Margin and Capital Requirements for Covered Swap Entities, 39754-39780 [2020-14097]
Download as PDF
<![CDATA[
39754
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
permits swaps entered into prior to an
applicable compliance date (legacy
swaps) to retain their legacy status in
the event that they are amended to
replace an interbank offered rate (IBOR)
or other discontinued rate, modifies
initial margin requirements for noncleared swaps between affiliates,
introduces an additional compliance
date for initial margin requirements,
clarifies the point in time at which
trading documentation must be in place,
permits legacy swaps to retain their
legacy status in the event that they are
amended due to technical amendments,
notional reductions, or portfolio
compression exercises, and makes
technical changes to relocate the
provision addressing amendments to
legacy swaps that are made to comply
with the Qualified Financial Contract
Rules, as defined in the Supplementary
Information section. In addition, the
final rule addresses comments received
in response to the agencies’ publication
of the interim final rule that would
preserve the status of legacy swaps
meeting certain criteria if the United
Kingdom withdraws from the European
Union (hereafter ‘‘Brexit) without a
negotiated settlement agreement.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 45
[Docket No. OCC–2019–0023]
RIN 1557–AE69
FEDERAL RESERVE SYSTEM
12 CFR Part 237
[Docket No. R–1682]
RIN 7100–AF62
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 349
RIN 3064–AF08
FARM CREDIT ADMINISTRATION
12 CFR Part 624
RIN 3052–AD38
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1221
The final rule is effective August
31, 2020.
DATES:
RIN 2590–AB03
FOR FURTHER INFORMATION CONTACT:
Margin and Capital Requirements for
Covered Swap Entities
Office of the Comptroller of the
Currency, Treasury (OCC); Board of
Governors of the Federal Reserve
System (Board); Federal Deposit
Insurance Corporation (FDIC); Farm
Credit Administration (FCA); and the
Federal Housing Finance Agency
(FHFA).
ACTION: Final rule.
AGENCY:
The OCC, Board, FDIC, FCA,
and FHFA (each, an agency, and
collectively, the agencies) are adopting
a final rule that amends the agencies’
regulations requiring swap dealers and
security-based swap dealers under the
agencies’ respective jurisdictions to
exchange margin with their
counterparties for swaps that are not
centrally cleared (Swap Margin Rule).
The Swap Margin Rule as adopted in
2015 takes effect under a phased
compliance schedule spanning from
2016 through 2020, and the entities
covered by the rule continue to hold
swaps in their portfolios that were
entered into before the effective dates of
the rule. Such swaps are grandfathered
from the Swap Margin Rule’s
requirements until they expire
according to their terms. The final rule
SUMMARY:
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
OCC: Chris McBride, Director for
Market Risk, Treasury and Market Risk
Policy, (202) 649–6402, or Allison
Hester-Haddad, Counsel, Chief
Counsel’s Office, (202) 649–5490, for
persons who are deaf or hearing
impaired, TTY (202) 649–5597, Office of
the Comptroller of the Currency, 400 7th
Street SW, Washington, DC 20219.
Board: Constance Horsley, Deputy
Associate Director, (202) 452–5239,
Lesley Chao, Lead Financial Institution
Policy Analyst, (202) 974–7063, or John
Feid, Principal Economist, (202) 452–
2385, Division of Supervision and
Regulation; Patricia Yeh, Senior
Counsel, (202) 452–3089, or Justyna
Bolter, Senior Attorney, (202) 452–2686,
Legal Division; for users of
Telecommunication Devices for the Deaf
(TDD) only, contact 202–263–4869;
Board of Governors of the Federal
Reserve System, 20th and C Streets NW,
Washington, DC 20551.
FDIC: Irina Leonova, Senior Policy
Analyst, ileonova@fdic.gov, Capital
Markets Branch, Division of Risk
Management Supervision, (202) 898–
3843; Thomas F. Hearn, Counsel,
thohearn@fdic.gov, Legal Division,
Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC
20429.
PO 00000
Frm 00002
Fmt 4701
Sfmt 4700
FCA: Jeremy R. Edelstein, Associate
Director, Timothy T. Nerdahl, Senior
Policy Analyst, Clayton D. Milburn,
Senior Financial Analyst, Finance and
Capital Markets Team, Office of
Regulatory Policy, (703) 883–4414, TTY
(703) 883–4056, or Richard A. Katz,
Senior Counsel, Office of General
Counsel, (703) 883–4020, TTY (703)
883–4056, Farm Credit Administration,
1501 Farm Credit Drive, McLean, VA
22102–5090.
FHFA: Christopher Vincent, Senior
Financial Analyst, Office of Financial
Analysis, Modeling & Simulations, (202)
649–3685, Christopher.Vincent@
fhfa.gov, or James P. Jordan, Associate
General Counsel, Office of General
Counsel, (202) 649–3075,
James.Jordan@fhfa.gov, Federal Housing
Finance Agency, Constitution Center,
400 7th St. SW, Washington, DC 20219.
The telephone number for the
Telecommunications Device for the
Hearing Impaired is (800) 877–8339.
SUPPLEMENTARY INFORMATION:
I. Introduction
The agencies are adopting the recently
proposed amendments to the agencies’
regulations that require swap dealers
and security-based swap dealers under
the agencies’ respective jurisdictions to
exchange margin with their
counterparties for swaps that are not
centrally cleared (Swap Margin Rule or
Rule), with certain adjustments (final
rule). As discussed in detail below, the
final rule (1) permits swaps entered into
prior to an applicable compliance date
(legacy swaps) to retain their legacy
status in the event that they are
amended to replace an interbank offered
rate (IBOR) or other discontinued rate,
(2) modifies initial margin requirements
for non-cleared swaps between covered
swap entities and their affiliates, (3)
introduces an additional compliance
date for initial margin requirements, (4)
clarifies the point in time at which
trading documentation must be in place,
(5) permits legacy swaps to retain their
legacy status in the event that they are
amended due to technical amendments,
notional reductions, or portfolio
compression exercises, (6) makes
technical changes to relocate the
provision within the rule addressing
amendments to legacy swaps that are
made to comply with the qualified
financial contract rules (QFC Rules),1
and (7) addresses comments received in
response to the agencies’ publication of
1 83 FR 50805 (October 10, 2018). The QFC Rules
are codified as follows: 12 CFR part 47 (OCC’s QFC
Rule); 12 CFR part 252, subpart I (Board’s QFC
Rule); 12 CFR part 382 (FDIC’s QFC Rule).
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
the interim final rule dealing with
Brexit-related issues.
A. Background on the Swap Margin
Rule
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (DoddFrank Act) required the agencies to
jointly adopt rules that establish capital
and margin requirements for swap
entities that are prudentially regulated
by one of the agencies (covered swap
entities).2 These capital and margin
requirements apply to swaps that are
not cleared by a registered derivatives
clearing organization or a registered
clearing agency (non-cleared swaps).3
For the remainder of this preamble, the
term ‘‘non-cleared swaps’’ refers to noncleared swaps and non-cleared securitybased swaps unless the context requires
otherwise.
The Basel Committee on Banking
Supervision (BCBS) and the Board of
the International Organization of
Securities Commissions (IOSCO)
established an international framework
for margin requirements on non-cleared
derivatives in September 2013 (BCBS/
IOSCO Framework).4 Following the
establishment of the BCBS/IOSCO
Framework, on November 30, 2015, the
agencies published the Swap Margin
Rule, which includes many of the
principles and other aspects of the
BCBS/IOSCO Framework.5 In particular,
the Swap Margin Rule adopted the
implementation schedule set forth in
the BCBS/IOSCO Framework, including
2 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, 124 Stat. 1376
(2010). See 7 U.S.C. 6s; 15 U.S.C. 78o–10. Sections
731 and 764 of the Dodd-Frank Act added a new
section 4s to the Commodity Exchange Act of 1936,
as amended, and a new section, section 15F, to the
Securities Exchange Act of 1934, as amended,
respectively, which require registration with the
Commodity Futures Trading Commission (CFTC) of
swap dealers and major swap participants and the
U.S. Securities and Exchange Commission (SEC) of
security-based swap dealers and major securitybased swap participants (each a swap entity and,
collectively, swap entities). Section 1a(39) of the
Commodity Exchange Act of 1936, as amended,
defines the term ‘‘prudential regulator’’ for
purposes of the margin requirements applicable to
swap dealers, major swap participants, securitybased swap dealers and major security-based swap
participants. See 7 U.S.C. 1a(39).
3 A ‘‘swap’’ is defined in section 721 of the DoddFrank Act to include, among other things, an
interest rate swap, commodity swap, equity swap,
and credit default swap, and a security-based swap
is defined in section 761 of the Dodd-Frank Act to
include a swap based on a single security or loan
or on a narrow-based security index. See 7 U.S.C.
1a(47); 15 U.S.C. 78c(a)(68).
4 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (September
2013), available at https://www.bis.org/publ/
bcbs261.pdf.
5 80 FR 74840 (November 30, 2015).
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
the revised implementation schedule
adopted on March 18, 2015.6
The Swap Margin Rule established an
effective date of April 1, 2016, with a
phased-in compliance schedule for the
initial and variation margin
requirements.7 On or after March 1,
2017, all covered swap entities were
required to comply with the variation
margin requirements for transactions
with other swap entities and financial
end user counterparties. The Swap
Margin Rule presently requires all
covered swap entities to comply with
the initial margin requirements for noncleared swaps with all financial end
users with a material swaps exposure
and with all swap entities by September
1, 2020.
B. Overview of the Notice of Proposed
Rulemaking and General Summary of
Comments
On November 7, 2019, the agencies
sought comment on a proposal to revise
certain parts of the Swap Margin Rule
to facilitate the implementation of
prudent risk management strategies at
covered swap entities (proposed rule or
proposal).8 The proposed amendments
permitted legacy swaps to retain their
legacy status in the event that they are
amended to replace an interbank offered
rate (IBOR) or other discontinued rate,
introduced an additional compliance
date for initial margin requirements,
clarified the point in time at which
trading documentation must be in place,
and permitted legacy swaps to retain
their legacy status in the event that they
are amended due to technical
amendments, notional reductions, or
portfolio compression exercises. The
proposal would also have made
technical changes to relocate the
provision within the rule addressing
amendments to legacy swaps that are
made to comply with the QFC Rules.
6 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (March 2015),
available at https://www.bis.org/bcbs/publ/
d317.pdf.
7 The applicable compliance date for a covered
swap entity is based on the average daily aggregate
notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps of
the covered swap entity and its counterparty
(accounting for their respective affiliates) for each
business day in March, April, and May of that year.
The applicable compliance dates for initial margin
requirements that are currently in place, and the
corresponding average daily aggregate notional
amount thresholds, are: September 1, 2016, $3
trillion; September 1, 2017, $2.25 trillion;
September 1, 2018, $1.5 trillion; September 1, 2019,
$0.75 trillion; and September 1, 2020, all swap
entities and counterparties. See § __.1(e) of the
Swap Margin Rule. In this final rule, the agencies
are also adding one additional year to this schedule
for certain counterparties.
8 84 FR 59970 (Nov. 7, 2019).
PO 00000
Frm 00003
Fmt 4701
Sfmt 4700
39755
The proposal would also have no
longer required covered swap entities to
collect initial margin for non-cleared
swaps with affiliates. However, interaffiliate transactions would have
continued to be subject to variation
margin requirements. Inter-affiliate
transactions of covered swap entities
regulated by the FDIC, the OCC, and the
Board also would continue to be subject
to other applicable rules and
regulations.
The agencies received approximately
20 comments on the proposal, from U.S.
financial institutions, public interest
groups, trade associations, academic
institutions, and other interested
parties. Agency staff also met with some
commenters at those commenters’
request to discuss their comments on
the proposal.9
Most commenters supported the
proposal’s relief to amend certain legacy
swaps for certain reasons and the
proposal’s addition of a compliance
phase for smaller entities, as a
meaningful way to assist market
participants in managing and
prioritizing their resources, mitigating
potential trading disruptions related to
the transition of IBORs to other interest
rates, complying with documentation
requirements, and engaging in certain
trade life-cycle events.
With respect to removing the initial
margin requirement for inter-affiliate
transactions, some commenters
supported the proposal while others
expressed the view that the proposal
would increase risks to covered swap
entities individually and financial
stability more broadly. For example, a
few commenters shared their view that
collateralization (in the form of initial
margin collected from a covered swap
entity’s affiliate) is a highly effective
tool for reducing closeout risk.10 These
commenters were concerned that the
proposed rule would eliminate an
estimated $40 billion in collateral held
by covered swap entities, which, in
their view, is necessary for closeout
risk-absorption. Some of the
commenters also expressed the view
that banking organizations are using
inter-affiliate swaps for the primary
purpose of concentrating the risks of the
organizations’ world-wide derivatives
activities onto the books of the covered
9 Summaries of these meetings may be found at
the internet sites where the agencies’ have posted
public comments on the NPR. See, e.g., https://
www.federalreserve.gov/apps/foia/
proposedregs.aspx.
10 Closeout risk is the risk associated with the
period following a confirmed default wherein the
defaulting counterparty is unable to perform on the
swap contract and the cost of legally closing out the
existing swap and establishing a replacement swap
with a new counterparty is unknown.
E:\FR\FM\01JYR3.SGM
01JYR3
39756
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
swap entities subject to the Swap
Margin Rule, i.e., U.S. insured
depository institutions.
By contrast, commenters supporting
the removal of the initial margin
requirement for inter-affiliate
transactions asserted that the proposal
would align the Swap Margin Rule with
the margin requirements of some other
domestic and foreign jurisdictions and
facilitate more balanced and effective
risk management practices across the
spectrum of risks faced within banking
organizations that engage in non-cleared
swaps.
As discussed below in this
SUPPLEMENTARY INFORMATION section, the
final rule adopts, with certain
adjustments in response to the
comments received, the proposal that
(1) permits swaps entered into prior to
an applicable compliance date (legacy
swaps) to retain their legacy status in
the event that they are amended to
replace an IBOR or other discontinued
rate, (2) modifies the initial margin
requirement for non-cleared swaps
between covered swap entities and their
affiliates, (3) introduces an additional
compliance date for initial margin
requirements, (4) clarifies the point in
time at which trading documentation
must be in place, (5) permits legacy
swaps to retain their legacy status in the
event that they are amended due to
technical amendments, notional
reductions, or portfolio compression
exercises, (6) makes technical changes
to relocate the provision within the rule
addressing amendments to legacy swaps
that are made to comply with the
qualified financial contract rules (QFC
Rules),) 11 and (7) addresses comments
received in response to the agencies’
publication of the interim final rule
dealing with Brexit-related issues.
II. Interbank Offered Rates
A. Summary of Proposed Rule
Due to the potential discontinuation
of LIBOR at the end of 2021, covered
swap entities face uncertainty about the
way their swap contracts that include an
interest rate based on LIBOR and other
IBORs will operate after a permanent
discontinuation. An interest rate is a
critical term for calculating payments
under a swap contract, be it an interest
rate swap or another type of swap that
includes a reference interest rate as one
of the mechanisms for determining
payments or premiums. In many
instances, covered swap entities may
decide to amend existing swap contracts
11 83
FR 50805 (October 10, 2018). The QFC Rules
are codified as follows: 12 CFR part 47 (OCC’s QFC
Rule); 12 CFR part 252, subpart I (Board’s QFC
Rule); 12 CFR part 382 (FDIC’s QFC Rule).
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
to replace an IBOR before the IBOR
becomes discontinued. Such
amendments may also trigger follow-on
amendments that the counterparties
determine are necessary to maintain the
economics of the contract.12 Absent
revisions to the Swap Margin Rule, an
amendment to a legacy swap could
affect the legacy status of such a swap
and make it subject to the margin
requirements of the rule. In order to
enable covered swap entities and their
counterparties to minimize disturbance
to the financial markets, the agencies
proposed to provide relief to permit
covered swap entities to amend the
interest rates in a legacy swap contract,
based on certain conditions of
eligibility, and to adopt necessary
follow-on amendments, without the
swap losing its legacy status.
B. Method of Amendment
1. Proposal
In recognition of the ongoing efforts to
transition away from certain IBORs due
to their potential discontinuation, the
agencies proposed to amend the Swap
Margin Rule to remove impediments
that would limit the ability of covered
swap entities to replace certain interest
rates in their legacy non-cleared swaps.
Proposed § __.1(h) recognized that these
replacements could be carried out using
a variety of legal mechanisms by
permitting amendments accomplished
by the parties’ adherence to a protocol,
contractual amendment of an agreement
or confirmation, or execution of a new
contract in replacement of and
immediately upon termination of an
existing contract (i.e., tear-up), subject
to certain limitations found in § __
.1(h)(3).
2. Final Rule
Commenters were supportive of the
flexibility that the agencies provided
regarding the method of amendment,
particularly the flexibility to make
amendments to an individual noncleared swap or on a netting set level.
Several commenters requested a
technical change to the language in
proposed § __.1(h) to clarify that the
method of adherence to a protocol is
itself a contractual amendment. To
make this clarification, the agencies are
replacing the language ‘‘contractual
amendment of an agreement or
confirmation’’ with ‘‘other amendment
of a contract or confirmation’’ to make
clear that both an adherence to a
12 Follow-on amendments may include, for
example, spread adjustments resulting from the
move from a term rate to an overnight rate, from an
unsecured rate to a secured rate, or from a change
in tenor.
PO 00000
Frm 00004
Fmt 4701
Sfmt 4700
protocol as well as other amendments
are permissible methods of amendment
to a legacy swap, and also to maintain
consistency in using the term ‘‘contract’’
rather than ‘‘agreement’’ in § __.1(h).
The agencies are also making nonsubstantive parallel changes to the rule
text to clarify that the execution of a
new contract or confirmation in
replacement of and immediately upon
termination of an existing contract or
confirmation is a permitted method of
amendment.
A few commenters also requested that
the agencies expand § __.1(h) to include
new, non-legacy swaps entered into
solely for managing the transition away
from IBORs, or new, non-legacy swaps
designed to transition an existing swap
away from an IBOR even if the swap
may not be amended or terminated.
These commenters suggested this
expansion would facilitate use of basis
swaps to offset IBOR exposure from
legacy swaps against new exposure to a
risk-free rate (RFR). One commenter
argued this would be roughly
economically equivalent to directly
amending one or more existing swaps to
eliminate the IBOR exposure and
replacing it with an RFR.
The agencies are not expanding the
regulation beyond the methods that
were proposed in § __.1(h).) The
alternative suggested by the commenters
would be ineffective in resolving the
problem the agencies seek to address.
As long as covered swap entities hold
existing swaps contractually obligating
them to exchange payments based on
IBORs, they bear the risk that those
IBORs will be discontinued. If a covered
swap entity hedges that IBOR exposure
to another benchmark by executing a
new basis swap, one leg of that swap
will necessarily be linked to the IBOR.
While the agencies believe there may be
certain circumstances in which sound
risk management by a covered swap
entity would include new trading
activity between IBOR and non-IBOR
market exposures (with contract dates
ending by December 2021), these
activities go beyond the scope of relief
the agencies are providing with this
rule.
C. Purpose of Amendments
1. Proposal
The proposed rule described the type
of interest rate that can be replaced and
the accompanying changes that would
be permitted. Proposed §§ __
.1(h)(3)(i)(A) and (B) would permit
amendments that are made solely to
accommodate the replacement of an
IBOR or of any other non-IBOR interest
rate that a covered swap entity
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
reasonably expects to be discontinued
or reasonably determines has lost its
relevance as a reliable benchmark due to
a significant impairment with an
alternate interest rate.
2. Final Rule
The agencies did not receive any
comments on this part of the proposed
rule and are adopting it as proposed.
D. Permitted Interest Rates
1. Proposal
The proposed rule provided that an
IBOR could be replaced, including but
not limited to LIBOR, TIBOR, BBSW,
SIBOR, CDOR, EURIBOR, and HIBOR.
Although the current uncertainty
surrounding interest rates is tied to
IBORs, the agencies also proposed a
second, more subjective standard that
would be applicable to other categories
of interest rates, should the need arise
in the future. This forward-looking
standard was designed to encourage
covered swap entities to resolve critical
uncertainties before an interest rate is
discontinued, or loses its market
relevance, in order to minimize
disturbance to the markets.
The proposed rule (§ __.1(h)(3)(i)(C))
also contemplated that an interest rate
may need to be replaced more than one
time. For example, an IBOR may first be
replaced with fallback provisions at a
time when a permanent alternative
interest rate is not yet available or not
yet agreed upon by the swap
participants, or amendment
documentation has not yet been
developed. Subsequently, fallback
provisions may be replaced with
permanent alternative interest rates. If
the original interest rate that is being
replaced is an IBOR or any other nonIBOR interest rate that otherwise met
the requirements of the proposed rule
and that a covered swap entity
reasonably expects to be discontinued
or reasonably determines has lost its
relevance as a reliable benchmark due to
a significant impairment, the noncleared swap may be amended more
than once to accommodate ongoing
developments toward a permanent
replacement interest rate. The proposed
rule did not limit the number of
amendments that could take place, as
long as the interest rate that was
originally present in the non-cleared
swap met the criteria in either proposed
§ __.1(h)(3)(i)(A) or § __.1(h)(3)(i)(B).
The proposed rule would not permit
subsequent amendments that change
interest rates or other terms of the noncleared swap for any purpose other than
for those purposes explicitly set out in
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
§ __.1(h), without triggering application
of the margin requirements.
To benefit from the treatment of this
new legacy swap provision, a covered
swap entity must make the amendments
to the non-cleared swap solely to
accommodate the replacement of an
interest rate described in the proposed
rule. The proposed rule was flexible as
to the incoming replacement interest
rate by leaving it up to the
counterparties to select a mutually
agreeable replacement interest rate. The
proposed rule provided examples of the
Secured Overnight Funding Rate
(SOFR), the AMERIBOR and the
Overnight Bank Funding Rate as some
potential alternatives suggested by some
market participants. The agencies
expected that any replacement interest
rate, including any successor
replacement interest rate, would be
agreed upon by the parties after
assessing its complexity, safety and
soundness, and taking into
consideration associated risk
management practices.13
2. Final Rule
The agencies received several
comments expressing concern that the
proposed rule could be read as applying
to interest rate swaps only and
requesting similar relief for all other
asset categories of swaps, including
foreign exchange, equity, commodity,
and credit default swaps. The agencies
are clarifying that amendments to the
rule permit amendments to interest rates
but do not restrict the categories of
swaps where those interest rates appear
and thus do not restrict the categories of
swaps in which those amendments
could be made. Interest rates could be
used in a variety of different categories
of swaps, such as an underlying interest
rate index in an interest rate swap or as
a discounting interest rate for collateral
or payment calculations in a
commodity, foreign exchange, equity, or
credit swap. In other words, the relief
provided applies to all categories of
non-cleared swaps that include or refer
to an IBOR or any other interest rate
described in paragraphs (h)(3)(i)(A)–(C)
of the final rule.
One commenter requested that the
agencies extend the relief in the
Proposal to cover amendments made
solely to accommodate the replacement
of any reference instrument (e.g.,
iTraxx) reasonably expected to be
discontinued or reasonably determined
to have lost its relevance as a reliable
13 The replacement rate is also expected to be
consistent with international standards, such as the
IOSCO Principles for Financial Benchmarks. See
https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD415.pdf.
PO 00000
Frm 00005
Fmt 4701
Sfmt 4700
39757
benchmark due to a significant
impairment. The agencies note that
there is no current expectation or
indication that any major non-interest
rate reference instrument is expected to
be discontinued. Moreover, the
expected discontinuation of IBORs
place these interest rates in a special
position that does not extend to periodic
revisions of underlying reference
instruments in commodity, foreign
exchange, credit, equity, or other swaps.
The agencies are not modifying the final
rule to allow the replacement of a noninterest rate reference instrument while
retaining the legacy status of the swap.
If any expectation of discontinuation
arises in the future, the agencies may
reconsider their position.
One commenter requested
clarification that any new intermediate
or permanent interest rate does not
necessarily have to be viewed by the
market as a ‘‘successor’’ to the IBOR or
other discontinued rate, but that the
counterparties to the swap contract
simply have to agree on the appropriate
replacement interest rate. The agencies
confirm this understanding.
Commenters expressed concern that
changes to the discounting methods to
adopt RFRs used by some central
counterparties (CCPs) would require
conforming changes to over-the-counter
swaptions that may be presented to
these CCPs for clearing. The agencies
have modified the proposed rule to
allow legacy swaps to be amended to
reflect these changes to the discount
interest rate and remain legacy swaps.
The agencies did not receive any
other comments on this part of the
proposed rule and are adopting it
largely as proposed.
E. Follow-On Amendments
1. Proposal
In the proposed rule, the agencies
acknowledged that replacing an interest
rate could require other contractual
changes to maintain the economics of
the non-cleared swap and to preserve
the relative economic values to the
parties after incorporating changes to
the interest rate. The proposed rule
would permit changes that incorporate
spreads and other adjustments that
accompany and implement the
replacement interest rate amendment.
The proposed rule would also permit
other, more administrative and
technical changes necessary to
operationalize the determination of
payments or other exchanges of
economic value using the replacement
interest rate, including changes to
determination dates, calculation agents,
and payment dates. These types of
E:\FR\FM\01JYR3.SGM
01JYR3
39758
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
administrative changes may be
necessary to adjust computations and
operational provisions to reflect the
differences between an IBOR and the
replacement interest rate or rates. The
agencies envisioned that a number of
contractual changes could be necessary
to maintain the economics of the noncleared swap, and for this reason, the
proposed rule would permit these
changes. However, the agencies did not
believe that the relief being provided for
interest rate replacement purposes
should be expansively applied to
encompass all changes to a legacy swap.
Accordingly, the proposed rule text
clarified that the proposed safe harbor
for legacy swaps would be unavailable
if the amendments extend the maturity
or increase the total effective notional
amount of the non-cleared swap,
irrespective of the reason for those
changes.
2. Final Rule
The agencies received several
comments requesting reconsideration of
the restriction on extending the maturity
or increasing the total effective notional
amount of the non-cleared swap. Day
count conventions or other factors such
as final settlement or final payment
occurring on the 30th of the month
versus the 15th of the month may result
in an extension of the remaining
maturity of a swap. Since the
counterparty to a non-cleared swap may
not know the size of the final payment
until the end of the interest period, the
swap may incorporate a payment delay,
with the final maturity shifting as a
result. Commenters also explained that
the replacement of an IBOR may
increase the total effective notional
amount of the non-cleared swap under
a few scenarios. For example, a fixedfor-floating IBOR swap may use a 30/
360 day count fraction market
convention, but the market standard for
a replacement reference benchmark rate
swap may use an actual/360 day count
fraction market convention. Under this
scenario, the notional amount would
need to be adjusted to ensure that the
payment amounts on the fixed leg of the
replacement reference benchmark rate
swap are the same compared to the
IBOR swap.
In response to these comments, the
agencies understand that certain
differences in market conventions may
not yet be well established or expected.
The agencies are preserving the
proposal’s restriction on extensions of
maturity and increases of total effective
notional amount, but adding language
allowing extensions and increases as
necessary to accommodate the
differences between market conventions
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
for an outgoing interest rate and its
replacement. Market conventions could
include changes in day count
conventions, settlement date, or final
payment date.
Several commenters also explained
that counterparties may employ
portfolio compression to effectuate
amendments to legacy swaps for the
purpose of eliminating IBORs, and that
differences between market conventions
for an outgoing interest rate and its
replacement in this context could also
affect the remaining maturity and total
effective notional amount of portfolios
of IBOR swaps. The agencies are adding
new paragraph (h)(3)(iii) to
accommodate portfolio compression
exercises that are driven by the sole
purpose of replacing an interest rate
described in paragraph (h)(3)(i). In such
a case, portfolio compression would not
be subject to the limitations in
paragraph (h)(4), but may not extend the
maturity or increase the total effective
notional amount of the non-cleared
swap or non-cleared security-based
swap beyond what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
Commenters also expressed a concern
that changes associated with the
liquidity of specific maturities of swaps
with a replacement interest rate may
result in an increase in the remaining
maturity of the non-cleared swap. For
example, a swap with a four-year
remaining maturity may not be as liquid
as a swap with a five-year remaining
maturity. Given that this rationale for an
extension of maturity can significantly
increase the remaining maturity of a
legacy swap, the agencies believe that it
could lead to inappropriate extensions
or evasion of the requirements of the
rule. Accordingly, the agencies are not
permitting an extension of the
remaining maturity for liquidity or
similar reasons.
F. End Date
The proposed rule did not specify an
end date by which IBOR-related
amendments must be completed, but
requested comment on that issue.
Several commenters agreed with the
agencies’ approach to not specify an end
date, explaining that amendments
related to fallbacks or other transitions
to replacement interest rates may not be
completed in one step or within a given
time frame. Accordingly, the agencies
are not adopting any specific end date
by which IBOR-related amendments
must be completed.
PO 00000
Frm 00006
Fmt 4701
Sfmt 4700
G. Exemptions for Commercial and
Cooperative End Users
One commenter requested that the
agencies clarify how the Swap Margin
Rule treats post-compliance date noncleared swaps that qualified for the
commercial/cooperative end user
exemption from the rule under § __
.1(d)(1), if such swaps are amended to
accommodate changes to referenced
benchmark interest rates. The
commenter expressed concern that postcompliance date non-cleared swaps
originally exempted under
§ __.1(d)(1) will need to be amended by
commercial end users or cooperatives to
remove an IBOR benchmark interest
rate. Specifically, the commenter noted
that the amended swaps might become
subject to temporary mismatches
between the rate referenced by such
swaps and the commercial arrangements
being hedged, thereby raising questions
about their exempt status.
The commenter’s request is based on
two no-action letters that the CFTC
issued pertaining to non-cleared swaps
in which the counterparty qualified for
an exemption or exception from
mandatory clearing and/or non-cleared
margin requirements under the
Commodity Exchange Act (CEA) or
CFTC regulations.14
The scope of the agencies’ exemption
for commercial and cooperative end
users in § __.1(d)(1) is, by its terms, tied
to the scope of the commercial end user
exemptions in the CEA and their
implementing regulations. No-action
letters are not included under the
agencies’ regulations. However, for the
same reasons the agencies are amending
§ __.1(h) to preserve the legacy status of
swaps during the IBOR transition, the
agencies will treat commercial and
cooperative end user swaps originally
exempted under § __.1(d)(1) as
remaining within the scope of
§ __.1(d)(1) if those swaps are
effectuated under the terms of the two
applicable CFTC no-action letters.15
14 See CFTC Letter No. 19–28 (December 17,
2019), in section V.A., providing regulatory relief
from the mandatory clearing requirement, and
CFTC Letter 19–26 (December 17, 2019), in section
E.1., which granted relief from the CFTC’s margin
requirements for non-cleared swaps. In both
situations, the counterparties previously relied on
the end-user exemptions end-user exemptions in
the CEA and applicable CFTC regulations.
15 Id. The agencies’ determination is specific to
these two CFTC no-action letters, and more
specifically to section V.A. of CFTC Letter No. 19–
28 and section E.1. of CFTC Letter No. 19–26. The
agencies are not applying CFTC no-action letters to
modify the terms of the Swap Margin Rule in any
other regard.
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
III. Non-Cleared Swaps Between
Covered Swap Entities and an Affiliate
posed by the counterparty and the risks
of such non-cleared swap.
The agencies proposed to amend the
treatment of affiliate transactions in the
Swap Margin Rule by creating an
exemption from the initial margin
requirements for non-cleared swaps
between affiliates. The agencies also
proposed, however, to retain the
requirement that affiliates exchange
variation margin. Twenty-two interested
persons submitted public comments to
the agencies on the proposal, including
individuals, banking and securities
trade groups, public interest advocacy
groups, and one custodian bank.
After consideration of these public
comments, as discussed below, the
agencies are adopting the rule as
proposed with a modification (1)
requiring a covered swap entity to
calculate and monitor the amount of
inter-affiliate initial margin that would
otherwise be required to be collected by
such covered swap entity under the
Swap Margin Rule; and (2) requiring a
covered swap entity to collect initial
margin from its affiliates on all new
non-cleared swaps if the aggregate
initial margin calculation amount
exceeds 15 percent of the covered swap
entity’s Tier 1 capital (‘‘15% Tier 1
Threshold’’). This requirement will
apply to inter-affiliate swaps executed
on any business day the 15% Tier 1
Threshold is exceeded and remain in
place as long as the 15%Tier 1 threshold
has been exceeded. A covered swap
entity will not be required to collect
initial margin from its affiliates if the
aggregate inter-affiliate initial margin
calculation amount is 15 percent or less
of the covered swap entity’s Tier 1
capital. For purposes of the calculation
described above and as further
discussed below, a covered swap entity
will treat non-cleared swaps between a
subsidiary of the covered swap entity
and an affiliate as if the non-cleared
swaps were its own. Additionally, the
agencies are also clarifying one aspect of
the initial margin requirement for
affiliates. The final rule clarifies that
non-cleared swaps between affiliates
remain subject to § __.3(d), which
describes the initial margin
requirements that apply to non-cleared
swaps between a covered swap entity
and counterparties that are not subject
to the Swap Margin Rule’s requirement
to calculate and exchange initial margin
on a daily basis. That section provides
that a covered swap entity shall collect
initial margin at such times and in such
forms and such amounts (if any), that
the covered swap entity determines
appropriately addresses the credit risk
A. Main Proposal
The agencies proposed to amend
§ __.11 of the Swap Margin Rule, which
currently establishes a special set of six
regulatory requirements for swap
transactions between a covered swap
entity and an affiliate. Five of these
provisions concern the requirement for
a covered swap entity to collect initial
margin for covered swap transactions
with an affiliate. Each of these five
provisions focuses on a particular aspect
of the Swap Margin Rule’s initial margin
requirements as they generally apply to
non-affiliated counterparties, and
provides corresponding exemptions
from or reductions to that particular
aspect of the Swap Margin Rule’s
requirements whenever the
counterparty is an affiliate of the
covered swap entity.16 The agencies
proposed to replace this set of five
exemptive provisions with a single
exemption from the initial margin
exchange requirement contained in
§ __.3 of the Swap Margin Rule. The
agencies proposed to retain the sixth
regulatory requirement in § __.11, which
is the requirement for covered swap
entities to collect and post variation
margin for affiliate swap transactions
pursuant to § __.4 of the Swap Margin
Rule.17
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
B. Comments and Considerations for the
Final Rule
Twelve commenters representing the
views of covered swap entities and their
counterparties expressed support for the
proposed rule. Commenters in this
group generally expressed the view that
inter-affiliate swaps are an important
risk management tool, the use of which
would be facilitated by the proposed
rule. Several of these commenters
further expressed the view that the risks
of inter-affiliate swaps are better
addressed by other means, such as
capital, credit risk limits, and variation
margin. Many also noted the interaffiliate provisions of the current Swap
Margin Rule are inconsistent with those
of the CFTC and most G20 regulators.
One commenter estimates that $39.4
billion of inter-affiliate initial margin
collateral was held at year-end 2018 by
16 Swap Margin Rule §§ __.11(b)(1) (posting initial
margin); (b)(2) (initial margin threshold amount);
(d) (custody of margin); (e) (margin model holding
period); and (f) (standardized margin amounts).
17 Swap Margin Rule § __.11(c). This subsection
creates no variations from the generally-applicable
requirements of § __.4. Accordingly, the agencies
proposed to remove it, and § __.4 directly applies
to covered swap entities engaging in swap
transactions with affiliates on the same terms as it
applies with any other counterparty.
PO 00000
Frm 00007
Fmt 4701
Sfmt 4700
39759
the group of covered swap entities that
first became subject to the Swap Margin
Rule in 2016.
Eight commenters, including public
interest advocacy groups and
individuals, expressed opposition to the
agencies’ proposal, and provided several
different grounds for their objections.
These views are grounded on similar
core concerns, which the agencies have
evaluated as follows.
One concern centers on some
commenters’ view that initial margin
serves a special loss-absorbing function
in the inter-affiliate context, and the
agencies’ proposal would increase risks
to covered swap entities individually
and financial stability more broadly by
removing this protection. One
commenter discussed the specific
function of initial margin and contrasted
it with variation margin.
Initial margin is a risk management
tool designed to mitigate a covered swap
entity’s exposure to market risk
associated with a counterparty’s default
by requiring a counterparty to obtain
and provide financial collateral equal to
the potential future exposure (PFE) the
covered swap entity would face if the
counterparty defaults. Under the Swap
Margin Rule, a covered swap entity
accordingly collects high-quality
collateral from its counterparty equal to
this PFE, placed in third-party custody
to provide a source of payment to offset
this risk. This PFE is the measurement
of the exposure due to the defaulting
counterparty’s inability to continue
performing on the swap contracts
during the period after the
counterparty’s default but before the
covered swap entity closes out its
positions with the defaulting
counterparty and establishes similar
trades with a new counterparty.
In practice, it can take a varying
number of days after default for the
covered swap entity to establish new
trades with new counterparties as
necessary to replace or re-hedge the
defaulted swaps.18 The process of
18 If the net value to the covered swap entity of
the portfolio with the counterparty (the current
exposure amount) was positive at the time of the
default, the covered swap entity already holds
variation margin—collected from the counterparty
on a daily basis as required by the Swap Margin
Rule—to cover that amount. The Swap Margin
Rule’s variation margin provisions require covered
swap entities to recalculate the monetary value of
the portfolio of swaps with each counterparty every
business day. If the monetary value of the portfolio
to the covered swap entity has increased, the
covered swap entity is required to collect additional
variation margin collateral from the counterparty. If
the monetary value has decreased, the covered
swap entity is required to return an equivalent
amount of variation margin collateral to the
counterparty. §§ __.2 ‘‘variation margin’’ and
E:\FR\FM\01JYR3.SGM
Continued
01JYR3
39760
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
obtaining new swaps contracts with
new counterparties creates additional
costs that can vary depending on
prevailing market conditions at the time
default occurs and in the subsequent
days needed to obtain the new
contracts. This potential range of costs
represents the covered swap entity’s
PFE.
As the commenter noted, because
these costs will vary depending on
whatever market conditions actually
exist at the unknown future time when
the counterparty defaults, the Swap
Margin Rule requires covered swap
entities to calculate PFE based on the
premise that its market costs will be on
the high end of the expected range,
statistically speaking. Because of this
uncertainty, the amount of initial
margin collateral a covered swap entity
will collect under the Swap Margin Rule
is significantly higher than the daily
amount of variation margin exchanged,
which is based on current and known
changes in the market conditions that
change the value of the portfolio of
swaps.
Commenters expressing concern
about PFE risk asserted that
collateralization (in the form of initial
margin collected from the covered swap
entity’s affiliate) is an effective tool for
reducing the close-out and re-hedging
risk described above. These commenters
objected that the proposed rule would
eliminate an estimated $40 billion in
collateral held by covered swap entities
that, in the commenters’ views, is
necessary for mitigating PFE risk.
However, it is incumbent on supervisors
to evaluate multiple approaches to
controlling the overall risk of interaffiliate swaps exposures, and to
consider which of the available
approaches to deploy depending on
how those risks occur (and evolve) in
the industry. Inter-affiliate counterparty
credit risk, in the form of PFE, is one of
several risks that affiliated banking
organizations need to manage. The
nature of these risks, their potential
severity, and the mechanisms to manage
them in tandem vary such that no single
approach to address all risks in isolation
is appropriate. Supervisors have a
variety of tools at their disposal to
‘‘variation margin amount,’’ __.4. It is generally
industry practice to use cash as variation margin
collateral; however, if non-cash financial collateral
is used, the covered swap entity must re-value it
each day and adjust the daily variation margin
collection or return amounts to reflect those
changes as well. § __.6(e). If the event triggering the
counterparty’s default under a swap is the
counterparty’s failure to provide additional
collateral in response to a margin call, then the
dealer’s current credit exposure will be
undercollateralized by the amount of the day’s
changes in current exposure and/or collateral value.
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
ensure protection of a banking
organization’s financial integrity, in
light of the banking organization’s
particular scope of activities (both
financial and geographic).19 Initial
margin can be effective in addressing
the PFE risks of inter-affiliate
transactions within a banking
organization, but viewing it as a
comprehensive solution is a simplistic
approach.
Some of these commenters also
expressed the view that banking
organizations are using inter-affiliate
swaps for the primary purpose of
concentrating the risks of the
organizations’ world-wide derivatives
activities onto the books of the covered
swap entities covered by the prudential
regulators’ Swap Margin Rule, i.e., U.S.
insured depository institutions (IDIs).
These views are not consistent with the
agencies’ supervisory experience since
the rule took effect. As described in
greater detail below, the agencies
observe that internationally active
banking organizations that have a crossborder organizational structure relying
on separate legal entities must use interaffiliate swaps to manage the risks of the
overall banking organization’s outwardfacing derivatives exposures. Other
internationally active banks, operating
cross-border through branching
structures, do not have the need to use
inter-affiliate swaps for risk
management.
As the agencies discussed in the
proposal, actual supervisory experience
in the years since the agencies imposed
the Swap Margin Rule’s current
requirements has raised two interrelated concerns at the institutionspecific level and the systemic level
about the utility of initial margin to
address exposures arising from interaffiliate swap transactions. These
concerns surround impediments to a
19 For example, internationally-active banking
organizations face the financial risks of each
location in which they operate, and one important
tool is the coordination by international supervisors
to ensure equivalent supervisory requirements are
implemented across jurisdictions, normalizing
market conditions in each location. For any banking
organization with important sources of revenue
spread across more than one entity, the strength of
the banking organization could be materially
affected in the absence of successful strategic
management of all the business components.
Supervisors play an important role in assessing
whether the organization’s management maintains
an effective process for identifying, measuring, and
managing all key risks in this regard. Organizationwide capital, leverage, and liquidity considerations
are important supervisory considerations. Other
measures include amount limits, concentration
limits, collateral amount and quality, qualitative
transaction restrictions, or market equivalency
standards. Even matters such as addressing market
concerns about ring-fencing available assets can
have a significant benefit in reducing a U.S. bank’s
foreign exposures.
PO 00000
Frm 00008
Fmt 4701
Sfmt 4700
banking organization’s best management
practices for cross-border swap risks,
and whether these risks are more
appropriately addressed through other
regulatory and supervisory mechanisms
as discussed below, and limitations on
the effectiveness of inter-affiliate margin
to address systemic cross-border market
risks, also discussed below.
1. Effects of the Inter-Affiliate Initial
Margin Requirement on Banking
Organizations
Some covered swap entities covered
by the Swap Margin Rule are
internationally active banking
organizations and their swaps activities
are carried out in a cross-border
marketplace. Some commenters
perceive that U.S. banking organizations
use inter-affiliate swaps primarily to
transfer the risks of all their foreign
derivatives activities into the U.S.
insured depository institution.
However, the agencies observe a
redistribution of risk based instead on
the international scope of the banking
organization’s business.
In the market for non-cleared
derivatives, inter-dealer trading activity
for certain types of derivatives is heavily
concentrated in one geographic location,
while the marketplace for other types of
derivatives takes place in a different
geographic location. An internationally
active U.S. banking organization
participates as a covered swap entity in
a number of these marketplaces by
establishing a place of business in each,
such as a locally incorporated business
entity, or a foreign branch of the main
U.S. bank. The banking organization
also has swap customers at home and
abroad and services them by
establishing a place of business in the
same geographic locations as the
customers.
If a customer in one market (e.g., the
U.K.) needs a non-cleared swap that is
traded in the local market (e.g., a
sterling interest rate swap), the U.K.
operation of the banking organization
handles the entire transaction locally.
On the other hand, if a U.S. customer
needs the same sterling interest rate
swap, the U.S.-based establishment of
the banking organization enters into the
swap with the customer (collecting
margin and exchanging periodic
payments on the swap) while the
banking organization uses its U.K
establishment to execute on the marketfacing sterling interest rate swap (also
exchanging margin with its counterparty
in that market). Best safety and
soundness practices in risk management
dictate that the banking organization’s
personnel with the expertise in a class
of derivatives be located in the relevant
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
market location, where they can obtain
the most advantageous swap terms, such
as best pricing or a wider range of
maturities. On the customer side,
market expectations are that the banking
organization will locate personnel in the
same location as the customer.
As a result, international banking
organizations using inter-affiliate swaps
as a risk management tool under this
business model are hedging market risk
arising from the nature of their worldwide customer needs (e.g., dollar swaps,
euro swaps) and managing it in the
corresponding market location. A
foreign customer’s need for a U.S. dollar
swap product would engage the
involvement of the U.S. banking
organization’s U.S. bank affiliate, due
not to the depository institution status
of the U.S. bank or some bias in favor
of the banking organization’s home
market, but rather to its place as the
banking organization’s locus of market
activity in the dollar market. As in the
example above, if a U.S. customer of the
U.S. bank sought a sterling swap
product, the opposite occurs. Moreover,
if a non-U.S. customer in one location
needs a type of swap traded in another
non-U.S. location, the risk can be
transferred between them without any
direct U.S. intermediation.20
For internationally-active banking
organizations, U.S. supervisors consider
this arrangement a better risk
management practice than using the
U.S. location to manage the marketfacing risk of the swap through local
trading (in a less liquid market for that
that type of exposure), or U.S. personnel
endeavoring to make trades with foreign
dealers in the relevant market (through
cross-border communication and
contracts).21 As discussed below, this is
20 When a non-bank affiliate enters into a noncleared swap with its counterparty, and then enters
into an inter-affiliate swap with a U.S. institution
to manage the market risk component, commenters
also expressed the view that the affiliate thereby
‘‘transfers the risk’’ of the non-cleared swap into the
U.S. institution. The agencies have considered this
viewpoint and note that the affiliate continues to
face the counterparty, actively managing the
counterparty credit risk and exchanging margin in
accordance with the same margin standards as the
U.S. has imposed pursuant to the BCBS–IOSCO
framework. To the extent these counterparties are
also financial intermediaries, they are themselves
subject to the same margin standards, buttressing
their financial resiliency. Because the prudential
regulators’ margin rules apply to covered swap
entities that are foreign banks, in many instances
those margin rules are, in fact, identical.
21 Commenters in the group objecting to the
agencies’ initial margin proposal did not object to
maintaining the Rule’s variation margin
requirement. As one commenter noted, variation
margin performs a different function than initial
margin. Where initial margin is calibrated to PFE,
variation margin reflects the ongoing shift in market
value of a swap contract between the covered swap
entity and the counterparty on a daily basis.
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
occurring in the context of supervisory
oversight of the banking organization
aimed at ensuring the affiliates are in
good financial standing, utilizing an
appropriate system of market and credit
risk limits, and the affiliates themselves
obtain robust initial margin from their
counterparties, to protect the affiliates
from PFE risk if their counterparties
should default.22
Also, as the agencies discussed in the
proposal, some internationally active
U.S. banking organizations utilize the
same arrangement without creating
inter-affiliate PFE, because they set up
their foreign establishments as a foreign
branch of the U.S. bank. From an entity
and accounting standpoint, the U.S.
bank can transact with the customer and
hedge its cross-border swap risk through
foreign swap contracts, all within the
same entity (and without the need to
create an internal swap).
The risk presented to the U.S. bank by
the foreign-market swaps themselves is
identical under both structural
Because a non-cleared swap creates bilateral
payment obligations between the two parties, the
current market value of the cash flows due to be
paid to one party will usually be higher than the
current market value of the cash flows due to be
paid to other party, depending on how the market
value for the underlying reference asset or rate rises
or falls. In this regard, the agencies note that
variation margin requires ongoing daily payments
from the party that is ‘‘out of the money’’ over to
the party that is ‘‘in the money.’’ Internationally
active banking organizations routinely exchange
variation margin on inter-affiliate swaps, but not
exclusively as a counterparty default risk mitigation
tool. For strategic purposes, banking organizations
internally measure and evaluate the relative
profitability of their differing lines of business and
locations (typically by comparing profits for the
location as a ratio of the level of regulatory capital
and funding costs associated with the location). The
exchange of variation margin is a natural way for
the two different locations (trading desks) to assign
the profitability of the swap to the right desk for
these internal measurements, and related purposes.
22 One commenter expressed the view that these
considerations would potentially address the
commenter’s concerns about PFE risk transfer from
affiliates, but also posited that the agencies were
unconcerned about the potential absence of these
factors in issuing the proposal. The agencies note
that the presence of these important risk
management measures is a supervisory expectation
for banking organizations engaged in the practice.
The agencies also note the commenter presumes the
Swap Margin Rule’s methodology for determining
the initial margin collection amount—which
represents the agencies’ implementation of Section
3.1 of the BCBS–IOSCO Framework’s requirement
for portfolio replacement costs designed to address
unexpected third-party counterparty defaults based
on a probability statistical model using a 10-day
holding period and presuming a period of severe
market stress—is properly calibrated for the closeout risk of interaffiliate transactions that are already
subject to several additional prudential riskreducing requirements and reduced information
gaps. Moreover, the agencies note that Element 6 of
the BCBS–IOSCO Framework itself excludes
interaffiliate swaps from the scope of the
Framework and did not contemplate that Section
3.1 of the BCBS–IOSCO Framework would be
applied to them.
PO 00000
Frm 00009
Fmt 4701
Sfmt 4700
39761
alternatives, whether the banking
organization uses a foreign branch or a
foreign affiliate. That risk is managed
through several tools, including the
banking organization’s board-approved
system of risk limits governing its
participation in the foreign swap
market; the banking organization’s
underwriting and ongoing monitoring of
the credit risk of the counterparties it
faces through swap transactions in the
foreign swap market; and the collection
of variation margin and initial margin
requirements from those foreign market
counterparties, under margin
regulations developed on a coordinated
basis by U.S. and foreign regulators
through an established, formal process.
The addition of an affiliated entity
instead of a branch may have the effect
of creating other regulatory and risk
issues to be considered, but these are
separate from the risks of the foreign
swap itself and are addressed under
separate supervisory and regulatory
frameworks.
The participation of U.S. banking
organizations in the derivatives markets
abroad is substantial, making attempts
to ‘‘compartmentalize’’ the exposures of
significant market affiliates on the basis
of legal separation and collateral
exclusively challenging.23 Sound risk
management for banking organizations
necessitates ongoing assessments of
financial performance across the
organization and corrective incremental
responses to undesirable changes in key
risk metrics.
The agencies’ structural concerns
described above have arisen with the
benefit of hindsight in the time since the
Rule was finalized. In 2014 and 2015,
the future structure of the cross-border
non-cleared swaps market was
potentially subject to significant change
in response to key factors such as
growth in the cleared derivatives market
(reducing non-cleared activity), industry
acclamation to significant expected cost
increases attributable to the robust
world-wide margin regimes about to
take effect, and new regulatory
resolution planning requirements,
causing internal restructuring within
banking organizations in response to
these factors. These unknowns, and the
costs of the inter-affiliate initial margin
requirement, could have reasonably
been expected to curtail existing use of
23 See, e.g., https://www.bis.org/ifc/publ/
ifcb31n.pdf (U.S.-based banking organizations
engage in derivatives activities across G–10
countries actively, with non-U.S. market
participation exceeding U.S. market participation in
the aggregate); see also, Guidance for § 165(d)
Resolution Plan Submissions by Domestic Covered
Companies, 84 FR 1438 (February 4, 2019).
E:\FR\FM\01JYR3.SGM
01JYR3
39762
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
inter-affiliate non-cleared swaps.24 For
example, some internationally-active
covered swap entities conducted their
cross-border business through foreign
branches, and others might have
restructured to eliminate the need for
inter-affiliate swaps. The agencies’ past
expectations of reductions in interaffiliate swap activity have not been
borne out through the completion of the
Swap Margin Rule’s implementation
phase. In addition, among the
prudential regulators, the banking
agencies continue to assess the proper
calibration of regulatory capital
requirements including enhanced
recognition of collateralization (or the
lack of it) for closeout risk.25
2. System-Wide Effectiveness of InterAffiliate Initial Margin Requirements
Commenters objecting to the agencies’
proposal also expressed the view that
the agencies are engaging in a ‘‘race to
the bottom’’ to the extent the agencies
discussed how inter-affiliate initial
margin requirements have not been
universally applied by other domestic
and foreign regulators. As stated in the
proposal, the agencies raise this concern
in the context of observing that limited
application of the initial margin
requirements to one slice of the market
is a blunt tool for enhancing financial
stability among interconnected financial
market participants. With the benefit of
hindsight, the agencies observe that
other regulators developing their
implementing rules in 2015 and beyond
have not implemented the same
comprehensive inter-affiliate margin
collection requirements that the
agencies did in 2015.26 As a result,
24 See 80 FR at 74,893 (‘‘It is likely the behavior
of swap market participants, including affiliate
counterparties, will respond to incentives created
by these swap margin requirements. Such changes
could have a dramatic effect on the pattern of
affiliate swap transactions which would itself have
a significant impact on the amounts of initial
margin that are ultimately collected on interaffiliate transactions.’’)
25 In this regard, it is worth noting that the
analysis in this Supplementary Information Section
evaluates comments on the proposal from the
perspective of the Swap Margin Rule. The
evaluation of risk for inter-affiliate trades and the
best way to address such risks from a regulatory
perspective could change depending on, among
other things, the statutory authority on which a
regulatory requirement is premised.
26 In the EU, intragroup transactions are fully
exempt (not only initial margin, but also variation
margin), unless the relevant affiliates are subject to
specific and identified legal impediments to funds
transfers between them, such as currency exchange
restrictions, identified defects in one of the
affiliate’s formal resolution plans, or other specific
legal restriction that significantly affects the transfer
of funds between the affiliates. See Commodity
Futures Trading Commission Comparability
Determination for the European Union, 82 FR
48394, 48399–48400 (October 18, 2017) (comparing
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
certain anticipated systemic protections
that would have accrued from
comprehensive inter-affiliate initial
margin practices world-wide will not be
realized.
Commenters opposing the agencies’
proposal also expressed the view that
the agencies were eliminating an
estimated $40 billion of initial margin
collateral that will serve a ‘‘loss
absorbing capacity’’ to protect against
potential affiliate default on their swaps
exposures. Initial margin, however, is
not loss-absorbing in the same sense as
equity capital; initial margin collateral
is funded with borrowings from the
banking organization’s creditors.27 The
practice in banking organizations of
providing collateral to their bank
CFTC non-cleared swap margin rules to comparable
EU rules, discussing EU reliance on appropriate
centralized risk evaluation, measurement, and
control procedures between cross-border affiliates,
and margin rule comparability determinations
outside the EU); see also Commission Implementing
Decision (EU) 2017/1857 (October 13, 2017) (EU
comparability determination for US transactions
subject to the CFTC non-cleared margin rules),
available at https://eur-lex.europa.eu/legal-content/
EN/TXT/PDF/?uri=CELEX:32017D1857&from=ES;
European Supervisory Authorities, EMIR RTS on
various amendments to the bilateral margin
requirements in view of the international
framework (December 5, 2019) (notice of proposed
amendments to EMIR non-cleared derivatives
margin rule to grant an additional extension of the
exemption from comparability determination
requirements), available at https://eba.europa.eu/
sites/default/documents/files/document_library//
ESAs%202019%2020%20%20Final%20Report%20%20Bilateral%20margin%20amendments.pdf. In
Japan, prudential regulators address inter-affiliate
non-cleared derivatives with existing capital
standards and risk-management principles in the
first instance, with margin as a voluntary
alternative. See Commodity Futures Trading
Commission Amendment to Comparability
Determination for the Japan, 84 FR 12074, 12079
(April 1, 2019). All other major jurisdictions also
exempt inter-affiliate non-cleared derivatives from
margin requirements, including Canada (https://
www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/
Pages/e22.aspx, both initial and variation margin);
Australia (https://www.apra.gov.au/sites/default/
files/prudential_standard_cps_226_margining_and_
risk_mitigation_for_non-centrally_cleared_
derivatives.pdf, initial margin); Hong Kong (https://
www.hkma.gov.hk/media/eng/doc/key-functions/
banking-stability/supervisory-policy-manual/CR-G14.pdf, both initial and variation margin); and
Singapore (https://www.mas.gov.sg/-/media/MAS/
Regulations-and-Financial-Stability/RegulationsGuidance-and-Licensing/Securities-Futures-andFund-Management/Regulations-Guidance-andLicensing/Guidelines/Guidelines-on-MarginRequirements-for-NonCentrally-Cleared-OTCDerivatives-Contracts-revised-on-5-October2018.pdf, both initial and variation margin).
27 Two commenters suggested the affiliate’s use of
leverage to acquire initial margin collateral was a
choice, and the affiliate could instead raise
additional equity or retain earnings to fund it. This
is not consistent with the agencies’ supervisory and
policy-making experience for internationally-active
banks, where public policy and competitiveness
concerns serve to establish and maintain capital
requirements that must address not only adequacy,
but regime equivalency.
PO 00000
Frm 00010
Fmt 4701
Sfmt 4700
affiliates as security for the banking
organization’s financial obligations is a
routine and expected aspect of the
business. But it is accompanied by
market expectations on behalf of each
banking organization’s creditors if the
aggregate extent to which it is employed
in the banking organization materially
exceeds established expectations.
During periods of market distress, those
creditors’ claims are potentially
subordinated to the bank’s claim on the
banking organization’s assets, placing
additional stress on the banking
organization’s access to funding if the
subordination effects are materially
beyond the norm.
C. Description of the Final Rule
After considering commenters’ range
of views about the proposed rule, the
agencies have determined to finalize it
consistent with the proposal, with two
revisions.
First, the agencies are including a
limit on the aggregate amount that a
covered swap entity may recognize
pursuant to the inter-affiliate initial
margin exemption provided under the
final rule. This limit, as further
described below, is set at 15 percent of
the covered swap entity’s tier 1 capital.
The agencies are incorporating the 15%
Tier 1 Threshold into § __.11 as an
augmentation to reflect safety and
soundness and financial system risk
concerns of the Board, the FDIC, and the
OCC surrounding the status of covered
swap entities that are U.S. insured
depository institutions.28 The agencies,
in their supervisory experience, have
observed that covered swap entities
have collected inter-affiliate initial
margin under the current rule at levels
that do not exceed this limit.
Nevertheless, the agencies’
determinations underlying the decision
to issue this final rule are informed
significantly by the agencies’
supervisory experience overseeing interaffiliate swap activities at covered swap
entities during the first four years the
Swap Margin Rule has been in effect.
Accordingly, the agencies believe it is
appropriate to apply the 15% Tier 1
Threshold as an augmentation, as the
agencies continue to supervise covered
swap entities further into the maturation
of the international derivatives market
reforms that have been under
development since 2010. This
augmentation will address additional
supervisory concerns that may arise at
a covered swap entity whose tier 1
capital base is contracting in an
unusually rapid pattern, a situation that
evidences the institution is experiencing
28 7
E:\FR\FM\01JYR3.SGM
U.S.C. 6s(e)(3); 15 U.S.C. 78o–10(e)(3).
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
heightened levels of stress, or whose
inter-affiliate derivative exposures
increase in an unusually rapid pattern.
Thus, the agencies have set it at a level
that exceeds the typical initial margin
collection amounts at the affected
covered swap entities, to accommodate
expected levels and taking into
consideration a range of those levels
that varies somewhat across those
covered swap entities.
This provision requires a covered
swap entity to calculate the initial
margin collection amount 29 each
business day for each counterparty that
is a swap entity or a financial end-user
with a material swaps exposure that is
an affiliate, and aggregate these amounts
to determine whether the aggregate
amount exceeds the 15% Tier 1
Threshold.30 When a covered swap
entity calculates the 15 percent
threshold, it must include all noncleared swaps between the covered
swap entity and its affiliates (which
includes subsidiaries of the covered
swap entity) plus all non-cleared swaps
between an covered swap entity
subsidiary and other affiliates (but not
double counting non-cleared swaps
with the parent covered swap entity). So
long as the aggregate remains below the
15% Tier 1 Threshold, the covered swap
entity is exempt from the requirement to
collect initial margin from its affiliates.
If, however, the aggregate exceeds the
15% Tier 1 Threshold on any business
day, the final rule requires the covered
swap entity to collect initial margin on
any additional non-cleared swap
executed with an affiliated swap entity
or financial end user.31 Once the 15
percent threshold is exceeded, the
covered swap entity is required to
collect initial margin on all new
transactions with its affiliates (which
includes the covered swap entity
29 Section __.2 of the current rule defines the
‘‘initial margin collection amount’’ as the amount
of initial margin the covered swap entity calculates
for a counterparty using the covered swap entity’s
approved initial margin model under § __.8 (or if
the covered swap entity does not have an initial
margin model, the standardized approach under
Appendix A).
30 The final rule specifies that tier 1 capital for
this purpose is comprised of common equity tier 1
capital and additional tier 1 capital, as defined in
the agencies’ respective regulations at 12 CFR
3.20(b)–(c) (OCC); 12 CFR 217.20(b)–(c) (Board); 12
CFR 324.20(b)–(c) (FDIC); 12 CFR 628.20(b)–(c) for
Farm Credit System banks and associations and 12
CFR 652.61(b) for the Federal Agricultural Mortgage
Corporation (FCA); and 12 CFR 1240(b)–(c) (FHFA).
Covered swap entities are required to use the tier
1 capital amounts reported in their most recent Call
Report.
31 The final rule does not require the covered
swap entity to begin collecting initial margin on its
portfolio of interaffiliate swaps that were executed
before the business day on which the 15% Tier 1
Threshold is exceeded.
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
subsidiaries). Also, if a covered swap
entity subsidiary enters into a noncleared swap with an affiliate other than
the covered swap entity,32 the covered
swap entity must collect initial margin
from the affiliate, and the subsidiary
does not need to also collect initial
margin for the affiliate for that noncleared swap. This provision is
designed to provide protection for the
covered swap entity. Initial margin
collection takes place pursuant to the
generally-applicable initial margin
requirement specified in § __.3(a) of the
current rule, commencing the day after
execution of the non-cleared swap and
with updates each business day as
specified in § __.3(c).33 The covered
swap entity is obligated to continue
initial margin collection on these new
swaps until they terminate under their
own terms. If, however, the covered
swap entity’s aggregate initial margin
collection amount calculation falls
below the 15% Tier 1 Threshold, the
covered swap entity is no longer
obligated to maintain initial margin on
these non-cleared swaps. Consistent
with § __.11(d) of the current rule, the
covered swap entity is permitted to
maintain custody of non-cash initial
margin collateral collected pursuant to
these requirements with the covered
swap entity itself or with an affiliate,
but is otherwise subject to the
segregation requirements of § __.7 of the
current rule.34
As part of this addition, the agencies
are making associated changes to § __.9
of the Swap Margin Rule. Section __.9
addresses cross-border application of
the Swap Margin Rule to certain foreign
32 The rule provides that if any subsidiary of the
covered swap entity executes a non-cleared swap
with any other affiliated swap entity or financial
end user, the covered swap entity must treat that
swap as its own for purposes of complying with
these requirements. Additionally, the agencies have
added an expanded definition of a ‘‘subsidiary’’ to
§ __.11(d) for these purposes, consistent with the
structure of the expanded ‘‘affiliate’’ definition. The
agencies have also incorporated language in § __
.11(a)(5)(ii) for multi-tier CSE structures that permit
the lower tier CSEs to count their inter-affiliate noncleared swaps as part of the top-tier IDI’s 15% Tier
1 Threshold if the top-tier IDI collects initial margin
for additional inter-affiliate swaps entered into by
the lower tier CSEs after the limit is reached. This
is intended to greatly simply the limit calculations
for multi-tiered CSEs, while still ensuring the
requirements of § __.11(a) are fully satisfied at the
IDI level.
33 Covered swap entities may avail themselves of
the option, pursuant to § __.5(a)(3)(ii) of the current
rule, to place these swaps in a separate netting set
for purposes of calculating the initial margin
collection amount on a portfolio basis under an
eligible master netting agreement.
34 The agencies have also made corresponding
technical revisions to the language of § __.11 to
provide an exemption from the requirements to post
initial margin under § __.3(b), consistent with the
current rule. This exemption is not subject to the
15% Tier 1 Threshold.
PO 00000
Frm 00011
Fmt 4701
Sfmt 4700
39763
financial firms that are organized under
non-U.S. law and operate abroad, and
that fall within the scope of the Rule
because they are also registered with the
CFTC or SEC as swap dealers or
security-based swap dealers. These
firms include foreign-chartered banks,
and foreign-chartered subsidiaries of
Edge corporations and agreement
corporations.35 Under the current rule,
these foreign firms are currently not
subject to comprehensive initial margin
collection requirements for affiliate
swap transactions under the laws of
their home counties.36 However, if they
engage in a swap transaction with a U.S.
affiliate, § __.9 currently requires them
to collect initial margin from the U.S.
affiliate.
The amendment to § __.11 that the
agencies issue today would apply to
these foreign firms, absent a change to
§ __.9. As discussed above, the 15
percent threshold in § __.11 is an
augmentation reflecting safety and
soundness and financial system risk
concerns of covered swap entities that
are U.S. insured depository institutions.
Imposing the 15 percent threshold
requirement on these foreign firms is
not relevant to these concerns and could
even have the incongruous result of
requiring a U.S. covered swap entity to
post initial margin collateral to an
affiliated foreign firm. Accordingly, the
agencies are adding a new subsection § _
_.9(h), which provides that these foreign
firms are exempt from the requirement
to collect initial margin from their
affiliates under § __.3(a), and the foreign
firms are not subject to the 15 percent
threshold under § __.11(a) unless they
are subsidiaries of a covered swap entity
subject to the requirements of § __.11. In
that case, the firm is treated the same as
any other subsidiary, as described
above, and the parent covered swap
entity is required to treat inter-affiliate
exposures between the subsidiary and
an affiliate as if it is its own.37
Second, the agencies are also
including an additional revision that is
35 Specifically, see §§ __.9(a) and __.9(d)(3)(i)–(ii).
These entities are often governed by non-U.S.
regulatory capital requirements and they do not file
Call Reports; U.S. branches and agencies of foreign
banks are not subject to stand-alone capital
requirements.
36 See footnote 27, supra.
37 For applicable transactions with U.S. affiliates,
these foreign firms will be covered by § __.11(b),
exempting them from posting initial margin to
affiliates pursuant to § __.3(b). These foreign firms
will be subject to § __.4, requiring them to exchange
variation margin, which is standard practice for
these firms, and § __.11(c), requiring swap dealers
to collect initial margin at such times and in such
forms and such amounts (if any) that the covered
swap entity determines appropriately address the
credit risk posed by the counterparty and the risks
of the swap, consistent with § __.3(d).
E:\FR\FM\01JYR3.SGM
01JYR3
39764
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
consistent with the Rule’s current
treatment of counterparties that are not
subject to the Rule’s quantitative
requirement to exchange and segregate
initial margin on a daily basis.
Section __.3 of the Rule contains the
core initial margin requirement,
directing covered swap entities to
collect and post initial margin as
calculated under § __.8. Accordingly, in
drafting the proposed rule text for the
initial margin exemption in proposed
§ __.11(a), the agencies exempted swaps
between affiliates from § __.3 in its
entirety. In the final rule, the agencies
have revised the text of the exemption
in § __.11, in order to preserve the
applicability of § __.3(d).
Section __.3(d) addresses
counterparties who are not financial end
users with a material swaps exposure or
swap entities. These counterparties are
not subject to daily initial margin
exchange pursuant to § __.3(a)–(c). For
these other counterparties, § __.3(d)
requires covered swap entities to collect
initial margin at such times and in such
forms and such amounts (if any) that the
covered swap entity determines
appropriately address the credit risk
posed by the counterparty and the risks
of the swap. When the agencies adopted
the Rule in 2015, this provision was
included to reflect prudent risk
management practices in the industry
before the Rule’s issuance, whereby an
institution would include initial margin
on a case-by-case basis for any type of
swap counterparty, as part of their
internal risk management practices, if
the institution judged it to be
appropriate.38
The agencies, in assessing the risk of
PFE to a covered swap entity in
transacting swaps with an affiliate, have
determined that an across-the-board
requirement in the Swap Margin Rule to
collect initial margin from affiliates is
not the best approach. That being said,
the agencies do not assess inter-affiliate
swaps to be risk-free, and there can still
be circumstances in which the agencies
would expect a covered swap entity to
incorporate initial margin as well as
variation margin into its risk
management for exposures to a
particular affiliate or particular swaps.
Accordingly, the agencies have revised
the text of § __.11 to treat inter-affiliate
swaps the same way as swaps with
other counterparties pursuant to
§ __.3(d).
Commenters that addressed the
agencies’ proposed definition of an
‘‘affiliate’’ for purposes of § __.11
supported it. The agencies are adopting
it without change.
38 80
FR 74840, 74844 (November 30, 2015).
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
D. Federal Reserve Board Statement on
Sections 23A and 23B of the Federal
Reserve Act
Although this final rule will exempt
non-cleared swaps between a bank and
its affiliates from the initial margin
requirements of the swap margin rule
under the conditions described above,
swaps between a bank and its affiliates
are of course also subject to sections
23A and 23B of the Federal Reserve Act
and the Board’s Regulation W.
The Board’s position is that, under
section 23A, bank-affiliate derivatives
generally can be valued at the bank’s
current exposure to the affiliate.
Accordingly, the Board believes that a
bank must collect 23A-compliant
variation margin from its affiliates to
cover its current exposure on bankaffiliate derivatives, but generally is not
required to collect initial margin to
cover the bank’s potential future
exposure on the transactions.
Under section 23B, a bank’s swaps
with its affiliates must be on terms and
conditions that are substantially the
same, or at least as favorable to the
bank, as those prevailing at the time for
comparable transactions with third
parties. In part because of the swap
margin rule and in part due to natural
evolution in the financial markets,
comparable swap transactions between
a bank and a third party today involve
the bank collecting initial margin from,
and posting initial margin to, the
counterparty.
In many cases the Board finds it
reasonable to conclude that a bankaffiliate swap with no initial margin
requirement is at least as favorable to
the bank as a comparable banknonaffiliate swap with two-way initial
margin requirements. This occurs where
the two-way initial margining described
above requires each of the two
counterparties to give the other
counterparty a contractual term of
roughly equivalent value. In the Board’s
view, situations where the bank and
affiliate each agree not to require an
equivalent exchange of initial margin
from the other will generally create a set
of contractual terms that is roughly
equally favorable to the bank as a twoway initial margin regime.
Some cases of specific bank-affiliate
swap arrangements without initial
margin requirements could raise issues
under section 23B, however, as can
every affiliate transaction depending on
the facts and circumstances of the
arrangement. In the Board’s view,
relevant facts for the section 23B
analysis include the relative
creditworthiness of the bank vs. the
affiliate, whether the bank-affiliate swap
PO 00000
Frm 00012
Fmt 4701
Sfmt 4700
portfolio is more likely to create
potential future exposure of the bank to
the affiliate or vice versa, and whether
or not the affiliate requires initial
margin from the bank under the swap
arrangement.
E. Other Comments
Four commenters expressed the view
that the agencies are without the
statutory authority to adopt the
proposed rule. One among these
commenters provided an analysis of the
language Congress used in requiring the
prudential regulators to issue the margin
requirements. In this commenter’s view,
the meaning of the words Congress
chose are so prescriptive that they
compel the agencies to impose initial
margin and variation margin
requirements on all swap transactions
within the scope of the legislation.
The agencies note that, in requiring
the prudential regulators to issue margin
and capital requirements, the statutory
language also mandates that the
requirements shall help ensure the
safety and soundness of covered swap
entities and be appropriate for the risk
associated with the swaps held by the
covered swap entity.39 The agencies
have previously considered the same
line of analysis pursued by the
commenters, in connection with
adopting the Swap Margin Rule in
2015.40 The agencies have concluded
that the statutes direct the agencies to
employ a risk-based approach to
imposing margin requirements, and the
agencies have done so by imposing rules
that vary depending on the type of
counterparty in light of the risks
presented.41
Commenters that opposed the
agencies’ proposal also expressed the
view that the agencies’ discussion and
analysis in the SUPPLEMENTARY
INFORMATION section of the proposal was
deficient. The commenters were of the
view that the agencies discussed the
same factors in 2015 and 2019, but in
the first instance the agencies
determined initial margin was required
to address the risk of inter-affiliate swap
exposures, whereas in the second
instance the agencies drew the opposite
conclusion.42 In this regard, the
39 7
U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o–10(e)(3)(A).
FR at 74866; see also 79 FR 57348, 57354–
55 (September 24, 2014).
41 The agencies also note that the Swap Margin
Rule imposes margin requirements on a covered
swap entity’s non-cleared swaps with affiliates,
specifically the variation margin collection
requirement of § __4(a)–(b), and the above-described
requirement of § __.3(d).
42 Some commenters also expressed the view that
the agencies are obligated to perform an analysis of
the PFEs between covered swap entities and their
affiliates, using the Swap Margin Rule’s framework
40 80
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
agencies note that the analysis in 2015
did not propound the imposition of an
across-the-board inter-affiliate initial
margin requirement, and the agencies
carefully evaluated the extent to which
numerous aspects of the Rule’s initial
margin requirements should be reduced
commensurate with the risks the
agencies anticipated.43 In issuing these
revisions, the agencies have performed
the same probing analysis of the
relevant factors, based on industry
practices as they have settled after the
Rule’s compliance period.
IV. Additional Compliance Date for
Initial Margin Requirements
A. Proposal
The agencies proposed to give
covered swap entities an additional year
to implement initial margin
requirements for certain smaller
counterparties. The implementation of
both initial and variation margin
requirements started on September 1,
2016. With respect to initial margin
requirements, the requirements in the
Swap Margin Rule were implemented in
five phases from September 1, 2016,
through September 1, 2020, depending
on the size of the covered swap entity’s
portfolio of non-cleared swaps and the
counterparty’s portfolio of non-cleared
swaps. Variation margin requirements
for all covered swap entities and
counterparties were completely phased
in by March 1, 2017. This schedule was
consistent with BCBS/IOSCO
Framework when the Swap Margin Rule
was adopted in 2015.
The phase-in schedule for initial
margin is based on the average daily
aggregate notional amount (AANA) of
non-cleared swaps for March, April, and
May, held in each party’s market-wide
portfolio, measured separately from the
standpoint of the covered swap entity
and the standpoint of the
counterparty.44 With the recent
occurrence of the fourth phase of initial
margin compliance obligations on
September 1, 2019—for covered swap
entities and counterparties with an
AANA of $750 billion to $1.5 trillion—
the group currently scheduled for the
fifth phase of compliance in the
upcoming year includes all remaining
for quantifying initial margin collection amounts, in
order to quantify how much PFEs would increase
as a result of the proposed change. As the agencies
discussed above, however, the Rule’s methodology
for evaluating the PFE of an unaffiliated
counterparty is not an appropriate measurement of
inter-affiliate risk. Among other things, it does not
take relevant additional risk management factors
into account, and it was originally formulated with
the expectation it would not be applied to interaffiliate swaps.
43 80 FR 74887–889.
44 See supra note 7.
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
entities within the scope of the initial
margin requirements, spanning AANAs
from $8 billion up to $750 billion.45
The industry raised significant
concerns about the operational and
other difficulties associated with
beginning to exchange initial margin
with the large number of relatively
small counterparties encompassed in
the Swap Margin Rule’s fifth phase.46
Following the revisions adopted in July
2019 to the BCBS/IOSCO Framework to
permit an additional phase for smaller
counterparties, the agencies proposed to
amend the Swap Margin Rule to add an
additional phase for smaller
counterparties.47 Specifically, the
agencies proposed to amend the
compliance schedule to add a sixth
phase of compliance for certain smaller
entities that are currently subject to the
‘‘phase five’’ compliance deadline. The
proposed amendments would have
required compliance by September 1,
2020, for counterparties with an AANA
ranging from $50 billion up to $750
billion, while the compliance date for
all other counterparties (with an AANA
ranging from a ‘‘material swaps
exposure’’ of $8 billion up to $50
billion) would have been extended to
September 1, 2021.
B. Final Rule
Commenters supported the proposed
amendments to the compliance
schedule, specifically, the additional
phase six for all other counterparties
(i.e., with an AANA of $8 billion up to
$50 billion) with a compliance date of
September 1, 2021. Commenters noted
that the proposal did not clarify the
convention that should be used for
calculating the AANA for purposes of
the proposed phase six and therefore, by
default, the calculation would be based
on the methodology for calculating
‘‘material swaps exposure,’’ which is
determined based on an entity’s and its
affiliates AANA for June, July, and
August of the previous calendar year (in
this case, 2020). Several commenters
recommended that the agencies clarify
that, for purposes of the new phase six,
45 The Swap Margin Rule does not require initial
margin to be exchanged with any counterparty
whose AANA is less than $8 billion as of the
previous June, July, and August. See § __.3 and the
definition of ‘‘material swaps exposure’’ in § __.1.
46 The industry’s implementation work to execute
new trading documentation to meet variation
margin compliance obligations by 2017 largely
excluded any required documentation for initial
margin, due to the greater operational complexity
associated with ‘‘T+1’’ portfolio reconciliation of
internally-modeled initial margin amounts and
third-party segregation of initial margin collateral.
47 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (July 2019),
available at https://www.bis.org/bcbs/publ/
d475.pdf.
PO 00000
Frm 00013
Fmt 4701
Sfmt 4700
39765
the calculation is based on the AANA
for March, April, and May of the same
year, which is consistent with the
BCBS/IOSCO Framework. One
commenter recommended that the
calculation of ‘‘material swaps
exposure’’ be based on the AANA for
March, April, and May, beginning in
2021 and thereafter, and asserted this
approach would maintain consistency
with the BCBS/IOSCO Framework and
other foreign jurisdictions.
The final rule adopts the additional
phase six as proposed. The agencies
acknowledge that a change to the AANA
calculation for phase six would result in
greater consistency with the BCBS/
IOSCO Framework, but are not adopting
the recommended change to the month
calculation convention because basing
AANA on June, July, and August of the
previous calendar year will provide end
users subject to phase six with more
time to prepare for compliance with
initial margin requirements following
meeting the material swaps exposure
threshold. Moreover, the definition of
material swaps exposure is not being
amended as part of this final rule. The
material swaps exposure definition was
not raised as an issue in the proposal,
as an amendment to that definition
would affect more than just the phasein periods in § __.1(e). The agencies
confirm that the material swaps
exposure is to be calculated based on
the previous year.48 For example, for the
period January 1, 2022 through
December 31, 2022, an entity would
determine whether it had a material
swaps exposure with reference to June,
July, and August of 2021.
V. Documentation Requirements
A. Proposal
The agencies proposed to amend the
documentation requirements under
§ __.10 of the Swap Margin Rule.
Pursuant to § __.10 of the Rule, a
covered swap entity must execute
trading documentation with each
counterparty that falls within the scope
of the Rule’s definition of a ‘‘swap
entity’’ or a ‘‘financial end user’’
regarding credit support arrangements
unless the swap entity or financial end
user is explicitly exempt from the Rule
pursuant to § __.1(d).49 The
documentation must provide the
covered swap entity the contractual
rights and obligations to collect and post
initial and variation margin in such
amounts, in such form, and under such
circumstances as are required by the
Rule. The documentation must also
48 See
49 80
E:\FR\FM\01JYR3.SGM
80 FR 74857 (November 30, 2015).
FR 74886–74887 (November 30, 2015).
01JYR3
39766
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
specify the methods, procedures, rules,
and inputs for determining the value of
each non-cleared swap for purposes of
calculating variation margin and the
procedures by which any disputes
concerning the valuation of non-cleared
swaps or the valuation of assets
collected or posted as initial margin or
variation margin may be resolved.
Finally, the documentation must also
describe the methods, procedures, rules,
and inputs used to calculate initial
margin for non-cleared swaps entered
into between the covered swap entity
and the counterparty.50 The proposed
rule clarified that under § __.10 of the
Rule, a covered swap entity is not
required to execute initial margin
trading documentation with a
counterparty prior to the time that it is
required to collect or post initial margin
pursuant to § __.3.51
B. Final Rule
Commenters supported the proposed
amendment to § __.10 of the Rule. The
agencies are adopting the amendment to
§ __.10 of the Rule as proposed.
In addition, the preamble to the
proposal discussed the operation of the
custody agreement requirements in
§ __.7 of the Swap Margin Rule. Under
§ __.7, custody agreements are required
to be in place only after initial margin
is required to be collected or posted
pursuant to § __.3, or when initial
margin is posted by a covered swap
entity beyond an amount required by
the Rule. The agencies explained that
they expect that covered swap entities
will closely monitor their exposures and
take appropriate steps to ensure that
trading documentation is in place at
such time as initial margin is required
to be exchanged pursuant to § __.3. The
agencies noted that this view is
consistent with statements of the BCBS
and IOSCO with respect to
internationally agreed standards for
margin requirements for non-centrally
cleared derivatives.52 Commenters
50 Id.
51 Under § __.3, a covered swap entity must
collect or post initial margin when it calculates an
initial margin amount that, after subtracting the
initial margin threshold amount (not including any
portion of the initial margin threshold amount
already applied by the covered swap entity or its
affiliates to other non-cleared swaps or non-cleared
security-based swaps with the counterparty or its
affiliates), exceeds zero.
52 BCBS/IOSCO statement on the final
implementation phases of the Margin requirements
for non-centrally cleared derivatives, March 5, 2019,
available at https://www.iosco.org/library/pubdocs/
pdf/IOSCOPD624.pdf, stating that ‘‘the framework
does not specify documentation, custodial or
operational requirements if the bilateral initial
margin amount does not exceed the framework’s
Ö50 million initial margin threshold. It is expected,
however, that covered entities will act diligently
VerDate Sep<11>2014
01:25 Jul 01, 2020
Jkt 250001
supported this clarification, and the
agencies reaffirm their statement
regarding the execution of custody
agreements required pursuant to § __.7
of the Rule.
VI. Portfolio Compression Exercises
and Other Amendments
A. Summary of Proposed Rule
The Swap Margin Rule applies to
non-cleared swaps entered into on or
after the applicable compliance date.
The agencies are concerned about
amendments to a swap that was entered
into before the applicable compliance
date if the amendments would have the
effect of allowing covered swap entities
and their counterparties to evade or
otherwise artificially delay
implementation of margin requirements.
In particular, the agencies are concerned
that market participants might amend
legacy swaps, rather than entering into
new swaps and exchanging margin
pursuant to the Rule once the legacy
swaps expire according to their original
terms. The proposed rule permitted
certain amendments, particularly nonmaterial amendments to non-economic
terms, as well as amendments that are
made to reduce operational or
counterparty risk, such as notional
reductions and portfolio compressions,
to be executed while still allowing those
amended legacy swaps to remain
exempt from the Swap Margin Rule.
The proposed rule clarified the
agencies’ implementation of the legacy
swaps provisions of the Swap Margin
Rule since its adoption in 2015. The
proposed rule was intended to permit
amendments to legacy swaps arising
from certain routine industry practices
over the life-cycle of a non-cleared swap
that are carried out for logistical
reasons, risk-management purposes, or
IBOR replacement. The proposed rule
covered amendments that do not raise
concerns that the covered swap entity is
seeking to evade or otherwise delay the
application of margin requirements for
non-cleared swaps.
B. Technical Changes
1. Proposal
The proposed rule recognized the
legacy status of a non-cleared swap that
has been amended to reflect technical
changes, such as addresses, the
identities of parties for delivery of
formal notices, and other administrative
or operational provisions of the noncleared swap that do not alter the noncleared swap’s underlying asset or
when their exposures approach the threshold to
ensure that the relevant arrangements needed are in
place if the threshold is exceeded.’’
PO 00000
Frm 00014
Fmt 4701
Sfmt 4700
indicator, such as a security, currency,
interest rate, commodity, or price index,
the remaining maturity, or the total
effective notional amount. For example,
an interest rate swap documentation
amendment that changes the
counterparty’s contact person or a
weather swap documentation
amendment that changes the margin
payment instructions would not impact
those swaps’ legacy status. However, an
interest rate swap amendment to the
fixed leg interest rate or a weather swap
amendment to the measurement of the
precipitation level would impact those
swaps’ legacy status as it is intended to
change the economic valuation of the
swap. The technical changes permitted
by the proposed rule are necessary to
reflect changes in a counterparty’s
circumstances, but are not associated
with a desire by either party to increase
or decrease its exposure to market risk
factors.
2. Final Rule
Commenters were supportive of the
proposal. Commenters agreed with the
agencies that amendments made for
logistical or risk management purposes
arising from routine industry practices
over the life-cycle of the swap, should
not cause legacy swaps to lose their
legacy status. One commenter requested
that the agencies permit any technical
amendment that does not affect the
economic obligations of the parties or
the valuation of the legacy swap. Two
commenters requested clarification that
the language in the proposed rule aligns
with the CFTC’s Division of Swap
Dealer and Intermediary Oversight’s
June 6, 2019 No Action Position
wherein the CFTC took a no action
position on legacy swaps that are
amended, ‘‘provided that no term is
amended that would affect the
economic obligations of the parties or
the valuation’’ of the swap or that are
partially terminated or partially novated
subject to certain conditions.53 The
agencies are clarifying that the language
in the proposed rule is intended to align
with the CFTC’s No Action Position.
With respect to the language in
§ __.1(h)(5)(i), a commenter requested a
technical change from usage of the word
‘‘indicator,’’ because it is not a common
term in the industry, to the word
‘‘reference.’’ The agencies are amending
the rule to reflect this technical change.
The agencies did not receive any
other comments on this part of the
proposed rule and are adopting it,
subject to the technical change
discussed, as proposed.
53 CFTC
E:\FR\FM\01JYR3.SGM
Letter No. 19–13 (June 06, 2019) at 8.
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
C. Reduction in Notional Amount
1. Proposal
The proposed rule recognized the
legacy status of a non-cleared swap that
has been amended solely to reduce the
notional amount of the non-cleared
swap, without altering other terms of
the original non-cleared swap. For these
purposes, a reduction in notional
amount may be achieved through a
partial termination of the original noncleared swap, with the remaining nonterminated non-cleared swap being able
to retain its legacy status. A reduction
in notional amount could also be
achieved by novating a portion of the
original non-cleared swap’s notional
amount to a third party. The original
non-cleared swap, with a lower notional
amount, would retain legacy status, but
the novated portion would not retain
legacy status.
2. Final Rule
The agencies did not receive
comments on this amendment and are
adopting it as proposed.
C. Portfolio Compression Exercises
1. Proposal
The proposed rule recognized the
legacy status of non-cleared swaps that
have been modified as part of certain
portfolio compression exercises used as
a risk management tool or for IBOR
replacement. In compression, offsetting
trades between two or more parties are
amended or torn up and replaced,
which reduces the size of gross
derivatives exposures and generally
reduces the number or frequency of
payments between parties, thus
maintaining or reducing the overall risk
profile of the portfolio.
In a simple bilateral form of
compression between two
counterparties, the dealer agrees with
another dealer to compress trades so
that offsetting positions are cancelled
and only the net amount remains,
without any change to the overall
market exposures. The resulting net
position is documented by amending
one of the original swaps. This
‘‘amended swap’’ method is the
predominant method used in
compressions of non-cleared interest
rate swaps. Compression can also be
done on a multilateral basis among more
than two counterparties, and is often
even more efficient, as trades across
multiple dealers involved in a
compression exercise can be offset,
reducing the risk in each relationship
across the various counterparties
involved in the compression. The
resulting net position is documented by
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
creating a replacement swap reflecting
the net position. This ‘‘replacement
swap’’ method is predominantly used in
compression exercises for non-cleared
credit default swaps, but it can also be
used for interest rate swap compression.
Compression often results in the
cancellation of offsetting positions, but
it could also result in new trades being
booked into an existing non-cleared
portfolio to reflect the netted-down risk
of the original portfolio.
2. Final Rule
Commenters were generally
supportive of this amendment to
maintain legacy status of non-cleared
swap after portfolio compression
exercises. Commenters noted that
portfolio compression generally reduces
gross derivative exposures and reduces
the frequency of payment, reducing the
portfolio’s risk profile.
The agencies are modifying the
language in § __.1(h)(4) to make clear
that when parties engage in portfolio
compression, the resulting replacement
swap from the compression exercise is
accorded legacy treatment so long as it
meets the limitations in § __.1(h)(4). As
described above, in order to separate
compression for the purposes of
replacing an interest rate listed in
§ __.1(h)(3)(i) and compression for other
risk reducing or risk neutral purposes,
the rule now has a section for the former
(under § __.1(h)(3)) and the latter (under
§ __.1(h)(4)). The rule also makes clear
that the resulting non-cleared swap or
non-cleared security-based swap from
the portfolio compression exercises may
not (1) exceed the sum of the total
effective notional amounts of all of the
swaps that were submitted to the
compression exercise that had the same
or longer remaining maturity as the
resulting swap; or (2) exceed the longest
remaining maturity of all the swaps
submitted to the compression exercise.
This is consistent with the proposal.
As in other areas of the final rule,
supervisors may review these changes to
confirm that covered swap entities are
not purposefully avoiding the
requirements of the rule.
VII. Technical Changes
The proposed rule would have
deleted § __.1(e)(7), which includes an
amendment relating to the QFC Rules.
The text of § __.1(e)(7), with slight
modifications, would have been moved
to § __.1(h)(1), so that it would reside in
the section of the Swap Margin Rule
dedicated to legacy swap amendments.
The methods of amendment listed in
§ __.1(h) would have applied not only to
IBOR replacements, but also to any
other contractual modifications
PO 00000
Frm 00015
Fmt 4701
Sfmt 4700
39767
permitted under § __.1(h), including
amendments relating to the QFC Rules.
The agencies did not receive any
comments on this part of the proposed
rule and are adopting it as proposed.
VIII. Comments Regarding Broader
Changes to the Swap Margin Rule
Several commenters that supported
the proposed rule also requested
broader changes to the rule. Some
commenters requested a carve-out for
seeded funds and an alternative
approach to US GAAP accounting
analysis for purposes of determining the
application of the rule. These
commenters asserted that the limited
and passive nature of the relationship
between seeded funds and their
sponsors does not warrant the
requirement to aggregate a seeded fund’s
swap exposures with those of its parent
or other commonly consolidated entities
for the purpose of calculation material
swap exposure. One commenter
requested the agencies make an
announcement to deprioritize
compliance with any enforcement of the
swap margin rule with respect to seeded
funds. Another commenter stated that
non-public and mutual insurance
companies that are not required to
perform GAAP accounting analysis do
not routinely do so because the cost to
perform such analysis for limited
purposes is significant. They suggested
engagement with the regulators to
determine if an alternative approach
may be available.
Other commenters representing
nonprofit organizations, asset managers,
mutual funds, other institutional asset
managers, and custodian banks
recommended the types of eligible
collateral be expanded to include
certain types of money market mutual
funds and exchange traded funds.
Commenters also requested exclusion of
seeded funds from the definition of a
consolidated group through limited rule
making. Other commenters raised
concerns with the current $50 million
initial margin threshold and requested
that an additional 6-month grace period
be provided after a financial end user
crosses the initial margin threshold. In
addition, commenters requested a less
frequent calculation of the initial margin
threshold amount because of the burden
associated with the testing and
monitoring in-scope counterparties.
Commenters also requested that the
agencies work with regulated entities to
develop an approach for the allocation
of the initial margin amounts and the
minimum transfer amount across
multiple asset managers for a given
client.
E:\FR\FM\01JYR3.SGM
01JYR3
39768
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
Commenters also requested that the
agencies exclude physically settled
foreign exchange swaps from the
material swaps exposure calculation
and consider making comparability and
substitute compliance determination for
foreign jurisdictions.
The agencies are not adopting these
broader proposed changes in this final
rule because they fall outside the scope
of the changes the agencies sought
comment on in the proposed rule. The
agencies will continue to evaluate the
requirements of this rule to ensure they
meet the agencies’ objectives.
IX. Brexit IFR
The agencies issued an interim final
rule, which became effective on March
19, 2019, to provide certainty for
covered swap entities as they prepare
for the event commonly described as
‘‘Brexit.’’ 54 In particular, the interim
final rule provided a covered swap
entity with the ability to continue to
service its cross-border clients in the
event that the U.K. withdraws from the
E.U. without a Withdrawal Agreement.
A Withdrawal Agreement between the
UK and EU was ratified in January
2020.55 The Withdrawal Agreement
addresses certain EU-related matters
that will immediately be affected by the
withdrawal itself and a transition
period. The transition period will run
until December 31, 2020 and could be
extended by one or two years.
The agencies received one comment
letter on the interim final rule. The
commenter requested that the agencies
amend the interim final rule to exclude
swaps with a flip clause. The comment
raised an issue that was not within the
scope of the interim final rule.
Accordingly, the agencies are not
making any revisions to the rule and are
retaining it as a final rule as initially
adopted.
X. Administrative Law Matters
Paperwork Reduction Act Analysis
Certain provisions of the final
rulemaking contain ‘‘collection of
information’’ requirements within the
meaning of the Paperwork Reduction
Act (PRA) of 1995 (44 U.S.C. 3501–
3521). In accordance with the
requirements of the PRA, the agencies
may not conduct or sponsor, and a
respondent is not required to respond
to, an information collection unless it
displays a currently valid Office of
54 84
FR 9940 (March 19, 2019).
55 See European Council Press Release ‘‘Brexit:
Council adopts decision to conclude the withdraw
agreement’’ (January 30, 2020), available at https://
www.consilium.europa.eu/en/press/press-releases/
2020/01/30/brexit-council-adopts-decision-toconclude-the-withdrawal-agreement/.
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
Management and Budget (OMB) control
number.
The agencies reviewed the final
rulemaking and determined that it
reduces certain recordkeeping
requirements that have been previously
cleared under various OMB control
numbers. In order to be consistent
across the agencies, the agencies are also
applying a conforming methodology for
calculating the burden estimates. The
agencies are proposing to extend for
three years, with revision, these
information collections. The OCC and
FDIC have submitted to OMB for review
under section 3507(d) of the PRA (44
U.S.C. 3507(d)) and section 1320.11 of
the OMB’s implementing regulations (5
CFR 1320). The Board has reviewed the
information collection under its
delegated authority. The OMB control
numbers are 1557–0251 (OCC), 3064–
0204 (FDIC), and 7100–0364 (Board).
The FCA has determined the final
rulemaking has no PRA implications
because Farm Credit System institutions
are Federally chartered
instrumentalities of the United States
and instrumentalities of the United
States are specifically excepted from the
definition of ‘‘collection of information’’
contained in 44 U.S.C. 3502(3). The
FHFA has determined that the final
rulemaking does not contain any
collection of information for which the
agency must obtain clearance under the
PRA.
Current Actions
The final rulemaking removes the
record keeping requirement in § __.11(b)
that a covered swap entity shall
calculate the amount of initial margin
that would be required to be posted to
an affiliate that is a financial end user
with material swaps exposure pursuant
to § __.3(b) and provide documentation
of such amount to each affiliate on a
daily basis.
Final Revision, With Extension, of the
Following Information Collections
Title of information collection:
Reporting and Recordkeeping
Requirements Associated with Swaps
Margin and Swaps Push-Out.
Frequency: Annual and event
generated.
Affected public: Businesses or other
for-profit.
Estimated average hours per response:
Reporting
Section __.1(d)—1 hour (on average of
1,000 times per year).
Sections __.8(c) and __.8(d)—240
hours.
Section __.8(f)(3)—50 hours.
PO 00000
Frm 00016
Fmt 4701
Sfmt 4700
Section __.9(e)—10 hours (on average
of 3 times per year).
Sections 237.22(a)(1) and 237.22(e)
(Board only)—7 hours.
Recordkeeping
Sections __.2 (definition of ‘‘eligible
master netting agreement,’’ item 4),
237.8(g), and 237.10—5 hours.
Section __.5(c)(2)(i)—4 hours.
Section __.7(c)—100 hours.
Sections __.8(e) and 237.8(f)—40
hours.
Section __.8(h)—20 hours.
Disclosure
Section __.1(h)—1 hour.
OCC
Respondents: Any national bank or a
subsidiary thereof, Federal savings
association or a subsidiary thereof, or
Federal branch or agency of a foreign
bank that is registered as a swap dealer,
major swap participant, security-based
swap dealer, or major security-based
swap participant.
Estimated number of respondents: 10.
Proposed revisions only estimated
annual burden: ¥2,500 hours.
Total estimated annual burden:
14,900 hours.
Board
Respondents: Any state member bank
(as defined in 12 CFR 208.2(g)), bank
holding company (as defined in 12
U.S.C. 1841), savings and loan holding
company (as defined in 12 U.S.C.
1467a), foreign banking organization (as
defined in 12 CFR 211.21(o)), foreign
bank that does not operate an insured
branch, state branch or state agency of
a foreign bank (as defined in 12 U.S.C.
3101(b)(11) and (12)), or Edge or
agreement corporation (as defined in 12
CFR 211.1(c)(2) and (3)) that is
registered as a swap dealer, major swap
participant, security-based swap dealer,
or major security-based swap
participant.
Estimated number of respondents: 41.
Proposed revisions only estimated
annual burden: ¥10,209 hours.
Total estimated annual burden:
61,104 hours.
FDIC
FDIC: Any FDIC-insured statechartered bank that is not a member of
the Federal Reserve System or FDICinsured state-chartered savings
association that is registered as a swap
dealer, major swap participant, securitybased swap dealer, or major securitybased swap participant.
Estimated number of respondents: 1.
Proposed revisions only estimated
annual burden: ¥249 hours.
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
Total estimated annual burden: 1,490
hours.
Regulatory Flexibility Act Analysis
OCC: In general, the Regulatory
Flexibility Act (RFA) (5 U.S.C. 601 et
seq.) requires that in connection with a
final rulemaking, an agency publish a
final regulatory flexibility analysis that
describes the impact of the rule on small
entities. Under section 605(b) of the
RFA, this analysis is not required if an
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small entities
and publishes its certification and a
brief explanatory statement in the
Federal Register along with its rule.
As part of our analysis, we consider
whether, pursuant to the RFA, the final
rule would have a significant economic
impact on a substantial number of small
entities. The OCC currently supervises
approximately 745 small entities.56
Among these 745 small entities, 42
could be affected by the final rule if one
or more of these small entities are a
party to a financial contract with a
covered swap entity. Because we believe
banks will incur de minimis costs, if
any, to comply with the final rule, we
conclude that the final rule would not
have a significant economic impact on
a substantial number of small entities.57
Board: The Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (RFA), generally
requires that an agency prepare and
make available for public comment a
final regulatory flexibility analysis in
connection with a final rulemaking or
certify that the final rule will not have
a significant economic impact on a
substantial number of small entities.58
As described above, the final rule
amends the Swap Margin Rule as
follows:
First, the final rule provides relief by
allowing legacy swaps to be amended to
56 We base our estimate of the number of small
entities on the Small Business Administration’s
(SBA’s) size thresholds for commercial banks and
savings institutions, and trust companies, which are
$600 million and $41.5 million, respectively.
Consistent with the General Principles of
Affiliation, 13 CFR 121.103(a), we count the assets
of affiliated financial institutions when determining
if we should classify an OCC-supervised institution
as a small entity. We use December 31, 2019, to
determine size because a ‘‘financial institution’s
assets are determined by averaging the assets
reported on its four quarterly financial statements
for the preceding year.’’ See footnote 8 of the SBA’s
Table of Size Standards.
57 As one way of determining whether any of the
small entities is a covered swap entity, the OCC
reviewed the CFTC’s listing of registered swap
dealers at https://www.cftc.gov/LawRegulation/
DoddFrankAct/registerswapdealer. The SEC has not
yet imposed a registration requirement on entities
that meet the definition of security-based swap
dealer or major security-based swap participant.
58 See 5 U.S.C. 603(a).
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
replace interbank offered rates (IBORs)
and other interest rates that are
reasonably expected to be discontinued
or are reasonably determined to have
lost their relevance as a reliable
benchmark due to a significant
impairment, without such swaps losing
their legacy status.
Second, the final rule adds an
additional initial margin compliance
period for swaps with certain smaller
counterparties, and clarifies the existing
trading documentation requirements in
§ __.10 of the Rule.
Third, the final rule permits
amendments driven by certain routine
life-cycle activities that covered swap
entities may conduct for legacy swaps,
such as reduction of notional amounts
and portfolio compression exercises,
without triggering margin requirements.
Fourth, the final rule would make
final a previously issued interim final
rule that preserve the status of legacy
swaps meeting certain criteria after the
United Kingdom withdraws from the
European Union without a negotiated
settlement agreement.
Lastly, the final rule amends the
treatment of affiliate transactions by
amending the regulatory requirement
that a covered swap entity collect initial
margin for non-cleared swaps from its
affiliates. The final rule retains the
requirement that affiliates exchange
variation margin. It also makes clear that
affiliates should continue to use sound
judgment to impose initial margin on
non-cleared swaps when appropriate.
This final rule applies to financial
institutions that are covered swap
entities that are subject to the
requirements of the Swap Margin Rule.
Under SBA regulations, the finance and
insurance sectors include commercial
banking, savings institutions, credit
unions, other depository credit
intermediation and credit card issuing
entities (financial institutions). With
respect to financial institutions that are
covered swap entities under the Swap
Margin Rule, a financial institution
generally is considered small if it has
assets of $600 million or less.59 Covered
swap entities would be considered
financial institutions for purposes of the
RFA in accordance with SBA
regulations. The Board does not expect
that any covered swap entity is likely to
be a small financial institution, because
a small financial institution is unlikely
to engage in the level of swap activity
59 See 13 CFR 121.201 (effective December 2,
2014, as amended by 84 FR 34261, effective August
19, 2019); see also 13 CFR 121.103(a)(6) (noting
factors that the SBA considers in determining
whether an entity qualifies as a small business,
including receipts, employees, and other measures
of its domestic and foreign affiliates).
PO 00000
Frm 00017
Fmt 4701
Sfmt 4700
39769
that would require it to register as a
swap dealer or a major swap participant
with the CFTC or a security-based swap
dealer or security-based major swap
participant with the U.S. Securities and
Exchange Commission (SEC).60 None of
the current Board-regulated covered
swap entities are small entities for
purposes of the RFA.
The Board does not believe that this
final rule will result in any new
reporting, recordkeeping or other
compliance requirements resulting in
increased burden to any small entities,
nor, therefore, that there are any
significant alternatives to the final rule
that would reduce the impact on small
entities. In light of the foregoing, the
Board certifies pursuant to section
605(b) of the RFA that the final rule will
not have a significant economic impact
on a substantial number of small
entities.
FDIC: The RFA generally requires
that, in connection with a final
rulemaking, an agency prepare and
make available for public comment a
final regulatory flexibility analysis
describing the impact of the final rule
on small entities. However, a regulatory
flexibility analysis is not required if the
agency certifies that the final rule will
not have a significant economic impact
on a substantial number of small
entities. The SBA has defined ‘‘small
entities’’ to include banking
organizations with total assets of less
than or equal to $600 million that are
independently owned and operated or
owned by a holding company with less
than or equal to $600 million in total
assets.61 Generally, the FDIC considers a
significant effect to be a quantified effect
in excess of 5 percent of total annual
salaries and benefits per institution, or
2.5 percent of total non-interest
expenses. The FDIC believes that effects
in excess of these thresholds typically
represent significant effects for FDIC60 The CFTC has published a list of provisionally
registered swap dealers as of February 27, 2020, that
does not include any small financial institutions.
See https://www.cftc.gov/LawRegulation/
DoddFrankAct/registerswapdealer. The SEC has not
yet imposed a registration requirement on entities
that meet the definition of security-based swap
dealer or major security-based swap participant.
61 The SBA defines a small banking organization
as having $600 million or less in assets, where an
organization’s ‘‘assets are determined by averaging
the assets reported on its four quarterly financial
statements for the preceding year.’’ See 13 CFR
121.201 (as amended by 84 FR 34261, effective
August 19, 2019). In its determination, the ‘‘SBA
counts the receipts, employees, or other measure of
size of the concern whose size is at issue and all
of its domestic and foreign affiliates.’’ See 13 CFR
121.103. Following these regulations, the FDIC uses
a covered entity’s affiliated and acquired assets,
averaged over the preceding four quarters, to
determine whether the covered entity is ‘‘small’’ for
the purposes of RFA.
E:\FR\FM\01JYR3.SGM
01JYR3
39770
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
supervised institutions. For the reasons
described below, the FDIC certifies
pursuant to section 605(b) of the RFA
that the final rule will not have a
significant economic impact on a
substantial number of small entities.
According to data from recent
Consolidated Reports of Income and
Condition (Call Report),62 the FDIC
supervised 3,344 institutions. Of those,
2,581581 are considered ‘‘small,’’
according to the terms of the RFA. As
discussed previously, the final rule
directly applies to covered swap entities
(which includes persons registered with
the CFTC as swap dealers or major swap
participants pursuant to the Commodity
Exchange Act of 1936 and persons
registered with the SEC as securitybased swap dealers and major securitybased swap participants under the
Securities Exchange Act of 1934) that
are subject to the requirements of the
Swap Margin Rule. The FDIC has
identified 108 swap dealers and major
swap participants that, as of February
27, 2020, have registered as swap
entities.63 One of these institutions is
supervised by the FDIC, however that
institution holds in excess of $460
billion in assets and does not meet the
definition of ‘‘small’’ for the purpose of
RFA.
As an amendment to the Swap Margin
Rule, the final rule also affects
counterparties to swaps entered into by
covered swap entities. However, the
Terrorism Risk Insurance Program
Reauthorization Act of 2015 excludes
non-cleared swaps entered into for
hedging purposes by a financial
institution with total assets of $10
billion or less from the requirements of
the Swap Margin Rule. Given this
exclusion, a non-cleared swap between
a covered swap entity and a small FDICsupervised entity that is used to hedge
a commercial risk of the small entity
62 FDIC
Call Report, December 31, 2019.
the SEC had adopted a regulation that
would require registration of security-based swap
dealers and major security-based swap participants,
as of June 28, 2019, there was no date established
as the compliance date and no SEC-published list
of any such entities that so registered (see 84 FR
4906 at 4925). Accordingly, no security-based swap
dealers and no major security-based swap
participants have been identified as swap entities
by the FDIC. In identifying the 105 institutions
referred to in the text, the FDIC used the list of swap
dealers set forth, on March 22, 2020 (providing data
as of February 27, 2020) at https://www.cftc.gov/
LawRegulation/DoddFrankAct/
registerswapdealer.html. Major swap participants,
among others, are required to apply for registration
through a filing with the National Futures
Association. Accordingly, the FDIC reviewed the
National Futures Association https://
www.nfa.futures.org/members/sd/ to
determine whether there were registered major
swap participants. As of March 22, 2020, there were
no major swap participants listed on this link.
63 While
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
will not be subject to the Swap Margin
Rule. The FDIC believes that it is
unlikely that any small entity it
supervises will engage in non-cleared
swaps for purposes other than hedging.
Given that no FDIC-supervised small
entities are covered swap entities and
that it is unlikely that FDIC-supervised
small entities enter into non-cleared
swaps for purposes other than hedging,
this final rule is not expected to have a
significant economic impact on a
substantial number of small entities
supervised by the FDIC. For these
reasons, the FDIC certifies that the final
rule will not have a significant
economic impact on a substantial
number of small entities, within the
meaning of those terms as used in the
RFA. Accordingly, a regulatory
flexibility analysis is not required.
FCA: Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), FCA hereby certifies that the
final rule will not have a significant
economic impact on a substantial
number of small entities. Each of the
banks in the Farm Credit System,
considered together with its affiliated
associations, has assets and annual
income in excess of the amounts that
would qualify them as small entities;
nor does the Federal Agricultural
Mortgage Corporation meet the
definition of ‘‘small entity.’’ Therefore,
Farm Credit System institutions are not
‘‘small entities’’ as defined in the
Regulatory Flexibility Act.
FHFA: The Regulatory Flexibility Act
(5 U.S.C. 601 et seq.) requires that a
regulation that has a significant
economic impact on a substantial
number of small entities, small
businesses, or small organizations must
include a final regulatory flexibility
analysis describing the regulation’s
impact on small entities. FHFA need not
undertake such an analysis if the agency
has certified the regulation will not have
a significant economic impact on a
substantial number of small entities. 5
U.S.C. 605(b). FHFA has considered the
impact of the final rule under the
Regulatory Flexibility Act, and certifies
that the final rule does not have a
significant economic impact on a
substantial number of small entities
because the final rule is applicable only
to FHFA’s regulated entities, which are
not small entities for purposes of the
Regulatory Flexibility Act.
Unfunded Mandates Reform Act of 1995
The OCC has analyzed the final rule
under the factors in the Unfunded
Mandates Reform Act of 1995
(UMRA).64 Under this analysis, the OCC
PO 00000
considered whether the final rule
includes a Federal mandate that may
result in the expenditure by State, local,
and tribal governments, in the aggregate,
or by the private sector, of $100 million
or more in any one year (adjusted
annually for inflation). The UMRA does
not apply to regulations that incorporate
requirements specifically set forth in
law.
The OCC analyzed the amendments
proposed in this final rulemaking and
has determined that they would not
result in expenditures by State, local,
and Tribal governments, in the
aggregate, or by the private sector, of
$157 million in any one year.
Accordingly, the OCC has not prepared
a written statement under sections 202
and 205.
Riegle Community Development and
Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the
Riegle Community Development and
Regulatory Improvement Act
(RCDRIA),65 in determining the effective
date and administrative compliance
requirements for new regulations that
impose additional reporting, disclosure,
or other requirements on insured
depository institutions (IDIs), each
Federal banking agency must consider,
consistent with principles of safety and
soundness and the public interest, any
administrative burdens that such
regulations would place on depository
institutions, including small depository
institutions, and customers of
depository institutions, as well as the
benefits of such regulations. In addition,
section 302(b) of RCDRIA requires new
regulations and amendments to
regulations that impose additional
reporting, disclosures, or other new
requirements on IDIs generally to take
effect on the first day of a calendar
quarter that begins on or after the date
on which the regulations are published
in final form.66
Each Federal banking agency has
determined that the final rule would not
impose additional reporting, disclosure,
or other requirements on IDIs; therefore,
the requirements of the RCDRIA do not
apply.
A. Plain Language
Section 722 of the Gramm-LeachBliley Act 67 requires the Federal
banking agencies to use plain language
in all proposed and final rules
published after January 1, 2000. The
agencies have sought to present the final
rule in a simple and straightforward
65 12
U.S.C. 4802(a).
U.S.C. 4802.
67 12 U.S.C. 4809.
66 12
64 2
U.S.C. 1531 et seq.
Frm 00018
Fmt 4701
Sfmt 4700
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
manner and did not receive comment on
the use of plain language.
recordkeeping requirements, Risk, Rural
areas, Swaps.
B. The Congressional Review Act
12 CFR Part 1221
For purposes of Congressional Review
Act, the OMB makes a determination as
to whether a final rule constitutes a
‘‘major’’ rule.68 If a rule is deemed a
‘‘major rule’’ by the OMB, the
Congressional Review Act generally
provides that the rule may not take
effect until at least 60 days following its
publication.69
The Congressional Review Act defines
a ‘‘major rule’’ as any rule that the
Administrator of the Office of
Information and Regulatory Affairs of
the OMB finds has resulted in or is
likely to result in—(A) an annual effect
on the economy of $100,000,000 or
more; (B) a major increase in costs or
prices for consumers, individual
industries, Federal, State, or local
government agencies or geographic
regions, or (C) significant adverse effects
on competition, employment,
investment, productivity, innovation, or
on the ability of United States-based
enterprises to compete with foreignbased enterprises in domestic and
export markets.70 As required by the
Congressional Review Act, the agencies
will submit the final rule and other
appropriate reports to Congress and the
Government Accountability Office for
review.
Government-sponsored enterprises,
Mortgages, Securities.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the
common preamble and under the
authority of 12 U.S.C. 93a and
5412(b)(2)(B), the Office of the
Comptroller of the Currency amends
part 45 of Title 12, Code of Federal
Regulations, as follows:
PART 45—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
1. The authority citation for part 45
continues to read as follows:
■
Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et
seq., 12 U.S.C. 93a, 161, 481, 1818, 3907,
3909, 5412(b)(2)(B), and 15 U.S.C. 78o–10(e).
2. Section 45.1 is amended by revising
paragraphs (e)(6) and (7) and (h)
introductory text and adding paragraphs
(h)(1) and (3) through (5) to read as
follows:
■
List of Subjects
§ 45.1 Authority, purpose, scope,
exemptions and compliance dates.
12 CFR Part 45
*
Administrative practice and
procedure, Capital, Margin
requirements, National Banks, Federal
Savings Associations, Reporting and
recordkeeping requirements, Risk.
12 CFR Part 237
Administrative practice and
procedure, Banks, Banking, Foreign
Banking, Holding companies, Reporting
and recordkeeping requirements,
Swaps.
12 CFR Part 349
Administrative practice and
procedure, Banks, Banking, Holding
companies, Capital, Margin
requirements, Reporting and
recordkeeping requirements, Savings
associations, Risk, Swaps.
12 CFR Part 624
Accounting, Agriculture, Banks,
Banking, Capital, Cooperatives, Credit,
Margin requirements, Reporting and
68 5
U.S.C. 801 et seq.
U.S.C. 801(a)(3).
70 5 U.S.C. 804(2).
69 5
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
*
*
*
*
(e) * * *
(6) September 1, 2020, with respect to
requirements in § 45.3 for initial margin
for any non-cleared swaps and noncleared security-based swaps, where
both:
(i) The covered swap entity combined
with all its affiliates; and
(ii) Its counterparty combined with all
its affiliates, have an average daily
aggregate notional amount of noncleared swaps, foreign exchange
forwards and foreign exchange swaps
for March, April, and May 2020 that
exceeds $50 billion, where such
amounts are calculated only for
business days; and
(iii) In calculating the amounts in
paragraphs (e)(6)(i) and (ii) of this
section, an entity shall count the
average daily aggregate notional amount
of a non-cleared swap, a non-cleared
security-based swap, a foreign exchange
forward or a foreign exchange swap
between the entity and an affiliate only
one time, and shall not count a swap or
security-based swap that is exempt
pursuant to paragraph (d) of this
section.
PO 00000
Frm 00019
Fmt 4701
Sfmt 4700
39771
(7) September 1, 2021, with respect to
requirements in § 45.3 for initial margin
for any other covered swap entity with
respect to non-cleared swaps and noncleared security-based swaps entered
into with any other counterparty.
*
*
*
*
*
(h) Legacy swaps. Covered swaps
entities are required to comply with the
requirements of this part for non-cleared
swaps and non-cleared security-based
swaps entered into on or after the
relevant compliance dates for variation
margin and for initial margin
established in paragraph (e) of this
section. Any non-cleared swap or noncleared security-based swap entered
into before such relevant date shall
remain outside the scope of this part if
amendments are made to the noncleared swap or non-cleared securitybased swap by method of adherence to
a protocol, other amendment of a
contract or confirmation, or execution of
a new contract or confirmation in
replacement of and immediately upon
termination of an existing contract or
confirmation, as follows:
(1) Amendments to the non-cleared
swap or non-cleared security-based
swap solely to comply with the
requirements of 12 CFR part 47, 12 CFR
part 252 subpart I, or 12 CFR part 382,
as applicable;
*
*
*
*
*
(3)(i) Amendments to the non-cleared
swap or non-cleared security-based
swap that are made solely to
accommodate the replacement of:
(A) An interbank offered rate (IBOR)
including, but not limited to, the
London Interbank Offered Rate (LIBOR),
the Tokyo Interbank Offered Rate
(TIBOR), the Bank Bill Swap Rate
(BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian
Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and
the Hong Kong Interbank Offered Rate
(HIBOR);
(B) Any other interest rate that a
covered swap entity reasonably expects
to be replaced or discontinued or
reasonably determines has lost its
relevance as a reliable benchmark due to
a significant impairment; or
(C) Any other interest rate that
succeeds a rate referenced in paragraph
(h)(3)(i)(A) or (B) of this section. An
amendment made under this paragraph
(h)(3)(i)(C) could be one of multiple
amendments made under this paragraph
(h)(3)(i)(C). For example, an amendment
could replace an IBOR with a temporary
interest rate and later replace the
temporary interest rate with a
permanent interest rate.
E:\FR\FM\01JYR3.SGM
01JYR3
39772
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
(ii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also incorporate spreads or other
adjustments to the replacement interest
rate and make other necessary technical
changes to operationalize the
determination of payments or other
exchanges of economic value using the
replacement interest rate, including
changes to determination dates,
calculation agents, and payment dates.
The changes may not extend the
maturity or increase the total effective
notional amount of the non-cleared
swap or non-cleared security-based
swap beyond what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
(iii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also be effectuated through portfolio
compression between or among covered
swap entities and their counterparties.
Portfolio compression under this
paragraph is not subject to the
limitations in paragraph (h)(4) of this
section but any non-cleared swaps or
non-cleared security-based swaps
resulting from the portfolio compression
may not have a longer maturity or
increase the total effective notional
amount more than what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
(4) Amendments solely to reduce risk
or remain risk-neutral through portfolio
compression between or among covered
swap entities and their counterparties,
as long as any non-cleared swaps or
non-cleared security-based swaps
resulting from the portfolio compression
do not:
(i) Exceed the sum of the total
effective notional amounts of all of the
swaps that were submitted to the
compression exercise that had the same
or longer remaining maturity as the
resulting swap; or
(ii) Exceed the longest remaining
maturity of all the swaps submitted to
the compression exercise.
(5) The non-cleared swap or noncleared security-based swap was
amended solely for one of the following
reasons:
(i) To reflect technical changes, such
as addresses, identities of parties for
delivery of formal notices, and other
administrative or operational provisions
as long as they do not alter the noncleared swap’s or non-cleared securitybased swap’s underlying asset or
reference, the remaining maturity, or the
total effective notional amount; or
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
(ii) To reduce the notional amount, so
long as:
(A) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully terminated; or
(B) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully novated to a third
party, who complies with applicable
margin rules for the novated portion
upon the transfer.
■ 3. Section 45.9 is amended by adding
paragraph (h) to read as follows:
§ 45.9 Cross-border application of margin
requirements.
*
*
*
*
*
(h)(1) A covered swap entity
described in paragraphs (d)(3)(i) and (ii)
of this section is not subject to the
requirements of § 45.3(a) or § 45.11(a)
for any non-cleared swap or non-cleared
security-based swap executed with an
affiliate of the covered swap entity; and
(2) For purposes of paragraph (h)(1) of
this section, ‘‘affiliate’’ has the same
meaning provided in § 45.11(d).
■ 4. Section 45.10 is amended by
revising paragraph (a) to read as follows:
§ 45.10
Documentation of margin matters.
*
*
*
*
*
(a) Provides the covered swap entity
and its counterparty with the
contractual right to collect and post
initial margin and variation margin in
such amounts, in such form, and under
such circumstances as are required by
this subpart, and at such time as initial
margin or variation margin is required
to be collected or posted under § 45.3 or
§ 45.4, as applicable; and
*
*
*
*
*
■ 5. Section 45.11 is revised to read as
follows:
§ 45.11
Special rules for affiliates.
(a)(1) A covered swap entity shall
calculate on each business day an initial
margin collection amount for each
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity.
(2) If the aggregate of all initial margin
collection amounts calculated under
paragraph (a)(1) of this section does not
exceed 15 percent of the covered swap
entity’s tier 1 capital, the requirements
for a covered swap entity to collect
initial margin under § 45.3(a) do not
apply with respect to any non-cleared
swap or non-cleared security-based
swap with a counterparty that is an
affiliate.
(3) On each business day that the
aggregate of all initial margin collection
PO 00000
Frm 00020
Fmt 4701
Sfmt 4700
amounts calculated under paragraph
(a)(1) of this section exceeds 15 percent
of the covered swap entity’s tier 1
capital:
(i) The covered swap entity shall
collect initial margin under § 45.3(a) for
each additional non-cleared swap and
non-cleared security-based swap
executed that business day with a
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity, commencing on the day
after execution and continuing on a
daily basis as required under § 45.3(c),
until the earlier of:
(A) The termination date of such noncleared swap or non-cleared securitybased swap, or
(B) The business day on which the
aggregate of all initial margin collection
amounts calculated under § 45.11(a)(1)
falls below 15 percent of the covered
swap entity’s tier 1 capital;
(ii) Notwithstanding § 45.7(b), to the
extent the covered swap entity collects
initial margin pursuant to paragraph
(a)(3)(i) of this section in the form of
collateral other than cash collateral, the
custodian for such collateral may be the
covered swap entity or an affiliate of the
covered swap entity;
(4) For purposes of this paragraph (a),
‘‘tier 1 capital’’ means the sum of
common equity tier 1 capital as defined
in 12 CFR 3.20(b) and additional tier 1
capital as defined in 12 CFR 3.20(c), as
reported in the institution’s most recent
Consolidated Reports of Income and
Condition (Call Report); and
(5) If any subsidiary of the covered
swap entity (including a subsidiary
described in § 45.9(h)) executes any
non-cleared swap or non-cleared
security-based swap with any
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity:
(i) The covered swap entity shall treat
such non-cleared swap or security-based
swap as its own for purposes of this
paragraph (a); and
(ii) If the subsidiary is itself a covered
swap entity, the compliance by its
parent covered swap entity with this
paragraph (a)(5) shall be deemed to
establish the subsidiary’s compliance
with the requirements of this paragraph
(a) and to exempt the subsidiary from
the requirements for a covered swap
entity to collect initial margin under
§ 45.3(a) from an affiliate.
(b) The requirement for a covered
swap entity to post initial margin under
§ 45.3(b) does not apply with respect to
any non-cleared swap or non-cleared
security-based swap with a counterparty
that is an affiliate.
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
(c) Section 45.3(d) shall apply to a
counterparty that is an affiliate in the
same manner as it applies to any
counterparty that is neither a financial
end user without a material swap
exposure nor a swap entity.
(d) For purposes of this section:
(1) An affiliate means:
(i) An affiliate as defined in § 45.2; or
(ii) Any company that controls, is
controlled by, or is under common
control with the covered swap entity
through the direct or indirect exercise of
controlling influence over the
management or policies of the
controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in § 45.2;
or
(ii) Any company that is controlled by
the covered swap entity through the
direct or indirect exercise of controlling
influence over the management or
policies of the controlled company.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the
common preamble, the Board of
Governors of the Federal Reserve
System amends 12 CFR part 237 as
follows:
PART 237—SWAPS MARGIN AND
SWAPS PUSH-OUT (REGULATION KK)
6. The authority citation for part 237
continues to read as follows:
■
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–
10(e), 15 U.S.C. 8305, 12 U.S.C. 221 et seq.,
12 U.S.C. 343–350, 12 U.S.C. 1818, 12 U.S.C.
1841 et seq., 12 U.S.C. 3101 et seq., and 12
U.S.C. 1461 et seq.
7. Revise the heading of part 237 to
read as shown above.
■
Subpart A—Margin and Capital
Requirements for Covered Swap
Entities (Regulation KK)
8. Section 237.1 is amended by
revising paragraphs (e)(6) and (7) and
(h) introductory text and adding
paragraphs (h)(1) and (3) through (5) to
read as follows:
■
§ 237.1 Authority, purpose, scope,
exemptions and compliance dates.
*
*
*
*
*
(e) * * *
(6) September 1, 2020, with respect to
requirements in § 237.3 for initial
margin for any non-cleared swaps and
non-cleared security-based swaps,
where both:
(i) The covered swap entity combined
with all its affiliates; and
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
(ii) Its counterparty combined with all
its affiliates, have an average daily
aggregate notional amount of noncleared swaps, foreign exchange
forwards and foreign exchange swaps
for March, April, and May 2020 that
exceeds $50 billion, where such
amounts are calculated only for
business days; and
(iii) In calculating the amounts in
paragraphs (e)(6)(i) and (ii) of this
section, an entity shall count the
average daily aggregate notional amount
of a non-cleared swap, a non-cleared
security-based swap, a foreign exchange
forward or a foreign exchange swap
between the entity and an affiliate only
one time, and shall not count a swap or
security-based swap that is exempt
pursuant to paragraph (d) of this
section.
(7) September 1, 2021, with respect to
requirements in § 237.3 for initial
margin for any other covered swap
entity with respect to non-cleared swaps
and non-cleared security-based swaps
entered into with any other
counterparty.
*
*
*
*
*
(h) Legacy swaps. Covered swaps
entities are required to comply with the
requirements of this subpart for noncleared swaps and non-cleared securitybased swaps entered into on or after the
relevant compliance dates for variation
margin and for initial margin
established in paragraph (e) of this
section. Any non-cleared swap or noncleared security-based swap entered
into before such relevant date shall
remain outside the scope of this subpart
if amendments are made to the noncleared swap or non-cleared securitybased swap by method of adherence to
a protocol, other amendment of a
contract or confirmation, or execution of
a new contract or confirmation in
replacement of and immediately upon
termination of an existing contract or
confirmation, as follows:
(1) Amendments to the non-cleared
swap or non-cleared security-based
swap solely to comply with the
requirements of 12 CFR part 47, 12 CFR
part 252 subpart I, or 12 CFR part 382,
as applicable;
*
*
*
*
*
(3)(i) Amendments to the non-cleared
swap or non-cleared security-based
swap that are made solely to
accommodate the replacement of:
(A) An interbank offered rate (IBOR)
including, but not limited to, the
London Interbank Offered Rate (LIBOR),
the Tokyo Interbank Offered Rate
(TIBOR), the Bank Bill Swap Rate
(BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian
PO 00000
Frm 00021
Fmt 4701
Sfmt 4700
39773
Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and
the Hong Kong Interbank Offered Rate
(HIBOR);
(B) Any other interest rate that a
covered swap entity reasonably expects
to be replaced or discontinued or
reasonably determines has lost its
relevance as a reliable benchmark due to
a significant impairment; or
(C) Any other interest rate that
succeeds a rate referenced in paragraph
(h)(3)(i)(A) or (B) of this section. An
amendment made under this paragraph
(h)(3)(i)(C) could be one of multiple
amendments made under this paragraph
(h)(3)(i)(C). For example, an amendment
could replace an IBOR with a temporary
interest rate and later replace the
temporary interest rate with a
permanent interest rate.
(ii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also incorporate spreads or other
adjustments to the replacement interest
rate and make other necessary technical
changes to operationalize the
determination of payments or other
exchanges of economic value using the
replacement interest rate, including
changes to determination dates,
calculation agents, and payment dates.
The changes may not extend the
maturity or increase the total effective
notional amount of the non-cleared
swap or non-cleared security-based
swap beyond what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
(iii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also be effectuated through portfolio
compression between or among covered
swap entities and their counterparties.
Portfolio compression under this
paragraph is not subject to the
limitations in paragraph (h)(4) of this
section, but any non-cleared swaps or
non-cleared security-based swaps
resulting from the portfolio compression
may not have a longer maturity or
increase the total effective notional
amount more than what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
(4) Amendments solely to reduce risk
or remain risk-neutral through portfolio
compression between or among covered
swap entities and their counterparties,
as long as any non-cleared swaps or
non-cleared security-based swaps
resulting from the portfolio compression
do not:
(i) Exceed the sum of the total
effective notional amounts of all of the
E:\FR\FM\01JYR3.SGM
01JYR3
39774
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
swaps that were submitted to the
compression exercise that had the same
or longer remaining maturity as the
resulting swap; or
(ii) Exceed the longest remaining
maturity of all the swaps submitted to
the compression exercise.
(5) The non-cleared swap or noncleared security-based swap was
amended solely for one of the following
reasons:
(i) To reflect technical changes, such
as addresses, identities of parties for
delivery of formal notices, and other
administrative or operational provisions
as long as they do not alter the noncleared swap’s or non-cleared securitybased swap’s underlying asset or
reference, the remaining maturity, or the
total effective notional amount; or
(ii) To reduce the notional amount, so
long as:
(A) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully terminated; or
(B) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully novated to a third
party, who complies with applicable
margin rules for the novated portion
upon the transfer.
■ 9. Section 237.9 is amended by adding
paragraph (h) to read as follows:
§ 237.9 Cross-border application of margin
requirements.
*
*
*
*
*
(h)(1) A covered swap entity
described in paragraphs (d)(3)(i) and (ii)
of this section is not subject to the
requirements of § 237.3(a) or § 237.11(a)
for any non-cleared swap or non-cleared
security-based swap executed with an
affiliate of the covered swap entity; and
(2) For purposes of paragraph (h)(1) of
this section, ‘‘affiliate’’ has the same
meaning provided in 12 CFR 237.11(d).
■ 10. Section 237.10 is amended by
revising paragraph (a) to read as follows:
§ 237.10 Documentation of margin
matters.
*
*
*
*
*
(a) Provides the covered swap entity
and its counterparty with the
contractual right to collect and post
initial margin and variation margin in
such amounts, in such form, and under
such circumstances as are required by
this subpart, and at such time as initial
margin or variation margin is required
to be collected or posted under § 237.3
or § 237.4, as applicable; and
*
*
*
*
*
■ 11. Section 237.11 is revised to read
as follows:
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
§ 237.11
Special rules for affiliates.
(a)(1) A covered swap entity shall
calculate on each business day an initial
margin collection amount for each
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity.
(2) If the aggregate of all initial margin
collection amounts calculated under
paragraph (a)(1) of this section does not
exceed 15 percent of the covered swap
entity’s tier 1 capital, the requirements
for a covered swap entity to collect
initial margin under § 237.3(a) do not
apply with respect to any non-cleared
swap or non-cleared security-based
swap with a counterparty that is an
affiliate.
(3) On each business day that the
aggregate of all initial margin collection
amounts calculated under paragraph
(a)(1) of this section exceeds 15 percent
of the covered swap entity’s tier 1
capital:
(i) The covered swap entity shall
collect initial margin under § 237.3(a)
for each additional non-cleared swap
and non-cleared security-based swap
executed that business day with a
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity, commencing on the day
after execution and continuing on a
daily basis as required under § 237.3(c),
until the earlier of:
(A) The termination date of such noncleared swap or non-cleared securitybased swap, or
(B) The business day on which the
aggregate of all initial margin collection
amounts calculated under paragraph
(a)(1) of this section falls below 15
percent of the covered swap entity’s tier
1 capital;
(ii) Notwithstanding § 237.7(b), to the
extent the covered swap entity collects
initial margin pursuant to paragraph
(a)(3)(i) of this section in the form of
collateral other than cash collateral, the
custodian for such collateral may be the
covered swap entity or an affiliate of the
covered swap entity; and
(4) For purposes of this paragraph (a),
‘‘tier 1 capital’’ means the sum of
common equity tier 1 capital as defined
in 12 CFR 217.20(b) and additional tier
1 capital as defined in 12 CFR 217.20(c),
as reported in the institution’s most
recent Consolidated Reports of Income
and Condition (Call Report).
(5) If any subsidiary of the covered
swap entity (including a subsidiary
described in § 237.9(h)) executes any
non-cleared swap or non-cleared
security-based swap with any
counterparty that is a swap entity or
financial end user with a material swaps
PO 00000
Frm 00022
Fmt 4701
Sfmt 4700
exposure and an affiliate of the covered
swap entity:
(i) The covered swap entity shall treat
such non-cleared swap or security-based
swap as its own for purposes of this
paragraph (a); and
(ii) If the subsidiary is itself a covered
swap entity, the compliance by its
parent affiliated covered swap entity
with this paragraph (a)(5) shall be
deemed to establish the subsidiary’s
compliance with the requirements of
this paragraph (a) and to exempt the
subsidiary from the requirements for a
covered swap entity to collect initial
margin under § 237.3(a) from an
affiliate.
(b) The requirement for a covered
swap entity to post initial margin under
§ 237.3(b) does not apply with respect to
any non-cleared swap or non-cleared
security-based swap with a counterparty
that is an affiliate.
(c) Section 237.3(d) shall apply to a
counterparty that is an affiliate in the
same manner as it applies to any
counterparty that is neither a financial
end user without a material swap
exposure nor a swap entity.
(d) For purposes of this section,
(1) An affiliate means:
(i) An affiliate as defined in § 237.2;
or
(ii) Any company that controls, is
controlled by, or is under common
control with the covered swap entity
through the direct or indirect exercise of
controlling influence over the
management or policies of the
controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in § 237.2;
or
(ii) Any company that is controlled by
the covered swap entity through the
direct or indirect exercise of controlling
influence over the management or
policies of the controlled company.
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the
SUPPLEMENTARY INFORMATION section, the
Federal Deposit Insurance Corporation
amends 12 CFR chapter III as follows:
PART 349—DERIVATIVES
Subpart A—Margin and Capital
Requirements for Covered Swap
Entries
12. The authority citation for subpart
A of part 349 continues to read as
follows:
■
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–
10(e), and 12 U.S.C. 1818 and 12 U.S.C.
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
1819(a)(Tenth), 12 U.S.C. 1813(q), 1818,
1819, and 3108.
13. Section 349.1 is amended by
revising paragraphs (e)(6) and (7) and
(h) introductory text, and adding
paragraphs (h)(1) and (3) through (5) to
read as follows:
■
§ 349.1 Authority, purpose, scope,
exemptions and compliance dates.
*
*
*
*
*
(e) * * *
(6) September 1, 2020, with respect to
requirements in § 349.3 for initial
margin for any non-cleared swaps and
non-cleared security-based swaps,
where both:
(i) The covered swap entity combined
with all its affiliates; and
(ii) Its counterparty combined with all
its affiliates, have an average daily
aggregate notional amount of noncleared swaps, foreign exchange
forwards and foreign exchange swaps
for March, April, and May 2020 that
exceeds $50 billion, where such
amounts are calculated only for
business days; and
(iii) In calculating the amounts in
paragraphs (e)(6)(i) and (ii) of this
section, an entity shall count the
average daily aggregate notional amount
of a non-cleared swap, a non-cleared
security-based swap, a foreign exchange
forward or a foreign exchange swap
between the entity and an affiliate only
one time, and shall not count a swap or
security-based swap that is exempt
pursuant to paragraph (d) of this
section.
(7) September 1, 2021, with respect to
requirements in § 349.3 for initial
margin for any other covered swap
entity with respect to non-cleared swaps
and non-cleared security-based swaps
entered into with any other
counterparty.
*
*
*
*
*
(h) Legacy swaps. Covered swaps
entities are required to comply with the
requirements of this subpart for noncleared swaps and non-cleared securitybased swaps entered into on or after the
relevant compliance dates for variation
margin and for initial margin
established in paragraph (e) of this
section. Any non-cleared swap or noncleared security-based swap entered
into before such relevant date shall
remain outside the scope of this subpart
if amendments are made to the noncleared swap or non-cleared securitybased swap by method of adherence to
a protocol, other amendment of a
contract or confirmation, or execution of
a new contract or confirmation in
replacement of and immediately upon
termination of an existing contract or
confirmation, as follows:
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
(1) Amendments to the non-cleared
swap or non-cleared security-based
swap solely to comply with the
requirements of 12 CFR part 47, 12 CFR
part 252 subpart I, or 12 CFR part 382,
as applicable;
*
*
*
*
*
(3)(i) Amendments to the non-cleared
swap or non-cleared security-based
swap that are made solely to
accommodate the replacement of:
(A) An interbank offered rate (IBOR)
including, but not limited to, the
London Interbank Offered Rate (LIBOR),
the Tokyo Interbank Offered Rate
(TIBOR), the Bank Bill Swap Rate
(BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian
Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and
the Hong Kong Interbank Offered Rate
(HIBOR);
(B) Any other interest rate that a
covered swap entity reasonably expects
to be replaced or discontinued or
reasonably determines has lost its
relevance as a reliable benchmark due to
a significant impairment; or
(C) Any other interest rate that
succeeds a rate referenced in paragraph
(h)(3)(i)(A) or (B) of this section. An
amendment made under this paragraph
(h)(3)(i)(C) could be one of multiple
amendments made under this paragraph
(h)(3)(i)(C). For example, an amendment
could replace an IBOR with a temporary
interest rate and later replace the
temporary interest rate with a
permanent interest rate.
(ii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also incorporate spreads or other
adjustments to the replacement interest
rate and make other necessary technical
changes to operationalize the
determination of payments or other
exchanges of economic value using the
replacement interest rate, including
changes to determination dates,
calculation agents, and payment dates.
The changes may not have a longer
maturity or increase the total effective
notional amount of the non-cleared
swap or non-cleared security-based
swap beyond what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
(iii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also be effectuated through portfolio
compression between or among covered
swap entities and their counterparties.
Portfolio compression under this
paragraph is not subject to the
limitations in paragraph (h)(4) of this
PO 00000
Frm 00023
Fmt 4701
Sfmt 4700
39775
section, but any non-cleared swap[s] or
non-cleared security-based swaps
resulting from the portfolio compression
may not extend the maturity or increase
the total effective notional amount more
than what is necessary to accommodate
the differences between market
conventions for an outgoing interest rate
and its replacement.
(4) Amendments solely to reduce risk
or remain risk-neutral through portfolio
compression between or among covered
swap entities and their counterparties,
as long as any non-cleared swaps or
non-cleared security-based swaps
resulting from the portfolio compression
do not:
(i) Exceed the sum of the total
effective notional amounts of all of the
swaps that were submitted to the
compression exercise that had the same
or longer remaining maturity as the
resulting swap; or
(ii) Exceed the longest remaining
maturity of all the swaps submitted to
the compression exercise.
(5) The non-cleared swap or noncleared security-based swap was
amended solely for one of the following
reasons:
(i) To reflect technical changes, such
as addresses, identities of parties for
delivery of formal notices, and other
administrative or operational provisions
as long as they do not alter the noncleared swap’s or non-cleared securitybased swap’s underlying asset or
reference, the remaining maturity, or the
total effective notional amount; or
(ii) To reduce the notional amount, so
long as:
(A) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully terminated; or
(B) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully novated to a third
party, who complies with applicable
margin rules for the novated portion
upon the transfer.
■ 14. Section 349.9 is amended by
adding paragraph (h) to read as follows:
§ 349.9 Cross-border application of margin
requirements.
*
*
*
*
*
(h)(1) A covered swap entity
described in paragraphs (d)(3)(i) and (ii)
is not subject to the requirements of
§ 349.3(a) or § 349.11 for any noncleared swap or non-cleared securitybased swap executed with an affiliate of
the covered swap entity; and
(2) For purposes of paragraph (h)(1) of
this section, ‘‘affiliate’’ has the same
meaning provided in § 349.11(d).
■ 15. Section 349.10 is amended by
revising paragraph (a) to read as follows:
E:\FR\FM\01JYR3.SGM
01JYR3
39776
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
§ 349.10 Documentation of margin
matters.
*
*
*
*
*
(a) Provides the covered swap entity
and its counterparty with the
contractual right to collect and post
initial margin and variation margin in
such amounts, in such form, and under
such circumstances as are required by
this subpart, and at such time as initial
margin or variation margin is required
to be collected or posted under § 349.3
or § 349.4, as applicable; and
*
*
*
*
*
■ 16. Section 349.11 is revised to read
as follows:
§ 349.11
Special rules for affiliates.
(a)(1) A covered swap entity shall
calculate on each business day an initial
margin collection amount for each
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity.
(2) If the aggregate of all initial margin
collection amounts calculated under
paragraph (a)(1) of this section does not
exceed 15 percent of the covered swap
entity’s tier 1 capital, the requirements
for a covered swap entity to collect
initial margin under § 349.3(a) do not
apply with respect to any non-cleared
swap or non-cleared security-based
swap with a counterparty that is an
affiliate.
(3) On each business day that the
aggregate of all initial margin collection
amounts calculated under paragraph
(a)(1) of this section exceeds 15 percent
of the covered swap entity’s tier 1
capital:
(i) The covered swap entity shall
collect initial margin under § 349.3(a)
for each additional non-cleared swap
and non-cleared security-based swap
executed that business day with a
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity, commencing on the day
after execution and continuing on a
daily basis as required under § 45.3(c),
until the earlier of:
(A) The termination date of such noncleared swap or non-cleared securitybased swap, or
(B) The business day on which the
aggregate of all initial margin collection
amounts calculated under paragraph
(a)(1) of this section falls below 15
percent of the covered swap entity’s tier
1 capital;
(ii) Notwithstanding § 349.7(b), to the
extent the covered swap entity collects
initial margin pursuant to paragraph
(a)(3)(i) of this section in the form of
collateral other than cash collateral, the
custodian for such collateral may be the
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
covered swap entity or an affiliate of the
covered swap entity;
(4) For purposes of this paragraph (a),
‘‘tier 1 capital’’ means the sum of
common equity tier 1 capital as defined
in 12 CFR 324.20(b) and additional tier
1 capital as defined in 12 CFR 324.20(c),
as reported in the institution’s most
recent Consolidated Reports of Income
and Condition (Call Report); and
(5) If any subsidiary of the covered
swap entity (including a subsidiary
described in § 349.9(h)) executes any
non-cleared swap or non-cleared
security-based swap with any
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity:
(i) The covered swap entity shall treat
such non-cleared swap or security-based
swap as its own for purposes of this
paragraph (a); and
(ii) If the subsidiary is itself a covered
swap entity, the compliance by its
parent covered swap entity with this
paragraph (a)(5) shall be deemed to
establish the subsidiary’s compliance
with the requirements of this paragraph
(a) and to exempt the subsidiary from
the requirements for a covered swap
entity to collect initial margin under
§ 349.3(a) from an affiliate.
(b) The requirement for a covered
swap entity to post initial margin under
§ 349.3(b) does not apply with respect to
any non-cleared swap or non-cleared
security-based swap with a counterparty
that is an affiliate.
(c) Section 349.3(d) shall apply to a
counterparty that is an affiliate in the
same manner as it applies to any
counterparty that is neither a financial
end user without a material swap
exposure nor a swap entity.
(d) For purposes of this section:
(1) An affiliate means:
(i) An affiliate as defined in § 349.2;
or
(ii) Any company that controls, is
controlled by, or is under common
control with the covered swap entity
through the direct or indirect exercise of
controlling influence over the
management or policies of the
controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in § 349.2;
or
(ii) Any company that is controlled by
the covered swap entity through the
direct or indirect exercise of controlling
influence over the management or
policies of the controlled company.
PO 00000
Frm 00024
Fmt 4701
Sfmt 4700
FARM CREDIT ADMINISTRATION
12 CFR Chapter VI
Authority and Issuance
For the reasons set forth in the
preamble, the Farm Credit
Administration amends chapter VI of
title 12, Code of Federal Regulations, as
follows:
PART 624—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
17. The authority citation for part 624
continues to read as follows:
■
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–
10(e), 12 U.S.C. 2154, 12 U.S.C. 2243, 12
U.S.C. 2252, 12 U.S.C. 2279bb–1.
18. Section 624.1 is amended by
revising paragraphs (e)(6) and (7) and
(h) introductory text and adding
paragraphs (h)(1) and (3) through (5) to
read as follows:
■
§ 624.1 Authority, purpose, scope,
exemptions and compliance dates.
*
*
*
*
*
(e) * * *
(6) September 1, 2020, with respect to
requirements in § 624.3 for initial
margin for any non-cleared swaps and
non-cleared security-based swaps,
where both:
(i) The covered swap entity combined
with all its affiliates; and
(ii) Its counterparty combined with all
its affiliates, have an average daily
aggregate notional amount of noncleared swaps, foreign exchange
forwards and foreign exchange swaps
for March, April, and May 2020 that
exceeds $50 billion, where such
amounts are calculated only for
business days; and
(iii) In calculating the amounts in
paragraphs (e)(6)(i) and (ii) of this
section, an entity shall count the
average daily aggregate notional amount
of a non-cleared swap, a non-cleared
security-based swap, a foreign exchange
forward or a foreign exchange swap
between the entity and an affiliate only
one time, and shall not count a swap or
security-based swap that is exempt
pursuant to paragraph (d) of this
section.
(7) September 1, 2021, with respect to
requirements in § 624.3 for initial
margin for any other covered swap
entity with respect to non-cleared swaps
and non-cleared security-based swaps
entered into with any other
counterparty.
*
*
*
*
*
(h) Legacy swaps. Covered swaps
entities are required to comply with the
requirements of this subpart for noncleared swaps and non-cleared security-
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
based swaps entered into on or after the
relevant compliance dates for variation
margin and for initial margin
established in paragraph (e) of this
section. Any non-cleared swap or noncleared security-based swap entered
into before such relevant date shall
remain outside the scope of this subpart
if amendments are made to the noncleared swap or non-cleared securitybased swap by method of adherence to
a protocol, other amendment of a
contract or confirmation, or execution of
a new contract or confirmation in
replacement of and immediately upon
termination of an existing contract or
confirmation, as follows:
(1) Amendments to the non-cleared
swap or non-cleared security-based
swap solely to comply with the
requirements of 12 CFR part 47, 12 CFR
part 252 subpart I, or 12 CFR part 382,
as applicable;
*
*
*
*
*
(3)(i) Amendments to the non-cleared
swap or non-cleared security-based
swap that are made solely to
accommodate the replacement of:
(A) An interbank offered rate (IBOR)
including, but not limited to, the
London Interbank Offered Rate (LIBOR),
the Tokyo Interbank Offered Rate
(TIBOR), the Bank Bill Swap Rate
(BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian
Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and
the Hong Kong Interbank Offered Rate
(HIBOR);
(B) Any other interest rate that a
covered swap entity reasonably expects
to be replaced or discontinued or
reasonably determines has lost its
relevance as a reliable benchmark due to
a significant impairment; or
(C) Any other interest rate that
succeeds a rate referenced in paragraph
(h)(3)(i)(A) or (B) of this section. An
amendment made under this paragraph
(h)(3)(i)(C) could be one of multiple
amendments made under this paragraph
(h)(3)(i)(C). For example, an amendment
could replace an IBOR with a temporary
interest rate and later replace the
temporary interest rate with a
permanent interest rate.
(ii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also incorporate spreads or other
adjustments to the replacement interest
rate and make other necessary technical
changes to operationalize the
determination of payments or other
exchanges of economic value using the
replacement interest rate, including
changes to determination dates,
calculation agents, and payment dates.
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
The changes may not extend the
maturity or increase the total effective
notional amount of the non-cleared
swap or non-cleared security-based
swap beyond what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
(iii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also be effectuated through portfolio
compression between or among covered
swap entities and their counterparties.
Portfolio compression under this
paragraph is not subject to the
limitations in paragraph (h)(4) of this
section, but any non-cleared swap[s] or
non-cleared security-based swaps
resulting from the portfolio compression
may not extend the maturity or increase
the total effective notional amount more
than what is necessary to accommodate
the differences between market
conventions for an outgoing interest rate
and its replacement.
(4) Amendments solely to reduce risk
or remain risk-neutral through portfolio
compression between or among covered
swap entities and their counterparties,
as long as any non-cleared swaps or
non-cleared security-based swaps
resulting from the portfolio compression
do not:
(i) Exceed the sum of the total
effective notional amounts of all of the
swaps that were submitted to the
compression exercise that had the same
or longer remaining maturity as the
resulting swap; or
(ii) Exceed the longest remaining
maturity of all the swaps submitted to
the compression exercise.
(5) The non-cleared swap or noncleared security-based swap was
amended solely for one of the following
reasons:
(i) To reflect technical changes, such
as addresses, identities of parties for
delivery of formal notices, and other
administrative or operational provisions
as long as they do not alter the noncleared swap’s or non-cleared securitybased swap’s underlying asset or
reference, the remaining maturity, or the
total effective notional amount; or
(ii) To reduce the notional amount, so
long as:
(A) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully terminated; or
(B) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully novated to a third
party, who complies with applicable
margin rules for the novated portion
upon the transfer.
PO 00000
Frm 00025
Fmt 4701
Sfmt 4700
39777
19. Section 624.9 is amended by
adding paragraph (h) to read as follows:
■
§ 624.9 Cross-Border application of
margin requirements.
*
*
*
*
*
(h)(1) A covered swap entity
described in paragraphs (d)(3)(i) and (ii)
of this section is not subject to the
requirements of § 624.3(a) or § 624.11(a)
for any non-cleared swap or non-cleared
security-based swap executed with an
affiliate of the covered swap entity; and
(2) For purposes of paragraph (h)(1) of
this section, ‘‘affiliate’’ has the same
meaning provided in § 624.11(d).
■ 20. Section 624.10 is amended by
revising paragraph (a) to read as follows:
§ 624.10 Documentation of margin
matters.
*
*
*
*
*
(a) Provides the covered swap entity
and its counterparty with the
contractual right to collect and post
initial margin and variation margin in
such amounts, in such form, and under
such circumstances as are required by
this subpart, and at such time as initial
margin or variation margin is required
to be collected or posted under § 624.3
or § 624.4, as applicable; and
*
*
*
*
*
■ 21. Section 624.11 is revised to read
as follows:
§ 624.11
Special rules for affiliates.
(a)(1) A covered swap entity shall
calculate on each business day an initial
margin collection amount for each
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity.
(2) If the aggregate of all initial margin
collection amounts calculated under
paragraph (a)(1) of this section does not
exceed 15 percent of the covered swap
entity’s tier 1 capital, the requirements
for a covered swap entity to collect
initial margin under § 624.3(a) do not
apply with respect to any non-cleared
swap or non-cleared security-based
swap with a counterparty that is an
affiliate.
(3) On each business day that the
aggregate of all initial margin collection
amounts calculated under paragraph
(a)(1) of this section exceeds 15 percent
of the covered swap entity’s tier 1
capital:
(i) The covered swap entity shall
collect initial margin under § 624.3(a)
for each additional non-cleared swap
and non-cleared security-based swap
executed that business day with a
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
E:\FR\FM\01JYR3.SGM
01JYR3
39778
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
swap entity, commencing on the day
after execution and continuing on a
daily basis as required under § 624.3(c),
until the earlier of;
(A) The termination date of such noncleared swap or non-cleared securitybased swap, or
(B) The business day on which the
aggregate of all initial margin collection
amounts calculated under paragraph
(a)(1) of this section falls below 15
percent of the covered swap entity’s tier
1 capital;
(ii) Notwithstanding § 624.7(b), to the
extent the covered swap entity collects
initial margin pursuant to paragraph
(a)(3)(i) of this section in the form of
collateral other than cash collateral, the
custodian for such collateral may be the
covered swap entity or an affiliate of the
covered swap entity; and
(4) For purposes of this paragraph (a),
‘‘tier 1 capital’’ means:
(i) For Farm Credit System banks and
associations, the sum of common equity
tier 1 capital as defined in 12 CFR
628.20(b) and additional tier 1 capital as
defined in 12 CFR 628.20(c), and as
reported in the institution’s most recent
Uniform Reports of Financial Condition
and Performance (Call Report); or
(ii) For the Federal Agricultural
Mortgage Corporation, as defined and
required in in 12 CFR 652.61, and as
reported in the institution’s most recent
Call Report.
(5) If any subsidiary of the covered
swap entity (including a subsidiary
described in § 624.9(h)) executes any
non-cleared swap or non-cleared
security-based swap with any
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity:
(i) The covered swap entity shall treat
such non-cleared swap or security-based
swap as its own for purposes of this
paragraph (a); and
(ii) If the subsidiary is itself a covered
swap entity, the compliance by its
parent covered swap entity with this
paragraph (a)(5) shall be deemed to
establish the subsidiary’s compliance
with the requirements of § 624.11(a) and
to exempt the subsidiary from the
requirements for a covered swap entity
to collect initial margin under § 624.3(a)
from an affiliate.
(b) The requirement for a covered
swap entity to post initial margin under
§ 624.3(b) does not apply with respect to
any non-cleared swap or non-cleared
security-based swap with a counterparty
that is an affiliate.
(c) Section 624.3(d) shall apply to a
counterparty that is an affiliate in the
same manner as it applies to any
counterparty that is neither a financial
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
end user without a material swap
exposure nor a swap entity.
(d) For purposes of this section:
(1) An affiliate means:
(i) An affiliate as defined in § 624.2;
or
(ii) Any company that controls, is
controlled by, or is under common
control with the covered swap entity
through the direct or indirect exercise of
controlling influence over the
management or policies of the
controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in § 624.2;
or
(ii) Any company that is controlled by
the covered swap entity through the
direct or indirect exercise of controlling
influence over the management or
policies of the controlled company.
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Chapter XII
Authority and Issuance
For the reasons set forth in the
preamble, the Federal Housing Finance
Agency amends chapter XII of title 12,
Code of Federal Regulations, as follows:
PART 1221—MARGIN AND CAPITAL
REQUIREMENTS FOR COVERED
SWAP ENTITIES
22. The authority citation for part
1221 continues to read as follows:
■
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–
10(e), 12 U.S.C. 4513, and 12 U.S.C. 4526(a).
23. Section 1221.1 is amended by
revising paragraphs (e)(6) and (7) and
(h) introductory text and adding
paragraphs (h)(1) and (3) through (5) to
read as follows:
■
§ 1221.1 Authority, purpose, scope,
exemptions and compliance dates.
*
*
*
*
*
(e) * * *
(6) September 1, 2020, with respect to
the requirements in § 1221.3 for initial
margin for any non-cleared swaps and
non-cleared security-based swaps,
where both:
(i) The covered swap entity combined
with all its affiliates; and
(ii) Its counterparty combined with all
its affiliates, have an average daily
aggregate notional amount of noncleared swaps, foreign exchange
forwards and foreign exchange swaps
for March, April, and May 2020 that
exceeds $50 billion, where such
amounts are calculated only for
business days; and
(iii) In calculating the amounts in
paragraphs (e)(6)(i) and (ii) of this
section, an entity shall count the
PO 00000
Frm 00026
Fmt 4701
Sfmt 4700
average daily aggregate notional amount
of a non-cleared swap, a non-cleared
security-based swap, a foreign exchange
forward or a foreign exchange swap
between the entity and an affiliate only
one time, and shall not count a swap or
security-based swap that is exempt
pursuant to paragraph (d) of this
section.
(7) September 1, 2021, with respect to
requirements in § 1221.3 for initial
margin for any other covered swap
entity with respect to non-cleared swaps
and non-cleared security-based swaps
entered into with any other
counterparty.
*
*
*
*
*
(h) Legacy swaps. Covered swaps
entities are required to comply with the
requirements of this part for non-cleared
swaps and non-cleared security-based
swaps entered into on or after the
relevant compliance dates for variation
margin and for initial margin
established in paragraph (e) of this
section. Any non-cleared swap or noncleared security-based swap entered
into before such relevant date shall
remain outside the scope of this part if
amendments are made to the noncleared swap or non-cleared securitybased swap by method of adherence to
a protocol, other amendment of a
contract or confirmation, or execution of
a new contract or confirmation in
replacement of and immediately upon
termination of an existing contract or
confirmation, as follows:
(1) Amendments to the non-cleared
swap or non-cleared security-based
swap solely to comply with the
requirements of 12 CFR part 47, 12 CFR
part 252 subpart I, or 12 CFR part 382,
as applicable;
*
*
*
*
*
(3)(i) Amendments to the non-cleared
swap or non-cleared security-based
swap that are made solely to
accommodate the replacement of:
(A) An interbank offered rate (IBOR)
including, but not limited to, the
London Interbank Offered Rate (LIBOR),
the Tokyo Interbank Offered Rate
(TIBOR), the Bank Bill Swap Rate
(BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian
Dollar Offered Rate (CDOR), the Euro
Interbank Offered Rate (EURIBOR), and
the Hong Kong Interbank Offered Rate
(HIBOR);
(B) Any other interest rate that a
covered swap entity reasonably expects
to be replaced or discontinued or
reasonably determines has lost its
relevance as a reliable benchmark due to
a significant impairment; or
(C) Any other interest rate that
succeeds a rate referenced in paragraph
E:\FR\FM\01JYR3.SGM
01JYR3
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
(h)(3)(i)(A) or (B) of this section. An
amendment made under this paragraph
(h)(3)(i)(C) could be one of multiple
amendments made under this paragraph
(h)(3)(i)(C). For example, an amendment
could replace an IBOR with a temporary
interest rate and later replace the
temporary interest rate with a
permanent interest rate.
(ii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also incorporate spreads or other
adjustments to the replacement interest
rate and make other necessary technical
changes to operationalize the
determination of payments or other
exchanges of economic value using the
replacement interest rate, including
changes to determination dates,
calculation agents, and payment dates.
The changes may not have a longer
maturity or increase the total effective
notional amount of the non-cleared
swap or non-cleared security-based
swap beyond what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
(iii) Amendments to accommodate
replacement of an interest rate described
in paragraph (h)(3)(i) of this section may
also be effectuated through portfolio
compression between or among covered
swap entities and their counterparties.
Portfolio compression under this
paragraph (h)(3)(iii) is not subject to the
limitations in paragraph (h)(4) of this
section, but any non-cleared swap[s] or
non-cleared security-based swaps
resulting from the portfolio compression
may not have a longer maturity or
increase the total effective notional
amount more than what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
(4) Amendments solely to reduce risk
or remain risk-neutral through portfolio
compression between or among covered
swap entities and their counterparties,
as long as any non-cleared swaps or
non-cleared security-based swaps
resulting from the portfolio compression
do not:
(i) Exceed the sum of the total
effective notional amounts of all of the
swaps that were submitted to the
compression exercise that had the same
or longer remaining maturity as the
resulting swap; or
(ii) Exceed the longest remaining
maturity of all the swaps submitted to
the compression exercise.
(5) The non-cleared swap or noncleared security-based swap was
amended solely for one of the following
reasons:
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
(i) To reflect technical changes, such
as addresses, identities of parties for
delivery of formal notices, and other
administrative or operational provisions
as long as they do not alter the noncleared swap’s or non-cleared securitybased swap’s underlying asset or
reference, the remaining maturity, or the
total effective notional amount; or
(ii) To reduce the notional amount, so
long as:
(A) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully terminated; or
(B) All payment obligations attached
to the total effective notional amount
being eliminated as a result of the
amendment are fully novated to a third
party, who complies with applicable
margin rules for the novated portion
upon the transfer.
■ 24. Section 1221.9 is amended by
adding paragraph (h) to read as follows:
§ 1221.9 Cross-Border application of
margin requirements.
*
*
*
*
*
(h)(1) A covered swap entity
described in paragraphs (d)(3)(i) and (ii)
of this section is not subject to the
requirements of § 1221.3(a) or
§ 1221.11(a) for any non-cleared swap or
non-cleared security-based swap
executed with an affiliate of the covered
swap entity; and
(2) For purposes of paragraph (h)(1) of
this section, ‘‘affiliate’’ has the same
meaning provided in § 1221.11(d).
■ 25. In § 1221.10 revise paragraph (a) to
read as follows:
§ 1221.10
matters.
Documentation of margin
*
*
*
*
*
(a) Provides the covered swap entity
and its counterparty with the
contractual right to collect and post
initial margin and variation margin in
such amounts, in such form, and under
such circumstances as are required by
this part, and at such time as initial
margin or variation margin is required
to be collected or posted under § 1221.3
or § 1221.4, as applicable; and
*
*
*
*
*
■ 26. Section 1221.11 is revised to read
as follows:
§ 1221.11
Special rules for affiliates.
(a)(1) A covered swap entity shall
calculate on each business day an initial
margin collection amount for each
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity.
(2) If the aggregate of all initial margin
collection amounts calculated under
PO 00000
Frm 00027
Fmt 4701
Sfmt 4700
39779
paragraph (a)(1) of this section does not
exceed 15 percent of the covered swap
entity’s tier 1 capital, the requirements
for a covered swap entity to collect
initial margin under § 1221.3(a) do not
apply with respect to any non-cleared
swap or non-cleared security-based
swap with a counterparty that is an
affiliate.
(3) On each business day that the
aggregate of all initial margin collection
amounts calculated under paragraph
(a)(1) of this section exceeds 15 percent
of the covered swap entity’s tier 1
capital:
(i) The covered swap entity shall
collect initial margin under § 1221.3(a)
for each additional non-cleared swap
and non-cleared security-based swap
executed that business day with a
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity, commencing on the day
after execution and continuing on a
daily basis as required under
§ 1221.3(c), until the earlier of;
(A) The termination date of such noncleared swap or non-cleared securitybased swap, or
(B) The business day on which the
aggregate of all initial margin collection
amounts calculated under paragraph
(a)(1) of this section falls below 15
percent of the covered swap entity’s tier
1 capital;
(ii) Notwithstanding § 1221.7(b), to
the extent the covered swap entity
collects initial margin pursuant to
paragraph (a)(3)(i) of this section in the
form of collateral other than cash
collateral, the custodian for such
collateral may be the covered swap
entity or an affiliate of the covered swap
entity; and
(4) For purposes of paragraph (a) of
this section, ‘‘tier 1 capital’’ means:
(i) The sum of common equity tier 1
capital as defined in 12 CFR 1240.20(b)
and additional tier 1 capital as defined
in 12 CFR 1240.20(c).
(5) If any subsidiary of the covered
swap entity (including a subsidiary
described in § 1221.9(h)) executes any
non-cleared swap or non-cleared
security-based swap with any
counterparty that is a swap entity or
financial end user with a material swaps
exposure and an affiliate of the covered
swap entity;
(i) The covered swap entity shall treat
such non-cleared swap or security-based
swap as its own for purposes of this
paragraph (a); and
(ii) If the subsidiary is itself a covered
swap entity, the compliance by its
parent covered swap entity with this
paragraph (a)(5) shall be deemed to
establish the subsidiary’s compliance
E:\FR\FM\01JYR3.SGM
01JYR3
39780
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
with the requirements of this paragraph
(a) and to exempt the subsidiary from
the requirements for a covered swap
entity to collect initial margin under
§ 1221.3(a) from an affiliate.
(b) The requirement for a covered
swap entity to post initial margin under
§ 1221.3(b) does not apply with respect
to any non-cleared swap or non-cleared
security-based swap with a counterparty
that is an affiliate.
(c) Section 1221.3(d) shall apply to a
counterparty that is an affiliate in the
same manner as it applies to any
counterparty that is neither a financial
end user without a material swap
exposure nor a swap entity.
(d) For purposes of this section:
(1) An affiliate means:
(i) An affiliate as defined in § 1221.2;
or
(ii) Any company that controls, is
controlled by, or is under common
VerDate Sep<11>2014
00:24 Jul 01, 2020
Jkt 250001
control with the covered swap entity
through the direct or indirect exercise of
controlling influence over the
management or policies of the
controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in § 1221.2;
or
(ii) Any company that is controlled by
the covered swap entity through the
direct or indirect exercise of controlling
influence over the management or
policies of the controlled company.
Dated at Washington, DC, on or about June
25, 2020.
James P. Sheesley,
Acting Assistant Executive Secretary.
Dated: June 24, 2020.
Dale Aultman
Secretary, Farm Credit Administration Board.
Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2020–14097 Filed 6–30–20; 8:45 am]
BILLING CODE 4810–33; 6210–01; 6705–01; 6714–01;
7535–01–P
Brian P. Brooks,
Acting Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
PO 00000
Frm 00028
Fmt 4701
Sfmt 9990
E:\FR\FM\01JYR3.SGM
01JYR3
]]>Agencies
[Federal Register Volume 85, Number 127 (Wednesday, July 1, 2020)]
[Rules and Regulations]
[Pages 39754-39780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14097]
[[Page 39753]]
Vol. 85
Wednesday,
No. 127
July 1, 2020
Part III
Department of the Treasury
-----------------------------------------------------------------------
Comptroller of the Currency
-----------------------------------------------------------------------
12 CFR Part 45
Federal Reserve System
-----------------------------------------------------------------------
12 CFR Part 237
Federal Deposit Insurance Corporation
-----------------------------------------------------------------------
12 CFR Part 349
Farm Credit Administration
-----------------------------------------------------------------------
12 CFR 624
Federal Housing Finance Agency
-----------------------------------------------------------------------
12 CFR Part 1221
Margin and Capital Requirements for Covered Swap Entities; Direct-
Interim-Final Rule-Final Rule
Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules
and Regulations
[[Page 39754]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 45
[Docket No. OCC-2019-0023]
RIN 1557-AE69
FEDERAL RESERVE SYSTEM
12 CFR Part 237
[Docket No. R-1682]
RIN 7100-AF62
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 349
RIN 3064-AF08
FARM CREDIT ADMINISTRATION
12 CFR Part 624
RIN 3052-AD38
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1221
RIN 2590-AB03
Margin and Capital Requirements for Covered Swap Entities
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Farm Credit Administration (FCA);
and the Federal Housing Finance Agency (FHFA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (each, an agency, and
collectively, the agencies) are adopting a final rule that amends the
agencies' regulations requiring swap dealers and security-based swap
dealers under the agencies' respective jurisdictions to exchange margin
with their counterparties for swaps that are not centrally cleared
(Swap Margin Rule). The Swap Margin Rule as adopted in 2015 takes
effect under a phased compliance schedule spanning from 2016 through
2020, and the entities covered by the rule continue to hold swaps in
their portfolios that were entered into before the effective dates of
the rule. Such swaps are grandfathered from the Swap Margin Rule's
requirements until they expire according to their terms. The final rule
permits swaps entered into prior to an applicable compliance date
(legacy swaps) to retain their legacy status in the event that they are
amended to replace an interbank offered rate (IBOR) or other
discontinued rate, modifies initial margin requirements for non-cleared
swaps between affiliates, introduces an additional compliance date for
initial margin requirements, clarifies the point in time at which
trading documentation must be in place, permits legacy swaps to retain
their legacy status in the event that they are amended due to technical
amendments, notional reductions, or portfolio compression exercises,
and makes technical changes to relocate the provision addressing
amendments to legacy swaps that are made to comply with the Qualified
Financial Contract Rules, as defined in the Supplementary Information
section. In addition, the final rule addresses comments received in
response to the agencies' publication of the interim final rule that
would preserve the status of legacy swaps meeting certain criteria if
the United Kingdom withdraws from the European Union (hereafter
``Brexit) without a negotiated settlement agreement.
DATES: The final rule is effective August 31, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: Chris McBride, Director for Market Risk, Treasury and Market
Risk Policy, (202) 649-6402, or Allison Hester-Haddad, Counsel, Chief
Counsel's Office, (202) 649-5490, for persons who are deaf or hearing
impaired, TTY (202) 649-5597, Office of the Comptroller of the
Currency, 400 7th Street SW, Washington, DC 20219.
Board: Constance Horsley, Deputy Associate Director, (202) 452-
5239, Lesley Chao, Lead Financial Institution Policy Analyst, (202)
974-7063, or John Feid, Principal Economist, (202) 452-2385, Division
of Supervision and Regulation; Patricia Yeh, Senior Counsel, (202) 452-
3089, or Justyna Bolter, Senior Attorney, (202) 452-2686, Legal
Division; for users of Telecommunication Devices for the Deaf (TDD)
only, contact 202-263-4869; Board of Governors of the Federal Reserve
System, 20th and C Streets NW, Washington, DC 20551.
FDIC: Irina Leonova, Senior Policy Analyst, [email protected],
Capital Markets Branch, Division of Risk Management Supervision, (202)
898-3843; Thomas F. Hearn, Counsel, [email protected], Legal Division,
Federal Deposit Insurance Corporation, 550 17th Street NW, Washington,
DC 20429.
FCA: Jeremy R. Edelstein, Associate Director, Timothy T. Nerdahl,
Senior Policy Analyst, Clayton D. Milburn, Senior Financial Analyst,
Finance and Capital Markets Team, Office of Regulatory Policy, (703)
883-4414, TTY (703) 883-4056, or Richard A. Katz, Senior Counsel,
Office of General Counsel, (703) 883-4020, TTY (703) 883-4056, Farm
Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
FHFA: Christopher Vincent, Senior Financial Analyst, Office of
Financial Analysis, Modeling & Simulations, (202) 649-3685,
[email protected], or James P. Jordan, Associate General
Counsel, Office of General Counsel, (202) 649-3075,
[email protected], Federal Housing Finance Agency, Constitution
Center, 400 7th St. SW, Washington, DC 20219. The telephone number for
the Telecommunications Device for the Hearing Impaired is (800) 877-
8339.
SUPPLEMENTARY INFORMATION:
I. Introduction
The agencies are adopting the recently proposed amendments to the
agencies' regulations that require swap dealers and security-based swap
dealers under the agencies' respective jurisdictions to exchange margin
with their counterparties for swaps that are not centrally cleared
(Swap Margin Rule or Rule), with certain adjustments (final rule). As
discussed in detail below, the final rule (1) permits swaps entered
into prior to an applicable compliance date (legacy swaps) to retain
their legacy status in the event that they are amended to replace an
interbank offered rate (IBOR) or other discontinued rate, (2) modifies
initial margin requirements for non-cleared swaps between covered swap
entities and their affiliates, (3) introduces an additional compliance
date for initial margin requirements, (4) clarifies the point in time
at which trading documentation must be in place, (5) permits legacy
swaps to retain their legacy status in the event that they are amended
due to technical amendments, notional reductions, or portfolio
compression exercises, (6) makes technical changes to relocate the
provision within the rule addressing amendments to legacy swaps that
are made to comply with the qualified financial contract rules (QFC
Rules),\1\ and (7) addresses comments received in response to the
agencies' publication of
[[Page 39755]]
the interim final rule dealing with Brexit-related issues.
---------------------------------------------------------------------------
\1\ 83 FR 50805 (October 10, 2018). The QFC Rules are codified
as follows: 12 CFR part 47 (OCC's QFC Rule); 12 CFR part 252,
subpart I (Board's QFC Rule); 12 CFR part 382 (FDIC's QFC Rule).
---------------------------------------------------------------------------
A. Background on the Swap Margin Rule
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) required the agencies to jointly adopt rules that
establish capital and margin requirements for swap entities that are
prudentially regulated by one of the agencies (covered swap
entities).\2\ These capital and margin requirements apply to swaps that
are not cleared by a registered derivatives clearing organization or a
registered clearing agency (non-cleared swaps).\3\ For the remainder of
this preamble, the term ``non-cleared swaps'' refers to non-cleared
swaps and non-cleared security-based swaps unless the context requires
otherwise.
---------------------------------------------------------------------------
\2\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010). See 7 U.S.C. 6s; 15
U.S.C. 78o-10. Sections 731 and 764 of the Dodd-Frank Act added a
new section 4s to the Commodity Exchange Act of 1936, as amended,
and a new section, section 15F, to the Securities Exchange Act of
1934, as amended, respectively, which require registration with the
Commodity Futures Trading Commission (CFTC) of swap dealers and
major swap participants and the U.S. Securities and Exchange
Commission (SEC) of security-based swap dealers and major security-
based swap participants (each a swap entity and, collectively, swap
entities). Section 1a(39) of the Commodity Exchange Act of 1936, as
amended, defines the term ``prudential regulator'' for purposes of
the margin requirements applicable to swap dealers, major swap
participants, security-based swap dealers and major security-based
swap participants. See 7 U.S.C. 1a(39).
\3\ A ``swap'' is defined in section 721 of the Dodd-Frank Act
to include, among other things, an interest rate swap, commodity
swap, equity swap, and credit default swap, and a security-based
swap is defined in section 761 of the Dodd-Frank Act to include a
swap based on a single security or loan or on a narrow-based
security index. See 7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68).
---------------------------------------------------------------------------
The Basel Committee on Banking Supervision (BCBS) and the Board of
the International Organization of Securities Commissions (IOSCO)
established an international framework for margin requirements on non-
cleared derivatives in September 2013 (BCBS/IOSCO Framework).\4\
Following the establishment of the BCBS/IOSCO Framework, on November
30, 2015, the agencies published the Swap Margin Rule, which includes
many of the principles and other aspects of the BCBS/IOSCO
Framework.\5\ In particular, the Swap Margin Rule adopted the
implementation schedule set forth in the BCBS/IOSCO Framework,
including the revised implementation schedule adopted on March 18,
2015.\6\
---------------------------------------------------------------------------
\4\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
\5\ 80 FR 74840 (November 30, 2015).
\6\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (March 2015), available at https://www.bis.org/bcbs/publ/d317.pdf.
---------------------------------------------------------------------------
The Swap Margin Rule established an effective date of April 1,
2016, with a phased-in compliance schedule for the initial and
variation margin requirements.\7\ On or after March 1, 2017, all
covered swap entities were required to comply with the variation margin
requirements for transactions with other swap entities and financial
end user counterparties. The Swap Margin Rule presently requires all
covered swap entities to comply with the initial margin requirements
for non-cleared swaps with all financial end users with a material
swaps exposure and with all swap entities by September 1, 2020.
---------------------------------------------------------------------------
\7\ The applicable compliance date for a covered swap entity is
based on the average daily aggregate notional amount of non-cleared
swaps, foreign exchange forwards and foreign exchange swaps of the
covered swap entity and its counterparty (accounting for their
respective affiliates) for each business day in March, April, and
May of that year. The applicable compliance dates for initial margin
requirements that are currently in place, and the corresponding
average daily aggregate notional amount thresholds, are: September
1, 2016, $3 trillion; September 1, 2017, $2.25 trillion; September
1, 2018, $1.5 trillion; September 1, 2019, $0.75 trillion; and
September 1, 2020, all swap entities and counterparties. See Sec.
__.1(e) of the Swap Margin Rule. In this final rule, the agencies
are also adding one additional year to this schedule for certain
counterparties.
---------------------------------------------------------------------------
B. Overview of the Notice of Proposed Rulemaking and General Summary of
Comments
On November 7, 2019, the agencies sought comment on a proposal to
revise certain parts of the Swap Margin Rule to facilitate the
implementation of prudent risk management strategies at covered swap
entities (proposed rule or proposal).\8\ The proposed amendments
permitted legacy swaps to retain their legacy status in the event that
they are amended to replace an interbank offered rate (IBOR) or other
discontinued rate, introduced an additional compliance date for initial
margin requirements, clarified the point in time at which trading
documentation must be in place, and permitted legacy swaps to retain
their legacy status in the event that they are amended due to technical
amendments, notional reductions, or portfolio compression exercises.
The proposal would also have made technical changes to relocate the
provision within the rule addressing amendments to legacy swaps that
are made to comply with the QFC Rules.
---------------------------------------------------------------------------
\8\ 84 FR 59970 (Nov. 7, 2019).
---------------------------------------------------------------------------
The proposal would also have no longer required covered swap
entities to collect initial margin for non-cleared swaps with
affiliates. However, inter-affiliate transactions would have continued
to be subject to variation margin requirements. Inter-affiliate
transactions of covered swap entities regulated by the FDIC, the OCC,
and the Board also would continue to be subject to other applicable
rules and regulations.
The agencies received approximately 20 comments on the proposal,
from U.S. financial institutions, public interest groups, trade
associations, academic institutions, and other interested parties.
Agency staff also met with some commenters at those commenters' request
to discuss their comments on the proposal.\9\
---------------------------------------------------------------------------
\9\ Summaries of these meetings may be found at the internet
sites where the agencies' have posted public comments on the NPR.
See, e.g., https://www.federalreserve.gov/apps/foia/proposedregs.aspx.
---------------------------------------------------------------------------
Most commenters supported the proposal's relief to amend certain
legacy swaps for certain reasons and the proposal's addition of a
compliance phase for smaller entities, as a meaningful way to assist
market participants in managing and prioritizing their resources,
mitigating potential trading disruptions related to the transition of
IBORs to other interest rates, complying with documentation
requirements, and engaging in certain trade life-cycle events.
With respect to removing the initial margin requirement for inter-
affiliate transactions, some commenters supported the proposal while
others expressed the view that the proposal would increase risks to
covered swap entities individually and financial stability more
broadly. For example, a few commenters shared their view that
collateralization (in the form of initial margin collected from a
covered swap entity's affiliate) is a highly effective tool for
reducing closeout risk.\10\ These commenters were concerned that the
proposed rule would eliminate an estimated $40 billion in collateral
held by covered swap entities, which, in their view, is necessary for
closeout risk-absorption. Some of the commenters also expressed the
view that banking organizations are using inter-affiliate swaps for the
primary purpose of concentrating the risks of the organizations' world-
wide derivatives activities onto the books of the covered
[[Page 39756]]
swap entities subject to the Swap Margin Rule, i.e., U.S. insured
depository institutions.
---------------------------------------------------------------------------
\10\ Closeout risk is the risk associated with the period
following a confirmed default wherein the defaulting counterparty is
unable to perform on the swap contract and the cost of legally
closing out the existing swap and establishing a replacement swap
with a new counterparty is unknown.
---------------------------------------------------------------------------
By contrast, commenters supporting the removal of the initial
margin requirement for inter-affiliate transactions asserted that the
proposal would align the Swap Margin Rule with the margin requirements
of some other domestic and foreign jurisdictions and facilitate more
balanced and effective risk management practices across the spectrum of
risks faced within banking organizations that engage in non-cleared
swaps.
As discussed below in this Supplementary Information section, the
final rule adopts, with certain adjustments in response to the comments
received, the proposal that (1) permits swaps entered into prior to an
applicable compliance date (legacy swaps) to retain their legacy status
in the event that they are amended to replace an IBOR or other
discontinued rate, (2) modifies the initial margin requirement for non-
cleared swaps between covered swap entities and their affiliates, (3)
introduces an additional compliance date for initial margin
requirements, (4) clarifies the point in time at which trading
documentation must be in place, (5) permits legacy swaps to retain
their legacy status in the event that they are amended due to technical
amendments, notional reductions, or portfolio compression exercises,
(6) makes technical changes to relocate the provision within the rule
addressing amendments to legacy swaps that are made to comply with the
qualified financial contract rules (QFC Rules),) \11\ and (7) addresses
comments received in response to the agencies' publication of the
interim final rule dealing with Brexit-related issues.
---------------------------------------------------------------------------
\11\ 83 FR 50805 (October 10, 2018). The QFC Rules are codified
as follows: 12 CFR part 47 (OCC's QFC Rule); 12 CFR part 252,
subpart I (Board's QFC Rule); 12 CFR part 382 (FDIC's QFC Rule).
---------------------------------------------------------------------------
II. Interbank Offered Rates
A. Summary of Proposed Rule
Due to the potential discontinuation of LIBOR at the end of 2021,
covered swap entities face uncertainty about the way their swap
contracts that include an interest rate based on LIBOR and other IBORs
will operate after a permanent discontinuation. An interest rate is a
critical term for calculating payments under a swap contract, be it an
interest rate swap or another type of swap that includes a reference
interest rate as one of the mechanisms for determining payments or
premiums. In many instances, covered swap entities may decide to amend
existing swap contracts to replace an IBOR before the IBOR becomes
discontinued. Such amendments may also trigger follow-on amendments
that the counterparties determine are necessary to maintain the
economics of the contract.\12\ Absent revisions to the Swap Margin
Rule, an amendment to a legacy swap could affect the legacy status of
such a swap and make it subject to the margin requirements of the rule.
In order to enable covered swap entities and their counterparties to
minimize disturbance to the financial markets, the agencies proposed to
provide relief to permit covered swap entities to amend the interest
rates in a legacy swap contract, based on certain conditions of
eligibility, and to adopt necessary follow-on amendments, without the
swap losing its legacy status.
---------------------------------------------------------------------------
\12\ Follow-on amendments may include, for example, spread
adjustments resulting from the move from a term rate to an overnight
rate, from an unsecured rate to a secured rate, or from a change in
tenor.
---------------------------------------------------------------------------
B. Method of Amendment
1. Proposal
In recognition of the ongoing efforts to transition away from
certain IBORs due to their potential discontinuation, the agencies
proposed to amend the Swap Margin Rule to remove impediments that would
limit the ability of covered swap entities to replace certain interest
rates in their legacy non-cleared swaps. Proposed Sec. __.1(h)
recognized that these replacements could be carried out using a variety
of legal mechanisms by permitting amendments accomplished by the
parties' adherence to a protocol, contractual amendment of an agreement
or confirmation, or execution of a new contract in replacement of and
immediately upon termination of an existing contract (i.e., tear-up),
subject to certain limitations found in Sec. __.1(h)(3).
2. Final Rule
Commenters were supportive of the flexibility that the agencies
provided regarding the method of amendment, particularly the
flexibility to make amendments to an individual non-cleared swap or on
a netting set level. Several commenters requested a technical change to
the language in proposed Sec. __.1(h) to clarify that the method of
adherence to a protocol is itself a contractual amendment. To make this
clarification, the agencies are replacing the language ``contractual
amendment of an agreement or confirmation'' with ``other amendment of a
contract or confirmation'' to make clear that both an adherence to a
protocol as well as other amendments are permissible methods of
amendment to a legacy swap, and also to maintain consistency in using
the term ``contract'' rather than ``agreement'' in Sec. __.1(h). The
agencies are also making non-substantive parallel changes to the rule
text to clarify that the execution of a new contract or confirmation in
replacement of and immediately upon termination of an existing contract
or confirmation is a permitted method of amendment.
A few commenters also requested that the agencies expand Sec.
__.1(h) to include new, non-legacy swaps entered into solely for
managing the transition away from IBORs, or new, non-legacy swaps
designed to transition an existing swap away from an IBOR even if the
swap may not be amended or terminated. These commenters suggested this
expansion would facilitate use of basis swaps to offset IBOR exposure
from legacy swaps against new exposure to a risk-free rate (RFR). One
commenter argued this would be roughly economically equivalent to
directly amending one or more existing swaps to eliminate the IBOR
exposure and replacing it with an RFR.
The agencies are not expanding the regulation beyond the methods
that were proposed in Sec. __.1(h).) The alternative suggested by the
commenters would be ineffective in resolving the problem the agencies
seek to address. As long as covered swap entities hold existing swaps
contractually obligating them to exchange payments based on IBORs, they
bear the risk that those IBORs will be discontinued. If a covered swap
entity hedges that IBOR exposure to another benchmark by executing a
new basis swap, one leg of that swap will necessarily be linked to the
IBOR. While the agencies believe there may be certain circumstances in
which sound risk management by a covered swap entity would include new
trading activity between IBOR and non-IBOR market exposures (with
contract dates ending by December 2021), these activities go beyond the
scope of relief the agencies are providing with this rule.
C. Purpose of Amendments
1. Proposal
The proposed rule described the type of interest rate that can be
replaced and the accompanying changes that would be permitted. Proposed
Sec. Sec. __.1(h)(3)(i)(A) and (B) would permit amendments that are
made solely to accommodate the replacement of an IBOR or of any other
non-IBOR interest rate that a covered swap entity
[[Page 39757]]
reasonably expects to be discontinued or reasonably determines has lost
its relevance as a reliable benchmark due to a significant impairment
with an alternate interest rate.
2. Final Rule
The agencies did not receive any comments on this part of the
proposed rule and are adopting it as proposed.
D. Permitted Interest Rates
1. Proposal
The proposed rule provided that an IBOR could be replaced,
including but not limited to LIBOR, TIBOR, BBSW, SIBOR, CDOR, EURIBOR,
and HIBOR. Although the current uncertainty surrounding interest rates
is tied to IBORs, the agencies also proposed a second, more subjective
standard that would be applicable to other categories of interest
rates, should the need arise in the future. This forward-looking
standard was designed to encourage covered swap entities to resolve
critical uncertainties before an interest rate is discontinued, or
loses its market relevance, in order to minimize disturbance to the
markets.
The proposed rule (Sec. __.1(h)(3)(i)(C)) also contemplated that
an interest rate may need to be replaced more than one time. For
example, an IBOR may first be replaced with fallback provisions at a
time when a permanent alternative interest rate is not yet available or
not yet agreed upon by the swap participants, or amendment
documentation has not yet been developed. Subsequently, fallback
provisions may be replaced with permanent alternative interest rates.
If the original interest rate that is being replaced is an IBOR or any
other non-IBOR interest rate that otherwise met the requirements of the
proposed rule and that a covered swap entity reasonably expects to be
discontinued or reasonably determines has lost its relevance as a
reliable benchmark due to a significant impairment, the non-cleared
swap may be amended more than once to accommodate ongoing developments
toward a permanent replacement interest rate. The proposed rule did not
limit the number of amendments that could take place, as long as the
interest rate that was originally present in the non-cleared swap met
the criteria in either proposed Sec. __.1(h)(3)(i)(A) or Sec.
__.1(h)(3)(i)(B). The proposed rule would not permit subsequent
amendments that change interest rates or other terms of the non-cleared
swap for any purpose other than for those purposes explicitly set out
in Sec. __.1(h), without triggering application of the margin
requirements.
To benefit from the treatment of this new legacy swap provision, a
covered swap entity must make the amendments to the non-cleared swap
solely to accommodate the replacement of an interest rate described in
the proposed rule. The proposed rule was flexible as to the incoming
replacement interest rate by leaving it up to the counterparties to
select a mutually agreeable replacement interest rate. The proposed
rule provided examples of the Secured Overnight Funding Rate (SOFR),
the AMERIBOR and the Overnight Bank Funding Rate as some potential
alternatives suggested by some market participants. The agencies
expected that any replacement interest rate, including any successor
replacement interest rate, would be agreed upon by the parties after
assessing its complexity, safety and soundness, and taking into
consideration associated risk management practices.\13\
---------------------------------------------------------------------------
\13\ The replacement rate is also expected to be consistent with
international standards, such as the IOSCO Principles for Financial
Benchmarks. See https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf.
---------------------------------------------------------------------------
2. Final Rule
The agencies received several comments expressing concern that the
proposed rule could be read as applying to interest rate swaps only and
requesting similar relief for all other asset categories of swaps,
including foreign exchange, equity, commodity, and credit default
swaps. The agencies are clarifying that amendments to the rule permit
amendments to interest rates but do not restrict the categories of
swaps where those interest rates appear and thus do not restrict the
categories of swaps in which those amendments could be made. Interest
rates could be used in a variety of different categories of swaps, such
as an underlying interest rate index in an interest rate swap or as a
discounting interest rate for collateral or payment calculations in a
commodity, foreign exchange, equity, or credit swap. In other words,
the relief provided applies to all categories of non-cleared swaps that
include or refer to an IBOR or any other interest rate described in
paragraphs (h)(3)(i)(A)-(C) of the final rule.
One commenter requested that the agencies extend the relief in the
Proposal to cover amendments made solely to accommodate the replacement
of any reference instrument (e.g., iTraxx) reasonably expected to be
discontinued or reasonably determined to have lost its relevance as a
reliable benchmark due to a significant impairment. The agencies note
that there is no current expectation or indication that any major non-
interest rate reference instrument is expected to be discontinued.
Moreover, the expected discontinuation of IBORs place these interest
rates in a special position that does not extend to periodic revisions
of underlying reference instruments in commodity, foreign exchange,
credit, equity, or other swaps. The agencies are not modifying the
final rule to allow the replacement of a non-interest rate reference
instrument while retaining the legacy status of the swap. If any
expectation of discontinuation arises in the future, the agencies may
reconsider their position.
One commenter requested clarification that any new intermediate or
permanent interest rate does not necessarily have to be viewed by the
market as a ``successor'' to the IBOR or other discontinued rate, but
that the counterparties to the swap contract simply have to agree on
the appropriate replacement interest rate. The agencies confirm this
understanding.
Commenters expressed concern that changes to the discounting
methods to adopt RFRs used by some central counterparties (CCPs) would
require conforming changes to over-the-counter swaptions that may be
presented to these CCPs for clearing. The agencies have modified the
proposed rule to allow legacy swaps to be amended to reflect these
changes to the discount interest rate and remain legacy swaps.
The agencies did not receive any other comments on this part of the
proposed rule and are adopting it largely as proposed.
E. Follow-On Amendments
1. Proposal
In the proposed rule, the agencies acknowledged that replacing an
interest rate could require other contractual changes to maintain the
economics of the non-cleared swap and to preserve the relative economic
values to the parties after incorporating changes to the interest rate.
The proposed rule would permit changes that incorporate spreads and
other adjustments that accompany and implement the replacement interest
rate amendment. The proposed rule would also permit other, more
administrative and technical changes necessary to operationalize the
determination of payments or other exchanges of economic value using
the replacement interest rate, including changes to determination
dates, calculation agents, and payment dates. These types of
[[Page 39758]]
administrative changes may be necessary to adjust computations and
operational provisions to reflect the differences between an IBOR and
the replacement interest rate or rates. The agencies envisioned that a
number of contractual changes could be necessary to maintain the
economics of the non-cleared swap, and for this reason, the proposed
rule would permit these changes. However, the agencies did not believe
that the relief being provided for interest rate replacement purposes
should be expansively applied to encompass all changes to a legacy
swap. Accordingly, the proposed rule text clarified that the proposed
safe harbor for legacy swaps would be unavailable if the amendments
extend the maturity or increase the total effective notional amount of
the non-cleared swap, irrespective of the reason for those changes.
2. Final Rule
The agencies received several comments requesting reconsideration
of the restriction on extending the maturity or increasing the total
effective notional amount of the non-cleared swap. Day count
conventions or other factors such as final settlement or final payment
occurring on the 30th of the month versus the 15th of the month may
result in an extension of the remaining maturity of a swap. Since the
counterparty to a non-cleared swap may not know the size of the final
payment until the end of the interest period, the swap may incorporate
a payment delay, with the final maturity shifting as a result.
Commenters also explained that the replacement of an IBOR may increase
the total effective notional amount of the non-cleared swap under a few
scenarios. For example, a fixed-for-floating IBOR swap may use a 30/360
day count fraction market convention, but the market standard for a
replacement reference benchmark rate swap may use an actual/360 day
count fraction market convention. Under this scenario, the notional
amount would need to be adjusted to ensure that the payment amounts on
the fixed leg of the replacement reference benchmark rate swap are the
same compared to the IBOR swap.
In response to these comments, the agencies understand that certain
differences in market conventions may not yet be well established or
expected. The agencies are preserving the proposal's restriction on
extensions of maturity and increases of total effective notional
amount, but adding language allowing extensions and increases as
necessary to accommodate the differences between market conventions for
an outgoing interest rate and its replacement. Market conventions could
include changes in day count conventions, settlement date, or final
payment date.
Several commenters also explained that counterparties may employ
portfolio compression to effectuate amendments to legacy swaps for the
purpose of eliminating IBORs, and that differences between market
conventions for an outgoing interest rate and its replacement in this
context could also affect the remaining maturity and total effective
notional amount of portfolios of IBOR swaps. The agencies are adding
new paragraph (h)(3)(iii) to accommodate portfolio compression
exercises that are driven by the sole purpose of replacing an interest
rate described in paragraph (h)(3)(i). In such a case, portfolio
compression would not be subject to the limitations in paragraph
(h)(4), but may not extend the maturity or increase the total effective
notional amount of the non-cleared swap or non-cleared security-based
swap beyond what is necessary to accommodate the differences between
market conventions for an outgoing interest rate and its replacement.
Commenters also expressed a concern that changes associated with
the liquidity of specific maturities of swaps with a replacement
interest rate may result in an increase in the remaining maturity of
the non-cleared swap. For example, a swap with a four-year remaining
maturity may not be as liquid as a swap with a five-year remaining
maturity. Given that this rationale for an extension of maturity can
significantly increase the remaining maturity of a legacy swap, the
agencies believe that it could lead to inappropriate extensions or
evasion of the requirements of the rule. Accordingly, the agencies are
not permitting an extension of the remaining maturity for liquidity or
similar reasons.
F. End Date
The proposed rule did not specify an end date by which IBOR-related
amendments must be completed, but requested comment on that issue.
Several commenters agreed with the agencies' approach to not specify an
end date, explaining that amendments related to fallbacks or other
transitions to replacement interest rates may not be completed in one
step or within a given time frame. Accordingly, the agencies are not
adopting any specific end date by which IBOR-related amendments must be
completed.
G. Exemptions for Commercial and Cooperative End Users
One commenter requested that the agencies clarify how the Swap
Margin Rule treats post-compliance date non-cleared swaps that
qualified for the commercial/cooperative end user exemption from the
rule under Sec. __.1(d)(1), if such swaps are amended to accommodate
changes to referenced benchmark interest rates. The commenter expressed
concern that post-compliance date non-cleared swaps originally exempted
under Sec. __.1(d)(1) will need to be amended by commercial end users
or cooperatives to remove an IBOR benchmark interest rate.
Specifically, the commenter noted that the amended swaps might become
subject to temporary mismatches between the rate referenced by such
swaps and the commercial arrangements being hedged, thereby raising
questions about their exempt status.
The commenter's request is based on two no-action letters that the
CFTC issued pertaining to non-cleared swaps in which the counterparty
qualified for an exemption or exception from mandatory clearing and/or
non-cleared margin requirements under the Commodity Exchange Act (CEA)
or CFTC regulations.\14\
---------------------------------------------------------------------------
\14\ See CFTC Letter No. 19-28 (December 17, 2019), in section
V.A., providing regulatory relief from the mandatory clearing
requirement, and CFTC Letter 19-26 (December 17, 2019), in section
E.1., which granted relief from the CFTC's margin requirements for
non-cleared swaps. In both situations, the counterparties previously
relied on the end-user exemptions end-user exemptions in the CEA and
applicable CFTC regulations.
---------------------------------------------------------------------------
The scope of the agencies' exemption for commercial and cooperative
end users in Sec. __.1(d)(1) is, by its terms, tied to the scope of
the commercial end user exemptions in the CEA and their implementing
regulations. No-action letters are not included under the agencies'
regulations. However, for the same reasons the agencies are amending
Sec. __.1(h) to preserve the legacy status of swaps during the IBOR
transition, the agencies will treat commercial and cooperative end user
swaps originally exempted under Sec. __.1(d)(1) as remaining within
the scope of Sec. __.1(d)(1) if those swaps are effectuated under the
terms of the two applicable CFTC no-action letters.\15\
---------------------------------------------------------------------------
\15\ Id. The agencies' determination is specific to these two
CFTC no-action letters, and more specifically to section V.A. of
CFTC Letter No. 19-28 and section E.1. of CFTC Letter No. 19-26. The
agencies are not applying CFTC no-action letters to modify the terms
of the Swap Margin Rule in any other regard.
---------------------------------------------------------------------------
[[Page 39759]]
III. Non-Cleared Swaps Between Covered Swap Entities and an Affiliate
The agencies proposed to amend the treatment of affiliate
transactions in the Swap Margin Rule by creating an exemption from the
initial margin requirements for non-cleared swaps between affiliates.
The agencies also proposed, however, to retain the requirement that
affiliates exchange variation margin. Twenty-two interested persons
submitted public comments to the agencies on the proposal, including
individuals, banking and securities trade groups, public interest
advocacy groups, and one custodian bank.
After consideration of these public comments, as discussed below,
the agencies are adopting the rule as proposed with a modification (1)
requiring a covered swap entity to calculate and monitor the amount of
inter-affiliate initial margin that would otherwise be required to be
collected by such covered swap entity under the Swap Margin Rule; and
(2) requiring a covered swap entity to collect initial margin from its
affiliates on all new non-cleared swaps if the aggregate initial margin
calculation amount exceeds 15 percent of the covered swap entity's Tier
1 capital (``15% Tier 1 Threshold''). This requirement will apply to
inter-affiliate swaps executed on any business day the 15% Tier 1
Threshold is exceeded and remain in place as long as the 15%Tier 1
threshold has been exceeded. A covered swap entity will not be required
to collect initial margin from its affiliates if the aggregate inter-
affiliate initial margin calculation amount is 15 percent or less of
the covered swap entity's Tier 1 capital. For purposes of the
calculation described above and as further discussed below, a covered
swap entity will treat non-cleared swaps between a subsidiary of the
covered swap entity and an affiliate as if the non-cleared swaps were
its own. Additionally, the agencies are also clarifying one aspect of
the initial margin requirement for affiliates. The final rule clarifies
that non-cleared swaps between affiliates remain subject to Sec.
__.3(d), which describes the initial margin requirements that apply to
non-cleared swaps between a covered swap entity and counterparties that
are not subject to the Swap Margin Rule's requirement to calculate and
exchange initial margin on a daily basis. That section provides that a
covered swap entity shall collect initial margin at such times and in
such forms and such amounts (if any), that the covered swap entity
determines appropriately addresses the credit risk posed by the
counterparty and the risks of such non-cleared swap.
A. Main Proposal
The agencies proposed to amend Sec. __.11 of the Swap Margin Rule,
which currently establishes a special set of six regulatory
requirements for swap transactions between a covered swap entity and an
affiliate. Five of these provisions concern the requirement for a
covered swap entity to collect initial margin for covered swap
transactions with an affiliate. Each of these five provisions focuses
on a particular aspect of the Swap Margin Rule's initial margin
requirements as they generally apply to non-affiliated counterparties,
and provides corresponding exemptions from or reductions to that
particular aspect of the Swap Margin Rule's requirements whenever the
counterparty is an affiliate of the covered swap entity.\16\ The
agencies proposed to replace this set of five exemptive provisions with
a single exemption from the initial margin exchange requirement
contained in Sec. __.3 of the Swap Margin Rule. The agencies proposed
to retain the sixth regulatory requirement in Sec. __.11, which is the
requirement for covered swap entities to collect and post variation
margin for affiliate swap transactions pursuant to Sec. __.4 of the
Swap Margin Rule.\17\
---------------------------------------------------------------------------
\16\ Swap Margin Rule Sec. Sec. __.11(b)(1) (posting initial
margin); (b)(2) (initial margin threshold amount); (d) (custody of
margin); (e) (margin model holding period); and (f) (standardized
margin amounts).
\17\ Swap Margin Rule Sec. __.11(c). This subsection creates no
variations from the generally-applicable requirements of Sec. __.4.
Accordingly, the agencies proposed to remove it, and Sec. __.4
directly applies to covered swap entities engaging in swap
transactions with affiliates on the same terms as it applies with
any other counterparty.
---------------------------------------------------------------------------
B. Comments and Considerations for the Final Rule
Twelve commenters representing the views of covered swap entities
and their counterparties expressed support for the proposed rule.
Commenters in this group generally expressed the view that inter-
affiliate swaps are an important risk management tool, the use of which
would be facilitated by the proposed rule. Several of these commenters
further expressed the view that the risks of inter-affiliate swaps are
better addressed by other means, such as capital, credit risk limits,
and variation margin. Many also noted the inter-affiliate provisions of
the current Swap Margin Rule are inconsistent with those of the CFTC
and most G20 regulators. One commenter estimates that $39.4 billion of
inter-affiliate initial margin collateral was held at year-end 2018 by
the group of covered swap entities that first became subject to the
Swap Margin Rule in 2016.
Eight commenters, including public interest advocacy groups and
individuals, expressed opposition to the agencies' proposal, and
provided several different grounds for their objections. These views
are grounded on similar core concerns, which the agencies have
evaluated as follows.
One concern centers on some commenters' view that initial margin
serves a special loss-absorbing function in the inter-affiliate
context, and the agencies' proposal would increase risks to covered
swap entities individually and financial stability more broadly by
removing this protection. One commenter discussed the specific function
of initial margin and contrasted it with variation margin.
Initial margin is a risk management tool designed to mitigate a
covered swap entity's exposure to market risk associated with a
counterparty's default by requiring a counterparty to obtain and
provide financial collateral equal to the potential future exposure
(PFE) the covered swap entity would face if the counterparty defaults.
Under the Swap Margin Rule, a covered swap entity accordingly collects
high-quality collateral from its counterparty equal to this PFE, placed
in third-party custody to provide a source of payment to offset this
risk. This PFE is the measurement of the exposure due to the defaulting
counterparty's inability to continue performing on the swap contracts
during the period after the counterparty's default but before the
covered swap entity closes out its positions with the defaulting
counterparty and establishes similar trades with a new counterparty.
In practice, it can take a varying number of days after default for
the covered swap entity to establish new trades with new counterparties
as necessary to replace or re-hedge the defaulted swaps.\18\ The
process of
[[Page 39760]]
obtaining new swaps contracts with new counterparties creates
additional costs that can vary depending on prevailing market
conditions at the time default occurs and in the subsequent days needed
to obtain the new contracts. This potential range of costs represents
the covered swap entity's PFE.
---------------------------------------------------------------------------
\18\ If the net value to the covered swap entity of the
portfolio with the counterparty (the current exposure amount) was
positive at the time of the default, the covered swap entity already
holds variation margin--collected from the counterparty on a daily
basis as required by the Swap Margin Rule--to cover that amount. The
Swap Margin Rule's variation margin provisions require covered swap
entities to recalculate the monetary value of the portfolio of swaps
with each counterparty every business day. If the monetary value of
the portfolio to the covered swap entity has increased, the covered
swap entity is required to collect additional variation margin
collateral from the counterparty. If the monetary value has
decreased, the covered swap entity is required to return an
equivalent amount of variation margin collateral to the
counterparty. Sec. Sec. __.2 ``variation margin'' and ``variation
margin amount,'' __.4. It is generally industry practice to use cash
as variation margin collateral; however, if non-cash financial
collateral is used, the covered swap entity must re-value it each
day and adjust the daily variation margin collection or return
amounts to reflect those changes as well. Sec. __.6(e). If the
event triggering the counterparty's default under a swap is the
counterparty's failure to provide additional collateral in response
to a margin call, then the dealer's current credit exposure will be
undercollateralized by the amount of the day's changes in current
exposure and/or collateral value.
---------------------------------------------------------------------------
As the commenter noted, because these costs will vary depending on
whatever market conditions actually exist at the unknown future time
when the counterparty defaults, the Swap Margin Rule requires covered
swap entities to calculate PFE based on the premise that its market
costs will be on the high end of the expected range, statistically
speaking. Because of this uncertainty, the amount of initial margin
collateral a covered swap entity will collect under the Swap Margin
Rule is significantly higher than the daily amount of variation margin
exchanged, which is based on current and known changes in the market
conditions that change the value of the portfolio of swaps.
Commenters expressing concern about PFE risk asserted that
collateralization (in the form of initial margin collected from the
covered swap entity's affiliate) is an effective tool for reducing the
close-out and re-hedging risk described above. These commenters
objected that the proposed rule would eliminate an estimated $40
billion in collateral held by covered swap entities that, in the
commenters' views, is necessary for mitigating PFE risk. However, it is
incumbent on supervisors to evaluate multiple approaches to controlling
the overall risk of inter-affiliate swaps exposures, and to consider
which of the available approaches to deploy depending on how those
risks occur (and evolve) in the industry. Inter-affiliate counterparty
credit risk, in the form of PFE, is one of several risks that
affiliated banking organizations need to manage. The nature of these
risks, their potential severity, and the mechanisms to manage them in
tandem vary such that no single approach to address all risks in
isolation is appropriate. Supervisors have a variety of tools at their
disposal to ensure protection of a banking organization's financial
integrity, in light of the banking organization's particular scope of
activities (both financial and geographic).\19\ Initial margin can be
effective in addressing the PFE risks of inter-affiliate transactions
within a banking organization, but viewing it as a comprehensive
solution is a simplistic approach.
---------------------------------------------------------------------------
\19\ For example, internationally-active banking organizations
face the financial risks of each location in which they operate, and
one important tool is the coordination by international supervisors
to ensure equivalent supervisory requirements are implemented across
jurisdictions, normalizing market conditions in each location. For
any banking organization with important sources of revenue spread
across more than one entity, the strength of the banking
organization could be materially affected in the absence of
successful strategic management of all the business components.
Supervisors play an important role in assessing whether the
organization's management maintains an effective process for
identifying, measuring, and managing all key risks in this regard.
Organization-wide capital, leverage, and liquidity considerations
are important supervisory considerations. Other measures include
amount limits, concentration limits, collateral amount and quality,
qualitative transaction restrictions, or market equivalency
standards. Even matters such as addressing market concerns about
ring-fencing available assets can have a significant benefit in
reducing a U.S. bank's foreign exposures.
---------------------------------------------------------------------------
Some of these commenters also expressed the view that banking
organizations are using inter-affiliate swaps for the primary purpose
of concentrating the risks of the organizations' world-wide derivatives
activities onto the books of the covered swap entities covered by the
prudential regulators' Swap Margin Rule, i.e., U.S. insured depository
institutions (IDIs). These views are not consistent with the agencies'
supervisory experience since the rule took effect. As described in
greater detail below, the agencies observe that internationally active
banking organizations that have a cross-border organizational structure
relying on separate legal entities must use inter-affiliate swaps to
manage the risks of the overall banking organization's outward-facing
derivatives exposures. Other internationally active banks, operating
cross-border through branching structures, do not have the need to use
inter-affiliate swaps for risk management.
As the agencies discussed in the proposal, actual supervisory
experience in the years since the agencies imposed the Swap Margin
Rule's current requirements has raised two inter-related concerns at
the institution-specific level and the systemic level about the utility
of initial margin to address exposures arising from inter-affiliate
swap transactions. These concerns surround impediments to a banking
organization's best management practices for cross-border swap risks,
and whether these risks are more appropriately addressed through other
regulatory and supervisory mechanisms as discussed below, and
limitations on the effectiveness of inter-affiliate margin to address
systemic cross-border market risks, also discussed below.
1. Effects of the Inter-Affiliate Initial Margin Requirement on Banking
Organizations
Some covered swap entities covered by the Swap Margin Rule are
internationally active banking organizations and their swaps activities
are carried out in a cross-border marketplace. Some commenters perceive
that U.S. banking organizations use inter-affiliate swaps primarily to
transfer the risks of all their foreign derivatives activities into the
U.S. insured depository institution. However, the agencies observe a
redistribution of risk based instead on the international scope of the
banking organization's business.
In the market for non-cleared derivatives, inter-dealer trading
activity for certain types of derivatives is heavily concentrated in
one geographic location, while the marketplace for other types of
derivatives takes place in a different geographic location. An
internationally active U.S. banking organization participates as a
covered swap entity in a number of these marketplaces by establishing a
place of business in each, such as a locally incorporated business
entity, or a foreign branch of the main U.S. bank. The banking
organization also has swap customers at home and abroad and services
them by establishing a place of business in the same geographic
locations as the customers.
If a customer in one market (e.g., the U.K.) needs a non-cleared
swap that is traded in the local market (e.g., a sterling interest rate
swap), the U.K. operation of the banking organization handles the
entire transaction locally. On the other hand, if a U.S. customer needs
the same sterling interest rate swap, the U.S.-based establishment of
the banking organization enters into the swap with the customer
(collecting margin and exchanging periodic payments on the swap) while
the banking organization uses its U.K establishment to execute on the
market-facing sterling interest rate swap (also exchanging margin with
its counterparty in that market). Best safety and soundness practices
in risk management dictate that the banking organization's personnel
with the expertise in a class of derivatives be located in the relevant
[[Page 39761]]
market location, where they can obtain the most advantageous swap
terms, such as best pricing or a wider range of maturities. On the
customer side, market expectations are that the banking organization
will locate personnel in the same location as the customer.
As a result, international banking organizations using inter-
affiliate swaps as a risk management tool under this business model are
hedging market risk arising from the nature of their world-wide
customer needs (e.g., dollar swaps, euro swaps) and managing it in the
corresponding market location. A foreign customer's need for a U.S.
dollar swap product would engage the involvement of the U.S. banking
organization's U.S. bank affiliate, due not to the depository
institution status of the U.S. bank or some bias in favor of the
banking organization's home market, but rather to its place as the
banking organization's locus of market activity in the dollar market.
As in the example above, if a U.S. customer of the U.S. bank sought a
sterling swap product, the opposite occurs. Moreover, if a non-U.S.
customer in one location needs a type of swap traded in another non-
U.S. location, the risk can be transferred between them without any
direct U.S. intermediation.\20\
---------------------------------------------------------------------------
\20\ When a non-bank affiliate enters into a non-cleared swap
with its counterparty, and then enters into an inter-affiliate swap
with a U.S. institution to manage the market risk component,
commenters also expressed the view that the affiliate thereby
``transfers the risk'' of the non-cleared swap into the U.S.
institution. The agencies have considered this viewpoint and note
that the affiliate continues to face the counterparty, actively
managing the counterparty credit risk and exchanging margin in
accordance with the same margin standards as the U.S. has imposed
pursuant to the BCBS-IOSCO framework. To the extent these
counterparties are also financial intermediaries, they are
themselves subject to the same margin standards, buttressing their
financial resiliency. Because the prudential regulators' margin
rules apply to covered swap entities that are foreign banks, in many
instances those margin rules are, in fact, identical.
---------------------------------------------------------------------------
For internationally-active banking organizations, U.S. supervisors
consider this arrangement a better risk management practice than using
the U.S. location to manage the market-facing risk of the swap through
local trading (in a less liquid market for that that type of exposure),
or U.S. personnel endeavoring to make trades with foreign dealers in
the relevant market (through cross-border communication and
contracts).\21\ As discussed below, this is occurring in the context of
supervisory oversight of the banking organization aimed at ensuring the
affiliates are in good financial standing, utilizing an appropriate
system of market and credit risk limits, and the affiliates themselves
obtain robust initial margin from their counterparties, to protect the
affiliates from PFE risk if their counterparties should default.\22\
---------------------------------------------------------------------------
\21\ Commenters in the group objecting to the agencies' initial
margin proposal did not object to maintaining the Rule's variation
margin requirement. As one commenter noted, variation margin
performs a different function than initial margin. Where initial
margin is calibrated to PFE, variation margin reflects the ongoing
shift in market value of a swap contract between the covered swap
entity and the counterparty on a daily basis. Because a non-cleared
swap creates bilateral payment obligations between the two parties,
the current market value of the cash flows due to be paid to one
party will usually be higher than the current market value of the
cash flows due to be paid to other party, depending on how the
market value for the underlying reference asset or rate rises or
falls. In this regard, the agencies note that variation margin
requires ongoing daily payments from the party that is ``out of the
money'' over to the party that is ``in the money.'' Internationally
active banking organizations routinely exchange variation margin on
inter-affiliate swaps, but not exclusively as a counterparty default
risk mitigation tool. For strategic purposes, banking organizations
internally measure and evaluate the relative profitability of their
differing lines of business and locations (typically by comparing
profits for the location as a ratio of the level of regulatory
capital and funding costs associated with the location). The
exchange of variation margin is a natural way for the two different
locations (trading desks) to assign the profitability of the swap to
the right desk for these internal measurements, and related
purposes.
\22\ One commenter expressed the view that these considerations
would potentially address the commenter's concerns about PFE risk
transfer from affiliates, but also posited that the agencies were
unconcerned about the potential absence of these factors in issuing
the proposal. The agencies note that the presence of these important
risk management measures is a supervisory expectation for banking
organizations engaged in the practice. The agencies also note the
commenter presumes the Swap Margin Rule's methodology for
determining the initial margin collection amount--which represents
the agencies' implementation of Section 3.1 of the BCBS-IOSCO
Framework's requirement for portfolio replacement costs designed to
address unexpected third-party counterparty defaults based on a
probability statistical model using a 10-day holding period and
presuming a period of severe market stress--is properly calibrated
for the close-out risk of interaffiliate transactions that are
already subject to several additional prudential risk-reducing
requirements and reduced information gaps. Moreover, the agencies
note that Element 6 of the BCBS-IOSCO Framework itself excludes
interaffiliate swaps from the scope of the Framework and did not
contemplate that Section 3.1 of the BCBS-IOSCO Framework would be
applied to them.
---------------------------------------------------------------------------
Also, as the agencies discussed in the proposal, some
internationally active U.S. banking organizations utilize the same
arrangement without creating inter-affiliate PFE, because they set up
their foreign establishments as a foreign branch of the U.S. bank. From
an entity and accounting standpoint, the U.S. bank can transact with
the customer and hedge its cross-border swap risk through foreign swap
contracts, all within the same entity (and without the need to create
an internal swap).
The risk presented to the U.S. bank by the foreign-market swaps
themselves is identical under both structural alternatives, whether the
banking organization uses a foreign branch or a foreign affiliate. That
risk is managed through several tools, including the banking
organization's board-approved system of risk limits governing its
participation in the foreign swap market; the banking organization's
underwriting and ongoing monitoring of the credit risk of the
counterparties it faces through swap transactions in the foreign swap
market; and the collection of variation margin and initial margin
requirements from those foreign market counterparties, under margin
regulations developed on a coordinated basis by U.S. and foreign
regulators through an established, formal process.
The addition of an affiliated entity instead of a branch may have
the effect of creating other regulatory and risk issues to be
considered, but these are separate from the risks of the foreign swap
itself and are addressed under separate supervisory and regulatory
frameworks.
The participation of U.S. banking organizations in the derivatives
markets abroad is substantial, making attempts to ``compartmentalize''
the exposures of significant market affiliates on the basis of legal
separation and collateral exclusively challenging.\23\ Sound risk
management for banking organizations necessitates ongoing assessments
of financial performance across the organization and corrective
incremental responses to undesirable changes in key risk metrics.
---------------------------------------------------------------------------
\23\ See, e.g., https://www.bis.org/ifc/publ/ifcb31n.pdf (U.S.-
based banking organizations engage in derivatives activities across
G-10 countries actively, with non-U.S. market participation
exceeding U.S. market participation in the aggregate); see also,
Guidance for Sec. 165(d) Resolution Plan Submissions by Domestic
Covered Companies, 84 FR 1438 (February 4, 2019).
---------------------------------------------------------------------------
The agencies' structural concerns described above have arisen with
the benefit of hindsight in the time since the Rule was finalized. In
2014 and 2015, the future structure of the cross-border non-cleared
swaps market was potentially subject to significant change in response
to key factors such as growth in the cleared derivatives market
(reducing non-cleared activity), industry acclamation to significant
expected cost increases attributable to the robust world-wide margin
regimes about to take effect, and new regulatory resolution planning
requirements, causing internal restructuring within banking
organizations in response to these factors. These unknowns, and the
costs of the inter-affiliate initial margin requirement, could have
reasonably been expected to curtail existing use of
[[Page 39762]]
inter-affiliate non-cleared swaps.\24\ For example, some
internationally-active covered swap entities conducted their cross-
border business through foreign branches, and others might have
restructured to eliminate the need for inter-affiliate swaps. The
agencies' past expectations of reductions in inter-affiliate swap
activity have not been borne out through the completion of the Swap
Margin Rule's implementation phase. In addition, among the prudential
regulators, the banking agencies continue to assess the proper
calibration of regulatory capital requirements including enhanced
recognition of collateralization (or the lack of it) for closeout
risk.\25\
---------------------------------------------------------------------------
\24\ See 80 FR at 74,893 (``It is likely the behavior of swap
market participants, including affiliate counterparties, will
respond to incentives created by these swap margin requirements.
Such changes could have a dramatic effect on the pattern of
affiliate swap transactions which would itself have a significant
impact on the amounts of initial margin that are ultimately
collected on inter-affiliate transactions.'')
\25\ In this regard, it is worth noting that the analysis in
this Supplementary Information Section evaluates comments on the
proposal from the perspective of the Swap Margin Rule. The
evaluation of risk for inter-affiliate trades and the best way to
address such risks from a regulatory perspective could change
depending on, among other things, the statutory authority on which a
regulatory requirement is premised.
---------------------------------------------------------------------------
2. System-Wide Effectiveness of Inter-Affiliate Initial Margin
Requirements
Commenters objecting to the agencies' proposal also expressed the
view that the agencies are engaging in a ``race to the bottom'' to the
extent the agencies discussed how inter-affiliate initial margin
requirements have not been universally applied by other domestic and
foreign regulators. As stated in the proposal, the agencies raise this
concern in the context of observing that limited application of the
initial margin requirements to one slice of the market is a blunt tool
for enhancing financial stability among interconnected financial market
participants. With the benefit of hindsight, the agencies observe that
other regulators developing their implementing rules in 2015 and beyond
have not implemented the same comprehensive inter-affiliate margin
collection requirements that the agencies did in 2015.\26\ As a result,
certain anticipated systemic protections that would have accrued from
comprehensive inter-affiliate initial margin practices world-wide will
not be realized.
---------------------------------------------------------------------------
\26\ In the EU, intragroup transactions are fully exempt (not
only initial margin, but also variation margin), unless the relevant
affiliates are subject to specific and identified legal impediments
to funds transfers between them, such as currency exchange
restrictions, identified defects in one of the affiliate's formal
resolution plans, or other specific legal restriction that
significantly affects the transfer of funds between the affiliates.
See Commodity Futures Trading Commission Comparability Determination
for the European Union, 82 FR 48394, 48399-48400 (October 18, 2017)
(comparing CFTC non-cleared swap margin rules to comparable EU
rules, discussing EU reliance on appropriate centralized risk
evaluation, measurement, and control procedures between cross-border
affiliates, and margin rule comparability determinations outside the
EU); see also Commission Implementing Decision (EU) 2017/1857
(October 13, 2017) (EU comparability determination for US
transactions subject to the CFTC non-cleared margin rules),
available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017D1857&from=ES; European Supervisory Authorities,
EMIR RTS on various amendments to the bilateral margin requirements
in view of the international framework (December 5, 2019) (notice of
proposed amendments to EMIR non-cleared derivatives margin rule to
grant an additional extension of the exemption from comparability
determination requirements), available at https://eba.europa.eu/sites/default/documents/files/document_library//ESAs%202019%2020%20-%20Final%20Report%20-%20Bilateral%20margin%20amendments.pdf. In
Japan, prudential regulators address inter-affiliate non-cleared
derivatives with existing capital standards and risk-management
principles in the first instance, with margin as a voluntary
alternative. See Commodity Futures Trading Commission Amendment to
Comparability Determination for the Japan, 84 FR 12074, 12079 (April
1, 2019). All other major jurisdictions also exempt inter-affiliate
non-cleared derivatives from margin requirements, including Canada
(https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/e22.aspx, both initial and variation margin); Australia (https://www.apra.gov.au/sites/default/files/prudential_standard_cps_226_margining_and_risk_mitigation_for_non-centrally_cleared_derivatives.pdf, initial margin); Hong Kong
(https://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/CR-G-14.pdf, both initial and
variation margin); and Singapore (https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Securities-Futures-and-Fund-Management/Regulations-Guidance-and-Licensing/Guidelines/Guidelines-on-Margin-Requirements-for-NonCentrally-Cleared-OTC-Derivatives-Contracts-revised-on-5-October-2018.pdf, both initial and variation margin).
---------------------------------------------------------------------------
Commenters opposing the agencies' proposal also expressed the view
that the agencies were eliminating an estimated $40 billion of initial
margin collateral that will serve a ``loss absorbing capacity'' to
protect against potential affiliate default on their swaps exposures.
Initial margin, however, is not loss-absorbing in the same sense as
equity capital; initial margin collateral is funded with borrowings
from the banking organization's creditors.\27\ The practice in banking
organizations of providing collateral to their bank affiliates as
security for the banking organization's financial obligations is a
routine and expected aspect of the business. But it is accompanied by
market expectations on behalf of each banking organization's creditors
if the aggregate extent to which it is employed in the banking
organization materially exceeds established expectations. During
periods of market distress, those creditors' claims are potentially
subordinated to the bank's claim on the banking organization's assets,
placing additional stress on the banking organization's access to
funding if the subordination effects are materially beyond the norm.
---------------------------------------------------------------------------
\27\ Two commenters suggested the affiliate's use of leverage to
acquire initial margin collateral was a choice, and the affiliate
could instead raise additional equity or retain earnings to fund it.
This is not consistent with the agencies' supervisory and policy-
making experience for internationally-active banks, where public
policy and competitiveness concerns serve to establish and maintain
capital requirements that must address not only adequacy, but regime
equivalency.
---------------------------------------------------------------------------
C. Description of the Final Rule
After considering commenters' range of views about the proposed
rule, the agencies have determined to finalize it consistent with the
proposal, with two revisions.
First, the agencies are including a limit on the aggregate amount
that a covered swap entity may recognize pursuant to the inter-
affiliate initial margin exemption provided under the final rule. This
limit, as further described below, is set at 15 percent of the covered
swap entity's tier 1 capital. The agencies are incorporating the 15%
Tier 1 Threshold into Sec. __.11 as an augmentation to reflect safety
and soundness and financial system risk concerns of the Board, the
FDIC, and the OCC surrounding the status of covered swap entities that
are U.S. insured depository institutions.\28\ The agencies, in their
supervisory experience, have observed that covered swap entities have
collected inter-affiliate initial margin under the current rule at
levels that do not exceed this limit. Nevertheless, the agencies'
determinations underlying the decision to issue this final rule are
informed significantly by the agencies' supervisory experience
overseeing inter-affiliate swap activities at covered swap entities
during the first four years the Swap Margin Rule has been in effect.
Accordingly, the agencies believe it is appropriate to apply the 15%
Tier 1 Threshold as an augmentation, as the agencies continue to
supervise covered swap entities further into the maturation of the
international derivatives market reforms that have been under
development since 2010. This augmentation will address additional
supervisory concerns that may arise at a covered swap entity whose tier
1 capital base is contracting in an unusually rapid pattern, a
situation that evidences the institution is experiencing
[[Page 39763]]
heightened levels of stress, or whose inter-affiliate derivative
exposures increase in an unusually rapid pattern. Thus, the agencies
have set it at a level that exceeds the typical initial margin
collection amounts at the affected covered swap entities, to
accommodate expected levels and taking into consideration a range of
those levels that varies somewhat across those covered swap entities.
---------------------------------------------------------------------------
\28\ 7 U.S.C. 6s(e)(3); 15 U.S.C. 78o-10(e)(3).
---------------------------------------------------------------------------
This provision requires a covered swap entity to calculate the
initial margin collection amount \29\ each business day for each
counterparty that is a swap entity or a financial end-user with a
material swaps exposure that is an affiliate, and aggregate these
amounts to determine whether the aggregate amount exceeds the 15% Tier
1 Threshold.\30\ When a covered swap entity calculates the 15 percent
threshold, it must include all non-cleared swaps between the covered
swap entity and its affiliates (which includes subsidiaries of the
covered swap entity) plus all non-cleared swaps between an covered swap
entity subsidiary and other affiliates (but not double counting non-
cleared swaps with the parent covered swap entity). So long as the
aggregate remains below the 15% Tier 1 Threshold, the covered swap
entity is exempt from the requirement to collect initial margin from
its affiliates. If, however, the aggregate exceeds the 15% Tier 1
Threshold on any business day, the final rule requires the covered swap
entity to collect initial margin on any additional non-cleared swap
executed with an affiliated swap entity or financial end user.\31\ Once
the 15 percent threshold is exceeded, the covered swap entity is
required to collect initial margin on all new transactions with its
affiliates (which includes the covered swap entity subsidiaries). Also,
if a covered swap entity subsidiary enters into a non-cleared swap with
an affiliate other than the covered swap entity,\32\ the covered swap
entity must collect initial margin from the affiliate, and the
subsidiary does not need to also collect initial margin for the
affiliate for that non-cleared swap. This provision is designed to
provide protection for the covered swap entity. Initial margin
collection takes place pursuant to the generally-applicable initial
margin requirement specified in Sec. __.3(a) of the current rule,
commencing the day after execution of the non-cleared swap and with
updates each business day as specified in Sec. __.3(c).\33\ The
covered swap entity is obligated to continue initial margin collection
on these new swaps until they terminate under their own terms. If,
however, the covered swap entity's aggregate initial margin collection
amount calculation falls below the 15% Tier 1 Threshold, the covered
swap entity is no longer obligated to maintain initial margin on these
non-cleared swaps. Consistent with Sec. __.11(d) of the current rule,
the covered swap entity is permitted to maintain custody of non-cash
initial margin collateral collected pursuant to these requirements with
the covered swap entity itself or with an affiliate, but is otherwise
subject to the segregation requirements of Sec. __.7 of the current
rule.\34\
---------------------------------------------------------------------------
\29\ Section __.2 of the current rule defines the ``initial
margin collection amount'' as the amount of initial margin the
covered swap entity calculates for a counterparty using the covered
swap entity's approved initial margin model under Sec. __.8 (or if
the covered swap entity does not have an initial margin model, the
standardized approach under Appendix A).
\30\ The final rule specifies that tier 1 capital for this
purpose is comprised of common equity tier 1 capital and additional
tier 1 capital, as defined in the agencies' respective regulations
at 12 CFR 3.20(b)-(c) (OCC); 12 CFR 217.20(b)-(c) (Board); 12 CFR
324.20(b)-(c) (FDIC); 12 CFR 628.20(b)-(c) for Farm Credit System
banks and associations and 12 CFR 652.61(b) for the Federal
Agricultural Mortgage Corporation (FCA); and 12 CFR 1240(b)-(c)
(FHFA). Covered swap entities are required to use the tier 1 capital
amounts reported in their most recent Call Report.
\31\ The final rule does not require the covered swap entity to
begin collecting initial margin on its portfolio of interaffiliate
swaps that were executed before the business day on which the 15%
Tier 1 Threshold is exceeded.
\32\ The rule provides that if any subsidiary of the covered
swap entity executes a non-cleared swap with any other affiliated
swap entity or financial end user, the covered swap entity must
treat that swap as its own for purposes of complying with these
requirements. Additionally, the agencies have added an expanded
definition of a ``subsidiary'' to Sec. __.11(d) for these purposes,
consistent with the structure of the expanded ``affiliate''
definition. The agencies have also incorporated language in Sec.
__.11(a)(5)(ii) for multi-tier CSE structures that permit the lower
tier CSEs to count their inter-affiliate non-cleared swaps as part
of the top-tier IDI's 15% Tier 1 Threshold if the top-tier IDI
collects initial margin for additional inter-affiliate swaps entered
into by the lower tier CSEs after the limit is reached. This is
intended to greatly simply the limit calculations for multi-tiered
CSEs, while still ensuring the requirements of Sec. __.11(a) are
fully satisfied at the IDI level.
\33\ Covered swap entities may avail themselves of the option,
pursuant to Sec. __.5(a)(3)(ii) of the current rule, to place these
swaps in a separate netting set for purposes of calculating the
initial margin collection amount on a portfolio basis under an
eligible master netting agreement.
\34\ The agencies have also made corresponding technical
revisions to the language of Sec. __.11 to provide an exemption
from the requirements to post initial margin under Sec. __.3(b),
consistent with the current rule. This exemption is not subject to
the 15% Tier 1 Threshold.
---------------------------------------------------------------------------
As part of this addition, the agencies are making associated
changes to Sec. __.9 of the Swap Margin Rule. Section __.9 addresses
cross-border application of the Swap Margin Rule to certain foreign
financial firms that are organized under non-U.S. law and operate
abroad, and that fall within the scope of the Rule because they are
also registered with the CFTC or SEC as swap dealers or security-based
swap dealers. These firms include foreign-chartered banks, and foreign-
chartered subsidiaries of Edge corporations and agreement
corporations.\35\ Under the current rule, these foreign firms are
currently not subject to comprehensive initial margin collection
requirements for affiliate swap transactions under the laws of their
home counties.\36\ However, if they engage in a swap transaction with a
U.S. affiliate, Sec. __.9 currently requires them to collect initial
margin from the U.S. affiliate.
---------------------------------------------------------------------------
\35\ Specifically, see Sec. Sec. __.9(a) and __.9(d)(3)(i)-
(ii). These entities are often governed by non-U.S. regulatory
capital requirements and they do not file Call Reports; U.S.
branches and agencies of foreign banks are not subject to stand-
alone capital requirements.
\36\ See footnote 27, supra.
---------------------------------------------------------------------------
The amendment to Sec. __.11 that the agencies issue today would
apply to these foreign firms, absent a change to Sec. __.9. As
discussed above, the 15 percent threshold in Sec. __.11 is an
augmentation reflecting safety and soundness and financial system risk
concerns of covered swap entities that are U.S. insured depository
institutions. Imposing the 15 percent threshold requirement on these
foreign firms is not relevant to these concerns and could even have the
incongruous result of requiring a U.S. covered swap entity to post
initial margin collateral to an affiliated foreign firm. Accordingly,
the agencies are adding a new subsection Sec. __.9(h), which provides
that these foreign firms are exempt from the requirement to collect
initial margin from their affiliates under Sec. __.3(a), and the
foreign firms are not subject to the 15 percent threshold under Sec.
__.11(a) unless they are subsidiaries of a covered swap entity subject
to the requirements of Sec. __.11. In that case, the firm is treated
the same as any other subsidiary, as described above, and the parent
covered swap entity is required to treat inter-affiliate exposures
between the subsidiary and an affiliate as if it is its own.\37\
---------------------------------------------------------------------------
\37\ For applicable transactions with U.S. affiliates, these
foreign firms will be covered by Sec. __.11(b), exempting them from
posting initial margin to affiliates pursuant to Sec. __.3(b).
These foreign firms will be subject to Sec. __.4, requiring them to
exchange variation margin, which is standard practice for these
firms, and Sec. __.11(c), requiring swap dealers to collect initial
margin at such times and in such forms and such amounts (if any)
that the covered swap entity determines appropriately address the
credit risk posed by the counterparty and the risks of the swap,
consistent with Sec. __.3(d).
---------------------------------------------------------------------------
Second, the agencies are also including an additional revision that
is
[[Page 39764]]
consistent with the Rule's current treatment of counterparties that are
not subject to the Rule's quantitative requirement to exchange and
segregate initial margin on a daily basis.
Section __.3 of the Rule contains the core initial margin
requirement, directing covered swap entities to collect and post
initial margin as calculated under Sec. __.8. Accordingly, in drafting
the proposed rule text for the initial margin exemption in proposed
Sec. __.11(a), the agencies exempted swaps between affiliates from
Sec. __.3 in its entirety. In the final rule, the agencies have
revised the text of the exemption in Sec. __.11, in order to preserve
the applicability of Sec. __.3(d).
Section __.3(d) addresses counterparties who are not financial end
users with a material swaps exposure or swap entities. These
counterparties are not subject to daily initial margin exchange
pursuant to Sec. __.3(a)-(c). For these other counterparties, Sec.
__.3(d) requires covered swap entities to collect initial margin at
such times and in such forms and such amounts (if any) that the covered
swap entity determines appropriately address the credit risk posed by
the counterparty and the risks of the swap. When the agencies adopted
the Rule in 2015, this provision was included to reflect prudent risk
management practices in the industry before the Rule's issuance,
whereby an institution would include initial margin on a case-by-case
basis for any type of swap counterparty, as part of their internal risk
management practices, if the institution judged it to be
appropriate.\38\
---------------------------------------------------------------------------
\38\ 80 FR 74840, 74844 (November 30, 2015).
---------------------------------------------------------------------------
The agencies, in assessing the risk of PFE to a covered swap entity
in transacting swaps with an affiliate, have determined that an across-
the-board requirement in the Swap Margin Rule to collect initial margin
from affiliates is not the best approach. That being said, the agencies
do not assess inter-affiliate swaps to be risk-free, and there can
still be circumstances in which the agencies would expect a covered
swap entity to incorporate initial margin as well as variation margin
into its risk management for exposures to a particular affiliate or
particular swaps. Accordingly, the agencies have revised the text of
Sec. __.11 to treat inter-affiliate swaps the same way as swaps with
other counterparties pursuant to Sec. __.3(d).
Commenters that addressed the agencies' proposed definition of an
``affiliate'' for purposes of Sec. __.11 supported it. The agencies
are adopting it without change.
D. Federal Reserve Board Statement on Sections 23A and 23B of the
Federal Reserve Act
Although this final rule will exempt non-cleared swaps between a
bank and its affiliates from the initial margin requirements of the
swap margin rule under the conditions described above, swaps between a
bank and its affiliates are of course also subject to sections 23A and
23B of the Federal Reserve Act and the Board's Regulation W.
The Board's position is that, under section 23A, bank-affiliate
derivatives generally can be valued at the bank's current exposure to
the affiliate. Accordingly, the Board believes that a bank must collect
23A-compliant variation margin from its affiliates to cover its current
exposure on bank-affiliate derivatives, but generally is not required
to collect initial margin to cover the bank's potential future exposure
on the transactions.
Under section 23B, a bank's swaps with its affiliates must be on
terms and conditions that are substantially the same, or at least as
favorable to the bank, as those prevailing at the time for comparable
transactions with third parties. In part because of the swap margin
rule and in part due to natural evolution in the financial markets,
comparable swap transactions between a bank and a third party today
involve the bank collecting initial margin from, and posting initial
margin to, the counterparty.
In many cases the Board finds it reasonable to conclude that a
bank-affiliate swap with no initial margin requirement is at least as
favorable to the bank as a comparable bank-nonaffiliate swap with two-
way initial margin requirements. This occurs where the two-way initial
margining described above requires each of the two counterparties to
give the other counterparty a contractual term of roughly equivalent
value. In the Board's view, situations where the bank and affiliate
each agree not to require an equivalent exchange of initial margin from
the other will generally create a set of contractual terms that is
roughly equally favorable to the bank as a two-way initial margin
regime.
Some cases of specific bank-affiliate swap arrangements without
initial margin requirements could raise issues under section 23B,
however, as can every affiliate transaction depending on the facts and
circumstances of the arrangement. In the Board's view, relevant facts
for the section 23B analysis include the relative creditworthiness of
the bank vs. the affiliate, whether the bank-affiliate swap portfolio
is more likely to create potential future exposure of the bank to the
affiliate or vice versa, and whether or not the affiliate requires
initial margin from the bank under the swap arrangement.
E. Other Comments
Four commenters expressed the view that the agencies are without
the statutory authority to adopt the proposed rule. One among these
commenters provided an analysis of the language Congress used in
requiring the prudential regulators to issue the margin requirements.
In this commenter's view, the meaning of the words Congress chose are
so prescriptive that they compel the agencies to impose initial margin
and variation margin requirements on all swap transactions within the
scope of the legislation.
The agencies note that, in requiring the prudential regulators to
issue margin and capital requirements, the statutory language also
mandates that the requirements shall help ensure the safety and
soundness of covered swap entities and be appropriate for the risk
associated with the swaps held by the covered swap entity.\39\ The
agencies have previously considered the same line of analysis pursued
by the commenters, in connection with adopting the Swap Margin Rule in
2015.\40\ The agencies have concluded that the statutes direct the
agencies to employ a risk-based approach to imposing margin
requirements, and the agencies have done so by imposing rules that vary
depending on the type of counterparty in light of the risks
presented.\41\
---------------------------------------------------------------------------
\39\ 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-10(e)(3)(A).
\40\ 80 FR at 74866; see also 79 FR 57348, 57354-55 (September
24, 2014).
\41\ The agencies also note that the Swap Margin Rule imposes
margin requirements on a covered swap entity's non-cleared swaps
with affiliates, specifically the variation margin collection
requirement of Sec. __4(a)-(b), and the above-described requirement
of Sec. __.3(d).
---------------------------------------------------------------------------
Commenters that opposed the agencies' proposal also expressed the
view that the agencies' discussion and analysis in the Supplementary
Information section of the proposal was deficient. The commenters were
of the view that the agencies discussed the same factors in 2015 and
2019, but in the first instance the agencies determined initial margin
was required to address the risk of inter-affiliate swap exposures,
whereas in the second instance the agencies drew the opposite
conclusion.\42\ In this regard, the
[[Page 39765]]
agencies note that the analysis in 2015 did not propound the imposition
of an across-the-board inter-affiliate initial margin requirement, and
the agencies carefully evaluated the extent to which numerous aspects
of the Rule's initial margin requirements should be reduced
commensurate with the risks the agencies anticipated.\43\ In issuing
these revisions, the agencies have performed the same probing analysis
of the relevant factors, based on industry practices as they have
settled after the Rule's compliance period.
---------------------------------------------------------------------------
\42\ Some commenters also expressed the view that the agencies
are obligated to perform an analysis of the PFEs between covered
swap entities and their affiliates, using the Swap Margin Rule's
framework for quantifying initial margin collection amounts, in
order to quantify how much PFEs would increase as a result of the
proposed change. As the agencies discussed above, however, the
Rule's methodology for evaluating the PFE of an unaffiliated
counterparty is not an appropriate measurement of inter-affiliate
risk. Among other things, it does not take relevant additional risk
management factors into account, and it was originally formulated
with the expectation it would not be applied to inter-affiliate
swaps.
\43\ 80 FR 74887-889.
---------------------------------------------------------------------------
IV. Additional Compliance Date for Initial Margin Requirements
A. Proposal
The agencies proposed to give covered swap entities an additional
year to implement initial margin requirements for certain smaller
counterparties. The implementation of both initial and variation margin
requirements started on September 1, 2016. With respect to initial
margin requirements, the requirements in the Swap Margin Rule were
implemented in five phases from September 1, 2016, through September 1,
2020, depending on the size of the covered swap entity's portfolio of
non-cleared swaps and the counterparty's portfolio of non-cleared
swaps. Variation margin requirements for all covered swap entities and
counterparties were completely phased in by March 1, 2017. This
schedule was consistent with BCBS/IOSCO Framework when the Swap Margin
Rule was adopted in 2015.
The phase-in schedule for initial margin is based on the average
daily aggregate notional amount (AANA) of non-cleared swaps for March,
April, and May, held in each party's market-wide portfolio, measured
separately from the standpoint of the covered swap entity and the
standpoint of the counterparty.\44\ With the recent occurrence of the
fourth phase of initial margin compliance obligations on September 1,
2019--for covered swap entities and counterparties with an AANA of $750
billion to $1.5 trillion--the group currently scheduled for the fifth
phase of compliance in the upcoming year includes all remaining
entities within the scope of the initial margin requirements, spanning
AANAs from $8 billion up to $750 billion.\45\
---------------------------------------------------------------------------
\44\ See supra note 7.
\45\ The Swap Margin Rule does not require initial margin to be
exchanged with any counterparty whose AANA is less than $8 billion
as of the previous June, July, and August. See Sec. __.3 and the
definition of ``material swaps exposure'' in Sec. __.1.
---------------------------------------------------------------------------
The industry raised significant concerns about the operational and
other difficulties associated with beginning to exchange initial margin
with the large number of relatively small counterparties encompassed in
the Swap Margin Rule's fifth phase.\46\ Following the revisions adopted
in July 2019 to the BCBS/IOSCO Framework to permit an additional phase
for smaller counterparties, the agencies proposed to amend the Swap
Margin Rule to add an additional phase for smaller counterparties.\47\
Specifically, the agencies proposed to amend the compliance schedule to
add a sixth phase of compliance for certain smaller entities that are
currently subject to the ``phase five'' compliance deadline. The
proposed amendments would have required compliance by September 1,
2020, for counterparties with an AANA ranging from $50 billion up to
$750 billion, while the compliance date for all other counterparties
(with an AANA ranging from a ``material swaps exposure'' of $8 billion
up to $50 billion) would have been extended to September 1, 2021.
---------------------------------------------------------------------------
\46\ The industry's implementation work to execute new trading
documentation to meet variation margin compliance obligations by
2017 largely excluded any required documentation for initial margin,
due to the greater operational complexity associated with ``T+1''
portfolio reconciliation of internally-modeled initial margin
amounts and third-party segregation of initial margin collateral.
\47\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf.
---------------------------------------------------------------------------
B. Final Rule
Commenters supported the proposed amendments to the compliance
schedule, specifically, the additional phase six for all other
counterparties (i.e., with an AANA of $8 billion up to $50 billion)
with a compliance date of September 1, 2021. Commenters noted that the
proposal did not clarify the convention that should be used for
calculating the AANA for purposes of the proposed phase six and
therefore, by default, the calculation would be based on the
methodology for calculating ``material swaps exposure,'' which is
determined based on an entity's and its affiliates AANA for June, July,
and August of the previous calendar year (in this case, 2020). Several
commenters recommended that the agencies clarify that, for purposes of
the new phase six, the calculation is based on the AANA for March,
April, and May of the same year, which is consistent with the BCBS/
IOSCO Framework. One commenter recommended that the calculation of
``material swaps exposure'' be based on the AANA for March, April, and
May, beginning in 2021 and thereafter, and asserted this approach would
maintain consistency with the BCBS/IOSCO Framework and other foreign
jurisdictions.
The final rule adopts the additional phase six as proposed. The
agencies acknowledge that a change to the AANA calculation for phase
six would result in greater consistency with the BCBS/IOSCO Framework,
but are not adopting the recommended change to the month calculation
convention because basing AANA on June, July, and August of the
previous calendar year will provide end users subject to phase six with
more time to prepare for compliance with initial margin requirements
following meeting the material swaps exposure threshold. Moreover, the
definition of material swaps exposure is not being amended as part of
this final rule. The material swaps exposure definition was not raised
as an issue in the proposal, as an amendment to that definition would
affect more than just the phase-in periods in Sec. __.1(e). The
agencies confirm that the material swaps exposure is to be calculated
based on the previous year.\48\ For example, for the period January 1,
2022 through December 31, 2022, an entity would determine whether it
had a material swaps exposure with reference to June, July, and August
of 2021.
---------------------------------------------------------------------------
\48\ See 80 FR 74857 (November 30, 2015).
---------------------------------------------------------------------------
V. Documentation Requirements
A. Proposal
The agencies proposed to amend the documentation requirements under
Sec. __.10 of the Swap Margin Rule. Pursuant to Sec. __.10 of the
Rule, a covered swap entity must execute trading documentation with
each counterparty that falls within the scope of the Rule's definition
of a ``swap entity'' or a ``financial end user'' regarding credit
support arrangements unless the swap entity or financial end user is
explicitly exempt from the Rule pursuant to Sec. __.1(d).\49\ The
documentation must provide the covered swap entity the contractual
rights and obligations to collect and post initial and variation margin
in such amounts, in such form, and under such circumstances as are
required by the Rule. The documentation must also
[[Page 39766]]
specify the methods, procedures, rules, and inputs for determining the
value of each non-cleared swap for purposes of calculating variation
margin and the procedures by which any disputes concerning the
valuation of non-cleared swaps or the valuation of assets collected or
posted as initial margin or variation margin may be resolved. Finally,
the documentation must also describe the methods, procedures, rules,
and inputs used to calculate initial margin for non-cleared swaps
entered into between the covered swap entity and the counterparty.\50\
The proposed rule clarified that under Sec. __.10 of the Rule, a
covered swap entity is not required to execute initial margin trading
documentation with a counterparty prior to the time that it is required
to collect or post initial margin pursuant to Sec. __.3.\51\
---------------------------------------------------------------------------
\49\ 80 FR 74886-74887 (November 30, 2015).
\50\ Id.
\51\ Under Sec. __.3, a covered swap entity must collect or
post initial margin when it calculates an initial margin amount
that, after subtracting the initial margin threshold amount (not
including any portion of the initial margin threshold amount already
applied by the covered swap entity or its affiliates to other non-
cleared swaps or non-cleared security-based swaps with the
counterparty or its affiliates), exceeds zero.
---------------------------------------------------------------------------
B. Final Rule
Commenters supported the proposed amendment to Sec. __.10 of the
Rule. The agencies are adopting the amendment to Sec. __.10 of the
Rule as proposed.
In addition, the preamble to the proposal discussed the operation
of the custody agreement requirements in Sec. __.7 of the Swap Margin
Rule. Under Sec. __.7, custody agreements are required to be in place
only after initial margin is required to be collected or posted
pursuant to Sec. __.3, or when initial margin is posted by a covered
swap entity beyond an amount required by the Rule. The agencies
explained that they expect that covered swap entities will closely
monitor their exposures and take appropriate steps to ensure that
trading documentation is in place at such time as initial margin is
required to be exchanged pursuant to Sec. __.3. The agencies noted
that this view is consistent with statements of the BCBS and IOSCO with
respect to internationally agreed standards for margin requirements for
non-centrally cleared derivatives.\52\ Commenters supported this
clarification, and the agencies reaffirm their statement regarding the
execution of custody agreements required pursuant to Sec. __.7 of the
Rule.
---------------------------------------------------------------------------
\52\ BCBS/IOSCO statement on the final implementation phases of
the Margin requirements for non-centrally cleared derivatives, March
5, 2019, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD624.pdf, stating that ``the framework does not specify
documentation, custodial or operational requirements if the
bilateral initial margin amount does not exceed the framework's
[euro]50 million initial margin threshold. It is expected, however,
that covered entities will act diligently when their exposures
approach the threshold to ensure that the relevant arrangements
needed are in place if the threshold is exceeded.''
---------------------------------------------------------------------------
VI. Portfolio Compression Exercises and Other Amendments
A. Summary of Proposed Rule
The Swap Margin Rule applies to non-cleared swaps entered into on
or after the applicable compliance date. The agencies are concerned
about amendments to a swap that was entered into before the applicable
compliance date if the amendments would have the effect of allowing
covered swap entities and their counterparties to evade or otherwise
artificially delay implementation of margin requirements. In
particular, the agencies are concerned that market participants might
amend legacy swaps, rather than entering into new swaps and exchanging
margin pursuant to the Rule once the legacy swaps expire according to
their original terms. The proposed rule permitted certain amendments,
particularly non-material amendments to non-economic terms, as well as
amendments that are made to reduce operational or counterparty risk,
such as notional reductions and portfolio compressions, to be executed
while still allowing those amended legacy swaps to remain exempt from
the Swap Margin Rule.
The proposed rule clarified the agencies' implementation of the
legacy swaps provisions of the Swap Margin Rule since its adoption in
2015. The proposed rule was intended to permit amendments to legacy
swaps arising from certain routine industry practices over the life-
cycle of a non-cleared swap that are carried out for logistical
reasons, risk-management purposes, or IBOR replacement. The proposed
rule covered amendments that do not raise concerns that the covered
swap entity is seeking to evade or otherwise delay the application of
margin requirements for non-cleared swaps.
B. Technical Changes
1. Proposal
The proposed rule recognized the legacy status of a non-cleared
swap that has been amended to reflect technical changes, such as
addresses, the identities of parties for delivery of formal notices,
and other administrative or operational provisions of the non-cleared
swap that do not alter the non-cleared swap's underlying asset or
indicator, such as a security, currency, interest rate, commodity, or
price index, the remaining maturity, or the total effective notional
amount. For example, an interest rate swap documentation amendment that
changes the counterparty's contact person or a weather swap
documentation amendment that changes the margin payment instructions
would not impact those swaps' legacy status. However, an interest rate
swap amendment to the fixed leg interest rate or a weather swap
amendment to the measurement of the precipitation level would impact
those swaps' legacy status as it is intended to change the economic
valuation of the swap. The technical changes permitted by the proposed
rule are necessary to reflect changes in a counterparty's
circumstances, but are not associated with a desire by either party to
increase or decrease its exposure to market risk factors.
2. Final Rule
Commenters were supportive of the proposal. Commenters agreed with
the agencies that amendments made for logistical or risk management
purposes arising from routine industry practices over the life-cycle of
the swap, should not cause legacy swaps to lose their legacy status.
One commenter requested that the agencies permit any technical
amendment that does not affect the economic obligations of the parties
or the valuation of the legacy swap. Two commenters requested
clarification that the language in the proposed rule aligns with the
CFTC's Division of Swap Dealer and Intermediary Oversight's June 6,
2019 No Action Position wherein the CFTC took a no action position on
legacy swaps that are amended, ``provided that no term is amended that
would affect the economic obligations of the parties or the valuation''
of the swap or that are partially terminated or partially novated
subject to certain conditions.\53\ The agencies are clarifying that the
language in the proposed rule is intended to align with the CFTC's No
Action Position. With respect to the language in Sec. __.1(h)(5)(i), a
commenter requested a technical change from usage of the word
``indicator,'' because it is not a common term in the industry, to the
word ``reference.'' The agencies are amending the rule to reflect this
technical change.
---------------------------------------------------------------------------
\53\ CFTC Letter No. 19-13 (June 06, 2019) at 8.
---------------------------------------------------------------------------
The agencies did not receive any other comments on this part of the
proposed rule and are adopting it, subject to the technical change
discussed, as proposed.
[[Page 39767]]
C. Reduction in Notional Amount
1. Proposal
The proposed rule recognized the legacy status of a non-cleared
swap that has been amended solely to reduce the notional amount of the
non-cleared swap, without altering other terms of the original non-
cleared swap. For these purposes, a reduction in notional amount may be
achieved through a partial termination of the original non-cleared
swap, with the remaining non-terminated non-cleared swap being able to
retain its legacy status. A reduction in notional amount could also be
achieved by novating a portion of the original non-cleared swap's
notional amount to a third party. The original non-cleared swap, with a
lower notional amount, would retain legacy status, but the novated
portion would not retain legacy status.
2. Final Rule
The agencies did not receive comments on this amendment and are
adopting it as proposed.
C. Portfolio Compression Exercises
1. Proposal
The proposed rule recognized the legacy status of non-cleared swaps
that have been modified as part of certain portfolio compression
exercises used as a risk management tool or for IBOR replacement. In
compression, offsetting trades between two or more parties are amended
or torn up and replaced, which reduces the size of gross derivatives
exposures and generally reduces the number or frequency of payments
between parties, thus maintaining or reducing the overall risk profile
of the portfolio.
In a simple bilateral form of compression between two
counterparties, the dealer agrees with another dealer to compress
trades so that offsetting positions are cancelled and only the net
amount remains, without any change to the overall market exposures. The
resulting net position is documented by amending one of the original
swaps. This ``amended swap'' method is the predominant method used in
compressions of non-cleared interest rate swaps. Compression can also
be done on a multilateral basis among more than two counterparties, and
is often even more efficient, as trades across multiple dealers
involved in a compression exercise can be offset, reducing the risk in
each relationship across the various counterparties involved in the
compression. The resulting net position is documented by creating a
replacement swap reflecting the net position. This ``replacement swap''
method is predominantly used in compression exercises for non-cleared
credit default swaps, but it can also be used for interest rate swap
compression. Compression often results in the cancellation of
offsetting positions, but it could also result in new trades being
booked into an existing non-cleared portfolio to reflect the netted-
down risk of the original portfolio.
2. Final Rule
Commenters were generally supportive of this amendment to maintain
legacy status of non-cleared swap after portfolio compression
exercises. Commenters noted that portfolio compression generally
reduces gross derivative exposures and reduces the frequency of
payment, reducing the portfolio's risk profile.
The agencies are modifying the language in Sec. __.1(h)(4) to make
clear that when parties engage in portfolio compression, the resulting
replacement swap from the compression exercise is accorded legacy
treatment so long as it meets the limitations in Sec. __.1(h)(4). As
described above, in order to separate compression for the purposes of
replacing an interest rate listed in Sec. __.1(h)(3)(i) and
compression for other risk reducing or risk neutral purposes, the rule
now has a section for the former (under Sec. __.1(h)(3)) and the
latter (under Sec. __.1(h)(4)). The rule also makes clear that the
resulting non-cleared swap or non-cleared security-based swap from the
portfolio compression exercises may not (1) exceed the sum of the total
effective notional amounts of all of the swaps that were submitted to
the compression exercise that had the same or longer remaining maturity
as the resulting swap; or (2) exceed the longest remaining maturity of
all the swaps submitted to the compression exercise. This is consistent
with the proposal.
As in other areas of the final rule, supervisors may review these
changes to confirm that covered swap entities are not purposefully
avoiding the requirements of the rule.
VII. Technical Changes
The proposed rule would have deleted Sec. __.1(e)(7), which
includes an amendment relating to the QFC Rules. The text of Sec.
__.1(e)(7), with slight modifications, would have been moved to Sec.
__.1(h)(1), so that it would reside in the section of the Swap Margin
Rule dedicated to legacy swap amendments. The methods of amendment
listed in Sec. __.1(h) would have applied not only to IBOR
replacements, but also to any other contractual modifications permitted
under Sec. __.1(h), including amendments relating to the QFC Rules.
The agencies did not receive any comments on this part of the
proposed rule and are adopting it as proposed.
VIII. Comments Regarding Broader Changes to the Swap Margin Rule
Several commenters that supported the proposed rule also requested
broader changes to the rule. Some commenters requested a carve-out for
seeded funds and an alternative approach to US GAAP accounting analysis
for purposes of determining the application of the rule. These
commenters asserted that the limited and passive nature of the
relationship between seeded funds and their sponsors does not warrant
the requirement to aggregate a seeded fund's swap exposures with those
of its parent or other commonly consolidated entities for the purpose
of calculation material swap exposure. One commenter requested the
agencies make an announcement to deprioritize compliance with any
enforcement of the swap margin rule with respect to seeded funds.
Another commenter stated that non-public and mutual insurance companies
that are not required to perform GAAP accounting analysis do not
routinely do so because the cost to perform such analysis for limited
purposes is significant. They suggested engagement with the regulators
to determine if an alternative approach may be available.
Other commenters representing nonprofit organizations, asset
managers, mutual funds, other institutional asset managers, and
custodian banks recommended the types of eligible collateral be
expanded to include certain types of money market mutual funds and
exchange traded funds. Commenters also requested exclusion of seeded
funds from the definition of a consolidated group through limited rule
making. Other commenters raised concerns with the current $50 million
initial margin threshold and requested that an additional 6-month grace
period be provided after a financial end user crosses the initial
margin threshold. In addition, commenters requested a less frequent
calculation of the initial margin threshold amount because of the
burden associated with the testing and monitoring in-scope
counterparties. Commenters also requested that the agencies work with
regulated entities to develop an approach for the allocation of the
initial margin amounts and the minimum transfer amount across multiple
asset managers for a given client.
[[Page 39768]]
Commenters also requested that the agencies exclude physically
settled foreign exchange swaps from the material swaps exposure
calculation and consider making comparability and substitute compliance
determination for foreign jurisdictions.
The agencies are not adopting these broader proposed changes in
this final rule because they fall outside the scope of the changes the
agencies sought comment on in the proposed rule. The agencies will
continue to evaluate the requirements of this rule to ensure they meet
the agencies' objectives.
IX. Brexit IFR
The agencies issued an interim final rule, which became effective
on March 19, 2019, to provide certainty for covered swap entities as
they prepare for the event commonly described as ``Brexit.'' \54\ In
particular, the interim final rule provided a covered swap entity with
the ability to continue to service its cross-border clients in the
event that the U.K. withdraws from the E.U. without a Withdrawal
Agreement. A Withdrawal Agreement between the UK and EU was ratified in
January 2020.\55\ The Withdrawal Agreement addresses certain EU-related
matters that will immediately be affected by the withdrawal itself and
a transition period. The transition period will run until December 31,
2020 and could be extended by one or two years.
---------------------------------------------------------------------------
\54\ 84 FR 9940 (March 19, 2019).
\55\ See European Council Press Release ``Brexit: Council adopts
decision to conclude the withdraw agreement'' (January 30, 2020),
available at https://www.consilium.europa.eu/en/press/press-releases/2020/01/30/brexit-council-adopts-decision-to-conclude-the-withdrawal-agreement/.
---------------------------------------------------------------------------
The agencies received one comment letter on the interim final rule.
The commenter requested that the agencies amend the interim final rule
to exclude swaps with a flip clause. The comment raised an issue that
was not within the scope of the interim final rule. Accordingly, the
agencies are not making any revisions to the rule and are retaining it
as a final rule as initially adopted.
X. Administrative Law Matters
Paperwork Reduction Act Analysis
Certain provisions of the final rulemaking contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number.
The agencies reviewed the final rulemaking and determined that it
reduces certain recordkeeping requirements that have been previously
cleared under various OMB control numbers. In order to be consistent
across the agencies, the agencies are also applying a conforming
methodology for calculating the burden estimates. The agencies are
proposing to extend for three years, with revision, these information
collections. The OCC and FDIC have submitted to OMB for review under
section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of
the OMB's implementing regulations (5 CFR 1320). The Board has reviewed
the information collection under its delegated authority. The OMB
control numbers are 1557-0251 (OCC), 3064-0204 (FDIC), and 7100-0364
(Board). The FCA has determined the final rulemaking has no PRA
implications because Farm Credit System institutions are Federally
chartered instrumentalities of the United States and instrumentalities
of the United States are specifically excepted from the definition of
``collection of information'' contained in 44 U.S.C. 3502(3). The FHFA
has determined that the final rulemaking does not contain any
collection of information for which the agency must obtain clearance
under the PRA.
Current Actions
The final rulemaking removes the record keeping requirement in
Sec. __.11(b) that a covered swap entity shall calculate the amount of
initial margin that would be required to be posted to an affiliate that
is a financial end user with material swaps exposure pursuant to Sec.
__.3(b) and provide documentation of such amount to each affiliate on a
daily basis.
Final Revision, With Extension, of the Following Information
Collections
Title of information collection: Reporting and Recordkeeping
Requirements Associated with Swaps Margin and Swaps Push-Out.
Frequency: Annual and event generated.
Affected public: Businesses or other for-profit.
Estimated average hours per response:
Reporting
Section __.1(d)--1 hour (on average of 1,000 times per year).
Sections __.8(c) and __.8(d)--240 hours.
Section __.8(f)(3)--50 hours.
Section __.9(e)--10 hours (on average of 3 times per year).
Sections 237.22(a)(1) and 237.22(e) (Board only)--7 hours.
Recordkeeping
Sections __.2 (definition of ``eligible master netting agreement,''
item 4), 237.8(g), and 237.10--5 hours.
Section __.5(c)(2)(i)--4 hours.
Section __.7(c)--100 hours.
Sections __.8(e) and 237.8(f)--40 hours.
Section __.8(h)--20 hours.
Disclosure
Section __.1(h)--1 hour.
OCC
Respondents: Any national bank or a subsidiary thereof, Federal
savings association or a subsidiary thereof, or Federal branch or
agency of a foreign bank that is registered as a swap dealer, major
swap participant, security-based swap dealer, or major security-based
swap participant.
Estimated number of respondents: 10.
Proposed revisions only estimated annual burden: -2,500 hours.
Total estimated annual burden: 14,900 hours.
Board
Respondents: Any state member bank (as defined in 12 CFR 208.2(g)),
bank holding company (as defined in 12 U.S.C. 1841), savings and loan
holding company (as defined in 12 U.S.C. 1467a), foreign banking
organization (as defined in 12 CFR 211.21(o)), foreign bank that does
not operate an insured branch, state branch or state agency of a
foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12)), or Edge or
agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)) that
is registered as a swap dealer, major swap participant, security-based
swap dealer, or major security-based swap participant.
Estimated number of respondents: 41.
Proposed revisions only estimated annual burden: -10,209 hours.
Total estimated annual burden: 61,104 hours.
FDIC
FDIC: Any FDIC-insured state-chartered bank that is not a member of
the Federal Reserve System or FDIC-insured state-chartered savings
association that is registered as a swap dealer, major swap
participant, security-based swap dealer, or major security-based swap
participant.
Estimated number of respondents: 1.
Proposed revisions only estimated annual burden: -249 hours.
[[Page 39769]]
Total estimated annual burden: 1,490 hours.
Regulatory Flexibility Act Analysis
OCC: In general, the Regulatory Flexibility Act (RFA) (5 U.S.C. 601
et seq.) requires that in connection with a final rulemaking, an agency
publish a final regulatory flexibility analysis that describes the
impact of the rule on small entities. Under section 605(b) of the RFA,
this analysis is not required if an agency certifies that the rule will
not have a significant economic impact on a substantial number of small
entities and publishes its certification and a brief explanatory
statement in the Federal Register along with its rule.
As part of our analysis, we consider whether, pursuant to the RFA,
the final rule would have a significant economic impact on a
substantial number of small entities. The OCC currently supervises
approximately 745 small entities.\56\ Among these 745 small entities,
42 could be affected by the final rule if one or more of these small
entities are a party to a financial contract with a covered swap
entity. Because we believe banks will incur de minimis costs, if any,
to comply with the final rule, we conclude that the final rule would
not have a significant economic impact on a substantial number of small
entities.\57\
---------------------------------------------------------------------------
\56\ We base our estimate of the number of small entities on the
Small Business Administration's (SBA's) size thresholds for
commercial banks and savings institutions, and trust companies,
which are $600 million and $41.5 million, respectively. Consistent
with the General Principles of Affiliation, 13 CFR 121.103(a), we
count the assets of affiliated financial institutions when
determining if we should classify an OCC-supervised institution as a
small entity. We use December 31, 2019, to determine size because a
``financial institution's assets are determined by averaging the
assets reported on its four quarterly financial statements for the
preceding year.'' See footnote 8 of the SBA's Table of Size
Standards.
\57\ As one way of determining whether any of the small entities
is a covered swap entity, the OCC reviewed the CFTC's listing of
registered swap dealers at https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer. The SEC has not yet imposed a
registration requirement on entities that meet the definition of
security-based swap dealer or major security-based swap participant.
---------------------------------------------------------------------------
Board: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA),
generally requires that an agency prepare and make available for public
comment a final regulatory flexibility analysis in connection with a
final rulemaking or certify that the final rule will not have a
significant economic impact on a substantial number of small
entities.\58\
---------------------------------------------------------------------------
\58\ See 5 U.S.C. 603(a).
---------------------------------------------------------------------------
As described above, the final rule amends the Swap Margin Rule as
follows:
First, the final rule provides relief by allowing legacy swaps to
be amended to replace interbank offered rates (IBORs) and other
interest rates that are reasonably expected to be discontinued or are
reasonably determined to have lost their relevance as a reliable
benchmark due to a significant impairment, without such swaps losing
their legacy status.
Second, the final rule adds an additional initial margin compliance
period for swaps with certain smaller counterparties, and clarifies the
existing trading documentation requirements in Sec. __.10 of the Rule.
Third, the final rule permits amendments driven by certain routine
life-cycle activities that covered swap entities may conduct for legacy
swaps, such as reduction of notional amounts and portfolio compression
exercises, without triggering margin requirements.
Fourth, the final rule would make final a previously issued interim
final rule that preserve the status of legacy swaps meeting certain
criteria after the United Kingdom withdraws from the European Union
without a negotiated settlement agreement.
Lastly, the final rule amends the treatment of affiliate
transactions by amending the regulatory requirement that a covered swap
entity collect initial margin for non-cleared swaps from its
affiliates. The final rule retains the requirement that affiliates
exchange variation margin. It also makes clear that affiliates should
continue to use sound judgment to impose initial margin on non-cleared
swaps when appropriate.
This final rule applies to financial institutions that are covered
swap entities that are subject to the requirements of the Swap Margin
Rule. Under SBA regulations, the finance and insurance sectors include
commercial banking, savings institutions, credit unions, other
depository credit intermediation and credit card issuing entities
(financial institutions). With respect to financial institutions that
are covered swap entities under the Swap Margin Rule, a financial
institution generally is considered small if it has assets of $600
million or less.\59\ Covered swap entities would be considered
financial institutions for purposes of the RFA in accordance with SBA
regulations. The Board does not expect that any covered swap entity is
likely to be a small financial institution, because a small financial
institution is unlikely to engage in the level of swap activity that
would require it to register as a swap dealer or a major swap
participant with the CFTC or a security-based swap dealer or security-
based major swap participant with the U.S. Securities and Exchange
Commission (SEC).\60\ None of the current Board-regulated covered swap
entities are small entities for purposes of the RFA.
---------------------------------------------------------------------------
\59\ See 13 CFR 121.201 (effective December 2, 2014, as amended
by 84 FR 34261, effective August 19, 2019); see also 13 CFR
121.103(a)(6) (noting factors that the SBA considers in determining
whether an entity qualifies as a small business, including receipts,
employees, and other measures of its domestic and foreign
affiliates).
\60\ The CFTC has published a list of provisionally registered
swap dealers as of February 27, 2020, that does not include any
small financial institutions. See https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer. The SEC has not yet imposed a
registration requirement on entities that meet the definition of
security-based swap dealer or major security-based swap participant.
---------------------------------------------------------------------------
The Board does not believe that this final rule will result in any
new reporting, recordkeeping or other compliance requirements resulting
in increased burden to any small entities, nor, therefore, that there
are any significant alternatives to the final rule that would reduce
the impact on small entities. In light of the foregoing, the Board
certifies pursuant to section 605(b) of the RFA that the final rule
will not have a significant economic impact on a substantial number of
small entities.
FDIC: The RFA generally requires that, in connection with a final
rulemaking, an agency prepare and make available for public comment a
final regulatory flexibility analysis describing the impact of the
final rule on small entities. However, a regulatory flexibility
analysis is not required if the agency certifies that the final rule
will not have a significant economic impact on a substantial number of
small entities. The SBA has defined ``small entities'' to include
banking organizations with total assets of less than or equal to $600
million that are independently owned and operated or owned by a holding
company with less than or equal to $600 million in total assets.\61\
Generally, the FDIC considers a significant effect to be a quantified
effect in excess of 5 percent of total annual salaries and benefits per
institution, or 2.5 percent of total non-interest expenses. The FDIC
believes that effects in excess of these thresholds typically represent
significant effects for FDIC-
[[Page 39770]]
supervised institutions. For the reasons described below, the FDIC
certifies pursuant to section 605(b) of the RFA that the final rule
will not have a significant economic impact on a substantial number of
small entities.
---------------------------------------------------------------------------
\61\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 84 FR 34261, effective August 19, 2019). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
---------------------------------------------------------------------------
According to data from recent Consolidated Reports of Income and
Condition (Call Report),\62\ the FDIC supervised 3,344 institutions. Of
those, 2,581581 are considered ``small,'' according to the terms of the
RFA. As discussed previously, the final rule directly applies to
covered swap entities (which includes persons registered with the CFTC
as swap dealers or major swap participants pursuant to the Commodity
Exchange Act of 1936 and persons registered with the SEC as security-
based swap dealers and major security-based swap participants under the
Securities Exchange Act of 1934) that are subject to the requirements
of the Swap Margin Rule. The FDIC has identified 108 swap dealers and
major swap participants that, as of February 27, 2020, have registered
as swap entities.\63\ One of these institutions is supervised by the
FDIC, however that institution holds in excess of $460 billion in
assets and does not meet the definition of ``small'' for the purpose of
RFA.
---------------------------------------------------------------------------
\62\ FDIC Call Report, December 31, 2019.
\63\ While the SEC had adopted a regulation that would require
registration of security-based swap dealers and major security-based
swap participants, as of June 28, 2019, there was no date
established as the compliance date and no SEC-published list of any
such entities that so registered (see 84 FR 4906 at 4925).
Accordingly, no security-based swap dealers and no major security-
based swap participants have been identified as swap entities by the
FDIC. In identifying the 105 institutions referred to in the text,
the FDIC used the list of swap dealers set forth, on March 22, 2020
(providing data as of February 27, 2020) at https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html. Major swap
participants, among others, are required to apply for registration
through a filing with the National Futures Association. Accordingly,
the FDIC reviewed the National Futures Association https://www.nfa.futures.org/members/sd/ to determine whether there
were registered major swap participants. As of March 22, 2020, there
were no major swap participants listed on this link.
---------------------------------------------------------------------------
As an amendment to the Swap Margin Rule, the final rule also
affects counterparties to swaps entered into by covered swap entities.
However, the Terrorism Risk Insurance Program Reauthorization Act of
2015 excludes non-cleared swaps entered into for hedging purposes by a
financial institution with total assets of $10 billion or less from the
requirements of the Swap Margin Rule. Given this exclusion, a non-
cleared swap between a covered swap entity and a small FDIC-supervised
entity that is used to hedge a commercial risk of the small entity will
not be subject to the Swap Margin Rule. The FDIC believes that it is
unlikely that any small entity it supervises will engage in non-cleared
swaps for purposes other than hedging.
Given that no FDIC-supervised small entities are covered swap
entities and that it is unlikely that FDIC-supervised small entities
enter into non-cleared swaps for purposes other than hedging, this
final rule is not expected to have a significant economic impact on a
substantial number of small entities supervised by the FDIC. For these
reasons, the FDIC certifies that the final rule will not have a
significant economic impact on a substantial number of small entities,
within the meaning of those terms as used in the RFA. Accordingly, a
regulatory flexibility analysis is not required.
FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.), FCA hereby certifies that the final rule will
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the Farm Credit System, considered
together with its affiliated associations, has assets and annual income
in excess of the amounts that would qualify them as small entities; nor
does the Federal Agricultural Mortgage Corporation meet the definition
of ``small entity.'' Therefore, Farm Credit System institutions are not
``small entities'' as defined in the Regulatory Flexibility Act.
FHFA: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.)
requires that a regulation that has a significant economic impact on a
substantial number of small entities, small businesses, or small
organizations must include a final regulatory flexibility analysis
describing the regulation's impact on small entities. FHFA need not
undertake such an analysis if the agency has certified the regulation
will not have a significant economic impact on a substantial number of
small entities. 5 U.S.C. 605(b). FHFA has considered the impact of the
final rule under the Regulatory Flexibility Act, and certifies that the
final rule does not have a significant economic impact on a substantial
number of small entities because the final rule is applicable only to
FHFA's regulated entities, which are not small entities for purposes of
the Regulatory Flexibility Act.
Unfunded Mandates Reform Act of 1995
The OCC has analyzed the final rule under the factors in the
Unfunded Mandates Reform Act of 1995 (UMRA).\64\ Under this analysis,
the OCC considered whether the final rule includes a Federal mandate
that may result in the expenditure by State, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year (adjusted annually for inflation). The
UMRA does not apply to regulations that incorporate requirements
specifically set forth in law.
---------------------------------------------------------------------------
\64\ 2 U.S.C. 1531 et seq.
---------------------------------------------------------------------------
The OCC analyzed the amendments proposed in this final rulemaking
and has determined that they would not result in expenditures by State,
local, and Tribal governments, in the aggregate, or by the private
sector, of $157 million in any one year. Accordingly, the OCC has not
prepared a written statement under sections 202 and 205.
Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\65\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions (IDIs), each Federal banking agency
must consider, consistent with principles of safety and soundness and
the public interest, any administrative burdens that such regulations
would place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on IDIs
generally to take effect on the first day of a calendar quarter that
begins on or after the date on which the regulations are published in
final form.\66\
---------------------------------------------------------------------------
\65\ 12 U.S.C. 4802(a).
\66\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
Each Federal banking agency has determined that the final rule
would not impose additional reporting, disclosure, or other
requirements on IDIs; therefore, the requirements of the RCDRIA do not
apply.
A. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \67\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies have sought to present
the final rule in a simple and straightforward
[[Page 39771]]
manner and did not receive comment on the use of plain language.
---------------------------------------------------------------------------
\67\ 12 U.S.C. 4809.
---------------------------------------------------------------------------
B. The Congressional Review Act
For purposes of Congressional Review Act, the OMB makes a
determination as to whether a final rule constitutes a ``major''
rule.\68\ If a rule is deemed a ``major rule'' by the OMB, the
Congressional Review Act generally provides that the rule may not take
effect until at least 60 days following its publication.\69\
---------------------------------------------------------------------------
\68\ 5 U.S.C. 801 et seq.
\69\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------
The Congressional Review Act defines a ``major rule'' as any rule
that the Administrator of the Office of Information and Regulatory
Affairs of the OMB finds has resulted in or is likely to result in--(A)
an annual effect on the economy of $100,000,000 or more; (B) a major
increase in costs or prices for consumers, individual industries,
Federal, State, or local government agencies or geographic regions, or
(C) significant adverse effects on competition, employment, investment,
productivity, innovation, or on the ability of United States-based
enterprises to compete with foreign-based enterprises in domestic and
export markets.\70\ As required by the Congressional Review Act, the
agencies will submit the final rule and other appropriate reports to
Congress and the Government Accountability Office for review.
---------------------------------------------------------------------------
\70\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 45
Administrative practice and procedure, Capital, Margin
requirements, National Banks, Federal Savings Associations, Reporting
and recordkeeping requirements, Risk.
12 CFR Part 237
Administrative practice and procedure, Banks, Banking, Foreign
Banking, Holding companies, Reporting and recordkeeping requirements,
Swaps.
12 CFR Part 349
Administrative practice and procedure, Banks, Banking, Holding
companies, Capital, Margin requirements, Reporting and recordkeeping
requirements, Savings associations, Risk, Swaps.
12 CFR Part 624
Accounting, Agriculture, Banks, Banking, Capital, Cooperatives,
Credit, Margin requirements, Reporting and recordkeeping requirements,
Risk, Rural areas, Swaps.
12 CFR Part 1221
Government-sponsored enterprises, Mortgages, Securities.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the common preamble and under the
authority of 12 U.S.C. 93a and 5412(b)(2)(B), the Office of the
Comptroller of the Currency amends part 45 of Title 12, Code of Federal
Regulations, as follows:
PART 45--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
0
1. The authority citation for part 45 continues to read as follows:
Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et seq., 12 U.S.C. 93a,
161, 481, 1818, 3907, 3909, 5412(b)(2)(B), and 15 U.S.C. 78o-10(e).
0
2. Section 45.1 is amended by revising paragraphs (e)(6) and (7) and
(h) introductory text and adding paragraphs (h)(1) and (3) through (5)
to read as follows:
Sec. 45.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(6) September 1, 2020, with respect to requirements in Sec. 45.3
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April, and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021, with respect to requirements in Sec. 45.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
* * * * *
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this part for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant
compliance dates for variation margin and for initial margin
established in paragraph (e) of this section. Any non-cleared swap or
non-cleared security-based swap entered into before such relevant date
shall remain outside the scope of this part if amendments are made to
the non-cleared swap or non-cleared security-based swap by method of
adherence to a protocol, other amendment of a contract or confirmation,
or execution of a new contract or confirmation in replacement of and
immediately upon termination of an existing contract or confirmation,
as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate that a covered swap entity reasonably
expects to be replaced or discontinued or reasonably determines has
lost its relevance as a reliable benchmark due to a significant
impairment; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under
this paragraph (h)(3)(i)(C) could be one of multiple amendments made
under this paragraph (h)(3)(i)(C). For example, an amendment could
replace an IBOR with a temporary interest rate and later replace the
temporary interest rate with a permanent interest rate.
[[Page 39772]]
(ii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also incorporate
spreads or other adjustments to the replacement interest rate and make
other necessary technical changes to operationalize the determination
of payments or other exchanges of economic value using the replacement
interest rate, including changes to determination dates, calculation
agents, and payment dates. The changes may not extend the maturity or
increase the total effective notional amount of the non-cleared swap or
non-cleared security-based swap beyond what is necessary to accommodate
the differences between market conventions for an outgoing interest
rate and its replacement.
(iii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also be
effectuated through portfolio compression between or among covered swap
entities and their counterparties. Portfolio compression under this
paragraph is not subject to the limitations in paragraph (h)(4) of this
section but any non-cleared swaps or non-cleared security-based swaps
resulting from the portfolio compression may not have a longer maturity
or increase the total effective notional amount more than what is
necessary to accommodate the differences between market conventions for
an outgoing interest rate and its replacement.
(4) Amendments solely to reduce risk or remain risk-neutral through
portfolio compression between or among covered swap entities and their
counterparties, as long as any non-cleared swaps or non-cleared
security-based swaps resulting from the portfolio compression do not:
(i) Exceed the sum of the total effective notional amounts of all
of the swaps that were submitted to the compression exercise that had
the same or longer remaining maturity as the resulting swap; or
(ii) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
reference, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or
(B) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
novated to a third party, who complies with applicable margin rules for
the novated portion upon the transfer.
0
3. Section 45.9 is amended by adding paragraph (h) to read as follows:
Sec. 45.9 Cross-border application of margin requirements.
* * * * *
(h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
(ii) of this section is not subject to the requirements of Sec.
45.3(a) or Sec. 45.11(a) for any non-cleared swap or non-cleared
security-based swap executed with an affiliate of the covered swap
entity; and
(2) For purposes of paragraph (h)(1) of this section, ``affiliate''
has the same meaning provided in Sec. 45.11(d).
0
4. Section 45.10 is amended by revising paragraph (a) to read as
follows:
Sec. 45.10 Documentation of margin matters.
* * * * *
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this subpart, and at such time as initial margin or
variation margin is required to be collected or posted under Sec. 45.3
or Sec. 45.4, as applicable; and
* * * * *
0
5. Section 45.11 is revised to read as follows:
Sec. 45.11 Special rules for affiliates.
(a)(1) A covered swap entity shall calculate on each business day
an initial margin collection amount for each counterparty that is a
swap entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity.
(2) If the aggregate of all initial margin collection amounts
calculated under paragraph (a)(1) of this section does not exceed 15
percent of the covered swap entity's tier 1 capital, the requirements
for a covered swap entity to collect initial margin under Sec. 45.3(a)
do not apply with respect to any non-cleared swap or non-cleared
security-based swap with a counterparty that is an affiliate.
(3) On each business day that the aggregate of all initial margin
collection amounts calculated under paragraph (a)(1) of this section
exceeds 15 percent of the covered swap entity's tier 1 capital:
(i) The covered swap entity shall collect initial margin under
Sec. 45.3(a) for each additional non-cleared swap and non-cleared
security-based swap executed that business day with a counterparty that
is a swap entity or financial end user with a material swaps exposure
and an affiliate of the covered swap entity, commencing on the day
after execution and continuing on a daily basis as required under Sec.
45.3(c), until the earlier of:
(A) The termination date of such non-cleared swap or non-cleared
security-based swap, or
(B) The business day on which the aggregate of all initial margin
collection amounts calculated under Sec. 45.11(a)(1) falls below 15
percent of the covered swap entity's tier 1 capital;
(ii) Notwithstanding Sec. 45.7(b), to the extent the covered swap
entity collects initial margin pursuant to paragraph (a)(3)(i) of this
section in the form of collateral other than cash collateral, the
custodian for such collateral may be the covered swap entity or an
affiliate of the covered swap entity;
(4) For purposes of this paragraph (a), ``tier 1 capital'' means
the sum of common equity tier 1 capital as defined in 12 CFR 3.20(b)
and additional tier 1 capital as defined in 12 CFR 3.20(c), as reported
in the institution's most recent Consolidated Reports of Income and
Condition (Call Report); and
(5) If any subsidiary of the covered swap entity (including a
subsidiary described in Sec. 45.9(h)) executes any non-cleared swap or
non-cleared security-based swap with any counterparty that is a swap
entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity:
(i) The covered swap entity shall treat such non-cleared swap or
security-based swap as its own for purposes of this paragraph (a); and
(ii) If the subsidiary is itself a covered swap entity, the
compliance by its parent covered swap entity with this paragraph (a)(5)
shall be deemed to establish the subsidiary's compliance with the
requirements of this paragraph (a) and to exempt the subsidiary from
the requirements for a covered swap entity to collect initial margin
under Sec. 45.3(a) from an affiliate.
(b) The requirement for a covered swap entity to post initial
margin under Sec. 45.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
[[Page 39773]]
(c) Section 45.3(d) shall apply to a counterparty that is an
affiliate in the same manner as it applies to any counterparty that is
neither a financial end user without a material swap exposure nor a
swap entity.
(d) For purposes of this section:
(1) An affiliate means:
(i) An affiliate as defined in Sec. 45.2; or
(ii) Any company that controls, is controlled by, or is under
common control with the covered swap entity through the direct or
indirect exercise of controlling influence over the management or
policies of the controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in Sec. 45.2; or
(ii) Any company that is controlled by the covered swap entity
through the direct or indirect exercise of controlling influence over
the management or policies of the controlled company.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the common preamble, the Board of
Governors of the Federal Reserve System amends 12 CFR part 237 as
follows:
PART 237--SWAPS MARGIN AND SWAPS PUSH-OUT (REGULATION KK)
0
6. The authority citation for part 237 continues to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 15 U.S.C. 8305,
12 U.S.C. 221 et seq., 12 U.S.C. 343-350, 12 U.S.C. 1818, 12 U.S.C.
1841 et seq., 12 U.S.C. 3101 et seq., and 12 U.S.C. 1461 et seq.
0
7. Revise the heading of part 237 to read as shown above.
Subpart A--Margin and Capital Requirements for Covered Swap
Entities (Regulation KK)
0
8. Section 237.1 is amended by revising paragraphs (e)(6) and (7) and
(h) introductory text and adding paragraphs (h)(1) and (3) through (5)
to read as follows:
Sec. 237.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(6) September 1, 2020, with respect to requirements in Sec. 237.3
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April, and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021, with respect to requirements in Sec. 237.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
* * * * *
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this subpart for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant
compliance dates for variation margin and for initial margin
established in paragraph (e) of this section. Any non-cleared swap or
non-cleared security-based swap entered into before such relevant date
shall remain outside the scope of this subpart if amendments are made
to the non-cleared swap or non-cleared security-based swap by method of
adherence to a protocol, other amendment of a contract or confirmation,
or execution of a new contract or confirmation in replacement of and
immediately upon termination of an existing contract or confirmation,
as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate that a covered swap entity reasonably
expects to be replaced or discontinued or reasonably determines has
lost its relevance as a reliable benchmark due to a significant
impairment; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under
this paragraph (h)(3)(i)(C) could be one of multiple amendments made
under this paragraph (h)(3)(i)(C). For example, an amendment could
replace an IBOR with a temporary interest rate and later replace the
temporary interest rate with a permanent interest rate.
(ii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also incorporate
spreads or other adjustments to the replacement interest rate and make
other necessary technical changes to operationalize the determination
of payments or other exchanges of economic value using the replacement
interest rate, including changes to determination dates, calculation
agents, and payment dates. The changes may not extend the maturity or
increase the total effective notional amount of the non-cleared swap or
non-cleared security-based swap beyond what is necessary to accommodate
the differences between market conventions for an outgoing interest
rate and its replacement.
(iii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also be
effectuated through portfolio compression between or among covered swap
entities and their counterparties. Portfolio compression under this
paragraph is not subject to the limitations in paragraph (h)(4) of this
section, but any non-cleared swaps or non-cleared security-based swaps
resulting from the portfolio compression may not have a longer maturity
or increase the total effective notional amount more than what is
necessary to accommodate the differences between market conventions for
an outgoing interest rate and its replacement.
(4) Amendments solely to reduce risk or remain risk-neutral through
portfolio compression between or among covered swap entities and their
counterparties, as long as any non-cleared swaps or non-cleared
security-based swaps resulting from the portfolio compression do not:
(i) Exceed the sum of the total effective notional amounts of all
of the
[[Page 39774]]
swaps that were submitted to the compression exercise that had the same
or longer remaining maturity as the resulting swap; or
(ii) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
reference, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or
(B) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
novated to a third party, who complies with applicable margin rules for
the novated portion upon the transfer.
0
9. Section 237.9 is amended by adding paragraph (h) to read as follows:
Sec. 237.9 Cross-border application of margin requirements.
* * * * *
(h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
(ii) of this section is not subject to the requirements of Sec.
237.3(a) or Sec. 237.11(a) for any non-cleared swap or non-cleared
security-based swap executed with an affiliate of the covered swap
entity; and
(2) For purposes of paragraph (h)(1) of this section, ``affiliate''
has the same meaning provided in 12 CFR 237.11(d).
0
10. Section 237.10 is amended by revising paragraph (a) to read as
follows:
Sec. 237.10 Documentation of margin matters.
* * * * *
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this subpart, and at such time as initial margin or
variation margin is required to be collected or posted under Sec.
237.3 or Sec. 237.4, as applicable; and
* * * * *
0
11. Section 237.11 is revised to read as follows:
Sec. 237.11 Special rules for affiliates.
(a)(1) A covered swap entity shall calculate on each business day
an initial margin collection amount for each counterparty that is a
swap entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity.
(2) If the aggregate of all initial margin collection amounts
calculated under paragraph (a)(1) of this section does not exceed 15
percent of the covered swap entity's tier 1 capital, the requirements
for a covered swap entity to collect initial margin under Sec.
237.3(a) do not apply with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is an affiliate.
(3) On each business day that the aggregate of all initial margin
collection amounts calculated under paragraph (a)(1) of this section
exceeds 15 percent of the covered swap entity's tier 1 capital:
(i) The covered swap entity shall collect initial margin under
Sec. 237.3(a) for each additional non-cleared swap and non-cleared
security-based swap executed that business day with a counterparty that
is a swap entity or financial end user with a material swaps exposure
and an affiliate of the covered swap entity, commencing on the day
after execution and continuing on a daily basis as required under Sec.
237.3(c), until the earlier of:
(A) The termination date of such non-cleared swap or non-cleared
security-based swap, or
(B) The business day on which the aggregate of all initial margin
collection amounts calculated under paragraph (a)(1) of this section
falls below 15 percent of the covered swap entity's tier 1 capital;
(ii) Notwithstanding Sec. 237.7(b), to the extent the covered swap
entity collects initial margin pursuant to paragraph (a)(3)(i) of this
section in the form of collateral other than cash collateral, the
custodian for such collateral may be the covered swap entity or an
affiliate of the covered swap entity; and
(4) For purposes of this paragraph (a), ``tier 1 capital'' means
the sum of common equity tier 1 capital as defined in 12 CFR 217.20(b)
and additional tier 1 capital as defined in 12 CFR 217.20(c), as
reported in the institution's most recent Consolidated Reports of
Income and Condition (Call Report).
(5) If any subsidiary of the covered swap entity (including a
subsidiary described in Sec. 237.9(h)) executes any non-cleared swap
or non-cleared security-based swap with any counterparty that is a swap
entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity:
(i) The covered swap entity shall treat such non-cleared swap or
security-based swap as its own for purposes of this paragraph (a); and
(ii) If the subsidiary is itself a covered swap entity, the
compliance by its parent affiliated covered swap entity with this
paragraph (a)(5) shall be deemed to establish the subsidiary's
compliance with the requirements of this paragraph (a) and to exempt
the subsidiary from the requirements for a covered swap entity to
collect initial margin under Sec. 237.3(a) from an affiliate.
(b) The requirement for a covered swap entity to post initial
margin under Sec. 237.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
(c) Section 237.3(d) shall apply to a counterparty that is an
affiliate in the same manner as it applies to any counterparty that is
neither a financial end user without a material swap exposure nor a
swap entity.
(d) For purposes of this section,
(1) An affiliate means:
(i) An affiliate as defined in Sec. 237.2; or
(ii) Any company that controls, is controlled by, or is under
common control with the covered swap entity through the direct or
indirect exercise of controlling influence over the management or
policies of the controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in Sec. 237.2; or
(ii) Any company that is controlled by the covered swap entity
through the direct or indirect exercise of controlling influence over
the management or policies of the controlled company.
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the Supplementary Information section,
the Federal Deposit Insurance Corporation amends 12 CFR chapter III as
follows:
PART 349--DERIVATIVES
Subpart A--Margin and Capital Requirements for Covered Swap Entries
0
12. The authority citation for subpart A of part 349 continues to read
as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), and 12 U.S.C.
1818 and 12 U.S.C.
[[Page 39775]]
1819(a)(Tenth), 12 U.S.C. 1813(q), 1818, 1819, and 3108.
0
13. Section 349.1 is amended by revising paragraphs (e)(6) and (7) and
(h) introductory text, and adding paragraphs (h)(1) and (3) through (5)
to read as follows:
Sec. 349.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(6) September 1, 2020, with respect to requirements in Sec. 349.3
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April, and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021, with respect to requirements in Sec. 349.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
* * * * *
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this subpart for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant
compliance dates for variation margin and for initial margin
established in paragraph (e) of this section. Any non-cleared swap or
non-cleared security-based swap entered into before such relevant date
shall remain outside the scope of this subpart if amendments are made
to the non-cleared swap or non-cleared security-based swap by method of
adherence to a protocol, other amendment of a contract or confirmation,
or execution of a new contract or confirmation in replacement of and
immediately upon termination of an existing contract or confirmation,
as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate that a covered swap entity reasonably
expects to be replaced or discontinued or reasonably determines has
lost its relevance as a reliable benchmark due to a significant
impairment; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under
this paragraph (h)(3)(i)(C) could be one of multiple amendments made
under this paragraph (h)(3)(i)(C). For example, an amendment could
replace an IBOR with a temporary interest rate and later replace the
temporary interest rate with a permanent interest rate.
(ii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also incorporate
spreads or other adjustments to the replacement interest rate and make
other necessary technical changes to operationalize the determination
of payments or other exchanges of economic value using the replacement
interest rate, including changes to determination dates, calculation
agents, and payment dates. The changes may not have a longer maturity
or increase the total effective notional amount of the non-cleared swap
or non-cleared security-based swap beyond what is necessary to
accommodate the differences between market conventions for an outgoing
interest rate and its replacement.
(iii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also be
effectuated through portfolio compression between or among covered swap
entities and their counterparties. Portfolio compression under this
paragraph is not subject to the limitations in paragraph (h)(4) of this
section, but any non-cleared swap[s] or non-cleared security-based
swaps resulting from the portfolio compression may not extend the
maturity or increase the total effective notional amount more than what
is necessary to accommodate the differences between market conventions
for an outgoing interest rate and its replacement.
(4) Amendments solely to reduce risk or remain risk-neutral through
portfolio compression between or among covered swap entities and their
counterparties, as long as any non-cleared swaps or non-cleared
security-based swaps resulting from the portfolio compression do not:
(i) Exceed the sum of the total effective notional amounts of all
of the swaps that were submitted to the compression exercise that had
the same or longer remaining maturity as the resulting swap; or
(ii) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
reference, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or
(B) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
novated to a third party, who complies with applicable margin rules for
the novated portion upon the transfer.
0
14. Section 349.9 is amended by adding paragraph (h) to read as
follows:
Sec. 349.9 Cross-border application of margin requirements.
* * * * *
(h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
(ii) is not subject to the requirements of Sec. 349.3(a) or Sec.
349.11 for any non-cleared swap or non-cleared security-based swap
executed with an affiliate of the covered swap entity; and
(2) For purposes of paragraph (h)(1) of this section, ``affiliate''
has the same meaning provided in Sec. 349.11(d).
0
15. Section 349.10 is amended by revising paragraph (a) to read as
follows:
[[Page 39776]]
Sec. 349.10 Documentation of margin matters.
* * * * *
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this subpart, and at such time as initial margin or
variation margin is required to be collected or posted under Sec.
349.3 or Sec. 349.4, as applicable; and
* * * * *
0
16. Section 349.11 is revised to read as follows:
Sec. 349.11 Special rules for affiliates.
(a)(1) A covered swap entity shall calculate on each business day
an initial margin collection amount for each counterparty that is a
swap entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity.
(2) If the aggregate of all initial margin collection amounts
calculated under paragraph (a)(1) of this section does not exceed 15
percent of the covered swap entity's tier 1 capital, the requirements
for a covered swap entity to collect initial margin under Sec.
349.3(a) do not apply with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is an affiliate.
(3) On each business day that the aggregate of all initial margin
collection amounts calculated under paragraph (a)(1) of this section
exceeds 15 percent of the covered swap entity's tier 1 capital:
(i) The covered swap entity shall collect initial margin under
Sec. 349.3(a) for each additional non-cleared swap and non-cleared
security-based swap executed that business day with a counterparty that
is a swap entity or financial end user with a material swaps exposure
and an affiliate of the covered swap entity, commencing on the day
after execution and continuing on a daily basis as required under Sec.
45.3(c), until the earlier of:
(A) The termination date of such non-cleared swap or non-cleared
security-based swap, or
(B) The business day on which the aggregate of all initial margin
collection amounts calculated under paragraph (a)(1) of this section
falls below 15 percent of the covered swap entity's tier 1 capital;
(ii) Notwithstanding Sec. 349.7(b), to the extent the covered swap
entity collects initial margin pursuant to paragraph (a)(3)(i) of this
section in the form of collateral other than cash collateral, the
custodian for such collateral may be the covered swap entity or an
affiliate of the covered swap entity;
(4) For purposes of this paragraph (a), ``tier 1 capital'' means
the sum of common equity tier 1 capital as defined in 12 CFR 324.20(b)
and additional tier 1 capital as defined in 12 CFR 324.20(c), as
reported in the institution's most recent Consolidated Reports of
Income and Condition (Call Report); and
(5) If any subsidiary of the covered swap entity (including a
subsidiary described in Sec. 349.9(h)) executes any non-cleared swap
or non-cleared security-based swap with any counterparty that is a swap
entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity:
(i) The covered swap entity shall treat such non-cleared swap or
security-based swap as its own for purposes of this paragraph (a); and
(ii) If the subsidiary is itself a covered swap entity, the
compliance by its parent covered swap entity with this paragraph (a)(5)
shall be deemed to establish the subsidiary's compliance with the
requirements of this paragraph (a) and to exempt the subsidiary from
the requirements for a covered swap entity to collect initial margin
under Sec. 349.3(a) from an affiliate.
(b) The requirement for a covered swap entity to post initial
margin under Sec. 349.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
(c) Section 349.3(d) shall apply to a counterparty that is an
affiliate in the same manner as it applies to any counterparty that is
neither a financial end user without a material swap exposure nor a
swap entity.
(d) For purposes of this section:
(1) An affiliate means:
(i) An affiliate as defined in Sec. 349.2; or
(ii) Any company that controls, is controlled by, or is under
common control with the covered swap entity through the direct or
indirect exercise of controlling influence over the management or
policies of the controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in Sec. 349.2; or
(ii) Any company that is controlled by the covered swap entity
through the direct or indirect exercise of controlling influence over
the management or policies of the controlled company.
FARM CREDIT ADMINISTRATION
12 CFR Chapter VI
Authority and Issuance
For the reasons set forth in the preamble, the Farm Credit
Administration amends chapter VI of title 12, Code of Federal
Regulations, as follows:
PART 624--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
0
17. The authority citation for part 624 continues to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 2154,
12 U.S.C. 2243, 12 U.S.C. 2252, 12 U.S.C. 2279bb-1.
0
18. Section 624.1 is amended by revising paragraphs (e)(6) and (7) and
(h) introductory text and adding paragraphs (h)(1) and (3) through (5)
to read as follows:
Sec. 624.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(6) September 1, 2020, with respect to requirements in Sec. 624.3
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April, and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021, with respect to requirements in Sec. 624.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
* * * * *
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this subpart for non-cleared swaps and non-
cleared security-
[[Page 39777]]
based swaps entered into on or after the relevant compliance dates for
variation margin and for initial margin established in paragraph (e) of
this section. Any non-cleared swap or non-cleared security-based swap
entered into before such relevant date shall remain outside the scope
of this subpart if amendments are made to the non-cleared swap or non-
cleared security-based swap by method of adherence to a protocol, other
amendment of a contract or confirmation, or execution of a new contract
or confirmation in replacement of and immediately upon termination of
an existing contract or confirmation, as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate that a covered swap entity reasonably
expects to be replaced or discontinued or reasonably determines has
lost its relevance as a reliable benchmark due to a significant
impairment; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under
this paragraph (h)(3)(i)(C) could be one of multiple amendments made
under this paragraph (h)(3)(i)(C). For example, an amendment could
replace an IBOR with a temporary interest rate and later replace the
temporary interest rate with a permanent interest rate.
(ii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also incorporate
spreads or other adjustments to the replacement interest rate and make
other necessary technical changes to operationalize the determination
of payments or other exchanges of economic value using the replacement
interest rate, including changes to determination dates, calculation
agents, and payment dates. The changes may not extend the maturity or
increase the total effective notional amount of the non-cleared swap or
non-cleared security-based swap beyond what is necessary to accommodate
the differences between market conventions for an outgoing interest
rate and its replacement.
(iii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also be
effectuated through portfolio compression between or among covered swap
entities and their counterparties. Portfolio compression under this
paragraph is not subject to the limitations in paragraph (h)(4) of this
section, but any non-cleared swap[s] or non-cleared security-based
swaps resulting from the portfolio compression may not extend the
maturity or increase the total effective notional amount more than what
is necessary to accommodate the differences between market conventions
for an outgoing interest rate and its replacement.
(4) Amendments solely to reduce risk or remain risk-neutral through
portfolio compression between or among covered swap entities and their
counterparties, as long as any non-cleared swaps or non-cleared
security-based swaps resulting from the portfolio compression do not:
(i) Exceed the sum of the total effective notional amounts of all
of the swaps that were submitted to the compression exercise that had
the same or longer remaining maturity as the resulting swap; or
(ii) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
reference, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or
(B) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
novated to a third party, who complies with applicable margin rules for
the novated portion upon the transfer.
0
19. Section 624.9 is amended by adding paragraph (h) to read as
follows:
Sec. 624.9 Cross-Border application of margin requirements.
* * * * *
(h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
(ii) of this section is not subject to the requirements of Sec.
624.3(a) or Sec. 624.11(a) for any non-cleared swap or non-cleared
security-based swap executed with an affiliate of the covered swap
entity; and
(2) For purposes of paragraph (h)(1) of this section, ``affiliate''
has the same meaning provided in Sec. 624.11(d).
0
20. Section 624.10 is amended by revising paragraph (a) to read as
follows:
Sec. 624.10 Documentation of margin matters.
* * * * *
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this subpart, and at such time as initial margin or
variation margin is required to be collected or posted under Sec.
624.3 or Sec. 624.4, as applicable; and
* * * * *
0
21. Section 624.11 is revised to read as follows:
Sec. 624.11 Special rules for affiliates.
(a)(1) A covered swap entity shall calculate on each business day
an initial margin collection amount for each counterparty that is a
swap entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity.
(2) If the aggregate of all initial margin collection amounts
calculated under paragraph (a)(1) of this section does not exceed 15
percent of the covered swap entity's tier 1 capital, the requirements
for a covered swap entity to collect initial margin under Sec.
624.3(a) do not apply with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is an affiliate.
(3) On each business day that the aggregate of all initial margin
collection amounts calculated under paragraph (a)(1) of this section
exceeds 15 percent of the covered swap entity's tier 1 capital:
(i) The covered swap entity shall collect initial margin under
Sec. 624.3(a) for each additional non-cleared swap and non-cleared
security-based swap executed that business day with a counterparty that
is a swap entity or financial end user with a material swaps exposure
and an affiliate of the covered
[[Page 39778]]
swap entity, commencing on the day after execution and continuing on a
daily basis as required under Sec. 624.3(c), until the earlier of;
(A) The termination date of such non-cleared swap or non-cleared
security-based swap, or
(B) The business day on which the aggregate of all initial margin
collection amounts calculated under paragraph (a)(1) of this section
falls below 15 percent of the covered swap entity's tier 1 capital;
(ii) Notwithstanding Sec. 624.7(b), to the extent the covered swap
entity collects initial margin pursuant to paragraph (a)(3)(i) of this
section in the form of collateral other than cash collateral, the
custodian for such collateral may be the covered swap entity or an
affiliate of the covered swap entity; and
(4) For purposes of this paragraph (a), ``tier 1 capital'' means:
(i) For Farm Credit System banks and associations, the sum of
common equity tier 1 capital as defined in 12 CFR 628.20(b) and
additional tier 1 capital as defined in 12 CFR 628.20(c), and as
reported in the institution's most recent Uniform Reports of Financial
Condition and Performance (Call Report); or
(ii) For the Federal Agricultural Mortgage Corporation, as defined
and required in in 12 CFR 652.61, and as reported in the institution's
most recent Call Report.
(5) If any subsidiary of the covered swap entity (including a
subsidiary described in Sec. 624.9(h)) executes any non-cleared swap
or non-cleared security-based swap with any counterparty that is a swap
entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity:
(i) The covered swap entity shall treat such non-cleared swap or
security-based swap as its own for purposes of this paragraph (a); and
(ii) If the subsidiary is itself a covered swap entity, the
compliance by its parent covered swap entity with this paragraph (a)(5)
shall be deemed to establish the subsidiary's compliance with the
requirements of Sec. 624.11(a) and to exempt the subsidiary from the
requirements for a covered swap entity to collect initial margin under
Sec. 624.3(a) from an affiliate.
(b) The requirement for a covered swap entity to post initial
margin under Sec. 624.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
(c) Section 624.3(d) shall apply to a counterparty that is an
affiliate in the same manner as it applies to any counterparty that is
neither a financial end user without a material swap exposure nor a
swap entity.
(d) For purposes of this section:
(1) An affiliate means:
(i) An affiliate as defined in Sec. 624.2; or
(ii) Any company that controls, is controlled by, or is under
common control with the covered swap entity through the direct or
indirect exercise of controlling influence over the management or
policies of the controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in Sec. 624.2; or
(ii) Any company that is controlled by the covered swap entity
through the direct or indirect exercise of controlling influence over
the management or policies of the controlled company.
FEDERAL HOUSING FINANCE AGENCY
12 CFR Chapter XII
Authority and Issuance
For the reasons set forth in the preamble, the Federal Housing
Finance Agency amends chapter XII of title 12, Code of Federal
Regulations, as follows:
PART 1221--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP
ENTITIES
0
22. The authority citation for part 1221 continues to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 4513,
and 12 U.S.C. 4526(a).
0
23. Section 1221.1 is amended by revising paragraphs (e)(6) and (7) and
(h) introductory text and adding paragraphs (h)(1) and (3) through (5)
to read as follows:
Sec. 1221.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(6) September 1, 2020, with respect to the requirements in Sec.
1221.3 for initial margin for any non-cleared swaps and non-cleared
security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April, and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021, with respect to requirements in Sec. 1221.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
* * * * *
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this part for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant
compliance dates for variation margin and for initial margin
established in paragraph (e) of this section. Any non-cleared swap or
non-cleared security-based swap entered into before such relevant date
shall remain outside the scope of this part if amendments are made to
the non-cleared swap or non-cleared security-based swap by method of
adherence to a protocol, other amendment of a contract or confirmation,
or execution of a new contract or confirmation in replacement of and
immediately upon termination of an existing contract or confirmation,
as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), the Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate that a covered swap entity reasonably
expects to be replaced or discontinued or reasonably determines has
lost its relevance as a reliable benchmark due to a significant
impairment; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph
[[Page 39779]]
(h)(3)(i)(A) or (B) of this section. An amendment made under this
paragraph (h)(3)(i)(C) could be one of multiple amendments made under
this paragraph (h)(3)(i)(C). For example, an amendment could replace an
IBOR with a temporary interest rate and later replace the temporary
interest rate with a permanent interest rate.
(ii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also incorporate
spreads or other adjustments to the replacement interest rate and make
other necessary technical changes to operationalize the determination
of payments or other exchanges of economic value using the replacement
interest rate, including changes to determination dates, calculation
agents, and payment dates. The changes may not have a longer maturity
or increase the total effective notional amount of the non-cleared swap
or non-cleared security-based swap beyond what is necessary to
accommodate the differences between market conventions for an outgoing
interest rate and its replacement.
(iii) Amendments to accommodate replacement of an interest rate
described in paragraph (h)(3)(i) of this section may also be
effectuated through portfolio compression between or among covered swap
entities and their counterparties. Portfolio compression under this
paragraph (h)(3)(iii) is not subject to the limitations in paragraph
(h)(4) of this section, but any non-cleared swap[s] or non-cleared
security-based swaps resulting from the portfolio compression may not
have a longer maturity or increase the total effective notional amount
more than what is necessary to accommodate the differences between
market conventions for an outgoing interest rate and its replacement.
(4) Amendments solely to reduce risk or remain risk-neutral through
portfolio compression between or among covered swap entities and their
counterparties, as long as any non-cleared swaps or non-cleared
security-based swaps resulting from the portfolio compression do not:
(i) Exceed the sum of the total effective notional amounts of all
of the swaps that were submitted to the compression exercise that had
the same or longer remaining maturity as the resulting swap; or
(ii) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
reference, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or
(B) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
novated to a third party, who complies with applicable margin rules for
the novated portion upon the transfer.
0
24. Section 1221.9 is amended by adding paragraph (h) to read as
follows:
Sec. 1221.9 Cross-Border application of margin requirements.
* * * * *
(h)(1) A covered swap entity described in paragraphs (d)(3)(i) and
(ii) of this section is not subject to the requirements of Sec.
1221.3(a) or Sec. 1221.11(a) for any non-cleared swap or non-cleared
security-based swap executed with an affiliate of the covered swap
entity; and
(2) For purposes of paragraph (h)(1) of this section, ``affiliate''
has the same meaning provided in Sec. 1221.11(d).
0
25. In Sec. 1221.10 revise paragraph (a) to read as follows:
Sec. 1221.10 Documentation of margin matters.
* * * * *
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this part, and at such time as initial margin or
variation margin is required to be collected or posted under Sec.
1221.3 or Sec. 1221.4, as applicable; and
* * * * *
0
26. Section 1221.11 is revised to read as follows:
Sec. 1221.11 Special rules for affiliates.
(a)(1) A covered swap entity shall calculate on each business day
an initial margin collection amount for each counterparty that is a
swap entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity.
(2) If the aggregate of all initial margin collection amounts
calculated under paragraph (a)(1) of this section does not exceed 15
percent of the covered swap entity's tier 1 capital, the requirements
for a covered swap entity to collect initial margin under Sec.
1221.3(a) do not apply with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is an affiliate.
(3) On each business day that the aggregate of all initial margin
collection amounts calculated under paragraph (a)(1) of this section
exceeds 15 percent of the covered swap entity's tier 1 capital:
(i) The covered swap entity shall collect initial margin under
Sec. 1221.3(a) for each additional non-cleared swap and non-cleared
security-based swap executed that business day with a counterparty that
is a swap entity or financial end user with a material swaps exposure
and an affiliate of the covered swap entity, commencing on the day
after execution and continuing on a daily basis as required under Sec.
1221.3(c), until the earlier of;
(A) The termination date of such non-cleared swap or non-cleared
security-based swap, or
(B) The business day on which the aggregate of all initial margin
collection amounts calculated under paragraph (a)(1) of this section
falls below 15 percent of the covered swap entity's tier 1 capital;
(ii) Notwithstanding Sec. 1221.7(b), to the extent the covered
swap entity collects initial margin pursuant to paragraph (a)(3)(i) of
this section in the form of collateral other than cash collateral, the
custodian for such collateral may be the covered swap entity or an
affiliate of the covered swap entity; and
(4) For purposes of paragraph (a) of this section, ``tier 1
capital'' means:
(i) The sum of common equity tier 1 capital as defined in 12 CFR
1240.20(b) and additional tier 1 capital as defined in 12 CFR
1240.20(c).
(5) If any subsidiary of the covered swap entity (including a
subsidiary described in Sec. 1221.9(h)) executes any non-cleared swap
or non-cleared security-based swap with any counterparty that is a swap
entity or financial end user with a material swaps exposure and an
affiliate of the covered swap entity;
(i) The covered swap entity shall treat such non-cleared swap or
security-based swap as its own for purposes of this paragraph (a); and
(ii) If the subsidiary is itself a covered swap entity, the
compliance by its parent covered swap entity with this paragraph (a)(5)
shall be deemed to establish the subsidiary's compliance
[[Page 39780]]
with the requirements of this paragraph (a) and to exempt the
subsidiary from the requirements for a covered swap entity to collect
initial margin under Sec. 1221.3(a) from an affiliate.
(b) The requirement for a covered swap entity to post initial
margin under Sec. 1221.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
(c) Section 1221.3(d) shall apply to a counterparty that is an
affiliate in the same manner as it applies to any counterparty that is
neither a financial end user without a material swap exposure nor a
swap entity.
(d) For purposes of this section:
(1) An affiliate means:
(i) An affiliate as defined in Sec. 1221.2; or
(ii) Any company that controls, is controlled by, or is under
common control with the covered swap entity through the direct or
indirect exercise of controlling influence over the management or
policies of the controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in Sec. 1221.2; or
(ii) Any company that is controlled by the covered swap entity
through the direct or indirect exercise of controlling influence over
the management or policies of the controlled company.
Brian P. Brooks,
Acting Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on or about June 25, 2020.
James P. Sheesley,
Acting Assistant Executive Secretary.
Dated: June 24, 2020.
Dale Aultman
Secretary, Farm Credit Administration Board.
Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2020-14097 Filed 6-30-20; 8:45 am]
BILLING CODE 4810-33; 6210-01; 6705-01; 6714-01; 7535-01-P
