusion
under the National Environmental
Policy Act in accordance with FAA
Order 1050.1F, ‘‘Environmental
Impacts: Policies and Procedures,’’
paragraph 5–6.5.a. This airspace action
is not expected to cause any potentially
significant environmental impacts, and
no extraordinary circumstances exist
that warrant preparation of an
environmental assessment.
Lists of Subjects in 14 CFR Part 71
Airspace, Incorporation by reference,
Navigation (air).
Adoption of the Amendment
In consideration of the foregoing, the
Federal Aviation Administration
amends 14 CFR part 71 as follows:
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PART 71—DESIGNATION OF CLASS A,
B, C, D, AND E AIRSPACE AREAS; AIR
TRAFFIC SERVICE ROUTES; AND
REPORTING POINTS
1. The authority citation for part 71
continues to read as follows:
■
Authority: 49 U.S.C. 106(f), 106(g); 40103,
40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR,
1959–1963 Comp., p. 389.
§ 71.1
[Amended]
2. The incorporation by reference in
14 CFR 71.1 of FAA Order 7400.11D,
Airspace Designations and Reporting
Points, dated August 8, 2019, and
effective September 15, 2019, is
amended as follows:
■
Paragraph 6005 Class E Airspace Areas
Extending Upward From 700 Feet or More
Above the Surface of the Earth.
*
*
*
*
*
ACE IA E5 Shenandoah, IA [Amended]
Shenandoah Municipal Airport, IA
(Lat. 40°45′06″ N, long. 95°24′49″ W)
That airspace extending upward from 700
feet above the surface within a 6.5-mile
radius of Shenandoah Municipal Airport.
Issued in Fort Worth, Texas, on May 5,
2020.
Steven T. Phillips,
Acting Manager, Operations Support Group,
ATO Central Service Center.
[FR Doc. 2020–09892 Filed 5–8–20; 8:45 am]
BILLING CODE 4910–13–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 23
RIN 3038–AE77
Margin Requirements for Uncleared
Swaps for Swap Dealers and Major
Swap Participants
Commodity Futures Trading
Commission.
ACTION: Final rule.
AGENCY:
The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is amending the margin
requirements for uncleared swaps for
swap dealers (‘‘SD’’) and major swap
participants (‘‘MSP’’) for which there is
no prudential regulator to add the
European Stability Mechanism (‘‘ESM’’)
to the list of entities that are expressly
excluded from the definition of
financial end user under Commission
regulations and to correct an erroneous
cross-reference in Commission
regulations (‘‘Final Rules’’).
DATES: This final rule is effective June
10, 2020.
SUMMARY:
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Federal Register / Vol. 85, No. 91 / Monday, May 11, 2020 / Rules and Regulations
FOR FURTHER INFORMATION CONTACT:
Joshua B. Sterling, Director, 202–418–
6056, jsterling@cftc.gov; Thomas J.
Smith, Deputy Director, 202–418–5495,
tsmith@cftc.gov; Warren Gorlick,
Associate Director, 202–418–5195,
wgorlick@cftc.gov; Carmen MoncadaTerry, Special Counsel, 202–418–5795,
cmoncada-terry@cftc.gov; or Rafael
Martinez, Senior Financial Risk Analyst,
202–418–5462, rmartinez@cftc.gov,
Division of Swap Dealer and
Intermediary Oversight, Commodity
Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
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In January 2016, the Commission
adopted regulation §§ 23.150 through
23.161 (collectively, ‘‘CFTC Margin
Rule’’) to implement section 4s(e) of the
Commodity Exchange Act (‘‘CEA’’),1
which requires SDs and MSPs for which
there is not a prudential regulator
(‘‘CSEs’’) to meet minimum initial and
variation margin requirements adopted
by the Commission by rule or
regulation.2
Since adopting the CFTC Margin
Rule, the Commission’s Division of
Swap Dealer and Intermediary
Oversight (‘‘DSIO’’) has issued staff
guidance, including no-action letters,
addressing the application of the rule. In
July 2017, DSIO issued CFTC Letter No.
17–34 in response to a request for relief
submitted by the ESM.3 The ESM
sought relief with respect to uncleared
swaps transactions it entered into with
SDs, representing that it was similar to
1 See Margin Requirements for Uncleared Swaps
for Swap Dealers and Major Swap Participants, 81
FR 636 (Jan. 6, 2016) (‘‘Final Margin Rule’’); Margin
Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants—Cross-Border
Application of the Margin Requirements, 81 FR
34818 (May 31, 2016).
2 See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for
which there is a ‘‘Prudential Regulator’’ must meet
the margin requirements for uncleared swaps
established by the applicable ‘‘Prudential
Regulator.’’ 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C.
1a(39) (defining the term ‘‘Prudential Regulator’’ to
include the Board of Governors of the Federal
Reserve System; the Office of the Comptroller of the
Currency; the Federal Deposit Insurance
Corporation; the Farm Credit Administration; and
the Federal Housing Finance Agency, and
specifying the entities for which these agencies act
as Prudential Regulators). The Prudential
Regulators published final margin requirements in
November 2015. See Margin and Capital
Requirements for Covered Swap Entities, 80 FR
74840 (Nov. 30, 2015).
3 CFTC Letter No. 17–34, Commission regulation
§§ 23.150 through 23.159, 23.161; No-Action
Position with Respect to Uncleared Swaps with the
European Stability Mechanism (July 24, 2017)
(‘‘CFTC Letter No. 17–34’’), available at https://
www.cftc.gov/idc/groups/public/@lrlettergeneral/
documents/letter/17-34.pdf.
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multilateral development banks, as the
term is defined in Commission
regulation § 23.151, which are excluded
from the definition of financial end user
and whose swaps are exempt from the
CFTC Margin Rule.
In October 2019, the Commission
proposed to codify CFTC Letter No. 17–
34 and amend Commission regulation
§ 23.151 to exclude the ESM from the
definition of financial end user and thus
exempt from the CFTC Margin Rule
uncleared swaps entered into by the
ESM.4 The Commission also proposed
to correct a typographical error in
Commission regulation § 23.157.5
II. Final Rules
The Commission is adopting the
amendments to Commission regulation
§§ 23.151 and 23.157 as proposed. The
Commission received three comments
in the file for the Proposal,6 only one of
which directly addressed the Proposal.7
The Futures Industry Association
(‘‘FIA’’) indicated, among other things,
that its commodities members generally
support the Proposal.8
A. Commission Regulation § 23.151—
Definition of Financial end user
The CFTC Margin Rule applies to
swap transactions between CSEs and
counterparties that are SDs, MSPs or
financial end users. Commission
regulation § 23.151 defines the term
‘‘financial end user,’’ 9 excluding from
the definition sovereign entities,
multilateral development banks, the
Bank for International Settlements,
entities exempt from the definition of
financial entity pursuant to section
2(h)(7)(C)(iii) of the Act and
implementing regulations, affiliates that
qualify for the exemption from clearing
4 Margin Requirements for Uncleared Swaps for
Swap Dealers and Major Swap Participants, 84 FR
56392 (Oct. 22, 2019) (the ‘‘Proposal’’), at 56393–
4.
5 Id. at 56394.
6 Comments for the Proposal are available on the
Commission website at https://comments.cftc.gov/
PublicComments/CommentList.aspx?id=3038.
Comment letter no. 62275 dated Dec. 23, 2019 from
the Asset Management Group of the Securities
Industry and Financial Markets Association,
available at https://comments.cftc.gov/
PublicComments/ViewComment.
aspx?id=62275&SearchText=, discussed other
margin issues outside the scope of the Proposal. In
addition, an anonymous commenter submitted a
comment addressing issues unrelated to margin.
Comment no. 62220 dated Oct. 22, 2019, available
at https://comments.cftc.gov/PublicComments/
ViewComment.aspx?id=62220&SearchText=.
7 Comment letter no. 62272 dated Dec. 23, 2019
from FIA, available at https://comments.cftc.gov/
PublicComments/ViewComment.aspx?
id=62272&SearchText= (the ‘‘FIA letter’’),
discussed other margin issues outside the scope of
the Proposal.
8 FIA letter at 2.
9 17 CFR 23.151.
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27675
pursuant to section 2(h)(7)(D) of the Act,
and eligible treasury affiliates that the
Commission exempts from the
requirements of Commission regulation
§§ 23.150 through 23.161 by rule.10
The Commission is adopting the
proposed amendment to Commission
regulation § 23.151. As amended,
Commission regulation § 23.151
excludes the ESM from the definition of
financial end user, effectively
exempting uncleared swaps transactions
entered into by the ESM from the CFTC
Margin Rule. With respect to the
proposed amendment, FIA stated that
its commodity members generally
support the Commission’s efforts to
amend its rules to relieve burdens on
market participants.
The amendment to Commission
regulation § 23.151 codifies the relief
provided by CFTC Letter No. 17–34,
which extends no-action relief from the
CFTC Margin Rule with respect to
uncleared swaps between SDs and the
ESM. The no-action relief was granted
based on the ESM’s representations
concerning the nature of its operations.
The no-action letter stated that the ESM
is an intergovernmental financial
institution that provides financial
assistance for national or regional
development to Euro area member states
that are in or are threatened by severe
financial distress, similar to multilateral
development banks, which are excluded
from the definition of financial end user
in Commission regulation § 23.151. To
accomplish its policy goals, the ESM
utilizes several financial assistance
instruments, including loans in various
forms which can be used for multiple
purposes and are offered only subject to
bespoke specified conditions, including
economic reforms. The ESM enters into
uncleared swaps with SDs to hedge the
interest rate and currency risks it faces
as a result of entering into and funding
loans and to hedge risks associated with
its invested capital. The ESM does not,
and will not, enter into uncleared swaps
for speculative purposes.
In granting no-action relief, DSIO
noted that the ESM, like multilateral
development banks excluded from the
financial end user definition, has a
lower risk profile, posing less
counterparty risk to an SD and less
systemic risk to the financial system.
While not explicitly finding that the
ESM was a multilateral development
bank, DSIO recognized that its functions
and credit profile justified relief.11
10 See
id.
Basel Committee on Banking Supervision
ascribes to the ESM a 0% risk weight. The ESM has
been included in the list of entities that receive a
11 The
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Based on the aforementioned
considerations, the Commission amends
paragraph (2)(iii) of the definition of
Financial end user in Commission
regulation § 23.151 by adding the ESM
to the list of entities that are excluded
from the definition of financial end
user. As a result of the ESM’s exclusion
from the definition of financial end
user, uncleared swaps entered into
between the ESM and CSEs are exempt
from the CFTC Margin Rule. The
Commission believes that the
amendment, as adopted, provides
clarity and certainty to CSEs that are
counterparties to the ESM that
uncleared swaps entered into with the
ESM are not subject to the CFTC Margin
Rule. The Commission is adopting the
amendment because activities
conducted by the ESM, like activities
conducted by multilateral development
banks that are excluded from the
financial end user definition, generally
have a different purpose in the financial
system. These types of entities are
established by governments and their
financial activities are designed to
further governmental purposes, posing
less counterparty risk to CSEs and less
systemic risk to the financial system.
Furthermore, the Commission
believes that the amendment encourages
international comity and continued
cooperation between the Commission
and the European Union (‘‘EU’’)
authorities. In this regard, the
Commission notes that the ESM is
exempt from the European Market
Infrastructure Regulation or EMIR’s
margin rules for OTC derivatives
contracts not cleared by a central
counterparty.12 By taking this action,
the Commission acknowledges the
unique interests of the EU authorities in
the ESM and recognizes that the
principles of international comity
counsel mutual respect for the
important interests of foreign
sovereigns.13
0% risk weight in the document entitled ‘‘Basel II:
International Convergence of Capital Measurement
and Capital Standards: A Revised Framework—
Comprehensive Version, June 2006.’’ See BIS, Risk
Weight for the European Stability Mechanism
(ESM) and European Financial Stability Facility
(EFSF), https://www.bis.org/publ/bcbs_nl17.htm.
12 See Regulation (EU) No 648/2012 of the
European Parliament and the Council of the
European Union of July 4, 2012.
13 See Restatement (Third) of Foreign Relations
Law of the United States sec. 403 (Am. Law Inst.
2018) (the Restatement). The Restatement provides
that even where a country has a basis for
jurisdiction, it should not prescribe law with
respect to a person or activity in another country
when the exercise of such jurisdiction is
unreasonable. See Restatement section 403(1).
Notably, the Restatement recognizes that, in the
exercise of international comity, reciprocity is an
appropriate consideration in determining whether
to exercise jurisdiction extraterritorially.
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B. Amendment of Commission
Regulation § 23.157—Correction of
Cross-Reference
The Commission is adopting a
corrective amendment to Commission
regulation § 23.157. In its comment
letter, FIA indicated that its
commodities members generally
support the Commission’s efforts to
amend its rules when necessary to
correct errors.14
Commission regulation § 23.157
requires initial margin collected from or
posted by a CSE to be held by one or
more independent custodians. The CSE
must enter into a custodial agreement
with each custodian that holds the
initial margin collateral. In particular,
paragraph (c)(1) of Commission
regulation § 23.157 provides that the
custodial agreement must prohibit the
custodian from rehypothecating,
repledging, reusing, or otherwise
transferring the collateral except that
cash collateral may be held in a general
deposit account with the custodian if
the funds in the account are used to
purchase an asset described in
Commission regulation § 23.156(a)(1)(iv)
through (xii).
In administering the Commission’s
regulations, DSIO staff noticed that the
cross-reference to ‘‘§ 23.156(a)(1)(iv)
through (xii)’’ in paragraph (c)(1) of
Commission regulation § 23.157 was
erroneous. First, the existing crossreference incorrectly refers to nonexisting paragraphs. Second, the
existing cross-reference excludes
treasury securities and U.S. Government
agency securities, which are included in
the list of eligible collateral set forth in
Commission regulation § 23.156(a)(1),
and which the Commission intended to
include as eligible assets into which
cash collateral can be converted.15 To
administer the CFTC Margin Rule and
prevent confusion in its application, the
Commission is hereby amending
Commission regulation § 23.157(c)(1) to
remove the erroneous cross-reference to
‘‘§ 23.156(a)(1)(iv) through (xii)’’ and
replace it with the corrected crossreference ‘‘§ 23.156(a)(1)(ii) through
(x).’’
14 FIA
letter at 2.
the Final Margin Rule, the Commission
explained that its intent was to exclude
‘‘immediately available cash funds,’’ which is one
form of eligible collateral in Commission regulation
§ 23.156(a)(1), because allowing such eligible
collateral to be held in the form of a deposit liability
of the custodian bank would be incompatible with
Commission regulation § 23.157(c)’s prohibition
against rehypothecation of collateral. See Final
Margin Rule, 81 FR at 671. However, the
Commission expressly stated that the custodian
could use cash funds to purchase other forms of
eligible collateral. See id.
15 In
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III. Administrative Compliance
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires Federal agencies, in
promulgating regulations, to consider
whether the rules they propose will
have a significant economic impact on
a substantial number of small entities
and, if so, provide a regulatory
flexibility analysis respecting the
impact.16 The Commission certified that
the Proposal would not have a
significant economic impact on a
substantial number of small entities.
The Commission requested comments
with respect to the RFA and received no
comments.
As discussed in the Proposal, the
Final Rules only affect 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’’).17 The
Commission has previously determined
that SDs, MSPs, and ECPs are not small
entities for purposes of the RFA.18
Therefore, the Commission believes that
the Final Rules 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 the
Final Rules will not have a significant
economic impact on a substantial
number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 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. The Final Rules, as
adopted, contain no requirements
subject to the PRA.
C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its actions before
16 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
regulation § 1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
18 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).
19 44 U.S.C. 3501 et seq.
17 Each
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promulgating a regulation under the
CEA. Section 15(a) further specifies that
the costs and benefits shall be evaluated
in light of the following five broad areas
of market and public concern: (1)
Protection of market participants and
the public; (2) efficiency,
competitiveness, and financial integrity
of futures markets; (3) price discovery;
(4) sound risk management practices;
and (5) other public interest
considerations. The Commission
considers the costs and benefits
resulting from its discretionary
determinations with respect to the
section 15(a) considerations.
In addition, the Commission notes
that the consideration of costs and
benefits below is based on the
understanding that the markets function
internationally, with many transactions
involving U.S. firms taking place across
international boundaries; with some
Commission registrants being organized
outside of the United States; with
leading industry members typically
conducting operations both within and
outside the United States; and with
industry members commonly following
substantially similar business practices
wherever located. Where the
Commission does not specifically refer
to matters of location, the below
discussion of costs and benefits refers to
the effects of the Final Rules on all
activities subject to the Proposal,
whether by virtue of the activity’s
physical location in the United States or
by virtue of the activities’ connection
with or effect on U.S. commerce under
CEA section 2(i).20
1. Baseline and Rule Summary
The baseline for the Commission’s
consideration of the costs and benefits
of these Final Rules is the CFTC Margin
Rule. The Commission recognizes that
to the extent market participants have
relied on CFTC Letter No. 17–34, the
actual costs and benefits of the
amendment to Commission regulation
§ 23.151, as realized in the market, may
not be as significant. The amendment,
as adopted, revises the definition of
financial end user in Commission
regulation § 23.151 to exclude the ESM
from the definition. The amendment
codifies CFTC Letter No. 17–34 and
confirms that uncleared swaps with the
ESM as a counterparty are not subject to
the CFTC Margin Rule. As a result, CSEs
facing the ESM will not be required to
exchange margin with the ESM,
resulting in the collection of lesser
amounts of margin to mitigate the risk
of uncleared swaps, which could
increase the possibility of a systemic
20 See
7 U.S.C. 2(i).
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event. Nevertheless, after analyzing the
swap data repository (‘‘SDR’’) data, the
Commission believes that by classifying
the ESM as a non-financial end-user and
excluding it from the margin
requirements, it is unlikely that the
Final Rule will result in substantial
systemic risk.21
The Commission notes that the ESM
has a lower risk profile, maintaining
high capital levels with ultimate
financial backing from the EU, and thus
poses less counterparty risk to CSEs and
less systemic risk to the financial
system. In addition, in the
Commission’s view, relief from the
margin requirements will enable the
ESM to fulfill its mission of providing
support to member states of the EU in
financial distress, in particular, in times
of tight liquidity, contributing to the
stability of the EU financial system and
the reduction of risk.
The Commission is also adopting an
amendment to Commission regulation
§ 23.157(c)(1) to remove the erroneous
cross-reference to ‘‘§ 23.156(a)(1)(iv)
through (xii)’’ and to replace it with the
corrected cross-reference
‘‘§ 23.156(a)(1)(ii) through (x).’’ The
Commission believes that custodial
banks will benefit from being able to
convert cash posted as initial margin
into treasury and U.S. Government
agency securities as was originally
intended by the Commission.
The Commission sought comment on
all aspects of the cost and benefit
considerations in the Proposal but
received no substantive comments.
2. Section 15(a) Considerations
a. Protection of Market Participants and
Public
The amendment to Commission
regulation § 23.151, as adopted, codifies
CFTC Letter No. 17–34 and confirms
that uncleared swaps with the ESM as
a counterparty are not subject to the
CFTC Margin Rule. As discussed in the
Proposal, given the limited activity of
the ESM in the swaps markets, the
Commission believes that the
unmargined exposure resulting from
uncleared swaps between CSEs and the
ESM is unlikely to result in significant
risk to the financial system. Inasmuch as
margin is posted to protect
counterparties against credit risk, the
creditworthiness of the ESM is critical
to this analysis. The ESM has
maintained high capital levels and has
ultimate backing from the EU.22
21 Recent review of data from the SDRs indicates
that the ESM engages in limited swap trading
activity.
22 CFTC Letter No. 17–34 states that ‘‘[w]ith
respect to its credit risk, as part of its emergency
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Consequently, the Commission is of the
view that the ESM does not pose
substantial counterparty credit risk.
Thus, the Commission believes that
there will be no material impact on
market participants and the general
public relative to the status quo
baseline.
b. Efficiency, Competitiveness, and
Financial Integrity of Markets
The Commission believes that the
efficiency, competitiveness, and
financial integrity of markets will not be
significantly impacted by amending
Commission regulation § 23.151 to
exclude the ESM from the definition of
financial end user and therefore
removing the requirement to post and
collect margin in uncleared swap
transactions with the ESM.
One of the main functions of the ESM
is to provide emergency assistance to
members states of the EU in financial
distress.23 The Commission believes
that relief from the margin requirements
will allow the ESM to meet its mission,
in particular, in times of tight liquidity,
contributing to the stability of the EU
financial system and the reduction of
risk. Moreover, given the nature of its
operations, the ESM is motivated to
choose sensible, creditworthy
counterparties and to limit its credit risk
exposure.
c. Price Discovery
The amendment to Commission
regulation § 23.151 codifies CFTC Letter
No. 17–34, relieving the ESM and its
counterparties from the CFTC Margin
Rule. The codification of the no-action
relief as a rule formalizes a no-action
position held by DSIO and promotes
transparency concerning the
applicability of the CFTC Margin Rule.
Because there will not be a legal
requirement that margin be posted in
uncleared swap transactions with the
ESM, such transactions will likely be for
prices that deviate from similar
uncleared swap transactions with
financial end users but be in line with
swaps with non-financial entities. As a
procedure, the ESM’s member states have
irrevocably agreed to contribute a total of
approximately Ö624 billion in additional capital
should the ESM face financial distress. Further, the
ESM is subject to limits on its lending and
borrowing, and the ESM’s property, funding, and
assets in its member states are immune from search,
requisition, confiscation, expropriation, or any
other form of seizure, taking, or foreclosure. In
addition, to the extent necessary to carry out its
activities, all property, funding, and assets of the
ESM are free from restrictions, regulations, controls,
and moratoria of any nature. The combined
application of these rules and limits is effective in
keeping the ESM’s total liabilities well below its
available capital.’’
23 See CFTC Letter No. 17–34.
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result, uncleared swaps entered into
with the ESM could increase, which
could enhance, or at least not harm, the
price discovery process.
d. Sound Risk Management
The ESM is an intergovernmental
financial institution established by the
EU and its financial activities are
designed to advance EU objectives. The
ESM’s purpose is to manage the
potential for systemic risk by providing
support to member states that are in
distress. The exposures posed by the
ESM are therefore relatively unique.
Accordingly, the amendment to
Commission regulation § 23.151 to
exclude the ESM from the definition of
financial end user and thereby remove
it from the purview of the CFTC Margin
Rule may result in CSEs being more
inclined to enter into uncleared swaps
with the ESM, benefiting from the
overall diversification of their swap
portfolios, which is consistent with
sound risk management. Also, while
relief from the margin requirements will
result in the ESM collecting lesser
amounts of margin to mitigate the risk
of uncleared swaps, increasing the
possibility of systemic risk, the
Commission believes that the ESM’s
uncleared swaps activity, as reflected in
the SDR data, is unlikely to result in
substantial systemic risk.24
e. Other Public Interest Considerations
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As discussed in the Proposal, the
Commission believes that the
amendment to Commission regulation
§ 23.151 is also warranted based on the
interests of comity and the
Commission’s continuing cross-border
coordination with EU authorities, such
as the 2016 EC–CFTC Agreement, which
has fostered cooperation and mutual
respect between the CFTC and EU
authorities.
The Commission believes that the
public interest to be protected by the
antitrust laws is generally fair
competition. The Commission requested
comments on whether the Proposal
implicated any other specific public
interest to be protected by the antitrust
laws and received no comments.
The Commission has considered the
Final Rules to determine whether they
are anticompetitive and has identified
no anticompetitive effects. The
Commission requested comments on
whether the Proposal was
anticompetitive and, if it is, what the
anticompetitive effects are, and received
no comments.
Because the Commission has
determined that the Final Rules are not
anticompetitive and have no
anticompetitive effects, the Commission
has not identified any less
anticompetitive means of achieving the
purposes of the CEA.
List of Subjects in 17 CFR Part 23
Capital and margin requirements,
Major swap participants, Swap dealers,
Swaps.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission amends 17 CFR
part 23 as set forth below:
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. In § 23.151, revise paragraph (2)(iii)
of the definition of Financial end user
to read as follows:
■
D. Antitrust Considerations
§ 23.151 Definitions applicable to margin
requirements.
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.25
*
24 See
25 7
supra, n. 21.
U.S.C. 19(b).
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*
*
*
*
Financial end user * * *
(2) * * *
(iii) The Bank for International
Settlements and the European Stability
Mechanism;
*
*
*
*
*
■ 3. In § 23.157, revise paragraph (c)(1)
to read as follows:
§ 23.157
Custodial arrangements.
*
*
*
*
*
(c) * * *
(1) Prohibits the custodian from
rehypothecating, repledging, reusing, or
otherwise transferring (through
securities lending, securities borrowing,
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Frm 00034
Fmt 4700
Sfmt 4700
repurchase agreement, reverse
repurchase agreement or other means)
the collateral held by the custodian
except that cash collateral may be held
in a general deposit account with the
custodian if the funds in the account are
used to purchase an asset described in
§ 23.156(a)(1)(ii) through (x), such asset
is held in compliance with this section,
and such purchase takes place within a
time period reasonably necessary to
consummate such purchase after the
cash collateral is posted as initial
margin; and
*
*
*
*
*
Issued in Washington, DC, on April 17,
2020, 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, Chairman’s
Statement, 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
Chairman Heath P. Tarbert
I am pleased to support today’s final rule
codifying relief from the Margin Rule for the
European Stability Mechanism (‘‘ESM’’).1
The Margin Rule requires the posting of
initial and variation margin for uncleared
swaps entered into by certain swap dealers,
major swap participants, and ‘‘financial end
user[s].’’ 2 Today’s final rule will amend the
definition of ‘‘financial end user’’ in
Regulation 23.151 to exclude the ESM from
the requirements of the Margin Rule.
As I explained when this amendment was
proposed last October,3 the ESM provides
financing and bond purchases to support
Eurozone member states, serving similar
functions as a multilateral development
bank. Given that multilateral development
banks and related entities 4 are excluded from
1 The Margin Rule is codified at Commission
Regulations 23.150 through 23.161, 17 CFR 23.150–
23.161 (2019).
2 Regulation 23.151 applies to swap dealers,
major swap participants, and financial end users
that are not subject to regulation by a ‘‘Prudential
Regulator,’’ which term our laws use as shorthand
to mean what is essentially a banking regulator.
3 See Statement of Chairman Heath P. Tarbert
Before the Open Commission Meeting on October
16, 2019 (Oct. 16, 2019), available at https://
www.cftc.gov/PressRoom/SpeechesTestimony/
heathstatement101619.
4 The Margin Rule excludes from the definition of
‘‘financial end user’’ sovereign entities, multilateral
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the Margin Rule, it makes good sense to
codify the same relief for the ESM.5 This is
especially true given the ESM’s role in the
market. As its name suggests, the ESM is an
agent of stability and does not raise concerns
about risk in the derivatives markets.
Codifying the ESM’s relief from the Margin
Rule is particularly important as Europe
responds to the financial fallout of the global
coronavirus pandemic.
Erasmus observed long ago that ‘‘humility
is wisdom.’’ Keeping that perspective is
especially important when it comes to
financial regulatory areas where nations have
implemented a common set of core
principles internationally. Those
internationally-shared frameworks serve as a
baseline, and national regulators have
necessarily tailored their specific rules to the
unique attributes of their own domestic
markets. But we should be humble, and
indeed wise enough, to resist the temptation
to insist that a foreign counterpart adopt
domestic regulations on a rule-by-rule basis.
Cross-border derivatives regulation that
utilizes comity and deference can enable the
effective implementation of the post-crisis
G20 derivatives regulatory reforms.
As I have stated before, were financial
regulators to insist that their counterparts
overseas import each other’s specific rules
wholesale, it would lead to an absurd result
ad infinitum.6 Just as the G20, Financial
Stability Board, and various standard-setting
bodies were established to prevent a global
race to the bottom, their work is also meant
to prevent nations from forcing the complete
strictures of their domestic regimes onto
others. For example, the Principles for
Financial Markets Infrastructure (‘‘PFMI’’)
represent international standards for, among
other things, central counterparties and trade
repositories. All of the G20 nations have
adopted the PFMI, providing an opportunity
for meaningful dialogue with both the
European Commission and the European
Securities and Markets Authority regarding
the status of American and European central
counterparties.
Those discussions are ongoing and have
been productive. In particular, we are
working toward a potential cooperative
framework for the supervision of central
counterparties engaged in international
markets. With an eye to this progress, I
believe today’s final amendments to the
Margin Rule are appropriate. I am
development banks, and the Bank for International
Settlements, among other entities. See Regulation
23.151.
5 The ESM has had no-action relief from the
Margin Rule since July 24, 2017. See CFTC Letter
17–34 (July 24, 2017); see also CFTC Letter 19–22
(Oct. 16, 2019).
6 See Statement of Chairman Heath P. Tarbert in
Support of the Cross-Border Swaps Proposal (Dec.
18, 2019), available at https://www.cftc.gov/
PressRoom/SpeechesTestimony/tarbert
statement121819 (‘‘If we impose our regulations on
non-U.S. persons whenever they have a remote
nexus to the United States, then we should be
willing for all other jurisdictions to do the same.
The end result would be absurdity, with everyone
trying to regulate everyone else. And the
duplicative and overlapping regulations would
inevitably lead to fragmentation in the global swaps
market—itself a potential source of systemic risk.’’).
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encouraged by the tone of the dialogue and
the commitment of our EU counterparts to
reach a mutually beneficial arrangement that
will stand the test of time. I believe such an
arrangement for the supervision of third
country central counterparties would entail a
great degree of regulatory deference and
international comity alongside extensive
information sharing and regular
communications between supervisory
authorities. I look forward to continuing to
engage with our European colleagues to
advance our shared interests in a robust and
resilient transatlantic derivatives market. In
that context, I am pleased to support today’s
final rule to exclude the ESM from the
Margin Rule.7
Appendix 3—Supporting Statement of
Commissioner Brian Quintenz
In March 2018, I articulated my approach
to our current regulatory relationship with
our European counterparts in light of their
refusal to stand by or re-affirm their 2016
commitments in the CFTC’s and European
Commission’s common approach to the
regulation of cross-border central
counterparties (CCPs) (CFTC–EC CCP
Agreement).1 Specifically, I believe that the
absence of the agreement’s re-affirmation in
the European Market Infrastructure
Regulation 2.2 (EMIR 2.2) directly implied
the agreement’s abrogation.2 I therefore
vowed that I would either object to or vote
against any relief provided to, or requested
by, European Union authorities until the
agreement’s clarity was restored. Since that
time, I have consistently voted against, or
objected to, any regulation or relief that
provides special accommodations to
European entities, including the proposed
exemption from margin requirements for the
European Stability Mechanism (ESM) that
the Commission seeks to finalize today.3
However, the unprecedented devastating
economic and social impacts of COVID–19
7 Today the Commission is also voting on a
proposal to codify the ESM’s relief from the
Clearing Requirement under Part 50 of the CFTC’s
rules.
1 Keynote Address of Commissioner Brian
Quintenz before FIA Annual Meeting, Boca Raton,
Florida (March 14, 2018), https://www.cftc.gov/
PressRoom/SpeechesTestimony/opaquintenz9; and
Joint Statement from CFTC Chairman Timothy
Massad and European Commissioner Jonathan Hill,
CFTC and the European Commission: Common
approach for transatlantic CCPs (Feb. 10, 2016),
https://www.cftc.gov/PressRoom/PressReleases/
pr7342-16.
2 The proposed implementation of EMIR 2.2 by
ESMA is available at, https://www.esma.europa.eu/
press-news/esma-news/esma-consults-tieringcomparable-compliance-and-fees-under-emir-22.
3 Dissenting Statement by Commissioner Brian
Quintenz before the Open Commission Meeting:
FBOT Registration (Nov. 5, 2019), https://
www.cftc.gov/PressRoom/SpeechesTestimony/
quintenzstatement110519; Dissenting Statement by
Commissioner Quintenz to the Proposed Exclusion
for the European Stability Mechanism from the
Commission’s Margin Requirements for Uncleared
Swaps (Oct. 16, 2019), https://www.cftc.gov/
PressRoom/SpeechesTestimony/quintentz
statement101619; Statement of Commissioner Brian
Quintenz on Staff No-Action Relief for Eurex
Clearing AG (December 20, 2018), https://
www.cftc.gov/PressRoom/SpeechesTestimony/
quintenzstatement122018.
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27679
across the globe warrant a reprieve from that
position. In the United States, financial
regulators have acted swiftly, decisively, and
boldly to mitigate economic disruptions and
support market liquidity, including
providing regulatory relief where necessary.
I am very proud of the CFTC’s decisive
response to the COVID–19 pandemic, which
promoted the full functioning of derivatives
markets despite the extraordinary challenges
facing exchanges, clearinghouses, and market
intermediaries as a result of social
distancing.4 I know the Commission, under
the strong leadership of Chairman Heath P.
Tarbert, is committed to providing any
additional relief necessary to ensure that U.S.
markets remain accessible.
Our European counterparts are engaged in
the same epic struggle as we are to lessen the
extraordinary economic and social harms of
this pandemic. Although I remain committed
to ensuring the terms of the CFTC–EC CCP
Agreement are ultimately upheld, I also
recognize that issue is one facet of a much
broader, deeper bond we share with the
European Union—a relationship that has
been grounded in goodwill, trust, and
partnership. Many of the European
institutions affected by the rules and noaction relief before the Commission today are
likely to be central to the European Union’s
COVID–19 economic recovery efforts. As a
result, I believe it is appropriate to support
the items before the Commission today,
which, by providing relief from CFTC
clearing and margin requirements, may
bolster the ability of EU institutions to
provide critical financial assistance to their
economies, businesses, and citizens.
For example, the European Commission,
ESM, and European Investment Bank (EIB)
are working in concert to take unprecedented
actions at the European level to complement
national measures to mitigate the impacts of
COVID–19.5 The ESM has many economic
tools at its disposal, including making loans
to Eurozone member states, purchasing the
bonds of Eurozone members, providing
precautionary credit lines that can be drawn
upon if needed, and directly recapitalizing
financial institutions.6
Similarly, the EIB, the lending arm of the
European Union, and the European
Investment Fund (EIF), which specializes in
finance for small and medium sized
businesses, are also working together to
respond to COVID–19. Together, the EIB and
the EIF have proposed a plan to provide
immediate financing to combat the health
and economic effects of the pandemic.7 Each
4 Statement of CFTC Commissioner Brian
Quintenz on Current Market Dynamics and
Commission Actions Related to COVID–19 (March
18, 2020), https://www.cftc.gov/PressRoom/
SpeechesTestimony/quintenzstatment031820.
5 The time for solidarity in Europe is now—a
concerted European financial response to the
corona-crisis, https://www.esm.europa.eu/blog/
time-solidarity-europe-concerted-europeanfinancial-response-corona-crisis (April 2, 2020).
6 European Stability Mechanism, Lending Toolkit,
https://www.esm.europa.eu/assistance/lendingtoolkit.
7 Coronavirus outbreak: EIB Group’s response to
the pandemic, https://www.eib.org/en/about/
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of these EU institutions may seek to enter
into swaps subject to the CFTC’s clearing or
uncleared margin requirements in order to
hedge the risks associated with these lending
and investment activities. Accordingly, I
support today’s measures that provide relief
from those requirements, thereby freeing up
additional capital that can be immediately
deployed in the European economy.
When the present hardship caused by
COVID–19 abates, I look forward to reengaging with our European counterparts on
the critical issue of the oversight of U.S.
CCPs. I believe the possibility still exists for
a successful implementation of EMIR 2.2 that
fully respects the CFTC’s ultimate authority
over U.S. CCPs, and I am committed to doing
everything in my power to achieve this
outcome.
Amendments To Swap Clearing Requirement
Exemptions Under Part 50
I am pleased to support this proposal,
which codifies existing relief, from the
Commission’s requirement that certain
commonly traded interest rate swaps and
credit default swaps be cleared following
their execution.8 The new exemptions could
be elected by several classes of counterparties
that may enter into these swaps, namely:
Sovereign nations; central banks;
‘‘international financial institutions’’ of
which sovereign nations are members; bank
holding companies, and savings and loan
holding companies, whose assets total no
more than $10 billion; and community
development financial institutions
recognized by the U.S. Treasury Department.
Today’s proposal notes that many of these
entities have actually relied on existing relief,
electing not to clear swaps that are generally
subject to the clearing requirement.
I strongly support the policy of
international ‘‘comity’’ described in the
proposal, recognizing that sovereign nations
and their instrumentalities should generally
not be subject to the Commission’s
regulations. I trust that by proposing this
relief, the United States, the Federal Reserve,
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initiatives/covid-19-response/index.htm (April 9,
2020).
8 The swap clearing requirement is codified in
part 50 of the Commission’s regulations (17 CFR
part 50).
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and other U.S. government instrumentalities
will receive the same treatment in foreign
jurisdictions. As noted above, this policy is
timely in light of the current projects the
ESM, the EIB, and the EIF are currently
undertaking in response to the pandemic. I
am pleased that the Commission can provide
flexibility to these entities at this time when
entering into swaps with U.S. swap dealers.
To this end, I also support the decision of the
Division of Clearing and Risk to extend the
current, time-limited no-action relief
provided to the ESM 9 pending the
finalization of the amendments to part 50. I
note that the EIB, EIF, other international
financial institutions, central banks, and
sovereign entities currently have relief that is
not time-limited.10
As for the bank holding companies, savings
and loan holding companies, and community
development financial institutions that
would be provided relief pursuant to this
proposal, I am hopeful that the Commission
will ultimately finalize this relief, which it
first proposed for these entities in 2018.11
However, I note that these entities currently
have relief pursuant to no-action letters
issued in 2016 that have no expiration
dates.12
Final Rule Excluding the European Stability
Mechanism From CFTC Margin
Requirements for Uncleared Swaps
I support today’s final rule that would
exempt a swap between the European
Stability Mechanism and a swap dealer from
the Commission’s margin requirements
applicable to uncleared swaps. This rule is
premised on the same policy of international
comity referenced in today’s proposed
exemption from the swap clearing
requirement. I would like to highlight that
the EIB, EIF, and the other international
financial institutions referenced by the
proposed exemption from the swap clearing
9 CFTC
Letter 19–23 (Oct. 16, 2019).
Exception to the Clearing
Requirement for Swaps, 77 FR 42,560, 42,561–62
(Jul. 19, 2012).
11 Amendments to Clearing Exemption for Swaps
Entered Into by Certain Bank Holding Companies,
Savings and Loan Holding Companies, and
Community Development Financial Institutions, 83
FR 44,001 (Aug. 29, 2018).
12 CFTC Letters 16–01 and –02 (both Jan. 8, 2016).
10 End-User
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requirement, as well as sovereign entities and
central banks, are already exempted from the
Commission’s margin requirements for
uncleared swaps pursuant to Commission
regulations.13 Finally, I am pleased that the
Division of Swap Dealer and Intermediary
Oversight is today extending previously
granted, time-limited no-action relief to the
ESM,14 pending the effective date of today’s
final rule.
Appendix 4—Statement of Commissioner
Dan M. Berkovitz
I support today’s final rule that excludes
the European Stability Mechanism (‘‘ESM’’)
from the definition of financial end user in
the Commission’s margin rules. The final
rule codifies no-action relief that has been in
effect since 2017 that exempts the ESM from
initial and variation margin requirements for
uncleared swaps with swap dealer or major
swap participant counterparties. The final
rule recognizes the ESM’s status as an
intergovernmental institution that assists
Euro-area members in financial distress and
its similarity to multilateral development
banks that are excluded from the definition
of financial end user. The ESM does not
engage in speculative swaps trading and its
swaps activities are in furtherance of its
financial assistance programs. The final rule
provides certainty to both the ESM and its
swap dealer counterparties in uncleared
swaps, facilitates the ESM’s work in
mitigating systemic risk, and poses minimal
risk to the U.S. financial system.
The final rule also recognizes the
importance of international comity in
regulating entities established by sovereign
governments for governmental purposes. I
encourage continued cooperation between
the Commission and European authorities in
maintaining mutual respect for our
corresponding regulatory interests and
expertise.
I thank the staff of the Division of Swap
Dealer and Intermediary Oversight for their
work on this final rule and their
responsiveness to suggestions from my office.
[FR Doc. 2020–08601 Filed 5–8–20; 8:45 am]
BILLING CODE 6351–01–P
13 CFTC
14 CFTC
E:\FR\FM\11MYR1.SGM
regulation 23.151.
Letter 19–22 (Oct. 16, 2019).
11MYR1
]]>Agencies
[Federal Register Volume 85, Number 91 (Monday, May 11, 2020)]
[Rules and Regulations]
[Pages 27674-27680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08601]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AE77
Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is amending the margin requirements for uncleared swaps for
swap dealers (``SD'') and major swap participants (``MSP'') for which
there is no prudential regulator to add the European Stability
Mechanism (``ESM'') to the list of entities that are expressly excluded
from the definition of financial end user under Commission regulations
and to correct an erroneous cross-reference in Commission regulations
(``Final Rules'').
DATES: This final rule is effective June 10, 2020.
[[Page 27675]]
FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, 202-418-
6056, [email protected]; Thomas J. Smith, Deputy Director, 202-418-
5495, [email protected]; Warren Gorlick, Associate Director, 202-418-
5195, [email protected]; Carmen Moncada-Terry, Special Counsel, 202-
418-5795, [email protected]; or Rafael Martinez, Senior Financial
Risk Analyst, 202-418-5462, [email protected], Division of Swap Dealer
and Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
In January 2016, the Commission adopted regulation Sec. Sec.
23.150 through 23.161 (collectively, ``CFTC Margin Rule'') to implement
section 4s(e) of the Commodity Exchange Act (``CEA''),\1\ which
requires SDs and MSPs for which there is not a prudential regulator
(``CSEs'') to meet minimum initial and variation margin requirements
adopted by the Commission by rule or regulation.\2\
---------------------------------------------------------------------------
\1\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (``Final
Margin Rule''); Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants--Cross-Border Application of the
Margin Requirements, 81 FR 34818 (May 31, 2016).
\2\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a
``Prudential Regulator'' must meet the margin requirements for
uncleared swaps established by the applicable ``Prudential
Regulator.'' 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39)
(defining the term ``Prudential Regulator'' to include the Board of
Governors of the Federal Reserve System; the Office of the
Comptroller of the Currency; the Federal Deposit Insurance
Corporation; the Farm Credit Administration; and the Federal Housing
Finance Agency, and specifying the entities for which these agencies
act as Prudential Regulators). The Prudential Regulators published
final margin requirements in November 2015. See Margin and Capital
Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015).
---------------------------------------------------------------------------
Since adopting the CFTC Margin Rule, the Commission's Division of
Swap Dealer and Intermediary Oversight (``DSIO'') has issued staff
guidance, including no-action letters, addressing the application of
the rule. In July 2017, DSIO issued CFTC Letter No. 17-34 in response
to a request for relief submitted by the ESM.\3\ The ESM sought relief
with respect to uncleared swaps transactions it entered into with SDs,
representing that it was similar to multilateral development banks, as
the term is defined in Commission regulation Sec. 23.151, which are
excluded from the definition of financial end user and whose swaps are
exempt from the CFTC Margin Rule.
---------------------------------------------------------------------------
\3\ CFTC Letter No. 17-34, Commission regulation Sec. Sec.
23.150 through 23.159, 23.161; No-Action Position with Respect to
Uncleared Swaps with the European Stability Mechanism (July 24,
2017) (``CFTC Letter No. 17-34''), available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-34.pdf.
---------------------------------------------------------------------------
In October 2019, the Commission proposed to codify CFTC Letter No.
17-34 and amend Commission regulation Sec. 23.151 to exclude the ESM
from the definition of financial end user and thus exempt from the CFTC
Margin Rule uncleared swaps entered into by the ESM.\4\ The Commission
also proposed to correct a typographical error in Commission regulation
Sec. 23.157.\5\
---------------------------------------------------------------------------
\4\ Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 84 FR 56392 (Oct. 22, 2019) (the
``Proposal''), at 56393-4.
\5\ Id. at 56394.
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II. Final Rules
The Commission is adopting the amendments to Commission regulation
Sec. Sec. 23.151 and 23.157 as proposed. The Commission received three
comments in the file for the Proposal,\6\ only one of which directly
addressed the Proposal.\7\ The Futures Industry Association (``FIA'')
indicated, among other things, that its commodities members generally
support the Proposal.\8\
---------------------------------------------------------------------------
\6\ Comments for the Proposal are available on the Commission
website at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3038. Comment letter no. 62275 dated Dec. 23,
2019 from the Asset Management Group of the Securities Industry and
Financial Markets Association, available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62275&SearchText=, discussed other margin issues
outside the scope of the Proposal. In addition, an anonymous
commenter submitted a comment addressing issues unrelated to margin.
Comment no. 62220 dated Oct. 22, 2019, available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62220&SearchText=.
\7\ Comment letter no. 62272 dated Dec. 23, 2019 from FIA,
available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62272&SearchText= (the ``FIA letter''),
discussed other margin issues outside the scope of the Proposal.
\8\ FIA letter at 2.
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A. Commission Regulation Sec. 23.151--Definition of Financial end user
The CFTC Margin Rule applies to swap transactions between CSEs and
counterparties that are SDs, MSPs or financial end users. Commission
regulation Sec. 23.151 defines the term ``financial end user,'' \9\
excluding from the definition sovereign entities, multilateral
development banks, the Bank for International Settlements, entities
exempt from the definition of financial entity pursuant to section
2(h)(7)(C)(iii) of the Act and implementing regulations, affiliates
that qualify for the exemption from clearing pursuant to section
2(h)(7)(D) of the Act, and eligible treasury affiliates that the
Commission exempts from the requirements of Commission regulation
Sec. Sec. 23.150 through 23.161 by rule.\10\
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\9\ 17 CFR 23.151.
\10\ See id.
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The Commission is adopting the proposed amendment to Commission
regulation Sec. 23.151. As amended, Commission regulation Sec. 23.151
excludes the ESM from the definition of financial end user, effectively
exempting uncleared swaps transactions entered into by the ESM from the
CFTC Margin Rule. With respect to the proposed amendment, FIA stated
that its commodity members generally support the Commission's efforts
to amend its rules to relieve burdens on market participants.
The amendment to Commission regulation Sec. 23.151 codifies the
relief provided by CFTC Letter No. 17-34, which extends no-action
relief from the CFTC Margin Rule with respect to uncleared swaps
between SDs and the ESM. The no-action relief was granted based on the
ESM's representations concerning the nature of its operations. The no-
action letter stated that the ESM is an intergovernmental financial
institution that provides financial assistance for national or regional
development to Euro area member states that are in or are threatened by
severe financial distress, similar to multilateral development banks,
which are excluded from the definition of financial end user in
Commission regulation Sec. 23.151. To accomplish its policy goals, the
ESM utilizes several financial assistance instruments, including loans
in various forms which can be used for multiple purposes and are
offered only subject to bespoke specified conditions, including
economic reforms. The ESM enters into uncleared swaps with SDs to hedge
the interest rate and currency risks it faces as a result of entering
into and funding loans and to hedge risks associated with its invested
capital. The ESM does not, and will not, enter into uncleared swaps for
speculative purposes.
In granting no-action relief, DSIO noted that the ESM, like
multilateral development banks excluded from the financial end user
definition, has a lower risk profile, posing less counterparty risk to
an SD and less systemic risk to the financial system. While not
explicitly finding that the ESM was a multilateral development bank,
DSIO recognized that its functions and credit profile justified
relief.\11\
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\11\ The Basel Committee on Banking Supervision ascribes to the
ESM a 0% risk weight. The ESM has been included in the list of
entities that receive a 0% risk weight in the document entitled
``Basel II: International Convergence of Capital Measurement and
Capital Standards: A Revised Framework--Comprehensive Version, June
2006.'' See BIS, Risk Weight for the European Stability Mechanism
(ESM) and European Financial Stability Facility (EFSF), https://www.bis.org/publ/bcbs_nl17.htm.
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[[Page 27676]]
Based on the aforementioned considerations, the Commission amends
paragraph (2)(iii) of the definition of Financial end user in
Commission regulation Sec. 23.151 by adding the ESM to the list of
entities that are excluded from the definition of financial end user.
As a result of the ESM's exclusion from the definition of financial end
user, uncleared swaps entered into between the ESM and CSEs are exempt
from the CFTC Margin Rule. The Commission believes that the amendment,
as adopted, provides clarity and certainty to CSEs that are
counterparties to the ESM that uncleared swaps entered into with the
ESM are not subject to the CFTC Margin Rule. The Commission is adopting
the amendment because activities conducted by the ESM, like activities
conducted by multilateral development banks that are excluded from the
financial end user definition, generally have a different purpose in
the financial system. These types of entities are established by
governments and their financial activities are designed to further
governmental purposes, posing less counterparty risk to CSEs and less
systemic risk to the financial system.
Furthermore, the Commission believes that the amendment encourages
international comity and continued cooperation between the Commission
and the European Union (``EU'') authorities. In this regard, the
Commission notes that the ESM is exempt from the European Market
Infrastructure Regulation or EMIR's margin rules for OTC derivatives
contracts not cleared by a central counterparty.\12\ By taking this
action, the Commission acknowledges the unique interests of the EU
authorities in the ESM and recognizes that the principles of
international comity counsel mutual respect for the important interests
of foreign sovereigns.\13\
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\12\ See Regulation (EU) No 648/2012 of the European Parliament
and the Council of the European Union of July 4, 2012.
\13\ See Restatement (Third) of Foreign Relations Law of the
United States sec. 403 (Am. Law Inst. 2018) (the Restatement). The
Restatement provides that even where a country has a basis for
jurisdiction, it should not prescribe law with respect to a person
or activity in another country when the exercise of such
jurisdiction is unreasonable. See Restatement section 403(1).
Notably, the Restatement recognizes that, in the exercise of
international comity, reciprocity is an appropriate consideration in
determining whether to exercise jurisdiction extraterritorially.
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B. Amendment of Commission Regulation Sec. 23.157--Correction of
Cross-Reference
The Commission is adopting a corrective amendment to Commission
regulation Sec. 23.157. In its comment letter, FIA indicated that its
commodities members generally support the Commission's efforts to amend
its rules when necessary to correct errors.\14\
---------------------------------------------------------------------------
\14\ FIA letter at 2.
---------------------------------------------------------------------------
Commission regulation Sec. 23.157 requires initial margin
collected from or posted by a CSE to be held by one or more independent
custodians. The CSE must enter into a custodial agreement with each
custodian that holds the initial margin collateral. In particular,
paragraph (c)(1) of Commission regulation Sec. 23.157 provides that
the custodial agreement must prohibit the custodian from
rehypothecating, repledging, reusing, or otherwise transferring the
collateral except that cash collateral may be held in a general deposit
account with the custodian if the funds in the account are used to
purchase an asset described in Commission regulation Sec.
23.156(a)(1)(iv) through (xii).
In administering the Commission's regulations, DSIO staff noticed
that the cross-reference to ``Sec. 23.156(a)(1)(iv) through (xii)'' in
paragraph (c)(1) of Commission regulation Sec. 23.157 was erroneous.
First, the existing cross-reference incorrectly refers to non-existing
paragraphs. Second, the existing cross-reference excludes treasury
securities and U.S. Government agency securities, which are included in
the list of eligible collateral set forth in Commission regulation
Sec. 23.156(a)(1), and which the Commission intended to include as
eligible assets into which cash collateral can be converted.\15\ To
administer the CFTC Margin Rule and prevent confusion in its
application, the Commission is hereby amending Commission regulation
Sec. 23.157(c)(1) to remove the erroneous cross-reference to ``Sec.
23.156(a)(1)(iv) through (xii)'' and replace it with the corrected
cross-reference ``Sec. 23.156(a)(1)(ii) through (x).''
---------------------------------------------------------------------------
\15\ In the Final Margin Rule, the Commission explained that its
intent was to exclude ``immediately available cash funds,'' which is
one form of eligible collateral in Commission regulation Sec.
23.156(a)(1), because allowing such eligible collateral to be held
in the form of a deposit liability of the custodian bank would be
incompatible with Commission regulation Sec. 23.157(c)'s
prohibition against rehypothecation of collateral. See Final Margin
Rule, 81 FR at 671. However, the Commission expressly stated that
the custodian could use cash funds to purchase other forms of
eligible collateral. See id.
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III. Administrative Compliance
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires Federal agencies,
in promulgating regulations, to consider whether the rules they propose
will have a significant economic impact on a substantial number of
small entities and, if so, provide a regulatory flexibility analysis
respecting the impact.\16\ The Commission certified that the Proposal
would not have a significant economic impact on a substantial number of
small entities. The Commission requested comments with respect to the
RFA and received no comments.
---------------------------------------------------------------------------
\16\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
As discussed in the Proposal, the Final Rules only affect 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'').\17\ The Commission has previously determined
that SDs, MSPs, and ECPs are not small entities for purposes of the
RFA.\18\ Therefore, the Commission believes that the Final Rules will
not have a significant economic impact on a substantial number of small
entities, as defined in the RFA.
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\17\ 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 regulation Sec. 1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
\18\ 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 the Final Rules will not
have a significant economic impact on a substantial number of small
entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \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. The Final Rules, as adopted, contain no
requirements subject to the PRA.
---------------------------------------------------------------------------
\19\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before
[[Page 27677]]
promulgating a regulation under the CEA. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) considerations.
In addition, the Commission notes that the consideration of costs
and benefits below is based on the understanding that the markets
function internationally, with many transactions involving U.S. firms
taking place across international boundaries; with some Commission
registrants being organized outside of the United States; with leading
industry members typically conducting operations both within and
outside the United States; and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to the effects of the
Final Rules on all activities subject to the Proposal, whether by
virtue of the activity's physical location in the United States or by
virtue of the activities' connection with or effect on U.S. commerce
under CEA section 2(i).\20\
---------------------------------------------------------------------------
\20\ See 7 U.S.C. 2(i).
---------------------------------------------------------------------------
1. Baseline and Rule Summary
The baseline for the Commission's consideration of the costs and
benefits of these Final Rules is the CFTC Margin Rule. The Commission
recognizes that to the extent market participants have relied on CFTC
Letter No. 17-34, the actual costs and benefits of the amendment to
Commission regulation Sec. 23.151, as realized in the market, may not
be as significant. The amendment, as adopted, revises the definition of
financial end user in Commission regulation Sec. 23.151 to exclude the
ESM from the definition. The amendment codifies CFTC Letter No. 17-34
and confirms that uncleared swaps with the ESM as a counterparty are
not subject to the CFTC Margin Rule. As a result, CSEs facing the ESM
will not be required to exchange margin with the ESM, resulting in the
collection of lesser amounts of margin to mitigate the risk of
uncleared swaps, which could increase the possibility of a systemic
event. Nevertheless, after analyzing the swap data repository (``SDR'')
data, the Commission believes that by classifying the ESM as a non-
financial end-user and excluding it from the margin requirements, it is
unlikely that the Final Rule will result in substantial systemic
risk.\21\
---------------------------------------------------------------------------
\21\ Recent review of data from the SDRs indicates that the ESM
engages in limited swap trading activity.
---------------------------------------------------------------------------
The Commission notes that the ESM has a lower risk profile,
maintaining high capital levels with ultimate financial backing from
the EU, and thus poses less counterparty risk to CSEs and less systemic
risk to the financial system. In addition, in the Commission's view,
relief from the margin requirements will enable the ESM to fulfill its
mission of providing support to member states of the EU in financial
distress, in particular, in times of tight liquidity, contributing to
the stability of the EU financial system and the reduction of risk.
The Commission is also adopting an amendment to Commission
regulation Sec. 23.157(c)(1) to remove the erroneous cross-reference
to ``Sec. 23.156(a)(1)(iv) through (xii)'' and to replace it with the
corrected cross-reference ``Sec. 23.156(a)(1)(ii) through (x).'' The
Commission believes that custodial banks will benefit from being able
to convert cash posted as initial margin into treasury and U.S.
Government agency securities as was originally intended by the
Commission.
The Commission sought comment on all aspects of the cost and
benefit considerations in the Proposal but received no substantive
comments.
2. Section 15(a) Considerations
a. Protection of Market Participants and Public
The amendment to Commission regulation Sec. 23.151, as adopted,
codifies CFTC Letter No. 17-34 and confirms that uncleared swaps with
the ESM as a counterparty are not subject to the CFTC Margin Rule. As
discussed in the Proposal, given the limited activity of the ESM in the
swaps markets, the Commission believes that the unmargined exposure
resulting from uncleared swaps between CSEs and the ESM is unlikely to
result in significant risk to the financial system. Inasmuch as margin
is posted to protect counterparties against credit risk, the
creditworthiness of the ESM is critical to this analysis. The ESM has
maintained high capital levels and has ultimate backing from the
EU.\22\ Consequently, the Commission is of the view that the ESM does
not pose substantial counterparty credit risk. Thus, the Commission
believes that there will be no material impact on market participants
and the general public relative to the status quo baseline.
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\22\ CFTC Letter No. 17-34 states that ``[w]ith respect to its
credit risk, as part of its emergency procedure, the ESM's member
states have irrevocably agreed to contribute a total of
approximately [euro]624 billion in additional capital should the ESM
face financial distress. Further, the ESM is subject to limits on
its lending and borrowing, and the ESM's property, funding, and
assets in its member states are immune from search, requisition,
confiscation, expropriation, or any other form of seizure, taking,
or foreclosure. In addition, to the extent necessary to carry out
its activities, all property, funding, and assets of the ESM are
free from restrictions, regulations, controls, and moratoria of any
nature. The combined application of these rules and limits is
effective in keeping the ESM's total liabilities well below its
available capital.''
---------------------------------------------------------------------------
b. Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission believes that the efficiency, competitiveness, and
financial integrity of markets will not be significantly impacted by
amending Commission regulation Sec. 23.151 to exclude the ESM from the
definition of financial end user and therefore removing the requirement
to post and collect margin in uncleared swap transactions with the ESM.
One of the main functions of the ESM is to provide emergency
assistance to members states of the EU in financial distress.\23\ The
Commission believes that relief from the margin requirements will allow
the ESM to meet its mission, in particular, in times of tight
liquidity, contributing to the stability of the EU financial system and
the reduction of risk. Moreover, given the nature of its operations,
the ESM is motivated to choose sensible, creditworthy counterparties
and to limit its credit risk exposure.
---------------------------------------------------------------------------
\23\ See CFTC Letter No. 17-34.
---------------------------------------------------------------------------
c. Price Discovery
The amendment to Commission regulation Sec. 23.151 codifies CFTC
Letter No. 17-34, relieving the ESM and its counterparties from the
CFTC Margin Rule. The codification of the no-action relief as a rule
formalizes a no-action position held by DSIO and promotes transparency
concerning the applicability of the CFTC Margin Rule. Because there
will not be a legal requirement that margin be posted in uncleared swap
transactions with the ESM, such transactions will likely be for prices
that deviate from similar uncleared swap transactions with financial
end users but be in line with swaps with non-financial entities. As a
[[Page 27678]]
result, uncleared swaps entered into with the ESM could increase, which
could enhance, or at least not harm, the price discovery process.
d. Sound Risk Management
The ESM is an intergovernmental financial institution established
by the EU and its financial activities are designed to advance EU
objectives. The ESM's purpose is to manage the potential for systemic
risk by providing support to member states that are in distress. The
exposures posed by the ESM are therefore relatively unique.
Accordingly, the amendment to Commission regulation Sec. 23.151 to
exclude the ESM from the definition of financial end user and thereby
remove it from the purview of the CFTC Margin Rule may result in CSEs
being more inclined to enter into uncleared swaps with the ESM,
benefiting from the overall diversification of their swap portfolios,
which is consistent with sound risk management. Also, while relief from
the margin requirements will result in the ESM collecting lesser
amounts of margin to mitigate the risk of uncleared swaps, increasing
the possibility of systemic risk, the Commission believes that the
ESM's uncleared swaps activity, as reflected in the SDR data, is
unlikely to result in substantial systemic risk.\24\
---------------------------------------------------------------------------
\24\ See supra, n. 21.
---------------------------------------------------------------------------
e. Other Public Interest Considerations
As discussed in the Proposal, the Commission believes that the
amendment to Commission regulation Sec. 23.151 is also warranted based
on the interests of comity and the Commission's continuing cross-border
coordination with EU authorities, such as the 2016 EC-CFTC Agreement,
which has fostered cooperation and mutual respect between the CFTC and
EU authorities.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
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.\25\
---------------------------------------------------------------------------
\25\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission believes that the public interest to be protected by
the antitrust laws is generally fair competition. The Commission
requested comments on whether the Proposal implicated any other
specific public interest to be protected by the antitrust laws and
received no comments.
The Commission has considered the Final Rules to determine whether
they are anticompetitive and has identified no anticompetitive effects.
The Commission requested comments on whether the Proposal was
anticompetitive and, if it is, what the anticompetitive effects are,
and received no comments.
Because the Commission has determined that the Final Rules are not
anticompetitive and have no anticompetitive effects, the Commission has
not identified any less anticompetitive means of achieving the purposes
of the CEA.
List of Subjects in 17 CFR Part 23
Capital and margin requirements, Major swap participants, Swap
dealers, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 23 as set forth below:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).
0
2. In Sec. 23.151, revise paragraph (2)(iii) of the definition of
Financial end user to read as follows:
Sec. 23.151 Definitions applicable to margin requirements.
* * * * *
Financial end user * * *
(2) * * *
(iii) The Bank for International Settlements and the European
Stability Mechanism;
* * * * *
0
3. In Sec. 23.157, revise paragraph (c)(1) to read as follows:
Sec. 23.157 Custodial arrangements.
* * * * *
(c) * * *
(1) Prohibits the custodian from rehypothecating, repledging,
reusing, or otherwise transferring (through securities lending,
securities borrowing, repurchase agreement, reverse repurchase
agreement or other means) the collateral held by the custodian except
that cash collateral may be held in a general deposit account with the
custodian if the funds in the account are used to purchase an asset
described in Sec. 23.156(a)(1)(ii) through (x), such asset is held in
compliance with this section, and such purchase takes place within a
time period reasonably necessary to consummate such purchase after the
cash collateral is posted as initial margin; and
* * * * *
Issued in Washington, DC, on April 17, 2020, 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, Chairman's
Statement, 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 Chairman Heath P. Tarbert
I am pleased to support today's final rule codifying relief from
the Margin Rule for the European Stability Mechanism (``ESM'').\1\
The Margin Rule requires the posting of initial and variation margin
for uncleared swaps entered into by certain swap dealers, major swap
participants, and ``financial end user[s].'' \2\ Today's final rule
will amend the definition of ``financial end user'' in Regulation
23.151 to exclude the ESM from the requirements of the Margin Rule.
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\1\ The Margin Rule is codified at Commission Regulations 23.150
through 23.161, 17 CFR 23.150-23.161 (2019).
\2\ Regulation 23.151 applies to swap dealers, major swap
participants, and financial end users that are not subject to
regulation by a ``Prudential Regulator,'' which term our laws use as
shorthand to mean what is essentially a banking regulator.
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As I explained when this amendment was proposed last October,\3\
the ESM provides financing and bond purchases to support Eurozone
member states, serving similar functions as a multilateral
development bank. Given that multilateral development banks and
related entities \4\ are excluded from
[[Page 27679]]
the Margin Rule, it makes good sense to codify the same relief for
the ESM.\5\ This is especially true given the ESM's role in the
market. As its name suggests, the ESM is an agent of stability and
does not raise concerns about risk in the derivatives markets.
Codifying the ESM's relief from the Margin Rule is particularly
important as Europe responds to the financial fallout of the global
coronavirus pandemic.
---------------------------------------------------------------------------
\3\ See Statement of Chairman Heath P. Tarbert Before the Open
Commission Meeting on October 16, 2019 (Oct. 16, 2019), available at
https://www.cftc.gov/PressRoom/SpeechesTestimony/heathstatement101619.
\4\ The Margin Rule excludes from the definition of ``financial
end user'' sovereign entities, multilateral development banks, and
the Bank for International Settlements, among other entities. See
Regulation 23.151.
\5\ The ESM has had no-action relief from the Margin Rule since
July 24, 2017. See CFTC Letter 17-34 (July 24, 2017); see also CFTC
Letter 19-22 (Oct. 16, 2019).
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Erasmus observed long ago that ``humility is wisdom.'' Keeping
that perspective is especially important when it comes to financial
regulatory areas where nations have implemented a common set of core
principles internationally. Those internationally-shared frameworks
serve as a baseline, and national regulators have necessarily
tailored their specific rules to the unique attributes of their own
domestic markets. But we should be humble, and indeed wise enough,
to resist the temptation to insist that a foreign counterpart adopt
domestic regulations on a rule-by-rule basis. Cross-border
derivatives regulation that utilizes comity and deference can enable
the effective implementation of the post-crisis G20 derivatives
regulatory reforms.
As I have stated before, were financial regulators to insist
that their counterparts overseas import each other's specific rules
wholesale, it would lead to an absurd result ad infinitum.\6\ Just
as the G20, Financial Stability Board, and various standard-setting
bodies were established to prevent a global race to the bottom,
their work is also meant to prevent nations from forcing the
complete strictures of their domestic regimes onto others. For
example, the Principles for Financial Markets Infrastructure
(``PFMI'') represent international standards for, among other
things, central counterparties and trade repositories. All of the
G20 nations have adopted the PFMI, providing an opportunity for
meaningful dialogue with both the European Commission and the
European Securities and Markets Authority regarding the status of
American and European central counterparties.
---------------------------------------------------------------------------
\6\ See Statement of Chairman Heath P. Tarbert in Support of the
Cross-Border Swaps Proposal (Dec. 18, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement121819
(``If we impose our regulations on non-U.S. persons whenever they
have a remote nexus to the United States, then we should be willing
for all other jurisdictions to do the same. The end result would be
absurdity, with everyone trying to regulate everyone else. And the
duplicative and overlapping regulations would inevitably lead to
fragmentation in the global swaps market--itself a potential source
of systemic risk.'').
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Those discussions are ongoing and have been productive. In
particular, we are working toward a potential cooperative framework
for the supervision of central counterparties engaged in
international markets. With an eye to this progress, I believe
today's final amendments to the Margin Rule are appropriate. I am
encouraged by the tone of the dialogue and the commitment of our EU
counterparts to reach a mutually beneficial arrangement that will
stand the test of time. I believe such an arrangement for the
supervision of third country central counterparties would entail a
great degree of regulatory deference and international comity
alongside extensive information sharing and regular communications
between supervisory authorities. I look forward to continuing to
engage with our European colleagues to advance our shared interests
in a robust and resilient transatlantic derivatives market. In that
context, I am pleased to support today's final rule to exclude the
ESM from the Margin Rule.\7\
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\7\ Today the Commission is also voting on a proposal to codify
the ESM's relief from the Clearing Requirement under Part 50 of the
CFTC's rules.
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Appendix 3--Supporting Statement of Commissioner Brian Quintenz
In March 2018, I articulated my approach to our current
regulatory relationship with our European counterparts in light of
their refusal to stand by or re-affirm their 2016 commitments in the
CFTC's and European Commission's common approach to the regulation
of cross-border central counterparties (CCPs) (CFTC-EC CCP
Agreement).\1\ Specifically, I believe that the absence of the
agreement's re-affirmation in the European Market Infrastructure
Regulation 2.2 (EMIR 2.2) directly implied the agreement's
abrogation.\2\ I therefore vowed that I would either object to or
vote against any relief provided to, or requested by, European Union
authorities until the agreement's clarity was restored. Since that
time, I have consistently voted against, or objected to, any
regulation or relief that provides special accommodations to
European entities, including the proposed exemption from margin
requirements for the European Stability Mechanism (ESM) that the
Commission seeks to finalize today.\3\
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\1\ Keynote Address of Commissioner Brian Quintenz before FIA
Annual Meeting, Boca Raton, Florida (March 14, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz9; and Joint
Statement from CFTC Chairman Timothy Massad and European
Commissioner Jonathan Hill, CFTC and the European Commission: Common
approach for transatlantic CCPs (Feb. 10, 2016), https://www.cftc.gov/PressRoom/PressReleases/pr7342-16.
\2\ The proposed implementation of EMIR 2.2 by ESMA is available
at, https://www.esma.europa.eu/press-news/esma-news/esma-consults-tiering-comparable-compliance-and-fees-under-emir-22.
\3\ Dissenting Statement by Commissioner Brian Quintenz before
the Open Commission Meeting: FBOT Registration (Nov. 5, 2019),
https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement110519; Dissenting Statement by Commissioner
Quintenz to the Proposed Exclusion for the European Stability
Mechanism from the Commission's Margin Requirements for Uncleared
Swaps (Oct. 16, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintentzstatement101619; Statement of
Commissioner Brian Quintenz on Staff No-Action Relief for Eurex
Clearing AG (December 20, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement122018.
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However, the unprecedented devastating economic and social
impacts of COVID-19 across the globe warrant a reprieve from that
position. In the United States, financial regulators have acted
swiftly, decisively, and boldly to mitigate economic disruptions and
support market liquidity, including providing regulatory relief
where necessary. I am very proud of the CFTC's decisive response to
the COVID-19 pandemic, which promoted the full functioning of
derivatives markets despite the extraordinary challenges facing
exchanges, clearinghouses, and market intermediaries as a result of
social distancing.\4\ I know the Commission, under the strong
leadership of Chairman Heath P. Tarbert, is committed to providing
any additional relief necessary to ensure that U.S. markets remain
accessible.
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\4\ Statement of CFTC Commissioner Brian Quintenz on Current
Market Dynamics and Commission Actions Related to COVID-19 (March
18, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatment031820.
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Our European counterparts are engaged in the same epic struggle
as we are to lessen the extraordinary economic and social harms of
this pandemic. Although I remain committed to ensuring the terms of
the CFTC-EC CCP Agreement are ultimately upheld, I also recognize
that issue is one facet of a much broader, deeper bond we share with
the European Union--a relationship that has been grounded in
goodwill, trust, and partnership. Many of the European institutions
affected by the rules and no-action relief before the Commission
today are likely to be central to the European Union's COVID-19
economic recovery efforts. As a result, I believe it is appropriate
to support the items before the Commission today, which, by
providing relief from CFTC clearing and margin requirements, may
bolster the ability of EU institutions to provide critical financial
assistance to their economies, businesses, and citizens.
For example, the European Commission, ESM, and European
Investment Bank (EIB) are working in concert to take unprecedented
actions at the European level to complement national measures to
mitigate the impacts of COVID-19.\5\ The ESM has many economic tools
at its disposal, including making loans to Eurozone member states,
purchasing the bonds of Eurozone members, providing precautionary
credit lines that can be drawn upon if needed, and directly
recapitalizing financial institutions.\6\
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\5\ The time for solidarity in Europe is now--a concerted
European financial response to the corona-crisis, https://www.esm.europa.eu/blog/time-solidarity-europe-concerted-european-financial-response-corona-crisis (April 2, 2020).
\6\ European Stability Mechanism, Lending Toolkit, https://www.esm.europa.eu/assistance/lending-toolkit.
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Similarly, the EIB, the lending arm of the European Union, and
the European Investment Fund (EIF), which specializes in finance for
small and medium sized businesses, are also working together to
respond to COVID-19. Together, the EIB and the EIF have proposed a
plan to provide immediate financing to combat the health and
economic effects of the pandemic.\7\ Each
[[Page 27680]]
of these EU institutions may seek to enter into swaps subject to the
CFTC's clearing or uncleared margin requirements in order to hedge
the risks associated with these lending and investment activities.
Accordingly, I support today's measures that provide relief from
those requirements, thereby freeing up additional capital that can
be immediately deployed in the European economy.
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\7\ Coronavirus outbreak: EIB Group's response to the pandemic,
https://www.eib.org/en/about/initiatives/covid-19-response/index.htm
(April 9, 2020).
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When the present hardship caused by COVID-19 abates, I look
forward to re-engaging with our European counterparts on the
critical issue of the oversight of U.S. CCPs. I believe the
possibility still exists for a successful implementation of EMIR 2.2
that fully respects the CFTC's ultimate authority over U.S. CCPs,
and I am committed to doing everything in my power to achieve this
outcome.
Amendments To Swap Clearing Requirement Exemptions Under Part 50
I am pleased to support this proposal, which codifies existing
relief, from the Commission's requirement that certain commonly
traded interest rate swaps and credit default swaps be cleared
following their execution.\8\ The new exemptions could be elected by
several classes of counterparties that may enter into these swaps,
namely: Sovereign nations; central banks; ``international financial
institutions'' of which sovereign nations are members; bank holding
companies, and savings and loan holding companies, whose assets
total no more than $10 billion; and community development financial
institutions recognized by the U.S. Treasury Department. Today's
proposal notes that many of these entities have actually relied on
existing relief, electing not to clear swaps that are generally
subject to the clearing requirement.
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\8\ The swap clearing requirement is codified in part 50 of the
Commission's regulations (17 CFR part 50).
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I strongly support the policy of international ``comity''
described in the proposal, recognizing that sovereign nations and
their instrumentalities should generally not be subject to the
Commission's regulations. I trust that by proposing this relief, the
United States, the Federal Reserve, and other U.S. government
instrumentalities will receive the same treatment in foreign
jurisdictions. As noted above, this policy is timely in light of the
current projects the ESM, the EIB, and the EIF are currently
undertaking in response to the pandemic. I am pleased that the
Commission can provide flexibility to these entities at this time
when entering into swaps with U.S. swap dealers. To this end, I also
support the decision of the Division of Clearing and Risk to extend
the current, time-limited no-action relief provided to the ESM \9\
pending the finalization of the amendments to part 50. I note that
the EIB, EIF, other international financial institutions, central
banks, and sovereign entities currently have relief that is not
time-limited.\10\
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\9\ CFTC Letter 19-23 (Oct. 16, 2019).
\10\ End-User Exception to the Clearing Requirement for Swaps,
77 FR 42,560, 42,561-62 (Jul. 19, 2012).
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As for the bank holding companies, savings and loan holding
companies, and community development financial institutions that
would be provided relief pursuant to this proposal, I am hopeful
that the Commission will ultimately finalize this relief, which it
first proposed for these entities in 2018.\11\ However, I note that
these entities currently have relief pursuant to no-action letters
issued in 2016 that have no expiration dates.\12\
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\11\ Amendments to Clearing Exemption for Swaps Entered Into by
Certain Bank Holding Companies, Savings and Loan Holding Companies,
and Community Development Financial Institutions, 83 FR 44,001 (Aug.
29, 2018).
\12\ CFTC Letters 16-01 and -02 (both Jan. 8, 2016).
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Final Rule Excluding the European Stability Mechanism From CFTC
Margin Requirements for Uncleared Swaps
I support today's final rule that would exempt a swap between
the European Stability Mechanism and a swap dealer from the
Commission's margin requirements applicable to uncleared swaps. This
rule is premised on the same policy of international comity
referenced in today's proposed exemption from the swap clearing
requirement. I would like to highlight that the EIB, EIF, and the
other international financial institutions referenced by the
proposed exemption from the swap clearing requirement, as well as
sovereign entities and central banks, are already exempted from the
Commission's margin requirements for uncleared swaps pursuant to
Commission regulations.\13\ Finally, I am pleased that the Division
of Swap Dealer and Intermediary Oversight is today extending
previously granted, time-limited no-action relief to the ESM,\14\
pending the effective date of today's final rule.
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\13\ CFTC regulation 23.151.
\14\ CFTC Letter 19-22 (Oct. 16, 2019).
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Appendix 4--Statement of Commissioner Dan M. Berkovitz
I support today's final rule that excludes the European
Stability Mechanism (``ESM'') from the definition of financial end
user in the Commission's margin rules. The final rule codifies no-
action relief that has been in effect since 2017 that exempts the
ESM from initial and variation margin requirements for uncleared
swaps with swap dealer or major swap participant counterparties. The
final rule recognizes the ESM's status as an intergovernmental
institution that assists Euro-area members in financial distress and
its similarity to multilateral development banks that are excluded
from the definition of financial end user. The ESM does not engage
in speculative swaps trading and its swaps activities are in
furtherance of its financial assistance programs. The final rule
provides certainty to both the ESM and its swap dealer
counterparties in uncleared swaps, facilitates the ESM's work in
mitigating systemic risk, and poses minimal risk to the U.S.
financial system.
The final rule also recognizes the importance of international
comity in regulating entities established by sovereign governments
for governmental purposes. I encourage continued cooperation between
the Commission and European authorities in maintaining mutual
respect for our corresponding regulatory interests and expertise.
I thank the staff of the Division of Swap Dealer and
Intermediary Oversight for their work on this final rule and their
responsiveness to suggestions from my office.
[FR Doc. 2020-08601 Filed 5-8-20; 8:45 am]
BILLING CODE 6351-01-P
