Exemption From the Swap Clearing Requirement for Certain Affiliated Entities-Alternative Compliance Frameworks for Anti-Evasionary Measures, 44170-44183 [2020-14390]

Download as PDF 44170 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations SUPPLEMENT NO. 4 TO PART 744—ENTITY LIST—Continued Country For all items subject to the EAR. (See § 744.11 of the EAR). * * Yitu Technologies, 23F, Shanghai Arch Tower I, 523 Loushanguan Rd, Changning District, Shanghai, China. * For all items subject to the EAR. (See § 744.11 of the EAR). * * Yixin Science and Technology Co. Ltd., a.k.a., the following four aliases: —Yixin Technology; —Yuxin Technology; —Yuxin Science and Technology; and —Ecguard. 216 Qiantangjiang Rd., Urumqi, Xinjiang, China; and 17th Floor Tong Guang Building, No 12 Beijing Agricultural Exhibition South, Chaoyang District, Beijing, China; and 17F Tongguang Mansion # 12 Nongzhannanli, Chaoyang, Beijing, China; and 216 Qiantangjiang Road, Urumqi, Xinjiang. * * * For all items subject to the EAR. (See § 744.11 of the EAR). * Richard E. Ashooh, Assistant Secretary for Export Administration. [FR Doc. 2020–15827 Filed 7–20–20; 11:15 am] BILLING CODE 3510–33–P COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 50 RIN 3038–AE92 Exemption From the Swap Clearing Requirement for Certain Affiliated Entities—Alternative Compliance Frameworks for Anti-Evasionary Measures jbell on DSKBBXCHB2PROD with RULES License review policy Yili Kazakh Autonomous Prefecture Public Security Bureau, a.k.a., the following one alias: —Ili Kazakh Autonomous Prefecture Public Security Bureau. Sidalin W Rd., Yining City, XUAR 835000, China. * Commodity Futures Trading Commission. ACTION: Final rule. AGENCY: The Commodity Futures Trading Commission (Commission or SUMMARY: VerDate Sep<11>2014 License requirement Entity 16:35 Jul 21, 2020 Jkt 250001 * Case-by-case review for ECCNs 1A004.c, 1A004.d, 1A995, 1A999.a, 1D003, 2A983, 2D983, and 2E983, and for EAR99 items described in the Note to ECCN 1A995; case-bycase review for items necessary to detect, identify and treat infectious disease; and presumption of denial for all other items subject to the EAR. * * Case-by-case review for ECCNs 1A004.c, 1A004.d, 1A995, 1A999.a, 1D003, 2A983, 2D983, and 2E983, and for EAR99 items described in the Note to ECCN 1A995; case-bycase review for items necessary to detect, identify and treat infectious disease; and presumption of denial for all other items subject to the EAR. * * Case-by-case review for ECCNs 1A004.c, 1A004.d, 1A995, 1A999.a, 1D003, 2A983, 2D983, and 2E983, and for EAR99 items described in the Note to ECCN 1A995; case-bycase review for items necessary to detect, identify and treat infectious disease; and presumption of denial for all other items subject to the EAR. * 84 FR 54004, 10/9/19. 85 FR [INSERT FR PAGE NUMBER] 7/22/20. * * * * * * The effective date for this final rule is August 21, 2020. Fmt 4700 * 84 FR 54004, 10/9/19. 85 FR [INSERT FR PAGE NUMBER] 7/22/20. * DATES: Frm 00026 84 FR 54004, 10/9/19. 85 FR [INSERT FR PAGE NUMBER] 7/22/20. * CFTC) is adopting amendments to Commission regulation 50.52, which exempts certain affiliated entities within a corporate group from the swap clearing requirement under the applicable provision of the Commodity Exchange Act (CEA or Act). These amendments concern the antievasionary condition that swaps subject to the clearing requirement entered into with unaffiliated counterparties either be cleared or be eligible for an exception to or exemption from the clearing requirement. Specifically, the amendments make permanent certain temporary alternative compliance frameworks intended to make this antievasionary condition workable for international corporate groups in the absence of foreign clearing regimes determined to be comparable to CFTC requirements. PO 00000 Federal Register citation Sfmt 4700 FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director, Division of Clearing and Risk, at 202– 418–5684 or sjosephson@cftc.gov; Melissa A. D’Arcy, Special Counsel, Division of Clearing and Risk, at 202– 418–5086 or mdarcy@cftc.gov; or Stephen A. Kane, Office of the Chief Economist, at 202–418–5911 or skane@ cftc.gov, in each case at the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: Table of Contents I. Background A. Swap Clearing Requirement B. Commission Regulation 50.52 II. The Proposal To Amend Regulation 50.52 A. The Commission’s Proposal To Revise the Alternative Compliance Frameworks B. Comments Received C. Trade Execution Requirement III. Final Rule E:\FR\FM\22JYR1.SGM 22JYR1 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations A. Amendments to Commission Regulation 50.52 B. Commission’s Section 4(c) Authority C. Effective Date and Compliance Date IV. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Cost-Benefit Considerations D. Antitrust Considerations I. Background jbell on DSKBBXCHB2PROD with RULES A. Swap Clearing Requirement Part 50 of the Commission’s regulations implements the swap clearing requirement under section 2(h) of the CEA and certain exceptions and exemptions thereto. The swap clearing requirement under section 2(h)(1)(A) of the CEA states that if the Commission requires a swap to be cleared, then it is unlawful for any person to engage in that swap unless the swap is submitted for clearing to a derivatives clearing organization (DCO) that is registered under the CEA or a DCO that the Commission has exempted from registration. The Commission has adopted swap clearing requirement determinations for certain classes of interest rate swaps and credit default swaps.1 Swaps that are subject to the Commission’s swap clearing requirement are described in Commission regulation 50.4 (Clearing Requirement). Part 50 of the Commission’s regulations also includes a number of exceptions to and exemptions from the Clearing Requirement. Certain of these exceptions or exemptions are based on statutory principles (e.g., the end-user exception),2 and others were adopted pursuant to the Commission’s public interest exemption authority (e.g., the exemption for cooperatives).3 In April 2013 the Commission adopted a limited exemption from the Clearing Requirement for certain affiliated entities pursuant to its public interest authority (Inter-Affiliate Exemption).4 The Inter-Affiliate Exemption is subject to certain conditions that limit the availability of the exemption and are designed to ensure that the Clearing Requirement is not circumvented. When the Commission adopted the Inter-Affiliate Exemption, it concluded that, an 1 Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 2012) and Clearing Requirement Determination Under Section 2(h) of the CEA for Interest Rate Swaps, 81 FR 71202 (Oct. 14, 2016). 2 See End-User Exception to the Clearing Requirement for Swaps, 77 FR 42560 (Jul. 19, 2012). 3 See Clearing Exemption for Certain Swaps Entered Into by Cooperatives, 78 FR 52286 (Aug. 22, 2013). 4 Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750 (Apr. 11, 2013). VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 exemption subject to certain conditions is appropriate for the transactions at issue, promotes responsible financial innovation and fair competition, and is consistent with the public interest.5 These conditions are an important element of the Inter-Affiliate Exemption and continue to be an area of the Commission’s focus. This final rule amends certain regulatory provisions in Commission regulation 50.52 relating to the conditions of electing the InterAffiliate Exemption. B. Commission Regulation 50.52 Commission regulation 50.52 governs the eligibility and compliance requirements for market participants electing not to clear inter-affiliate swaps pursuant to the Inter-Affiliate Exemption. This regulation has been in effect since June 2013, and Commission staff has monitored the election and availability of the Inter-Affiliate Exemption over time. Certain assumptions about the global adoption of swap clearing mandates were not realized, and the Commission’s conditions to the Inter-Affiliate Exemption that were adopted and implemented in 2013 no longer serve the function intended.6 This final rule amends those conditions to the InterAffiliate Exemption in order to reflect current regulatory practices. 1. Eligible Affiliate Counterparties First, to qualify for the Inter-Affiliate Exemption, each counterparty to a swap must meet the definition of an ‘‘eligible affiliate counterparty’’ set forth in Commission regulation 50.52(a). The terms of the exempted swap must comply with a documentation requirement and be subject to a centralized risk management program. The election of the Inter-Affiliate Exemption, as well as how the requirements of the exemption are met, must be reported to a Commissionregistered swap data repository. Finally, the Inter-Affiliate Exemption generally requires each eligible affiliate counterparty to clear swaps executed with unaffiliated counterparties (i.e., outward-facing swaps), if the swaps are covered by the Commission’s Clearing Requirement and do not otherwise qualify for an exception to or exemption at 21754. non-U.S. jurisdictions are still in the process of adopting their domestic mandatory clearing regimes, some non-U.S. jurisdictions may never implement clearing for swaps, and a number of non-U.S. regimes vary significantly in terms of product and participant scope from the Commission’s Clearing Requirement. PO 00000 5 Id. 6 Some Frm 00027 Fmt 4700 Sfmt 4700 44171 from the Clearing Requirement (Outward-Facing Swaps Condition).7 The Commission continues to believe that it is necessary to impose riskmitigating conditions on inter-affiliate swaps to uphold the Clearing Requirement, deter evasion, and help protect against systemic risk to the U.S. As the Commission stated in the adopting release issuing the InterAffiliate Exemption, entities that are affiliated with each other are separate legal entities notwithstanding their affiliation.8 As separate legal entities, affiliates generally are not legally responsible for each other’s contractual obligations. This legal reality becomes readily apparent when one or more affiliate(s) become insolvent. Affiliates, as separate legal entities, are managed in bankruptcy as separate estates, and the trustee for each debtor estate has a duty to the creditors of the affiliate, not the corporate family, the parent of the affiliates, or the corporate family’s creditors. 2. Outward-Facing Swaps Condition The Outward-Facing Swaps Condition requires that an eligible affiliate counterparty relying on the InterAffiliate Exemption clear any swap covered by the Clearing Requirement (i.e., an interest rate or credit default swap identified in Commission regulation 50.4) that is entered into with an unaffiliated counterparty, unless the swap qualifies for an exception or exemption from the Clearing Requirement under part 50. This provision applies to any eligible affiliate counterparty electing the Inter-Affiliate Exemption, including an eligible affiliate counterparty located outside of the United States. The Outward-Facing Swaps Condition is intended to prevent swap market participants from using the InterAffiliate Exemption to evade the Clearing Requirement or to transfer risk to U.S. firms by entering into uncleared swaps with non-U.S. affiliates in jurisdictions that do not have mandatory clearing regimes comparable to the Commission’s clearing requirement regime. Such evasion could be accomplished if the non-U.S. affiliate enters into a swap with an unaffiliated party also located outside of the U.S. and that swap is related on a back-toback or matched book basis with the swap executed with the affiliated party located in the U.S. In the adopting release to the Inter-Affiliate Exemption, 7 Commission regulation 50.52(b)(4)(i). Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, at 21752–21753 (Apr. 11, 2013). 8 Clearing E:\FR\FM\22JYR1.SGM 22JYR1 44172 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations the Commission noted that section 2(h)(4)(A) of the CEA requires the Commission to prescribe rules to prevent evasion of the Clearing Requirement.9 The Commission did not propose and is not adopting any substantive changes to the definition of ‘‘eligible affiliate counterparty’’ or the Outward-Facing Swaps Condition. The final rule today adopts changes to the alternative conditions for complying with the Outward-Facing Swaps Condition. II. The Proposal To Amend Commission Regulation 50.52 jbell on DSKBBXCHB2PROD with RULES A. The Commission’s Proposal To Revise the Alternative Compliance Frameworks On December 23, 2019, the Commission published a notice of proposed rulemaking (the Proposal) to amend Commission regulation 50.52.10 The Commission proposed changes that would establish the same conditions and requirements to comply with the Inter-Affiliate Exemption as those provided for in current no-action relief granted to eligible affiliate counterparties under CFTC Letter No. 17–66.11 The Commission requested comments from market participants about their experiences electing and complying with conditions of the InterAffiliate Exemption and on all other aspects of the Proposal. The revisions outlined in the Proposal would effectively codify CFTC Letter No. 17–66 by reinstating and revising the two alternative compliance frameworks set forth in Commission 9 Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, at 21761 (Apr. 11, 2013). The Commission also notes that Commission regulation 1.6 makes it unlawful to conduct activities outside the United States, including entering into agreements, contracts, and transactions and structuring entities, to willfully evade or attempt to evade any provision of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the swap clearing requirement under section 2(h)(1) of the CEA. Any such evasionary conduct will be subject to the relevant provisions of Title VII. In determining whether a transaction or entity structure is designed to evade, the Commission considers the extent to which there is a legitimate business purpose for such structure. 77 FR 48208, at 48301 (Aug. 13, 2012). 10 Exemption From the Swap Clearing Requirement for Certain Affiliated Entities— Alternative Compliance Frameworks for AntiEvasionary Measures, 84 FR 70446 (Dec. 23, 2019). 11 CFTC Letter No. 17–66 (Dec. 14, 2017), available at https://www.cftc.gov/LawRegulation/ CFTCStaffLetters/index.htm. See also, previously granted relief under CFTC Letter Nos. 14–135 (Nov. 7, 2014), 15–63 (Nov. 17, 2015), 16–81 (Nov. 28, 2016), and 16–84 (Dec. 15, 2016). CFTC Letter No. 17–66 expires on the earlier of (i) December 31, 2020 at 11:59 p.m. (Eastern Time); or (ii) the effective date of amendments to Commission regulation 50.52. VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 regulations 50.52(b)(4)(ii) and (iii) (together, the Alternative Compliance Frameworks) and make additional minor changes. The Alternative Compliance Frameworks were adopted for a limited time period and expired on March 11, 2014. Under the Proposal, the Commission regulation subsections 50.52(b)(4)(ii)(A) and 50.52(b)(4)(ii)(B), which both expired on March 11, 2014, would be reinstated and combined in revised subsection 50.52(b)(4)(ii). The Commission proposed to delete the expiration date, expand the list of jurisdictions in which one of the counterparties may be located and still comply with the Alternative Compliance Frameworks, and streamline the variation margining requirement. As explained in the Proposal, eligible affiliate counterparties continue to rely on the Alternative Compliance Frameworks made available through no-action relief. Deleting the March 11, 2014 expiration date reinstates this portion of the Alternative Compliance Framework. Revised Commission regulation 50.52(b)(4)(ii) permits non-U.S. eligible affiliate counterparties located in Australia, Canada, Hong Kong, Mexico, Switzerland, or the United Kingdom, to comply with this Alternative Compliance Framework, as well as eligible affiliate counterparties located in the European Union, Japan, or Singapore. Finally, for the reasons discussed below, the variation margin requirement in revised Commission regulation 50.52(b)(4)(ii) does not include the option to pay and collect full variation margin daily on all swaps entered into between the eligible affiliate counterparty located in the listed jurisdictions and an unaffiliated counterparty, because market participants have not relied on this provision. Under the Proposal, the Commission did not revise the five percent test, described below, other than to delete the expiration date, modify the jurisdictions in which an eligible affiliate counterparty may be located for purposes of complying with that provision, and streamline the variation margining requirement. The five percent test is a provision in the Alternative Compliance Framework that permitted (until its expiration on March 11, 2014), an eligible affiliate counterparty located in the U.S. to comply with certain variation margin provisions in lieu of clearing, with respect to a swap executed opposite an eligible affiliate counterparty located in a non-U.S. jurisdiction other than the European PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 Union, Japan, or Singapore.12 According to this test, the aggregate notional value of swaps included in a class of swaps identified by Commission regulation 50.4 (classes of swaps covered by the Clearing Requirement) executed between an eligible affiliate counterparty located in the U.S. and an eligible affiliate counterparty located in a non-U.S. jurisdiction other than the European Union, Japan, or Singapore may not exceed five percent of the aggregate notional value of all swaps included in a class of swaps identified by Commission regulation 50.4 that are executed by the U.S. eligible affiliate counterparty. If the five percent threshold was exceeded, the Alternative Compliance Framework was unavailable under existing Commission regulation 50.52(b)(4)(iii), in connection with swaps with eligible affiliate counterparties located in a non-U.S. jurisdiction other than the European Union, Japan, or Singapore. Eligible affiliates in certain jurisdictions have been granted relief through CFTC staff letters with respect to the Alternative Compliance Framework under Commission regulation 50.52(b)(4)(ii), but CFTC staff had not issued no-action relief to remove those jurisdictions from the category of ‘‘other jurisdictions’’ contemplated by Commission regulation 50.52(b)(4)(iii). The Commission made these amendments in the Proposal to no longer categorize those jurisdictions as ‘‘other jurisdictions,’’ in order to appropriately broaden the availability of the Alternative Compliance Framework while maintaining protections against evasion of the Clearing Requirement. As the Commission explained in the Proposal, the five percent test establishes a relative limit on the amount of uncleared swaps activity— activity that would otherwise be subject to the Commission’s Clearing Requirement—that any one U.S. eligible affiliate counterparty may conduct with its affiliated counterparties in certain ‘‘other jurisdictions.’’ In other words, the U.S. affiliate cannot enter into swaps that total (in aggregate) more than five percent of all of its swaps that are subject to the Commission’s Clearing Requirement, with affiliates in the ‘‘other jurisdictions.’’ The five percent test has the practical effect of limiting the relative notional amount of uncleared swaps activity that affiliates conduct in jurisdictions that are not identified in Commission regulation 50.52(b)(4)(ii). The Commission continues to believe that limiting the relative notional amount of uncleared 12 Commission E:\FR\FM\22JYR1.SGM 22JYR1 regulation 50.52(b)(4)(iii). jbell on DSKBBXCHB2PROD with RULES Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations swaps executed in jurisdictions that have not established or implemented clearing regimes, along with conditioning relief on the use of variation margin, protects the eligible affiliate counterparty located in the United States from exposure to the risks associated with material swaps exposure in jurisdictions that do not have their own domestic clearing regime. The changes adopted today will decrease the number of ‘‘other jurisdictions’’ and as a result market participants may increase the notional amount of swap activity in those jurisdictions while still remaining below the five percent limit. The Commission did not receive any comments regarding this change. Furthermore, the Commission believes that the revised five percent test facilitates effective risk management among affiliated entities while protecting U.S. affiliates from transferring unmitigated risk into the U.S. from other jurisdictions. Finally, under the Proposal, the variation margin requirement in revised Commission regulation 50.52(b)(4)(iii) did not include the option to pay and collect full variation margin daily on all swaps entered into between the eligible affiliate counterparty located in the listed jurisdictions and an unaffiliated counterparty, because market participants have not been electing this option. The Proposal did not include any changes to the requirement that any swaps that are exempted from the Clearing Requirement under the InterAffiliate Exemption must be subject to a centralized risk management program.13 Also, all swaps exempted from the Clearing Requirement pursuant to the Inter-Affiliate Exemption will continue to be subject to the reporting requirements outlined in Commission regulation 50.52(c)–(d) and part 45 of the Commission’s regulations. The Commission relies on these reporting requirements to monitor the number of entities electing the Inter-Affiliate Exemption, as well as the number of inter-affiliate swaps for which the exemption is claimed. As discussed in greater detail below, data on the election of the Inter-Affiliate Exemption has been considered by the Commission and supports its belief that this final rule to reinstate the Alternative Compliance Frameworks will not increase opportunities for affiliated entities to evade the Clearing Requirement. 13 Commission VerDate Sep<11>2014 regulation 50.52(b)(3). 16:35 Jul 21, 2020 Jkt 250001 B. Comments Received The Commission received one comment letter in response to the Proposal from the International Swaps and Derivatives Association, Inc. (ISDA). ISDA supported the Proposal and stated that the revisions would provide legal certainty to market participants operating under Commission staff no-action relief. ISDA suggested two changes to the Proposal: (1) A modification to the variation margin requirements in the Proposal; and (2) a clarification related to the Commission’s swap trade execution requirement under section 2(h)(8) of the CEA (Trade Execution Requirement). ISDA recommended that the Commission allow eligible affiliate counterparties exchanging variation margin payments with other eligible affiliate counterparties under the Alternative Compliance Frameworks to comply with non-U.S. uncleared margin requirements that have been deemed comparable by the Commission. The Commission has issued comparability determinations regarding uncleared swap margin regimes for swap dealers and major swaps participants in Japan, the European Union, Australia, and the United Kingdom (by staff no-action relief as a former member of the European Union).14 In ISDA’s view, the Commission should allow eligible affiliate counterparties to rely on these comparability determinations in order to satisfy any variation margin requirements under the Alternative Compliance Frameworks. ISDA did not suggest a specific change to the regulatory text under Commission regulation 50.52, but argued that applying the comparability determinations in this context would be consistent with the Commission’s efforts and policies relating to cross-border swaps activities. For a number of reasons, the Commission declines to adopt any changes to the variation margin requirements under the Alternative Compliance Frameworks, other than the amendments that were considered in 14 Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 63376 (Sept. 15, 2016); Amendment to Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12074 (Apr. 1, 2019); Comparability Determination for the European Union: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 82 FR 48394 (Oct. 18, 2017); and Comparability Determination for Australia: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12908 (Apr. 3, 2019). See also CFTC Letter No. 19–08, available at: https:// www.cftc.gov/csl/19-08/download. PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 44173 the Proposal. In response to ISDA’s request, the Commission notes that while it has adopted uncleared margin comparability determinations for certain jurisdictions (but not all jurisdictions in which an eligible affiliate counterparty may be located), the application of a non-U.S. jurisdiction’s uncleared margin regime would not be appropriate for counterparties electing the InterAffiliate Exemption. First, changing the Commission’s approach to the variation margin requirements for counterparties using the Alternative Compliance Frameworks would require at least some counterparties to alter their existing variation margining practices with respect to inter-affiliate swaps. Eligible affiliate counterparties have been relying on the Alternative Compliance Frameworks in practice for approximately seven years and imposing a new standard for the variation margin requirement for certain entities would represent a significant change from a well-established status quo that the Commission believes has been working well over that period of time. As discussed below, the condition requiring eligible affiliate counterparties to pay and collect variation margin provides risk-mitigating benefits and acts as a protection against accumulating uncollateralized risks in affiliated counterparties that do not clear their outward-facing swaps. The variation margin condition under the Inter-Affiliate Exemption also serves a distinct purpose in preventing the transfer of risk back to the United States. Permitting counterparties to comply with a non-U.S. uncleared margin regime in some instances may eliminate the risk-mitigation effects of the variation margin condition in the Alternative Compliance Frameworks because there may not necessarily be corresponding variation margin requirements under the non-U.S. jurisdiction’s uncleared margin regime. For instance, the Japanese interaffiliate regime does not require counterparties to inter-affiliate swaps to pay or collect variation margin. If the Commission applied its findings from its comparability determination with respect to Japan in the Alternative Compliance Frameworks, then the eligible affiliate counterparties would not be required to pay or collect any variation margin on their swaps with other eligible affiliate counterparties. The Commission understands that each non-U.S. jurisdiction may have a different treatment of inter-affiliate derivative transactions that is tailored to its own legal framework and market conditions. The Commission recognized E:\FR\FM\22JYR1.SGM 22JYR1 44174 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations jbell on DSKBBXCHB2PROD with RULES this point and looked at the broader market framework in its comparability determinations with respect to margin requirements for uncleared swaps for swap dealers and major swap participants.15 The comparability determinations analyze the uncleared margin regimes using broad, outcomesbased measures to assess compliance with the CFTC’s margin requirements. The variation margin requirements included in the Alternative Compliance Frameworks can be distinguished from the analysis undertaken in the comparability determinations with respect to the uncleared margin regimes because the variation margin requirements under the Alternative Compliance Framework are more specifically designed to protect against the evasion of the Clearing Requirement and the transfer of risk back to the United States. The variation margin required under the Alternative Compliance Frameworks provides assurance that counterparties electing the Inter-Affiliate Exemption are not entering into uncollateralized uncleared outward-facing swaps that would otherwise be subject to the Clearing Requirement without taking important risk-mitigating precautions. For these reasons, the Commission believes the Alternative Compliance Frameworks serve a unique risk mitigating function that protects against evasion of the Clearing Requirement and guards against systemic risks to the United States that could arise from uncleared swaps entered into by eligible affiliate counterparties. Accordingly, the Commission will not apply its comparability determinations to the variation margin requirements under revised Commission regulation 50.52(b)(4). ISDA’s comment letter also asked the Commission for confirmation that the eligible affiliate counterparties electing the Inter-Affiliate Exemption would be eligible for an automatic exemption from the Trade Execution Requirement. ISDA cited to Commission statements in 2013 in which the Commission determined that swaps between certain affiliated entities electing the InterAffiliate Exemption would not be subject to the Trade Execution Requirement.16 The Commission 15 See Amendment to Comparability Determination for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12074, at 12078 (Apr. 1, 2019). 16 Process for a Designated Contract Market or Swap Execution Facility To Make a Swap Available to Trade, Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under the Commodity Exchange Act, 78 FR 33606, at n. 1 (June 4, 2013). VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 reaffirms its previous statement in this final rule. However, the Commission is not making any findings or determinations related to the Trade Execution Requirement at this time. A further discussion of the Trade Execution Requirement is included below. After considering ISDA’s comment letter and the Commission’s experience administering the Inter-Affiliate Exemption, the Commission is adopting amendments to Commission regulation 50.52 as proposed. Adopting these revisions provides legal certainty to swaps market participants and increases the flexibility offered to counterparties electing not to clear inter-affiliate swaps, while also guarding against the unmitigated transfer of risk into U.S. markets. C. Trade Execution Requirement The Inter-Affiliate Exemption provides relief from the Commission’s Clearing Requirement. The Commission’s Trade Execution Requirement is related to the Clearing Requirement because it applies to a subset of swaps that are subject to a clearing requirement determination under Commission regulation 50.4. The Trade Execution Requirement applies to swaps that have been made available to trade and requires that the counterparties execute a swap in accordance with the execution methods described in Commission regulation 37.9(a)(2).17 In the Proposal, the Commission stated that it was ‘‘not considering any changes with regard to the trade execution requirement because those are the subject of another ongoing rulemaking.’’ 18 The Commission did not request comment regarding the Trade Execution Requirement and did not include a policy position in the Proposal. Therefore, the application of the Trade Execution Requirement is beyond the scope of this final rule. The Commission continues to evaluate its 2018 proposal related to swap execution facilities and the Trade 17 Under Commission regulation 37.9(a)(2), swaps subject to the Trade Execution Requirement that are not block trades must be executed on an order book, as defined in Commission regulation 37.3(a)(3) or a request for quote system, as defined in Commission regulation 37.9(a)(3) in conjunction with an order book. For the current list of swaps that are subject to the Trade Execution Requirement, see Swaps Made Available To Trade, available at: https://www.cftc.gov/sites/default/files/ idc/groups/public/@otherif/documents/file/ swapsmadeavailablechart.pdf. 18 Exemption From the Swap Clearing Requirement for Certain Affiliated Entities— Alternative Compliance Frameworks for AntiEvasionary Measures, 84 FR 70446, at 70447 (Dec. 23, 2019). PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 Execution Requirement (SEF Proposal).19 Under the SEF Proposal, the Commission proposed to exempt swaps relying on the Inter-Affiliate Exemption from the Trade Execution Requirement.20 Because the SEF proposal addresses a broader set of exemptions from the Trade Execution Requirement (i.e., more than swap transactions relying on the InterAffiliate Exemption from the Clearing Requirement), the Commission believes a final rule comprehensively addressing the Trade Execution Requirement is preferable to making a limited determination in this context. In addition, Commission staff has provided no-action relief from the Trade Execution Requirement to eligible affiliate counterparties executing interaffiliate swaps with other eligible affiliate counterparties, even if the InterAffiliate Exemption is not elected.21 ISDA’s comment to the Proposal included a request that the Commission adopt relief similar to the no-action relief provided in CFTC Letter No. 17– 67. CFTC Letter No. 17–67 was not subject to any discussion in the Proposal and continues to be the staff’s position. The Commission may address separately no-action relief from the Trade Execution Requirement for eligible affiliated entities. III. Final Rule A. Amendments to Commission Regulation 50.52 The Commission has considered the comment from ISDA and is adopting the amendments to Commission regulation 50.52 as proposed. The Commission is inserting a new definition for the term ‘‘United States’’ under Commission regulation 50.52(a)(2)(iii). The Commission received no comments on this definition and is adopting the change as proposed. The Commission is deleting references to the March 11, 2014 expiration date in Commission regulations 50.52(b)(4)(ii) and (iii) as proposed. This will reinstate the Alternative Compliance Frameworks as an option available in the Commission’s regulations for complying with the Outward-Facing Swaps Condition. The Commission is deleting Commission regulation 50.52(b)(4)(ii)(B) as proposed. This regulation permitted certain affiliate counterparties to comply with the Alternative Compliance Framework, provided, 19 Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946 (Nov. 30, 2018). 20 Id. at 62038. 21 CFTC Letter No. 17–67, available at: https:// www.cftc.gov/csl/17-67/download. E:\FR\FM\22JYR1.SGM 22JYR1 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations jbell on DSKBBXCHB2PROD with RULES among other conditions, that neither eligible affiliate counterparty is affiliated with an entity that is a swap dealer or major swap participant. In the Proposal, the Commission noted that it had reviewed swap data and found that entities that elected to comply with the Alternative Compliance Framework were financial entities or affiliated with swap dealers and did not rely on this provision of the Alternative Compliance Framework. In response to the Proposal, no commenter addressed this point or reported having relied on this provision without being so affiliated. Thus, the Commission believes it is appropriate to delete it. The Commission is deleting Commission regulation 50.52(b)(4)(iii)(A) as proposed. Similar to the point above, the Commission noted in the Proposal that it was not aware of any eligible affiliate counterparty that has opted to use this provision, and requested comment on whether any market participant relied on this provision in the past, or intended to rely on this provision if it were reinstated. Since the Commission received no reports of use of this provision or other comments, it believes it is appropriate to delete it. The Commission is adopting the revisions to the lists of jurisdictions included or excluded from Commission regulations 50.52(b)(4)(ii) and (iii) as proposed. The only comment on this point, from ISDA, supported the Commission’s effort to provide legal certainty to market participants who have been operating under no-action relief pursuant to a series of CFTC staff letters. Commission regulation 50.52(b)(4)(ii), as reinstated and revised, will permit each eligible affiliate counterparty, or a third party that directly or indirectly holds a majority interest in both eligible affiliate counterparties, to pay and collect full variation margin daily on all of the eligible affiliate counterparties’ swaps with other eligible affiliate counterparties, if at least one of the eligible affiliate counterparties is located in Australia, Canada, the European Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, or the United Kingdom.22 Under this provision, eligible affiliate counterparties electing the exemption 22 The Commission is expanding the list of jurisdictions under Commission regulation 50.52(b)(4)(ii) to include the United Kingdom as a separate jurisdiction from the European Union, in order to codify the no-action relief issued in preparation for the United Kingdom’s withdrawal from the European Union, commonly referred to as ‘‘Brexit.’’ CFTC Letter No. 19–09 (Apr. 5, 2019), available at https://www.cftc.gov/csl/19-09/ download. VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 must pay and collect variation margin on swaps with all other eligible affiliate counterparties with whom they enter into swaps. The variation margin requirement does not extend beyond these swaps to include swaps between counterparties not electing the exemption. Commission regulation 50.52(b)(4)(iii), as reinstated and revised, will permit each eligible affiliate counterparty, or a third party that directly or indirectly holds a majority interest in both eligible affiliate counterparties, to pay and collect full variation margin daily on all of the eligible affiliate counterparties’ swaps with other eligible affiliate counterparties, if the eligible affiliate counterparty that is located in the United States enters into swaps, included in the class of Commission regulation 50.4 swaps, with eligible affiliate counterparties located in jurisdictions other than Australia, Canada, the European Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, or the United Kingdom. However, if relying on this provision, the aggregate notional value of swaps with such counterparties included in the class of Commission regulation 50.4 swaps may not exceed five percent of the aggregate notional value of all swaps included in the class of Commission regulation 50.4 swaps entered into by the eligible affiliate counterparty located in the U.S. As noted above, the eligible affiliate counterparties electing the exemption must pay and collect variation margin on swaps with all other eligible affiliate counterparties with whom they enter into swaps. The Commission is adopting the revisions to the variation margining requirements under Commission regulation 50.52(b)(4)(ii)–(iii) as proposed. The Commission sought comment from market participants about the two different variation margining options offered in current Commission regulations 50.52(b)(4)(ii)(A)(1) and (2), and Commission regulations 50.52(b)(4)(iii)(A) and (B). In particular, the Commission asked commenters whether compliance with the OutwardFacing Swaps Condition via the Alternative Compliance Frameworks was consistent or inconsistent with margin requirements in non-U.S. jurisdictions.23 The Commission did not receive an independent analysis of the comparability between the Alternative 23 Exemption From the Swap Clearing Requirement for Certain Affiliated Entities— Alternative Compliance Frameworks for AntiEvasionary Measures, 84 FR 70446, at 70452 (Dec. 23, 2019). PO 00000 Frm 00031 Fmt 4700 Sfmt 4700 44175 Compliance Frameworks and margin requirements in non-U.S. jurisdictions. ISDA’s comment letter requested that the Commission apply the uncleared margin requirement comparability determinations to the margin requirements in the Alternative Compliance Framework. As discussed above, the Commission is not implementing that change. The Commission believes that amendments to Commission regulation 50.52(b)(4) adopted in this final rule provide an exemption from the Clearing Requirement in a manner that is demonstrated to be workable, while imposing conditions necessary to ensure that the Inter-Affiliate Exemption is not used to evade the Clearing Requirement and that inter-affiliate swaps exempted from required clearing meet certain riskmitigating conditions to protect the U.S. financial system. In addition, the Commission believes that these amendments provide flexibility to eligible affiliate counterparties electing the Inter-Affiliate Exemption and increase legal certainty for the reasons stated above. B. Commission’s Section 4(c) Authority In the Proposal, the Commission requested comment on whether the amendments to Commission regulation 50.52 were an appropriate exercise of the Commission’s authority under section 4(c) of the CEA and whether they were in the public interest. The Commission received no comments regarding the Commission’s use of its section 4(c) authority in this context. The Commission continues to believe that its use of section 4(c) authority, which was used to adopt the InterAffiliate Exemption pursuant to section 4(c)(1) of the CEA, is appropriate to provide certain eligible affiliate counterparties with a limited exemption from the Clearing Requirement. Section 4(c)(1) of the CEA grants the Commission the authority to exempt any transaction or class of transactions, including swaps, from certain provisions of the CEA, including the Commission’s Clearing Requirement, in order to ‘‘promote responsible economic or financial innovation and fair competition.’’ Section 4(c)(2) of the CEA further provides that the Commission may not grant exemptive relief unless it determines that: (1) The exemption is appropriate for the transaction and consistent with the public interest; (2) the exemption is consistent with the purposes of the CEA; (3) the transaction will be entered into solely between ‘‘appropriate persons’’; and (4) the exemption will not have a material adverse effect on the ability of the E:\FR\FM\22JYR1.SGM 22JYR1 44176 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations jbell on DSKBBXCHB2PROD with RULES Commission or any contract market to discharge its regulatory or selfregulatory responsibilities under the CEA. In enacting section 4(c), Congress noted that the purpose of the provision is to give the Commission a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.24 The Commission believes that the Inter-Affiliate Exemption, including the Alternative Compliance Frameworks, as modified by this final rule, is consistent with the public interest and the purposes of the CEA. As the Commission noted in the adopting release for the Inter-Affiliate Exemption final rulemaking, inter-affiliate swaps fulfill an important risk management role within corporate groups.25 These swaps may be beneficial to the entity as a whole. These amendments to the Outward-Facing Swaps Condition and the Alternative Compliance Frameworks will permit the variation margin provisions under revised Commission regulations 50.52(b)(4)(ii) and (iii) to be used in connection with swaps with eligible affiliate counterparties located in any non-U.S. jurisdiction, not only those located in the European Union, Japan, or Singapore. Pursuant to staff no-action relief, as discussed above, these provisions have been in use since 2013. Based on the Commission’s review of recent data reported to the Depository Trust & Clearing Corporation’s swap data repository, DTCC Data Repository (U.S.) LLC, the Alternative Compliance Framework provisions under Commission regulation 50.52(b)(4)(ii) appear to be working. The Commission has identified approximately 55 entities located in Australia, Canada, the European Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, or the United Kingdom that elected the InterAffiliate Exemption between January 1, 2019 to December 31, 2019.26 The 24 House Conf. Report No. 102–978, 1992 U.S.C.C.A.N. 3179, at 3213. 25 Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, at 21754 (Apr. 11, 2013) (citing to commenters and the proposal in support of the conclusion that ‘‘inter-affiliate transactions provide an important risk management role within corporate groups’’ and that ‘‘swaps entered into between corporate affiliates, if properly risk-managed, may be beneficial to the entity as a whole.’’). 26 The Commission notes that although current Commission regulation 50.52 does not permit entities to comply with either of the Alternative Compliance Frameworks because they have expired, the relief provided by staff no-action letters means that market participants have continued to use and report swaps activity in compliance with the Alternative Compliance Frameworks. VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 Commission believes that these entities chose to, or could have, complied with the Alternative Compliance Framework under Commission regulation 50.52(b)(4)(ii) because of the jurisdiction in which they are organized. Based on the same data set from January 1, 2019 to December 31, 2019, the Commission identified 16 entities located in jurisdictions other than Australia, Canada, the European Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, the United Kingdom, or the United States that elected the InterAffiliate Exemption and chose to, or could have, complied with the Alternative Compliance Framework under Commission regulation 50.52(b)(4)(iii). During the same time period, the data showed that approximately 110 U.S. entities elected the Inter-Affiliate Exemption. The Commission believes that adopting amendments to the Alternative Compliance Frameworks, including reinstating the provisions and extending the availability of the first framework under Commission regulation 50.52(b)(4)(ii) to eligible affiliate counterparties located in Australia, Canada, the European Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, and the United Kingdom, while correspondingly narrowing the availability of the second framework under Commission regulation 50.52(b)(4)(iii), is appropriate for purposes of swaps between affiliated entities, promotes responsible financial innovation and fair competition, and is consistent with the public interest. In this regard, the Commission considered whether the availability of the Alternative Compliance Frameworks might result in fewer affiliated counterparties clearing their outwardfacing swaps and the significance of any such reduction in terms of the use of inter-affiliate swaps as a risk management tool. Generally speaking, it is difficult to estimate whether the final rule will reduce central clearing of outward-facing swaps. Among other factors, the application of mandatory clearing and the availability of central clearing for particular types of swaps vary by jurisdiction. Also, market participants’ response to the final rule may depend on which of their swaps are eligible for the Inter-Affiliate Exemption. Despite this uncertainty, the Commission believes that there may be a significant number of affiliated counterparties that will continue to engage in uncleared swaps activity as permitted under the amended Alternative Compliance Frameworks, PO 00000 Frm 00032 Fmt 4700 Sfmt 4700 subject to the conditions imposed by this final rule.27 Swap dealers electing the exemption use inter-affiliate swaps as an important risk management tool within corporate groups, and these affiliated groups are subject to a range of regulatory and other controls as part of their swap activities in the United States and in other jurisdictions. This includes the requirement to maintain a risk management program that takes into account risks posed by the swap dealer’s affiliates and is integrated into the risk management of the broader corporate group.28 In addition, the conditions to the Inter-Affiliate Exemption itself require the swaps covered by the exemption to be subject to a centralized risk management program. In sum, in considering whether the amendments in this final rule promote responsible financial innovation and fair competition and are consistent with the public interest, the Commission took the factors discussed above into account— i.e., the value of inter-affiliate swaps as a risk management tool, the extent to which the Alternative Compliance Frameworks foster this use of interaffiliate swaps, and the potential for more elections not to clear outwardfacing swaps. The Commission continues to believe that the amendments to the OutwardFacing Swaps Condition and Alternative Compliance Frameworks will be available only to ‘‘appropriate persons.’’ Section 4(c)(3) of the CEA includes within the term ‘‘appropriate person’’ a number of specified categories of persons, including such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections. In the 2013 Inter-Affiliate Exemption final rulemaking, the Commission found that eligible contract participants (ECPs) are appropriate persons within the scope of section 4(c)(3)(K) of the CEA.29 The Commission noted that the elements of the ECP definition (as set forth in section 1a(18)(A) of the CEA and Commission regulation 1.3(m)) 27 Based on a recent review of swap data reflecting use of the Inter-Affiliate Exemption, the Commission estimates that over 70 eligible affiliate counterparties located outside of the United States may elect to comply with one of the reinstated Alternative Compliance Frameworks thereby choosing not to clear their outward-facing swaps and rather to pay and collect variation margin on all swaps with other eligible affiliate counterparties instead. These entities include affiliates of swap dealers that are active in multiple jurisdictions. 28 Commission regulation 23.600(c)(ii). 29 Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, at 21754 (Apr. 11, 2013). E:\FR\FM\22JYR1.SGM 22JYR1 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations jbell on DSKBBXCHB2PROD with RULES generally are more restrictive than the comparable elements of the enumerated ‘‘appropriate person’’ definition. Given that only ECPs are permitted to enter into uncleared swaps, there is no risk that a non-ECP or a person who does not satisfy the requirements for an ‘‘appropriate person’’ could enter into an uncleared swap using the InterAffiliate Exemption. Consistent with its finding in the 2013 Inter-Affiliate Exemption final rulemaking, the Commission reaffirms that the class of persons eligible to rely on the InterAffiliate Exemption is limited to ‘‘appropriate persons’’ within the scope of section 4(c)(3) of the CEA. Finally, the Commission expects, based on its past experiences and the comment received, that the amendments to Commission regulation 50.52 will not have a material effect on the ability of the Commission to discharge its regulatory responsibilities. The InterAffiliate Exemption continues to be limited in scope and the Commission receives information regarding the election and use of exempt swaps between eligible affiliated entities because they are reported to a swap data repository. In fact, the Commission hopes that future changes to part 45 reporting requirements may improve the Commission’s ability to ascertain quickly which swaps are subject to the Inter-Affiliate Exemption versus other available exemptions or exceptions to the Clearing Requirement.30 As the Commission has done in the past, it will monitor swap counterparties’ elections of the Inter-Affiliate Exemption and swap activity through reported data. The Commission’s special call, antifraud, and anti-evasion authorities are unaffected by these amendments and remain in place. The Commission may exercise its special call, anti-fraud, or anti-evasion authorities in response to concerns about the use of the InterAffiliate Exemption. For all of these reasons, the Commission remains confident that it can discharge its regulatory responsibilities under the CEA. C. Effective Date and Compliance Date This final rule will be effective 30 days after publication in the Federal Register. Compliance with the revised Alternative Compliance Frameworks will be required on the effective date. Eligible affiliate counterparties entering into a swap on or after the effective date and claiming the Inter-Affiliate Exemption must comply with the revised Alternative Compliance Frameworks in Commission regulation 50.52. III. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) requires agencies to consider whether the rules they issue will have a significant economic impact on a substantial number of small entities and, if so, to provide a regulatory flexibility analysis regarding the impact on those entities.31 Each Federal agency is required to conduct an initial and final regulatory flexibility analysis for each rule of general applicability for which the agency issues a general notice of proposed rulemaking.32 As discussed in the Proposal, the amendments to the Inter-Affiliate Exemption will not affect any small entities, as the RFA uses that term. Pursuant to section 2(e) of the CEA, only ECPs may enter into swaps, unless the swap is listed on a DCM. The Commission has previously determined that ECPs are not small entities for purposes of the RFA.33 The amendments to the Inter-Affiliate Exemption will affect only market participants that qualify as ECPs. All persons that are not ECPs are required to execute their swaps on a DCM, and all contracts executed on a DCM must be cleared by a DCO, as required by statute and regulation, not by operation of any Clearing Requirement. Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the amendments adopted in this final rule will not have a significant economic impact on a substantial number of small entities. B. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA) 34 imposes certain requirements on federal agencies, including the Commission, in connection with conducting or sponsoring any collection of information as defined by the PRA. Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number from the Office of Management and Budget (OMB). This final rule will not require a new collection of information from any persons or entities. The Commission is not amending any reporting 31 5 30 See generally, Swap Data Recordkeeping and Reporting Requirements, 85 FR 21578 (Apr. 17, 2020). VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 PO 00000 U.S.C. 601 et seq. 32 Id. 33 66 34 44 FR 20740, at 20743 (Apr. 25, 2001). U.S.C. 3507(d). Frm 00033 Fmt 4700 Sfmt 4700 44177 requirements related to the InterAffiliate Exemption in this final rule. The reporting requirement and collection of information related to the Inter-Affiliate Exemption, under Commission regulations 50.52(c) and (d), has been assigned control number 3038–0104 by OMB and will continue to be reviewed periodically. C. Cost-Benefit Considerations 1. Statutory and Regulatory Background Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders. Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations (collectively referred to herein as the Section 15(a) Factors). The Commission considers the costs and benefits resulting from its discretionary determination to adopt this final rulemaking with respect to each of the Section 15(a) Factors below. The regulatory baseline for the Commission’s consideration of the costs and benefits of this final rule is the regulatory status quo. The regulatory status quo is determined by the Commission’s existing regulations governing the Clearing Requirement and the Inter-Affiliate Exemption in part 50 of the Commission’s regulations. The Commission recognizes, however, that to the extent that market participants have relied upon relevant Commission staff no-action relief, the actual costs and benefits of this final rule, as realized in the market, may not be as significant. For example, the Alternative Compliance Frameworks in current Commission regulation 50.52 expired on March 11, 2014. As a practical matter, market participants have continued to comply with the Inter-Affiliate Exemption using the Alternative Compliance Frameworks because a series of staff no-action letters stated that staff would not recommend that the Commission commence an enforcement action against entities using the Alternative Compliance Frameworks. Thus, the costs and benefits considered below are likely to be different than those faced by a current swap counterparty electing the Inter-Affiliate Exemption. The Commission notes that the consideration of costs and benefits E:\FR\FM\22JYR1.SGM 22JYR1 44178 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations below is based on the understanding that the markets function internationally, with many transactions involving U.S. firms taking place across international boundaries; with some Commission registrants being organized outside of the United States; with leading industry members typically conducting operations both within and outside the United States; and with industry members commonly following substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, the below discussion of costs and benefits refers to the effects of this final rule on all activity subject to the amended regulations, whether by virtue of the activity’s physical location in the United States or by virtue of the activity’s connection with or effect on U.S. commerce under section 2(i) of the CEA.35 In particular, the Commission notes that a significant number of entities affected by this final rule are located outside of the United States. The Commission sought comments on all aspects of the cost and benefit considerations in the Proposal. In particular, the Commission requested that commenters provide any data or other information that would be useful in quantifying costs and benefits of the Proposal. The Commission also requested specific comments on two alternatives considered by the Commission: (i) Adopting modified Alternative Compliance Frameworks including expiration dates; and (ii) making no amendments to the OutwardFacing Swaps Condition. The Commission received no comments in response to the Proposal that discussed cost and benefit considerations. Despite this fact, the Commission has endeavored to assess the costs and benefits of the amendments adopted by this final rule in quantitative terms wherever possible. In the sections that follow, the Commission considers the costs and benefits of adopting this final rule, and the impact on the Section 15(a) Factors of adopting the final rule. 2. Considerations of the Costs and Benefits of the Commission’s Action jbell on DSKBBXCHB2PROD with RULES a. Costs The Commission believes that there will be some costs associated with adopting the final rule, as compared to the regulatory baseline. Under this final rule, eligible affiliate counterparties could increase their counterparty credit risk by electing to comply with one of 35 7 U.S.C. 2(i). VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 the Alternative Compliance Frameworks instead of choosing to clear any outward-facing swap. Clearing, along with the Commission’s requirements related to swap clearing, mitigates counterparty credit risk in the following ways: (1) A futures commission merchant guarantees the performance of a customer and in so doing, takes steps to monitor and mitigate the risk of a counterparty default; (2) a clearinghouse collects sufficient initial margin to cover potential future exposures and regularly collects and pays variation margin to cover current exposures; (3) a clearinghouse has rules, and enforcement mechanisms to ensure the rules are followed, to mark a swap to market and to require that margin be posted in a timely fashion; (4) a clearinghouse facilitates netting within portfolios of swaps and among counterparties; and (5) a clearinghouse holds collateral in a guaranty fund in order to mutualize the remaining tail risk not covered by initial margin contributions among clearing members.36 The risk-mitigating benefits of clearing outward-facing swaps will not be realized if the affiliated counterparties elect to use the Alternative Compliance Frameworks. This final rule may produce a marginal increase in systemic risk and related costs because certain outward-facing swaps that were required to be cleared may now remain uncleared as long as the affiliated counterparties exchange variation margin daily under the Alternative Compliance Frameworks. Moreover, there may be an increased risk of contagion and systemic risk to the financial system that results from permitting additional market participants to use the Alternative Clearing Frameworks to avoid clearing certain swaps subject to the Clearing Requirement. Swap clearing mitigates risk on a transaction level, as outlined above, and it also provides protection against risk transfer throughout the financial system. While counterparty credit risk between affiliated entities represents a slightly lower risk to the overall financial system than counterparty credit risk between nonaffiliated entities, it is still the case that clearing provides the most complete protection against counterparty credit risk. Systemic risk, and the costs associated with it, is minimized to the extent that affiliated counterparties exchange variation margin as a 36 See Clearing Requirement Determination Under Section 2(h) of the CEA for Interest Rate Swaps, 81 FR 71230 (Oct. 14, 2016). PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 condition to the Alternative Compliance Frameworks.37 Swap market participants could experience overall increases in the costs of clearing under the final rule. Fewer entities may choose to clear swaps in order to comply with the OutwardFacing Swaps Condition once the Alternative Compliance Frameworks are available.38 Certain entities that had become members of a clearinghouse to clear outward-facing swaps may no longer need those relationships. The decrease in clearing activity could result in decreased liquidity in non-U.S. markets and at clearinghouses where eligible counterparties previously cleared outward-facing swaps. Collectively, these changes could make clearing swaps more expensive in those less liquid markets. Finally, the availability of the modified Alternative Compliance Frameworks may increase costs to any third party creditor of an entity using an Alternative Compliance Framework instead of clearing its outward-facing swaps. While the variation margin requirements under the Alternative Compliance Frameworks mitigate the buildup of credit risk within a corporate group that uses a centralized risk management structure, it is still possible that requiring affiliated counterparties to exchange variation margin instead of clearing outward-facing swaps could produce additional risk to external creditors and/or third parties. As noted above, clearing provides the most complete protection against counterparty credit risk, even though that risk, when it is between affiliated entities, represents a slightly lower risk to the overall financial system than when between non-affiliates. In addition, the combination of reinstating the Alternative Compliance Frameworks while expanding the number of jurisdictions excluded from the five percent limitation may cause market participants to alter their swaps trading behavior. To the extent that affiliated entities under current requirements face a choice between clearing the outward-facing swap and satisfying some other exception or exemption from the Clearing Requirement, they may have a different internal calculation under the final rule 37 Requiring counterparties to exchange variation margin daily is one effective risk management tool that prevents swap market participants from accumulating uncollateralized risk. 38 As a practical matter, many market participants relied on Commission staff no-action relief to comply with the Outward-Facing Swaps Condition through modified alternative compliance frameworks. However, for purposes of this analysis of costs, the Commission assumes that the Alternative Compliance Frameworks have expired. E:\FR\FM\22JYR1.SGM 22JYR1 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations jbell on DSKBBXCHB2PROD with RULES for determining whether to engage in a swap or shift risk among affiliated entities depending on whether the swap would cause it to exceed the five percent test under new Commission regulation 50.52(b)(4)(iii). The new limitations and geographical restrictions in the final rule may incentivize affiliated entities to transition their swaps to counterparties located in swaps markets which do not have local clearing mandates or well-developed clearing infrastructures. Swaps entered into with counterparties in those locations may pose higher systemic risks and costs related to those risks could increase. b. Benefits The Commission believes that there will be significant benefits associated with adopting this final rule, as compared to the regulatory baseline. The final rule amendments to Commission regulation 50.52 will permit eligible affiliate counterparties to use the Alternative Compliance Frameworks. Swap counterparties will benefit from this additional flexibility in their inter-affiliate swap risk management. In addition to this qualitative benefit, the Commission expects that there will be cost saving benefits for certain entities as well. Affiliated counterparties that elect to comply with one of the Alternative Compliance Frameworks and exchange variation margin may experience cost savings if their variation margining practices are less expensive than clearing the outward-facing swap. The costs of clearing an outward-facing swap would include initial margin (paid to either a futures commission merchant or the clearinghouse) and clearing fees. This final rule does not specify the methods or calculations required for affiliated entities exchanging variation margin daily on all swaps with other eligible affiliate counterparties. Therefore, the level of these cost savings may differ from entity to entity, and from swap to swap. Certain corporate entities might be incentivized by the new availability of the Alternative Compliance Frameworks to increase their inter-affiliate swap activity (or to start entering into swaps between affiliates). An increase in interaffiliate swap activity between eligible entities complying with the conditions to the Inter-Affiliate Exemption could result in enhanced centralized risk management for those entities. The availability of, and improvements to, centralized risk management systems can produce long-term cost savings driven by efficiency, resiliency, and stability. Entities that increase or start to VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 engage in inter-affiliate swaps may experience cost savings across their swaps books because they can use interaffiliate swap transactions to shift swaps activity to the jurisdictions with more liquid markets (resulting in lower costs). As discussed in the Proposal, the Commission estimated the number of entities that have used or potentially would use the Alternative Compliance Frameworks adopted in this final rule under Commission regulation 50.52(b)(4)(ii) and (iii).39 Since the Commission published the Proposal, Commission staff continued to examine swap data reported to the Depository Trust & Clearing Corporation’s swap data repository, DTCC Data Repository (U.S.) LLC. The Commission’s most recent data indicate that approximately 55 entities might elect to use the revised Alternative Compliance Framework under Commission regulation 50.52(b)(4)(ii) and as many as 16 entities might elect to use the revised Alternative Compliance Framework under Commission regulation 50.52(b)(4)(iii). Although historical data has limited benefit in predicting future use, the Commission notes that the number of entities that it estimates have used, or potentially would use, the Alternative Compliance Frameworks is similar to the data the Commission has collected in the past. Besides the difficulty in determining which entities might use the revised Alternative Compliance Frameworks, the estimate of the benefit to each entity is further complicated by the differing costs and capital structures related to each entity. Further, the Commission realizes that there may be even higher numbers of entities in the future that would benefit from this final rule and elect to satisfy the requirements in the Alternative Compliance Framework rather than clear an outward-facing swap. 3. Alternative of Allowing Eligible Affiliate Counterparties To Rely on Comparability Determinations in Order To Satisfy Any Variation Margin Requirements Under the Alternative Compliance Frameworks The Commission considered the alternative of allowing eligible affiliate counterparties to rely on comparability determinations to satisfy the Alternative Compliance Frameworks. The Commission understands that each nonU.S. jurisdiction may have different requirements for inter-affiliate 39 See Exemption From the Swap Clearing Requirement for Certain Affiliated Entities— Alternative Compliance Frameworks for AntiEvasionary Measures, 84 FR 70446, at 70454 and 70457 (Dec. 23, 2019). PO 00000 Frm 00035 Fmt 4700 Sfmt 4700 44179 derivative transactions that are customized to its own market structure and legal framework. The Commission acknowledges this, and in conducting its comparability determination uses a holistic, outcomes-based approach. The Commission’s comparability determinations do not require identical margin rules, including affiliated variation margin requirements. The variation margin required under the Alternative Compliance Frameworks provides important risk-mitigating safeguards that protect market participants and the public and are a sound risk management practice that helps reduce the buildup of credit exposure between affiliates. The design of the Commission’s variation margin requirements under the Alternative Compliance Framework is to guard against evasion of the Clearing Requirement and the transmission of losses back to the United States. Thus, the Commission will not apply its comparability determinations to the variation margin requirements under revised Commission regulation 50.52(b)(4). 4. Section 15(a) Factors a. Protection of Market Participants and the Public In revising the Outward-Facing Swaps Condition and Alternative Compliance Frameworks, the Commission considered various ways to appropriately protect affiliated entities, third parties in the swaps market, and the public. The Commission seeks to ensure that the final rule prevents swap market participants from evading the Commission’s Clearing Requirement and/or transferring excessive risk to an affiliated U.S. entity through the use of uncleared inter-affiliate swaps. The Commission is permitting eligible affiliate counterparties to elect not to clear an outward-facing swap subject to the Clearing Requirement, but only if eligible affiliates pay and collect daily variation margin on swaps. The Commission also considered the potential effects on the public of providing this alternative to clearing outward-facing swaps subject to the Clearing Requirement. In particular, the Commission considered the extent to which the Alternative Compliance Frameworks might result in fewer affiliated counterparties clearing their outward-facing swaps. One difficulty in estimating the effect of this final rule is the fact that the application of mandatory clearing and the availability of central clearing for particular types of swaps vary by jurisdiction. Also, many market participants enter into swaps E:\FR\FM\22JYR1.SGM 22JYR1 44180 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations jbell on DSKBBXCHB2PROD with RULES and other financial instruments in multiple jurisdictions, which may give them the ability to adjust their financial and risk management activity in response to variations in regulatory requirements. In the face of this uncertainty, the Commission believes that, even if the change in clearing activity and business for clearinghouses is uncertain, there may be a significant number of affiliated counterparties that will continue to engage in swaps activity permitted under the Alternative Compliance Frameworks.40 The Commission understands that the swap dealers conduct their swaps activities using affiliates in various jurisdictions. Swap dealers engage in inter-affiliate swaps in order to distribute risk among their affiliates. Thus, inter-affiliate swaps are an important part of prudent risk management, and a significant number of swap dealers and other market participants engage in inter-affiliate swaps. This inter-affiliate swaps activity is subject to a range of regulatory and other controls. In considering how the final rule would affect the protection of market participants and the public, the Commission took into account the value of inter-affiliate swaps as a risk management tool and the extent to which the Alternative Compliance Frameworks would foster this use of inter-affiliate swaps. The Commission also considered potential increases in systemic risk if affiliates elect not to clear outward-facing swaps and use the Alternative Compliance Frameworks instead. In view of these factors, the Commission believes that the potential increases in systemic risk will be mitigated by the controls on the use of inter-affiliate swaps, their inherent risk management features, and the conditions set out in the Alternative Compliance Frameworks. This final rule also would create certain costs that would be borne by entities electing the Inter-Affiliate Exemption. Under revised Commission regulation 50.52, entities that choose to comply with an Alternative Compliance Framework would be required to pay and collect variation margin on their inter-affiliate swaps, which could be a significant cost for those entities. 40 Based on a recent review of swap data reflecting use of the Inter-Affiliate Exemption, the Commission estimates that over 70 eligible affiliate counterparties located outside of the United States may elect to comply with one of the reinstated Alternative Compliance Frameworks thereby choosing not to clear their outward-facing swaps and rather to pay and collect variation margin on all swaps with other eligible affiliate counterparties instead. These entities include affiliates of swap dealers that are active in multiple jurisdictions. VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 However, an entity electing the InterAffiliate Exemption may continue to choose to clear an outward-facing swap with an unaffiliated counterparty instead of paying and collecting variation margin on all swaps with other eligible affiliate counterparties. Therefore, affected entities are free to choose which of these alternatives is best for them. b. Efficiency, Competitiveness, and Financial Integrity of Swap Markets The Commission believes that the amendments to the Inter-Affiliate Exemption may have some, but not a significant, impact on the efficiency or competiveness of swaps markets. As noted above, inter-affiliate swaps are an important risk management tool for affiliated corporate groups. To the extent that swap dealers may participate more extensively in swap markets in non-U.S. jurisdictions because they can use inter-affiliate swaps to manage risk efficiently, the amendments to the InterAffiliate Exemption may increase the efficiency, competitiveness, and financial integrity of swap markets by increasing the range of swaps that are available to market participants. The Commission also believes that the revised Outward-Facing Swaps Condition and Alternative Compliance Frameworks should discourage misuse of the Inter-Affiliate Exemption. For example, the Commission recognizes that internal calculations and swaps portfolio management are required to comply with the five percent test under Commission regulation 50.52(b)(4)(iii). If the Commission had not expanded the list of non-U.S. jurisdictions in which an affiliated counterparty may be located for purposes of Commission regulation 50.52(b)(4)(ii), entities may have failed to appropriately calculate the permissible limits under the five percent test under Commission regulation 50.52(b)(4)(iii). Aligning the scope of jurisdictions included in the Alternative Compliance Frameworks with the jurisdictions for which the domestic currency is subject to the Commission’s Clearing Requirement may help to make these calculations and compliance with the provisions easier. This part of the final rule should promote the financial integrity of swap markets and financial markets as a whole. c. Price Discovery Under Commission regulation 43.2, a ‘‘publicly reportable swap transaction,’’ means, among other things, any executed swap that is an arms’-length transaction between two parties that results in a corresponding change in the PO 00000 Frm 00036 Fmt 4700 Sfmt 4700 market risk position between the two parties.41 The Commission generally believes that non-arms’-length swaps do not contribute to price discovery in the markets, as they are not publically reported.42 Given that inter-affiliate swaps as defined in this final rule are usually not arms’-length transactions, the Commission believes that these amendments to the Inter-Affiliate Exemption will not have a significant effect on price discovery.43 However, if the availability of the Alternative Compliance Frameworks reduces the use of outward-facing swaps, which may or may not be publicly reported depending on the jurisdiction, there could be a negative impact on price discovery when outward-facing swaps would otherwise be publically reported. d. Sound Risk Management Practices The conditions of the Inter-Affiliate Exemption do not eliminate the possibility that risk may impact an entity, its affiliates, and counterparties of those affiliates.44 Without clearing a swap to mitigate the transmission of risk among affiliates, the risk that any one affiliate takes on through its swap transactions, and any contagion that may result through that risk, increases. This makes the risk mitigation requirements for outward-facing swaps more important as risk can be transferred more easily between affiliates. Exempting certain inter-affiliate swaps from the Clearing Requirement creates additional counterparty 41 Commission regulation 43.2. See also RealTime Public Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9, 2012). 42 Transactions that fall outside the definition of ‘‘publicly reportable swap transaction’’—that is, transactions that are not arms-length—‘‘do not serve the price discovery objective of CEA section 2(a)(13)(B).’’ Real-Time Public Reporting of Swap Transaction Data, 77 FR 1182, at 1195 (Jan. 9, 2012). See also id. at 1187 (discussing ‘‘Swaps Between Affiliates and Portfolio Compression Exercises’’), and also Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, at 21780 (Apr. 11, 2013). 43 The definition of ‘‘publicly reportable swap transaction’’ identifies two examples of transactions that fall outside the definition, including internal swaps between one-hundred percent owned subsidiaries of the same parent entity. Commission regulation 43.2 (adopted by Real-Time Public Reporting of Swap Transaction Data, 77 FR 1182, at 1244 (Jan. 9, 2012)). The Commission notes that the list of examples is not exhaustive. 44 The Commission notes that even in the absence of required clearing or margin requirements for swaps between certain affiliated entities, such entities may choose to use initial and variation margin to manage risks that could otherwise be transferred from one affiliate to another. Similarly, third parties that have entered into swaps with affiliates also may include variation margin requirements in their swap agreements. E:\FR\FM\22JYR1.SGM 22JYR1 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations exposure for affiliates.45 DCOs have many tools to mitigate risks. This increased counterparty credit risk among affiliates may increase the likelihood that a default of one affiliate could cause significant losses in other affiliated entities. If the default causes other affiliated entities to default, third parties that have entered into uncleared swaps or other agreements with those entities also could be affected. In 2013, when the Commission finalized the Inter-Affiliate Exemption, it assessed the risks of inter-affiliate swaps and stated that the partial internalization of costs among affiliated entities, combined with the documentation, risk management, reporting, and treatment of outwardfacing swaps requirements for electing the exception, would mitigate some of the risks associated with uncleared inter-affiliate swaps.46 However, the Commission indicated that these mitigants are not a perfect substitute for the protections that would otherwise be provided by clearing, or by a requirement to use more of the risk management tools that a clearinghouse uses to mitigate counterparty credit risk (i.e., both initial and variation margin, futures commission merchants monitoring the credit risk of customers, clearing member contributions to default funds, etc.).47 e. Other Public Interest Considerations The Commission has identified no other public interest considerations. D. Antitrust Considerations jbell on DSKBBXCHB2PROD with RULES Section 15(b) of the CEA requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the objectives of the CEA, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in requiring or approving any bylaw, rule, or regulation of a contract market or registered futures association established pursuant to section 17 of the CEA.48 The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission requested comments on whether the Proposal implicated any other specific public interest to be 45 Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, at 21780–21781 (Apr. 11, 2013). 46 Id. 47 Id. at 21778. 48 7 U.S.C. 19(b). VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 protected by the antitrust laws and received no comments. The Commission has considered this final rule to determine whether it is anticompetitive and has identified no anticompetitive effects. The Commission requested comment on whether the Proposal was anticompetitive and, if it was, what the anticompetitive effects were, and received no comments. Because the Commission has determined that the final rule is not anticompetitive and has no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the CEA. List of Subjects in 17 CFR Part 50 Business and industry, Clearing, Swaps. For the reasons stated in the preamble, the Commodity Futures Trading Commission amends 17 CFR part 50 as set forth below: PART 50—CLEARING REQUIREMENT AND RELATED RULES 1. The authority citation for part 50 is revised to read as follows: ■ Authority: 7 U.S.C. 2(h), and 7a–1 as amended by Pub. L. 111–203, 124 Stat. 1376. 2. Amend § 50.52 by: a. Revising paragraphs (a)(2)(i) and (ii); ■ b. Adding paragraph (a)(2)(iii); and ■ c. Revising paragraph (b)(4). The revisions and additions read as follows: ■ ■ § 50.52 Exemption for swaps between affiliates. (a) * * * (2) * * * (i) A counterparty or third party directly or indirectly holds a majority ownership interest if it directly or indirectly holds a majority of the equity securities of an entity, or the right to receive upon dissolution, or the contribution of, a majority of the capital of a partnership; (ii) The term ‘‘eligible affiliate counterparty’’ means an entity that meets the requirements of this paragraph; and (iii) The term ‘‘United States’’ means the United States of America, its territories and possessions, any State of the United States, and the District of Columbia. (b) * * * (4)(i) Subject to paragraphs (b)(4)(ii) and (iii) of this section, each eligible affiliate counterparty that enters into a swap, which is included in a class of swaps identified in § 50.4, with an unaffiliated counterparty shall: PO 00000 Frm 00037 Fmt 4700 Sfmt 4700 44181 (A) Comply with the requirements for clearing the swap in section 2(h) of the Act and this part; (B) Comply with the requirements for clearing the swap under a foreign jurisdiction’s clearing mandate that is comparable, and comprehensive but not necessarily identical, to the clearing requirement of section 2(h) of the Act and this part, as determined by the Commission; (C) Comply with an exception or exemption under section 2(h)(7) of the Act or this part; (D) Comply with an exception or exemption under a foreign jurisdiction’s clearing mandate, provided that: (1) The foreign jurisdiction’s clearing mandate is comparable, and comprehensive but not necessarily identical, to the clearing requirement of section 2(h) of the Act and this part, as determined by the Commission; and (2) The foreign jurisdiction’s exception or exemption is comparable to an exception or exemption under section 2(h)(7) of the Act or this part, as determined by the Commission; or (E) Clear such swap through a registered derivatives clearing organization or a clearing organization that is subject to supervision by appropriate government authorities in the home country of the clearing organization and has been assessed to be in compliance with the Principles for Financial Market Infrastructures. (ii) If one of the eligible affiliate counterparties is located in Australia, Canada, the European Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, or the United Kingdom and each eligible affiliate counterparty, or a third party that directly or indirectly holds a majority interest in both eligible affiliate counterparties, pays and collects full variation margin daily on all of the eligible affiliate counterparties’ swaps with other eligible affiliate counterparties, the requirements of paragraph (b)(4)(i) of this section shall be satisfied. (iii) If an eligible affiliate counterparty located in the United States enters into swaps, which are included in a class of swaps identified in § 50.4, with eligible affiliate counterparties located in jurisdictions other than Australia, Canada, the European Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, the United Kingdom, or the United States, and the aggregate notional value of such swaps, which are included in a class of swaps identified in § 50.4, does not exceed five percent of the aggregate notional value of all swaps, which are included in a class of swaps identified in § 50.4, in each instance the notional value as measured E:\FR\FM\22JYR1.SGM 22JYR1 44182 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations in U.S. dollar equivalents and calculated for each calendar quarter, entered into by the eligible affiliate counterparty located in the United States, then the requirements of paragraph (b)(4)(i) of this section shall be satisfied when each eligible affiliate counterparty, or a third party that directly or indirectly holds a majority interest in both eligible affiliate counterparties, pays and collects full variation margin daily on all of the eligible affiliate counterparties’ swaps with other eligible affiliate counterparties. * * * * * Issued in Washington, DC, on June 29, 2020, by the Commission. Robert Sidman, Deputy Secretary of the Commission. Note: The following appendices will not appear in the Code of Federal Regulations. Appendices to Exemption From the Swap Clearing Requirement for Certain Affiliated Entities—Alternative Compliance Frameworks for AntiEvasionary Measures—Commission Voting Summary, Chairman’s Statement, and Commissioners’ Statements Appendix 1—Commission Voting Summary On this matter, Chairman Tarbert and Commissioners Quintenz, Behnam, Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the negative. Appendix 2—Supporting Statement of Chairman Heath P. Tarbert jbell on DSKBBXCHB2PROD with RULES I am pleased to support our final rule codifying the alternative compliance framework for the Commission’s interaffiliate swap clearing exemption, which has been in place via the CFTC’s staff no-action relief since 2014. As I previously stated in connection with the proposed rule, codifying this relief is good policy and good government.1 From a policy perspective, the rule advances the goals of our swap clearing requirements by making anti-evasionary provisions of the inter-affiliate exemption workable for cross-border corporate groups. Stepping back for a moment and looking at the bigger picture, our clearing and initial margin requirements are meant to address counterparty credit risk. These measures generally are not appropriate for credit exposures between members of a single corporate group, where risk is managed internally on a centralized basis.2 1 Statement of Chairman Heath P. Tarbert: ‘‘Tripling Down on Transparency’’ n.12 (Dec. 10, 2019), https://www.cftc.gov/PressRoom/ SpeechesTestimony/tarbertstatement121019. 2 See Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750, 21753 (Apr. 11, 2013) (justifying the inter-affiliate clearing exemption in view of incentives to avoid defaulting VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 However, the CFTC has long been concerned that U.S. entities may misuse the inter-affiliate exemption to evade the clearing requirements more generally. For example, a U.S. entity may use back-to-back swaps to interpose a non-U.S. affiliate in the middle of the U.S. entity’s trade with a non-U.S. counterparty, where the non-U.S. affiliate and counterparty are in jurisdictions that do not have mandatory clearing regimes comparable to the Commission’s. In this way, the U.S. entity could improperly circumvent the clearing obligations that would apply if it were trading directly with the non-U.S. counterparty (because it would be exempted from clearing the trade with its non-U.S. affiliate, and the non-U.S. affiliate’s back-toback trade with the non-U.S. counterparty could fall outside U.S. clearing requirements). This evasion concern was particularly acute in the early years of the CFTC’s clearing regime, when a number of other jurisdictions had yet to implement their own clearing requirements in accordance with the G20 commitments at the 2009 Pittsburgh Summit. Moreover, section 2(h)(4)(A) of the Commodity Exchange Act requires us to prescribe rules to prevent evasion of the clearing requirement. Accordingly, as an anti-evasionary measure, the Commission required members of a corporate group taking advantage of the inter-affiliate exemption to clear their outward-facing swaps if such swaps would be clearing-mandated under CFTC rules, regardless whether the parties to the outward-facing swap were in fact subject to such rules.3 The ‘‘clearing outward-facing swaps’’ condition to the inter-affiliate exemption is unworkable for many market participants, however, because of inter-jurisdictional mismatches in clearing requirements and infrastructures. Accordingly, the CFTC’s staff no-action relief has extended the rule’s timelimited alternative compliance framework allowing affiliates to exchange variation margin in lieu of clearing outward-facing swaps.4 This alternative compliance option has allowed cross-border corporate groups to attain the risk-mitigating benefits of interaffiliate swaps,5 while complying with important anti-evasion measures in a way that is practicable for their global business. Indeed, the CFTC staff’s review of recent to affiliates and the common practice of centralized risk allocation decisions and default remedies, which reduce inter-affiliate default risk). 3 17 CFR 50.52(b)(4). 4 CFTC Letter No. 17–66 (Dec. 14, 2017), https:// www.cftc.gov/LawRegulation/CFTCStaffLetters/ index.htm; see also previously granted relief under CFTC Letter Nos. 14–135 (Nov. 7, 2014), 15–63 (Nov. 17, 2015), 16–81 (Nov. 28, 2016), and 16–84 (Dec. 15, 2016). CFTC Letter No. 17–66 expires on the earlier of (i) December 31, 2020 at 11:59 p.m. (Eastern Time); or (ii) the effective date of amendments to Commission regulation 50.52. 5 See 78 FR at 21754 (citing to commenters and the 2012 inter-affiliate exemption notice of proposed rulemaking in support of the conclusion that ‘‘inter-affiliate transactions provide an important risk management role within corporate groups’’ and that ‘‘swaps entered into between corporate affiliates, if properly risk-managed, may be beneficial to the entity as a whole’’). PO 00000 Frm 00038 Fmt 4700 Sfmt 4700 swap data indicates that over 70 eligible affiliate counterparties located outside the United States rely on the alternative compliance framework under the available staff no-action relief. By codifying this relief, we are providing the swaps market with clarity, certainty, and transparency— consistent with the CFTC’s mission, core values, and strategic objectives.6 I commend my fellow Commissioners and the CFTC’s staff for working to finalize the rule before us today, and I look forward to further efforts to advance these principles and goals in the near future. Appendix 3—Supporting Statement of Commissioner Brian Quintenz I support today’s final rule providing legal certainty to swap counterparties electing the inter-affiliate exemption from the Commission’s requirement that certain interest rate swaps and credit default swaps be cleared. At issue is an important condition of the exemption that reduces the likelihood that uncollateralized exposures can build up at a U.S. swap participant.1 I support the policy, made permanent by today’s rule, that permits variation margin to be exchanged by affiliated counterparties in lieu of clearing swaps with foreign counterparties. This provision appropriately balances an antievasionary measure with providing flexibility to market participants. The provision has functioned well since 2013, and it is appropriate to make the provision permanent after several extensions of the no-action relief.2 I would like to highlight that today’s final rule acknowledges that five additional jurisdictions have enacted swap clearing requirements since the first version of this rule was issued in 2013.3 Today’s rule therefore serves as another example of the Commission appropriately deferring to foreign regulatory regimes in order to reduce compliance burdens and promote market liquidity internationally. Not only do I support today’s final rule because it makes a sound policy permanent, but also because it codifies no-action relief that has proven workable for market participants. Codifying no-action relief makes the Commission’s regulatory framework more transparent and simplifies compliance. I would support continuing to codify other noaction relief, for example with respect to providing relief from the trade execution requirement for a swap exempted from the clearing requirement.4 6 See Draft CFTC 2020–2024 Strategic Plan, 85 FR 29,935 (May 19, 2020), https://www.govinfo.gov/ content/pkg/FR-2020-05-19/pdf/2020-10676.pdf. 1 CFTC regulation 50.52(b)(4)(ii)–(iii) (17 CFR 50.52(b)(4)(ii)–(iii)). 2 CFTC Letters 14–135, 15–63, 16–81, 16–84, and 17–66. 3 The first version of the rule had permitted, until 2014, unlimited variation margining when an affiliate was located in the E.U., Japan, and Singapore. Today’s version expands the list of eligible jurisdictions to include Australia, Canada, Hong Kong, Mexico, Switzerland, as well as the U.K. 4 CFTC Letter 17–67, proposed to be codified by the Commission’s 2018 proposed revised rules for swap execution facilities, 83 FR 61,946 (Nov. 30, 2018). E:\FR\FM\22JYR1.SGM 22JYR1 Federal Register / Vol. 85, No. 141 / Wednesday, July 22, 2020 / Rules and Regulations Finally, I would like to thank the staff of DCR for their diligence in completing this rulemaking. jbell on DSKBBXCHB2PROD with RULES Appendix 4—Concurring Statement of Commissioner Rostin Behnam I support today’s adoption of amendments to the exemption from the swap clearing requirement for certain affiliated entities within a corporate group. The amendments that update the conditions for the exemption incorporate several years of observation and analysis to build upon its utility within the global regulatory landscape, while affirming the Commission’s appropriate use of its public interest authority under section 4(c) of the Commodity Exchange Act. It can be tempting to use somewhat fluid and undeniably desirable objectives such as the promotion of responsible economic and financial innovation and fair competition to support all manner of regulatory changes. And I have not hesitated to highlight my own concerns for the imprudent use of 4(c) exemptive authority. However, I am pleased that when it comes to the risks associated with U.S firms entering into uncleared swaps with non-U.S. affiliates or evading the clearing requirement altogether, the Commission has consistently demonstrated that its reliance on the 4(c) authority provides the checks to ensure that the policy and outcomes remain legally sound and rational. I support today’s final rule, as I did the proposal, because it provides legal certainty, benefits from careful analysis and consideration of the data as well as the global regulatory landscape as it has developed, and leaves in place critical tools for Commission monitoring, oversight, and enforcement.1 However, I am mindful that guardrails put firmly in place by today’s amendments as a substitute for clearing outward-facing swaps may produce additional risk to external creditors and/or third parties, and that there may be an increased likelihood of risk to the financial system resulting from the availability of the exemption. While I encouraged interested parties to comment on this aspect of the exemption—the alternative compliance framework—the Commission did not receive any responsive comments.2 Without comments, the Commission’s findings and conclusions remain neither vigorously supported nor expressly undermined, and we will continue to discharge our regulatory responsibilities, remaining quick to respond as we closely monitor the data and global regulatory developments to ensure that the exemption does not add unnecessary and preventable risk to the U.S. financial system. I thank staff from the Division of Clearing and Risk for their thoughtful responses to my questions, and for making edits that reflect my comments and suggestions. 1 Exemption from the Swap Clearing Requirement for Certain Affiliated Entities, 84 FR 70446, 70460– 1 (proposed Dec. 23, 2019). 2 Id. at 70461. VerDate Sep<11>2014 16:35 Jul 21, 2020 Jkt 250001 Appendix 5—Statement of Commissioner Dan M. Berkovitz I support today’s final rule making permanent the alternative compliance frameworks for certain swaps involving the foreign affiliates of U.S. firms and their nonU.S. counterparties. The final rule upholds the Dodd-Frank Act’s clearing mandate, deters evasion, and protects against systemic risk from swaps executed overseas by foreign affiliates. The final rule, which adopts the rule as proposed,1 codifies existing practice and addresses anti-evasion provisions governing inter-affiliate swaps that the Commission first issued in 2013 and later extended through staff no-action letters. Commission regulations provide a limited, conditional ‘‘Inter-Affiliate Exemption’’ from clearing for swaps between certain affiliate counterparties, including U.S. firms and their foreign affiliates. Notably, the Inter-Affiliate Exemption includes an important ‘‘OutwardFacing Swaps Condition’’ to prevent U.S. firms from routing swaps through foreign affiliates to evade the Commission’s clearing requirement.2 The Outward-Facing Swaps Condition allows outward-facing swaps to be cleared pursuant to a comparable and comprehensive foreign clearing regime. Where the Commission has not made a comparability determination, the alternative compliance frameworks permit the foreign affiliate to exchange full, daily variation margin for the swap with its U.S. affiliate or its non-U.S. counterparty, rather than clearing the outward-facing swap. The alternative compliance frameworks preserve the competitiveness of the foreign affiliates of U.S. firms without importing significant risks into the U.S. Today’s final rule makes the alternative compliance frameworks permanent, with certain modifications.3 I support the final rule’s emphasis on clearing, anti-evasion, and systemic risk. The final rule also expands the jurisdictions subject to one of the alternative compliance frameworks to include additional jurisdictions that have adopted and implemented their respective domestic clearing mandates. By extending and making permanent the alternative compliance frameworks, the final rule addresses the lack of comparability determinations for foreign clearing regimes, while ensuring the continued operation of anti-evasion and antisystemic risk provisions in the Commission’s rules. I thank staff of the Division of Clearing and Risk for their work on this final rule and for their effective cooperation with my office. [FR Doc. 2020–14390 Filed 7–21–20; 8:45 am] BILLING CODE 6351–01–P 1 Exemption From the Swap Clearing Requirement for Certain Affiliated Entities— Alternative Compliance Frameworks for AntiEvasionary Measures, 84 FR 70446 (Dec. 23, 2019). 2 The Outward-Facing Swaps Condition requires the foreign affiliates of U.S. firms to clear their outward-facing swaps if such swaps are subject to the Commission’s clearing requirement and entered into with unaffiliated counterparties in foreign jurisdictions. 3 The original alternative compliance frameworks expired in 2014, but have been repeatedly extended through no-action letters. PO 00000 Frm 00039 Fmt 4700 Sfmt 4700 44183 DEPARTMENT OF HOMELAND SECURITY U.S. Customs and Border Protection 19 CFR Chapter I Notification of Temporary Travel Restrictions Applicable to Land Ports of Entry and Ferries Service Between the United States and Mexico Office of the Secretary, U.S. Department of Homeland Security; U.S. Customs and Border Protection, U.S. Department of Homeland Security. ACTION: Notification of continuation of temporary travel restrictions. AGENCY: This document announces the decision of the Secretary of Homeland Security (Secretary) to continue to temporarily limit the travel of individuals from Mexico into the United States at land ports of entry along the United States-Mexico border. Such travel will be limited to ‘‘essential travel,’’ as further defined in this document. DATES: These restrictions go into effect at 12 a.m. Eastern Daylight Time (EDT) on July 22, 2020 and will remain in effect until 11:59 p.m. EDT on August 20, 2020. FOR FURTHER INFORMATION CONTACT: Alyce Modesto, Office of Field Operations, U.S. Customs and Border Protection (CBP) at 202–344–3788. SUPPLEMENTARY INFORMATION: SUMMARY: Background On March 24, 2020, DHS published notice of the Secretary’s decision to temporarily limit the travel of individuals from Mexico into the United States at land ports of entry along the United States-Mexico border to ‘‘essential travel,’’ as further defined in that document.1 The document described the developing circumstances regarding the COVID–19 pandemic and stated that, given the outbreak and continued transmission and spread of the virus associated with COVID–19 within the United States and globally, the Secretary had determined that the risk of continued transmission and spread of the virus associated with COVID–19 between the United States and Mexico posed a ‘‘specific threat to human life or national interests.’’ The Secretary later published a series of 1 85 FR 16547 (Mar. 24, 2020). That same day, DHS also published notice of the Secretary’s decision to temporarily limit the travel of individuals from Canada into the United States at land ports of entry along the United States-Canada border to ‘‘essential travel,’’ as further defined in that document. 85 FR 16548 (Mar. 24, 2020). E:\FR\FM\22JYR1.SGM 22JYR1

Agencies

[Federal Register Volume 85, Number 141 (Wednesday, July 22, 2020)]
[Rules and Regulations]
[Pages 44170-44183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14390]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 50

RIN 3038-AE92


Exemption From the Swap Clearing Requirement for Certain 
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is adopting amendments to Commission regulation 50.52, which exempts 
certain affiliated entities within a corporate group from the swap 
clearing requirement under the applicable provision of the Commodity 
Exchange Act (CEA or Act). These amendments concern the anti-evasionary 
condition that swaps subject to the clearing requirement entered into 
with unaffiliated counterparties either be cleared or be eligible for 
an exception to or exemption from the clearing requirement. 
Specifically, the amendments make permanent certain temporary 
alternative compliance frameworks intended to make this anti-evasionary 
condition workable for international corporate groups in the absence of 
foreign clearing regimes determined to be comparable to CFTC 
requirements.

DATES: The effective date for this final rule is August 21, 2020.

FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director, 
Division of Clearing and Risk, at 202-418-5684 or [email protected]; 
Melissa A. D'Arcy, Special Counsel, Division of Clearing and Risk, at 
202-418-5086 or [email protected]; or Stephen A. Kane, Office of the 
Chief Economist, at 202-418-5911 or [email protected], in each case at the 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Swap Clearing Requirement
    B. Commission Regulation 50.52
II. The Proposal To Amend Regulation 50.52
    A. The Commission's Proposal To Revise the Alternative 
Compliance Frameworks
    B. Comments Received
    C. Trade Execution Requirement
III. Final Rule

[[Page 44171]]

    A. Amendments to Commission Regulation 50.52
    B. Commission's Section 4(c) Authority
    C. Effective Date and Compliance Date
IV. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

I. Background

A. Swap Clearing Requirement

    Part 50 of the Commission's regulations implements the swap 
clearing requirement under section 2(h) of the CEA and certain 
exceptions and exemptions thereto. The swap clearing requirement under 
section 2(h)(1)(A) of the CEA states that if the Commission requires a 
swap to be cleared, then it is unlawful for any person to engage in 
that swap unless the swap is submitted for clearing to a derivatives 
clearing organization (DCO) that is registered under the CEA or a DCO 
that the Commission has exempted from registration.
    The Commission has adopted swap clearing requirement determinations 
for certain classes of interest rate swaps and credit default swaps.\1\ 
Swaps that are subject to the Commission's swap clearing requirement 
are described in Commission regulation 50.4 (Clearing Requirement). 
Part 50 of the Commission's regulations also includes a number of 
exceptions to and exemptions from the Clearing Requirement. Certain of 
these exceptions or exemptions are based on statutory principles (e.g., 
the end-user exception),\2\ and others were adopted pursuant to the 
Commission's public interest exemption authority (e.g., the exemption 
for cooperatives).\3\
---------------------------------------------------------------------------

    \1\ Clearing Requirement Determination Under Section 2(h) of the 
CEA, 77 FR 74284 (Dec. 13, 2012) and Clearing Requirement 
Determination Under Section 2(h) of the CEA for Interest Rate Swaps, 
81 FR 71202 (Oct. 14, 2016).
    \2\ See End-User Exception to the Clearing Requirement for 
Swaps, 77 FR 42560 (Jul. 19, 2012).
    \3\ See Clearing Exemption for Certain Swaps Entered Into by 
Cooperatives, 78 FR 52286 (Aug. 22, 2013).
---------------------------------------------------------------------------

    In April 2013 the Commission adopted a limited exemption from the 
Clearing Requirement for certain affiliated entities pursuant to its 
public interest authority (Inter-Affiliate Exemption).\4\ The Inter-
Affiliate Exemption is subject to certain conditions that limit the 
availability of the exemption and are designed to ensure that the 
Clearing Requirement is not circumvented. When the Commission adopted 
the Inter-Affiliate Exemption, it concluded that, an exemption subject 
to certain conditions is appropriate for the transactions at issue, 
promotes responsible financial innovation and fair competition, and is 
consistent with the public interest.\5\ These conditions are an 
important element of the Inter-Affiliate Exemption and continue to be 
an area of the Commission's focus. This final rule amends certain 
regulatory provisions in Commission regulation 50.52 relating to the 
conditions of electing the Inter-Affiliate Exemption.
---------------------------------------------------------------------------

    \4\ Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 FR 21750 (Apr. 11, 2013).
    \5\ Id. at 21754.
---------------------------------------------------------------------------

B. Commission Regulation 50.52

    Commission regulation 50.52 governs the eligibility and compliance 
requirements for market participants electing not to clear inter-
affiliate swaps pursuant to the Inter-Affiliate Exemption. This 
regulation has been in effect since June 2013, and Commission staff has 
monitored the election and availability of the Inter-Affiliate 
Exemption over time. Certain assumptions about the global adoption of 
swap clearing mandates were not realized, and the Commission's 
conditions to the Inter-Affiliate Exemption that were adopted and 
implemented in 2013 no longer serve the function intended.\6\ This 
final rule amends those conditions to the Inter-Affiliate Exemption in 
order to reflect current regulatory practices.
---------------------------------------------------------------------------

    \6\ Some non-U.S. jurisdictions are still in the process of 
adopting their domestic mandatory clearing regimes, some non-U.S. 
jurisdictions may never implement clearing for swaps, and a number 
of non-U.S. regimes vary significantly in terms of product and 
participant scope from the Commission's Clearing Requirement.
---------------------------------------------------------------------------

1. Eligible Affiliate Counterparties
    First, to qualify for the Inter-Affiliate Exemption, each 
counterparty to a swap must meet the definition of an ``eligible 
affiliate counterparty'' set forth in Commission regulation 50.52(a). 
The terms of the exempted swap must comply with a documentation 
requirement and be subject to a centralized risk management program. 
The election of the Inter-Affiliate Exemption, as well as how the 
requirements of the exemption are met, must be reported to a 
Commission-registered swap data repository. Finally, the Inter-
Affiliate Exemption generally requires each eligible affiliate 
counterparty to clear swaps executed with unaffiliated counterparties 
(i.e., outward-facing swaps), if the swaps are covered by the 
Commission's Clearing Requirement and do not otherwise qualify for an 
exception to or exemption from the Clearing Requirement (Outward-Facing 
Swaps Condition).\7\
---------------------------------------------------------------------------

    \7\ Commission regulation 50.52(b)(4)(i).
---------------------------------------------------------------------------

    The Commission continues to believe that it is necessary to impose 
risk-mitigating conditions on inter-affiliate swaps to uphold the 
Clearing Requirement, deter evasion, and help protect against systemic 
risk to the U.S. As the Commission stated in the adopting release 
issuing the Inter-Affiliate Exemption, entities that are affiliated 
with each other are separate legal entities notwithstanding their 
affiliation.\8\ As separate legal entities, affiliates generally are 
not legally responsible for each other's contractual obligations. This 
legal reality becomes readily apparent when one or more affiliate(s) 
become insolvent. Affiliates, as separate legal entities, are managed 
in bankruptcy as separate estates, and the trustee for each debtor 
estate has a duty to the creditors of the affiliate, not the corporate 
family, the parent of the affiliates, or the corporate family's 
creditors.
---------------------------------------------------------------------------

    \8\ Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 FR 21750, at 21752-21753 (Apr. 11, 2013).
---------------------------------------------------------------------------

2. Outward-Facing Swaps Condition
    The Outward-Facing Swaps Condition requires that an eligible 
affiliate counterparty relying on the Inter-Affiliate Exemption clear 
any swap covered by the Clearing Requirement (i.e., an interest rate or 
credit default swap identified in Commission regulation 50.4) that is 
entered into with an unaffiliated counterparty, unless the swap 
qualifies for an exception or exemption from the Clearing Requirement 
under part 50. This provision applies to any eligible affiliate 
counterparty electing the Inter-Affiliate Exemption, including an 
eligible affiliate counterparty located outside of the United States.
    The Outward-Facing Swaps Condition is intended to prevent swap 
market participants from using the Inter-Affiliate Exemption to evade 
the Clearing Requirement or to transfer risk to U.S. firms by entering 
into uncleared swaps with non-U.S. affiliates in jurisdictions that do 
not have mandatory clearing regimes comparable to the Commission's 
clearing requirement regime. Such evasion could be accomplished if the 
non-U.S. affiliate enters into a swap with an unaffiliated party also 
located outside of the U.S. and that swap is related on a back-to-back 
or matched book basis with the swap executed with the affiliated party 
located in the U.S. In the adopting release to the Inter-Affiliate 
Exemption,

[[Page 44172]]

the Commission noted that section 2(h)(4)(A) of the CEA requires the 
Commission to prescribe rules to prevent evasion of the Clearing 
Requirement.\9\
---------------------------------------------------------------------------

    \9\ Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 FR 21750, at 21761 (Apr. 11, 2013). The Commission also 
notes that Commission regulation 1.6 makes it unlawful to conduct 
activities outside the United States, including entering into 
agreements, contracts, and transactions and structuring entities, to 
willfully evade or attempt to evade any provision of Title VII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, 
including the swap clearing requirement under section 2(h)(1) of the 
CEA. Any such evasionary conduct will be subject to the relevant 
provisions of Title VII. In determining whether a transaction or 
entity structure is designed to evade, the Commission considers the 
extent to which there is a legitimate business purpose for such 
structure. 77 FR 48208, at 48301 (Aug. 13, 2012).
---------------------------------------------------------------------------

    The Commission did not propose and is not adopting any substantive 
changes to the definition of ``eligible affiliate counterparty'' or the 
Outward-Facing Swaps Condition. The final rule today adopts changes to 
the alternative conditions for complying with the Outward-Facing Swaps 
Condition.

II. The Proposal To Amend Commission Regulation 50.52

A. The Commission's Proposal To Revise the Alternative Compliance 
Frameworks

    On December 23, 2019, the Commission published a notice of proposed 
rulemaking (the Proposal) to amend Commission regulation 50.52.\10\ The 
Commission proposed changes that would establish the same conditions 
and requirements to comply with the Inter-Affiliate Exemption as those 
provided for in current no-action relief granted to eligible affiliate 
counterparties under CFTC Letter No. 17-66.\11\ The Commission 
requested comments from market participants about their experiences 
electing and complying with conditions of the Inter-Affiliate Exemption 
and on all other aspects of the Proposal.
---------------------------------------------------------------------------

    \10\ Exemption From the Swap Clearing Requirement for Certain 
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 84 FR 70446 (Dec. 23, 2019).
    \11\ CFTC Letter No. 17-66 (Dec. 14, 2017), available at https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm. See also, 
previously granted relief under CFTC Letter Nos. 14-135 (Nov. 7, 
2014), 15-63 (Nov. 17, 2015), 16-81 (Nov. 28, 2016), and 16-84 (Dec. 
15, 2016). CFTC Letter No. 17-66 expires on the earlier of (i) 
December 31, 2020 at 11:59 p.m. (Eastern Time); or (ii) the 
effective date of amendments to Commission regulation 50.52.
---------------------------------------------------------------------------

    The revisions outlined in the Proposal would effectively codify 
CFTC Letter No. 17-66 by reinstating and revising the two alternative 
compliance frameworks set forth in Commission regulations 
50.52(b)(4)(ii) and (iii) (together, the Alternative Compliance 
Frameworks) and make additional minor changes. The Alternative 
Compliance Frameworks were adopted for a limited time period and 
expired on March 11, 2014.
    Under the Proposal, the Commission regulation subsections 
50.52(b)(4)(ii)(A) and 50.52(b)(4)(ii)(B), which both expired on March 
11, 2014, would be reinstated and combined in revised subsection 
50.52(b)(4)(ii). The Commission proposed to delete the expiration date, 
expand the list of jurisdictions in which one of the counterparties may 
be located and still comply with the Alternative Compliance Frameworks, 
and streamline the variation margining requirement. As explained in the 
Proposal, eligible affiliate counterparties continue to rely on the 
Alternative Compliance Frameworks made available through no-action 
relief. Deleting the March 11, 2014 expiration date reinstates this 
portion of the Alternative Compliance Framework. Revised Commission 
regulation 50.52(b)(4)(ii) permits non-U.S. eligible affiliate 
counterparties located in Australia, Canada, Hong Kong, Mexico, 
Switzerland, or the United Kingdom, to comply with this Alternative 
Compliance Framework, as well as eligible affiliate counterparties 
located in the European Union, Japan, or Singapore. Finally, for the 
reasons discussed below, the variation margin requirement in revised 
Commission regulation 50.52(b)(4)(ii) does not include the option to 
pay and collect full variation margin daily on all swaps entered into 
between the eligible affiliate counterparty located in the listed 
jurisdictions and an unaffiliated counterparty, because market 
participants have not relied on this provision.
    Under the Proposal, the Commission did not revise the five percent 
test, described below, other than to delete the expiration date, modify 
the jurisdictions in which an eligible affiliate counterparty may be 
located for purposes of complying with that provision, and streamline 
the variation margining requirement. The five percent test is a 
provision in the Alternative Compliance Framework that permitted (until 
its expiration on March 11, 2014), an eligible affiliate counterparty 
located in the U.S. to comply with certain variation margin provisions 
in lieu of clearing, with respect to a swap executed opposite an 
eligible affiliate counterparty located in a non-U.S. jurisdiction 
other than the European Union, Japan, or Singapore.\12\ According to 
this test, the aggregate notional value of swaps included in a class of 
swaps identified by Commission regulation 50.4 (classes of swaps 
covered by the Clearing Requirement) executed between an eligible 
affiliate counterparty located in the U.S. and an eligible affiliate 
counterparty located in a non-U.S. jurisdiction other than the European 
Union, Japan, or Singapore may not exceed five percent of the aggregate 
notional value of all swaps included in a class of swaps identified by 
Commission regulation 50.4 that are executed by the U.S. eligible 
affiliate counterparty. If the five percent threshold was exceeded, the 
Alternative Compliance Framework was unavailable under existing 
Commission regulation 50.52(b)(4)(iii), in connection with swaps with 
eligible affiliate counterparties located in a non-U.S. jurisdiction 
other than the European Union, Japan, or Singapore.
---------------------------------------------------------------------------

    \12\ Commission regulation 50.52(b)(4)(iii).
---------------------------------------------------------------------------

    Eligible affiliates in certain jurisdictions have been granted 
relief through CFTC staff letters with respect to the Alternative 
Compliance Framework under Commission regulation 50.52(b)(4)(ii), but 
CFTC staff had not issued no-action relief to remove those 
jurisdictions from the category of ``other jurisdictions'' contemplated 
by Commission regulation 50.52(b)(4)(iii). The Commission made these 
amendments in the Proposal to no longer categorize those jurisdictions 
as ``other jurisdictions,'' in order to appropriately broaden the 
availability of the Alternative Compliance Framework while maintaining 
protections against evasion of the Clearing Requirement.
    As the Commission explained in the Proposal, the five percent test 
establishes a relative limit on the amount of uncleared swaps 
activity--activity that would otherwise be subject to the Commission's 
Clearing Requirement--that any one U.S. eligible affiliate counterparty 
may conduct with its affiliated counterparties in certain ``other 
jurisdictions.'' In other words, the U.S. affiliate cannot enter into 
swaps that total (in aggregate) more than five percent of all of its 
swaps that are subject to the Commission's Clearing Requirement, with 
affiliates in the ``other jurisdictions.'' The five percent test has 
the practical effect of limiting the relative notional amount of 
uncleared swaps activity that affiliates conduct in jurisdictions that 
are not identified in Commission regulation 50.52(b)(4)(ii). The 
Commission continues to believe that limiting the relative notional 
amount of uncleared

[[Page 44173]]

swaps executed in jurisdictions that have not established or 
implemented clearing regimes, along with conditioning relief on the use 
of variation margin, protects the eligible affiliate counterparty 
located in the United States from exposure to the risks associated with 
material swaps exposure in jurisdictions that do not have their own 
domestic clearing regime. The changes adopted today will decrease the 
number of ``other jurisdictions'' and as a result market participants 
may increase the notional amount of swap activity in those 
jurisdictions while still remaining below the five percent limit. The 
Commission did not receive any comments regarding this change. 
Furthermore, the Commission believes that the revised five percent test 
facilitates effective risk management among affiliated entities while 
protecting U.S. affiliates from transferring unmitigated risk into the 
U.S. from other jurisdictions.
    Finally, under the Proposal, the variation margin requirement in 
revised Commission regulation 50.52(b)(4)(iii) did not include the 
option to pay and collect full variation margin daily on all swaps 
entered into between the eligible affiliate counterparty located in the 
listed jurisdictions and an unaffiliated counterparty, because market 
participants have not been electing this option.
    The Proposal did not include any changes to the requirement that 
any swaps that are exempted from the Clearing Requirement under the 
Inter-Affiliate Exemption must be subject to a centralized risk 
management program.\13\ Also, all swaps exempted from the Clearing 
Requirement pursuant to the Inter-Affiliate Exemption will continue to 
be subject to the reporting requirements outlined in Commission 
regulation 50.52(c)-(d) and part 45 of the Commission's regulations. 
The Commission relies on these reporting requirements to monitor the 
number of entities electing the Inter-Affiliate Exemption, as well as 
the number of inter-affiliate swaps for which the exemption is claimed. 
As discussed in greater detail below, data on the election of the 
Inter-Affiliate Exemption has been considered by the Commission and 
supports its belief that this final rule to reinstate the Alternative 
Compliance Frameworks will not increase opportunities for affiliated 
entities to evade the Clearing Requirement.
---------------------------------------------------------------------------

    \13\ Commission regulation 50.52(b)(3).
---------------------------------------------------------------------------

B. Comments Received

    The Commission received one comment letter in response to the 
Proposal from the International Swaps and Derivatives Association, Inc. 
(ISDA). ISDA supported the Proposal and stated that the revisions would 
provide legal certainty to market participants operating under 
Commission staff no-action relief. ISDA suggested two changes to the 
Proposal: (1) A modification to the variation margin requirements in 
the Proposal; and (2) a clarification related to the Commission's swap 
trade execution requirement under section 2(h)(8) of the CEA (Trade 
Execution Requirement).
    ISDA recommended that the Commission allow eligible affiliate 
counterparties exchanging variation margin payments with other eligible 
affiliate counterparties under the Alternative Compliance Frameworks to 
comply with non-U.S. uncleared margin requirements that have been 
deemed comparable by the Commission. The Commission has issued 
comparability determinations regarding uncleared swap margin regimes 
for swap dealers and major swaps participants in Japan, the European 
Union, Australia, and the United Kingdom (by staff no-action relief as 
a former member of the European Union).\14\ In ISDA's view, the 
Commission should allow eligible affiliate counterparties to rely on 
these comparability determinations in order to satisfy any variation 
margin requirements under the Alternative Compliance Frameworks. ISDA 
did not suggest a specific change to the regulatory text under 
Commission regulation 50.52, but argued that applying the comparability 
determinations in this context would be consistent with the 
Commission's efforts and policies relating to cross-border swaps 
activities.
---------------------------------------------------------------------------

    \14\ Comparability Determination for Japan: Margin Requirements 
for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 
FR 63376 (Sept. 15, 2016); Amendment to Comparability Determination 
for Japan: Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 84 FR 12074 (Apr. 1, 2019); 
Comparability Determination for the European Union: Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 82 FR 48394 (Oct. 18, 2017); and Comparability 
Determination for Australia: Margin Requirements for Uncleared Swaps 
for Swap Dealers and Major Swap Participants, 84 FR 12908 (Apr. 3, 
2019). See also CFTC Letter No. 19-08, available at: https://www.cftc.gov/csl/19-08/download.
---------------------------------------------------------------------------

    For a number of reasons, the Commission declines to adopt any 
changes to the variation margin requirements under the Alternative 
Compliance Frameworks, other than the amendments that were considered 
in the Proposal. In response to ISDA's request, the Commission notes 
that while it has adopted uncleared margin comparability determinations 
for certain jurisdictions (but not all jurisdictions in which an 
eligible affiliate counterparty may be located), the application of a 
non-U.S. jurisdiction's uncleared margin regime would not be 
appropriate for counterparties electing the Inter-Affiliate Exemption. 
First, changing the Commission's approach to the variation margin 
requirements for counterparties using the Alternative Compliance 
Frameworks would require at least some counterparties to alter their 
existing variation margining practices with respect to inter-affiliate 
swaps. Eligible affiliate counterparties have been relying on the 
Alternative Compliance Frameworks in practice for approximately seven 
years and imposing a new standard for the variation margin requirement 
for certain entities would represent a significant change from a well-
established status quo that the Commission believes has been working 
well over that period of time.
    As discussed below, the condition requiring eligible affiliate 
counterparties to pay and collect variation margin provides risk-
mitigating benefits and acts as a protection against accumulating 
uncollateralized risks in affiliated counterparties that do not clear 
their outward-facing swaps. The variation margin condition under the 
Inter-Affiliate Exemption also serves a distinct purpose in preventing 
the transfer of risk back to the United States. Permitting 
counterparties to comply with a non-U.S. uncleared margin regime in 
some instances may eliminate the risk-mitigation effects of the 
variation margin condition in the Alternative Compliance Frameworks 
because there may not necessarily be corresponding variation margin 
requirements under the non-U.S. jurisdiction's uncleared margin regime.
    For instance, the Japanese inter-affiliate regime does not require 
counterparties to inter-affiliate swaps to pay or collect variation 
margin. If the Commission applied its findings from its comparability 
determination with respect to Japan in the Alternative Compliance 
Frameworks, then the eligible affiliate counterparties would not be 
required to pay or collect any variation margin on their swaps with 
other eligible affiliate counterparties.
    The Commission understands that each non-U.S. jurisdiction may have 
a different treatment of inter-affiliate derivative transactions that 
is tailored to its own legal framework and market conditions. The 
Commission recognized

[[Page 44174]]

this point and looked at the broader market framework in its 
comparability determinations with respect to margin requirements for 
uncleared swaps for swap dealers and major swap participants.\15\ The 
comparability determinations analyze the uncleared margin regimes using 
broad, outcomes-based measures to assess compliance with the CFTC's 
margin requirements. The variation margin requirements included in the 
Alternative Compliance Frameworks can be distinguished from the 
analysis undertaken in the comparability determinations with respect to 
the uncleared margin regimes because the variation margin requirements 
under the Alternative Compliance Framework are more specifically 
designed to protect against the evasion of the Clearing Requirement and 
the transfer of risk back to the United States. The variation margin 
required under the Alternative Compliance Frameworks provides assurance 
that counterparties electing the Inter-Affiliate Exemption are not 
entering into uncollateralized uncleared outward-facing swaps that 
would otherwise be subject to the Clearing Requirement without taking 
important risk-mitigating precautions.
---------------------------------------------------------------------------

    \15\ See Amendment to Comparability Determination for Japan: 
Margin Requirements for Uncleared Swaps for Swap Dealers and Major 
Swap Participants, 84 FR 12074, at 12078 (Apr. 1, 2019).
---------------------------------------------------------------------------

    For these reasons, the Commission believes the Alternative 
Compliance Frameworks serve a unique risk mitigating function that 
protects against evasion of the Clearing Requirement and guards against 
systemic risks to the United States that could arise from uncleared 
swaps entered into by eligible affiliate counterparties. Accordingly, 
the Commission will not apply its comparability determinations to the 
variation margin requirements under revised Commission regulation 
50.52(b)(4).
    ISDA's comment letter also asked the Commission for confirmation 
that the eligible affiliate counterparties electing the Inter-Affiliate 
Exemption would be eligible for an automatic exemption from the Trade 
Execution Requirement. ISDA cited to Commission statements in 2013 in 
which the Commission determined that swaps between certain affiliated 
entities electing the Inter-Affiliate Exemption would not be subject to 
the Trade Execution Requirement.\16\ The Commission reaffirms its 
previous statement in this final rule. However, the Commission is not 
making any findings or determinations related to the Trade Execution 
Requirement at this time. A further discussion of the Trade Execution 
Requirement is included below.
---------------------------------------------------------------------------

    \16\ Process for a Designated Contract Market or Swap Execution 
Facility To Make a Swap Available to Trade, Swap Transaction 
Compliance and Implementation Schedule, and Trade Execution 
Requirement Under the Commodity Exchange Act, 78 FR 33606, at n. 1 
(June 4, 2013).
---------------------------------------------------------------------------

    After considering ISDA's comment letter and the Commission's 
experience administering the Inter-Affiliate Exemption, the Commission 
is adopting amendments to Commission regulation 50.52 as proposed. 
Adopting these revisions provides legal certainty to swaps market 
participants and increases the flexibility offered to counterparties 
electing not to clear inter-affiliate swaps, while also guarding 
against the unmitigated transfer of risk into U.S. markets.

C. Trade Execution Requirement

    The Inter-Affiliate Exemption provides relief from the Commission's 
Clearing Requirement. The Commission's Trade Execution Requirement is 
related to the Clearing Requirement because it applies to a subset of 
swaps that are subject to a clearing requirement determination under 
Commission regulation 50.4. The Trade Execution Requirement applies to 
swaps that have been made available to trade and requires that the 
counterparties execute a swap in accordance with the execution methods 
described in Commission regulation 37.9(a)(2).\17\
---------------------------------------------------------------------------

    \17\ Under Commission regulation 37.9(a)(2), swaps subject to 
the Trade Execution Requirement that are not block trades must be 
executed on an order book, as defined in Commission regulation 
37.3(a)(3) or a request for quote system, as defined in Commission 
regulation 37.9(a)(3) in conjunction with an order book. For the 
current list of swaps that are subject to the Trade Execution 
Requirement, see Swaps Made Available To Trade, available at: 
https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/file/swapsmadeavailablechart.pdf.
---------------------------------------------------------------------------

    In the Proposal, the Commission stated that it was ``not 
considering any changes with regard to the trade execution requirement 
because those are the subject of another ongoing rulemaking.'' \18\ The 
Commission did not request comment regarding the Trade Execution 
Requirement and did not include a policy position in the Proposal. 
Therefore, the application of the Trade Execution Requirement is beyond 
the scope of this final rule.
---------------------------------------------------------------------------

    \18\ Exemption From the Swap Clearing Requirement for Certain 
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 84 FR 70446, at 70447 (Dec. 23, 2019).
---------------------------------------------------------------------------

    The Commission continues to evaluate its 2018 proposal related to 
swap execution facilities and the Trade Execution Requirement (SEF 
Proposal).\19\ Under the SEF Proposal, the Commission proposed to 
exempt swaps relying on the Inter-Affiliate Exemption from the Trade 
Execution Requirement.\20\ Because the SEF proposal addresses a broader 
set of exemptions from the Trade Execution Requirement (i.e., more than 
swap transactions relying on the Inter-Affiliate Exemption from the 
Clearing Requirement), the Commission believes a final rule 
comprehensively addressing the Trade Execution Requirement is 
preferable to making a limited determination in this context.
---------------------------------------------------------------------------

    \19\ Swap Execution Facilities and Trade Execution Requirement, 
83 FR 61946 (Nov. 30, 2018).
    \20\ Id. at 62038.
---------------------------------------------------------------------------

    In addition, Commission staff has provided no-action relief from 
the Trade Execution Requirement to eligible affiliate counterparties 
executing inter-affiliate swaps with other eligible affiliate 
counterparties, even if the Inter-Affiliate Exemption is not 
elected.\21\ ISDA's comment to the Proposal included a request that the 
Commission adopt relief similar to the no-action relief provided in 
CFTC Letter No. 17-67. CFTC Letter No. 17-67 was not subject to any 
discussion in the Proposal and continues to be the staff's position. 
The Commission may address separately no-action relief from the Trade 
Execution Requirement for eligible affiliated entities.
---------------------------------------------------------------------------

    \21\ CFTC Letter No. 17-67, available at: https://www.cftc.gov/csl/17-67/download.
---------------------------------------------------------------------------

III. Final Rule

A. Amendments to Commission Regulation 50.52

    The Commission has considered the comment from ISDA and is adopting 
the amendments to Commission regulation 50.52 as proposed.
    The Commission is inserting a new definition for the term ``United 
States'' under Commission regulation 50.52(a)(2)(iii). The Commission 
received no comments on this definition and is adopting the change as 
proposed.
    The Commission is deleting references to the March 11, 2014 
expiration date in Commission regulations 50.52(b)(4)(ii) and (iii) as 
proposed. This will reinstate the Alternative Compliance Frameworks as 
an option available in the Commission's regulations for complying with 
the Outward-Facing Swaps Condition.
    The Commission is deleting Commission regulation 50.52(b)(4)(ii)(B) 
as proposed. This regulation permitted certain affiliate counterparties 
to comply with the Alternative Compliance Framework, provided,

[[Page 44175]]

among other conditions, that neither eligible affiliate counterparty is 
affiliated with an entity that is a swap dealer or major swap 
participant. In the Proposal, the Commission noted that it had reviewed 
swap data and found that entities that elected to comply with the 
Alternative Compliance Framework were financial entities or affiliated 
with swap dealers and did not rely on this provision of the Alternative 
Compliance Framework. In response to the Proposal, no commenter 
addressed this point or reported having relied on this provision 
without being so affiliated. Thus, the Commission believes it is 
appropriate to delete it.
    The Commission is deleting Commission regulation 
50.52(b)(4)(iii)(A) as proposed. Similar to the point above, the 
Commission noted in the Proposal that it was not aware of any eligible 
affiliate counterparty that has opted to use this provision, and 
requested comment on whether any market participant relied on this 
provision in the past, or intended to rely on this provision if it were 
reinstated. Since the Commission received no reports of use of this 
provision or other comments, it believes it is appropriate to delete 
it.
    The Commission is adopting the revisions to the lists of 
jurisdictions included or excluded from Commission regulations 
50.52(b)(4)(ii) and (iii) as proposed. The only comment on this point, 
from ISDA, supported the Commission's effort to provide legal certainty 
to market participants who have been operating under no-action relief 
pursuant to a series of CFTC staff letters.
    Commission regulation 50.52(b)(4)(ii), as reinstated and revised, 
will permit each eligible affiliate counterparty, or a third party that 
directly or indirectly holds a majority interest in both eligible 
affiliate counterparties, to pay and collect full variation margin 
daily on all of the eligible affiliate counterparties' swaps with other 
eligible affiliate counterparties, if at least one of the eligible 
affiliate counterparties is located in Australia, Canada, the European 
Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, or the United 
Kingdom.\22\ Under this provision, eligible affiliate counterparties 
electing the exemption must pay and collect variation margin on swaps 
with all other eligible affiliate counterparties with whom they enter 
into swaps. The variation margin requirement does not extend beyond 
these swaps to include swaps between counterparties not electing the 
exemption.
---------------------------------------------------------------------------

    \22\ The Commission is expanding the list of jurisdictions under 
Commission regulation 50.52(b)(4)(ii) to include the United Kingdom 
as a separate jurisdiction from the European Union, in order to 
codify the no-action relief issued in preparation for the United 
Kingdom's withdrawal from the European Union, commonly referred to 
as ``Brexit.'' CFTC Letter No. 19-09 (Apr. 5, 2019), available at 
https://www.cftc.gov/csl/19-09/download.
---------------------------------------------------------------------------

    Commission regulation 50.52(b)(4)(iii), as reinstated and revised, 
will permit each eligible affiliate counterparty, or a third party that 
directly or indirectly holds a majority interest in both eligible 
affiliate counterparties, to pay and collect full variation margin 
daily on all of the eligible affiliate counterparties' swaps with other 
eligible affiliate counterparties, if the eligible affiliate 
counterparty that is located in the United States enters into swaps, 
included in the class of Commission regulation 50.4 swaps, with 
eligible affiliate counterparties located in jurisdictions other than 
Australia, Canada, the European Union, Hong Kong, Japan, Mexico, 
Singapore, Switzerland, or the United Kingdom. However, if relying on 
this provision, the aggregate notional value of swaps with such 
counterparties included in the class of Commission regulation 50.4 
swaps may not exceed five percent of the aggregate notional value of 
all swaps included in the class of Commission regulation 50.4 swaps 
entered into by the eligible affiliate counterparty located in the U.S. 
As noted above, the eligible affiliate counterparties electing the 
exemption must pay and collect variation margin on swaps with all other 
eligible affiliate counterparties with whom they enter into swaps.
    The Commission is adopting the revisions to the variation margining 
requirements under Commission regulation 50.52(b)(4)(ii)-(iii) as 
proposed. The Commission sought comment from market participants about 
the two different variation margining options offered in current 
Commission regulations 50.52(b)(4)(ii)(A)(1) and (2), and Commission 
regulations 50.52(b)(4)(iii)(A) and (B). In particular, the Commission 
asked commenters whether compliance with the Outward-Facing Swaps 
Condition via the Alternative Compliance Frameworks was consistent or 
inconsistent with margin requirements in non-U.S. jurisdictions.\23\ 
The Commission did not receive an independent analysis of the 
comparability between the Alternative Compliance Frameworks and margin 
requirements in non-U.S. jurisdictions. ISDA's comment letter requested 
that the Commission apply the uncleared margin requirement 
comparability determinations to the margin requirements in the 
Alternative Compliance Framework. As discussed above, the Commission is 
not implementing that change.
---------------------------------------------------------------------------

    \23\ Exemption From the Swap Clearing Requirement for Certain 
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 84 FR 70446, at 70452 (Dec. 23, 2019).
---------------------------------------------------------------------------

    The Commission believes that amendments to Commission regulation 
50.52(b)(4) adopted in this final rule provide an exemption from the 
Clearing Requirement in a manner that is demonstrated to be workable, 
while imposing conditions necessary to ensure that the Inter-Affiliate 
Exemption is not used to evade the Clearing Requirement and that inter-
affiliate swaps exempted from required clearing meet certain risk-
mitigating conditions to protect the U.S. financial system. In 
addition, the Commission believes that these amendments provide 
flexibility to eligible affiliate counterparties electing the Inter-
Affiliate Exemption and increase legal certainty for the reasons stated 
above.

B. Commission's Section 4(c) Authority

    In the Proposal, the Commission requested comment on whether the 
amendments to Commission regulation 50.52 were an appropriate exercise 
of the Commission's authority under section 4(c) of the CEA and whether 
they were in the public interest. The Commission received no comments 
regarding the Commission's use of its section 4(c) authority in this 
context.
    The Commission continues to believe that its use of section 4(c) 
authority, which was used to adopt the Inter-Affiliate Exemption 
pursuant to section 4(c)(1) of the CEA, is appropriate to provide 
certain eligible affiliate counterparties with a limited exemption from 
the Clearing Requirement. Section 4(c)(1) of the CEA grants the 
Commission the authority to exempt any transaction or class of 
transactions, including swaps, from certain provisions of the CEA, 
including the Commission's Clearing Requirement, in order to ``promote 
responsible economic or financial innovation and fair competition.'' 
Section 4(c)(2) of the CEA further provides that the Commission may not 
grant exemptive relief unless it determines that: (1) The exemption is 
appropriate for the transaction and consistent with the public 
interest; (2) the exemption is consistent with the purposes of the CEA; 
(3) the transaction will be entered into solely between ``appropriate 
persons''; and (4) the exemption will not have a material adverse 
effect on the ability of the

[[Page 44176]]

Commission or any contract market to discharge its regulatory or self-
regulatory responsibilities under the CEA. In enacting section 4(c), 
Congress noted that the purpose of the provision is to give the 
Commission a means of providing certainty and stability to existing and 
emerging markets so that financial innovation and market development 
can proceed in an effective and competitive manner.\24\
---------------------------------------------------------------------------

    \24\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, at 
3213.
---------------------------------------------------------------------------

    The Commission believes that the Inter-Affiliate Exemption, 
including the Alternative Compliance Frameworks, as modified by this 
final rule, is consistent with the public interest and the purposes of 
the CEA. As the Commission noted in the adopting release for the Inter-
Affiliate Exemption final rulemaking, inter-affiliate swaps fulfill an 
important risk management role within corporate groups.\25\ These swaps 
may be beneficial to the entity as a whole. These amendments to the 
Outward-Facing Swaps Condition and the Alternative Compliance 
Frameworks will permit the variation margin provisions under revised 
Commission regulations 50.52(b)(4)(ii) and (iii) to be used in 
connection with swaps with eligible affiliate counterparties located in 
any non-U.S. jurisdiction, not only those located in the European 
Union, Japan, or Singapore. Pursuant to staff no-action relief, as 
discussed above, these provisions have been in use since 2013.
---------------------------------------------------------------------------

    \25\ Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 FR 21750, at 21754 (Apr. 11, 2013) (citing to 
commenters and the proposal in support of the conclusion that 
``inter-affiliate transactions provide an important risk management 
role within corporate groups'' and that ``swaps entered into between 
corporate affiliates, if properly risk-managed, may be beneficial to 
the entity as a whole.'').
---------------------------------------------------------------------------

    Based on the Commission's review of recent data reported to the 
Depository Trust & Clearing Corporation's swap data repository, DTCC 
Data Repository (U.S.) LLC, the Alternative Compliance Framework 
provisions under Commission regulation 50.52(b)(4)(ii) appear to be 
working. The Commission has identified approximately 55 entities 
located in Australia, Canada, the European Union, Hong Kong, Japan, 
Mexico, Singapore, Switzerland, or the United Kingdom that elected the 
Inter-Affiliate Exemption between January 1, 2019 to December 31, 
2019.\26\ The Commission believes that these entities chose to, or 
could have, complied with the Alternative Compliance Framework under 
Commission regulation 50.52(b)(4)(ii) because of the jurisdiction in 
which they are organized. Based on the same data set from January 1, 
2019 to December 31, 2019, the Commission identified 16 entities 
located in jurisdictions other than Australia, Canada, the European 
Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, the United 
Kingdom, or the United States that elected the Inter-Affiliate 
Exemption and chose to, or could have, complied with the Alternative 
Compliance Framework under Commission regulation 50.52(b)(4)(iii). 
During the same time period, the data showed that approximately 110 
U.S. entities elected the Inter-Affiliate Exemption.
---------------------------------------------------------------------------

    \26\ The Commission notes that although current Commission 
regulation 50.52 does not permit entities to comply with either of 
the Alternative Compliance Frameworks because they have expired, the 
relief provided by staff no-action letters means that market 
participants have continued to use and report swaps activity in 
compliance with the Alternative Compliance Frameworks.
---------------------------------------------------------------------------

    The Commission believes that adopting amendments to the Alternative 
Compliance Frameworks, including reinstating the provisions and 
extending the availability of the first framework under Commission 
regulation 50.52(b)(4)(ii) to eligible affiliate counterparties located 
in Australia, Canada, the European Union, Hong Kong, Japan, Mexico, 
Singapore, Switzerland, and the United Kingdom, while correspondingly 
narrowing the availability of the second framework under Commission 
regulation 50.52(b)(4)(iii), is appropriate for purposes of swaps 
between affiliated entities, promotes responsible financial innovation 
and fair competition, and is consistent with the public interest.
    In this regard, the Commission considered whether the availability 
of the Alternative Compliance Frameworks might result in fewer 
affiliated counterparties clearing their outward-facing swaps and the 
significance of any such reduction in terms of the use of inter-
affiliate swaps as a risk management tool. Generally speaking, it is 
difficult to estimate whether the final rule will reduce central 
clearing of outward-facing swaps. Among other factors, the application 
of mandatory clearing and the availability of central clearing for 
particular types of swaps vary by jurisdiction. Also, market 
participants' response to the final rule may depend on which of their 
swaps are eligible for the Inter-Affiliate Exemption. Despite this 
uncertainty, the Commission believes that there may be a significant 
number of affiliated counterparties that will continue to engage in 
uncleared swaps activity as permitted under the amended Alternative 
Compliance Frameworks, subject to the conditions imposed by this final 
rule.\27\
---------------------------------------------------------------------------

    \27\ Based on a recent review of swap data reflecting use of the 
Inter-Affiliate Exemption, the Commission estimates that over 70 
eligible affiliate counterparties located outside of the United 
States may elect to comply with one of the reinstated Alternative 
Compliance Frameworks thereby choosing not to clear their outward-
facing swaps and rather to pay and collect variation margin on all 
swaps with other eligible affiliate counterparties instead. These 
entities include affiliates of swap dealers that are active in 
multiple jurisdictions.
---------------------------------------------------------------------------

    Swap dealers electing the exemption use inter-affiliate swaps as an 
important risk management tool within corporate groups, and these 
affiliated groups are subject to a range of regulatory and other 
controls as part of their swap activities in the United States and in 
other jurisdictions. This includes the requirement to maintain a risk 
management program that takes into account risks posed by the swap 
dealer's affiliates and is integrated into the risk management of the 
broader corporate group.\28\ In addition, the conditions to the Inter-
Affiliate Exemption itself require the swaps covered by the exemption 
to be subject to a centralized risk management program. In sum, in 
considering whether the amendments in this final rule promote 
responsible financial innovation and fair competition and are 
consistent with the public interest, the Commission took the factors 
discussed above into account--i.e., the value of inter-affiliate swaps 
as a risk management tool, the extent to which the Alternative 
Compliance Frameworks foster this use of inter-affiliate swaps, and the 
potential for more elections not to clear outward-facing swaps.
---------------------------------------------------------------------------

    \28\ Commission regulation 23.600(c)(ii).
---------------------------------------------------------------------------

    The Commission continues to believe that the amendments to the 
Outward-Facing Swaps Condition and Alternative Compliance Frameworks 
will be available only to ``appropriate persons.'' Section 4(c)(3) of 
the CEA includes within the term ``appropriate person'' a number of 
specified categories of persons, including such other persons that the 
Commission determines to be appropriate in light of their financial or 
other qualifications, or the applicability of appropriate regulatory 
protections. In the 2013 Inter-Affiliate Exemption final rulemaking, 
the Commission found that eligible contract participants (ECPs) are 
appropriate persons within the scope of section 4(c)(3)(K) of the 
CEA.\29\ The Commission noted that the elements of the ECP definition 
(as set forth in section 1a(18)(A) of the CEA and Commission regulation 
1.3(m))

[[Page 44177]]

generally are more restrictive than the comparable elements of the 
enumerated ``appropriate person'' definition. Given that only ECPs are 
permitted to enter into uncleared swaps, there is no risk that a non-
ECP or a person who does not satisfy the requirements for an 
``appropriate person'' could enter into an uncleared swap using the 
Inter-Affiliate Exemption. Consistent with its finding in the 2013 
Inter-Affiliate Exemption final rulemaking, the Commission reaffirms 
that the class of persons eligible to rely on the Inter-Affiliate 
Exemption is limited to ``appropriate persons'' within the scope of 
section 4(c)(3) of the CEA.
---------------------------------------------------------------------------

    \29\ Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 FR 21750, at 21754 (Apr. 11, 2013).
---------------------------------------------------------------------------

    Finally, the Commission expects, based on its past experiences and 
the comment received, that the amendments to Commission regulation 
50.52 will not have a material effect on the ability of the Commission 
to discharge its regulatory responsibilities. The Inter-Affiliate 
Exemption continues to be limited in scope and the Commission receives 
information regarding the election and use of exempt swaps between 
eligible affiliated entities because they are reported to a swap data 
repository. In fact, the Commission hopes that future changes to part 
45 reporting requirements may improve the Commission's ability to 
ascertain quickly which swaps are subject to the Inter-Affiliate 
Exemption versus other available exemptions or exceptions to the 
Clearing Requirement.\30\ As the Commission has done in the past, it 
will monitor swap counterparties' elections of the Inter-Affiliate 
Exemption and swap activity through reported data. The Commission's 
special call, anti-fraud, and anti-evasion authorities are unaffected 
by these amendments and remain in place. The Commission may exercise 
its special call, anti-fraud, or anti-evasion authorities in response 
to concerns about the use of the Inter-Affiliate Exemption. For all of 
these reasons, the Commission remains confident that it can discharge 
its regulatory responsibilities under the CEA.
---------------------------------------------------------------------------

    \30\ See generally, Swap Data Recordkeeping and Reporting 
Requirements, 85 FR 21578 (Apr. 17, 2020).
---------------------------------------------------------------------------

C. Effective Date and Compliance Date

    This final rule will be effective 30 days after publication in the 
Federal Register. Compliance with the revised Alternative Compliance 
Frameworks will be required on the effective date. Eligible affiliate 
counterparties entering into a swap on or after the effective date and 
claiming the Inter-Affiliate Exemption must comply with the revised 
Alternative Compliance Frameworks in Commission regulation 50.52.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies to consider 
whether the rules they issue will have a significant economic impact on 
a substantial number of small entities and, if so, to provide a 
regulatory flexibility analysis regarding the impact on those 
entities.\31\ Each Federal agency is required to conduct an initial and 
final regulatory flexibility analysis for each rule of general 
applicability for which the agency issues a general notice of proposed 
rulemaking.\32\
---------------------------------------------------------------------------

    \31\ 5 U.S.C. 601 et seq.
    \32\ Id.
---------------------------------------------------------------------------

    As discussed in the Proposal, the amendments to the Inter-Affiliate 
Exemption will not affect any small entities, as the RFA uses that 
term. Pursuant to section 2(e) of the CEA, only ECPs may enter into 
swaps, unless the swap is listed on a DCM. The Commission has 
previously determined that ECPs are not small entities for purposes of 
the RFA.\33\ The amendments to the Inter-Affiliate Exemption will 
affect only market participants that qualify as ECPs. All persons that 
are not ECPs are required to execute their swaps on a DCM, and all 
contracts executed on a DCM must be cleared by a DCO, as required by 
statute and regulation, not by operation of any Clearing Requirement. 
Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the amendments adopted in 
this final rule will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \33\ 66 FR 20740, at 20743 (Apr. 25, 2001).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \34\ imposes certain 
requirements on federal agencies, including the Commission, in 
connection with conducting or sponsoring any collection of information 
as defined by the PRA. Under the PRA, an agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number from 
the Office of Management and Budget (OMB).
---------------------------------------------------------------------------

    \34\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

    This final rule will not require a new collection of information 
from any persons or entities. The Commission is not amending any 
reporting requirements related to the Inter-Affiliate Exemption in this 
final rule. The reporting requirement and collection of information 
related to the Inter-Affiliate Exemption, under Commission regulations 
50.52(c) and (d), has been assigned control number 3038-0104 by OMB and 
will continue to be reviewed periodically.

C. Cost-Benefit Considerations

1. Statutory and Regulatory Background
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
the following five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity; (3) price discovery; (4) 
sound risk management practices; and (5) other public interest 
considerations (collectively referred to herein as the Section 15(a) 
Factors). The Commission considers the costs and benefits resulting 
from its discretionary determination to adopt this final rulemaking 
with respect to each of the Section 15(a) Factors below.
    The regulatory baseline for the Commission's consideration of the 
costs and benefits of this final rule is the regulatory status quo. The 
regulatory status quo is determined by the Commission's existing 
regulations governing the Clearing Requirement and the Inter-Affiliate 
Exemption in part 50 of the Commission's regulations. The Commission 
recognizes, however, that to the extent that market participants have 
relied upon relevant Commission staff no-action relief, the actual 
costs and benefits of this final rule, as realized in the market, may 
not be as significant. For example, the Alternative Compliance 
Frameworks in current Commission regulation 50.52 expired on March 11, 
2014. As a practical matter, market participants have continued to 
comply with the Inter-Affiliate Exemption using the Alternative 
Compliance Frameworks because a series of staff no-action letters 
stated that staff would not recommend that the Commission commence an 
enforcement action against entities using the Alternative Compliance 
Frameworks. Thus, the costs and benefits considered below are likely to 
be different than those faced by a current swap counterparty electing 
the Inter-Affiliate Exemption.
    The Commission notes that the consideration of costs and benefits

[[Page 44178]]

below is based on the understanding that the markets function 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries; with some Commission registrants 
being organized outside of the United States; with leading industry 
members typically conducting operations both within and outside the 
United States; and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
below discussion of costs and benefits refers to the effects of this 
final rule on all activity subject to the amended regulations, whether 
by virtue of the activity's physical location in the United States or 
by virtue of the activity's connection with or effect on U.S. commerce 
under section 2(i) of the CEA.\35\ In particular, the Commission notes 
that a significant number of entities affected by this final rule are 
located outside of the United States.
---------------------------------------------------------------------------

    \35\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The Commission sought comments on all aspects of the cost and 
benefit considerations in the Proposal. In particular, the Commission 
requested that commenters provide any data or other information that 
would be useful in quantifying costs and benefits of the Proposal. The 
Commission also requested specific comments on two alternatives 
considered by the Commission: (i) Adopting modified Alternative 
Compliance Frameworks including expiration dates; and (ii) making no 
amendments to the Outward-Facing Swaps Condition. The Commission 
received no comments in response to the Proposal that discussed cost 
and benefit considerations. Despite this fact, the Commission has 
endeavored to assess the costs and benefits of the amendments adopted 
by this final rule in quantitative terms wherever possible.
    In the sections that follow, the Commission considers the costs and 
benefits of adopting this final rule, and the impact on the Section 
15(a) Factors of adopting the final rule.
2. Considerations of the Costs and Benefits of the Commission's Action
a. Costs
    The Commission believes that there will be some costs associated 
with adopting the final rule, as compared to the regulatory baseline. 
Under this final rule, eligible affiliate counterparties could increase 
their counterparty credit risk by electing to comply with one of the 
Alternative Compliance Frameworks instead of choosing to clear any 
outward-facing swap. Clearing, along with the Commission's requirements 
related to swap clearing, mitigates counterparty credit risk in the 
following ways: (1) A futures commission merchant guarantees the 
performance of a customer and in so doing, takes steps to monitor and 
mitigate the risk of a counterparty default; (2) a clearinghouse 
collects sufficient initial margin to cover potential future exposures 
and regularly collects and pays variation margin to cover current 
exposures; (3) a clearinghouse has rules, and enforcement mechanisms to 
ensure the rules are followed, to mark a swap to market and to require 
that margin be posted in a timely fashion; (4) a clearinghouse 
facilitates netting within portfolios of swaps and among 
counterparties; and (5) a clearinghouse holds collateral in a guaranty 
fund in order to mutualize the remaining tail risk not covered by 
initial margin contributions among clearing members.\36\ The risk-
mitigating benefits of clearing outward-facing swaps will not be 
realized if the affiliated counterparties elect to use the Alternative 
Compliance Frameworks. This final rule may produce a marginal increase 
in systemic risk and related costs because certain outward-facing swaps 
that were required to be cleared may now remain uncleared as long as 
the affiliated counterparties exchange variation margin daily under the 
Alternative Compliance Frameworks.
---------------------------------------------------------------------------

    \36\ See Clearing Requirement Determination Under Section 2(h) 
of the CEA for Interest Rate Swaps, 81 FR 71230 (Oct. 14, 2016).
---------------------------------------------------------------------------

    Moreover, there may be an increased risk of contagion and systemic 
risk to the financial system that results from permitting additional 
market participants to use the Alternative Clearing Frameworks to avoid 
clearing certain swaps subject to the Clearing Requirement. Swap 
clearing mitigates risk on a transaction level, as outlined above, and 
it also provides protection against risk transfer throughout the 
financial system. While counterparty credit risk between affiliated 
entities represents a slightly lower risk to the overall financial 
system than counterparty credit risk between non-affiliated entities, 
it is still the case that clearing provides the most complete 
protection against counterparty credit risk. Systemic risk, and the 
costs associated with it, is minimized to the extent that affiliated 
counterparties exchange variation margin as a condition to the 
Alternative Compliance Frameworks.\37\
---------------------------------------------------------------------------

    \37\ Requiring counterparties to exchange variation margin daily 
is one effective risk management tool that prevents swap market 
participants from accumulating uncollateralized risk.
---------------------------------------------------------------------------

    Swap market participants could experience overall increases in the 
costs of clearing under the final rule. Fewer entities may choose to 
clear swaps in order to comply with the Outward-Facing Swaps Condition 
once the Alternative Compliance Frameworks are available.\38\ Certain 
entities that had become members of a clearinghouse to clear outward-
facing swaps may no longer need those relationships. The decrease in 
clearing activity could result in decreased liquidity in non-U.S. 
markets and at clearinghouses where eligible counterparties previously 
cleared outward-facing swaps. Collectively, these changes could make 
clearing swaps more expensive in those less liquid markets.
---------------------------------------------------------------------------

    \38\ As a practical matter, many market participants relied on 
Commission staff no-action relief to comply with the Outward-Facing 
Swaps Condition through modified alternative compliance frameworks. 
However, for purposes of this analysis of costs, the Commission 
assumes that the Alternative Compliance Frameworks have expired.
---------------------------------------------------------------------------

    Finally, the availability of the modified Alternative Compliance 
Frameworks may increase costs to any third party creditor of an entity 
using an Alternative Compliance Framework instead of clearing its 
outward-facing swaps. While the variation margin requirements under the 
Alternative Compliance Frameworks mitigate the buildup of credit risk 
within a corporate group that uses a centralized risk management 
structure, it is still possible that requiring affiliated 
counterparties to exchange variation margin instead of clearing 
outward-facing swaps could produce additional risk to external 
creditors and/or third parties. As noted above, clearing provides the 
most complete protection against counterparty credit risk, even though 
that risk, when it is between affiliated entities, represents a 
slightly lower risk to the overall financial system than when between 
non-affiliates.
    In addition, the combination of reinstating the Alternative 
Compliance Frameworks while expanding the number of jurisdictions 
excluded from the five percent limitation may cause market participants 
to alter their swaps trading behavior. To the extent that affiliated 
entities under current requirements face a choice between clearing the 
outward-facing swap and satisfying some other exception or exemption 
from the Clearing Requirement, they may have a different internal 
calculation under the final rule

[[Page 44179]]

for determining whether to engage in a swap or shift risk among 
affiliated entities depending on whether the swap would cause it to 
exceed the five percent test under new Commission regulation 
50.52(b)(4)(iii). The new limitations and geographical restrictions in 
the final rule may incentivize affiliated entities to transition their 
swaps to counterparties located in swaps markets which do not have 
local clearing mandates or well-developed clearing infrastructures. 
Swaps entered into with counterparties in those locations may pose 
higher systemic risks and costs related to those risks could increase.
b. Benefits
    The Commission believes that there will be significant benefits 
associated with adopting this final rule, as compared to the regulatory 
baseline. The final rule amendments to Commission regulation 50.52 will 
permit eligible affiliate counterparties to use the Alternative 
Compliance Frameworks. Swap counterparties will benefit from this 
additional flexibility in their inter-affiliate swap risk management. 
In addition to this qualitative benefit, the Commission expects that 
there will be cost saving benefits for certain entities as well.
    Affiliated counterparties that elect to comply with one of the 
Alternative Compliance Frameworks and exchange variation margin may 
experience cost savings if their variation margining practices are less 
expensive than clearing the outward-facing swap. The costs of clearing 
an outward-facing swap would include initial margin (paid to either a 
futures commission merchant or the clearinghouse) and clearing fees. 
This final rule does not specify the methods or calculations required 
for affiliated entities exchanging variation margin daily on all swaps 
with other eligible affiliate counterparties. Therefore, the level of 
these cost savings may differ from entity to entity, and from swap to 
swap.
    Certain corporate entities might be incentivized by the new 
availability of the Alternative Compliance Frameworks to increase their 
inter-affiliate swap activity (or to start entering into swaps between 
affiliates). An increase in inter-affiliate swap activity between 
eligible entities complying with the conditions to the Inter-Affiliate 
Exemption could result in enhanced centralized risk management for 
those entities. The availability of, and improvements to, centralized 
risk management systems can produce long-term cost savings driven by 
efficiency, resiliency, and stability. Entities that increase or start 
to engage in inter-affiliate swaps may experience cost savings across 
their swaps books because they can use inter-affiliate swap 
transactions to shift swaps activity to the jurisdictions with more 
liquid markets (resulting in lower costs).
    As discussed in the Proposal, the Commission estimated the number 
of entities that have used or potentially would use the Alternative 
Compliance Frameworks adopted in this final rule under Commission 
regulation 50.52(b)(4)(ii) and (iii).\39\ Since the Commission 
published the Proposal, Commission staff continued to examine swap data 
reported to the Depository Trust & Clearing Corporation's swap data 
repository, DTCC Data Repository (U.S.) LLC. The Commission's most 
recent data indicate that approximately 55 entities might elect to use 
the revised Alternative Compliance Framework under Commission 
regulation 50.52(b)(4)(ii) and as many as 16 entities might elect to 
use the revised Alternative Compliance Framework under Commission 
regulation 50.52(b)(4)(iii). Although historical data has limited 
benefit in predicting future use, the Commission notes that the number 
of entities that it estimates have used, or potentially would use, the 
Alternative Compliance Frameworks is similar to the data the Commission 
has collected in the past.
---------------------------------------------------------------------------

    \39\ See Exemption From the Swap Clearing Requirement for 
Certain Affiliated Entities--Alternative Compliance Frameworks for 
Anti-Evasionary Measures, 84 FR 70446, at 70454 and 70457 (Dec. 23, 
2019).
---------------------------------------------------------------------------

    Besides the difficulty in determining which entities might use the 
revised Alternative Compliance Frameworks, the estimate of the benefit 
to each entity is further complicated by the differing costs and 
capital structures related to each entity. Further, the Commission 
realizes that there may be even higher numbers of entities in the 
future that would benefit from this final rule and elect to satisfy the 
requirements in the Alternative Compliance Framework rather than clear 
an outward-facing swap.
3. Alternative of Allowing Eligible Affiliate Counterparties To Rely on 
Comparability Determinations in Order To Satisfy Any Variation Margin 
Requirements Under the Alternative Compliance Frameworks
    The Commission considered the alternative of allowing eligible 
affiliate counterparties to rely on comparability determinations to 
satisfy the Alternative Compliance Frameworks. The Commission 
understands that each non-U.S. jurisdiction may have different 
requirements for inter-affiliate derivative transactions that are 
customized to its own market structure and legal framework. The 
Commission acknowledges this, and in conducting its comparability 
determination uses a holistic, outcomes-based approach. The 
Commission's comparability determinations do not require identical 
margin rules, including affiliated variation margin requirements. The 
variation margin required under the Alternative Compliance Frameworks 
provides important risk-mitigating safeguards that protect market 
participants and the public and are a sound risk management practice 
that helps reduce the buildup of credit exposure between affiliates. 
The design of the Commission's variation margin requirements under the 
Alternative Compliance Framework is to guard against evasion of the 
Clearing Requirement and the transmission of losses back to the United 
States. Thus, the Commission will not apply its comparability 
determinations to the variation margin requirements under revised 
Commission regulation 50.52(b)(4).
4. Section 15(a) Factors
a. Protection of Market Participants and the Public
    In revising the Outward-Facing Swaps Condition and Alternative 
Compliance Frameworks, the Commission considered various ways to 
appropriately protect affiliated entities, third parties in the swaps 
market, and the public. The Commission seeks to ensure that the final 
rule prevents swap market participants from evading the Commission's 
Clearing Requirement and/or transferring excessive risk to an 
affiliated U.S. entity through the use of uncleared inter-affiliate 
swaps. The Commission is permitting eligible affiliate counterparties 
to elect not to clear an outward-facing swap subject to the Clearing 
Requirement, but only if eligible affiliates pay and collect daily 
variation margin on swaps.
    The Commission also considered the potential effects on the public 
of providing this alternative to clearing outward-facing swaps subject 
to the Clearing Requirement. In particular, the Commission considered 
the extent to which the Alternative Compliance Frameworks might result 
in fewer affiliated counterparties clearing their outward-facing swaps. 
One difficulty in estimating the effect of this final rule is the fact 
that the application of mandatory clearing and the availability of 
central clearing for particular types of swaps vary by jurisdiction. 
Also, many market participants enter into swaps

[[Page 44180]]

and other financial instruments in multiple jurisdictions, which may 
give them the ability to adjust their financial and risk management 
activity in response to variations in regulatory requirements.
    In the face of this uncertainty, the Commission believes that, even 
if the change in clearing activity and business for clearinghouses is 
uncertain, there may be a significant number of affiliated 
counterparties that will continue to engage in swaps activity permitted 
under the Alternative Compliance Frameworks.\40\ The Commission 
understands that the swap dealers conduct their swaps activities using 
affiliates in various jurisdictions. Swap dealers engage in inter-
affiliate swaps in order to distribute risk among their affiliates. 
Thus, inter-affiliate swaps are an important part of prudent risk 
management, and a significant number of swap dealers and other market 
participants engage in inter-affiliate swaps. This inter-affiliate 
swaps activity is subject to a range of regulatory and other controls.
---------------------------------------------------------------------------

    \40\ Based on a recent review of swap data reflecting use of the 
Inter-Affiliate Exemption, the Commission estimates that over 70 
eligible affiliate counterparties located outside of the United 
States may elect to comply with one of the reinstated Alternative 
Compliance Frameworks thereby choosing not to clear their outward-
facing swaps and rather to pay and collect variation margin on all 
swaps with other eligible affiliate counterparties instead. These 
entities include affiliates of swap dealers that are active in 
multiple jurisdictions.
---------------------------------------------------------------------------

    In considering how the final rule would affect the protection of 
market participants and the public, the Commission took into account 
the value of inter-affiliate swaps as a risk management tool and the 
extent to which the Alternative Compliance Frameworks would foster this 
use of inter-affiliate swaps. The Commission also considered potential 
increases in systemic risk if affiliates elect not to clear outward-
facing swaps and use the Alternative Compliance Frameworks instead. In 
view of these factors, the Commission believes that the potential 
increases in systemic risk will be mitigated by the controls on the use 
of inter-affiliate swaps, their inherent risk management features, and 
the conditions set out in the Alternative Compliance Frameworks.
    This final rule also would create certain costs that would be borne 
by entities electing the Inter-Affiliate Exemption. Under revised 
Commission regulation 50.52, entities that choose to comply with an 
Alternative Compliance Framework would be required to pay and collect 
variation margin on their inter-affiliate swaps, which could be a 
significant cost for those entities. However, an entity electing the 
Inter-Affiliate Exemption may continue to choose to clear an outward-
facing swap with an unaffiliated counterparty instead of paying and 
collecting variation margin on all swaps with other eligible affiliate 
counterparties. Therefore, affected entities are free to choose which 
of these alternatives is best for them.
b. Efficiency, Competitiveness, and Financial Integrity of Swap Markets
    The Commission believes that the amendments to the Inter-Affiliate 
Exemption may have some, but not a significant, impact on the 
efficiency or competiveness of swaps markets. As noted above, inter-
affiliate swaps are an important risk management tool for affiliated 
corporate groups. To the extent that swap dealers may participate more 
extensively in swap markets in non-U.S. jurisdictions because they can 
use inter-affiliate swaps to manage risk efficiently, the amendments to 
the Inter-Affiliate Exemption may increase the efficiency, 
competitiveness, and financial integrity of swap markets by increasing 
the range of swaps that are available to market participants. The 
Commission also believes that the revised Outward-Facing Swaps 
Condition and Alternative Compliance Frameworks should discourage 
misuse of the Inter-Affiliate Exemption. For example, the Commission 
recognizes that internal calculations and swaps portfolio management 
are required to comply with the five percent test under Commission 
regulation 50.52(b)(4)(iii). If the Commission had not expanded the 
list of non-U.S. jurisdictions in which an affiliated counterparty may 
be located for purposes of Commission regulation 50.52(b)(4)(ii), 
entities may have failed to appropriately calculate the permissible 
limits under the five percent test under Commission regulation 
50.52(b)(4)(iii). Aligning the scope of jurisdictions included in the 
Alternative Compliance Frameworks with the jurisdictions for which the 
domestic currency is subject to the Commission's Clearing Requirement 
may help to make these calculations and compliance with the provisions 
easier. This part of the final rule should promote the financial 
integrity of swap markets and financial markets as a whole.
c. Price Discovery
    Under Commission regulation 43.2, a ``publicly reportable swap 
transaction,'' means, among other things, any executed swap that is an 
arms'-length transaction between two parties that results in a 
corresponding change in the market risk position between the two 
parties.\41\ The Commission generally believes that non-arms'-length 
swaps do not contribute to price discovery in the markets, as they are 
not publically reported.\42\ Given that inter-affiliate swaps as 
defined in this final rule are usually not arms'-length transactions, 
the Commission believes that these amendments to the Inter-Affiliate 
Exemption will not have a significant effect on price discovery.\43\ 
However, if the availability of the Alternative Compliance Frameworks 
reduces the use of outward-facing swaps, which may or may not be 
publicly reported depending on the jurisdiction, there could be a 
negative impact on price discovery when outward-facing swaps would 
otherwise be publically reported.
---------------------------------------------------------------------------

    \41\ Commission regulation 43.2. See also Real-Time Public 
Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9, 2012).
    \42\ Transactions that fall outside the definition of ``publicly 
reportable swap transaction''--that is, transactions that are not 
arms-length--``do not serve the price discovery objective of CEA 
section 2(a)(13)(B).'' Real-Time Public Reporting of Swap 
Transaction Data, 77 FR 1182, at 1195 (Jan. 9, 2012). See also id. 
at 1187 (discussing ``Swaps Between Affiliates and Portfolio 
Compression Exercises''), and also Clearing Exemption for Swaps 
Between Certain Affiliated Entities, 78 FR 21750, at 21780 (Apr. 11, 
2013).
    \43\ The definition of ``publicly reportable swap transaction'' 
identifies two examples of transactions that fall outside the 
definition, including internal swaps between one-hundred percent 
owned subsidiaries of the same parent entity. Commission regulation 
43.2 (adopted by Real-Time Public Reporting of Swap Transaction 
Data, 77 FR 1182, at 1244 (Jan. 9, 2012)). The Commission notes that 
the list of examples is not exhaustive.
---------------------------------------------------------------------------

d. Sound Risk Management Practices
    The conditions of the Inter-Affiliate Exemption do not eliminate 
the possibility that risk may impact an entity, its affiliates, and 
counterparties of those affiliates.\44\ Without clearing a swap to 
mitigate the transmission of risk among affiliates, the risk that any 
one affiliate takes on through its swap transactions, and any contagion 
that may result through that risk, increases. This makes the risk 
mitigation requirements for outward-facing swaps more important as risk 
can be transferred more easily between affiliates.
---------------------------------------------------------------------------

    \44\ The Commission notes that even in the absence of required 
clearing or margin requirements for swaps between certain affiliated 
entities, such entities may choose to use initial and variation 
margin to manage risks that could otherwise be transferred from one 
affiliate to another. Similarly, third parties that have entered 
into swaps with affiliates also may include variation margin 
requirements in their swap agreements.
---------------------------------------------------------------------------

    Exempting certain inter-affiliate swaps from the Clearing 
Requirement creates additional counterparty

[[Page 44181]]

exposure for affiliates.\45\ DCOs have many tools to mitigate risks. 
This increased counterparty credit risk among affiliates may increase 
the likelihood that a default of one affiliate could cause significant 
losses in other affiliated entities. If the default causes other 
affiliated entities to default, third parties that have entered into 
uncleared swaps or other agreements with those entities also could be 
affected.
---------------------------------------------------------------------------

    \45\ Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 FR 21750, at 21780-21781 (Apr. 11, 2013).
---------------------------------------------------------------------------

    In 2013, when the Commission finalized the Inter-Affiliate 
Exemption, it assessed the risks of inter-affiliate swaps and stated 
that the partial internalization of costs among affiliated entities, 
combined with the documentation, risk management, reporting, and 
treatment of outward-facing swaps requirements for electing the 
exception, would mitigate some of the risks associated with uncleared 
inter-affiliate swaps.\46\ However, the Commission indicated that these 
mitigants are not a perfect substitute for the protections that would 
otherwise be provided by clearing, or by a requirement to use more of 
the risk management tools that a clearinghouse uses to mitigate 
counterparty credit risk (i.e., both initial and variation margin, 
futures commission merchants monitoring the credit risk of customers, 
clearing member contributions to default funds, etc.).\47\
---------------------------------------------------------------------------

    \46\ Id.
    \47\ Id. at 21778.
---------------------------------------------------------------------------

e. Other Public Interest Considerations
    The Commission has identified no other public interest 
considerations.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
objectives of the CEA, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of the CEA.\48\ The Commission believes that the 
public interest to be protected by the antitrust laws is generally to 
protect competition. The Commission requested comments on whether the 
Proposal implicated any other specific public interest to be protected 
by the antitrust laws and received no comments.
---------------------------------------------------------------------------

    \48\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission has considered this final rule to determine whether 
it is anticompetitive and has identified no anticompetitive effects. 
The Commission requested comment on whether the Proposal was 
anticompetitive and, if it was, what the anticompetitive effects were, 
and received no comments.
    Because the Commission has determined that the final rule is not 
anticompetitive and has no anticompetitive effects, the Commission has 
not identified any less anticompetitive means of achieving the purposes 
of the CEA.

List of Subjects in 17 CFR Part 50

    Business and industry, Clearing, Swaps.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 50 as set forth below:

PART 50--CLEARING REQUIREMENT AND RELATED RULES

0
1. The authority citation for part 50 is revised to read as follows:

    Authority: 7 U.S.C. 2(h), and 7a-1 as amended by Pub. L. 111-
203, 124 Stat. 1376.


0
2. Amend Sec.  50.52 by:
0
a. Revising paragraphs (a)(2)(i) and (ii);
0
b. Adding paragraph (a)(2)(iii); and
0
c. Revising paragraph (b)(4).
    The revisions and additions read as follows:


Sec.  50.52  Exemption for swaps between affiliates.

    (a) * * *
    (2) * * *
    (i) A counterparty or third party directly or indirectly holds a 
majority ownership interest if it directly or indirectly holds a 
majority of the equity securities of an entity, or the right to receive 
upon dissolution, or the contribution of, a majority of the capital of 
a partnership;
    (ii) The term ``eligible affiliate counterparty'' means an entity 
that meets the requirements of this paragraph; and
    (iii) The term ``United States'' means the United States of 
America, its territories and possessions, any State of the United 
States, and the District of Columbia.
    (b) * * *
    (4)(i) Subject to paragraphs (b)(4)(ii) and (iii) of this section, 
each eligible affiliate counterparty that enters into a swap, which is 
included in a class of swaps identified in Sec.  50.4, with an 
unaffiliated counterparty shall:
    (A) Comply with the requirements for clearing the swap in section 
2(h) of the Act and this part;
    (B) Comply with the requirements for clearing the swap under a 
foreign jurisdiction's clearing mandate that is comparable, and 
comprehensive but not necessarily identical, to the clearing 
requirement of section 2(h) of the Act and this part, as determined by 
the Commission;
    (C) Comply with an exception or exemption under section 2(h)(7) of 
the Act or this part;
    (D) Comply with an exception or exemption under a foreign 
jurisdiction's clearing mandate, provided that:
    (1) The foreign jurisdiction's clearing mandate is comparable, and 
comprehensive but not necessarily identical, to the clearing 
requirement of section 2(h) of the Act and this part, as determined by 
the Commission; and
    (2) The foreign jurisdiction's exception or exemption is comparable 
to an exception or exemption under section 2(h)(7) of the Act or this 
part, as determined by the Commission; or
    (E) Clear such swap through a registered derivatives clearing 
organization or a clearing organization that is subject to supervision 
by appropriate government authorities in the home country of the 
clearing organization and has been assessed to be in compliance with 
the Principles for Financial Market Infrastructures.
    (ii) If one of the eligible affiliate counterparties is located in 
Australia, Canada, the European Union, Hong Kong, Japan, Mexico, 
Singapore, Switzerland, or the United Kingdom and each eligible 
affiliate counterparty, or a third party that directly or indirectly 
holds a majority interest in both eligible affiliate counterparties, 
pays and collects full variation margin daily on all of the eligible 
affiliate counterparties' swaps with other eligible affiliate 
counterparties, the requirements of paragraph (b)(4)(i) of this section 
shall be satisfied.
    (iii) If an eligible affiliate counterparty located in the United 
States enters into swaps, which are included in a class of swaps 
identified in Sec.  50.4, with eligible affiliate counterparties 
located in jurisdictions other than Australia, Canada, the European 
Union, Hong Kong, Japan, Mexico, Singapore, Switzerland, the United 
Kingdom, or the United States, and the aggregate notional value of such 
swaps, which are included in a class of swaps identified in Sec.  50.4, 
does not exceed five percent of the aggregate notional value of all 
swaps, which are included in a class of swaps identified in Sec.  50.4, 
in each instance the notional value as measured

[[Page 44182]]

in U.S. dollar equivalents and calculated for each calendar quarter, 
entered into by the eligible affiliate counterparty located in the 
United States, then the requirements of paragraph (b)(4)(i) of this 
section shall be satisfied when each eligible affiliate counterparty, 
or a third party that directly or indirectly holds a majority interest 
in both eligible affiliate counterparties, pays and collects full 
variation margin daily on all of the eligible affiliate counterparties' 
swaps with other eligible affiliate counterparties.
* * * * *

    Issued in Washington, DC, on June 29, 2020, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

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

Appendices to Exemption From the Swap Clearing Requirement for Certain 
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures--Commission Voting Summary, Chairman's Statement, 
and Commissioners' Statements

Appendix 1--Commission Voting Summary

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

Appendix 2--Supporting Statement of Chairman Heath P. Tarbert

    I am pleased to support our final rule codifying the alternative 
compliance framework for the Commission's inter-affiliate swap 
clearing exemption, which has been in place via the CFTC's staff no-
action relief since 2014. As I previously stated in connection with 
the proposed rule, codifying this relief is good policy and good 
government.\1\
---------------------------------------------------------------------------

    \1\ Statement of Chairman Heath P. Tarbert: ``Tripling Down on 
Transparency'' n.12 (Dec. 10, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement121019.
---------------------------------------------------------------------------

    From a policy perspective, the rule advances the goals of our 
swap clearing requirements by making anti-evasionary provisions of 
the inter-affiliate exemption workable for cross-border corporate 
groups. Stepping back for a moment and looking at the bigger 
picture, our clearing and initial margin requirements are meant to 
address counterparty credit risk. These measures generally are not 
appropriate for credit exposures between members of a single 
corporate group, where risk is managed internally on a centralized 
basis.\2\
---------------------------------------------------------------------------

    \2\ See Clearing Exemption for Swaps Between Certain Affiliated 
Entities, 78 FR 21750, 21753 (Apr. 11, 2013) (justifying the inter-
affiliate clearing exemption in view of incentives to avoid 
defaulting to affiliates and the common practice of centralized risk 
allocation decisions and default remedies, which reduce inter-
affiliate default risk).
---------------------------------------------------------------------------

    However, the CFTC has long been concerned that U.S. entities may 
misuse the inter-affiliate exemption to evade the clearing 
requirements more generally. For example, a U.S. entity may use 
back-to-back swaps to interpose a non-U.S. affiliate in the middle 
of the U.S. entity's trade with a non-U.S. counterparty, where the 
non-U.S. affiliate and counterparty are in jurisdictions that do not 
have mandatory clearing regimes comparable to the Commission's. In 
this way, the U.S. entity could improperly circumvent the clearing 
obligations that would apply if it were trading directly with the 
non-U.S. counterparty (because it would be exempted from clearing 
the trade with its non-U.S. affiliate, and the non-U.S. affiliate's 
back-to-back trade with the non-U.S. counterparty could fall outside 
U.S. clearing requirements).
    This evasion concern was particularly acute in the early years 
of the CFTC's clearing regime, when a number of other jurisdictions 
had yet to implement their own clearing requirements in accordance 
with the G20 commitments at the 2009 Pittsburgh Summit. Moreover, 
section 2(h)(4)(A) of the Commodity Exchange Act requires us to 
prescribe rules to prevent evasion of the clearing requirement. 
Accordingly, as an anti-evasionary measure, the Commission required 
members of a corporate group taking advantage of the inter-affiliate 
exemption to clear their outward-facing swaps if such swaps would be 
clearing-mandated under CFTC rules, regardless whether the parties 
to the outward-facing swap were in fact subject to such rules.\3\
---------------------------------------------------------------------------

    \3\ 17 CFR 50.52(b)(4).
---------------------------------------------------------------------------

    The ``clearing outward-facing swaps'' condition to the inter-
affiliate exemption is unworkable for many market participants, 
however, because of inter-jurisdictional mismatches in clearing 
requirements and infrastructures. Accordingly, the CFTC's staff no-
action relief has extended the rule's time-limited alternative 
compliance framework allowing affiliates to exchange variation 
margin in lieu of clearing outward-facing swaps.\4\
---------------------------------------------------------------------------

    \4\ CFTC Letter No. 17-66 (Dec. 14, 2017), https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm; see also previously 
granted relief under CFTC Letter Nos. 14-135 (Nov. 7, 2014), 15-63 
(Nov. 17, 2015), 16-81 (Nov. 28, 2016), and 16-84 (Dec. 15, 2016). 
CFTC Letter No. 17-66 expires on the earlier of (i) December 31, 
2020 at 11:59 p.m. (Eastern Time); or (ii) the effective date of 
amendments to Commission regulation 50.52.
---------------------------------------------------------------------------

    This alternative compliance option has allowed cross-border 
corporate groups to attain the risk-mitigating benefits of inter-
affiliate swaps,\5\ while complying with important anti-evasion 
measures in a way that is practicable for their global business. 
Indeed, the CFTC staff's review of recent swap data indicates that 
over 70 eligible affiliate counterparties located outside the United 
States rely on the alternative compliance framework under the 
available staff no-action relief. By codifying this relief, we are 
providing the swaps market with clarity, certainty, and 
transparency--consistent with the CFTC's mission, core values, and 
strategic objectives.\6\ I commend my fellow Commissioners and the 
CFTC's staff for working to finalize the rule before us today, and I 
look forward to further efforts to advance these principles and 
goals in the near future.
---------------------------------------------------------------------------

    \5\ See 78 FR at 21754 (citing to commenters and the 2012 inter-
affiliate exemption notice of proposed rulemaking in support of the 
conclusion that ``inter-affiliate transactions provide an important 
risk management role within corporate groups'' and that ``swaps 
entered into between corporate affiliates, if properly risk-managed, 
may be beneficial to the entity as a whole'').
    \6\ See Draft CFTC 2020-2024 Strategic Plan, 85 FR 29,935 (May 
19, 2020), https://www.govinfo.gov/content/pkg/FR-2020-05-19/pdf/2020-10676.pdf.
---------------------------------------------------------------------------

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I support today's final rule providing legal certainty to swap 
counterparties electing the inter-affiliate exemption from the 
Commission's requirement that certain interest rate swaps and credit 
default swaps be cleared. At issue is an important condition of the 
exemption that reduces the likelihood that uncollateralized 
exposures can build up at a U.S. swap participant.\1\ I support the 
policy, made permanent by today's rule, that permits variation 
margin to be exchanged by affiliated counterparties in lieu of 
clearing swaps with foreign counterparties. This provision 
appropriately balances an anti-evasionary measure with providing 
flexibility to market participants. The provision has functioned 
well since 2013, and it is appropriate to make the provision 
permanent after several extensions of the no-action relief.\2\
---------------------------------------------------------------------------

    \1\ CFTC regulation 50.52(b)(4)(ii)-(iii) (17 CFR 
50.52(b)(4)(ii)-(iii)).
    \2\ CFTC Letters 14-135, 15-63, 16-81, 16-84, and 17-66.
---------------------------------------------------------------------------

    I would like to highlight that today's final rule acknowledges 
that five additional jurisdictions have enacted swap clearing 
requirements since the first version of this rule was issued in 
2013.\3\ Today's rule therefore serves as another example of the 
Commission appropriately deferring to foreign regulatory regimes in 
order to reduce compliance burdens and promote market liquidity 
internationally.
---------------------------------------------------------------------------

    \3\ The first version of the rule had permitted, until 2014, 
unlimited variation margining when an affiliate was located in the 
E.U., Japan, and Singapore. Today's version expands the list of 
eligible jurisdictions to include Australia, Canada, Hong Kong, 
Mexico, Switzerland, as well as the U.K.
---------------------------------------------------------------------------

    Not only do I support today's final rule because it makes a 
sound policy permanent, but also because it codifies no-action 
relief that has proven workable for market participants. Codifying 
no-action relief makes the Commission's regulatory framework more 
transparent and simplifies compliance. I would support continuing to 
codify other no-action relief, for example with respect to providing 
relief from the trade execution requirement for a swap exempted from 
the clearing requirement.\4\
---------------------------------------------------------------------------

    \4\ CFTC Letter 17-67, proposed to be codified by the 
Commission's 2018 proposed revised rules for swap execution 
facilities, 83 FR 61,946 (Nov. 30, 2018).

---------------------------------------------------------------------------

[[Page 44183]]

    Finally, I would like to thank the staff of DCR for their 
diligence in completing this rulemaking.

Appendix 4--Concurring Statement of Commissioner Rostin Behnam

    I support today's adoption of amendments to the exemption from 
the swap clearing requirement for certain affiliated entities within 
a corporate group. The amendments that update the conditions for the 
exemption incorporate several years of observation and analysis to 
build upon its utility within the global regulatory landscape, while 
affirming the Commission's appropriate use of its public interest 
authority under section 4(c) of the Commodity Exchange Act. It can 
be tempting to use somewhat fluid and undeniably desirable 
objectives such as the promotion of responsible economic and 
financial innovation and fair competition to support all manner of 
regulatory changes. And I have not hesitated to highlight my own 
concerns for the imprudent use of 4(c) exemptive authority. However, 
I am pleased that when it comes to the risks associated with U.S 
firms entering into uncleared swaps with non-U.S. affiliates or 
evading the clearing requirement altogether, the Commission has 
consistently demonstrated that its reliance on the 4(c) authority 
provides the checks to ensure that the policy and outcomes remain 
legally sound and rational.
    I support today's final rule, as I did the proposal, because it 
provides legal certainty, benefits from careful analysis and 
consideration of the data as well as the global regulatory landscape 
as it has developed, and leaves in place critical tools for 
Commission monitoring, oversight, and enforcement.\1\ However, I am 
mindful that guardrails put firmly in place by today's amendments as 
a substitute for clearing outward-facing swaps may produce 
additional risk to external creditors and/or third parties, and that 
there may be an increased likelihood of risk to the financial system 
resulting from the availability of the exemption. While I encouraged 
interested parties to comment on this aspect of the exemption--the 
alternative compliance framework--the Commission did not receive any 
responsive comments.\2\ Without comments, the Commission's findings 
and conclusions remain neither vigorously supported nor expressly 
undermined, and we will continue to discharge our regulatory 
responsibilities, remaining quick to respond as we closely monitor 
the data and global regulatory developments to ensure that the 
exemption does not add unnecessary and preventable risk to the U.S. 
financial system.
---------------------------------------------------------------------------

    \1\ Exemption from the Swap Clearing Requirement for Certain 
Affiliated Entities, 84 FR 70446, 70460-1 (proposed Dec. 23, 2019).
    \2\ Id. at 70461.
---------------------------------------------------------------------------

    I thank staff from the Division of Clearing and Risk for their 
thoughtful responses to my questions, and for making edits that 
reflect my comments and suggestions.

Appendix 5--Statement of Commissioner Dan M. Berkovitz

    I support today's final rule making permanent the alternative 
compliance frameworks for certain swaps involving the foreign 
affiliates of U.S. firms and their non-U.S. counterparties. The 
final rule upholds the Dodd-Frank Act's clearing mandate, deters 
evasion, and protects against systemic risk from swaps executed 
overseas by foreign affiliates. The final rule, which adopts the 
rule as proposed,\1\ codifies existing practice and addresses anti-
evasion provisions governing inter-affiliate swaps that the 
Commission first issued in 2013 and later extended through staff no-
action letters.
---------------------------------------------------------------------------

    \1\ Exemption From the Swap Clearing Requirement for Certain 
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 84 FR 70446 (Dec. 23, 2019).
---------------------------------------------------------------------------

    Commission regulations provide a limited, conditional ``Inter-
Affiliate Exemption'' from clearing for swaps between certain 
affiliate counterparties, including U.S. firms and their foreign 
affiliates. Notably, the Inter-Affiliate Exemption includes an 
important ``Outward-Facing Swaps Condition'' to prevent U.S. firms 
from routing swaps through foreign affiliates to evade the 
Commission's clearing requirement.\2\ The Outward-Facing Swaps 
Condition allows outward-facing swaps to be cleared pursuant to a 
comparable and comprehensive foreign clearing regime.
---------------------------------------------------------------------------

    \2\ The Outward-Facing Swaps Condition requires the foreign 
affiliates of U.S. firms to clear their outward-facing swaps if such 
swaps are subject to the Commission's clearing requirement and 
entered into with unaffiliated counterparties in foreign 
jurisdictions.
---------------------------------------------------------------------------

    Where the Commission has not made a comparability determination, 
the alternative compliance frameworks permit the foreign affiliate 
to exchange full, daily variation margin for the swap with its U.S. 
affiliate or its non-U.S. counterparty, rather than clearing the 
outward-facing swap. The alternative compliance frameworks preserve 
the competitiveness of the foreign affiliates of U.S. firms without 
importing significant risks into the U.S. Today's final rule makes 
the alternative compliance frameworks permanent, with certain 
modifications.\3\
---------------------------------------------------------------------------

    \3\ The original alternative compliance frameworks expired in 
2014, but have been repeatedly extended through no-action letters.
---------------------------------------------------------------------------

    I support the final rule's emphasis on clearing, anti-evasion, 
and systemic risk. The final rule also expands the jurisdictions 
subject to one of the alternative compliance frameworks to include 
additional jurisdictions that have adopted and implemented their 
respective domestic clearing mandates. By extending and making 
permanent the alternative compliance frameworks, the final rule 
addresses the lack of comparability determinations for foreign 
clearing regimes, while ensuring the continued operation of anti-
evasion and anti-systemic risk provisions in the Commission's rules.
    I thank staff of the Division of Clearing and Risk for their 
work on this final rule and for their effective cooperation with my 
office.

[FR Doc. 2020-14390 Filed 7-21-20; 8:45 am]
BILLING CODE 6351-01-P