Swap Clearing Requirement Exemptions, 76428-76450 [2020-25394]

Download as PDF 76428 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations Cancellation and termination dates State and county Hidalgo, Jim Wells, Nueces, and Starr Counties, Texas .................................................................................. All other Texas counties and all other States .................................................................................................... * * * * * 6. Amend § 457.140 as follows a. In section 1, in the definition of ‘‘price election’’, remove the phrase ‘‘the provisions of’’; ■ b. In section 2, remove the phrase ‘‘FSA farm serial number’’ and add the phrase ‘‘FSA farm number’’ in its place; ■ c. In section 3, in paragraph (b)(1), remove the word ‘‘documentsdo’’ and add ‘‘documents do’’ in its place; ■ d. In section 7: ■ i. In paragraph (a)(2)(ii), remove the word ‘‘and’’ at the end of the paragraph; ■ ii. Revise paragraphs (a)(3) and (a)(4); ■ iii. In paragraph (c), remove the phrase ‘‘the sales closing date’’ and add the phrase ‘‘its sales closing date’’ in its place; ■ e. In section 8: ■ i. In paragraph (c) introductory text, remove the ‘‘al’’ at the end of the paragraph; ■ ii. In paragraph (c)(2), remove the phrase ‘‘to be’’; ■ iii. In paragraph (d), remove the word ‘‘fall’’ and add ‘‘fall-planted’’ in its place; ■ f. In section 9: ■ i. Remove one of the duplicate section 9 headings ‘‘Insurance Period’’; ■ ii. In paragraph (a), remove the phrase ‘‘fall and spring-planted types’’ and add ‘‘fall-planted and spring-planted types’’ in its place; ■ e. In section 11, in paragraph (a)(6), remove the phrase ‘‘fall-planted dry pea acreage’’ and add ‘‘fall-planted types’’ in its place; ■ h. In section 13: ■ i. In Example 2, paragraph (3), remove the comma and add a semi-colon in its place and add a semi-colon at the end of the paragraph; ■ ii. In Example 2, paragraph (6), remove the number ‘‘1.0’’ and add ‘‘1.00’’ in its place; ■ iii. In Example 2, paragraph (7), remove the comma and add a semicolon in its place; ■ iv. In paragraph (e) introductory text, remove the phrase ‘‘If applying a moisture adjustment, it’’ and add ‘‘Any adjustment for moisture’’ in its place; ■ i. In section 14, in paragraph (a), remove the word ‘‘fall’’ and add ‘‘fallplanted’’ in its place; ■ j. In section 15: ■ i. In paragraph (d), remove the phrase ‘‘both a both fall and spring-planted types’’ and add ‘‘both fall-planted and spring-planted types’’ in its place; and TKELLEY on DSKBCP9HB2PROD with RULES ■ ■ VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 ii. In paragraph (e)(4), remove the phrase ‘‘insured fall-plantedacreage’’ and add ‘‘insured fall-planted acreage’’ in its place. The revision read as follows: ■ § 457.108 Dry pea crop insurance provisions. * * * * * 7. Insured Crop (a) * * * (3) That are not planted to plow down, graze, harvest as hay, or otherwise not planted for harvest as a mature dry pea crop; and (4) That are not (unless allowed by the Special Provisions or by written agreement): (i) Interplanted with another crop; (ii) Planted into an established grass or legume; or (iii) Planted as a nurse crop. * * * * * Martin Barbre, Manager, Federal Crop Insurance Corporation. [FR Doc. 2020–26036 Filed 11–27–20; 8:45 am] BILLING CODE 3410–08–P COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 50 RIN 3038–AE33 Swap Clearing Requirement Exemptions Commodity Futures Trading Commission. ACTION: Final rule. AGENCY: The Commodity Futures Trading Commission (Commission or CFTC) is adopting amendments to the regulations governing which swaps are exempt from the clearing requirement set forth in applicable provisions of the Commodity Exchange Act (CEA). These amendments exempt from the clearing requirement swaps entered into by certain central banks, sovereign entities, international financial institutions, bank holding companies, savings and loan holding companies, and community development financial institutions. The Commission also is publishing a compliance schedule setting forth all the past compliance dates for the 2012 SUMMARY: PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 January 31. March 15. and 2016 swap clearing requirement regulations. Finally, the Commission is making certain other, non-substantive technical amendments. DATES: The effective date for this final rule is December 30, 2020. FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director, at 202–418–5684 or sjosephson@cftc.gov; Megan A. Wallace, Senior Special Counsel, at 202–418–5150 or mwallace@cftc.gov; Melissa D’Arcy, Special Counsel, at 202–418–5086 or mdarcy@cftc.gov; Division of Clearing and Risk; or Ayla Kayhan, Office of the Chief Economist, at 202–418–5947 or akayhan@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. Ongoing Review of 17 CFR Part 50 Regulations and May 2020 Proposal B. Swap Clearing Requirement C. Swaps With Central Banks, Sovereign Entities, and IFIs D. DCR No-Action Letters for Four Additional IFIs E. DCR No-Action Letters for Certain Bank Holding Companies, and Savings and Loan Holding Companies, and CDFIs F. DCR No-Action Letters for Relief for Community Development Financial Institutions II. Final Rule for Swaps Not Subject to the Clearing Requirement A. May 2020 Proposal B. Comments Received C. Swaps Entered Into by Central Banks, Sovereign Entities, and IFIs D. Exemption for Certain Central Banks, Sovereign Entities, and IFIs E. Data Related to Swaps Entered Into by IFIs F. Swaps Entered Into by Bank Holding Companies, Savings and Loan Holdings Companies, and CDFIs G. Exemption for CDFIs H. Exemption for Certain Bank Holding Companies and Savings and Loan Holding Companies I. Data Related to Swaps Entered Into by CDFIs, Bank Holding Companies, and Savings and Loan Holding Companies J. Adoption of Subpart D of Part 50 III. Clearing Requirement Compliance Schedule and Compliance Dates IV. Technical Amendment to Subpart C for Banks, Savings Associations, Farm Credit System Institutions, and Credit Unions E:\FR\FM\30NOR1.SGM 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations V. Commission’s Section 4(c) Authority A. Central Banks, Sovereign Entities and IFIs B. CDFIs, Certain Bank Holding Companies and Savings and Loan Holding Companies VI. Final Rules Do Not Effect Margin Requirements for Uncleared Swaps VII. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act C. Cost-Benefit Considerations D. Antitrust Considerations I. Background TKELLEY on DSKBCP9HB2PROD with RULES A. Ongoing Review of 17 CFR Part 50 Regulations and May 2020 Proposal On May 9, 2017, the Commission published in the Federal Register a request for information seeking suggestions from the public for simplifying the Commission’s regulations and practices, removing unnecessary burdens, and reducing costs.1 In response, a number of commenters asked the Commission to codify certain staff no-action letters and Commission guidance, including those that are the subject of this rulemaking.2 The Commission also engaged in an agency-wide review of its regulations and practices to make them simpler, less burdensome, and less costly. On May 12, 2020, the Commission published a notice of proposed rulemaking 3 that would exempt from the swap clearing requirement (1) swaps entered into by certain central banks, sovereign entities, and international financial institutions (IFIs), as set forth in the preamble to the 2012 End-User Exception final rule; 4 (2) swaps entered into by four additional IFIs that previously received staff no-action letters from the Commission’s Division of Clearing and Risk (DCR) in 2013 and 2017; 5 and (3) swaps entered into by 1 See Project KISS, 82 FR 21494 (May 9, 2017) and Project KISS, 82 FR 23765 (May 24, 2017). 2 See, e.g., Comment letter from the Institute of International Banking, International Swaps and Derivatives Association, Inc., and Securities Industry and Financial Markets Association, dated July 24, 2017, at 2. 3 Swap Clearing Requirement Exemptions, 85 FR 27955 (May 12, 2020) (hereinafter referred to as the May 2020 Proposal). 4 May 2020 Proposal at 27957–27961 (citing the End-User Exception to the Clearing Requirement for Swaps, 77 FR 42560 (Jul. 19, 2012)). 5 See CFTC Letter No. 13–25 (June 10, 2013) (providing no-action relief to the Corporacio´n Andina de Fomento); CFTC Letter No. 17–57 (Nov. 7, 2017) (providing no-action relief to Banco Centroamericano de Integracio´n Econo´mica); CFTC Letter No. 17–58 (Nov. 7, 2017) (providing noaction relief to the European Stability Mechanism and for which an expiration date was added in CFTC Letter Nos. 19–23 (Oct. 16, 2019), 20–13 (Apr. 14, 2020), and 20–22 (Aug. 27, 2020) (providing that no-action relief to the European Stability Mechanism expires on December 31, 2020)); and CFTC Letter No. 17–59 (Nov. 7, 2017) (providing VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 certain bank holding companies and savings and loan holding companies, as well as community development financial institutions (CDFIs).6 The Commission also proposed revisions to part 50 intended to simplify the requirements and minimize compliance burdens for market participants. The Commission proposed to add a compliance date chart for all swaps that the Commission has determined are required to be cleared under Commission regulation § 50.4.7 In addition, the Commission proposed improvements to the structure and organization of 17 CFR part 50 through heading changes and restructuring amendments.8 Finally, the Commission proposed the creation of a new subpart D to distinguish 17 CFR part 50 exemptions that apply to specific swaps from the exceptions and exemptions for market participants eligible to elect an exception or exemption under subpart C.9 B. Swap Clearing Requirement Title 17 CFR part 50 of the Commission’s regulations implements the swap clearing requirement under section 2(h) of the CEA. 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 no-action relief to the North American Development Bank). 6 The May 2020 Proposal included a supplemental notice of proposed rulemaking related to an August 2018 proposal issued by the Commission. See Amendments to Clearing Exemption for Swaps Entered Into by Certain Bank Holding Companies, Savings and Loan Holding Companies, and Community Development Financial Institutions, 83 FR 44001 (Aug. 29, 2018) (hereinafter referred to as the August 2018 Proposal). Both the August 2018 Proposal and the May 2020 Proposal (together, the Proposals) proposed to codify CFTC Letter No. 16–01 (Jan. 8, 2016) (providing no-action relief to certain small bank holding companies and savings and loan holding companies pursuant to a request from the American Bankers Association); and CFTC Letter No. 16–02 (Jan. 8, 2016) (providing no-action relief to community development financial institutions pursuant to a request from a coalition of such entities). 7 May 2020 Proposal, 85 FR at 27962. 8 For example, the Commission proposed that the provisions exempting eligible banks, savings associations, farm credit institutions, and credit unions from the definition of ‘‘financial entity’’ for purposes of the swap clearing requirement be moved to a separate regulation at 17 CFR 50.53 so that the exemption is easier to locate and the conditions to claim the exemption are set forth more clearly. See May 2020 Proposal, 85 FR at 27962–27963. 9 See id. at 27959–27960. PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 76429 from registration. The Commission has adopted swap clearing requirement determinations for certain classes of interest rate swaps and credit default swaps.10 Swaps that are subject to the Commission’s swap clearing requirement are described in Commission regulation § 50.4 (Clearing Requirement). Title 17 CFR 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),11 and others were adopted pursuant to the Commission’s public interest exemption authority (e.g., the exemption for swaps entered into by certain cooperatives and the exemption for swaps between affiliated entities).12 C. Swaps With Central Banks, Sovereign Entities, and IFIs In the preamble to the 2012 End-User Exception, the Commission determined that foreign central banks, foreign governments, and IFIs should not be subject to the swap clearing requirement set forth in section 2(h)(1) of the CEA.13 This determination was based on considerations of comity and was in keeping with the traditions of the international system.14 The Commission also stated that the Bank for International Settlements (BIS), of which the Federal Reserve and foreign central banks are members, should be considered to be a foreign central bank, and, therefore, swaps entered into by the BIS should not be subject to the Clearing Requirement.15 The Commission provided several reasons in support of its determination. First, the Federal Reserve Banks and the Federal Government are not subject to the Clearing Requirement under the CEA.16 Therefore, the Commission 10 Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284 (Dec. 13, 2012) (hereinafter referred to as the 2012 Clearing Requirement Determination) and Clearing Requirement Determination Under Section 2(h) of the CEA for Interest Rate Swaps, 81 FR 71202 (Oct. 14, 2016) (hereinafter referred to as the 2016 Clearing Requirement Determination). 11 2012 End-User Exception, 77 FR 42560. 12 Clearing Exemption for Certain Swaps Entered Into by Cooperatives, 78 FR 52286 (Aug. 22, 2013); Clearing Exemption for Swaps Between Certain Affiliated Entities, 78 FR 21750 (Apr. 11, 2013); and Exemption from the Swap Clearing Requirement for Certain Affiliated Entities—Alternative Compliance Frameworks for Anti-Evasionary Measures, 85 FR 44170 (Jul. 22, 2020). 13 See 2012 End-User Exception, at 42561–42562. 14 See id. 15 Id. at 42561, n.13. 16 Id. at 42562. Under the Dodd-Frank Act, Congress specifically excluded any agreement, E:\FR\FM\30NOR1.SGM Continued 30NOR1 76430 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES stated it would expect that if any part of the Federal Government, the Federal Reserve Banks, or IFIs of which the United States is a member were to engage in swaps in a foreign jurisdiction, the actions of those entities with respect to those swaps should not be subject to foreign regulation.17 Second, the Commission stated that canons of statutory construction ‘‘assume that legislators take account of the legitimate sovereign interests of other nations when they write American laws.’’ 18 Third, the Commission noted that IFIs operate with the benefit of certain privileges and immunities under U.S. law, which indicates that such entities may be treated similarly under certain circumstances.19 Finally, the Commission stated that there is nothing in the text or legislative history of the swap-related provisions of the DoddFrank Act to establish that Congress intended to deviate from the traditions of the international system by subjecting foreign central banks, foreign governments, or IFIs to the Clearing Requirement set forth in section 2(h)(1) of the CEA.20 In the preamble to the 2012 End-User Exception, the Commission also determined that the IFIs that would be exempt from the Clearing Requirement to be those institutions defined as such in section 262r(c)(2) of Title 22 of the U.S. Code,21 and the multilateral contract, or transaction a counterparty of which is a Federal Reserve bank, the Federal Government, or a Federal agency that is expressly backed by the full faith and credit of the United States from the definition of a swap under section 1a(47)(B)(ix) of the CEA. Public Law 111–203, 124 Stat. 1376 (2010). Only transactions that are swaps are subject to the Clearing Requirement. See section 2(h) of the CEA. 17 Id. at 42561–42562. 18 Id. at 42562 (citing F. Hoffman-LaRoche Ltd. v. Empagran S.A., 542 U.S. 155, 164 (2004)). 19 Id. at 42562 (citing various provisions of the U.S. Code and a CFTC staff interpretative letter, which stated that ‘‘[b]ased on the unique attributes and status of the World Bank Group as a multinational member agency, . . . the CFTC believes that the World Bank Group need not be treated as a U.S. person for purposes of application of the CFTC’s Part 30 rules.’’). The Commission also cited to a determination of the Board of Governors of the Federal Reserve that the Bank Holding Company Act does not apply to foreign governments because they are not ‘‘companies’’ as such term is defined in the Bank Holding Company Act. Id. 20 Id. at 42562. The Commission also noted that if a foreign central bank, foreign government, or IFI enters into an uncleared swap with a counterparty that is subject to the CEA and Commission regulations with regard to that transaction, then the counterparty should still comply with applicable Commission requirements under parts 23 and 45 of the Commission’s regulations. Id. 21 22 U.S.C. 262r(c)(2). The IFIs included in the U.S. Code in 2011 were the International Monetary Fund, International Bank for Reconstruction and Development, European Bank for Reconstruction and Development, International Development VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 development banks (MDBs) included in the Proposal for the Regulation of the European Parliament and of the Council of the European Union Final Compromise Text, Article 1(4a(a)) (March 19, 2012).22 Under EMIR, European authorities exempted 12 MDBs from all requirements apart from reporting obligations.23 Based on these two sources, the Commission identified 17 IFIs that would not be subject to the Clearing Requirement under its policy determination.24 D. DCR No-Action Letters for Four Additional IFIs Based on the Commission’s action in the preamble to the 2012 End-User Exception, DCR issued staff no-action letters to four additional IFIs stating that the division would not recommend the Commission take enforcement action Association, International Finance Corporation, Multilateral Investment Guarantee Agency, African Development Bank, African Development Fund, Asian Development Bank, Inter-American Development Bank, Bank for Economic Cooperation and Development in the Middle East and North Africa, and Inter-American Investment Corporation. 22 77 FR at 42561 n.14. This provision was enacted as Article 1(5)(a) of the European Market Infrastructure Reform (EMIR), and exempts those entities from all but the reporting requirement of EMIR. See Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, 2012 OJ (L201)1. Section 4.2 of part 1 of Annex VI to Directive 2006/48/EC, available at http://eur-lex.europa.eu/legal-content/ EN/TXT/?uri=celex%3A32012R0648 and http://eurlex.europa.eu/legal-content/EN/TXT/ ?uri=CELEX%3A32006L0048. See also discussion below regarding subsequent updates to EMIR. 23 The 12 entities exempt from the EMIR were the following: (1) International Bank for Reconstruction and Development; (2) International Finance Corporation; (3) Inter-American Development Bank; (4) Asian Development Bank; (5) African Development Bank; (6) Council of Europe Development Bank; (7) Nordic Investment Bank; (8) Caribbean Development Bank; (9) European Bank for Reconstruction and Development; (10) European Investment Bank; (11) European Investment Fund; and (12) Multilateral Investment Guarantee Agency. The Commission noted that the exemption for IFIs would be consistent with EMIR and other foreign laws. 77 FR at 42561 n.14. 24 The 17 international financial institutions identified in the preamble to the 2012 End-User Exception final rule are: (1) African Development Bank; (2) African Development Fund; (3) Asian Development Bank; (4) Bank for Economic Cooperation and Development in the Middle East and North Africa; (5) Caribbean Development Bank; (6) Council of Europe Development Bank; (7) European Bank for Reconstruction and Development; (8) European Investment Bank; (9) European Investment Fund; (10) Inter-American Development Bank; (11) Inter-American Investment Corporation; (12) International Bank for Reconstruction and Development (part of the World Bank Group); (13) International Development Association (part of the World Bank Group); (14) International Finance Corporation (part of the World Bank Group); (15) International Monetary Fund; (16) Multilateral Investment Guarantee Agency (part of the World Bank Group); and (17) Nordic Investment Bank. 77 FR at 42561–42562 n.14. PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 against such entities for not clearing swaps that otherwise would be subject to the Clearing Requirement, provided the IFIs satisfied certain conditions.25 These institutions include: (1) The Corporacio´n Andina de Fomento (CAF), an economic development financing institution established pursuant to a treaty among 10 Latin American countries; 26 (2) Banco Centroamericano de Integracio´n Econo´mica (CABEI), an economic development financing institution established pursuant to a treaty among 11 Latin American countries, Spain, and Taiwan; 27 (3) the European Stability Mechanism (ESM), a lending institution established by European Union member states to provide emergency financial assistance to member states located in the Eurozone; 28 and (4) the North American Development Bank (NADB), a financing institution established by the United States and Mexico under the auspices of the North American Free Trade Agreement to finance environmentally sustainable infrastructure projects in the region along the U.S.-Mexican border.29 In their request letters, CAF, CABEI, ESM, and NADB each stated that their functions, missions, and ownership structures are analogous to the functions, missions, and ownership structures of the IFIs included in the 2012 End-User Exception.30 E. DCR No-Action Letters for Certain Bank Holding Companies and Savings and Loan Holding Companies and CDFIs In 2016, DCR staff issued a no-action letter providing that the division would not recommend enforcement action against certain bank holding companies and savings and loan holding companies for not clearing swaps 25 DCR required each IFI to comply with other provisions of the CEA and the Commission’s regulations, such as the recordkeeping and reporting requirements under parts 23 and 45 of the Commission’s regulations, which would apply to an uncleared swap entered into by an IFI opposite a counterparty that is otherwise subject to the CEA and Commission regulations. 26 CFTC Letter No. 13–25. 27 CFTC Letter No. 17–57. 28 CFTC Letter No. 17–58. In CFTC Letter No. 20– 22, on August 27, 2020, DCR staff extended the expiration date of this no-action letter until December 31, 2020. The relief provided in CFTC Letter No. 20–22 will continue until the effective date of these final rules. 29 CFTC Letter No. 17–59. 30 For example, NADB was included as a MDB in the report required by 22 U.S.C. 262r(c)(2) since as early as 2012. The 2012 Report to Congress from the Chairman of the National Advisory Council on International Monetary and Financial Policies (December 2013) (referred to herein as the 2012 NAC Report), and subsequent reports, are available at https://www.treasury.gov/resource-center/ international/development-banks/Pages/congressindex.aspx. E:\FR\FM\30NOR1.SGM 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES subject to the Clearing Requirement if such entities satisfy certain conditions.31 At the same time, staff issued a no-action letter providing that DCR would not recommend enforcement action against CDFIs for not clearing certain swaps subject to the Clearing Requirement, under specific conditions.32 These bank holding companies, savings and loan holding companies, and CDFIs were not eligible to elect an exception to the Clearing Requirement under Commission regulation § 50.50(d) because they are not depository institutions. The 2016 DCR no-action letter for bank holding companies and savings and loan holding companies applies only to holding companies with no more than $10 billion in consolidated assets.33 This limitation is consistent with the statutory provisions under section 2(h)(7)(C)(ii) of the CEA and Commission regulation § 50.50(d) applicable to depository institutions and savings associations. The DCR letter also requires that such a holding company be using swaps to hedge or mitigate commercial risk and notify the Commission how it generally meets the obligations associated with entering into uncleared swaps.34 Many bank holding companies and savings and loan holding companies enter into interest rate swaps to hedge interest rate risk that they incur as a result of issuing debt securities or making loans to finance their subsidiary banks or savings associations.35 In addition, these swaps generally have a notional amount of $10 million or less, and the bank holding companies and savings and loan holding companies enter into swaps less frequently than other swap counterparties. Further, the bank holding company or savings and loan holding company, rather than the subsidiary bank or savings association, must enter into the swap in order to gain hedge accounting treatment.36 Also, in 2016, in response to a request from a coalition of CDFIs, DCR staff issued a no-action letter providing that 31 CFTC Letter No. 16–01 (Jan. 8, 2016) (providing no-action relief to certain small bank holding companies and savings and loan holding companies pursuant to a request from the American Bankers Association). 32 CFTC Letter No. 16–02 (Jan. 8, 2016) (providing no-action relief to CDFIs pursuant to a request from a Coalition of CDFIs). 33 Under CFTC Letter No. 16–01, the limitation of no more than $10 billion in consolidated assets means that the aggregate value of all the assets of all the bank holding company’s or savings and loan holding company’s subsidiaries on the last day of each subsidiary’s most recent fiscal year, do not exceed $10 billion. CFTC Letter No. 16–01, at 4. 34 See CFTC Letter No. 16–01, at 4. 35 CFTC Letter No. 16–01, at 3. 36 Id. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 the division would not recommend that the Commission take enforcement action against a CDFI for failure to comply with the Clearing Requirement, provided certain conditions are met.37 DCR limited the letter to CDFIs certified as such by the U.S. Department of the Treasury that engage in no more than 10 interest rate swaps per year, with an aggregate notional value cap of $200 million per year.38 However, DCR recognized that there are public interest benefits that may be served by permitting CDFIs to engage in limited swaps activity that serves smaller, local communities.39 DCR also was persuaded that status as a CDFI, pursuant to certification by the Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund), would ensure that CDFIs operate under a specific community development organizational mission and provide financial and community development services to a targeted market.40 II. Final Rule for Swaps Not Subject to the Clearing Requirement A. May 2020 Proposal On May 12, 2020, the Commission proposed amendments to Part 50 of the Commission’s regulations to create new exemptions from required clearing consistent with the policy statements made by the Commission in the 2012 End-User Exception and six no-action letters issued by DCR beginning in 2013, to add a compliance date chart, and to make other non-substantive technical amendments. The Commission requested comments from market participants on all aspects of the May 2020 Proposal. 37 See CFTC Letter No. 16–02, at 4. DCR required CDFIs to file a notice of election and additional information as described in Commission regulation § 50.50(b), and limited the election of the exception to swaps entered into for the sole purpose of hedging or mitigating commercial risk as described in Commission regulation § 50.50(c). Id. Letter No. 16–02 also noted that the letter did not excuse the affected persons from compliance with any other applicable requirements contained in the CEA or in the Commission’s regulations. Id. 38 See Certification as a Community Development Financial Institution, 12 CFR 1805.201. 39 CFTC Letter No. 16–02, at 3. 40 Community development financial institutions are small in scale and tend to serve smaller, local markets. They operate under an organizational mission of providing financial and community development services to underserved target markets. Community development financial institutions are entities that must apply for, and receive, certification from the CDFI Fund. The CDFI Fund was created by section 104 of the Community Development Banking and Financial Institutions Act of 1994, which is contained in Title I of the Riegle Community Development and Regulatory Improvement Act of 1994. See Public Law 103–325, 108 Stat. 2160 (1994). See CFTC Letter No. 16–02, at 3. PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 76431 B. Comments Received The Commission received ten comment letters in response to the May 2020 Proposal.41 Nearly all the comments letters supported the Commission’s proposal. Specific aspects of these comments, including suggested changes to the rule text and other clarifications, are discussed in detail below. One commenter, Better Markets, expressed opposition to the proposed exemptions for a number of reasons. Better Markets stated that the Commission’s proposal to permit financial entities to elect not to clear swaps subject to the Clearing Requirement is unnecessarily complex, undermines the Dodd-Frank Act’s financial reform effort, and could serve as a drain on liquidity in the cleared swap market. The Commission believes that the final rules make the overall regulatory framework for cleared swaps less complex, codify longstanding practice, and are narrowly tailored to limit any impact on cleared swaps market liquidity. C. Swaps Entered Into by Central Banks, Sovereign Entities, and IFIs In the May 2020 Proposal, the Commission proposed to codify its determination that swaps entered into by central banks, sovereign entities, and IFIs, set forth in the preamble to the 2012 End-User Exception final rule,42 are not subject to the Clearing Requirement under section 2(h)(1) of the CEA.43 The Commission received six comment letters addressing this aspect of the proposal.44 After considering the 41 The Commission received comments from the following: (1) American Bankers Association; (2) Asian Infrastructure Investment Bank (AIIB); (3) BIS; (4) Better Markets, Inc. (Better Markets), (5) Chris Barnard; (6) the Capital Impact Partners, Community Housing Capital, Enterprise Community Loan Fund, IFF, Low Income Investment Fund, Reinvestment Fund, and SelfHelp Ventures Fund (CDFI Coalition); (7) ESM; (8) Inter-American Development Bank, the InterAmerican Investment Corporation, the International Bank for Reconstruction and Development, and the International Finance Corporation (collectively referred to as Commenting IFIs); (9) New South Wales Treasury Corporation and (10) the Opportunity Finance Network. All comments are available on the Commission’s website at: https:// comments.cftc.gov/PublicComments/ CommentList.aspx?id=3112. 42 See 2012 End-User Exception, 77 FR at 42561– 42562. 43 Id. at 42562. As discussed in the preamble to the May 2020 Proposal, the Commission will refer to ‘‘foreign governments’’ as ‘‘sovereign entities’’ because it considers ‘‘foreign governments’’ and ‘‘sovereign entities’’ to mean the same thing. 85 FR at 27956 n.7, 27959. 44 The following comments addressed this proposal: Chris Barnard, AIIB, ESM, BIS, New South Wales Treasury Corporation, and Commenting IFIs. E:\FR\FM\30NOR1.SGM 30NOR1 76432 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations comments, the Commission is adopting the rules largely as proposed. The final regulations are consistent with the policy the Commission set out in the preamble to the 2012 End-User Exception, and in finalizing the exemption for swaps entered into by central banks and sovereign entities in regulation § 50.75 and the exemption for swaps entered into by IFIs in regulation § 50.76, the Commission is providing legal certainty that such swaps entered into by a narrow group of entities are not subject to the Clearing Requirement. In response to comments received, the Commission is making one important modification to the final regulations to clarify that the exemption is not dependent on the exempted swaps being reported to a swap data repository under Commission regulation §§ 45.3 and 45.4, and this reporting obligation does not fall to central banks, sovereign entities, or IFIs.45 As discussed further below, the Commission did not intend this result and is modifying the rule text accordingly. TKELLEY on DSKBCP9HB2PROD with RULES 1. Definition of Central Bank—§ 50.75(a) The Commission proposed to define ‘‘central bank’’ to mean a reserve bank or monetary authority of a central government (including the Board or Governors of the Federal Reserve System or any of the Federal Reserve Banks) or the Bank for International Settlements. The Commission did not receive any comment on its proposed definition of central bank and is adopting the definition for ‘‘central bank’’ as proposed. 2. Definition of Sovereign Entity— § 50.75(b) The Commission proposed to define ‘‘sovereign entity’’ to mean a central government (including the U.S. Government), or an agency, department, or ministry of a central government. In the 2012 End-User Exception final rule, the Commission referred to certain exempt swap counterparties as ‘‘foreign governments.’’ The term ‘‘foreign government’’ is intended to refer to sovereigns, similar to the U.S. Federal Government, that are located outside of the United States. Because the Commission distinguished the Federal Government from state and local government entities, the term ‘‘foreign government’’ is intended to apply only to the Federal level of governmental organizations.46 45 Under one reading of the proposed rule text, the exemption is dependent on reporting the swap to a swap data repository. See May 2020 Proposal, 85 FR at 27959. 46 77 FR at 42562. The Commission stated that Congress did not expressly exclude state and local VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 The Commission requested comment on the scope of the proposed definition and whether an alternative definition should be adopted. The Commission received one comment from New South Wales Treasury Corporation addressing this issue and proposing alternative definitions for consideration. The commenter stated that comity and the traditions of the international system support including foreign states and instrumentalities (such as agencies, departments, or ministries) under the definition of ‘‘sovereign entity.’’ The commenter further stated that the Commission should not limit its concept of ‘‘sovereign entities’’ based on the American distinction between states and the Federal Government because this would adversely impact foreign governments that operate under systems where the Federal and state governments exist as independent bodies but operate within a financially integrated system. The commenter proposed that the Commission consider alternative definitions of ‘‘sovereign entity’’ including: (1) A definition that includes all foreign state governments, agencies, departments, and ministries; (2) a definition that includes named jurisdictions that have a constitutional basis for sovereign authority based on a comparable recognition of the foreign state or public authority as a ‘‘sovereign’’ under national laws; (3) a definition based on recognition of foreign public sector entities based on government (state or Federal) ownership; or (4) a definition based on the alignment of an entity with capital adequacy standards under foreign laws. The Commission considered this comment and its proposed alternative definitions of ‘‘sovereign entity.’’ The Commission believes the definition of ‘‘sovereign entity’’ adopted in this final rule appropriately limits the exemption in a manner that is consistent with the 2012 End-User Exception and provides clarity regarding the scope of swaps that are not subject to the Clearing Requirement. The second and fourth alternatives proposed by the commenter would require the Commission periodically to reassess which entities are included in the definition based on geopolitical events or whether a specific entity meets capital adequacy standards under foreign law. The Commission does not believe that these alternatives provide standards that are feasible to government entities form the ‘‘financial entity’’ definition. On the contrary, in section 2(h)(7)(C)(i)(VII) of the CEA, Congress expressly included employee benefit plans of state and local governments in the ‘‘financial entity’’ definition, thereby prohibiting them from using the end-user exception. Id. PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 implement; nor are they helpful in identifying foreign government entities that are similar to the U.S. Federal Government. Rather, the Commission has purposefully defined the term ‘‘sovereign entity’’ so that it excludes the concept of ‘‘state governments.’’ The first and third alternatives proposed by the commenter would add references to foreign state governments or entities based on state government ownership. Under the best reading of section 2(h)(7) of the CEA, it is appropriate to limit the exemption from the Clearing Requirement to national governments thereby excluding state, regional, provincial, or municipal governments. This limitation applies equally to U.S. and non-U.S. governmental entities. The Commission continues to believe, as it did in 2012, that most governmental entities are predominantly engaged in non-banking and non-financial activities related to their core public functions and, therefore, are not likely to be ‘‘financial entities’’ ineligible to elect an exception from the Clearing Requirement under section 2(h)(7)(C) of the CEA.47 The activities of state and local government entities in the United States and internationally that might be in the business of banking or financial in nature under section 2(h)(7)(C)(i)(VIII) of the CEA ‘‘are likely to be incidental, not primary, activities of those entities.’’ 48 Nevertheless, because some state or local government entity’s swap activity may be commercial in nature, the Commission does not believe that a per se exclusion for state and local government entities from the Clearing Requirement is appropriate. Accordingly, the Commission has determined not to include these entities or any of the four suggested alternatives in the definition of ‘‘sovereign entity’’ and is adopting the definition of ‘‘sovereign entity’’ as proposed. In addition, adopting any of the alternative definitions of ‘‘sovereign entity’’ proposed by the commenter would diverge from the approach taken by the Commission in the margin for uncleared swaps rules under Part 23. Maintaining consistency between the application of the Clearing Requirement and the application of the margin for uncleared swaps regulations avoids introducing unnecessary complication and possible confusion for swap market participants due to the interrelationship between the two sets of regulations. 47 85 FR at 27960 (citing 2012 End-User Exception, 77 FR at 42562–42563). 48 Id. at 27960 (quoting 2012 End-User Exception, 77 FR at 42562–42563). E:\FR\FM\30NOR1.SGM 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES 3. Definition of IFI—§ 50.76(b) As proposed, regulation 50.76 would define ‘‘international financial institution’’ to mean the 17 entities the Commission identified in the 2012 EndUser Exception final rule,49 the four entities to whom DCR issued no-action letters in 2013 and 2017,50 the Islamic Development Bank,51 and any other entity that provides financing for national or regional development in which the U.S. Government is a shareholder or contributing member. The Commission received one comment on the definition of IFI. The Asian Infrastructure Investment Bank (AIIB) requested that it be included as an IFI because it is similar to other IFIs under proposed regulation § 50.76(b).52 According to AIIB, inclusion on the list would encourage international comity and promote cross-border cooperation, particularly with regard to European Union authorities because AIIB is exempt from the clearing obligation under European law.53 AIIB also states that the CEA does not require that the U.S. Government be a shareholder or 49 The 17 IFIs identified in the 2012 End-User Exception final rule are the following: (1) African Development Bank; (2) African Development Fund; (3) Asian Development Bank; (4) Bank for Economic Cooperation and Development in the Middle East and North Africa; (5) Caribbean Development Bank; (6) Council of Europe Development Bank; (7) European Bank for Reconstruction and Development; (8) European Investment Bank; (9) European Investment Fund; (10) Inter-American Development Bank; (11) Inter-American Investment Corporation; (12) International Bank for Reconstruction and Development (part of the World Bank Group); (13) International Development Association (part of the World Bank Group); (14) International Finance Corporation (part of the World Bank Group); (15) International Monetary Fund; (16) Multilateral Investment Guarantee Agency (part of the World Bank Group); and (17) Nordic Investment Bank. 50 CAF; CABEI; ESM; and NADB. 51 The Islamic Development Bank is included in the definition of ‘‘multilateral development bank’’ under Commission regulation § 23.151, the definitions applicable to the Commission’s margin for uncleared swaps rules and was included as an IFI in the May 2020 Proposal for this reason. 52 AIIB notes that in 2018 it submitted a request to DCR for no-action relief from the Clearing Requirement based on the same factors discussed in the DCR letters issued in 2013 and 2017. AIIB Letter at 3, n. 8. AIIB is a MDB that began operating on January 16, 2016. AIIB is an international organization with its principal office located in Beijing, People’s Republic of China. 53 AIIB Comment at 4. AIIB explains that it could not have been included as a MDB under European law in 2012 because it was not yet established. AIIB, along with CAF and CABEI, is included on a new list of MDBs that are not subject to the European clearing obligation under Regulation (EU) No 375/2013, Article 117(1) and (2)(p), available at https://eur-lex.europa.eu/legal-content/EN/TXT/ ?uri=CELEX:02019R0876-20200627. AIIB argues that the European Union’s subsequent recognition of AIIB as a MDB should mean that it is de facto an IFI for purposes of an exemption from the CFTC’s Clearing Requirement. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 contributing member of a foreign institution in order to qualify for an exemption from the Clearing Requirement, and ten of the 22 institutions included in regulation 50.76 do not have the U.S. Government as a shareholder or contributing member.54 AIIB argues that it is comparable to the other IFIs under the proposed rule and should be afforded similar treatment.55 The Commission does not believe it would be appropriate to include AIIB as an IFI for purposes of an exemption from the Clearing Requirement for a number of reasons. First, the CEA does not prescribe that the swaps of all foreign central banks, foreign sovereign entities, or IFIs should be exempt from the Clearing Requirement. Rather, pursuant to section 4(c) of the CEA, the Commission must find that exempting swaps entered into with AIIB from required clearing is consistent with public interest, taking into account principles of international comity. In the 2012 End-User Exception, the Commission did not exempt all IFIs from the Clearing Requirement. Rather, the Commission based its identification of IFIs on the expectation that if any of the Federal Government, Federal Reserve Banks, or international financial institutions of which the United States is a member were to engage in swap transactions in foreign jurisdictions, the actions of those entities with respect to those transactions would not be subject to foreign regulation.56 As explained above, the Commission determined that the exemption from the Clearing Requirement would apply to IFIs defined under 22 U.S.C. 262r(c)(2) and the IFIs defined as MDBs under the proposal for the regulation that became Regulation (EU) No 648/2012, of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories (EMIR).57 The IFIs defined in 22 U.S.C. 262r(c)(2) are entities in which the United States is a direct shareholder (or member) and therefore is able to influence the IFI and promote U.S. foreign policy, economic interests, and 54 AIIB Comment at 4. These institutions include the Bank for Economic Cooperation in the Middle East and North Africa, Caribbean Development Bank, Council of Europe Development Bank, European Investment Bank, European Investment Fund, Islamic Development Bank, Nordic Investment Bank, CABEI, CAF, and ESM. 55 AIIB further states that it has not entered into any swaps with any U.S. counterparty because it is not exempt from the Clearing Requirement and margin requirements. AIIB Comment at 8. 56 77 FR at 42561–42562 (emphasis added). 57 77 FR at 42561 n.14. PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 76433 national security interests abroad.58 Thus, while there is no requirement in the CEA that the U.S. Government be a shareholder or contributing member of an IFI in order to qualify for an exemption from the Clearing Requirement, the 2012 End-User Exception established a policy that recognized the importance of furthering U.S. policy goals when the Commission listed IFIs of which the United States is a member as the type of entity it would expect to be entitled to relief from mandatory clearing in foreign jurisdictions. Further, it is appropriate to exempt the swaps entered into by CAF, CABEI, ESM, and NADB from the Clearing Requirement.59 Each of these entities is sufficiently similar to the IFIs identified in the 2012 End-User Exception in that each entity’s function, mission, and ownership structure (i.e., comprised of national authorities) is analogous to those IFIs. In addition, it is appropriate to include the Islamic Development Bank as an IFI because it is included as a MDB under Commission regulation § 23.151, the definitions section for the margin for uncleared swaps rules. As noted above, consistency between the regulations for required clearing and margin for uncleared swaps helps avoid unnecessary complication and reduce possible confusion among market participants due to the interrelationship between the two sets of regulations. AIIB differs from the other IFIs in two important respects. First, as AIIB notes, the United States is not a shareholder under AIIB’s Articles of Agreement,60 and the Commission has indicated that the exemption from the Clearing Requirement should apply to IFIs of which the United States is a member. The United States made a determination not to become a shareholder or contributing member of AIIB.61 This 58 The United States also can exert this influence through its membership in an IFI that is a member of another IFI. See generally 2012 NAC Report. 59 The Commission notes that NADB was considered a MDB in 2012 and is included in the 2012 NAC Report. 60 The Articles of Agreement may be found here: https://www.aiib.org/en/about-aiib/who-we-are/ financing-operations/index.html. Under the Articles of Agreement, the number of shares is set at 1,000,000. Membership is divided between regional members and non-regional members, with regional members controlling 750,000 shares, and nonregional members controlling 250,000 shares. China owns 297,804 of the 750,000 regional member shares, with 16,150 shares unallocated. 61 According to a report from the Congressional Research Service, AIIB was conceived in 2013 as part of China’s ‘‘one belt, one road’’ policy. The United States did not join this development bank for two reasons. First, China’s voting share (28.7%) is substantially larger than that of the second-largest AIIB member nation (India at 8.3%). This is the E:\FR\FM\30NOR1.SGM Continued 30NOR1 76434 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES decision was based on, among other things, concerns that the goals of AIIB may not necessarily align with the interest of U.S. foreign policy, economic interests, and national security interests. It would not now be appropriate for the Commission to treat AIIB as if the United Stated had elected to become a member of AIIB. Further, with respect to the IFIs included in regulation 50.76, the member governments generally have a collective majority control and governance over the entities. In AIIB, China is the largest shareholder (controlling 297,804 of 1,000,000 shares), with no other member government holding a block of shares that could realistically influence policy.62 Second, AIIB’s stated purpose appears to be broader than the entities added pursuant to DCR no-action letters. The stated purpose of CAF is ‘‘to promote sustainable development and regional integration, by providing multiple financial services to clients in the public and private sectors of its Shareholder Countries.’’ 63 CABEI’s objective is ‘‘to promote the economic integration and the balanced economic and social development of the Central American region.’’ 64 ESM’s purpose is ‘‘to mobilize funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States.’’ 65 By contrast, AIIB’s purpose is to ‘‘foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors’’ and ‘‘promote regional cooperation and partnership in addressing development challenges by working in close cooperation with other multilateral and bilateral development largest gap between first and second largest shareholders at any existing MDB. Second, there are two key differences in governance structures: AIIB does not have a resident board of executive directors that represents member countries’ interests on a day-to-day basis; and AIIB gives more decision-making authority to regional countries and its largest shareholder (China). Congressional Research Service, Asian Infrastructure Investment Bank, R44754, at 8–10 (Feb. 3, 2017). 62 Id. 63 Article 3, Agreement Establishing Corporacio ´n Andina de Fomento (March 2015). 64 Article 2, CABEI Constitutive Agreement (Aug. 22, 2018). 65 Article 3, Treaty Establishing ESM (Feb. 2, 2012), available at https://www.esm.europa.eu/ legal-documents/esm-treaty. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 banks.’’ 66 The Commission notes AIIB’s broader purpose—particularly to create wealth—along with AIIB’s comments that ‘‘AIIB is posed to be a major issuer in the international capital markets’’ and ‘‘will be required to negotiate a significant volume of swaps in connection with issuances under this program’’ goes beyond other IFIs that serve the public interest needs of developing countries through lending capital.67 Finally, the Commission is not persuaded by AIIB’s argument that international comity with European authorities will be enhanced by exempting AIIB’s swaps from the CFTC’s Clearing Requirement. Global authorities, including the CFTC and European authorities, have long acknowledged that there will be differences in the scope of products and participants covered by their respective mandatory clearing regimes.68 In addition, the relevant country for purposes of considering international comity with regard to AIIB is more likely to be China given that AIIB’s headquarters are in Beijing. The Commission notes that China has issued a clearing mandate for Renminbi interest rate swaps, however, the Commission has not determined that such swaps are required to be cleared. For these reasons, the exclusion of AIIB from the definition of ‘‘international financial institution’’ for purposes of the Clearing Requirement is an appropriate exercise of the Commission’s discretion under section 4(c) of the CEA and is consistent with the 2012 End-User Exception.69 66 Article 1, AIIB’s Articles of Agreement (Dec. 25, 2015), available at https://www.aiib.org/en/aboutaiib/basic-documents/articles-of-agreement/ index.html. 67 AIIB Letter at 7. 68 2016 Clearing Requirement Determination, 81 FR at 71203–71205 (providing an overview of relevant clearing mandates adopted in non-U.S. jurisdictions with which the CFTC sought to align its clearing requirement, despite differences in terms of product and participant scope). See also the International Organization of Securities Commissions’ Information Repository for Central Clearing Requirements for OTC Derivatives (last updated Dec. 12, 2019), available at https:// www.iosco.org/publications/?subsection= information_repositories. 69 The Commission also notes that its decision regarding the scope of the definition of IFI is consistent with the Commission’s recently issued Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, 85 FR 56924 (Sep. 14, 2020). In the context of determining the registration threshold for swap dealers, the Commission stated that the term ‘‘U.S. person’’ does not include the International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 D. Exemption for Swaps With Central Banks, Sovereign Entities, and IFIs— § 50.75(a) and 50.76(a) Proposed regulation 50.75(a) would exempt from the Clearing Requirement swaps entered into by central banks and sovereign entities. Proposed regulation 50.76(a) would exempt from the Clearing Requirement swaps entered into with IFIs. Under both proposed rules, the Commission included the phrase ‘‘and this part if reported to a swap data repository pursuant to §§ 45.3 and 45.4 of this chapter.’’ The Commission received two comments on the inclusion of this reporting requirement. Both commenters, the BIS and the Commenting IFIs, supported the codification of the proposed exemptions from the Clearing Requirement, but noted that the Commission did not impose a reporting requirement on central banks, sovereign entities and IFIs in the 2012 End-User Exception. Rather, the commenters explained that under current market practice their swap counterparties report the swap to a swap data repository. The commenters stated that the Commission should clarify that the eligibility to claim an exemption is not conditioned on: (i) The central bank, sovereign entity, or IFI itself reporting the swap to a swap data repository; or (ii) its counterparty reporting the swap to a swap data repository.70 The Commission agrees with the comments received and did not intend to impose a reporting requirement on central banks, sovereign entities, or IFIs under regulations 50.75(a) and 50.76(a). The Commission is revising the text of the regulation to delete the reference to agencies and pension plans, and any other similar international organizations, and their agencies and pension plans. 85 FR at 56937. The Commission based its definition on 22 U.S.C. 262r(c)(2) and the European Union’s 2012 regulation on ‘‘OTC derivatives, central counterparties and trade repositories.’’ Id. (citations omitted). Additionally, the Commission stated there is nothing in the text or history of the swap-related provisions of Title VII to suggest that Congress intended to deviate from the traditions of the international system by including such IFIs within the definitions of the term ‘‘U.S. person.’’ Id. (quoting Further Definition of Swap Dealer, Security-Based Swap Dealer, Major Swap Participant, Major Security-Based Swap Participant and Eligible Contract Participant, 77 FR 30596, 30692 n.1189 (May 23, 2012) (citing to 22 U.S.C. 262r(c)(2) and the 2012 European Union definition for support in identifying IFIs as excluded from the definition of ‘‘U.S. person’’ as a discretionary and appropriate exercise of international comity-based doctrines). Finally, as noted above, the list of IFIs recognized in the European Union has since been superseded and updated in Regulation (EU) No 575/2013, Article 117(2). 70 See Commenting IFIs comment at 4–5 and BIS comment at 2–4. E:\FR\FM\30NOR1.SGM 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations swap data repository reporting.71 This edit also is intended to respond to commenters concerns that a counterparty’s failure to report a swap to a swap data repository could make those swaps ineligible for the exemption, even if the central bank, sovereign entity, or IFI had no knowledge of the counterparty’s failure to report appropriately. The removal of the citation to part 45 reporting from the regulation is intended to permit current practice to continue regarding which counterparty reports the swap to a swap data repository. The removal of the citation is not intended to relieve any swap counterparty’s independent obligation to report the swap to a swap data repository under Commission regulation §§ 45.3 and 45.4. TKELLEY on DSKBCP9HB2PROD with RULES E. Data Related to Swaps Entered Into by IFIs The Commission requested comment on the data it presented regarding the use of swaps by IFIs from the Depository Trust & Clearing Corporation’s (DTCC’s) swap data repository, DTCC Data Repository (DDR). As the Commission noted in the May 2020 Proposal, from January 1, 2018 to December 31, 2018, 16 IFIs named in proposed regulation 50.76 were counterparties to a swap that was entered into and reported to DDR during that time period. Overall, the 16 IFIs entered into approximately 2,500 uncleared interest rate swaps with an estimated total notional value of $220 billion. Of those 16, four IFIs entered into more than one hundred swaps during calendar year 2018. Compared to data that the Commission gathered from DDR during calendar year 2017, the number of IFIs entering into interest rate swaps increased from nine to 16, and the total number and total notional value of all uncleared interest rate swaps entered into by IFIs increased from 381 swaps totaling $59.8 billion to approximately 2,500 swaps totaling $220 billion. The Commission did not receive any comments on the data and has no reason to believe this data is not an accurate representation of swaps entered into by IFIs. Based on this data, the scope of swaps entered into by IFIs and eligible for this exemption is quantifiable and does not represent a significant shift in swaps away from the Clearing Requirement. The data also reflects 71 Regulation § 50.75(a) is being amended to state that swaps entered into by a central bank or sovereign entity shall be exempt from the clearing requirement of section 2(h)(1)(A) of the Act. Regulation § 50.76(a) is being amended to state that swaps entered into by an international financial institution shall be exempt from the clearing requirement of section 2(h)(1)(A) of the Act. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 76435 continued interest from IFIs in entering into uncleared swaps with their counterparties. institutions would have to post margin to satisfy the requirements of the DCO, which could raise the costs associated with hedging the risks of their swaps F. Swaps Entered Into With Certain with customers.75 In addition, the Bank Holding Companies, Savings and Commission acknowledged that some of Loan Holding Companies, and CDFIs these small financial institutions may The Commission proposed to exempt incur initial and annual fixed clearing from the Clearing Requirement swaps fees and other expenses that may be entered into to hedge or mitigate incrementally higher relative to the commercial risk if one of the number of swaps executed over a given counterparties to the swap is either (a) period of time.76 Finally, the a bank holding company or savings and Commission stated that given the loan holding company, each having no relatively low notional volume of swap more than $10 billion in consolidated books held by these small institutions, assets, or (b) CDFI transacting in certain and the commercial customer purposes types and quantities of swaps.72 Such an these swaps satisfy, the swaps executed exemption would be consistent with by these entities were what Congress Commission regulation § 50.50(d), was considering when it directed the which permits banks, savings Commission to consider the exemption associations, farm credit system for small financial entities.77 institutions, and credit unions with total The proposed amendments would assets of $10 billion or less (small codify two no-action letters issued by financial institutions) to elect not to DCR in 2016.78 The Commission clear their swaps that are used to hedge believes that codifying both of these or mitigate commercial risk.73 staff no-action letters is consistent with In adopting Commission regulation the policy rationale behind the § 50.50(d), the Commission noted that exemption from the Clearing small financial institutions tend to serve Requirement that the Commission smaller, local markets, and are well granted for swaps entered into by banks, situated to provide swaps to the savings associations, farm credit customers in their markets for the institutions, and credit unions in the purpose of hedging commercial risk.74 2012 End-User Exception.79 The Commission also noted that small The Commission received four financial institutions typically hedge comments letters on this aspect of the customer swaps by entering into proposal.80 While most of the comments matching swaps, and if those swaps had were supportive, Better Markets to be cleared, small financial opposed the Commission’s use of its public interest exemptive authority to 72 See August 2018 Proposal, 83 FR 44001 and exempt from the Clearing Requirement May 2020 Proposal, 85 FR 27955. swaps entered into by these entities. As 73 Commission regulation § 50.50(d); see also discussed below, the Commission is 2012 End-User Exception, 77 FR 42560. adopting the regulations as proposed Commission regulation § 50.50(d) exempts for the purposes of the Clearing Requirement, a person that with one minor clarification. is a ‘‘financial entity’’ solely because of section 2(h)(7)(C)(i)(VIII) of the CEA if the person: (1) Is organized as a bank, as defined in section 3(a) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a savings association, as defined in section 3(b) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a farm credit system institution chartered under the Farm Credit Act of 1971; or an insured Federal credit union or Statechartered credit union under the Federal Credit Union Act; and (2) has total assets of $10,000,000,000 or less on the last day of such person’s most recent fiscal year. Commission regulation § 50.50(d) does not excuse the affected persons from compliance with any other applicable requirements of the CEA or in the Commission’s regulations. As discussed below, the Commission is recodifying Commission regulation § 50.50(d) as a separate rule, § 50.53, so that it is easier to locate and the conditions to claim the exemption are set forth more clearly. The Commission does not consider this relocation to alter the substance of the exemption. 74 77 FR at 42578. The Commission acknowledged that, as indicated by commenters, that a large portion of the swaps executed by these financial institutions with customers likely hedge interest rate risk associated with commercial loans. Id. PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 1. Definition of Community Development Financial Institution— § 50.77(a) The Commission proposed to define ‘‘community development financial institution’’ to mean a CDFI, as defined in section 103(5) of the Community Development Banking and Financial Institutions Act of 1994, that is certified by the Treasury Department’s Community Development Financial 75 Id. These costs would largely be driven by the costs of clearing in terms of funding the cost of posting initial margin and paying variation margin to the DCO. 76 Id. 77 Id. 78 CFTC Letter No. 16–01 (request from the American Bankers Association) and CFTC Letter No. 16–02 (request from a coalition of CDFIs). 79 See August 2018 Proposal at 44004. See also 2012 End-User Exception, 77 FR at 42590–42591. 80 See Comments submitted by the American Bankers Association, Opportunity Finance Network, Better Markets, and the CDFI Coalition. E:\FR\FM\30NOR1.SGM 30NOR1 76436 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations Institution Fund under the requirements set forth in 12 CFR 180.201(b).81 CDFIs certified by the Treasury Department must meet certain community development finance criteria intended to show they promote economic revitalization and community development in low-income communities that lack adequate access to affordable financial products and services.82 The Commission did not receive any comment on its proposed definition and is adopting the definition as proposed. 2. Definition of Bank Holding Company—§ 50.78(a) The Commission proposed to define ‘‘bank holding company’’ to mean an entity that is organized as a bank holding company, as defined in section 2 of the Bank Holding Company Act of 1956.83 This definition represents the accepted meaning for ‘‘bank holding company.’’ The Commission did not receive any comments on the proposed definition and is adopting the definition as proposed. TKELLEY on DSKBCP9HB2PROD with RULES 3. Definition of Savings and Loan Holding Company—§ 50.79(a) The Commission proposed to define ‘‘savings and loan holding company’’ to mean an entity that is organized as a savings and loan holding company, as defined in section 10 of the Home 81 Under section 103, a ‘‘community development financial institution’’ means a person (other than an individual) that: (i) Has a primary mission of promoting community development; (ii) serves an investment area or targeted population; (iii) provides development services in conjunction with equity investments or loans, directly or through a subsidiary or affiliate; (iv) maintains, through representation on its governing board or otherwise, accountability to residents of its investment area or targeted population; and (v) is not an agency or instrumentality of the United States, or of any State or political subdivision of a State. 12 U.S.C. 4702(5). 82 See Certification as a Community Development Financial Institution, 12 CFR 1805.201(b)(1) through (6) (setting forth the following criteria for a community development financial institution to obtain Treasury Department certification: (1) It has a primary mission of community development; (2) its predominant business activity is the provision of financial products or financial services; (3) it serves one or more target markets such as an investment area or target population; (4) it has a track record of providing development services to borrowers in conjunction with financing activities; (5) it maintains accountability to the residents of its target market; and (6) it is a non-government entity). See also Community Development Financial Institutions Fund, Notice of Funds Availability, 83 FR 4750 (Feb. 1, 2018) (stating the priorities of the CDFI Fund). 83 Section 2 of the Bank Holding Company Act generally defines a ‘‘bank holding company,’’ subject to limited exceptions, as any company which has control over any bank or over any company that is or becomes a bank holding company. 12 U.S.C. 1841(a)(1) (subject to exceptions described in paragraph (5) therein). VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 Owners’ Loan Act of 1933.84 This definition represents the accepted meaning for ‘‘savings and loan holding company.’’ The Commission did not receive any comments on the proposed definition and is adopting the definition as proposed. G. Exemption From the Clearing Requirement for CDFIs—§ 50.77(b) The Commission proposed to exempt swaps entered into by a CDFI from the Clearing Requirement if: (1) The swap is a U.S. dollar denominated interest rate swap in the fixed-to-floating class or the forward rate agreement class that would otherwise be subject to the Clearing Requirement under Commission regulation § 50.4(a); (2) the total aggregate notional value of the all swaps entered into by the CDFI during the 365 calendar days prior to the day of execution of the swap is less than or equal to $200,000,000; (3) the swap is one of ten or fewer swap transactions that the CDFI enters into within a period of 365 calendar days; (4) one of the counterparties to the swap reports the swap to a swap data repository pursuant to Commission regulation §§ 45.3 and 45.4, and reports all information described under Commission regulation § 50.50(b) to a swap data repository; and (5) the swap is used to hedge or mitigate commercial risk as defined under Commission regulation § 50.50(c). The proposal is consistent with the 2016 DCR no-action relief previously afforded CDFIs.85 The Commission received strong support for the proposal. The CDFI Coalition supported the proposal because interest rate swaps help CDFIs manage risk, and CDFIs borrow funds at floating rates and lend to customers at fixed rates. The floating rate leaves the CDFI exposed to future adverse interest rate moves, and interest rate swaps allow the CDFI to hedge its interest rate exposure by converting that exposure to a fixed rate thereby enhancing its ability to lend to customers and fund projects.86 The CDFI Coalition stated that an exemption from the Clearing Requirement will eliminate the costs of clearing (posting of margin, cost of initial and annual fixed clearing fees and other expenses) and free up the time, effort, and resources that would be 84 Section 10 of the Home Owners’ Loan Act generally defines a ‘‘savings and loan holding company,’’ subject to limited exceptions, as any company that directly or indirectly controls a savings association or that controls any other company that is a savings and loan company. 12 U.S.C. 1467(a)(1)(D)(i) (subject to exclusions described in clause (ii)). 85 August 2018 Proposal, 83 FR at 44005 (citing CFTC Letter No. 16–02). 86 CDFI Coalition Letter at 3. PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 necessary to establish intermediary and clearinghouse access. The CDFI Coalition stated that ‘‘while the potential volume of interest rate swap activity may increase in the future, it will not reach the level of systemic importance.’’ 87 The CDFI Coalition also confirmed that CDFIs enter into swaps to hedge risk from financing transactions infrequently and have relatively low notional volume swap books.88 As was the case when the Commission provided an exception for the small banks, farm credit system institutions, and credit unions under regulation 50.50(d), the CDFI Coalition stressed the public interest benefits that will be served by permitting CDFIs to engage in tailored and limited swaps to pursue their public interest goals without incurring the costs of central clearing. Better Markets opposed the exemption for CDFIs, as well as for bank holding companies, and savings and loan holding companies, as unnecessary and detrimental to the derivatives reforms of the Dodd-Frank Act. Better Markets stated that under section 2(h)(7)(C)(ii) the CFTC may consider excluding only certain categories of financial entities and that Congress intended to insure financial institutions broadly mitigate risks through the derivatives clearing system.89 Better Markets is concerned that these exemptions will permit swaps activities to occur outside of regulated, transparent, impartially access markets, and will draw liquidity away from markets.90 The Commission disagrees with Better Markets’ view that the proposed exemption for CDFI is not permitted because Congress did not include CDFIs under section 2(h)(7)(C)(ii) of the CEA. As discussed further in Section V, below, Congress did not exclude section 2(h) from the Commission’s statutory authority under section 4(c) of the CEA if the Commission finds an exemption from the Clearing Requirement to be in the public interest. CDFIs are sufficiently similar to the type of entities Congress included when it directed the Commission to consider an exemption from the Clearing Requirement for small banks and savings associations.91 CDFIs certified 87 CDFI Coalition Letter at 6. The CDFI Coalition confirmed the swap data used in the proposed rule is correct: Eight different CDFIs entered into 13 uncleared interest rate swaps in 2018 with an aggregate notional value of almost $84 million. 89 Better Markets comment at 4–5. 90 Id. at 6–7. 91 See 77 FR at 42578. The Commission notes that uncleared swaps with a counterparty that is subject 88 Id. E:\FR\FM\30NOR1.SGM 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES by the CDFI Fund serve rural and urban low-income communities across the nation that lack adequate access to affordable financial products and services.92 Through financial assistance and grants from the CDFI Fund, CDFIs are able to make loans and investments, and to provide related services for the benefit of designated investment areas, target populations, or both.93 CDFIs enter into a limited number of interest rate swaps and forward rate agreement swaps in order to hedge interest rate risk incurred as a result of issuing debt securities or making loans in pursuit of their organizational missions.94 The CDFI Coalition requested that the Commission clarify that regulation 50.77(b)(1) applies equally to both fixedto-floating and floating-to-fixed interest rate swaps. The Commission confirms that the regulation is intended to apply to both fixed-to-floating and floating-tofixed interest rate swaps, and that both formulations are included within the fixed-to-floating swap class that is subject to the Clearing Requirement according to the specifications outlined in Table 1a to Commission regulation § 50.4(a).95 Given that the same language is used elsewhere in part 50 to describe the fixed-to-floating interest rate swap class, the Commission declines to amend regulation § 50.77(b)(1). to the CEA and Commission regulations with regard to that transaction must still comply with the CEA and Commission regulations as they pertain to uncleared swaps, e.g., the recordkeeping and reporting requirements under parts 23 and 45 of the Commission’s regulations. 92 See also Community Development Financial Institutions Fund, Notice of Funds Availability, 83 FR 4750 (Feb. 1, 2018) (stating the priorities of the CDFI Fund). In the event certification is not maintained, a CDFI would no longer meet the definition and would no longer be able to rely on this exemption from the Clearing Requirement. 93 See Community Development Financial Institutions Program, 68 FR 5704, 5704 (Feb. 4, 2003). Additional information is available at the CDFI Fund’s website, https://www.cdfifund.gov/ about/Pages/default.aspx. 94 CDFI Coalition comment at 5–6; Better Markets comment at 6. 95 Although the language in new regulation § 50.77(b)(1) and Commission regulation § 50.4 is written as applying to an interest rate swap in the ‘‘fixed-to-floating class’’ this does not mean that the provision applies only to swaps if the first leg is a fixed rate and the second leg is a floating rate. As the Commission explained when it determined that the class of ‘‘fixed-to-floating swaps’’ should be subject to the Clearing Requirement, a fixed-tofloating swap is a swap in which the payment or payments owed for one leg of the swap is calculated using a fixed rate and the payment or payments owed for the other leg are calculated using a floating rate. 2012 Clearing Requirement Determination at 74302. This description from the 2012 Clearing Requirement Determination helps to explain why it is unnecessary to list fixed-tofloating swaps and floating-to-fixed swaps separately; these two phrases are referring to the same swaps (i.e., one leg is a fixed rate and one leg is a floating rate, regardless of which leg is characterized as the first leg). VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 However, the Commission confirms that both fixed-to-floating and floating-tofixed interest rate swaps are covered by regulation § 50.77 for swaps entered into by CDFIs. The Commission also believes that the conditions set forth in proposed regulation § 50.77(b)(1) through (5) are consistent with the conditions under regulation § 50.50(d). By limiting the product scope to U.S. dollar interest rate swaps in the fixed-to-floating swap class and forward rate agreement class, the Commission is recognizing the need for CDFIs to hedge or mitigate interest rate risk created by the loans, investments, and financial services provided to their target populations. In addition, limiting the total aggregate notional value of all swaps and forward rate agreements entered into during the 365 calendar days prior to the day of execution to less than or equal to $200,000,000 ensures that the swaps are being used to hedge or mitigate commercial risk. In that same regard, the requirement that a given CDFI enter into ten or fewer swaps over the course of 365 calendar days will prevent these entities from arbitrarily increasing the number of swaps into which they enter. Lastly, the reporting requirement will permit the Commission to verify that the exemption is being used in the manner intended. The Commission did not receive any comments on the proposed conditions set forth in proposed rule 50.77(b)(2) through (5), and is adopting those conditions as proposed. H. Exemption From the Clearing Requirement for Bank Holding Companies—§ 50.78(b) and Savings and Loan Holding Companies—§ 50.79(b) As described above, the Commission proposed to codify the 2016 staff noaction letter extending relief from the Clearing Requirement to certain bank holding companies and savings and loan holding companies that otherwise would have qualified for the exception for small banks and savings associations under regulation 50.50(d).96 In response to this proposal, the Commission received one comment from the American Bankers Association stating its support,97 and as discussed above, 96 In CFTC Letter No. 16–01, subject to certain conditions, bank holding companies and savings and loan holding companies are permitted to elect the exception from the Clearing Requirement under Commission regulation § 50.50(d) as if the bank holding company or savings and loan holding company were a bank or savings association having no more than $10 billion in assets. 97 American Bankers Association comment, at 2. The American Bankers Association’s comment also expressed the position that all financial entities, apart from swap dealers and major swap PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 76437 one comment letter from Better Markets generally opposing the proposed exemptions. Better Markets states that section 2(h)(7)(C)(ii) of the CEA does not cover bank holding companies or savings and loan holding companies and that if Congress intended to authorize such an exemption, it would have done so explicitly.98 The Commission disagrees with Better Markets that the exemptions for bank holding companies and savings and loan holding companies are not permitted because the entities are not specifically listed under section 2(h)(7)(C)(ii) of the CEA. Bank holding companies and savings and loan holding companies with consolidated assets of no more than $10 billion are sufficiently similar to the type of entities Congress was considering when it directed the Commission to consider an exemption from the Clearing Requirement for small banks.99 Because Congress allowed the Commission to exempt small banks and small savings and loan associations with assets of no more than $10 billion from the Clearing Requirement, it follows that the parent companies of such small entities, when subject to the same size limit, should be eligible for a similar exemption from the Clearing Requirement under an appropriate exercise of the Commission’s exemptive authority under section 4(c). Bank holding companies and savings and loan holding companies generally enter into interest rate swaps to hedge interest rate risk that they incur as a result of making loans or issuing debt securities, the proceeds of which are generally used to finance their subsidiaries, which are themselves small financial institutions exempt from the Clearing Requirement under regulation 50.50(d), renumbered as Commission regulation § 50.53. These entities enter into swaps to hedge risk from financing transactions infrequently and have relatively low notional volume swap books. These entities also pose less counterparty credit risk insofar as they generally enter into swaps with a notional amount of $10 million or less.100 As discussed further below, commenters relied on data in the supplemental proposal regarding the participants, should be exempted from the Clearing Requirement. This comment is beyond the scope of this rulemaking. 98 Better Markets comment at 5–6. 99 In the preamble to the 2012 End-User Exception final rule, the Commission determined that small banks and small savings associations were not ‘‘financial entities’’ for purposes of the Clearing Requirement. 77 FR at 42578. 100 See August 2018 Proposal, 83 FR at 44005; see also CFTC Letter No. 16–01 at 3. E:\FR\FM\30NOR1.SGM 30NOR1 76438 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES number of swaps entered into by eligible bank holding companies and savings and loan holding companies to complete their own analyses related to swap market effects of the proposal.101 Regulation §§ 50.78(b)(2) and 50.79(b)(2) require that the information described in paragraph (b) of Commission regulation § 50.50 be reported to a swap data repository. Commission regulation § 50.50(b) requires that the electing counterparty notify the Commission of how it generally meets its financial obligations associated with its non-cleared swaps. This reporting requirement is needed in order to verify that the exemption from the Clearing Requirement is being used in the manner intended by the Commission and the exception is not being misused.102 Regulation §§ 50.78(b)(3) and 50.79(b)(3) also require that only swaps used to hedge or mitigate commercial risk, as defined under paragraph (c) of Commission regulation § 50.50, may be exempt from the Clearing Requirement. This limitation appropriately reflects how these entities use swaps and also responds to Better Market’s comment that the Commission does not have the authority to exempt swaps entered into by bank holding companies and savings and loan holding companies from the Clearing Requirement.103 Congress saw the benefit in exempting small banks, savings associations, farm credit system institutions, and credit unions from the Clearing Requirement when it allowed the Commission to consider such an exemption. The Commission issued such an exemption in the 2012 End-User Exception provided that such swaps are used for hedging and not speculation and are reported to a swap data repository.104 Since 2016, by virtue of a staff no-action 101 See Better Markets comment at 6 (stating that the data shows the proposal ‘‘would not dramatically shift swaps current trading away from the Dodd-Frank Act’s clearing and multilateral trading framework, it nevertheless would permit more than $200 million of swaps activities to occur outside of regulated, transparent, impartially accessed markets.’’) See also 85 FR at 27965 (noting that between January 1, 2018, and December 31, 2018, eleven bank holding companies executed 18 interest rate swaps with an aggregate notional value of $152.5 million. Seven of those bank holding companies entered into more than one swap during the calendar year 2018.). 102 2012 End-User Exception, 77 FR at 42565. See Section 2(h)(7)(F) of the CEA; Regulation § 50.10. 103 See August 2018 Proposal, 83 FR at 44006. 104 See Section 2(h)(7)(A) of the CEA. The Commission notes that uncleared swaps with a counterparty that is subject to the CEA and Commission regulations with regard to that transaction must still comply with the CEA and Commission regulations as they pertain to uncleared swaps, e.g., the recordkeeping and reporting requirements under parts 23 and 45 of the Commission’s regulations. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 letter, small bank holding companies and savings and loan holding companies have been permitted to elect the exemption under regulation § 50.50(d) on behalf of their underlying small bank or savings and loan. In the intervening four years, the Commission has not discovered or been made aware of any abuse of this no-action letter. Accordingly, the Commission believes that the extension of the 2012 End-User Exception’s exemption for small banks to bank holding companies and savings and loan holding companies subject to this new regulation is appropriate and consistent with Congressional intent. The Commission is adopting regulation §§ 50.78 and 50.79 as proposed. I. Data Related to Swaps of CDFIs, Bank Holding Companies, and Savings and Loan Holding Companies As the Commission did in the May 2020 Proposal, it is including a discussion of data related to past swaps activity to provide context for this final rule. All interest rate swaps data included in this section was reported to DDR as events-based data and was analyzed by Commission staff.105 During the time period between January 1, 2018, and December 31, 2018, eight different CDFIs entered into interest rate swaps and four of those entities entered into more than one swap. Over this one year, CDFIs entered into thirteen uncleared interest rate swaps with an aggregate notional value of almost $84 million. According to this data, more CDFIs entered into uncleared interest rate swaps during the calendar year 2018 than during the previous 18month time period between January 2017 and June 2018.106 At the same time, the aggregate notional value of all uncleared interest rate swaps entered into during calendar year 2018 ($83.9 million) was less than the aggregate notional value of swaps entered into by CDFIs during the 18-month time period between January 2017 and June 2018 ($251.6 million). The CDFI Coalition agreed with the data presented by the Commission in the May 2020 Proposal related to CDFI swaps activities.107 105 This section does not include credit default swaps data because the relief provided to CDFIs does not extend to credit default swaps and there has been no credit default swaps activity by eligible bank holding companies or savings and loan holding companies in the time periods analyzed. 106 During an earlier 18-month time period, between January 1, 2017 and June 29, 2018, three CDFIs executed interest rate swaps: One executed two swaps with an aggregate notional value of $5.6 million; another executed three swaps with an aggregate notional value of $116 million; and another executed three swaps with an aggregate notional value of $130 million. 107 CDFI Coalition comment at 5–6. PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 Similarly, the Commission provided data in the May 2020 Proposal regarding the number of swaps entered into by eligible bank holding companies and savings and loan holding companies. Between January 1, 2018 and December 31, 2018, eleven bank holding companies executed 18 interest rate swaps with an aggregate notional value of $152.5 million.108 Seven of these bank holding companies entered into more than one swap during the calendar year 2018. In calendar year 2018 the aggregate notional value of all swaps entered into by eligible bank holding companies increased substantially ($152.5 million in 2018 compared to $68.6 million in 2017), but this increase was also the result of more eligible bank holding companies entering into uncleared interest rate swaps. Based on this data, Better Markets concluded that the scope of the exemptions was limited and not likely to dramatically shift the level of swap clearing pursuant to the Clearing Requirement.109 The data, together with the market observations and statements by commenters, demonstrates that these entities have an ongoing interest in entering into uncleared swaps and likely will benefit from the Commission’s codification of the relief currently afforded under CFTC staff letters. J. Adoption of Subpart D of Part 50 The creation of subpart D is part of an effort to distinguish exemptions that apply to specific swaps from the exceptions and exemptions for market participants eligible to elect an exception or exemption under subpart C of Part 50. This distinction is important because the exemptions for swaps under subpart D are not eligible for an exemption from margin for uncleared swaps, as discussed further below. Additionally, some of the exemptions for swaps are more limited and, in some cases, have additional conditions. The exemptions in subpart D are intended to be consistent with the Commission’s determinations set forth in the 2012 End-User Exception and do not limit the applicability of any CEA provision or Commission regulation to any person or transaction, except as provided in this final rulemaking. The exemptions in subpart D will include transactions with central banks, 108 During the previous year, between January 1, 2017 and December 31, 2017, one bank holding company executed ten interest rate swaps with an aggregate notional value of $43.6 million, and a second bank holding company executed one interest rate swap with a notional value of $25 million. 109 Better Markets comment at 6. E:\FR\FM\30NOR1.SGM 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations sovereign entities, IFIs, bank holding companies, savings and loan holding companies, and CDFIs, as defined in the regulations. The same policy reasons that the Commission considered when exempting these institutions in the 2012 End-User Exception final rule support the adoption of subpart D. TKELLEY on DSKBCP9HB2PROD with RULES III. Clearing Requirement Compliance Schedule and Compliance Dates The Commission implemented the Clearing Requirement through two separate rulemakings: (i) The 2012 Clearing Requirement Determination; and (ii) the 2016 Clearing Requirement Determination. Under each of these final rules, the Commission made the decision to phase-in the compliance requirement. Neither clearing requirement determination required compliance by all market participants for all swaps included in Commission regulation § 50.4 on a single date. The Commission proposed to improve transparency and to provide the information about compliance dates for both the 2012 Clearing Requirement and the 2016 Clearing Requirement in one location that would be convenient for market participants to reference. The Commission did not receive any comments on proposed regulation § 50.26. The compliance schedule is adopted as proposed. IV. Technical Amendment to Subpart C for Banks, Savings Associations, Farm Credit System Institutions, and Credit Unions—§ 50.53 The Commission proposed technical amendments to subpart C of part 50 to reorganize the subpart by re-codifying the existing regulatory provision for certain banks, savings associations, farm credit system institutions, and credit unions to create a new numbered section and heading, proposed regulation § 50.53. The Commission believed that a stand-alone regulation for this exemption would facilitate swap counterparties’ use and understanding of Part 50 of the Commission’s regulations by separating this exemption from the non-financial entities’ exception. The Commission views this as a nonsubstantive change, and the minor changes to the text of the regulations serve to clarify and update the requirements in light of current swap reporting conventions, specifically related to swap data reporting by entities eligible for an exception or exemption from the Clearing Requirement. The Commission did not receive any comments on the proposed changes. The change is adopted as proposed, and the Commission is VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 changing cross-references to Commission regulation § 50.50(d) to new regulation § 50.53 throughout part 50. V. Commission’s Section 4(c) Authority Section 4(c) of the CEA provides the Commission with the authority to exempt certain transactions from the requirements of the CEA if the Commission determines that the exemption is consistent with the public interest. Section 4(c)(1) of the CEA authorizes the Commission to ‘‘promote responsible economic or financial innovation and fair competition’’ by exempting any transaction or class of transactions, including swaps, from any of the provisions of the CEA (subject to exceptions not relevant here).110 In enacting CEA section 4(c)(1), Congress noted that the goal 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.’’ 111 Section 4(c)(2) of the CEA further provides that the Commission may not grant exemptive relief unless it determines that: (A) The exemption is consistent with the public interest and the purposes of the CEA; and (B) the transaction will be entered into solely between ‘‘appropriate persons’’ and the exemption will not have a materially adverse effect on the ability of the Commission or any contract market to discharge its regulatory or selfregulatory responsibilities under the CEA.112 Section 4(c)(3) of the CEA includes within the term ‘‘appropriate person’’ a number of specified categories of persons, including any governmental entity (including the United States, any state, or any foreign government) or political subdivision thereof, or any multinational or supranational entity or any instrumentality, agency, or department 110 Pursuant to section 4(c)(1) of the CEA, in order to promote responsible economic or financial innovation and fair competition, the Commission by rule, regulation, or order, after notice and opportunity for hearing, may (on its own initiative or on application of any person) exempt any agreement, contract, or transaction (or class thereof) that is otherwise subject to subsection (a) of section 4(c)(1), either unconditionally or on stated terms or conditions, or for stated periods and either retroactively or prospectively, or both, from any of the requirements of subsection (a) of CEA section 4(c), or from any other provision of the CEA. The Commission is finalizing these exemptive rules pursuant to sections 4(c)(1) and 8a(5) of the CEA. 111 H.R. Rep. No. 102–978, 102d Cong. 2d Sess. at 81 (Oct. 2, 1992), reprinted in 1992 U.S.C.C.A.N. 3179, 3213. 112 Section 4(c)(2) of the CEA. PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 76439 of any of the foregoing,113 banks,114 savings associations,115 and 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.116 The Commission requested comment regarding whether the proposed amendments would be an appropriate exercise of the Commission’s authority under section 4(c) of the CEA, including whether the proposal promotes the public interest.117 The Commission also requested comment on whether there are any entities that would not be ‘‘appropriate persons’’ under section 4(c)(3) of the CEA, and on whether the Proposals provide certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.118 The Commission received one comment generally opposing the Commission’s exercise of its authority under section 4(c) to exempt from the Clearing Requirement swaps entered into with CDFIs, bank holding companies, and savings and loan holding companies, but the commenter stated that the Commission was correct to condition the exemptions to limit their scope and provide oversight of financial institutions relying on the exemptions.119 The Commission did not receive any comment on its proposed exercise of its authority under section 4(c) to exempt from the Clearing Requirement swaps entered into with central banks, sovereign entities, and IFIs. As discussed in detail above, the Commission believes that the exemptions from the Clearing Requirement for swaps entered into by central banks, sovereign entities, IFIs, banks holding companies, savings and loan holding companies, and CDFIs are a proper exercise of its exemptive authority under section 4(c) of the CEA. A. Central Banks, Sovereign Entities, and IFIs The Commission believes that it is consistent with the public interest and the purposes of the CEA to exempt from the Clearing Requirement swaps entered into with central banks, sovereign entities, and certain IFIs under its broad exemption authority under section 4(c) of the CEA. In 2012, the Commission 113 Section 4(c)(3)(H) of the CEA. 4(c)(3)(A) of the CEA. 115 Section 4(c)(3)(B) of the CEA. 116 Section 4(c)(3)(K) of the CEA. 117 May 2020 Proposal, 85 FR at 27966; August 2018 Proposal, 83 FR at 44008. 118 Id. 119 Better Markets comment at 5. 114 Section E:\FR\FM\30NOR1.SGM 30NOR1 76440 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES established a policy that transactions with central banks, sovereign entities (then referred to as foreign governments), and certain IFIs should be exempt from the Clearing Requirement on the basis of comity and in keeping with the traditions of the international system. The Commission continues to believe, as it did in 2012, that based on the canons of statutory construction and considerations of comity, and in keeping with the traditions of the international system, sovereign entities and central banks should not be subject to section 2(h)(1) of the CEA.120 With respect to IFIs, these entities serve an important public policy purpose. The member governments of IFIs generally have majority control and governance over these entities. The Commission therefore continues to believe that an exemption is appropriate because, in a real sense, an IFI is not separable from its government owners. Codifying the Commission’s 2012 policy determination through a section 4(c) exemption provides clarity and certainty for market participants.121 The amendments to exempt swaps entered into by central banks, sovereign entities, and certain IFIs from the Clearing Requirement are available only to ‘‘appropriate persons’’ under section 4(c)(3)(H) of the CEA. No commenter disputed that these entities are ‘‘appropriate persons’’ under section 4(c)(3)(H) of the CEA, which states that any governmental entity (including the United States, any state, or any foreign government), or political subdivision thereof, or any multinational or supranational entity or any instrumentality, agency, or department of any of the foregoing. The Commission also notes that these entities are considered ECPs as set forth in section 1a(18)(A)(vii) of the CEA. Given that only ECPs are permitted to enter into uncleared swaps, and that the ECP definition is generally more restrictive than the comparable elements of the ‘‘appropriate persons’’ definition of section 4(c)(3)(H) of the CEA, the Commission believes that there is no 120 The Commission continues to believe that transactions with sovereign wealth funds or similar entities should not be exempt from the Clearing Requirement because these entities generally act as investment funds. See 2012 End-User Exception, 77 FR at 42562, n.18 (noting that the foregoing rationale and considerations do not, however, extend to sovereign wealth funds or similar entities due to the predominantly commercial nature of their activities). 121 As with the other exemptions from the Clearing Requirement, the Commission reminds the counterparties that these swaps exempted from the Clearing Requirement by this final rule and the existing 2012 determination must be reported to a swap data repository. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 risk that the exemption could be used by any entity other than an ECP or ‘‘appropriate person.’’ Accordingly, the class of persons eligible to rely on regulation §§ 50.75 and 50.76 is limited to appropriate persons within the scope of section 4(c) of the CEA. Additionally, the Commission notes that the applicable central banks, sovereign entities and IFIs have been relying on the language in the preamble to the 2012 End-User Exception and the DCR no-action letters for many years. The Commission is not aware of any increase in counterparty risk attributable to the affected entities’ reliance on the 2012 preamble language and the staff no-action letters. Finally, the exemptions for swaps entered into with central banks, sovereign entities, and certain IFIs will not have a materially adverse effect on the ability of the Commission to discharge its regulatory responsibilities under the CEA. The exemptions from the Clearing Requirement are limited to swaps entered into with specific central banks, sovereign entities, and IFIs and do not limit the applicability of any other CEA provision or Commission regulation except as discussed above. The Commission will continue to have access to information regarding the exempted swaps because the nonelecting counterparty to the swap must report the swap to a swap data repository. Uncleared swaps with a counterparty that is otherwise subject to the CEA and Commission regulations with regard to such swaps must comply with the CEA and Commission regulations as they pertain to uncleared swaps. Additionally, the Commission retains its special call, anti-fraud, and anti-evasion authorities, which enables the Commission to adequately discharge its regulatory responsibilities under the CEA. B. CDFIs, Certain Bank Holding Companies, and Savings and Loan Holding Companies The Commission believes it is consistent with the public interest and the purposes of the CEA to exempt from the Clearing Requirement swaps entered into by CDFIs, bank holding companies, and savings and loan holding companies under section 4(c) of the CEA. The Commission believes that the same policy reasons that Congress considered in directing the Commission to consider exempting swaps entered into with small financial institutions (small banks, savings associations, farm credit system institutions, and credit unions) from the financial entity definition, making them eligible for the End-User Exception of section PO 00000 Frm 00022 Fmt 4700 Sfmt 4700 2(h)(7)(c)(ii) of the CEA, support an exemption for swaps entered into by CDFIs, bank holding companies, and savings and loan holding companies.122 In the 2012 End-User Exception, the Commission determined that the small financial institutions should be excepted from the financial entity definition because these entities tend to serve smaller, local markets, and the swaps executed by the small financial institutions likely hedge interest rate risk associated with making commercial loans.123 Small financial institutions typically hedge their swaps with customers by entering into matching swaps in the swap market, and if those matched swaps had to be centrally cleared, the small financial institutions would have to post margin to satisfy the requirements of the DCOs. The Commission determined that mandatory clearing could raise the costs for small financial institutions and such costs may be prohibitively high given the small number of swaps such entities execute over a given period of time.124 Swaps are an important risk management tool, and CDFIs, bank holding companies, and savings and loan holding companies should be afforded the means to hedge their capital costs economically in order to promote the public interest objectives of smaller financial institutions serving smaller, local markets. Commenters agreed with the Commission that the swaps entered into by CDFIs, bank holding companies, and savings and loan holding companies have smaller notional amounts and that these financial entities use swaps infrequently.125 While the Commission recognizes that these entities may enter into more swaps to hedge against rising interest rates, the conditions on the exemption make it unlikely that the volume of swaps entered into by these entities will reach a systemic level. These exemptions from the Clearing Requirement may serve to promote responsible financial innovation and fair competition due to the substantial fixed costs associated with clearing swaps. The cost of clearing on a perswap basis cannot be supported by the small number of trades into which the entities eligible to elect these 122 See 2012 End-User Exception, 77 FR at 42578. These entities are not eligible to elect the End-User Exception under Commission regulation § 50.50, and they remain financial entities under the definition of financial entity of section 2(h)(7)(C) of the CEA. 123 2012 End-User Exception, 77 FR at 42578. 124 Id. 125 See CDFI Coalition comment at 6; Better Markets comment at 6 (acknowledging that the scope of the exemption is limited and will not dramatically shift transactions away from clearing). E:\FR\FM\30NOR1.SGM 30NOR1 TKELLEY on DSKBCP9HB2PROD with RULES Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations exemptions enter. While the Commission did not receive any comments on the cost of clearing, the Commission notes that in 2012, the cost estimate for small financial institutions included between $2,500 and $25,000 in legal fees related to reviewing and negotiating clearing-related documents, and a minimum of between $75,000 and $125,000 per year on fees paid to each futures commission merchant with which it maintains a relationship.126 The Commission believes an exemption from the Clearing Requirement for CDFIs, bank holding companies, and savings and loan holding companies will lower costs, which enables these entities to better manage their financing risks and provide cost-effective loans to their subsidiaries, as well as to small and middle market businesses. In addition, this exemption from the Clearing Requirement may support commercial lending and depository activities of the holding company’s subsidiaries. The Commission believes that the specific amendments to exempt swaps entered into by CDFIs, bank holding companies, and savings and loan holding companies from the Clearing Requirement are available to only ‘‘appropriate persons.’’ Under section 4(c)(3)(A) and (B) of the CEA, ‘‘appropriate person’’ includes a bank or a trust, and a savings association. The extension of the term ‘‘appropriate person’’ to include CDFIs, bank holding companies, and savings and loan holding companies aligns with the statute’s determination that banks and savings associations are ‘‘appropriate persons.’’ The Commission did not receive any comments on whether these entities are ‘‘appropriate persons.’’ The bank holding companies, savings and loan holding companies, and CDFIs eligible to elect these exemptions are ECPs pursuant to section 1a(18)(A)(i) of the CEA.127 Given that only ECPs are permitted to enter into uncleared swaps, and that the ECP definition is generally more restrictive than the comparable elements of the enumerated ‘‘appropriate person’’ definition, 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 these exemptions from the Clearing Requirement. Accordingly, the Commission believes that the class of persons eligible to rely on the exemptions codified in new regulation §§ 50.75 through 50.79 will be limited to 126 2012 End-User Exception, 77 FR at 42577 n.74. 127 August 2018 Proposal, 83 FR at 44008. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 ‘‘appropriate persons’’ within the scope of section 4(c) of the CEA. The Commission notes that the CDFIs, bank holding companies, and savings and loan holding companies have been relying on the DCR no-action letters since 2016. The Commission is not aware of any increase in counterparty risk attributable to affected entities’ reliance on the staff no-action letters, and commenters did not point to any instances of increased counterparty risk. These exemptions from the Clearing Requirement are limited in scope, and the Commission will continue to have access to information regarding the swaps subject to these exemptions because such swaps will be reported to a swap data repository by one of the counterparties to the swap.128 The Commission further notes that the exemptions are intended to be consistent with the Commission’s policy determinations set forth in the 2012 End-User Exception with respect to the exception from the Clearing Requirement for small financial institutions, and do not limit the applicability of any CEA provision or Commission regulation to any person or transaction except as provided in this final rulemaking. In addition, the Commission retains its special call, antifraud, and anti-evasion authorities, which will enable it to adequately discharge its regulatory responsibilities under the CEA. The Commission therefore believes the exemptions will not have a materially adverse effect on the ability of the Commission to discharge its regulatory responsibilities under the CEA. For the reasons discussed above, it is appropriate and consistent with the public interest to adopt new regulation §§ 50.75 through 50.79 as set forth in subpart D. VI. Final Rules Do Not Effect Margin Requirements for Uncleared Swaps In the Proposals, the Commission explained that these exemptions, if finalized, would not affect the Commission’s margin requirements for uncleared swaps.129 The Commission did not receive any comments on the effect of the exemptions on the Commission’s margin requirements for uncleared swaps. 128 Uncleared swaps with a counterparty that is subject to the CEA and Commission regulations with regard to such swaps are required to comply with the CEA and Commission regulations, including data reporting and uncleared margin rules. 129 May 2020 Proposal, 85 FR at 27966, August 2018 Proposal, 83 FR at 44008 (citing to relevant margin for uncleared swaps provisions in Commission regulation § 23.150(b)(1)). PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 76441 The Commission affirms its position as set forth in the Proposals. Under Commission regulation § 23.150(b)(1), the margin requirements for uncleared swaps under part 23 of the Commission’s regulations do not apply to a swap if the counterparty qualifies for an exception from clearing under section 2(h)(7)(A) and implementing regulations.130 Commission regulation § 23.150(b) was added to the final margin rules after the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) 131 amended section 731 of the Dodd-Frank Act by adding section 4s(e)(4) to the CEA to provide that the initial and variation margin requirements will not apply to an uncleared swap in which a nonfinancial entity (including a small financial institution and a captive finance company) qualifies for an exception under section 2(h)(7)(A) of the CEA, as well as two exemptions from the Clearing Requirement that are not relevant in this context.132 The final rules are not implementing section 2(h)(7)(A) of the CEA. Instead, the Commission, pursuant to its 4(c) authority (as discussed above), is exempting swaps entered into by central banks, sovereign entities, IFIs, bank holding companies, savings and loan holding companies, and CDFIs from the Clearing Requirement. The Commission is not excluding these entities from the ‘‘financial entity’’ definition of section 2(h)(7)(C) of the CEA. Therefore, these entities are not eligible to elect the EndUser Exception under Commission regulation § 50.50, and they remain financial entities under the definition of financial entity of section 2(h)(7)(C) of the CEA. For these reasons, the new regulation §§ 50.75 through 50.79 do not implicate any of the provisions of section 4s(e)(4) of the CEA or Commission regulation § 23.150.133 130 Commission regulation § 23.150(b)(1). Law 114–1, 129 Stat. 3. 132 Commission regulation § 23.150(b)(2) provides that certain cooperative entities that are exempt from the Commission’s clearing requirement pursuant to section 4(c)(1) authority also are exempt from the initial and variation margin requirements. None of the entities included in this proposal is a cooperative that would meet the conditions in Commission regulation § 23.150(b)(2). In addition, the regulation § 23.150(b)(3), which pertains to affiliated entities, does not apply in this context. 133 The Commission believes that the final rules do not affect the margin rules for entities that are supervised by the prudential regulators. The prudential regulators’ rules contain provisions that are identical to Commission regulation § 23.150. See Margin and Capital Requirements for Covered Swap Entities, 80 FR 74916, 74923 (Nov. 20, 2015). 131 Public E:\FR\FM\30NOR1.SGM 30NOR1 76442 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations VII. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) requires Federal agencies to consider whether the regulations they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis on the impact.134 The Commission previously has established certain definitions of small entities to be used in evaluating the impact of its regulations on small entities in accordance with the RFA.135 As discussed in the Proposals, the final regulations do not affect any small entities as that term is used in the RFA. The regulations will affect specific counterparties to an uncleared swap, namely, central banks, sovereign entities, IFIs, bank holding companies, savings and loan holding companies, and CDFIs. Pursuant to sections 2(e) and 5(d)(11)(A) of the CEA, only ECPs may enter into uncleared swaps.136 As discussed above, the entities whose transactions are covered by these exemptions from the Clearing Requirement are ECPs.137 The Commission has stated previously that ECPs, by the nature of the definition, should not be considered small entities for RFA purposes.138 Because ECPs are not small entities, and persons not meeting the definition of ECP may not conduct transactions in uncleared swaps, the Commission need not conduct a regulatory flexibility analysis respecting the effect of these rules on ECPs. The Commission received no comments on the RFA discussions in the May 2020 Proposal or the August 2018 Proposal. Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the final regulations 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) 139 imposes certain requirements on Federal agencies, including the Commission, in connection with their U.S.C. 601 et seq. FR 18618 (Apr. 30, 1982). 136 Section 2(e) of the CEA limits non-ECPs to executing swap transactions on a board of trade designated as a contract market (DCM) and section 5(d)(11)(A) of the CEA requires all DCM transactions to be cleared. Accordingly, the two provisions read together permit only ECPs to execute uncleared swap transactions. 137 See Section 1a(18)(A)(i) and 1a(18)(A)(vii) of the CEA. 138 See Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25, 2001). 139 44 U.S.C. 3501 et seq. conducting or sponsoring any collection of information, as defined by the PRA. In the Proposals, the Commission determined that these regulations would not impose a new collection of any information or any new recordkeeping requirements on any persons and would not require approval of the Office of Management and Budget (OMB) under the PRA.140 The Commission received no comments on these determinations. As such, the final rules do not impose any new burden or any new information collection requirements in addition to those that already exist pursuant to Commission regulations. C. Cost-Benefit Considerations As discussed in detail above, the Commission is amending its regulations to add new regulation §§ 50.75 through 50.79, as set forth in subpart D, to exempt swaps entered into with central banks, sovereign entities, IFIs, certain bank holding companies, savings and loan holding companies, and CDFIs from the Clearing Requirement consistent with the policies set forth in the 2012 End-User Exception and subsequent staff no-action letters.141 Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating regulations under the CEA or issuing certain orders.142 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 as the Section 15(a) Factors). 1. Consideration of the Costs and Benefits of the Commission’s Action The baseline for the Commission’s consideration of the costs and benefits of this final rulemaking is the existing statutory and regulatory framework of section 2(h)(1) of the CEA and part 50 under which any swap subject to the Clearing Requirement would be required to be cleared by central banks, 134 5 TKELLEY on DSKBCP9HB2PROD with RULES 135 47 VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 140 The applicable collection of information is ‘‘Swap Data Recordkeeping and Reporting Requirements,’’ OMB control number 3038–0096. Parties wishing to review the CFTC’s information collections may do so at www.reginfo.gov, at which OMB maintains an inventory aggregating each of the CFTC’s currently approved information collections, as well as the information collections that presently are under review. 141 The other non-substantive amendments made to part 50 do not affect the cost-benefit considerations of this rulemaking. 142 Section 15(a) of the CEA. PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 sovereign entities, IFIs, bank holding companies, savings and loan holding companies, and CDFIs. The regulatory baseline, however, has been affected by Commission statements in the 2012 End-User Exception and CFTC no-action letters, which have been relied on by central banks, sovereign entities, IFIs, bank holding companies, savings and loan holding companies, CDFIs, and their counterparties when entering into swaps that otherwise would be subject to the Clearing Requirement. The final regulations in this adopting release largely codify the current practice that has been in place since 2012. The Commission recognizes that the actual costs and benefits of the final rules as realized in the market may not be as significant as compared to that regulatory baseline. The Commission endeavors to assess the expected costs and benefits of the final rules in quantitative terms where possible. Where estimation or quantification is not feasible, the Commission discusses the costs and benefits in qualitative terms. This consideration of costs and benefits is based on an understanding that the swap markets function internationally with many transactions involving U.S. firms taking place across international boundaries. Some Commission registrants are organized outside of the United States, some leading industry members typically conduct their operations both within and outside of the United States, and some industry members follow substantially similar business practices wherever they may be located. Where the Commission does not specifically refer to matters of location, this discussion of costs and benefits refers to the effects of the final rule on all activity subject to the amended part 50 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.143 In particular, the Commission notes that some entities affected by this rulemaking are located outside of the United States. In the sections that follow, the Commission discusses: (1) The costs and benefits of the new part 50 exemptions to the Clearing Requirement for swaps entered into by entities that meet the definitions of central bank, sovereign entity, IFI, bank holding company, savings and loan holding company, and CDFI as set forth in these rules; and (2) the impact of such exemptions on the Section 15(a) Factors. 143 Section E:\FR\FM\30NOR1.SGM 2(i) of the CEA. 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES a. Costs New Commission regulation §§ 50.75 through 50.79 exempt swaps entered into by central banks, sovereign entities, IFIs, certain bank holding companies, savings and loan holding companies, and CDFIs from the Clearing Requirement under section 2(h)(1)(A) of the CEA. In the Proposals, the Commission recognized that the protections of central clearing will not accrue to swaps entered into by these entities, which is a cost.144 The Clearing Requirement is designed to mitigate the counterparty credit risk associated with swaps and, in turn, to mitigate the potential systemic impact that an accumulation of counterparty credit risk through swaps activity could cause instability in the financial system. In general, central clearing mitigates counterparty credit risk through the substitution of the DCO as counterparty to the swap. After this novation occurs, a DCO manages risk by collecting initial margin from its clearing members for all their swap positions and collecting and paying out variation margin among its clearing members based on marking the swap positions to market prices on a daily basis. The collection of margin allows a DCO to mitigate the possibility of a clearing member or customer default, as well as to cover potential losses due to such a default. Central clearing also provides protection through a default fund that is made up of mutualized contributions from the DCO’s clearing members and can be used in the case of a default by one or more of those members. New Commission regulation §§ 50.75 through 50.77 exempting swaps entered into by central banks, sovereign entities, and IFIs codify the policy determination made in the Commission’s 2012 EndUser Exception that is based on considerations of international comity, and in keeping with the traditions of the international system. Under the final rules, swaps entered into by central banks (including BIS), sovereign entities, and IFIs are treated like swaps entered into by the Federal Reserve Banks, the Federal Government, or a Federal agency and are not subject to the Clearing Requirement. As discussed above, Congress exempted swaps entered into by the Federal entities expressly backed by the full faith and credit of the United States when it excluded any agreement, contract, or transaction entered into by these entities from the definition of a swap and 144 May 2020 Proposal, 85 FR at 27968; August 2018 Proposal, 83 FR at 44009. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 consequently from the application of the Clearing Requirement.145 The costs of not subjecting swaps exempted from the Clearing Requirement under these final rules, as identified in the May 2020 Proposal, include the possibility of increased counterparty credit risk that is left unmitigated by the protections of central clearing. The costs associated with exempting swaps entered into by central banks, sovereign entities, and IFIs from the Clearing Requirement also are reflected in data showing the low notional amounts and number of such swaps.146 The Commission received no comments directly related to the costs of regulation §§ 50.75 through 50.77. The Commission continues to believe that swaps entered into by central banks, sovereign entities, and certain IFIs should not be subject to the Clearing Requirement, and the minimal costs associated with this determination have been taken into account. Central banks, and the sovereign entities backing those central banks, are the very entities that protect the global financial system against systemic risk. IFIs provide financing for national and regional development and are fully backed by their governmental members. As such, the swaps into which they enter do not pose the type of risk that the Clearing Requirement was intended to address. Turning to new regulation §§ 50.78 and 50.79, which exempt from the Clearing Requirement swaps entered into by certain bank holding companies, savings and loan holding companies, and CDFIs, the direct cost associated with these final rules is that the exempted swaps will not be subject to the Clearing Requirement and the entities entering into the swaps will not benefit from the risk-mitigating aspects of clearing described above. Under this view, costs are measured in terms of increased risk to the counterparties to the swap and to the financial system. However, the Commission notes that, as was the case when the Commission exempted small financial institutions from the definition of ‘‘financial entity’’ for purposes of the codifying the enduser exception in 2012, these final regulations implementing the 145 Section 1a(47)(B)(ix) of the CEA. 146 May 2020 Proposal, 85 FR at 27967–27969. See also discussion of data above. From January 1, 2018 to December 31, 2018, 16 IFIs named in proposed regulation § 50.76 were counterparties to a swap that was entered into and reported to DDR during that time period. Overall, the 16 IFIs entered into approximately 2,500 uncleared interest rate swaps with an estimated total notional value of $220 billion. Of those 16, four IFIs entered into more than one hundred swaps during calendar year 2018. PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 76443 exemption for swaps entered into by bank holding companies, savings and loan holding companies, and CDFIs are appropriately conditioned to minimize risk.147 For example, the notice and reporting requirements under regulation §§ 50.77(b)(4) through (5), 50.78(b)(2) through (3), and 50.79(b)(2) through (3) will afford some degree of risk mitigation because the electing entity is required to indicate how the electing counterparty generally meets its financial obligations with regard to its uncleared swaps. These requirements also help ensure that counterparties are aware of the potential exposure each swap may have on the entity’s overall risk profile. The Commission also considered the regulatory reporting costs for bank holding companies, savings and loan holding companies, and CDFIs under new Commission regulation §§ 50.77(b)(4), 50.78(b)(2), and 50.79(b)(2) and concluded that the regulations do not impose any additional costs. In general, the Commission understands that in most cases reporting swaps to the swap data repository is done by swap counterparties that are swap dealers. The bank holding company, savings and loan holding company, and CDFI entities that are electing an exemption from the Clearing Requirement under these regulations would report the swaps to the swap data repository only in extremely rare cases.148 Because these entities have been operating pursuant to no-action letters that have the same reporting requirements, the Commission believes that the final rules will not impose any new compliance costs on bank holding companies, savings and loan holding companies, or CDFIs. The Commission also considered the additional cost to the financial system that could result from the imposition of the $10 billion size threshold for bank holding companies and savings and loan holding companies eligible for the exemption and has determined that there is no additional cost associated with the imposition of a size 147 2012 End-User Exception, 77 FR at 42578 (explaining the policy rationale for adopting the Clearing Requirement exception for small financial institutions and setting conditions on the exception). 148 As the Commission explains above, the election of an exemption from the Clearing Requirement by any central bank, sovereign entity, or identified IFI is not dependent on reporting the swap to a swap data repository. That obligation rests with the non-electing counterparty to the trade based upon independent obligations under part 23 or 45 of the Commission regulations. E:\FR\FM\30NOR1.SGM 30NOR1 76444 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES threshold.149 As noted in the 2018 Proposal, the $10 billion cap is a bright line and, due to the nature of using a bright line as a threshold, it is possible that some entities with attributes similar to those entities whose transactions are exempted from the Clearing Requirement, may not be eligible to use the exemption from the Clearing Requirement. It is also possible that some bank holding companies or savings and loan holding companies could make operational and business decisions that would allow them to qualify to use the exemption from the Clearing Requirement. However, the Commission does not expect that an entity would limit its potential revenue in order to maintain a smaller size in order to be able to rely on this exemption. As such, the Commission believes that the $10 billion size threshold is appropriate and will not impose additional costs on entities covered by these regulations. The comment letter received from Better Markets raises a number of indirect and hard to quantify costs.150 For example, the letter states that piecemeal exemptions and carve-outs diminish the effectiveness of the swap market regulatory reforms, result in less transparency, and fragment markets.151 Furthermore, the letter notes that the trades that will remain uncleared as a result of exemptions codified in this adopting release will be intermediated bilaterally with one of a handful of already dominant derivatives dealers, which limits participation and diversity in the cleared swaps markets and results in reduced liquidity in the marketplace.152 Despite these concerns, the Commission continues to believe that the conditions imposed on the swap exemptions under this adopting release limit these costs. Finally, another mitigating factor related to the costs of not centrally clearing these exempted swaps, is that the Commission’s uncleared margin requirements may apply to some of the swaps exempted under these final rules. In these instances, the costs that may result from not requiring central clearing by a DCO may be mitigated. b. Benefits The Commission has identified a number of benefits associated with the final regulations. The Commission notes that to the extent that market 149 The Commission did not propose a size threshold for CDFIs because the Commission believes these entities generally fall under the $10 billion size threshold. 150 Better Markets comment at 1–3. 151 Id. at 4. 152 Id. at 5. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 participants have been relying on Commission statements in the 2012 End-User Exception and DCR no-action letters, the actual benefits of the final rules as realized in the market may not be as significant as compared to the regulatory baseline. First, central banks, sovereign entities, IFIs, certain bank holding companies, savings and loan holding companies, and CDFIs will benefit from lower transaction costs as a result of these final exemptions from the Clearing Requirement. In terms of project financing and risk management, these entities will not face the added expense of central clearing and can put those cost savings to good use. For example, the costs savings achieved through these exemptions could allow CDFIs and IFIs to enter into more public service projects in furtherance of their missions. There are other important benefits associated with these amendments to part 50. If the Commission were to subject foreign governments (sovereign entities), central banks, or IFIs to regulation under the CEA in connection with their swaps, foreign regulators could reciprocate with regard to the United States Federal Government, Federal Reserve Banks, or IFIs of which the United States is a member in a similar manner. The Commission expects that these swap exemptions from the Clearing Requirement will help ensure that if any of the Federal Government, Federal Reserve Banks, or IFIs of which the United States is a member were to engage in swaps in foreign jurisdictions, the actions of those entities with respect to those transactions would not be subject to foreign regulation.153 In addition, there are benefits to the financial system from having certain bank holding companies, savings and loan holding companies, and CDFIs enter into interest rate swaps to hedge interest rate risk they incur as a result of issuing debt securities or making loans to finance their subsidiary banks or savings associations at a lower cost. For some bank holding companies and savings and loan holding companies, interest rate swaps need to be entered into by the holding company in order to gain hedge accounting treatment and promote efficiencies to benefit their subsidiaries.154 Finally, the costs savings from the final regulations may result in more projects being funded in small communities where certain bank holding companies, savings and loan 153 See discussion in the May 2020 Proposal, 85 FR at 27957 (citing 2012 End-User Exception, 77 FR at 42561–42562). 154 See August 2018 Proposal, 83 FR at 44010. PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 holding companies, and CDFIs operate. As several commenters noted, there can be significant benefits from exempting swaps entered into by small banks and CDFIs for the communities these entities serve.155 The Commission believes that most of the central banks, sovereign entities, IFIs, bank holding companies, savings and loan holding companies, and CDFIs that will benefit from these regulations also benefit from relief from the uncleared margin requirements under part 23 of the Commission’s regulations. For entities that would be required to comply with the Commission’s uncleared margin requirements, their benefit from an exemption would be mitigated. In addition, actual benefits may be less than expected if central banks, sovereign entities, and IFIs and their counterparties choose to clear their swaps voluntarily instead of relying on this exemption from the Clearing Requirement. As a practical matter, however, the Commission reviewed swap data and found that the entities that will benefit from the final rules are not clearing their swaps subject to the Clearing Requirement.156 In that regard, the practical effect and primary benefit of the final regulations is to provide regulatory certainty, which will reduce the legal costs faced by these entities. 2. Section 15(a) Factors The discussion that follows supplements the related cost and benefit considerations addressed in the preceding section and addresses the overall effect of the final rule in terms of the factors set forth in section 15(a) of the CEA. 155 See CDFI Coalition comment at 1–2 (‘‘providing regulatory certainty through codification of the no-action relief will help to ensure that community development financing remains available and commercially feasible for our country’s most distressed communities’’); id. at 4–6 (‘‘CDFIs, like small financial institutions, face the same costs [cost of posting margin to a DCO, cost of initial and annual fixed clearing fees, other expenses, in addition to time, effort and resources necessary to establish relationships with an intermediary and clearinghouse access] and provide similar public benefits by serving smaller, local markets and providing financial and community development services to a target market’’); and Opportunity Finance Network comment at 1 (‘‘the exemption will save CDFIs the expense of clearing swaps through a third-party clearinghouse, allowing more of their resources to be devoted to their community development mission’’). 156 Again, as the Commission noted in the May 2020 Proposal, the Commission reviewed data from January 1, 2018 to December 31, 2018 that was reported to DDR and found that 16 international financial institutions entered into approximately 2,500 uncleared interest rate swaps with an estimated total notional value of $220 billion. Three IFIs elected to clear a portion of their interest rate swaps. E:\FR\FM\30NOR1.SGM 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES a. Protection of Market Participants and the Public Section 15(a)(2)(A) of the CEA requires the Commission to evaluate the costs and benefits of a final regulation in light of considerations of protection of market participants and the public. The Commission considers the costs and benefits of the final regulations exempting swaps entered into with central banks, sovereign entities, IFIs, bank holding companies, savings and loan holding companies, and CDFIs from the Clearing Requirement in light of its responsibility for determining which swaps should be required to be cleared. In recognition of the significant riskmitigating benefits of central clearing, Congress amended the CEA to direct the Commission to review all swaps that are offered for clearing by DCOs to determine whether such swaps should be required to be cleared. The Commission is cognizant that in enacting the Dodd-Frank Act, Congress excluded from the definition of a swap any agreement, contract, or transaction wherein the counterparty is a Federal Reserve Bank, the Federal Government, or a Federal agency that is expressly backed by the full faith and credit of the United States. In so doing, Congress determined that swaps with the Federal Reserve Banks, the Federal Government, and Federal agencies are not subject to the Clearing Requirement. Under this final rule, the Commission is extending similar treatment for swap transactions with central banks and sovereign entities, as discussed above. With respect to certain bank holding companies, savings and loan holding companies, and CDFIs, the Commission believes that an exemption from the Clearing Requirement is similar to the regulatory treatment extended to swaps entered into with small banks, savings associations, farm credit institutions, and credit unions. Under the final rules, counterparties entering into swaps with central banks, sovereign entities, IFIs, certain bank holding companies, savings and loan holding companies, and CDFIs will not have the protection afforded by central clearing through posting initial margin, daily variation margin payments, and other types of collateralization and risk mitigation associated with central clearing. The Commission, however, believes Congress would not have excluded the swaps entered into by the Federal Reserve Bank, the Federal Government, and Federal agencies from the definition of a swap if such transactions would pose a significant VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 risk to market participants and the public. As discussed above, the Commission believes that international comity supports an exemption for swaps entered into by central banks, sovereign entities, and IFIs and is an appropriate exercise of the Commission’s authority under section 4(c) of the CEA. These institutions generally enter into a limited number of swaps in furtherance of their public interest missions. As such, while an exemption from the Clearing Requirement does result in reduced protection for counterparties, the Commission believes that the exemption for swaps with these entities does not pose a significant risk to market participants and the public. Finally, like the small financial institutions listed in section 2(h)(7)(C)(ii) of the CEA, the Commission believes that certain bank holding companies, savings and loan holding companies, and CDFIs are likely to have limited swaps exposure, both in terms of value and number. As such, the Commission believes that the exemptions will have a minimal impact on market participants. In addition, counterparties to a swap entered into with a bank holding company, savings and loan holding company, or CDFI under these exemptions will have some degree of protection against default because the electing entity is required to indicate how it generally meets the financial obligations associated with its uncleared swaps. The Commission also believes that the asset cap for bank holding companies and savings and loan holding companies whose transactions will be exempt from the Clearing Requirement, combined with the requirement that one of the counterparties to the swap adhere to the requirements of Commission regulation § 50.50(b) and (c), means the exemptions are not likely to have a negative impact on market participants or the public. b. Efficiency, Competitiveness, and Financial Integrity of Swap Markets Section 15(a)(2)(B) of the CEA requires the Commission to evaluate the costs and benefits of a regulation in light of efficiency, competitiveness, and financial integrity considerations. As discussed above, these final amendments to part 50 are likely to lower the cost of using swaps, and in that sense, make trading more efficient. Another potential effect of the exemptions may be to increase liquidity in swap markets insofar as entering into swaps would be less costly. Any increase in trading would improve the competitiveness of swaps markets for all PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 76445 participants. However, because of the small number of swaps anticipated to fall under these exemptions, and the low notional value of such swaps executed by bank holding companies, savings and loan holding companies, and CDFIs, in particular, the Commission expects a minimal impact on the efficiency of the swap markets, and negligible impact on the financial integrity of the overall swaps market. The Commission notes that to the extent that these counterparties’ swaps are currently not cleared because of reliance on the Commission’s determination in the 2012 End-User Exception and DCR no-action letters, the practical impact of the exemptions on the efficiency, competitiveness, and financial integrity of the swap markets may be negligible. c. Price Discovery Section 15(a)(2)(C) of the CEA requires the Commission to evaluate the costs and benefits of its regulations in light of price discovery considerations. The Commission believes that these exemptions from the Clearing Requirement will not have a significant impact on price discovery. Typically, more liquidity supports greater price discovery as more participants enter the market and/or more trading occurs. To the extent that markets become more liquid, price discovery could improve. In regard to transparency of prices, swaps, whether cleared or uncleared, and regardless of the counterparty, are required by section 2(a)(13)(G) of the CEA to be reported to a swap data repository. These final rules do not alter any independent reporting obligations under parts 23 or 45. Accordingly, the price discovery function of the reporting requirement is unchanged. In terms of price discovery through trade execution, the Commission notes that the swaps subject to these final rules would not typically be executed on an exchange. They also would not be subject to a trade execution requirement under section 2(h)(8) of the CEA. d. Sound Risk Management Practices Section 15(a)(2)(D) of the CEA requires the Commission to evaluate the costs and benefits of a regulation in light of sound risk management practices. The Commission believes that by eliminating the costs associated with clearing for central banks, sovereign entities, IFIs, bank holding companies, savings and loan holding companies, and IFIs, the Commission is facilitating the use of swaps by these entities. To the extent that these entities use swaps to hedge existing interest rate risk, the Commission believes the exemptions from the Clearing Requirement will E:\FR\FM\30NOR1.SGM 30NOR1 76446 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations enable better risk management at a potentially lower cost. The Commission also notes that swaps entered into by certain bank holding companies, savings and loan holding companies, and CDFIs tend to have small notional amounts, and the entities enter into swaps infrequently. Therefore, the Commission does not believe that swaps with these entities pose risk to U.S. financial markets. e. Other Public Interest Considerations Section 15(a)(2)(E) of the CEA requires the Commission to evaluate the costs and benefits of a regulation in light of other public interest considerations. As discussed above, the Commission believes that public interest and international comity support the exemption from the Clearing Requirement for swaps with central banks, sovereign entities, and IFIs. The Commission believes that the public interest mission of these entities will be served by lowering the cost of financing in support of their public interest missions. For the other entities, the Commission has not identified any public interest considerations relevant to this rulemaking beyond those already noted. C. 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 anti-competitive means of achieving the objectives of the CEA, as well as the policies and purposes of the CEA, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)).157 The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission did not identify anticompetitive effects of the Proposals. The Commission requested comment regarding its analysis about the possible anti-competitive effects of the proposed exemptions and whether there are specific public interests to be protected by the antitrust laws in this context.158 The Commission did not receive any comments. The Commission confirms its determination that these final rules establishing new exemptions from the Clearing Requirement under subpart D are not anti-competitive and have no anti-competitive effects. Given this determination, the Commission has not identified any less anti-competitive means of achieving the purposes of the CEA. List of Subjects in 17 CFR Part 50 Business and industry, Clearing, Cooperatives, Reporting requirements, Swaps. For the reasons discussed in the preamble, the Commodity Futures Trading Commission amends 17 CFR chapter I as follows: 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), 6(c), and 7a–1, as amended by Pub. L. 111–203, 124 Stat. 1376. 2. Revise subpart B heading to read as follows: ■ Subpart B—Clearing Requirement Compliance Schedule and Compliance Dates ■ 3. Add § 50.26 to read as follows: § 50.26 Swap clearing requirement compliance dates. (a) Compliance dates for interest rate swap classes. The compliance dates for swaps that are required to be cleared under § 50.4(a) are specified in the following table. TKELLEY on DSKBCP9HB2PROD with RULES TABLE 1 TO PARAGRAPH (a) Swap asset class Swap class subtype Currency and floating rate index Stated termination date range Interest Rate Swap .... Fixed-to-Floating ........ Euro (EUR) EURIBOR 28 days to 50 years ... Interest Rate Swap .... Fixed-to-Floating ........ Sterling (GBP) LIBOR 28 days to 50 years ... Interest Rate Swap .... Fixed-to-Floating ........ U.S. Dollar (USD) LIBOR. 28 days to 50 years ... Interest Rate Swap .... Fixed-to-Floating ........ Yen (JPY) LIBOR ...... 28 days to 50 years ... Interest Rate Swap .... Fixed-to-Floating ........ 28 days to 30 years ... Interest Rate Swap .... Fixed-to-Floating ........ 28 days to 30 years ... All entities July 10, 2017. Interest Rate Swap .... Fixed-to-Floating ........ 28 days to 10 years ... All entities August 30, 2017. Interest Rate Swap .... Fixed-to-Floating ........ 28 days to 21 years ... All entities December 13, 2016. Interest Rate Swap .... Fixed-to-Floating ........ 28 days to 10 years ... All entities April 10, 2017. Interest Rate Swap .... Fixed-to-Floating ........ 28 days to 10 years ... All entities April 10, 2017. Interest Rate Swap .... Fixed-to-Floating ........ 28 days to 10 years ... All entities October 15, 2018. Interest Rate Swap .... Fixed-to-Floating ........ Australian Dollar (AUD) BBSW. Canadian Dollar (CAD) CDOR. Hong Kong Dollar (HKD) HIBOR. Mexican Peso (MXN) TIIE–BANXICO. Norwegian Krone (NOK) NIBOR. Polish Zloty (PLN) WIBOR. Singapore Dollar (SGD) SOR–VWAP. Swedish Krona (SEK) STIBOR. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. All entities December 13, 2016. 28 days to 15 years ... All entities April 10, 2017. 157 Section 15(b) of the CEA. VerDate Sep<11>2014 17:14 Nov 27, 2020 Clearing requirement compliance date 158 May 2020 Proposal, 85 FR at 27970; August 2018 Proposal, 83 FR at 44011. Jkt 253001 PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 E:\FR\FM\30NOR1.SGM 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations 76447 TABLE 1 TO PARAGRAPH (a)—Continued Swap asset class Swap class subtype Currency and floating rate index Stated termination date range Interest Rate Swap .... Fixed-to-Floating ........ 28 days to 30 years ... All entities October 15, 2018. Interest Rate Swap .... Basis .......................... Swiss Franc (CHF) LIBOR. Euro (EUR) EURIBOR 28 days to 50 years ... Interest Rate Swap .... Basis .......................... Sterling (GBP) LIBOR 28 days to 50 years ... Interest Rate Swap .... Basis .......................... U.S. Dollar (USD) LIBOR. 28 days to 50 years ... Interest Rate Swap .... Basis .......................... Yen (JPY) LIBOR ...... 28 days to 30 years ... Interest Rate Swap .... Basis .......................... 28 days to 30 years ... Interest Rate Swap .... Forward Rate Agreement. Australian Dollar (AUD) BBSW. Euro (EUR) EURIBOR Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. All entities December 13, 2016. Interest Rate Swap .... Forward Rate Agreement. Sterling (GBP) LIBOR 3 days to 3 years ....... Interest Rate Swap .... Forward Rate Agreement. U.S. Dollar (USD) LIBOR. 3 days to 3 years ....... Interest Rate Swap .... Forward Rate Agreement. Yen (JPY) LIBOR ...... 3 days to 3 years ....... Interest Rate Swap .... Forward Rate Agreement. Forward Rate Agreement. Forward Rate Agreement. Overnight Index Swap Polish Zloty (PLN) WIBOR. Norwegian Krone (NOK) NIBOR. Swedish Krona (SEK) STIBOR. Euro (EUR) EONIA .... 3 days to 2 years ....... Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. All entities April 10, 2017. 3 days to 2 years ....... All entities April 10, 2017. 3 days to 3 years ....... All entities April 10, 2017. 7 days to 2 years ....... Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. All entities December 13, 2016. Interest Rate Swap .... Interest Rate Swap .... Interest Rate Swap .... Interest Rate Swap .... Interest Rate Swap .... Overnight Index Swap Overnight Index Swap Interest Rate Swap .... Overnight Index Swap Interest Rate Swap .... Overnight Index Swap (b) Compliance dates for credit default swap classes. The compliance dates for swaps that are required to be Sterling (GBP) SONIA U.S. Dollar (USD) FedFunds. 3 days to 3 years ....... 2 years + 1 day to 3 years. 7 days to 2 years ....... 2 years + 1 day to 3 years. 7 days to 2 years ....... 2 years + 1 day to 3 years. 7 days to 2 years ....... Australian Dollar (AUD) AONIA–OIS. Canadian Dollar 7 days to 2 years ....... (CAD) CORRA–OIS. Clearing requirement compliance date Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. All entities December 13, 2016. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. All entities December 13, 2016. All entities December 13, 2016. All entities July 10, 2017. cleared under § 50.4(b) are specified in the following table. TKELLEY on DSKBCP9HB2PROD with RULES TABLE 2 TO PARAGRAPH (b) Swap asset class Swap class subtype Indices Tenor Credit Default Swap ... North American untranched CDS indices. North American untranched CDS indices. CDX.NA.IG ................. 3Y, 5Y, 7Y, 10Y ......... CDX.NA.HY ............... 5Y ............................... Credit Default Swap ... VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 Clearing requirement compliance date Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. Category 1 entities March 11, 2013. All non-Category 2 entities June 10, 2013. Category 2 entities September 9, 2013. E:\FR\FM\30NOR1.SGM 30NOR1 76448 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TABLE 2 TO PARAGRAPH (b)—Continued Swap asset class Swap class subtype Indices Tenor Credit Default Swap ... European untranched CSD indices. iTraxx Europe ............ 5Y, 10Y ...................... Credit Default Swap ... European untranched CSD indices. iTraxx Europe Crossover. 5Y ............................... Credit Default Swap ... European untranched CSD indices. iTraxx Europe HiVol ... 5Y ............................... 4. Revise subpart C heading to read as follows: ■ Subpart C—Exceptions and Exemptions from the Clearing Requirement 5. In § 50.50, revise section heading and paragraph (b)(1)(iii)(A)(2) and remove paragraph (d) to read as follows: ■ § 50.50 Non-financial end-user exception to the clearing requirement. * * * * * (b) * * * (1) * * * (iii) * * * (A) * * * (2) Exempt from the definition of ‘‘financial entity’’ as described in § 50.53; * * * * * ■ 6. In § 50.51, revise section heading and paragraphs (a)(3)(i) and (ii) to read as follows: § 50.51 Cooperatives exempt from the clearing requirement. * * * * (a) * * * (3) * * * (i) Exempt from the definition of ‘‘financial entity’’ pursuant to § 50.53; or (ii) A cooperative formed under Federal or state law as a cooperative and each member thereof is either not a ‘‘financial entity,’’ as defined in section 2(h)(7)(C)(i) of the Act, or is exempt from the definition of ‘‘financial entity’’ pursuant to § 50.53. * * * * * ■ 7. Revise § 50.52 heading to read as follows: TKELLEY on DSKBCP9HB2PROD with RULES * § 50.52 Affiliated entities exempt from the clearing requirement. ■ 8. Add § 50.53 to read as follows: § 50.53 Banks, savings associations, farm credit system institutions, and credit unions exempt from the clearing requirement. For purposes of section 2(h)(7)(A) of the Act, a person that is a ‘‘financial VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 entity’’ solely because of section 2(h)(7)(C)(i)(VIII) shall be exempt from the definition of ‘‘financial entity’’ and is eligible to elect the exception to the clearing requirement under § 50.50, if such person: (a) Is organized as a bank, as defined in section 3(a) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a savings association, as defined in section 3(b) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a farm credit system institution chartered under the Farm Credit Act of 1971; or an insured Federal credit union or State-chartered credit union under the Federal Credit Union Act; and (b) Has total assets of $10,000,000,000 or less on the last day of such person’s most recent fiscal year; (c) Reports, or causes to be reported, the swap to a swap data repository pursuant to §§ 45.3 and 45.4 of this chapter, and reports, or causes to be reported, all information as provided in paragraph (b) of § 50.50 to a swap data repository; and (d) Is using the swap to hedge or mitigate commercial risk as provided in paragraph (c) of § 50.50. ■ 9. Add subpart D to read as follows: Subpart D—Swaps Not Subject to the Clearing Requirement Sec. 50.75 Swaps entered into by central banks or sovereign entities. 50.76 Swaps entered into by international financial institutions. 50.77 Interest rate swaps entered into by community development financial institutions. 50.78 Swaps entered into by bank holding companies. 50.79 Swaps entered into by savings and loan holding companies. PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 Clearing requirement compliance date Category 1 entities Category 2 entities All non-Category 2013. Category 1 entities Category 2 entities All non-Category 2013. Category 1 entities Category 2 entities All non-Category 2013. April 26, 2013. July 25, 2013. 2 entities October 23, April 26, 2013. July 25, 2013. 2 entities October 23, April 26, 2013. July 25, 2013. 2 entities October 23, § 50.75 Swaps entered into by central banks or sovereign entities. Swaps entered into by a central bank or sovereign entity shall be exempt from the clearing requirement of section 2(h)(1)(A) of the Act. (a) For the purposes of this section, the term central bank means a reserve bank or monetary authority of a central government (including the Board of Governors of the Federal Reserve System or any of the Federal Reserve Banks) or the Bank for International Settlements. (b) For the purposes of this section, the term sovereign entity means a central government (including the U.S. Government), or an agency, department, or ministry of a central government. § 50.76 Swaps entered into by international financial institutions. (a) Swaps entered into by an international financial institution shall be exempt from the clearing requirement of section 2(h)(1)(A) of the Act. (b) For purposes of this section, the term international financial institution means: (1) African Development Bank; (2) African Development Fund; (3) Asian Development Bank; (4) Banco Centroamericano de Integracio´n Econo´mica; (5) Bank for Economic Cooperation and Development in the Middle East and North Africa; (6) Caribbean Development Bank; (7) Corporacio´n Andina de Fomento; (8) Council of Europe Development Bank; (9) European Bank for Reconstruction and Development; (10) European Investment Bank; (11) European Investment Fund; (12) European Stability Mechanism; (13) Inter-American Development Bank; (14) Inter-American Investment Corporation; (15) International Bank for Reconstruction and Development; E:\FR\FM\30NOR1.SGM 30NOR1 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations (16) International Development Association; (17) International Finance Corporation; (18) International Monetary Fund; (19) Islamic Development Bank; (20) Multilateral Investment Guarantee Agency; (21) Nordic Investment Bank; (22) North American Development Bank; and (23) Any other entity that provides financing for national or regional development in which the U.S. Government is a shareholder or contributing member. TKELLEY on DSKBCP9HB2PROD with RULES § 50.77 Interest rate swaps entered into by community development financial institutions. (a) For the purposes of this section, the term community development financial institution means an entity that satisfies the definition in section 103(5) of the Community Development Banking and Financial Institutions Act of 1994, and is certified by the U.S. Department of the Treasury’s Community Development Financial Institution Fund as meeting the requirements set forth in 12 CFR 1805.201(b). (b) A swap entered into by a community development financial institution shall not be subject to the clearing requirement of section 2(h)(1)(A) of the Act and this part if: (1) The swap is a U.S. dollar denominated interest rate swap in the fixed-to-floating class or the forward rate agreement class of swaps that would otherwise be subject to the clearing requirement under § 50.4(a); (2) The total aggregate notional value of all swaps entered into by the community development financial institution during the 365 calendar days prior to the day of execution of the swap is less than or equal to $200,000,000; (3) The swap is one of ten or fewer swap transactions that the community development financial institution enters into within a period of 365 calendar days; (4) One of the counterparties to the swap reports the swap to a swap data repository pursuant to §§ 45.3 and 45.4 of this chapter, and reports all information as provided in paragraph (b) of § 50.50 to a swap data repository; and (5) The swap is used to hedge or mitigate commercial risk as provided in paragraph (c) of § 50.50. entity that is organized as a bank holding company, as defined in section 2 of the Bank Holding Company Act of 1956. (b) A swap entered into by a bank holding company shall not be subject to the clearing requirement of section 2(h)(1)(A) of the Act and this part if: (1) The bank holding company has aggregated assets, including the assets of all of its subsidiaries, that do not exceed $10,000,000,000 according to the value of assets of each subsidiary on the last day of each subsidiary’s most recent fiscal year; (2) One of the counterparties to the swap reports the swap to a swap data repository pursuant to §§ 45.3 and 45.4 of this chapter, and reports all information as provided in paragraph (b) of § 50.50 to a swap data repository; and (3) The swap is used to hedge or mitigate commercial risk as provided in paragraph (c) of § 50.50. § 50.79 Swaps entered into by savings and loan holding companies. (a) For purposes of this section, the term savings and loan holding company means an entity that is organized as a savings and loan holding company, as defined in section 10 of the Home Owners’ Loan Act of 1933. (b) A swap entered into by a savings and loan holding company shall not be subject to the clearing requirement of section 2(h)(1)(A) of the Act and this part if: (1) The savings and loan holding company has aggregated assets, including the assets of all of its subsidiaries, that do not exceed $10,000,000,000 according to the value of assets of each subsidiary on the last day of each subsidiary’s most recent fiscal year; (2) One of the counterparties to the swap reports the swap to a swap data repository pursuant to §§ 45.3 and 45.4 of this chapter, and reports all information as provided in paragraph (b) of § 50.50 to a swap data repository; and (3) The swap is used to hedge or mitigate commercial risk as provided in paragraph (c) of § 50.50. § 50.78 Swaps entered into by bank holding companies. Issued in Washington, DC, on November 12, 2020, by the Commission. Christopher Kirkpatrick, Secretary of the Commission. (a) For purposes of this section, the term bank holding company means an Note: The following appendices will not appear in the Code of Federal Regulations. VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 PO 00000 Frm 00031 Fmt 4700 Sfmt 4700 76449 Appendices to Swap Clearing Requirement Exemptions—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—Statement of Support of Chairman Heath P. Tarbert I am pleased to support today’s final rule amending the CFTC’s Part 50 rules, which implement the swap clearing requirement of section 2(h)(1) of the Commodity Exchange Act (the Clearing Requirement). The final rule concurrently achieves two ends—it demonstrates the CFTC’s evolving philosophy on comity and deference towards our international counterparts while alleviating unnecessary regulatory burdens on small domestic institutions that look nothing like Wall Street banks. First, today’s final rule creates new regulations 50.75 and 50.76, which codify existing exemptions from the Clearing Requirement for swaps entered into with certain central banks, sovereign entities, and international financial institutions. Just as we would not expect a foreign regulator to impose clearing requirements on the United States Treasury or the Federal Reserve for entering into swaps on behalf of our government, the CFTC will not impose similar requirements on other nations’ finance ministries and central banks. The same is true for multilateral governmental institutions such as the World Bank Group and the International Monetary Fund. Mutual respect and a two-way-street must be the cornerstone of our international regulatory relations. Second, the final rule establishes new regulations 50.77, 50.78, and 50.79, which exempt from the Clearing Requirement certain swaps entered into by small bank holding companies, savings and loan holding companies, and community development financial institutions. In addition, the final rule clarifies existing exemptions for banks, savings associations, farm credit systems, and credit unions with total assets of less than $10 billion. These entities are the engines of the real economy, providing financial support to American communities, businesses, and families. While exempting these entities from the Clearing Requirement makes sense in normal times, doing so is especially critical now. As we continue to manage the fallout of the COVID–19 (coronavirus) pandemic, it is particularly important that the CFTC advance our strategic goal of regulating the derivatives markets to promote the interests of all Americans.1 Today’s final rule is a step in that direction. Appendix 3—Supporting Statement of Commissioner Brian D. Quintenz I am pleased to support this final rule, which codifies existing relief from the 1 CFTC Strategic Plan 2020–2024, at 6 (discussing Strategic Goal 2), https://www.cftc.gov/media/3871/ CFTC2020_2024StrategicPlan/download. E:\FR\FM\30NOR1.SGM 30NOR1 76450 Federal Register / Vol. 85, No. 230 / Monday, November 30, 2020 / Rules and Regulations TKELLEY on DSKBCP9HB2PROD with RULES Commission’s requirement that certain commonly traded interest rate swaps and credit default swaps be cleared following their execution.2 The new exemptions may be elected by several classes of counterparties that may enter into these swaps, namely: Sovereign nations; central banks; ‘‘international financial institutions’’ of which sovereign nations are members; bank holding companies, and savings and loan holding companies, whose assets total no more than $10 billion; and community development financial institutions recognized by the U.S. Treasury Department. Today’s final rule notes that many of these entities have actually relied on existing relief, electing not to clear swaps that are generally subject to the clearing requirement. I strongly support the policy of international ‘‘comity’’ described in the final rule, recognizing that sovereign nations and their instrumentalities should generally not be subject to the Commission’s regulations. I trust that by issuing this rule, the United States, the Federal Reserve, and other U.S. government instrumentalities will receive the same treatment in foreign jurisdictions. Appendix 4—Statement of Commissioner Dan M. Berkovitz I am voting for the final rule codifying certain limited exemptions from the swap clearing requirement that currently exist through Commission guidance or staff no action relief. The exemptions are consistent with longstanding Commission policies. Analysis of available historical data shows that the number and notional amount of swaps that would be exempted are relatively limited and not likely to materially impact systemic risk. Furthermore, the swaps exempted from clearing will be subject to uncleared swap margin requirements, if applicable, thereby mitigating the risks of not clearing these swaps. The final rule codifies in rule text exemptions for swaps entered into by foreign central banks, sovereign entities at the national level, and certain international institutions that previously have been exempted from the clearing requirement through no action relief or guidance. In this regard, the final rule represents a proper exercise of international comity in recognition of the governmental nature and non-speculative purposes of these sovereign entities and international institutions. The final rule also provides clearing exemptions for certain interest rate swaps of community development financial institutions, subject to a number of significant limits, and for swaps entered into by bank or savings and loan holding companies that have no more than $10 billion in consolidated assets. In each case, the exemption only applies if the swap is used to hedge or mitigate commercial risks. Congress provided in Commodity Exchange Act section 2(h)(7)(C) for an exclusion from the clearing requirement for banks and savings associations with less than $10 billion in assets to the extent determined by 2 The swap clearing requirement is codified in part 50 of the Commission’s regulations (17 CFR part 50). VerDate Sep<11>2014 17:14 Nov 27, 2020 Jkt 253001 the Commission. It is appropriate to apply this exemption to the holding companies of these financial entities. One commenter, Better Markets, expressed concern that the number of entities that will now have an exemption from the clearing requirement has grown over time, leading to the potential for greater risk, reduction in liquidity in cleared markets, and complexity in managing the exemptions. As described in the preamble to the final rule, swap data repository data indicates that over the past several years the number and scope of swaps entered into by these institutions that will be included within the exemptions has been relatively limited. Given this data, these concerns, today, do not outweigh the benefits of the final rule. However, the Commission should periodically review the SDR data to reassess whether the clearing requirement exemptions are cumulatively having a material impact on the extent of swap clearing given the intent of the Dodd-Frank Act. The Commission can then evaluate whether, on a going forward basis, any changes to the exemptions may be warranted. I commend the staff of the Division of Clearing and Risk for this well developed and drafted final rule. The clarity and completeness of the final release helps establish a sound basis for the Commission to approve the final rule. [FR Doc. 2020–25394 Filed 11–27–20; 8:45 am] BILLING CODE 6351–01–P DEPARTMENT OF THE TREASURY Office of Foreign Assets Control 31 CFR Part 591 Publication of Web General Licenses Issued Pursuant to the Venezuela Sanctions Regulations Office of Foreign Assets Control, Treasury. ACTION: Publication of Web General Licenses. AGENCY: The Department of the Treasury’s Office of Foreign Assets Control (OFAC) is publishing three Venezuela-related web general licenses in the Federal Register: General License 5C, which has been superseded, General License 5D, which has been superseded, and General License 5E, each of which was previously issued on OFAC’s website. DATES: General License 5E was issued on October 6, 2020 and the authorizations in it will be effective January 19, 2021. FOR FURTHER INFORMATION CONTACT: OFAC: Assistant Director for Licensing, 202–622–2480; Assistant Director for Regulatory Affairs, 202–622–4855; or Assistant Director for Sanctions Compliance & Evaluation, 202–622– 2490. SUMMARY: PO 00000 Frm 00032 Fmt 4700 Sfmt 4700 SUPPLEMENTARY INFORMATION: Electronic Availability This document and additional information concerning OFAC are available on OFAC’s website (www.treasury.gov/ofac). Background On March 8, 2015, the President, invoking the authority of, inter alia, the International Emergency Economic Powers Act (50 U.S.C. 1701–1706), issued Executive Order (E.O.) 13692 of March 8, 2015, ‘‘Blocking Property and Suspending Entry of Certain Persons Contributing to the Situation in Venezuela’’ (80 FR 12747, March 11, 2015). In E.O. 13692, the President found that the situation in Venezuela, including the Government of Venezuela’s erosion of human rights guarantees, persecution of political opponents, curtailment of press freedoms, use of violence and human rights violations and abuses in response to antigovernment protests, and arbitrary arrest and detention of antigovernment protestors, as well as the exacerbating presence of significant public corruption, constitutes an unusual and extraordinary threat to the national security and foreign policy of the United States, and declared a national emergency to deal with that threat. The President has issued six additional Executive Orders pursuant to the national emergency declared in E.O. 13692: E.O. 13808 of August 24, 2017, ‘‘Imposing Additional Sanctions With Respect to the Situation in Venezuela’’ (82 FR 41155, August 29, 2017); E.O. 13827 of March 19, 2018, ‘‘Taking Additional Steps to Address the Situation in Venezuela’’ (83 FR 12469, March 21, 2018); E.O. 13835 of May 21, 2018, ‘‘Prohibiting Certain Additional Transactions With Respect to Venezuela’’ (83 FR 24001, May 24, 2018); E.O. 13850 of November 1, 2018, ‘‘Blocking Property of Additional Persons Contributing to the Situation in Venezuela’’ (83 FR 55243, November 2, 2018); E.O. 13857 of January 25, 2019, ‘‘Taking Additional Steps To Address the National Emergency With Respect to Venezuela’’ (84 FR 509, January 30, 2019); and E.O. 13884 of August 5, 2019, ‘‘Blocking Property of the Government of Venezuela’’ (84 FR 38843, August 7, 2019). OFAC, in consultation with the Department of State, issued Venezuelarelated General License (GL) 5 on July 19, 2018, pursuant to E.O. 13835, to authorize certain transactions related to the Petro´leos de Venezuela S.A. 2020 8.5 Percent Bond that were prohibited E:\FR\FM\30NOR1.SGM 30NOR1

Agencies

[Federal Register Volume 85, Number 230 (Monday, November 30, 2020)]
[Rules and Regulations]
[Pages 76428-76450]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25394]


=======================================================================
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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 50

RIN 3038-AE33


Swap Clearing Requirement Exemptions

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is adopting amendments to the regulations governing which swaps are 
exempt from the clearing requirement set forth in applicable provisions 
of the Commodity Exchange Act (CEA). These amendments exempt from the 
clearing requirement swaps entered into by certain central banks, 
sovereign entities, international financial institutions, bank holding 
companies, savings and loan holding companies, and community 
development financial institutions. The Commission also is publishing a 
compliance schedule setting forth all the past compliance dates for the 
2012 and 2016 swap clearing requirement regulations. Finally, the 
Commission is making certain other, non-substantive technical 
amendments.

DATES: The effective date for this final rule is December 30, 2020.

FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Deputy Director, 
at 202-418-5684 or [email protected]; Megan A. Wallace, Senior 
Special Counsel, at 202-418-5150 or [email protected]; Melissa D'Arcy, 
Special Counsel, at 202-418-5086 or [email protected]; Division of 
Clearing and Risk; or Ayla Kayhan, Office of the Chief Economist, at 
202-418-5947 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. Ongoing Review of 17 CFR Part 50 Regulations and May 2020 
Proposal
    B. Swap Clearing Requirement
    C. Swaps With Central Banks, Sovereign Entities, and IFIs
    D. DCR No-Action Letters for Four Additional IFIs
    E. DCR No-Action Letters for Certain Bank Holding Companies, and 
Savings and Loan Holding Companies, and CDFIs
    F. DCR No-Action Letters for Relief for Community Development 
Financial Institutions
II. Final Rule for Swaps Not Subject to the Clearing Requirement
    A. May 2020 Proposal
    B. Comments Received
    C. Swaps Entered Into by Central Banks, Sovereign Entities, and 
IFIs
    D. Exemption for Certain Central Banks, Sovereign Entities, and 
IFIs
    E. Data Related to Swaps Entered Into by IFIs
    F. Swaps Entered Into by Bank Holding Companies, Savings and 
Loan Holdings Companies, and CDFIs
    G. Exemption for CDFIs
    H. Exemption for Certain Bank Holding Companies and Savings and 
Loan Holding Companies
    I. Data Related to Swaps Entered Into by CDFIs, Bank Holding 
Companies, and Savings and Loan Holding Companies
    J. Adoption of Subpart D of Part 50
III. Clearing Requirement Compliance Schedule and Compliance Dates
IV. Technical Amendment to Subpart C for Banks, Savings 
Associations, Farm Credit System Institutions, and Credit Unions

[[Page 76429]]

V. Commission's Section 4(c) Authority
    A. Central Banks, Sovereign Entities and IFIs
    B. CDFIs, Certain Bank Holding Companies and Savings and Loan 
Holding Companies
VI. Final Rules Do Not Effect Margin Requirements for Uncleared 
Swaps
VII. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    D. Antitrust Considerations

I. Background

A. Ongoing Review of 17 CFR Part 50 Regulations and May 2020 Proposal

    On May 9, 2017, the Commission published in the Federal Register a 
request for information seeking suggestions from the public for 
simplifying the Commission's regulations and practices, removing 
unnecessary burdens, and reducing costs.\1\ In response, a number of 
commenters asked the Commission to codify certain staff no-action 
letters and Commission guidance, including those that are the subject 
of this rulemaking.\2\ The Commission also engaged in an agency-wide 
review of its regulations and practices to make them simpler, less 
burdensome, and less costly.
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    \1\ See Project KISS, 82 FR 21494 (May 9, 2017) and Project 
KISS, 82 FR 23765 (May 24, 2017).
    \2\ See, e.g., Comment letter from the Institute of 
International Banking, International Swaps and Derivatives 
Association, Inc., and Securities Industry and Financial Markets 
Association, dated July 24, 2017, at 2.
---------------------------------------------------------------------------

    On May 12, 2020, the Commission published a notice of proposed 
rulemaking \3\ that would exempt from the swap clearing requirement (1) 
swaps entered into by certain central banks, sovereign entities, and 
international financial institutions (IFIs), as set forth in the 
preamble to the 2012 End-User Exception final rule; \4\ (2) swaps 
entered into by four additional IFIs that previously received staff no-
action letters from the Commission's Division of Clearing and Risk 
(DCR) in 2013 and 2017; \5\ and (3) swaps entered into by certain bank 
holding companies and savings and loan holding companies, as well as 
community development financial institutions (CDFIs).\6\
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    \3\ Swap Clearing Requirement Exemptions, 85 FR 27955 (May 12, 
2020) (hereinafter referred to as the May 2020 Proposal).
    \4\ May 2020 Proposal at 27957-27961 (citing the End-User 
Exception to the Clearing Requirement for Swaps, 77 FR 42560 (Jul. 
19, 2012)).
    \5\ See CFTC Letter No. 13-25 (June 10, 2013) (providing no-
action relief to the Corporaci[oacute]n Andina de Fomento); CFTC 
Letter No. 17-57 (Nov. 7, 2017) (providing no-action relief to Banco 
Centroamericano de Integraci[oacute]n Econ[oacute]mica); CFTC Letter 
No. 17-58 (Nov. 7, 2017) (providing no-action relief to the European 
Stability Mechanism and for which an expiration date was added in 
CFTC Letter Nos. 19-23 (Oct. 16, 2019), 20-13 (Apr. 14, 2020), and 
20-22 (Aug. 27, 2020) (providing that no-action relief to the 
European Stability Mechanism expires on December 31, 2020)); and 
CFTC Letter No. 17-59 (Nov. 7, 2017) (providing no-action relief to 
the North American Development Bank).
    \6\ The May 2020 Proposal included a supplemental notice of 
proposed rulemaking related to an August 2018 proposal issued by the 
Commission. See Amendments to Clearing Exemption for Swaps Entered 
Into by Certain Bank Holding Companies, Savings and Loan Holding 
Companies, and Community Development Financial Institutions, 83 FR 
44001 (Aug. 29, 2018) (hereinafter referred to as the August 2018 
Proposal). Both the August 2018 Proposal and the May 2020 Proposal 
(together, the Proposals) proposed to codify CFTC Letter No. 16-01 
(Jan. 8, 2016) (providing no-action relief to certain small bank 
holding companies and savings and loan holding companies pursuant to 
a request from the American Bankers Association); and CFTC Letter 
No. 16-02 (Jan. 8, 2016) (providing no-action relief to community 
development financial institutions pursuant to a request from a 
coalition of such entities).
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    The Commission also proposed revisions to part 50 intended to 
simplify the requirements and minimize compliance burdens for market 
participants. The Commission proposed to add a compliance date chart 
for all swaps that the Commission has determined are required to be 
cleared under Commission regulation Sec.  50.4.\7\ In addition, the 
Commission proposed improvements to the structure and organization of 
17 CFR part 50 through heading changes and restructuring amendments.\8\ 
Finally, the Commission proposed the creation of a new subpart D to 
distinguish 17 CFR part 50 exemptions that apply to specific swaps from 
the exceptions and exemptions for market participants eligible to elect 
an exception or exemption under subpart C.\9\
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    \7\ May 2020 Proposal, 85 FR at 27962.
    \8\ For example, the Commission proposed that the provisions 
exempting eligible banks, savings associations, farm credit 
institutions, and credit unions from the definition of ``financial 
entity'' for purposes of the swap clearing requirement be moved to a 
separate regulation at 17 CFR 50.53 so that the exemption is easier 
to locate and the conditions to claim the exemption are set forth 
more clearly. See May 2020 Proposal, 85 FR at 27962-27963.
    \9\ See id. at 27959-27960.
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B. Swap Clearing Requirement

    Title 17 CFR part 50 of the Commission's regulations implements the 
swap clearing requirement under section 2(h) of the CEA. 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.\10\ Swaps that are subject to the Commission's swap 
clearing requirement are described in Commission regulation Sec.  50.4 
(Clearing Requirement).
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    \10\ Clearing Requirement Determination Under Section 2(h) of 
the CEA, 77 FR 74284 (Dec. 13, 2012) (hereinafter referred to as the 
2012 Clearing Requirement Determination) and Clearing Requirement 
Determination Under Section 2(h) of the CEA for Interest Rate Swaps, 
81 FR 71202 (Oct. 14, 2016) (hereinafter referred to as the 2016 
Clearing Requirement Determination).
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    Title 17 CFR 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),\11\ and others were adopted 
pursuant to the Commission's public interest exemption authority (e.g., 
the exemption for swaps entered into by certain cooperatives and the 
exemption for swaps between affiliated entities).\12\
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    \11\ 2012 End-User Exception, 77 FR 42560.
    \12\ Clearing Exemption for Certain Swaps Entered Into by 
Cooperatives, 78 FR 52286 (Aug. 22, 2013); Clearing Exemption for 
Swaps Between Certain Affiliated Entities, 78 FR 21750 (Apr. 11, 
2013); and Exemption from the Swap Clearing Requirement for Certain 
Affiliated Entities--Alternative Compliance Frameworks for Anti-
Evasionary Measures, 85 FR 44170 (Jul. 22, 2020).
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C. Swaps With Central Banks, Sovereign Entities, and IFIs

    In the preamble to the 2012 End-User Exception, the Commission 
determined that foreign central banks, foreign governments, and IFIs 
should not be subject to the swap clearing requirement set forth in 
section 2(h)(1) of the CEA.\13\ This determination was based on 
considerations of comity and was in keeping with the traditions of the 
international system.\14\ The Commission also stated that the Bank for 
International Settlements (BIS), of which the Federal Reserve and 
foreign central banks are members, should be considered to be a foreign 
central bank, and, therefore, swaps entered into by the BIS should not 
be subject to the Clearing Requirement.\15\
---------------------------------------------------------------------------

    \13\ See 2012 End-User Exception, at 42561-42562.
    \14\ See id.
    \15\ Id. at 42561, n.13.
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    The Commission provided several reasons in support of its 
determination. First, the Federal Reserve Banks and the Federal 
Government are not subject to the Clearing Requirement under the 
CEA.\16\ Therefore, the Commission

[[Page 76430]]

stated it would expect that if any part of the Federal Government, the 
Federal Reserve Banks, or IFIs of which the United States is a member 
were to engage in swaps in a foreign jurisdiction, the actions of those 
entities with respect to those swaps should not be subject to foreign 
regulation.\17\ Second, the Commission stated that canons of statutory 
construction ``assume that legislators take account of the legitimate 
sovereign interests of other nations when they write American laws.'' 
\18\ Third, the Commission noted that IFIs operate with the benefit of 
certain privileges and immunities under U.S. law, which indicates that 
such entities may be treated similarly under certain circumstances.\19\ 
Finally, the Commission stated that there is nothing in the text or 
legislative history of the swap-related provisions of the Dodd-Frank 
Act to establish that Congress intended to deviate from the traditions 
of the international system by subjecting foreign central banks, 
foreign governments, or IFIs to the Clearing Requirement set forth in 
section 2(h)(1) of the CEA.\20\
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    \16\ Id. at 42562. Under the Dodd-Frank Act, Congress 
specifically excluded any agreement, contract, or transaction a 
counterparty of which is a Federal Reserve bank, the Federal 
Government, or a Federal agency that is expressly backed by the full 
faith and credit of the United States from the definition of a swap 
under section 1a(47)(B)(ix) of the CEA. Public Law 111-203, 124 
Stat. 1376 (2010). Only transactions that are swaps are subject to 
the Clearing Requirement. See section 2(h) of the CEA.
    \17\ Id. at 42561-42562.
    \18\ Id. at 42562 (citing F. Hoffman-LaRoche Ltd. v. Empagran 
S.A., 542 U.S. 155, 164 (2004)).
    \19\ Id. at 42562 (citing various provisions of the U.S. Code 
and a CFTC staff interpretative letter, which stated that ``[b]ased 
on the unique attributes and status of the World Bank Group as a 
multinational member agency, . . . the CFTC believes that the World 
Bank Group need not be treated as a U.S. person for purposes of 
application of the CFTC's Part 30 rules.''). The Commission also 
cited to a determination of the Board of Governors of the Federal 
Reserve that the Bank Holding Company Act does not apply to foreign 
governments because they are not ``companies'' as such term is 
defined in the Bank Holding Company Act. Id.
    \20\ Id. at 42562. The Commission also noted that if a foreign 
central bank, foreign government, or IFI enters into an uncleared 
swap with a counterparty that is subject to the CEA and Commission 
regulations with regard to that transaction, then the counterparty 
should still comply with applicable Commission requirements under 
parts 23 and 45 of the Commission's regulations. Id.
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    In the preamble to the 2012 End-User Exception, the Commission also 
determined that the IFIs that would be exempt from the Clearing 
Requirement to be those institutions defined as such in section 
262r(c)(2) of Title 22 of the U.S. Code,\21\ and the multilateral 
development banks (MDBs) included in the Proposal for the Regulation of 
the European Parliament and of the Council of the European Union Final 
Compromise Text, Article 1(4a(a)) (March 19, 2012).\22\ Under EMIR, 
European authorities exempted 12 MDBs from all requirements apart from 
reporting obligations.\23\ Based on these two sources, the Commission 
identified 17 IFIs that would not be subject to the Clearing 
Requirement under its policy determination.\24\
---------------------------------------------------------------------------

    \21\ 22 U.S.C. 262r(c)(2). The IFIs included in the U.S. Code in 
2011 were the International Monetary Fund, International Bank for 
Reconstruction and Development, European Bank for Reconstruction and 
Development, International Development Association, International 
Finance Corporation, Multilateral Investment Guarantee Agency, 
African Development Bank, African Development Fund, Asian 
Development Bank, Inter-American Development Bank, Bank for Economic 
Cooperation and Development in the Middle East and North Africa, and 
Inter-American Investment Corporation.
    \22\ 77 FR at 42561 n.14. This provision was enacted as Article 
1(5)(a) of the European Market Infrastructure Reform (EMIR), and 
exempts those entities from all but the reporting requirement of 
EMIR. See Regulation (EU) No 648/2012 of the European Parliament and 
of the Council of 4 July 2012 on OTC derivatives, central 
counterparties and trade repositories, 2012 OJ (L201)1. Section 4.2 
of part 1 of Annex VI to Directive 2006/48/EC, available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32012R0648 and 
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32006L0048. See also discussion below regarding 
subsequent updates to EMIR.
    \23\ The 12 entities exempt from the EMIR were the following: 
(1) International Bank for Reconstruction and Development; (2) 
International Finance Corporation; (3) Inter-American Development 
Bank; (4) Asian Development Bank; (5) African Development Bank; (6) 
Council of Europe Development Bank; (7) Nordic Investment Bank; (8) 
Caribbean Development Bank; (9) European Bank for Reconstruction and 
Development; (10) European Investment Bank; (11) European Investment 
Fund; and (12) Multilateral Investment Guarantee Agency. The 
Commission noted that the exemption for IFIs would be consistent 
with EMIR and other foreign laws. 77 FR at 42561 n.14.
    \24\ The 17 international financial institutions identified in 
the preamble to the 2012 End-User Exception final rule are: (1) 
African Development Bank; (2) African Development Fund; (3) Asian 
Development Bank; (4) Bank for Economic Cooperation and Development 
in the Middle East and North Africa; (5) Caribbean Development Bank; 
(6) Council of Europe Development Bank; (7) European Bank for 
Reconstruction and Development; (8) European Investment Bank; (9) 
European Investment Fund; (10) Inter-American Development Bank; (11) 
Inter-American Investment Corporation; (12) International Bank for 
Reconstruction and Development (part of the World Bank Group); (13) 
International Development Association (part of the World Bank 
Group); (14) International Finance Corporation (part of the World 
Bank Group); (15) International Monetary Fund; (16) Multilateral 
Investment Guarantee Agency (part of the World Bank Group); and (17) 
Nordic Investment Bank. 77 FR at 42561-42562 n.14.
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D. DCR No-Action Letters for Four Additional IFIs

    Based on the Commission's action in the preamble to the 2012 End-
User Exception, DCR issued staff no-action letters to four additional 
IFIs stating that the division would not recommend the Commission take 
enforcement action against such entities for not clearing swaps that 
otherwise would be subject to the Clearing Requirement, provided the 
IFIs satisfied certain conditions.\25\ These institutions include: (1) 
The Corporaci[oacute]n Andina de Fomento (CAF), an economic development 
financing institution established pursuant to a treaty among 10 Latin 
American countries; \26\ (2) Banco Centroamericano de 
Integraci[oacute]n Econ[oacute]mica (CABEI), an economic development 
financing institution established pursuant to a treaty among 11 Latin 
American countries, Spain, and Taiwan; \27\ (3) the European Stability 
Mechanism (ESM), a lending institution established by European Union 
member states to provide emergency financial assistance to member 
states located in the Eurozone; \28\ and (4) the North American 
Development Bank (NADB), a financing institution established by the 
United States and Mexico under the auspices of the North American Free 
Trade Agreement to finance environmentally sustainable infrastructure 
projects in the region along the U.S.-Mexican border.\29\ In their 
request letters, CAF, CABEI, ESM, and NADB each stated that their 
functions, missions, and ownership structures are analogous to the 
functions, missions, and ownership structures of the IFIs included in 
the 2012 End-User Exception.\30\
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    \25\ DCR required each IFI to comply with other provisions of 
the CEA and the Commission's regulations, such as the recordkeeping 
and reporting requirements under parts 23 and 45 of the Commission's 
regulations, which would apply to an uncleared swap entered into by 
an IFI opposite a counterparty that is otherwise subject to the CEA 
and Commission regulations.
    \26\ CFTC Letter No. 13-25.
    \27\ CFTC Letter No. 17-57.
    \28\ CFTC Letter No. 17-58. In CFTC Letter No. 20-22, on August 
27, 2020, DCR staff extended the expiration date of this no-action 
letter until December 31, 2020. The relief provided in CFTC Letter 
No. 20-22 will continue until the effective date of these final 
rules.
    \29\ CFTC Letter No. 17-59.
    \30\ For example, NADB was included as a MDB in the report 
required by 22 U.S.C. 262r(c)(2) since as early as 2012. The 2012 
Report to Congress from the Chairman of the National Advisory 
Council on International Monetary and Financial Policies (December 
2013) (referred to herein as the 2012 NAC Report), and subsequent 
reports, are available at https://www.treasury.gov/resource-center/international/development-banks/Pages/congress-index.aspx.
---------------------------------------------------------------------------

E. DCR No-Action Letters for Certain Bank Holding Companies and Savings 
and Loan Holding Companies and CDFIs

    In 2016, DCR staff issued a no-action letter providing that the 
division would not recommend enforcement action against certain bank 
holding companies and savings and loan holding companies for not 
clearing swaps

[[Page 76431]]

subject to the Clearing Requirement if such entities satisfy certain 
conditions.\31\ At the same time, staff issued a no-action letter 
providing that DCR would not recommend enforcement action against CDFIs 
for not clearing certain swaps subject to the Clearing Requirement, 
under specific conditions.\32\ These bank holding companies, savings 
and loan holding companies, and CDFIs were not eligible to elect an 
exception to the Clearing Requirement under Commission regulation Sec.  
50.50(d) because they are not depository institutions.
---------------------------------------------------------------------------

    \31\ CFTC Letter No. 16-01 (Jan. 8, 2016) (providing no-action 
relief to certain small bank holding companies and savings and loan 
holding companies pursuant to a request from the American Bankers 
Association).
    \32\ CFTC Letter No. 16-02 (Jan. 8, 2016) (providing no-action 
relief to CDFIs pursuant to a request from a Coalition of CDFIs).
---------------------------------------------------------------------------

    The 2016 DCR no-action letter for bank holding companies and 
savings and loan holding companies applies only to holding companies 
with no more than $10 billion in consolidated assets.\33\ This 
limitation is consistent with the statutory provisions under section 
2(h)(7)(C)(ii) of the CEA and Commission regulation Sec.  50.50(d) 
applicable to depository institutions and savings associations. The DCR 
letter also requires that such a holding company be using swaps to 
hedge or mitigate commercial risk and notify the Commission how it 
generally meets the obligations associated with entering into uncleared 
swaps.\34\ Many bank holding companies and savings and loan holding 
companies enter into interest rate swaps to hedge interest rate risk 
that they incur as a result of issuing debt securities or making loans 
to finance their subsidiary banks or savings associations.\35\ In 
addition, these swaps generally have a notional amount of $10 million 
or less, and the bank holding companies and savings and loan holding 
companies enter into swaps less frequently than other swap 
counterparties. Further, the bank holding company or savings and loan 
holding company, rather than the subsidiary bank or savings 
association, must enter into the swap in order to gain hedge accounting 
treatment.\36\
---------------------------------------------------------------------------

    \33\ Under CFTC Letter No. 16-01, the limitation of no more than 
$10 billion in consolidated assets means that the aggregate value of 
all the assets of all the bank holding company's or savings and loan 
holding company's subsidiaries on the last day of each subsidiary's 
most recent fiscal year, do not exceed $10 billion. CFTC Letter No. 
16-01, at 4.
    \34\ See CFTC Letter No. 16-01, at 4.
    \35\ CFTC Letter No. 16-01, at 3.
    \36\ Id.
---------------------------------------------------------------------------

    Also, in 2016, in response to a request from a coalition of CDFIs, 
DCR staff issued a no-action letter providing that the division would 
not recommend that the Commission take enforcement action against a 
CDFI for failure to comply with the Clearing Requirement, provided 
certain conditions are met.\37\ DCR limited the letter to CDFIs 
certified as such by the U.S. Department of the Treasury that engage in 
no more than 10 interest rate swaps per year, with an aggregate 
notional value cap of $200 million per year.\38\ However, DCR 
recognized that there are public interest benefits that may be served 
by permitting CDFIs to engage in limited swaps activity that serves 
smaller, local communities.\39\ DCR also was persuaded that status as a 
CDFI, pursuant to certification by the Treasury Department's Community 
Development Financial Institutions Fund (CDFI Fund), would ensure that 
CDFIs operate under a specific community development organizational 
mission and provide financial and community development services to a 
targeted market.\40\
---------------------------------------------------------------------------

    \37\ See CFTC Letter No. 16-02, at 4. DCR required CDFIs to file 
a notice of election and additional information as described in 
Commission regulation Sec.  50.50(b), and limited the election of 
the exception to swaps entered into for the sole purpose of hedging 
or mitigating commercial risk as described in Commission regulation 
Sec.  50.50(c). Id. Letter No. 16-02 also noted that the letter did 
not excuse the affected persons from compliance with any other 
applicable requirements contained in the CEA or in the Commission's 
regulations. Id.
    \38\ See Certification as a Community Development Financial 
Institution, 12 CFR 1805.201.
    \39\ CFTC Letter No. 16-02, at 3.
    \40\ Community development financial institutions are small in 
scale and tend to serve smaller, local markets. They operate under 
an organizational mission of providing financial and community 
development services to underserved target markets. Community 
development financial institutions are entities that must apply for, 
and receive, certification from the CDFI Fund. The CDFI Fund was 
created by section 104 of the Community Development Banking and 
Financial Institutions Act of 1994, which is contained in Title I of 
the Riegle Community Development and Regulatory Improvement Act of 
1994. See Public Law 103-325, 108 Stat. 2160 (1994). See CFTC Letter 
No. 16-02, at 3.
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II. Final Rule for Swaps Not Subject to the Clearing Requirement

A. May 2020 Proposal

    On May 12, 2020, the Commission proposed amendments to Part 50 of 
the Commission's regulations to create new exemptions from required 
clearing consistent with the policy statements made by the Commission 
in the 2012 End-User Exception and six no-action letters issued by DCR 
beginning in 2013, to add a compliance date chart, and to make other 
non-substantive technical amendments. The Commission requested comments 
from market participants on all aspects of the May 2020 Proposal.

B. Comments Received

    The Commission received ten comment letters in response to the May 
2020 Proposal.\41\ Nearly all the comments letters supported the 
Commission's proposal. Specific aspects of these comments, including 
suggested changes to the rule text and other clarifications, are 
discussed in detail below.
---------------------------------------------------------------------------

    \41\ The Commission received comments from the following: (1) 
American Bankers Association; (2) Asian Infrastructure Investment 
Bank (AIIB); (3) BIS; (4) Better Markets, Inc. (Better Markets), (5) 
Chris Barnard; (6) the Capital Impact Partners, Community Housing 
Capital, Enterprise Community Loan Fund, IFF, Low Income Investment 
Fund, Reinvestment Fund, and Self-Help Ventures Fund (CDFI 
Coalition); (7) ESM; (8) Inter-American Development Bank, the Inter-
American Investment Corporation, the International Bank for 
Reconstruction and Development, and the International Finance 
Corporation (collectively referred to as Commenting IFIs); (9) New 
South Wales Treasury Corporation and (10) the Opportunity Finance 
Network. All comments are available on the Commission's website at: 
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3112.
---------------------------------------------------------------------------

    One commenter, Better Markets, expressed opposition to the proposed 
exemptions for a number of reasons. Better Markets stated that the 
Commission's proposal to permit financial entities to elect not to 
clear swaps subject to the Clearing Requirement is unnecessarily 
complex, undermines the Dodd-Frank Act's financial reform effort, and 
could serve as a drain on liquidity in the cleared swap market. The 
Commission believes that the final rules make the overall regulatory 
framework for cleared swaps less complex, codify longstanding practice, 
and are narrowly tailored to limit any impact on cleared swaps market 
liquidity.

C. Swaps Entered Into by Central Banks, Sovereign Entities, and IFIs

    In the May 2020 Proposal, the Commission proposed to codify its 
determination that swaps entered into by central banks, sovereign 
entities, and IFIs, set forth in the preamble to the 2012 End-User 
Exception final rule,\42\ are not subject to the Clearing Requirement 
under section 2(h)(1) of the CEA.\43\ The Commission received six 
comment letters addressing this aspect of the proposal.\44\ After 
considering the

[[Page 76432]]

comments, the Commission is adopting the rules largely as proposed. The 
final regulations are consistent with the policy the Commission set out 
in the preamble to the 2012 End-User Exception, and in finalizing the 
exemption for swaps entered into by central banks and sovereign 
entities in regulation Sec.  50.75 and the exemption for swaps entered 
into by IFIs in regulation Sec.  50.76, the Commission is providing 
legal certainty that such swaps entered into by a narrow group of 
entities are not subject to the Clearing Requirement.
---------------------------------------------------------------------------

    \42\ See 2012 End-User Exception, 77 FR at 42561-42562.
    \43\ Id. at 42562. As discussed in the preamble to the May 2020 
Proposal, the Commission will refer to ``foreign governments'' as 
``sovereign entities'' because it considers ``foreign governments'' 
and ``sovereign entities'' to mean the same thing. 85 FR at 27956 
n.7, 27959.
    \44\ The following comments addressed this proposal: Chris 
Barnard, AIIB, ESM, BIS, New South Wales Treasury Corporation, and 
Commenting IFIs.
---------------------------------------------------------------------------

    In response to comments received, the Commission is making one 
important modification to the final regulations to clarify that the 
exemption is not dependent on the exempted swaps being reported to a 
swap data repository under Commission regulation Sec. Sec.  45.3 and 
45.4, and this reporting obligation does not fall to central banks, 
sovereign entities, or IFIs.\45\ As discussed further below, the 
Commission did not intend this result and is modifying the rule text 
accordingly.
---------------------------------------------------------------------------

    \45\ Under one reading of the proposed rule text, the exemption 
is dependent on reporting the swap to a swap data repository. See 
May 2020 Proposal, 85 FR at 27959.
---------------------------------------------------------------------------

1. Definition of Central Bank--Sec.  50.75(a)
    The Commission proposed to define ``central bank'' to mean a 
reserve bank or monetary authority of a central government (including 
the Board or Governors of the Federal Reserve System or any of the 
Federal Reserve Banks) or the Bank for International Settlements. The 
Commission did not receive any comment on its proposed definition of 
central bank and is adopting the definition for ``central bank'' as 
proposed.
2. Definition of Sovereign Entity--Sec.  50.75(b)
    The Commission proposed to define ``sovereign entity'' to mean a 
central government (including the U.S. Government), or an agency, 
department, or ministry of a central government. In the 2012 End-User 
Exception final rule, the Commission referred to certain exempt swap 
counterparties as ``foreign governments.'' The term ``foreign 
government'' is intended to refer to sovereigns, similar to the U.S. 
Federal Government, that are located outside of the United States. 
Because the Commission distinguished the Federal Government from state 
and local government entities, the term ``foreign government'' is 
intended to apply only to the Federal level of governmental 
organizations.\46\
---------------------------------------------------------------------------

    \46\ 77 FR at 42562. The Commission stated that Congress did not 
expressly exclude state and local government entities form the 
``financial entity'' definition. On the contrary, in section 
2(h)(7)(C)(i)(VII) of the CEA, Congress expressly included employee 
benefit plans of state and local governments in the ``financial 
entity'' definition, thereby prohibiting them from using the end-
user exception. Id.
---------------------------------------------------------------------------

    The Commission requested comment on the scope of the proposed 
definition and whether an alternative definition should be adopted. The 
Commission received one comment from New South Wales Treasury 
Corporation addressing this issue and proposing alternative definitions 
for consideration.
    The commenter stated that comity and the traditions of the 
international system support including foreign states and 
instrumentalities (such as agencies, departments, or ministries) under 
the definition of ``sovereign entity.'' The commenter further stated 
that the Commission should not limit its concept of ``sovereign 
entities'' based on the American distinction between states and the 
Federal Government because this would adversely impact foreign 
governments that operate under systems where the Federal and state 
governments exist as independent bodies but operate within a 
financially integrated system. The commenter proposed that the 
Commission consider alternative definitions of ``sovereign entity'' 
including: (1) A definition that includes all foreign state 
governments, agencies, departments, and ministries; (2) a definition 
that includes named jurisdictions that have a constitutional basis for 
sovereign authority based on a comparable recognition of the foreign 
state or public authority as a ``sovereign'' under national laws; (3) a 
definition based on recognition of foreign public sector entities based 
on government (state or Federal) ownership; or (4) a definition based 
on the alignment of an entity with capital adequacy standards under 
foreign laws.
    The Commission considered this comment and its proposed alternative 
definitions of ``sovereign entity.'' The Commission believes the 
definition of ``sovereign entity'' adopted in this final rule 
appropriately limits the exemption in a manner that is consistent with 
the 2012 End-User Exception and provides clarity regarding the scope of 
swaps that are not subject to the Clearing Requirement. The second and 
fourth alternatives proposed by the commenter would require the 
Commission periodically to reassess which entities are included in the 
definition based on geopolitical events or whether a specific entity 
meets capital adequacy standards under foreign law. The Commission does 
not believe that these alternatives provide standards that are feasible 
to implement; nor are they helpful in identifying foreign government 
entities that are similar to the U.S. Federal Government. Rather, the 
Commission has purposefully defined the term ``sovereign entity'' so 
that it excludes the concept of ``state governments.''
    The first and third alternatives proposed by the commenter would 
add references to foreign state governments or entities based on state 
government ownership. Under the best reading of section 2(h)(7) of the 
CEA, it is appropriate to limit the exemption from the Clearing 
Requirement to national governments thereby excluding state, regional, 
provincial, or municipal governments. This limitation applies equally 
to U.S. and non-U.S. governmental entities. The Commission continues to 
believe, as it did in 2012, that most governmental entities are 
predominantly engaged in non-banking and non-financial activities 
related to their core public functions and, therefore, are not likely 
to be ``financial entities'' ineligible to elect an exception from the 
Clearing Requirement under section 2(h)(7)(C) of the CEA.\47\ The 
activities of state and local government entities in the United States 
and internationally that might be in the business of banking or 
financial in nature under section 2(h)(7)(C)(i)(VIII) of the CEA ``are 
likely to be incidental, not primary, activities of those entities.'' 
\48\ Nevertheless, because some state or local government entity's swap 
activity may be commercial in nature, the Commission does not believe 
that a per se exclusion for state and local government entities from 
the Clearing Requirement is appropriate. Accordingly, the Commission 
has determined not to include these entities or any of the four 
suggested alternatives in the definition of ``sovereign entity'' and is 
adopting the definition of ``sovereign entity'' as proposed.
---------------------------------------------------------------------------

    \47\ 85 FR at 27960 (citing 2012 End-User Exception, 77 FR at 
42562-42563).
    \48\ Id. at 27960 (quoting 2012 End-User Exception, 77 FR at 
42562-42563).
---------------------------------------------------------------------------

    In addition, adopting any of the alternative definitions of 
``sovereign entity'' proposed by the commenter would diverge from the 
approach taken by the Commission in the margin for uncleared swaps 
rules under Part 23. Maintaining consistency between the application of 
the Clearing Requirement and the application of the margin for 
uncleared swaps regulations avoids introducing unnecessary complication 
and possible confusion for swap market participants due to the 
interrelationship between the two sets of regulations.

[[Page 76433]]

3. Definition of IFI--Sec.  50.76(b)
    As proposed, regulation 50.76 would define ``international 
financial institution'' to mean the 17 entities the Commission 
identified in the 2012 End-User Exception final rule,\49\ the four 
entities to whom DCR issued no-action letters in 2013 and 2017,\50\ the 
Islamic Development Bank,\51\ and any other entity that provides 
financing for national or regional development in which the U.S. 
Government is a shareholder or contributing member.
---------------------------------------------------------------------------

    \49\ The 17 IFIs identified in the 2012 End-User Exception final 
rule are the following: (1) African Development Bank; (2) African 
Development Fund; (3) Asian Development Bank; (4) Bank for Economic 
Cooperation and Development in the Middle East and North Africa; (5) 
Caribbean Development Bank; (6) Council of Europe Development Bank; 
(7) European Bank for Reconstruction and Development; (8) European 
Investment Bank; (9) European Investment Fund; (10) Inter-American 
Development Bank; (11) Inter-American Investment Corporation; (12) 
International Bank for Reconstruction and Development (part of the 
World Bank Group); (13) International Development Association (part 
of the World Bank Group); (14) International Finance Corporation 
(part of the World Bank Group); (15) International Monetary Fund; 
(16) Multilateral Investment Guarantee Agency (part of the World 
Bank Group); and (17) Nordic Investment Bank.
    \50\ CAF; CABEI; ESM; and NADB.
    \51\ The Islamic Development Bank is included in the definition 
of ``multilateral development bank'' under Commission regulation 
Sec.  23.151, the definitions applicable to the Commission's margin 
for uncleared swaps rules and was included as an IFI in the May 2020 
Proposal for this reason.
---------------------------------------------------------------------------

    The Commission received one comment on the definition of IFI. The 
Asian Infrastructure Investment Bank (AIIB) requested that it be 
included as an IFI because it is similar to other IFIs under proposed 
regulation Sec.  50.76(b).\52\ According to AIIB, inclusion on the list 
would encourage international comity and promote cross-border 
cooperation, particularly with regard to European Union authorities 
because AIIB is exempt from the clearing obligation under European 
law.\53\ AIIB also states that the CEA does not require that the U.S. 
Government be a shareholder or contributing member of a foreign 
institution in order to qualify for an exemption from the Clearing 
Requirement, and ten of the 22 institutions included in regulation 
50.76 do not have the U.S. Government as a shareholder or contributing 
member.\54\ AIIB argues that it is comparable to the other IFIs under 
the proposed rule and should be afforded similar treatment.\55\
---------------------------------------------------------------------------

    \52\ AIIB notes that in 2018 it submitted a request to DCR for 
no-action relief from the Clearing Requirement based on the same 
factors discussed in the DCR letters issued in 2013 and 2017. AIIB 
Letter at 3, n. 8. AIIB is a MDB that began operating on January 16, 
2016. AIIB is an international organization with its principal 
office located in Beijing, People's Republic of China.
    \53\ AIIB Comment at 4. AIIB explains that it could not have 
been included as a MDB under European law in 2012 because it was not 
yet established. AIIB, along with CAF and CABEI, is included on a 
new list of MDBs that are not subject to the European clearing 
obligation under Regulation (EU) No 375/2013, Article 117(1) and 
(2)(p), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02019R0876-20200627. AIIB argues that the European 
Union's subsequent recognition of AIIB as a MDB should mean that it 
is de facto an IFI for purposes of an exemption from the CFTC's 
Clearing Requirement.
    \54\ AIIB Comment at 4. These institutions include the Bank for 
Economic Cooperation in the Middle East and North Africa, Caribbean 
Development Bank, Council of Europe Development Bank, European 
Investment Bank, European Investment Fund, Islamic Development Bank, 
Nordic Investment Bank, CABEI, CAF, and ESM.
    \55\ AIIB further states that it has not entered into any swaps 
with any U.S. counterparty because it is not exempt from the 
Clearing Requirement and margin requirements. AIIB Comment at 8.
---------------------------------------------------------------------------

    The Commission does not believe it would be appropriate to include 
AIIB as an IFI for purposes of an exemption from the Clearing 
Requirement for a number of reasons. First, the CEA does not prescribe 
that the swaps of all foreign central banks, foreign sovereign 
entities, or IFIs should be exempt from the Clearing Requirement. 
Rather, pursuant to section 4(c) of the CEA, the Commission must find 
that exempting swaps entered into with AIIB from required clearing is 
consistent with public interest, taking into account principles of 
international comity.
    In the 2012 End-User Exception, the Commission did not exempt all 
IFIs from the Clearing Requirement. Rather, the Commission based its 
identification of IFIs on the expectation that if any of the Federal 
Government, Federal Reserve Banks, or international financial 
institutions of which the United States is a member were to engage in 
swap transactions in foreign jurisdictions, the actions of those 
entities with respect to those transactions would not be subject to 
foreign regulation.\56\ As explained above, the Commission determined 
that the exemption from the Clearing Requirement would apply to IFIs 
defined under 22 U.S.C. 262r(c)(2) and the IFIs defined as MDBs under 
the proposal for the regulation that became Regulation (EU) No 648/
2012, of the European Parliament and of the Council on OTC derivatives, 
central counterparties and trade repositories (EMIR).\57\
---------------------------------------------------------------------------

    \56\ 77 FR at 42561-42562 (emphasis added).
    \57\ 77 FR at 42561 n.14.
---------------------------------------------------------------------------

    The IFIs defined in 22 U.S.C. 262r(c)(2) are entities in which the 
United States is a direct shareholder (or member) and therefore is able 
to influence the IFI and promote U.S. foreign policy, economic 
interests, and national security interests abroad.\58\ Thus, while 
there is no requirement in the CEA that the U.S. Government be a 
shareholder or contributing member of an IFI in order to qualify for an 
exemption from the Clearing Requirement, the 2012 End-User Exception 
established a policy that recognized the importance of furthering U.S. 
policy goals when the Commission listed IFIs of which the United States 
is a member as the type of entity it would expect to be entitled to 
relief from mandatory clearing in foreign jurisdictions.
---------------------------------------------------------------------------

    \58\ The United States also can exert this influence through its 
membership in an IFI that is a member of another IFI. See generally 
2012 NAC Report.
---------------------------------------------------------------------------

    Further, it is appropriate to exempt the swaps entered into by CAF, 
CABEI, ESM, and NADB from the Clearing Requirement.\59\ Each of these 
entities is sufficiently similar to the IFIs identified in the 2012 
End-User Exception in that each entity's function, mission, and 
ownership structure (i.e., comprised of national authorities) is 
analogous to those IFIs. In addition, it is appropriate to include the 
Islamic Development Bank as an IFI because it is included as a MDB 
under Commission regulation Sec.  23.151, the definitions section for 
the margin for uncleared swaps rules. As noted above, consistency 
between the regulations for required clearing and margin for uncleared 
swaps helps avoid unnecessary complication and reduce possible 
confusion among market participants due to the interrelationship 
between the two sets of regulations.
---------------------------------------------------------------------------

    \59\ The Commission notes that NADB was considered a MDB in 2012 
and is included in the 2012 NAC Report.
---------------------------------------------------------------------------

    AIIB differs from the other IFIs in two important respects. First, 
as AIIB notes, the United States is not a shareholder under AIIB's 
Articles of Agreement,\60\ and the Commission has indicated that the 
exemption from the Clearing Requirement should apply to IFIs of which 
the United States is a member. The United States made a determination 
not to become a shareholder or contributing member of AIIB.\61\ This

[[Page 76434]]

decision was based on, among other things, concerns that the goals of 
AIIB may not necessarily align with the interest of U.S. foreign 
policy, economic interests, and national security interests. It would 
not now be appropriate for the Commission to treat AIIB as if the 
United Stated had elected to become a member of AIIB. Further, with 
respect to the IFIs included in regulation 50.76, the member 
governments generally have a collective majority control and governance 
over the entities. In AIIB, China is the largest shareholder 
(controlling 297,804 of 1,000,000 shares), with no other member 
government holding a block of shares that could realistically influence 
policy.\62\
---------------------------------------------------------------------------

    \60\ The Articles of Agreement may be found here: https://www.aiib.org/en/about-aiib/who-we-are/financing-operations/index.html. Under the Articles of Agreement, the number of shares is 
set at 1,000,000. Membership is divided between regional members and 
non-regional members, with regional members controlling 750,000 
shares, and non-regional members controlling 250,000 shares. China 
owns 297,804 of the 750,000 regional member shares, with 16,150 
shares unallocated.
    \61\ According to a report from the Congressional Research 
Service, AIIB was conceived in 2013 as part of China's ``one belt, 
one road'' policy. The United States did not join this development 
bank for two reasons. First, China's voting share (28.7%) is 
substantially larger than that of the second-largest AIIB member 
nation (India at 8.3%). This is the largest gap between first and 
second largest shareholders at any existing MDB. Second, there are 
two key differences in governance structures: AIIB does not have a 
resident board of executive directors that represents member 
countries' interests on a day-to-day basis; and AIIB gives more 
decision-making authority to regional countries and its largest 
shareholder (China). Congressional Research Service, Asian 
Infrastructure Investment Bank, R44754, at 8-10 (Feb. 3, 2017).
    \62\ Id.
---------------------------------------------------------------------------

    Second, AIIB's stated purpose appears to be broader than the 
entities added pursuant to DCR no-action letters. The stated purpose of 
CAF is ``to promote sustainable development and regional integration, 
by providing multiple financial services to clients in the public and 
private sectors of its Shareholder Countries.'' \63\ CABEI's objective 
is ``to promote the economic integration and the balanced economic and 
social development of the Central American region.'' \64\ ESM's purpose 
is ``to mobilize funding and provide stability support under strict 
conditionality, appropriate to the financial assistance instrument 
chosen, to the benefit of ESM Members which are experiencing, or are 
threatened by, severe financing problems, if indispensable to safeguard 
the financial stability of the euro area as a whole and of its Member 
States.'' \65\
---------------------------------------------------------------------------

    \63\ Article 3, Agreement Establishing Corporaci[oacute]n Andina 
de Fomento (March 2015).
    \64\ Article 2, CABEI Constitutive Agreement (Aug. 22, 2018).
    \65\ Article 3, Treaty Establishing ESM (Feb. 2, 2012), 
available at https://www.esm.europa.eu/legal-documents/esm-treaty.
---------------------------------------------------------------------------

    By contrast, AIIB's purpose is to ``foster sustainable economic 
development, create wealth and improve infrastructure connectivity in 
Asia by investing in infrastructure and other productive sectors'' and 
``promote regional cooperation and partnership in addressing 
development challenges by working in close cooperation with other 
multilateral and bilateral development banks.'' \66\ The Commission 
notes AIIB's broader purpose--particularly to create wealth--along with 
AIIB's comments that ``AIIB is posed to be a major issuer in the 
international capital markets'' and ``will be required to negotiate a 
significant volume of swaps in connection with issuances under this 
program'' goes beyond other IFIs that serve the public interest needs 
of developing countries through lending capital.\67\
---------------------------------------------------------------------------

    \66\ Article 1, AIIB's Articles of Agreement (Dec. 25, 2015), 
available at https://www.aiib.org/en/about-aiib/basic-documents/articles-of-agreement/index.html.
    \67\ AIIB Letter at 7.
---------------------------------------------------------------------------

    Finally, the Commission is not persuaded by AIIB's argument that 
international comity with European authorities will be enhanced by 
exempting AIIB's swaps from the CFTC's Clearing Requirement. Global 
authorities, including the CFTC and European authorities, have long 
acknowledged that there will be differences in the scope of products 
and participants covered by their respective mandatory clearing 
regimes.\68\ In addition, the relevant country for purposes of 
considering international comity with regard to AIIB is more likely to 
be China given that AIIB's headquarters are in Beijing. The Commission 
notes that China has issued a clearing mandate for Renminbi interest 
rate swaps, however, the Commission has not determined that such swaps 
are required to be cleared.
---------------------------------------------------------------------------

    \68\ 2016 Clearing Requirement Determination, 81 FR at 71203-
71205 (providing an overview of relevant clearing mandates adopted 
in non-U.S. jurisdictions with which the CFTC sought to align its 
clearing requirement, despite differences in terms of product and 
participant scope). See also the International Organization of 
Securities Commissions' Information Repository for Central Clearing 
Requirements for OTC Derivatives (last updated Dec. 12, 2019), 
available at https://www.iosco.org/publications/?subsection=information_repositories.
---------------------------------------------------------------------------

    For these reasons, the exclusion of AIIB from the definition of 
``international financial institution'' for purposes of the Clearing 
Requirement is an appropriate exercise of the Commission's discretion 
under section 4(c) of the CEA and is consistent with the 2012 End-User 
Exception.\69\
---------------------------------------------------------------------------

    \69\ The Commission also notes that its decision regarding the 
scope of the definition of IFI is consistent with the Commission's 
recently issued Cross-Border Application of the Registration 
Thresholds and Certain Requirements Applicable to Swap Dealers and 
Major Swap Participants, 85 FR 56924 (Sep. 14, 2020). In the context 
of determining the registration threshold for swap dealers, the 
Commission stated that the term ``U.S. person'' does not include the 
International Monetary Fund, the International Bank for 
Reconstruction and Development, the Inter-American Development Bank, 
the Asian Development Bank, the African Development Bank, the United 
Nations, and their agencies and pension plans, and any other similar 
international organizations, and their agencies and pension plans. 
85 FR at 56937. The Commission based its definition on 22 U.S.C. 
262r(c)(2) and the European Union's 2012 regulation on ``OTC 
derivatives, central counterparties and trade repositories.'' Id. 
(citations omitted). Additionally, the Commission stated there is 
nothing in the text or history of the swap-related provisions of 
Title VII to suggest that Congress intended to deviate from the 
traditions of the international system by including such IFIs within 
the definitions of the term ``U.S. person.'' Id. (quoting Further 
Definition of Swap Dealer, Security-Based Swap Dealer, Major Swap 
Participant, Major Security-Based Swap Participant and Eligible 
Contract Participant, 77 FR 30596, 30692 n.1189 (May 23, 2012) 
(citing to 22 U.S.C. 262r(c)(2) and the 2012 European Union 
definition for support in identifying IFIs as excluded from the 
definition of ``U.S. person'' as a discretionary and appropriate 
exercise of international comity-based doctrines). Finally, as noted 
above, the list of IFIs recognized in the European Union has since 
been superseded and updated in Regulation (EU) No 575/2013, Article 
117(2).
---------------------------------------------------------------------------

D. Exemption for Swaps With Central Banks, Sovereign Entities, and 
IFIs--Sec.  50.75(a) and 50.76(a)

    Proposed regulation 50.75(a) would exempt from the Clearing 
Requirement swaps entered into by central banks and sovereign entities. 
Proposed regulation 50.76(a) would exempt from the Clearing Requirement 
swaps entered into with IFIs. Under both proposed rules, the Commission 
included the phrase ``and this part if reported to a swap data 
repository pursuant to Sec. Sec.  45.3 and 45.4 of this chapter.''
    The Commission received two comments on the inclusion of this 
reporting requirement. Both commenters, the BIS and the Commenting 
IFIs, supported the codification of the proposed exemptions from the 
Clearing Requirement, but noted that the Commission did not impose a 
reporting requirement on central banks, sovereign entities and IFIs in 
the 2012 End-User Exception. Rather, the commenters explained that 
under current market practice their swap counterparties report the swap 
to a swap data repository. The commenters stated that the Commission 
should clarify that the eligibility to claim an exemption is not 
conditioned on: (i) The central bank, sovereign entity, or IFI itself 
reporting the swap to a swap data repository; or (ii) its counterparty 
reporting the swap to a swap data repository.\70\
---------------------------------------------------------------------------

    \70\ See Commenting IFIs comment at 4-5 and BIS comment at 2-4.
---------------------------------------------------------------------------

    The Commission agrees with the comments received and did not intend 
to impose a reporting requirement on central banks, sovereign entities, 
or IFIs under regulations 50.75(a) and 50.76(a). The Commission is 
revising the text of the regulation to delete the reference to

[[Page 76435]]

swap data repository reporting.\71\ This edit also is intended to 
respond to commenters concerns that a counterparty's failure to report 
a swap to a swap data repository could make those swaps ineligible for 
the exemption, even if the central bank, sovereign entity, or IFI had 
no knowledge of the counterparty's failure to report appropriately. The 
removal of the citation to part 45 reporting from the regulation is 
intended to permit current practice to continue regarding which 
counterparty reports the swap to a swap data repository. The removal of 
the citation is not intended to relieve any swap counterparty's 
independent obligation to report the swap to a swap data repository 
under Commission regulation Sec. Sec.  45.3 and 45.4.
---------------------------------------------------------------------------

    \71\ Regulation Sec.  50.75(a) is being amended to state that 
swaps entered into by a central bank or sovereign entity shall be 
exempt from the clearing requirement of section 2(h)(1)(A) of the 
Act. Regulation Sec.  50.76(a) is being amended to state that swaps 
entered into by an international financial institution shall be 
exempt from the clearing requirement of section 2(h)(1)(A) of the 
Act.
---------------------------------------------------------------------------

E. Data Related to Swaps Entered Into by IFIs

    The Commission requested comment on the data it presented regarding 
the use of swaps by IFIs from the Depository Trust & Clearing 
Corporation's (DTCC's) swap data repository, DTCC Data Repository 
(DDR). As the Commission noted in the May 2020 Proposal, from January 
1, 2018 to December 31, 2018, 16 IFIs named in proposed regulation 
50.76 were counterparties to a swap that was entered into and reported 
to DDR during that time period. Overall, the 16 IFIs entered into 
approximately 2,500 uncleared interest rate swaps with an estimated 
total notional value of $220 billion. Of those 16, four IFIs entered 
into more than one hundred swaps during calendar year 2018. Compared to 
data that the Commission gathered from DDR during calendar year 2017, 
the number of IFIs entering into interest rate swaps increased from 
nine to 16, and the total number and total notional value of all 
uncleared interest rate swaps entered into by IFIs increased from 381 
swaps totaling $59.8 billion to approximately 2,500 swaps totaling $220 
billion.
    The Commission did not receive any comments on the data and has no 
reason to believe this data is not an accurate representation of swaps 
entered into by IFIs. Based on this data, the scope of swaps entered 
into by IFIs and eligible for this exemption is quantifiable and does 
not represent a significant shift in swaps away from the Clearing 
Requirement. The data also reflects continued interest from IFIs in 
entering into uncleared swaps with their counterparties.

F. Swaps Entered Into With Certain Bank Holding Companies, Savings and 
Loan Holding Companies, and CDFIs

    The Commission proposed to exempt from the Clearing Requirement 
swaps entered into to hedge or mitigate commercial risk if one of the 
counterparties to the swap is either (a) a bank holding company or 
savings and loan holding company, each having no more than $10 billion 
in consolidated assets, or (b) CDFI transacting in certain types and 
quantities of swaps.\72\ Such an exemption would be consistent with 
Commission regulation Sec.  50.50(d), which permits banks, savings 
associations, farm credit system institutions, and credit unions with 
total assets of $10 billion or less (small financial institutions) to 
elect not to clear their swaps that are used to hedge or mitigate 
commercial risk.\73\
---------------------------------------------------------------------------

    \72\ See August 2018 Proposal, 83 FR 44001 and May 2020 
Proposal, 85 FR 27955.
    \73\ Commission regulation Sec.  50.50(d); see also 2012 End-
User Exception, 77 FR 42560. Commission regulation Sec.  50.50(d) 
exempts for the purposes of the Clearing Requirement, a person that 
is a ``financial entity'' solely because of section 
2(h)(7)(C)(i)(VIII) of the CEA if the person: (1) Is organized as a 
bank, as defined in section 3(a) of the Federal Deposit Insurance 
Act, the deposits of which are insured by the Federal Deposit 
Insurance Corporation; a savings association, as defined in section 
3(b) of the Federal Deposit Insurance Act, the deposits of which are 
insured by the Federal Deposit Insurance Corporation; a farm credit 
system institution chartered under the Farm Credit Act of 1971; or 
an insured Federal credit union or State-chartered credit union 
under the Federal Credit Union Act; and (2) has total assets of 
$10,000,000,000 or less on the last day of such person's most recent 
fiscal year. Commission regulation Sec.  50.50(d) does not excuse 
the affected persons from compliance with any other applicable 
requirements of the CEA or in the Commission's regulations. As 
discussed below, the Commission is recodifying Commission regulation 
Sec.  50.50(d) as a separate rule, Sec.  50.53, so that it is easier 
to locate and the conditions to claim the exemption are set forth 
more clearly. The Commission does not consider this relocation to 
alter the substance of the exemption.
---------------------------------------------------------------------------

    In adopting Commission regulation Sec.  50.50(d), the Commission 
noted that small financial institutions tend to serve smaller, local 
markets, and are well situated to provide swaps to the customers in 
their markets for the purpose of hedging commercial risk.\74\ The 
Commission also noted that small financial institutions typically hedge 
customer swaps by entering into matching swaps, and if those swaps had 
to be cleared, small financial institutions would have to post margin 
to satisfy the requirements of the DCO, which could raise the costs 
associated with hedging the risks of their swaps with customers.\75\ In 
addition, the Commission acknowledged that some of these small 
financial institutions may incur initial and annual fixed clearing fees 
and other expenses that may be incrementally higher relative to the 
number of swaps executed over a given period of time.\76\ Finally, the 
Commission stated that given the relatively low notional volume of swap 
books held by these small institutions, and the commercial customer 
purposes these swaps satisfy, the swaps executed by these entities were 
what Congress was considering when it directed the Commission to 
consider the exemption for small financial entities.\77\
---------------------------------------------------------------------------

    \74\ 77 FR at 42578. The Commission acknowledged that, as 
indicated by commenters, that a large portion of the swaps executed 
by these financial institutions with customers likely hedge interest 
rate risk associated with commercial loans. Id.
    \75\ Id. These costs would largely be driven by the costs of 
clearing in terms of funding the cost of posting initial margin and 
paying variation margin to the DCO.
    \76\ Id.
    \77\ Id.
---------------------------------------------------------------------------

    The proposed amendments would codify two no-action letters issued 
by DCR in 2016.\78\ The Commission believes that codifying both of 
these staff no-action letters is consistent with the policy rationale 
behind the exemption from the Clearing Requirement that the Commission 
granted for swaps entered into by banks, savings associations, farm 
credit institutions, and credit unions in the 2012 End-User 
Exception.\79\
---------------------------------------------------------------------------

    \78\ CFTC Letter No. 16-01 (request from the American Bankers 
Association) and CFTC Letter No. 16-02 (request from a coalition of 
CDFIs).
    \79\ See August 2018 Proposal at 44004. See also 2012 End-User 
Exception, 77 FR at 42590-42591.
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    The Commission received four comments letters on this aspect of the 
proposal.\80\ While most of the comments were supportive, Better 
Markets opposed the Commission's use of its public interest exemptive 
authority to exempt from the Clearing Requirement swaps entered into by 
these entities. As discussed below, the Commission is adopting the 
regulations as proposed with one minor clarification.
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    \80\ See Comments submitted by the American Bankers Association, 
Opportunity Finance Network, Better Markets, and the CDFI Coalition.
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1. Definition of Community Development Financial Institution--Sec.  
50.77(a)
    The Commission proposed to define ``community development financial 
institution'' to mean a CDFI, as defined in section 103(5) of the 
Community Development Banking and Financial Institutions Act of 1994, 
that is certified by the Treasury Department's Community Development 
Financial

[[Page 76436]]

Institution Fund under the requirements set forth in 12 CFR 
180.201(b).\81\ CDFIs certified by the Treasury Department must meet 
certain community development finance criteria intended to show they 
promote economic revitalization and community development in low-income 
communities that lack adequate access to affordable financial products 
and services.\82\ The Commission did not receive any comment on its 
proposed definition and is adopting the definition as proposed.
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    \81\ Under section 103, a ``community development financial 
institution'' means a person (other than an individual) that: (i) 
Has a primary mission of promoting community development; (ii) 
serves an investment area or targeted population; (iii) provides 
development services in conjunction with equity investments or 
loans, directly or through a subsidiary or affiliate; (iv) 
maintains, through representation on its governing board or 
otherwise, accountability to residents of its investment area or 
targeted population; and (v) is not an agency or instrumentality of 
the United States, or of any State or political subdivision of a 
State. 12 U.S.C. 4702(5).
    \82\ See Certification as a Community Development Financial 
Institution, 12 CFR 1805.201(b)(1) through (6) (setting forth the 
following criteria for a community development financial institution 
to obtain Treasury Department certification: (1) It has a primary 
mission of community development; (2) its predominant business 
activity is the provision of financial products or financial 
services; (3) it serves one or more target markets such as an 
investment area or target population; (4) it has a track record of 
providing development services to borrowers in conjunction with 
financing activities; (5) it maintains accountability to the 
residents of its target market; and (6) it is a non-government 
entity). See also Community Development Financial Institutions Fund, 
Notice of Funds Availability, 83 FR 4750 (Feb. 1, 2018) (stating the 
priorities of the CDFI Fund).
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2. Definition of Bank Holding Company--Sec.  50.78(a)
    The Commission proposed to define ``bank holding company'' to mean 
an entity that is organized as a bank holding company, as defined in 
section 2 of the Bank Holding Company Act of 1956.\83\ This definition 
represents the accepted meaning for ``bank holding company.'' The 
Commission did not receive any comments on the proposed definition and 
is adopting the definition as proposed.
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    \83\ Section 2 of the Bank Holding Company Act generally defines 
a ``bank holding company,'' subject to limited exceptions, as any 
company which has control over any bank or over any company that is 
or becomes a bank holding company. 12 U.S.C. 1841(a)(1) (subject to 
exceptions described in paragraph (5) therein).
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3. Definition of Savings and Loan Holding Company--Sec.  50.79(a)
    The Commission proposed to define ``savings and loan holding 
company'' to mean an entity that is organized as a savings and loan 
holding company, as defined in section 10 of the Home Owners' Loan Act 
of 1933.\84\ This definition represents the accepted meaning for 
``savings and loan holding company.'' The Commission did not receive 
any comments on the proposed definition and is adopting the definition 
as proposed.
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    \84\ Section 10 of the Home Owners' Loan Act generally defines a 
``savings and loan holding company,'' subject to limited exceptions, 
as any company that directly or indirectly controls a savings 
association or that controls any other company that is a savings and 
loan company. 12 U.S.C. 1467(a)(1)(D)(i) (subject to exclusions 
described in clause (ii)).
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G. Exemption From the Clearing Requirement for CDFIs--Sec.  50.77(b)

    The Commission proposed to exempt swaps entered into by a CDFI from 
the Clearing Requirement if: (1) The swap is a U.S. dollar denominated 
interest rate swap in the fixed-to-floating class or the forward rate 
agreement class that would otherwise be subject to the Clearing 
Requirement under Commission regulation Sec.  50.4(a); (2) the total 
aggregate notional value of the all swaps entered into by the CDFI 
during the 365 calendar days prior to the day of execution of the swap 
is less than or equal to $200,000,000; (3) the swap is one of ten or 
fewer swap transactions that the CDFI enters into within a period of 
365 calendar days; (4) one of the counterparties to the swap reports 
the swap to a swap data repository pursuant to Commission regulation 
Sec. Sec.  45.3 and 45.4, and reports all information described under 
Commission regulation Sec.  50.50(b) to a swap data repository; and (5) 
the swap is used to hedge or mitigate commercial risk as defined under 
Commission regulation Sec.  50.50(c). The proposal is consistent with 
the 2016 DCR no-action relief previously afforded CDFIs.\85\
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    \85\ August 2018 Proposal, 83 FR at 44005 (citing CFTC Letter 
No. 16-02).
---------------------------------------------------------------------------

    The Commission received strong support for the proposal. The CDFI 
Coalition supported the proposal because interest rate swaps help CDFIs 
manage risk, and CDFIs borrow funds at floating rates and lend to 
customers at fixed rates. The floating rate leaves the CDFI exposed to 
future adverse interest rate moves, and interest rate swaps allow the 
CDFI to hedge its interest rate exposure by converting that exposure to 
a fixed rate thereby enhancing its ability to lend to customers and 
fund projects.\86\ The CDFI Coalition stated that an exemption from the 
Clearing Requirement will eliminate the costs of clearing (posting of 
margin, cost of initial and annual fixed clearing fees and other 
expenses) and free up the time, effort, and resources that would be 
necessary to establish intermediary and clearinghouse access. The CDFI 
Coalition stated that ``while the potential volume of interest rate 
swap activity may increase in the future, it will not reach the level 
of systemic importance.'' \87\
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    \86\ CDFI Coalition Letter at 3.
    \87\ CDFI Coalition Letter at 6.
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    The CDFI Coalition also confirmed that CDFIs enter into swaps to 
hedge risk from financing transactions infrequently and have relatively 
low notional volume swap books.\88\ As was the case when the Commission 
provided an exception for the small banks, farm credit system 
institutions, and credit unions under regulation 50.50(d), the CDFI 
Coalition stressed the public interest benefits that will be served by 
permitting CDFIs to engage in tailored and limited swaps to pursue 
their public interest goals without incurring the costs of central 
clearing.
---------------------------------------------------------------------------

    \88\ Id. The CDFI Coalition confirmed the swap data used in the 
proposed rule is correct: Eight different CDFIs entered into 13 
uncleared interest rate swaps in 2018 with an aggregate notional 
value of almost $84 million.
---------------------------------------------------------------------------

    Better Markets opposed the exemption for CDFIs, as well as for bank 
holding companies, and savings and loan holding companies, as 
unnecessary and detrimental to the derivatives reforms of the Dodd-
Frank Act. Better Markets stated that under section 2(h)(7)(C)(ii) the 
CFTC may consider excluding only certain categories of financial 
entities and that Congress intended to insure financial institutions 
broadly mitigate risks through the derivatives clearing system.\89\ 
Better Markets is concerned that these exemptions will permit swaps 
activities to occur outside of regulated, transparent, impartially 
access markets, and will draw liquidity away from markets.\90\
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    \89\ Better Markets comment at 4-5.
    \90\ Id. at 6-7.
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    The Commission disagrees with Better Markets' view that the 
proposed exemption for CDFI is not permitted because Congress did not 
include CDFIs under section 2(h)(7)(C)(ii) of the CEA. As discussed 
further in Section V, below, Congress did not exclude section 2(h) from 
the Commission's statutory authority under section 4(c) of the CEA if 
the Commission finds an exemption from the Clearing Requirement to be 
in the public interest.
    CDFIs are sufficiently similar to the type of entities Congress 
included when it directed the Commission to consider an exemption from 
the Clearing Requirement for small banks and savings associations.\91\ 
CDFIs certified

[[Page 76437]]

by the CDFI Fund serve rural and urban low-income communities across 
the nation that lack adequate access to affordable financial products 
and services.\92\ Through financial assistance and grants from the CDFI 
Fund, CDFIs are able to make loans and investments, and to provide 
related services for the benefit of designated investment areas, target 
populations, or both.\93\ CDFIs enter into a limited number of interest 
rate swaps and forward rate agreement swaps in order to hedge interest 
rate risk incurred as a result of issuing debt securities or making 
loans in pursuit of their organizational missions.\94\
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    \91\ See 77 FR at 42578. The Commission notes that uncleared 
swaps with a counterparty that is subject to the CEA and Commission 
regulations with regard to that transaction must still comply with 
the CEA and Commission regulations as they pertain to uncleared 
swaps, e.g., the recordkeeping and reporting requirements under 
parts 23 and 45 of the Commission's regulations.
    \92\ See also Community Development Financial Institutions Fund, 
Notice of Funds Availability, 83 FR 4750 (Feb. 1, 2018) (stating the 
priorities of the CDFI Fund). In the event certification is not 
maintained, a CDFI would no longer meet the definition and would no 
longer be able to rely on this exemption from the Clearing 
Requirement.
    \93\ See Community Development Financial Institutions Program, 
68 FR 5704, 5704 (Feb. 4, 2003). Additional information is available 
at the CDFI Fund's website, https://www.cdfifund.gov/about/Pages/default.aspx.
    \94\ CDFI Coalition comment at 5-6; Better Markets comment at 6.
---------------------------------------------------------------------------

    The CDFI Coalition requested that the Commission clarify that 
regulation 50.77(b)(1) applies equally to both fixed-to-floating and 
floating-to-fixed interest rate swaps. The Commission confirms that the 
regulation is intended to apply to both fixed-to-floating and floating-
to-fixed interest rate swaps, and that both formulations are included 
within the fixed-to-floating swap class that is subject to the Clearing 
Requirement according to the specifications outlined in Table 1a to 
Commission regulation Sec.  50.4(a).\95\ Given that the same language 
is used elsewhere in part 50 to describe the fixed-to-floating interest 
rate swap class, the Commission declines to amend regulation Sec.  
50.77(b)(1). However, the Commission confirms that both fixed-to-
floating and floating-to-fixed interest rate swaps are covered by 
regulation Sec.  50.77 for swaps entered into by CDFIs.
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    \95\ Although the language in new regulation Sec.  50.77(b)(1) 
and Commission regulation Sec.  50.4 is written as applying to an 
interest rate swap in the ``fixed-to-floating class'' this does not 
mean that the provision applies only to swaps if the first leg is a 
fixed rate and the second leg is a floating rate. As the Commission 
explained when it determined that the class of ``fixed-to-floating 
swaps'' should be subject to the Clearing Requirement, a fixed-to-
floating swap is a swap in which the payment or payments owed for 
one leg of the swap is calculated using a fixed rate and the payment 
or payments owed for the other leg are calculated using a floating 
rate. 2012 Clearing Requirement Determination at 74302. This 
description from the 2012 Clearing Requirement Determination helps 
to explain why it is unnecessary to list fixed-to-floating swaps and 
floating-to-fixed swaps separately; these two phrases are referring 
to the same swaps (i.e., one leg is a fixed rate and one leg is a 
floating rate, regardless of which leg is characterized as the first 
leg).
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    The Commission also believes that the conditions set forth in 
proposed regulation Sec.  50.77(b)(1) through (5) are consistent with 
the conditions under regulation Sec.  50.50(d). By limiting the product 
scope to U.S. dollar interest rate swaps in the fixed-to-floating swap 
class and forward rate agreement class, the Commission is recognizing 
the need for CDFIs to hedge or mitigate interest rate risk created by 
the loans, investments, and financial services provided to their target 
populations. In addition, limiting the total aggregate notional value 
of all swaps and forward rate agreements entered into during the 365 
calendar days prior to the day of execution to less than or equal to 
$200,000,000 ensures that the swaps are being used to hedge or mitigate 
commercial risk. In that same regard, the requirement that a given CDFI 
enter into ten or fewer swaps over the course of 365 calendar days will 
prevent these entities from arbitrarily increasing the number of swaps 
into which they enter. Lastly, the reporting requirement will permit 
the Commission to verify that the exemption is being used in the manner 
intended.
    The Commission did not receive any comments on the proposed 
conditions set forth in proposed rule 50.77(b)(2) through (5), and is 
adopting those conditions as proposed.

H. Exemption From the Clearing Requirement for Bank Holding Companies--
Sec.  50.78(b) and Savings and Loan Holding Companies--Sec.  50.79(b)

    As described above, the Commission proposed to codify the 2016 
staff no-action letter extending relief from the Clearing Requirement 
to certain bank holding companies and savings and loan holding 
companies that otherwise would have qualified for the exception for 
small banks and savings associations under regulation 50.50(d).\96\ In 
response to this proposal, the Commission received one comment from the 
American Bankers Association stating its support,\97\ and as discussed 
above, one comment letter from Better Markets generally opposing the 
proposed exemptions.
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    \96\ In CFTC Letter No. 16-01, subject to certain conditions, 
bank holding companies and savings and loan holding companies are 
permitted to elect the exception from the Clearing Requirement under 
Commission regulation Sec.  50.50(d) as if the bank holding company 
or savings and loan holding company were a bank or savings 
association having no more than $10 billion in assets.
    \97\ American Bankers Association comment, at 2. The American 
Bankers Association's comment also expressed the position that all 
financial entities, apart from swap dealers and major swap 
participants, should be exempted from the Clearing Requirement. This 
comment is beyond the scope of this rulemaking.
---------------------------------------------------------------------------

    Better Markets states that section 2(h)(7)(C)(ii) of the CEA does 
not cover bank holding companies or savings and loan holding companies 
and that if Congress intended to authorize such an exemption, it would 
have done so explicitly.\98\ The Commission disagrees with Better 
Markets that the exemptions for bank holding companies and savings and 
loan holding companies are not permitted because the entities are not 
specifically listed under section 2(h)(7)(C)(ii) of the CEA. Bank 
holding companies and savings and loan holding companies with 
consolidated assets of no more than $10 billion are sufficiently 
similar to the type of entities Congress was considering when it 
directed the Commission to consider an exemption from the Clearing 
Requirement for small banks.\99\ Because Congress allowed the 
Commission to exempt small banks and small savings and loan 
associations with assets of no more than $10 billion from the Clearing 
Requirement, it follows that the parent companies of such small 
entities, when subject to the same size limit, should be eligible for a 
similar exemption from the Clearing Requirement under an appropriate 
exercise of the Commission's exemptive authority under section 4(c).
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    \98\ Better Markets comment at 5-6.
    \99\ In the preamble to the 2012 End-User Exception final rule, 
the Commission determined that small banks and small savings 
associations were not ``financial entities'' for purposes of the 
Clearing Requirement. 77 FR at 42578.
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    Bank holding companies and savings and loan holding companies 
generally enter into interest rate swaps to hedge interest rate risk 
that they incur as a result of making loans or issuing debt securities, 
the proceeds of which are generally used to finance their subsidiaries, 
which are themselves small financial institutions exempt from the 
Clearing Requirement under regulation 50.50(d), renumbered as 
Commission regulation Sec.  50.53. These entities enter into swaps to 
hedge risk from financing transactions infrequently and have relatively 
low notional volume swap books. These entities also pose less 
counterparty credit risk insofar as they generally enter into swaps 
with a notional amount of $10 million or less.\100\ As discussed 
further below, commenters relied on data in the supplemental proposal 
regarding the

[[Page 76438]]

number of swaps entered into by eligible bank holding companies and 
savings and loan holding companies to complete their own analyses 
related to swap market effects of the proposal.\101\
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    \100\ See August 2018 Proposal, 83 FR at 44005; see also CFTC 
Letter No. 16-01 at 3.
    \101\ See Better Markets comment at 6 (stating that the data 
shows the proposal ``would not dramatically shift swaps current 
trading away from the Dodd-Frank Act's clearing and multilateral 
trading framework, it nevertheless would permit more than $200 
million of swaps activities to occur outside of regulated, 
transparent, impartially accessed markets.'') See also 85 FR at 
27965 (noting that between January 1, 2018, and December 31, 2018, 
eleven bank holding companies executed 18 interest rate swaps with 
an aggregate notional value of $152.5 million. Seven of those bank 
holding companies entered into more than one swap during the 
calendar year 2018.).
---------------------------------------------------------------------------

    Regulation Sec. Sec.  50.78(b)(2) and 50.79(b)(2) require that the 
information described in paragraph (b) of Commission regulation Sec.  
50.50 be reported to a swap data repository. Commission regulation 
Sec.  50.50(b) requires that the electing counterparty notify the 
Commission of how it generally meets its financial obligations 
associated with its non-cleared swaps. This reporting requirement is 
needed in order to verify that the exemption from the Clearing 
Requirement is being used in the manner intended by the Commission and 
the exception is not being misused.\102\
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    \102\ 2012 End-User Exception, 77 FR at 42565. See Section 
2(h)(7)(F) of the CEA; Regulation Sec.  50.10.
---------------------------------------------------------------------------

    Regulation Sec. Sec.  50.78(b)(3) and 50.79(b)(3) also require that 
only swaps used to hedge or mitigate commercial risk, as defined under 
paragraph (c) of Commission regulation Sec.  50.50, may be exempt from 
the Clearing Requirement. This limitation appropriately reflects how 
these entities use swaps and also responds to Better Market's comment 
that the Commission does not have the authority to exempt swaps entered 
into by bank holding companies and savings and loan holding companies 
from the Clearing Requirement.\103\
---------------------------------------------------------------------------

    \103\ See August 2018 Proposal, 83 FR at 44006.
---------------------------------------------------------------------------

    Congress saw the benefit in exempting small banks, savings 
associations, farm credit system institutions, and credit unions from 
the Clearing Requirement when it allowed the Commission to consider 
such an exemption. The Commission issued such an exemption in the 2012 
End-User Exception provided that such swaps are used for hedging and 
not speculation and are reported to a swap data repository.\104\ Since 
2016, by virtue of a staff no-action letter, small bank holding 
companies and savings and loan holding companies have been permitted to 
elect the exemption under regulation Sec.  50.50(d) on behalf of their 
underlying small bank or savings and loan. In the intervening four 
years, the Commission has not discovered or been made aware of any 
abuse of this no-action letter. Accordingly, the Commission believes 
that the extension of the 2012 End-User Exception's exemption for small 
banks to bank holding companies and savings and loan holding companies 
subject to this new regulation is appropriate and consistent with 
Congressional intent. The Commission is adopting regulation Sec. Sec.  
50.78 and 50.79 as proposed.
---------------------------------------------------------------------------

    \104\ See Section 2(h)(7)(A) of the CEA. The Commission notes 
that uncleared swaps with a counterparty that is subject to the CEA 
and Commission regulations with regard to that transaction must 
still comply with the CEA and Commission regulations as they pertain 
to uncleared swaps, e.g., the recordkeeping and reporting 
requirements under parts 23 and 45 of the Commission's regulations.
---------------------------------------------------------------------------

I. Data Related to Swaps of CDFIs, Bank Holding Companies, and Savings 
and Loan Holding Companies

    As the Commission did in the May 2020 Proposal, it is including a 
discussion of data related to past swaps activity to provide context 
for this final rule. All interest rate swaps data included in this 
section was reported to DDR as events-based data and was analyzed by 
Commission staff.\105\
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    \105\ This section does not include credit default swaps data 
because the relief provided to CDFIs does not extend to credit 
default swaps and there has been no credit default swaps activity by 
eligible bank holding companies or savings and loan holding 
companies in the time periods analyzed.
---------------------------------------------------------------------------

    During the time period between January 1, 2018, and December 31, 
2018, eight different CDFIs entered into interest rate swaps and four 
of those entities entered into more than one swap. Over this one year, 
CDFIs entered into thirteen uncleared interest rate swaps with an 
aggregate notional value of almost $84 million. According to this data, 
more CDFIs entered into uncleared interest rate swaps during the 
calendar year 2018 than during the previous 18-month time period 
between January 2017 and June 2018.\106\ At the same time, the 
aggregate notional value of all uncleared interest rate swaps entered 
into during calendar year 2018 ($83.9 million) was less than the 
aggregate notional value of swaps entered into by CDFIs during the 18-
month time period between January 2017 and June 2018 ($251.6 million). 
The CDFI Coalition agreed with the data presented by the Commission in 
the May 2020 Proposal related to CDFI swaps activities.\107\
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    \106\ During an earlier 18-month time period, between January 1, 
2017 and June 29, 2018, three CDFIs executed interest rate swaps: 
One executed two swaps with an aggregate notional value of $5.6 
million; another executed three swaps with an aggregate notional 
value of $116 million; and another executed three swaps with an 
aggregate notional value of $130 million.
    \107\ CDFI Coalition comment at 5-6.
---------------------------------------------------------------------------

    Similarly, the Commission provided data in the May 2020 Proposal 
regarding the number of swaps entered into by eligible bank holding 
companies and savings and loan holding companies. Between January 1, 
2018 and December 31, 2018, eleven bank holding companies executed 18 
interest rate swaps with an aggregate notional value of $152.5 
million.\108\ Seven of these bank holding companies entered into more 
than one swap during the calendar year 2018. In calendar year 2018 the 
aggregate notional value of all swaps entered into by eligible bank 
holding companies increased substantially ($152.5 million in 2018 
compared to $68.6 million in 2017), but this increase was also the 
result of more eligible bank holding companies entering into uncleared 
interest rate swaps.
---------------------------------------------------------------------------

    \108\ During the previous year, between January 1, 2017 and 
December 31, 2017, one bank holding company executed ten interest 
rate swaps with an aggregate notional value of $43.6 million, and a 
second bank holding company executed one interest rate swap with a 
notional value of $25 million.
---------------------------------------------------------------------------

    Based on this data, Better Markets concluded that the scope of the 
exemptions was limited and not likely to dramatically shift the level 
of swap clearing pursuant to the Clearing Requirement.\109\ The data, 
together with the market observations and statements by commenters, 
demonstrates that these entities have an ongoing interest in entering 
into uncleared swaps and likely will benefit from the Commission's 
codification of the relief currently afforded under CFTC staff letters.
---------------------------------------------------------------------------

    \109\ Better Markets comment at 6.
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J. Adoption of Subpart D of Part 50

    The creation of subpart D is part of an effort to distinguish 
exemptions that apply to specific swaps from the exceptions and 
exemptions for market participants eligible to elect an exception or 
exemption under subpart C of Part 50. This distinction is important 
because the exemptions for swaps under subpart D are not eligible for 
an exemption from margin for uncleared swaps, as discussed further 
below. Additionally, some of the exemptions for swaps are more limited 
and, in some cases, have additional conditions.
    The exemptions in subpart D are intended to be consistent with the 
Commission's determinations set forth in the 2012 End-User Exception 
and do not limit the applicability of any CEA provision or Commission 
regulation to any person or transaction, except as provided in this 
final rulemaking. The exemptions in subpart D will include transactions 
with central banks,

[[Page 76439]]

sovereign entities, IFIs, bank holding companies, savings and loan 
holding companies, and CDFIs, as defined in the regulations. The same 
policy reasons that the Commission considered when exempting these 
institutions in the 2012 End-User Exception final rule support the 
adoption of subpart D.

III. Clearing Requirement Compliance Schedule and Compliance Dates

    The Commission implemented the Clearing Requirement through two 
separate rulemakings: (i) The 2012 Clearing Requirement Determination; 
and (ii) the 2016 Clearing Requirement Determination. Under each of 
these final rules, the Commission made the decision to phase-in the 
compliance requirement. Neither clearing requirement determination 
required compliance by all market participants for all swaps included 
in Commission regulation Sec.  50.4 on a single date. The Commission 
proposed to improve transparency and to provide the information about 
compliance dates for both the 2012 Clearing Requirement and the 2016 
Clearing Requirement in one location that would be convenient for 
market participants to reference.
    The Commission did not receive any comments on proposed regulation 
Sec.  50.26. The compliance schedule is adopted as proposed.

IV. Technical Amendment to Subpart C for Banks, Savings Associations, 
Farm Credit System Institutions, and Credit Unions--Sec.  50.53

    The Commission proposed technical amendments to subpart C of part 
50 to reorganize the subpart by re-codifying the existing regulatory 
provision for certain banks, savings associations, farm credit system 
institutions, and credit unions to create a new numbered section and 
heading, proposed regulation Sec.  50.53. The Commission believed that 
a stand-alone regulation for this exemption would facilitate swap 
counterparties' use and understanding of Part 50 of the Commission's 
regulations by separating this exemption from the non-financial 
entities' exception.
    The Commission views this as a non-substantive change, and the 
minor changes to the text of the regulations serve to clarify and 
update the requirements in light of current swap reporting conventions, 
specifically related to swap data reporting by entities eligible for an 
exception or exemption from the Clearing Requirement. The Commission 
did not receive any comments on the proposed changes. The change is 
adopted as proposed, and the Commission is changing cross-references to 
Commission regulation Sec.  50.50(d) to new regulation Sec.  50.53 
throughout part 50.

V. Commission's Section 4(c) Authority

    Section 4(c) of the CEA provides the Commission with the authority 
to exempt certain transactions from the requirements of the CEA if the 
Commission determines that the exemption is consistent with the public 
interest. Section 4(c)(1) of the CEA authorizes the Commission to 
``promote responsible economic or financial innovation and fair 
competition'' by exempting any transaction or class of transactions, 
including swaps, from any of the provisions of the CEA (subject to 
exceptions not relevant here).\110\ In enacting CEA section 4(c)(1), 
Congress noted that the goal 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.'' \111\
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    \110\ Pursuant to section 4(c)(1) of the CEA, in order to 
promote responsible economic or financial innovation and fair 
competition, the Commission by rule, regulation, or order, after 
notice and opportunity for hearing, may (on its own initiative or on 
application of any person) exempt any agreement, contract, or 
transaction (or class thereof) that is otherwise subject to 
subsection (a) of section 4(c)(1), either unconditionally or on 
stated terms or conditions, or for stated periods and either 
retroactively or prospectively, or both, from any of the 
requirements of subsection (a) of CEA section 4(c), or from any 
other provision of the CEA. The Commission is finalizing these 
exemptive rules pursuant to sections 4(c)(1) and 8a(5) of the CEA.
    \111\ H.R. Rep. No. 102-978, 102d Cong. 2d Sess. at 81 (Oct. 2, 
1992), reprinted in 1992 U.S.C.C.A.N. 3179, 3213.
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    Section 4(c)(2) of the CEA further provides that the Commission may 
not grant exemptive relief unless it determines that: (A) The exemption 
is consistent with the public interest and the purposes of the CEA; and 
(B) the transaction will be entered into solely between ``appropriate 
persons'' and the exemption will not have a materially adverse effect 
on the ability of the Commission or any contract market to discharge 
its regulatory or self-regulatory responsibilities under the CEA.\112\ 
Section 4(c)(3) of the CEA includes within the term ``appropriate 
person'' a number of specified categories of persons, including any 
governmental entity (including the United States, any state, or any 
foreign government) or political subdivision thereof, or any 
multinational or supranational entity or any instrumentality, agency, 
or department of any of the foregoing,\113\ banks,\114\ savings 
associations,\115\ and 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.\116\
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    \112\ Section 4(c)(2) of the CEA.
    \113\ Section 4(c)(3)(H) of the CEA.
    \114\ Section 4(c)(3)(A) of the CEA.
    \115\ Section 4(c)(3)(B) of the CEA.
    \116\ Section 4(c)(3)(K) of the CEA.
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    The Commission requested comment regarding whether the proposed 
amendments would be an appropriate exercise of the Commission's 
authority under section 4(c) of the CEA, including whether the proposal 
promotes the public interest.\117\ The Commission also requested 
comment on whether there are any entities that would not be 
``appropriate persons'' under section 4(c)(3) of the CEA, and on 
whether the Proposals provide certainty and stability to existing and 
emerging markets so that financial innovation and market development 
can proceed in an effective and competitive manner.\118\
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    \117\ May 2020 Proposal, 85 FR at 27966; August 2018 Proposal, 
83 FR at 44008.
    \118\ Id.
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    The Commission received one comment generally opposing the 
Commission's exercise of its authority under section 4(c) to exempt 
from the Clearing Requirement swaps entered into with CDFIs, bank 
holding companies, and savings and loan holding companies, but the 
commenter stated that the Commission was correct to condition the 
exemptions to limit their scope and provide oversight of financial 
institutions relying on the exemptions.\119\ The Commission did not 
receive any comment on its proposed exercise of its authority under 
section 4(c) to exempt from the Clearing Requirement swaps entered into 
with central banks, sovereign entities, and IFIs. As discussed in 
detail above, the Commission believes that the exemptions from the 
Clearing Requirement for swaps entered into by central banks, sovereign 
entities, IFIs, banks holding companies, savings and loan holding 
companies, and CDFIs are a proper exercise of its exemptive authority 
under section 4(c) of the CEA.
---------------------------------------------------------------------------

    \119\ Better Markets comment at 5.
---------------------------------------------------------------------------

A. Central Banks, Sovereign Entities, and IFIs

    The Commission believes that it is consistent with the public 
interest and the purposes of the CEA to exempt from the Clearing 
Requirement swaps entered into with central banks, sovereign entities, 
and certain IFIs under its broad exemption authority under section 4(c) 
of the CEA. In 2012, the Commission

[[Page 76440]]

established a policy that transactions with central banks, sovereign 
entities (then referred to as foreign governments), and certain IFIs 
should be exempt from the Clearing Requirement on the basis of comity 
and in keeping with the traditions of the international system. The 
Commission continues to believe, as it did in 2012, that based on the 
canons of statutory construction and considerations of comity, and in 
keeping with the traditions of the international system, sovereign 
entities and central banks should not be subject to section 2(h)(1) of 
the CEA.\120\ With respect to IFIs, these entities serve an important 
public policy purpose. The member governments of IFIs generally have 
majority control and governance over these entities. The Commission 
therefore continues to believe that an exemption is appropriate 
because, in a real sense, an IFI is not separable from its government 
owners. Codifying the Commission's 2012 policy determination through a 
section 4(c) exemption provides clarity and certainty for market 
participants.\121\
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    \120\ The Commission continues to believe that transactions with 
sovereign wealth funds or similar entities should not be exempt from 
the Clearing Requirement because these entities generally act as 
investment funds. See 2012 End-User Exception, 77 FR at 42562, n.18 
(noting that the foregoing rationale and considerations do not, 
however, extend to sovereign wealth funds or similar entities due to 
the predominantly commercial nature of their activities).
    \121\ As with the other exemptions from the Clearing 
Requirement, the Commission reminds the counterparties that these 
swaps exempted from the Clearing Requirement by this final rule and 
the existing 2012 determination must be reported to a swap data 
repository.
---------------------------------------------------------------------------

    The amendments to exempt swaps entered into by central banks, 
sovereign entities, and certain IFIs from the Clearing Requirement are 
available only to ``appropriate persons'' under section 4(c)(3)(H) of 
the CEA. No commenter disputed that these entities are ``appropriate 
persons'' under section 4(c)(3)(H) of the CEA, which states that any 
governmental entity (including the United States, any state, or any 
foreign government), or political subdivision thereof, or any 
multinational or supranational entity or any instrumentality, agency, 
or department of any of the foregoing.
    The Commission also notes that these entities are considered ECPs 
as set forth in section 1a(18)(A)(vii) of the CEA. Given that only ECPs 
are permitted to enter into uncleared swaps, and that the ECP 
definition is generally more restrictive than the comparable elements 
of the ``appropriate persons'' definition of section 4(c)(3)(H) of the 
CEA, the Commission believes that there is no risk that the exemption 
could be used by any entity other than an ECP or ``appropriate 
person.'' Accordingly, the class of persons eligible to rely on 
regulation Sec. Sec.  50.75 and 50.76 is limited to appropriate persons 
within the scope of section 4(c) of the CEA.
    Additionally, the Commission notes that the applicable central 
banks, sovereign entities and IFIs have been relying on the language in 
the preamble to the 2012 End-User Exception and the DCR no-action 
letters for many years. The Commission is not aware of any increase in 
counterparty risk attributable to the affected entities' reliance on 
the 2012 preamble language and the staff no-action letters.
    Finally, the exemptions for swaps entered into with central banks, 
sovereign entities, and certain IFIs will not have a materially adverse 
effect on the ability of the Commission to discharge its regulatory 
responsibilities under the CEA. The exemptions from the Clearing 
Requirement are limited to swaps entered into with specific central 
banks, sovereign entities, and IFIs and do not limit the applicability 
of any other CEA provision or Commission regulation except as discussed 
above. The Commission will continue to have access to information 
regarding the exempted swaps because the non-electing counterparty to 
the swap must report the swap to a swap data repository. Uncleared 
swaps with a counterparty that is otherwise subject to the CEA and 
Commission regulations with regard to such swaps must comply with the 
CEA and Commission regulations as they pertain to uncleared swaps. 
Additionally, the Commission retains its special call, anti-fraud, and 
anti-evasion authorities, which enables the Commission to adequately 
discharge its regulatory responsibilities under the CEA.

B. CDFIs, Certain Bank Holding Companies, and Savings and Loan Holding 
Companies

    The Commission believes it is consistent with the public interest 
and the purposes of the CEA to exempt from the Clearing Requirement 
swaps entered into by CDFIs, bank holding companies, and savings and 
loan holding companies under section 4(c) of the CEA. The Commission 
believes that the same policy reasons that Congress considered in 
directing the Commission to consider exempting swaps entered into with 
small financial institutions (small banks, savings associations, farm 
credit system institutions, and credit unions) from the financial 
entity definition, making them eligible for the End-User Exception of 
section 2(h)(7)(c)(ii) of the CEA, support an exemption for swaps 
entered into by CDFIs, bank holding companies, and savings and loan 
holding companies.\122\
---------------------------------------------------------------------------

    \122\ See 2012 End-User Exception, 77 FR at 42578. These 
entities are not eligible to elect the End-User Exception under 
Commission regulation Sec.  50.50, and they remain financial 
entities under the definition of financial entity of section 
2(h)(7)(C) of the CEA.
---------------------------------------------------------------------------

    In the 2012 End-User Exception, the Commission determined that the 
small financial institutions should be excepted from the financial 
entity definition because these entities tend to serve smaller, local 
markets, and the swaps executed by the small financial institutions 
likely hedge interest rate risk associated with making commercial 
loans.\123\ Small financial institutions typically hedge their swaps 
with customers by entering into matching swaps in the swap market, and 
if those matched swaps had to be centrally cleared, the small financial 
institutions would have to post margin to satisfy the requirements of 
the DCOs. The Commission determined that mandatory clearing could raise 
the costs for small financial institutions and such costs may be 
prohibitively high given the small number of swaps such entities 
execute over a given period of time.\124\
---------------------------------------------------------------------------

    \123\ 2012 End-User Exception, 77 FR at 42578.
    \124\ Id.
---------------------------------------------------------------------------

    Swaps are an important risk management tool, and CDFIs, bank 
holding companies, and savings and loan holding companies should be 
afforded the means to hedge their capital costs economically in order 
to promote the public interest objectives of smaller financial 
institutions serving smaller, local markets. Commenters agreed with the 
Commission that the swaps entered into by CDFIs, bank holding 
companies, and savings and loan holding companies have smaller notional 
amounts and that these financial entities use swaps infrequently.\125\ 
While the Commission recognizes that these entities may enter into more 
swaps to hedge against rising interest rates, the conditions on the 
exemption make it unlikely that the volume of swaps entered into by 
these entities will reach a systemic level.
---------------------------------------------------------------------------

    \125\ See CDFI Coalition comment at 6; Better Markets comment at 
6 (acknowledging that the scope of the exemption is limited and will 
not dramatically shift transactions away from clearing).
---------------------------------------------------------------------------

    These exemptions from the Clearing Requirement may serve to promote 
responsible financial innovation and fair competition due to the 
substantial fixed costs associated with clearing swaps. The cost of 
clearing on a per-swap basis cannot be supported by the small number of 
trades into which the entities eligible to elect these

[[Page 76441]]

exemptions enter. While the Commission did not receive any comments on 
the cost of clearing, the Commission notes that in 2012, the cost 
estimate for small financial institutions included between $2,500 and 
$25,000 in legal fees related to reviewing and negotiating clearing-
related documents, and a minimum of between $75,000 and $125,000 per 
year on fees paid to each futures commission merchant with which it 
maintains a relationship.\126\ The Commission believes an exemption 
from the Clearing Requirement for CDFIs, bank holding companies, and 
savings and loan holding companies will lower costs, which enables 
these entities to better manage their financing risks and provide cost-
effective loans to their subsidiaries, as well as to small and middle 
market businesses. In addition, this exemption from the Clearing 
Requirement may support commercial lending and depository activities of 
the holding company's subsidiaries.
---------------------------------------------------------------------------

    \126\ 2012 End-User Exception, 77 FR at 42577 n.74.
---------------------------------------------------------------------------

    The Commission believes that the specific amendments to exempt 
swaps entered into by CDFIs, bank holding companies, and savings and 
loan holding companies from the Clearing Requirement are available to 
only ``appropriate persons.'' Under section 4(c)(3)(A) and (B) of the 
CEA, ``appropriate person'' includes a bank or a trust, and a savings 
association. The extension of the term ``appropriate person'' to 
include CDFIs, bank holding companies, and savings and loan holding 
companies aligns with the statute's determination that banks and 
savings associations are ``appropriate persons.'' The Commission did 
not receive any comments on whether these entities are ``appropriate 
persons.''
    The bank holding companies, savings and loan holding companies, and 
CDFIs eligible to elect these exemptions are ECPs pursuant to section 
1a(18)(A)(i) of the CEA.\127\ Given that only ECPs are permitted to 
enter into uncleared swaps, and that the ECP definition is generally 
more restrictive than the comparable elements of the enumerated 
``appropriate person'' definition, 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 these exemptions from 
the Clearing Requirement. Accordingly, the Commission believes that the 
class of persons eligible to rely on the exemptions codified in new 
regulation Sec. Sec.  50.75 through 50.79 will be limited to 
``appropriate persons'' within the scope of section 4(c) of the CEA.
---------------------------------------------------------------------------

    \127\ August 2018 Proposal, 83 FR at 44008.
---------------------------------------------------------------------------

    The Commission notes that the CDFIs, bank holding companies, and 
savings and loan holding companies have been relying on the DCR no-
action letters since 2016. The Commission is not aware of any increase 
in counterparty risk attributable to affected entities' reliance on the 
staff no-action letters, and commenters did not point to any instances 
of increased counterparty risk. These exemptions from the Clearing 
Requirement are limited in scope, and the Commission will continue to 
have access to information regarding the swaps subject to these 
exemptions because such swaps will be reported to a swap data 
repository by one of the counterparties to the swap.\128\
---------------------------------------------------------------------------

    \128\ Uncleared swaps with a counterparty that is subject to the 
CEA and Commission regulations with regard to such swaps are 
required to comply with the CEA and Commission regulations, 
including data reporting and uncleared margin rules.
---------------------------------------------------------------------------

    The Commission further notes that the exemptions are intended to be 
consistent with the Commission's policy determinations set forth in the 
2012 End-User Exception with respect to the exception from the Clearing 
Requirement for small financial institutions, and do not limit the 
applicability of any CEA provision or Commission regulation to any 
person or transaction except as provided in this final rulemaking. In 
addition, the Commission retains its special call, anti-fraud, and 
anti-evasion authorities, which will enable it to adequately discharge 
its regulatory responsibilities under the CEA. The Commission therefore 
believes the exemptions will not have a materially adverse effect on 
the ability of the Commission to discharge its regulatory 
responsibilities under the CEA.
    For the reasons discussed above, it is appropriate and consistent 
with the public interest to adopt new regulation Sec. Sec.  50.75 
through 50.79 as set forth in subpart D.

VI. Final Rules Do Not Effect Margin Requirements for Uncleared Swaps

    In the Proposals, the Commission explained that these exemptions, 
if finalized, would not affect the Commission's margin requirements for 
uncleared swaps.\129\ The Commission did not receive any comments on 
the effect of the exemptions on the Commission's margin requirements 
for uncleared swaps.
---------------------------------------------------------------------------

    \129\ May 2020 Proposal, 85 FR at 27966, August 2018 Proposal, 
83 FR at 44008 (citing to relevant margin for uncleared swaps 
provisions in Commission regulation Sec.  23.150(b)(1)).
---------------------------------------------------------------------------

    The Commission affirms its position as set forth in the Proposals. 
Under Commission regulation Sec.  23.150(b)(1), the margin requirements 
for uncleared swaps under part 23 of the Commission's regulations do 
not apply to a swap if the counterparty qualifies for an exception from 
clearing under section 2(h)(7)(A) and implementing regulations.\130\ 
Commission regulation Sec.  23.150(b) was added to the final margin 
rules after the Terrorism Risk Insurance Program Reauthorization Act of 
2015 (TRIPRA) \131\ amended section 731 of the Dodd-Frank Act by adding 
section 4s(e)(4) to the CEA to provide that the initial and variation 
margin requirements will not apply to an uncleared swap in which a non-
financial entity (including a small financial institution and a captive 
finance company) qualifies for an exception under section 2(h)(7)(A) of 
the CEA, as well as two exemptions from the Clearing Requirement that 
are not relevant in this context.\132\
---------------------------------------------------------------------------

    \130\ Commission regulation Sec.  23.150(b)(1).
    \131\ Public Law 114-1, 129 Stat. 3.
    \132\ Commission regulation Sec.  23.150(b)(2) provides that 
certain cooperative entities that are exempt from the Commission's 
clearing requirement pursuant to section 4(c)(1) authority also are 
exempt from the initial and variation margin requirements. None of 
the entities included in this proposal is a cooperative that would 
meet the conditions in Commission regulation Sec.  23.150(b)(2). In 
addition, the regulation Sec.  23.150(b)(3), which pertains to 
affiliated entities, does not apply in this context.
---------------------------------------------------------------------------

    The final rules are not implementing section 2(h)(7)(A) of the CEA. 
Instead, the Commission, pursuant to its 4(c) authority (as discussed 
above), is exempting swaps entered into by central banks, sovereign 
entities, IFIs, bank holding companies, savings and loan holding 
companies, and CDFIs from the Clearing Requirement. The Commission is 
not excluding these entities from the ``financial entity'' definition 
of section 2(h)(7)(C) of the CEA. Therefore, these entities are not 
eligible to elect the End-User Exception under Commission regulation 
Sec.  50.50, and they remain financial entities under the definition of 
financial entity of section 2(h)(7)(C) of the CEA. For these reasons, 
the new regulation Sec. Sec.  50.75 through 50.79 do not implicate any 
of the provisions of section 4s(e)(4) of the CEA or Commission 
regulation Sec.  23.150.\133\
---------------------------------------------------------------------------

    \133\ The Commission believes that the final rules do not affect 
the margin rules for entities that are supervised by the prudential 
regulators. The prudential regulators' rules contain provisions that 
are identical to Commission regulation Sec.  23.150. See Margin and 
Capital Requirements for Covered Swap Entities, 80 FR 74916, 74923 
(Nov. 20, 2015).

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[[Page 76442]]

VII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires Federal agencies to 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis on the impact.\134\ The 
Commission previously has established certain definitions of small 
entities to be used in evaluating the impact of its regulations on 
small entities in accordance with the RFA.\135\ As discussed in the 
Proposals, the final regulations do not affect any small entities as 
that term is used in the RFA. The regulations will affect specific 
counterparties to an uncleared swap, namely, central banks, sovereign 
entities, IFIs, bank holding companies, savings and loan holding 
companies, and CDFIs. Pursuant to sections 2(e) and 5(d)(11)(A) of the 
CEA, only ECPs may enter into uncleared swaps.\136\ As discussed above, 
the entities whose transactions are covered by these exemptions from 
the Clearing Requirement are ECPs.\137\ The Commission has stated 
previously that ECPs, by the nature of the definition, should not be 
considered small entities for RFA purposes.\138\ Because ECPs are not 
small entities, and persons not meeting the definition of ECP may not 
conduct transactions in uncleared swaps, the Commission need not 
conduct a regulatory flexibility analysis respecting the effect of 
these rules on ECPs.
---------------------------------------------------------------------------

    \134\ 5 U.S.C. 601 et seq.
    \135\ 47 FR 18618 (Apr. 30, 1982).
    \136\ Section 2(e) of the CEA limits non-ECPs to executing swap 
transactions on a board of trade designated as a contract market 
(DCM) and section 5(d)(11)(A) of the CEA requires all DCM 
transactions to be cleared. Accordingly, the two provisions read 
together permit only ECPs to execute uncleared swap transactions.
    \137\ See Section 1a(18)(A)(i) and 1a(18)(A)(vii) of the CEA.
    \138\ See Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 
25, 2001).
---------------------------------------------------------------------------

    The Commission received no comments on the RFA discussions in the 
May 2020 Proposal or the August 2018 Proposal. Accordingly, the 
Chairman, on behalf of the Commission, hereby certifies pursuant to 5 
U.S.C. 605(b) that the final regulations 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) \139\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. In the Proposals, the Commission 
determined that these regulations would not impose a new collection of 
any information or any new recordkeeping requirements on any persons 
and would not require approval of the Office of Management and Budget 
(OMB) under the PRA.\140\ The Commission received no comments on these 
determinations. As such, the final rules do not impose any new burden 
or any new information collection requirements in addition to those 
that already exist pursuant to Commission regulations.
---------------------------------------------------------------------------

    \139\ 44 U.S.C. 3501 et seq.
    \140\ The applicable collection of information is ``Swap Data 
Recordkeeping and Reporting Requirements,'' OMB control number 3038-
0096. Parties wishing to review the CFTC's information collections 
may do so at www.reginfo.gov, at which OMB maintains an inventory 
aggregating each of the CFTC's currently approved information 
collections, as well as the information collections that presently 
are under review.
---------------------------------------------------------------------------

C. Cost-Benefit Considerations

    As discussed in detail above, the Commission is amending its 
regulations to add new regulation Sec. Sec.  50.75 through 50.79, as 
set forth in subpart D, to exempt swaps entered into with central 
banks, sovereign entities, IFIs, certain bank holding companies, 
savings and loan holding companies, and CDFIs from the Clearing 
Requirement consistent with the policies set forth in the 2012 End-User 
Exception and subsequent staff no-action letters.\141\ Section 15(a) of 
the CEA requires the Commission to consider the costs and benefits of 
its actions before promulgating regulations under the CEA or issuing 
certain orders.\142\ 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 as the Section 
15(a) Factors).
---------------------------------------------------------------------------

    \141\ The other non-substantive amendments made to part 50 do 
not affect the cost-benefit considerations of this rulemaking.
    \142\ Section 15(a) of the CEA.
---------------------------------------------------------------------------

1. Consideration of the Costs and Benefits of the Commission's Action
    The baseline for the Commission's consideration of the costs and 
benefits of this final rulemaking is the existing statutory and 
regulatory framework of section 2(h)(1) of the CEA and part 50 under 
which any swap subject to the Clearing Requirement would be required to 
be cleared by central banks, sovereign entities, IFIs, bank holding 
companies, savings and loan holding companies, and CDFIs. The 
regulatory baseline, however, has been affected by Commission 
statements in the 2012 End-User Exception and CFTC no-action letters, 
which have been relied on by central banks, sovereign entities, IFIs, 
bank holding companies, savings and loan holding companies, CDFIs, and 
their counterparties when entering into swaps that otherwise would be 
subject to the Clearing Requirement. The final regulations in this 
adopting release largely codify the current practice that has been in 
place since 2012. The Commission recognizes that the actual costs and 
benefits of the final rules as realized in the market may not be as 
significant as compared to that regulatory baseline. The Commission 
endeavors to assess the expected costs and benefits of the final rules 
in quantitative terms where possible. Where estimation or 
quantification is not feasible, the Commission discusses the costs and 
benefits in qualitative terms.
    This consideration of costs and benefits is based on an 
understanding that the swap markets function internationally with many 
transactions involving U.S. firms taking place across international 
boundaries. Some Commission registrants are organized outside of the 
United States, some leading industry members typically conduct their 
operations both within and outside of the United States, and some 
industry members follow substantially similar business practices 
wherever they may be located. Where the Commission does not 
specifically refer to matters of location, this discussion of costs and 
benefits refers to the effects of the final rule on all activity 
subject to the amended part 50 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.\143\ In particular, the Commission notes that some 
entities affected by this rulemaking are located outside of the United 
States.
---------------------------------------------------------------------------

    \143\ Section 2(i) of the CEA.
---------------------------------------------------------------------------

    In the sections that follow, the Commission discusses: (1) The 
costs and benefits of the new part 50 exemptions to the Clearing 
Requirement for swaps entered into by entities that meet the 
definitions of central bank, sovereign entity, IFI, bank holding 
company, savings and loan holding company, and CDFI as set forth in 
these rules; and (2) the impact of such exemptions on the Section 15(a) 
Factors.

[[Page 76443]]

a. Costs
    New Commission regulation Sec. Sec.  50.75 through 50.79 exempt 
swaps entered into by central banks, sovereign entities, IFIs, certain 
bank holding companies, savings and loan holding companies, and CDFIs 
from the Clearing Requirement under section 2(h)(1)(A) of the CEA. In 
the Proposals, the Commission recognized that the protections of 
central clearing will not accrue to swaps entered into by these 
entities, which is a cost.\144\ The Clearing Requirement is designed to 
mitigate the counterparty credit risk associated with swaps and, in 
turn, to mitigate the potential systemic impact that an accumulation of 
counterparty credit risk through swaps activity could cause instability 
in the financial system.
---------------------------------------------------------------------------

    \144\ May 2020 Proposal, 85 FR at 27968; August 2018 Proposal, 
83 FR at 44009.
---------------------------------------------------------------------------

    In general, central clearing mitigates counterparty credit risk 
through the substitution of the DCO as counterparty to the swap. After 
this novation occurs, a DCO manages risk by collecting initial margin 
from its clearing members for all their swap positions and collecting 
and paying out variation margin among its clearing members based on 
marking the swap positions to market prices on a daily basis. The 
collection of margin allows a DCO to mitigate the possibility of a 
clearing member or customer default, as well as to cover potential 
losses due to such a default. Central clearing also provides protection 
through a default fund that is made up of mutualized contributions from 
the DCO's clearing members and can be used in the case of a default by 
one or more of those members.
    New Commission regulation Sec. Sec.  50.75 through 50.77 exempting 
swaps entered into by central banks, sovereign entities, and IFIs 
codify the policy determination made in the Commission's 2012 End-User 
Exception that is based on considerations of international comity, and 
in keeping with the traditions of the international system. Under the 
final rules, swaps entered into by central banks (including BIS), 
sovereign entities, and IFIs are treated like swaps entered into by the 
Federal Reserve Banks, the Federal Government, or a Federal agency and 
are not subject to the Clearing Requirement. As discussed above, 
Congress exempted swaps entered into by the Federal entities expressly 
backed by the full faith and credit of the United States when it 
excluded any agreement, contract, or transaction entered into by these 
entities from the definition of a swap and consequently from the 
application of the Clearing Requirement.\145\
---------------------------------------------------------------------------

    \145\ Section 1a(47)(B)(ix) of the CEA.
---------------------------------------------------------------------------

    The costs of not subjecting swaps exempted from the Clearing 
Requirement under these final rules, as identified in the May 2020 
Proposal, include the possibility of increased counterparty credit risk 
that is left unmitigated by the protections of central clearing. The 
costs associated with exempting swaps entered into by central banks, 
sovereign entities, and IFIs from the Clearing Requirement also are 
reflected in data showing the low notional amounts and number of such 
swaps.\146\
---------------------------------------------------------------------------

    \146\ May 2020 Proposal, 85 FR at 27967-27969. See also 
discussion of data above. From January 1, 2018 to December 31, 2018, 
16 IFIs named in proposed regulation Sec.  50.76 were counterparties 
to a swap that was entered into and reported to DDR during that time 
period. Overall, the 16 IFIs entered into approximately 2,500 
uncleared interest rate swaps with an estimated total notional value 
of $220 billion. Of those 16, four IFIs entered into more than one 
hundred swaps during calendar year 2018.
---------------------------------------------------------------------------

    The Commission received no comments directly related to the costs 
of regulation Sec. Sec.  50.75 through 50.77. The Commission continues 
to believe that swaps entered into by central banks, sovereign 
entities, and certain IFIs should not be subject to the Clearing 
Requirement, and the minimal costs associated with this determination 
have been taken into account. Central banks, and the sovereign entities 
backing those central banks, are the very entities that protect the 
global financial system against systemic risk. IFIs provide financing 
for national and regional development and are fully backed by their 
governmental members. As such, the swaps into which they enter do not 
pose the type of risk that the Clearing Requirement was intended to 
address.
    Turning to new regulation Sec. Sec.  50.78 and 50.79, which exempt 
from the Clearing Requirement swaps entered into by certain bank 
holding companies, savings and loan holding companies, and CDFIs, the 
direct cost associated with these final rules is that the exempted 
swaps will not be subject to the Clearing Requirement and the entities 
entering into the swaps will not benefit from the risk-mitigating 
aspects of clearing described above. Under this view, costs are 
measured in terms of increased risk to the counterparties to the swap 
and to the financial system. However, the Commission notes that, as was 
the case when the Commission exempted small financial institutions from 
the definition of ``financial entity'' for purposes of the codifying 
the end-user exception in 2012, these final regulations implementing 
the exemption for swaps entered into by bank holding companies, savings 
and loan holding companies, and CDFIs are appropriately conditioned to 
minimize risk.\147\ For example, the notice and reporting requirements 
under regulation Sec. Sec.  50.77(b)(4) through (5), 50.78(b)(2) 
through (3), and 50.79(b)(2) through (3) will afford some degree of 
risk mitigation because the electing entity is required to indicate how 
the electing counterparty generally meets its financial obligations 
with regard to its uncleared swaps. These requirements also help ensure 
that counterparties are aware of the potential exposure each swap may 
have on the entity's overall risk profile.
---------------------------------------------------------------------------

    \147\ 2012 End-User Exception, 77 FR at 42578 (explaining the 
policy rationale for adopting the Clearing Requirement exception for 
small financial institutions and setting conditions on the 
exception).
---------------------------------------------------------------------------

    The Commission also considered the regulatory reporting costs for 
bank holding companies, savings and loan holding companies, and CDFIs 
under new Commission regulation Sec. Sec.  50.77(b)(4), 50.78(b)(2), 
and 50.79(b)(2) and concluded that the regulations do not impose any 
additional costs. In general, the Commission understands that in most 
cases reporting swaps to the swap data repository is done by swap 
counterparties that are swap dealers. The bank holding company, savings 
and loan holding company, and CDFI entities that are electing an 
exemption from the Clearing Requirement under these regulations would 
report the swaps to the swap data repository only in extremely rare 
cases.\148\ Because these entities have been operating pursuant to no-
action letters that have the same reporting requirements, the 
Commission believes that the final rules will not impose any new 
compliance costs on bank holding companies, savings and loan holding 
companies, or CDFIs.
---------------------------------------------------------------------------

    \148\ As the Commission explains above, the election of an 
exemption from the Clearing Requirement by any central bank, 
sovereign entity, or identified IFI is not dependent on reporting 
the swap to a swap data repository. That obligation rests with the 
non-electing counterparty to the trade based upon independent 
obligations under part 23 or 45 of the Commission regulations.
---------------------------------------------------------------------------

    The Commission also considered the additional cost to the financial 
system that could result from the imposition of the $10 billion size 
threshold for bank holding companies and savings and loan holding 
companies eligible for the exemption and has determined that there is 
no additional cost associated with the imposition of a size

[[Page 76444]]

threshold.\149\ As noted in the 2018 Proposal, the $10 billion cap is a 
bright line and, due to the nature of using a bright line as a 
threshold, it is possible that some entities with attributes similar to 
those entities whose transactions are exempted from the Clearing 
Requirement, may not be eligible to use the exemption from the Clearing 
Requirement. It is also possible that some bank holding companies or 
savings and loan holding companies could make operational and business 
decisions that would allow them to qualify to use the exemption from 
the Clearing Requirement. However, the Commission does not expect that 
an entity would limit its potential revenue in order to maintain a 
smaller size in order to be able to rely on this exemption. As such, 
the Commission believes that the $10 billion size threshold is 
appropriate and will not impose additional costs on entities covered by 
these regulations.
---------------------------------------------------------------------------

    \149\ The Commission did not propose a size threshold for CDFIs 
because the Commission believes these entities generally fall under 
the $10 billion size threshold.
---------------------------------------------------------------------------

    The comment letter received from Better Markets raises a number of 
indirect and hard to quantify costs.\150\ For example, the letter 
states that piecemeal exemptions and carve-outs diminish the 
effectiveness of the swap market regulatory reforms, result in less 
transparency, and fragment markets.\151\ Furthermore, the letter notes 
that the trades that will remain uncleared as a result of exemptions 
codified in this adopting release will be intermediated bilaterally 
with one of a handful of already dominant derivatives dealers, which 
limits participation and diversity in the cleared swaps markets and 
results in reduced liquidity in the marketplace.\152\ Despite these 
concerns, the Commission continues to believe that the conditions 
imposed on the swap exemptions under this adopting release limit these 
costs.
---------------------------------------------------------------------------

    \150\ Better Markets comment at 1-3.
    \151\ Id. at 4.
    \152\ Id. at 5.
---------------------------------------------------------------------------

    Finally, another mitigating factor related to the costs of not 
centrally clearing these exempted swaps, is that the Commission's 
uncleared margin requirements may apply to some of the swaps exempted 
under these final rules. In these instances, the costs that may result 
from not requiring central clearing by a DCO may be mitigated.
b. Benefits
    The Commission has identified a number of benefits associated with 
the final regulations. The Commission notes that to the extent that 
market participants have been relying on Commission statements in the 
2012 End-User Exception and DCR no-action letters, the actual benefits 
of the final rules as realized in the market may not be as significant 
as compared to the regulatory baseline. First, central banks, sovereign 
entities, IFIs, certain bank holding companies, savings and loan 
holding companies, and CDFIs will benefit from lower transaction costs 
as a result of these final exemptions from the Clearing Requirement. In 
terms of project financing and risk management, these entities will not 
face the added expense of central clearing and can put those cost 
savings to good use. For example, the costs savings achieved through 
these exemptions could allow CDFIs and IFIs to enter into more public 
service projects in furtherance of their missions.
    There are other important benefits associated with these amendments 
to part 50. If the Commission were to subject foreign governments 
(sovereign entities), central banks, or IFIs to regulation under the 
CEA in connection with their swaps, foreign regulators could 
reciprocate with regard to the United States Federal Government, 
Federal Reserve Banks, or IFIs of which the United States is a member 
in a similar manner. The Commission expects that these swap exemptions 
from the Clearing Requirement will help ensure that if any of the 
Federal Government, Federal Reserve Banks, or IFIs of which the United 
States is a member were to engage in swaps in foreign jurisdictions, 
the actions of those entities with respect to those transactions would 
not be subject to foreign regulation.\153\
---------------------------------------------------------------------------

    \153\ See discussion in the May 2020 Proposal, 85 FR at 27957 
(citing 2012 End-User Exception, 77 FR at 42561-42562).
---------------------------------------------------------------------------

    In addition, there are benefits to the financial system from having 
certain bank holding companies, savings and loan holding companies, and 
CDFIs enter into interest rate swaps to hedge interest rate risk they 
incur as a result of issuing debt securities or making loans to finance 
their subsidiary banks or savings associations at a lower cost. For 
some bank holding companies and savings and loan holding companies, 
interest rate swaps need to be entered into by the holding company in 
order to gain hedge accounting treatment and promote efficiencies to 
benefit their subsidiaries.\154\ Finally, the costs savings from the 
final regulations may result in more projects being funded in small 
communities where certain bank holding companies, savings and loan 
holding companies, and CDFIs operate. As several commenters noted, 
there can be significant benefits from exempting swaps entered into by 
small banks and CDFIs for the communities these entities serve.\155\
---------------------------------------------------------------------------

    \154\ See August 2018 Proposal, 83 FR at 44010.
    \155\ See CDFI Coalition comment at 1-2 (``providing regulatory 
certainty through codification of the no-action relief will help to 
ensure that community development financing remains available and 
commercially feasible for our country's most distressed 
communities''); id. at 4-6 (``CDFIs, like small financial 
institutions, face the same costs [cost of posting margin to a DCO, 
cost of initial and annual fixed clearing fees, other expenses, in 
addition to time, effort and resources necessary to establish 
relationships with an intermediary and clearinghouse access] and 
provide similar public benefits by serving smaller, local markets 
and providing financial and community development services to a 
target market''); and Opportunity Finance Network comment at 1 
(``the exemption will save CDFIs the expense of clearing swaps 
through a third-party clearinghouse, allowing more of their 
resources to be devoted to their community development mission'').
---------------------------------------------------------------------------

    The Commission believes that most of the central banks, sovereign 
entities, IFIs, bank holding companies, savings and loan holding 
companies, and CDFIs that will benefit from these regulations also 
benefit from relief from the uncleared margin requirements under part 
23 of the Commission's regulations. For entities that would be required 
to comply with the Commission's uncleared margin requirements, their 
benefit from an exemption would be mitigated. In addition, actual 
benefits may be less than expected if central banks, sovereign 
entities, and IFIs and their counterparties choose to clear their swaps 
voluntarily instead of relying on this exemption from the Clearing 
Requirement. As a practical matter, however, the Commission reviewed 
swap data and found that the entities that will benefit from the final 
rules are not clearing their swaps subject to the Clearing 
Requirement.\156\ In that regard, the practical effect and primary 
benefit of the final regulations is to provide regulatory certainty, 
which will reduce the legal costs faced by these entities.
---------------------------------------------------------------------------

    \156\ Again, as the Commission noted in the May 2020 Proposal, 
the Commission reviewed data from January 1, 2018 to December 31, 
2018 that was reported to DDR and found that 16 international 
financial institutions entered into approximately 2,500 uncleared 
interest rate swaps with an estimated total notional value of $220 
billion. Three IFIs elected to clear a portion of their interest 
rate swaps.
---------------------------------------------------------------------------

2. Section 15(a) Factors
    The discussion that follows supplements the related cost and 
benefit considerations addressed in the preceding section and addresses 
the overall effect of the final rule in terms of the factors set forth 
in section 15(a) of the CEA.

[[Page 76445]]

a. Protection of Market Participants and the Public
    Section 15(a)(2)(A) of the CEA requires the Commission to evaluate 
the costs and benefits of a final regulation in light of considerations 
of protection of market participants and the public. The Commission 
considers the costs and benefits of the final regulations exempting 
swaps entered into with central banks, sovereign entities, IFIs, bank 
holding companies, savings and loan holding companies, and CDFIs from 
the Clearing Requirement in light of its responsibility for determining 
which swaps should be required to be cleared.
    In recognition of the significant risk-mitigating benefits of 
central clearing, Congress amended the CEA to direct the Commission to 
review all swaps that are offered for clearing by DCOs to determine 
whether such swaps should be required to be cleared. The Commission is 
cognizant that in enacting the Dodd-Frank Act, Congress excluded from 
the definition of a swap any agreement, contract, or transaction 
wherein the counterparty is a Federal Reserve Bank, the Federal 
Government, or a Federal agency that is expressly backed by the full 
faith and credit of the United States. In so doing, Congress determined 
that swaps with the Federal Reserve Banks, the Federal Government, and 
Federal agencies are not subject to the Clearing Requirement. Under 
this final rule, the Commission is extending similar treatment for swap 
transactions with central banks and sovereign entities, as discussed 
above. With respect to certain bank holding companies, savings and loan 
holding companies, and CDFIs, the Commission believes that an exemption 
from the Clearing Requirement is similar to the regulatory treatment 
extended to swaps entered into with small banks, savings associations, 
farm credit institutions, and credit unions.
    Under the final rules, counterparties entering into swaps with 
central banks, sovereign entities, IFIs, certain bank holding 
companies, savings and loan holding companies, and CDFIs will not have 
the protection afforded by central clearing through posting initial 
margin, daily variation margin payments, and other types of 
collateralization and risk mitigation associated with central clearing. 
The Commission, however, believes Congress would not have excluded the 
swaps entered into by the Federal Reserve Bank, the Federal Government, 
and Federal agencies from the definition of a swap if such transactions 
would pose a significant risk to market participants and the public.
    As discussed above, the Commission believes that international 
comity supports an exemption for swaps entered into by central banks, 
sovereign entities, and IFIs and is an appropriate exercise of the 
Commission's authority under section 4(c) of the CEA. These 
institutions generally enter into a limited number of swaps in 
furtherance of their public interest missions. As such, while an 
exemption from the Clearing Requirement does result in reduced 
protection for counterparties, the Commission believes that the 
exemption for swaps with these entities does not pose a significant 
risk to market participants and the public.
    Finally, like the small financial institutions listed in section 
2(h)(7)(C)(ii) of the CEA, the Commission believes that certain bank 
holding companies, savings and loan holding companies, and CDFIs are 
likely to have limited swaps exposure, both in terms of value and 
number. As such, the Commission believes that the exemptions will have 
a minimal impact on market participants. In addition, counterparties to 
a swap entered into with a bank holding company, savings and loan 
holding company, or CDFI under these exemptions will have some degree 
of protection against default because the electing entity is required 
to indicate how it generally meets the financial obligations associated 
with its uncleared swaps.
    The Commission also believes that the asset cap for bank holding 
companies and savings and loan holding companies whose transactions 
will be exempt from the Clearing Requirement, combined with the 
requirement that one of the counterparties to the swap adhere to the 
requirements of Commission regulation Sec.  50.50(b) and (c), means the 
exemptions are not likely to have a negative impact on market 
participants or the public.
b. Efficiency, Competitiveness, and Financial Integrity of Swap Markets
    Section 15(a)(2)(B) of the CEA requires the Commission to evaluate 
the costs and benefits of a regulation in light of efficiency, 
competitiveness, and financial integrity considerations. As discussed 
above, these final amendments to part 50 are likely to lower the cost 
of using swaps, and in that sense, make trading more efficient. Another 
potential effect of the exemptions may be to increase liquidity in swap 
markets insofar as entering into swaps would be less costly. Any 
increase in trading would improve the competitiveness of swaps markets 
for all participants. However, because of the small number of swaps 
anticipated to fall under these exemptions, and the low notional value 
of such swaps executed by bank holding companies, savings and loan 
holding companies, and CDFIs, in particular, the Commission expects a 
minimal impact on the efficiency of the swap markets, and negligible 
impact on the financial integrity of the overall swaps market. The 
Commission notes that to the extent that these counterparties' swaps 
are currently not cleared because of reliance on the Commission's 
determination in the 2012 End-User Exception and DCR no-action letters, 
the practical impact of the exemptions on the efficiency, 
competitiveness, and financial integrity of the swap markets may be 
negligible.
c. Price Discovery
    Section 15(a)(2)(C) of the CEA requires the Commission to evaluate 
the costs and benefits of its regulations in light of price discovery 
considerations. The Commission believes that these exemptions from the 
Clearing Requirement will not have a significant impact on price 
discovery. Typically, more liquidity supports greater price discovery 
as more participants enter the market and/or more trading occurs. To 
the extent that markets become more liquid, price discovery could 
improve. In regard to transparency of prices, swaps, whether cleared or 
uncleared, and regardless of the counterparty, are required by section 
2(a)(13)(G) of the CEA to be reported to a swap data repository. These 
final rules do not alter any independent reporting obligations under 
parts 23 or 45. Accordingly, the price discovery function of the 
reporting requirement is unchanged.
    In terms of price discovery through trade execution, the Commission 
notes that the swaps subject to these final rules would not typically 
be executed on an exchange. They also would not be subject to a trade 
execution requirement under section 2(h)(8) of the CEA.
d. Sound Risk Management Practices
    Section 15(a)(2)(D) of the CEA requires the Commission to evaluate 
the costs and benefits of a regulation in light of sound risk 
management practices. The Commission believes that by eliminating the 
costs associated with clearing for central banks, sovereign entities, 
IFIs, bank holding companies, savings and loan holding companies, and 
IFIs, the Commission is facilitating the use of swaps by these 
entities. To the extent that these entities use swaps to hedge existing 
interest rate risk, the Commission believes the exemptions from the 
Clearing Requirement will

[[Page 76446]]

enable better risk management at a potentially lower cost. The 
Commission also notes that swaps entered into by certain bank holding 
companies, savings and loan holding companies, and CDFIs tend to have 
small notional amounts, and the entities enter into swaps infrequently. 
Therefore, the Commission does not believe that swaps with these 
entities pose risk to U.S. financial markets.
e. Other Public Interest Considerations
    Section 15(a)(2)(E) of the CEA requires the Commission to evaluate 
the costs and benefits of a regulation in light of other public 
interest considerations. As discussed above, the Commission believes 
that public interest and international comity support the exemption 
from the Clearing Requirement for swaps with central banks, sovereign 
entities, and IFIs. The Commission believes that the public interest 
mission of these entities will be served by lowering the cost of 
financing in support of their public interest missions. For the other 
entities, the Commission has not identified any public interest 
considerations relevant to this rulemaking beyond those already noted.

C. 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 anti-competitive means of achieving the 
objectives of the CEA, as well as the policies and purposes of the CEA, 
in issuing any order or adopting any Commission rule or regulation 
(including any exemption under section 4(c) or 4c(b)).\157\ The 
Commission believes that the public interest to be protected by the 
antitrust laws is generally to protect competition. The Commission did 
not identify anti-competitive effects of the Proposals. The Commission 
requested comment regarding its analysis about the possible anti-
competitive effects of the proposed exemptions and whether there are 
specific public interests to be protected by the antitrust laws in this 
context.\158\
---------------------------------------------------------------------------

    \157\ Section 15(b) of the CEA.
    \158\ May 2020 Proposal, 85 FR at 27970; August 2018 Proposal, 
83 FR at 44011.
---------------------------------------------------------------------------

    The Commission did not receive any comments. The Commission 
confirms its determination that these final rules establishing new 
exemptions from the Clearing Requirement under subpart D are not anti-
competitive and have no anti-competitive effects. Given this 
determination, the Commission has not identified any less anti-
competitive means of achieving the purposes of the CEA.

List of Subjects in 17 CFR Part 50

    Business and industry, Clearing, Cooperatives, Reporting 
requirements, Swaps.

    For the reasons discussed in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR chapter I as follows:

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), 6(c), and 7a-1, as amended by Pub. L. 
111-203, 124 Stat. 1376.


0
2. Revise subpart B heading to read as follows:

Subpart B--Clearing Requirement Compliance Schedule and Compliance 
Dates

0
3. Add Sec.  50.26 to read as follows:


Sec.  50.26  Swap clearing requirement compliance dates.

    (a) Compliance dates for interest rate swap classes. The compliance 
dates for swaps that are required to be cleared under Sec.  50.4(a) are 
specified in the following table.

                                            Table 1 to Paragraph (a)
----------------------------------------------------------------------------------------------------------------
                                                       Currency and          Stated
        Swap asset class             Swap class       floating rate     termination date   Clearing requirement
                                      subtype             index              range            compliance date
----------------------------------------------------------------------------------------------------------------
Interest Rate Swap.............  Fixed-to-Floating  Euro (EUR)         28 days to 50      Category 1 entities
                                                     EURIBOR.           years.             March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Fixed-to-Floating  Sterling (GBP)     28 days to 50      Category 1 entities
                                                     LIBOR.             years.             March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Fixed-to-Floating  U.S. Dollar (USD)  28 days to 50      Category 1 entities
                                                     LIBOR.             years.             March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Fixed-to-Floating  Yen (JPY) LIBOR..  28 days to 50      Category 1 entities
                                                                        years.             March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Fixed-to-Floating  Australian Dollar  28 days to 30      All entities December
                                                     (AUD) BBSW.        years.             13, 2016.
Interest Rate Swap.............  Fixed-to-Floating  Canadian Dollar    28 days to 30      All entities July 10,
                                                     (CAD) CDOR.        years.             2017.
Interest Rate Swap.............  Fixed-to-Floating  Hong Kong Dollar   28 days to 10      All entities August
                                                     (HKD) HIBOR.       years.             30, 2017.
Interest Rate Swap.............  Fixed-to-Floating  Mexican Peso       28 days to 21      All entities December
                                                     (MXN) TIIE-        years.             13, 2016.
                                                     BANXICO.
Interest Rate Swap.............  Fixed-to-Floating  Norwegian Krone    28 days to 10      All entities April 10,
                                                     (NOK) NIBOR.       years.             2017.
Interest Rate Swap.............  Fixed-to-Floating  Polish Zloty       28 days to 10      All entities April 10,
                                                     (PLN) WIBOR.       years.             2017.
Interest Rate Swap.............  Fixed-to-Floating  Singapore Dollar   28 days to 10      All entities October
                                                     (SGD) SOR-VWAP.    years.             15, 2018.
Interest Rate Swap.............  Fixed-to-Floating  Swedish Krona      28 days to 15      All entities April 10,
                                                     (SEK) STIBOR.      years.             2017.

[[Page 76447]]

 
Interest Rate Swap.............  Fixed-to-Floating  Swiss Franc (CHF)  28 days to 30      All entities October
                                                     LIBOR.             years.             15, 2018.
Interest Rate Swap.............  Basis............  Euro (EUR)         28 days to 50      Category 1 entities
                                                     EURIBOR.           years.             March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Basis............  Sterling (GBP)     28 days to 50      Category 1 entities
                                                     LIBOR.             years.             March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Basis............  U.S. Dollar (USD)  28 days to 50      Category 1 entities
                                                     LIBOR.             years.             March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Basis............  Yen (JPY) LIBOR..  28 days to 30      Category 1 entities
                                                                        years.             March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Basis............  Australian Dollar  28 days to 30      All entities December
                                                     (AUD) BBSW.        years.             13, 2016.
Interest Rate Swap.............  Forward Rate       Euro (EUR)         3 days to 3 years  Category 1 entities
                                  Agreement.         EURIBOR.                              March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Forward Rate       Sterling (GBP)     3 days to 3 years  Category 1 entities
                                  Agreement.         LIBOR.                                March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Forward Rate       U.S. Dollar (USD)  3 days to 3 years  Category 1 entities
                                  Agreement.         LIBOR.                                March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Forward Rate       Yen (JPY) LIBOR..  3 days to 3 years  Category 1 entities
                                  Agreement.                                               March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Interest Rate Swap.............  Forward Rate       Polish Zloty       3 days to 2 years  All entities April 10,
                                  Agreement.         (PLN) WIBOR.                          2017.
Interest Rate Swap.............  Forward Rate       Norwegian Krone    3 days to 2 years  All entities April 10,
                                  Agreement.         (NOK) NIBOR.                          2017.
Interest Rate Swap.............  Forward Rate       Swedish Krona      3 days to 3 years  All entities April 10,
                                  Agreement.         (SEK) STIBOR.                         2017.
Interest Rate Swap.............  Overnight Index    Euro (EUR) EONIA.  7 days to 2 years  Category 1 entities
                                  Swap.                                                    March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
                                                                       2 years + 1 day    All entities December
                                                                        to 3 years.        13, 2016.
Interest Rate Swap.............  Overnight Index    Sterling (GBP)     7 days to 2 years  Category 1 entities
                                  Swap.              SONIA.                                March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
                                                                       2 years + 1 day    All entities December
                                                                        to 3 years.        13, 2016.
Interest Rate Swap.............  Overnight Index    U.S. Dollar (USD)  7 days to 2 years  Category 1 entities
                                  Swap.              FedFunds.                             March 11, 2013.
                                                                                          All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
                                                                       2 years + 1 day    All entities December
                                                                        to 3 years.        13, 2016.
Interest Rate Swap.............  Overnight Index    Australian Dollar  7 days to 2 years  All entities December
                                  Swap.              (AUD) AONIA-OIS.                      13, 2016.
Interest Rate Swap.............  Overnight Index    Canadian Dollar    7 days to 2 years  All entities July 10,
                                  Swap.              (CAD) CORRA-OIS.                      2017.
----------------------------------------------------------------------------------------------------------------

    (b) Compliance dates for credit default swap classes. The 
compliance dates for swaps that are required to be cleared under Sec.  
50.4(b) are specified in the following table.

                                            Table 2 to Paragraph (b)
----------------------------------------------------------------------------------------------------------------
                                     Swap class                                            Clearing requirement
        Swap asset class              subtype            Indices             Tenor            compliance date
----------------------------------------------------------------------------------------------------------------
Credit Default Swap............  North American     CDX.NA.IG........  3Y, 5Y, 7Y, 10Y..  Category 1 entities
                                  untranched CDS                                           March 11, 2013.
                                  indices.                                                All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.
Credit Default Swap............  North American     CDX.NA.HY........  5Y...............  Category 1 entities
                                  untranched CDS                                           March 11, 2013.
                                  indices.                                                All non-Category 2
                                                                                           entities June 10,
                                                                                           2013.
                                                                                          Category 2 entities
                                                                                           September 9, 2013.

[[Page 76448]]

 
Credit Default Swap............  European           iTraxx Europe....  5Y, 10Y..........  Category 1 entities
                                  untranched CSD                                           April 26, 2013.
                                  indices.                                                Category 2 entities
                                                                                           July 25, 2013.
                                                                                          All non-Category 2
                                                                                           entities October 23,
                                                                                           2013.
Credit Default Swap............  European           iTraxx Europe      5Y...............  Category 1 entities
                                  untranched CSD     Crossover.                            April 26, 2013.
                                  indices.                                                Category 2 entities
                                                                                           July 25, 2013.
                                                                                          All non-Category 2
                                                                                           entities October 23,
                                                                                           2013.
Credit Default Swap............  European           iTraxx Europe      5Y...............  Category 1 entities
                                  untranched CSD     HiVol.                                April 26, 2013.
                                  indices.                                                Category 2 entities
                                                                                           July 25, 2013.
                                                                                          All non-Category 2
                                                                                           entities October 23,
                                                                                           2013.
----------------------------------------------------------------------------------------------------------------


0
4. Revise subpart C heading to read as follows:

Subpart C--Exceptions and Exemptions from the Clearing Requirement

0
5. In Sec.  50.50, revise section heading and paragraph 
(b)(1)(iii)(A)(2) and remove paragraph (d) to read as follows:


Sec.  50.50  Non-financial end-user exception to the clearing 
requirement.

* * * * *
    (b) * * *
    (1) * * *
    (iii) * * *
    (A) * * *
    (2) Exempt from the definition of ``financial entity'' as described 
in Sec.  50.53;
* * * * *

0
6. In Sec.  50.51, revise section heading and paragraphs (a)(3)(i) and 
(ii) to read as follows:


Sec.  50.51  Cooperatives exempt from the clearing requirement.

* * * * *
    (a) * * *
    (3) * * *
    (i) Exempt from the definition of ``financial entity'' pursuant to 
Sec.  50.53; or
    (ii) A cooperative formed under Federal or state law as a 
cooperative and each member thereof is either not a ``financial 
entity,'' as defined in section 2(h)(7)(C)(i) of the Act, or is exempt 
from the definition of ``financial entity'' pursuant to Sec.  50.53.
* * * * *

0
7. Revise Sec.  50.52 heading to read as follows:


Sec.  50.52  Affiliated entities exempt from the clearing requirement.

0
8. Add Sec.  50.53 to read as follows:


Sec.  50.53  Banks, savings associations, farm credit system 
institutions, and credit unions exempt from the clearing requirement.

    For purposes of section 2(h)(7)(A) of the Act, a person that is a 
``financial entity'' solely because of section 2(h)(7)(C)(i)(VIII) 
shall be exempt from the definition of ``financial entity'' and is 
eligible to elect the exception to the clearing requirement under Sec.  
50.50, if such person:
    (a) Is organized as a bank, as defined in section 3(a) of the 
Federal Deposit Insurance Act, the deposits of which are insured by the 
Federal Deposit Insurance Corporation; a savings association, as 
defined in section 3(b) of the Federal Deposit Insurance Act, the 
deposits of which are insured by the Federal Deposit Insurance 
Corporation; a farm credit system institution chartered under the Farm 
Credit Act of 1971; or an insured Federal credit union or State-
chartered credit union under the Federal Credit Union Act; and
    (b) Has total assets of $10,000,000,000 or less on the last day of 
such person's most recent fiscal year;
    (c) Reports, or causes to be reported, the swap to a swap data 
repository pursuant to Sec. Sec.  45.3 and 45.4 of this chapter, and 
reports, or causes to be reported, all information as provided in 
paragraph (b) of Sec.  50.50 to a swap data repository; and
    (d) Is using the swap to hedge or mitigate commercial risk as 
provided in paragraph (c) of Sec.  50.50.

0
9. Add subpart D to read as follows:

Subpart D--Swaps Not Subject to the Clearing Requirement

Sec.
50.75 Swaps entered into by central banks or sovereign entities.
50.76 Swaps entered into by international financial institutions.
50.77 Interest rate swaps entered into by community development 
financial institutions.
50.78 Swaps entered into by bank holding companies.
50.79 Swaps entered into by savings and loan holding companies.


Sec.  50.75  Swaps entered into by central banks or sovereign entities.

    Swaps entered into by a central bank or sovereign entity shall be 
exempt from the clearing requirement of section 2(h)(1)(A) of the Act.
    (a) For the purposes of this section, the term central bank means a 
reserve bank or monetary authority of a central government (including 
the Board of Governors of the Federal Reserve System or any of the 
Federal Reserve Banks) or the Bank for International Settlements.
    (b) For the purposes of this section, the term sovereign entity 
means a central government (including the U.S. Government), or an 
agency, department, or ministry of a central government.


Sec.  50.76  Swaps entered into by international financial 
institutions.

    (a) Swaps entered into by an international financial institution 
shall be exempt from the clearing requirement of section 2(h)(1)(A) of 
the Act.
    (b) For purposes of this section, the term international financial 
institution means:
    (1) African Development Bank;
    (2) African Development Fund;
    (3) Asian Development Bank;
    (4) Banco Centroamericano de Integraci[oacute]n Econ[oacute]mica;
    (5) Bank for Economic Cooperation and Development in the Middle 
East and North Africa;
    (6) Caribbean Development Bank;
    (7) Corporaci[oacute]n Andina de Fomento;
    (8) Council of Europe Development Bank;
    (9) European Bank for Reconstruction and Development;
    (10) European Investment Bank;
    (11) European Investment Fund;
    (12) European Stability Mechanism;
    (13) Inter-American Development Bank;
    (14) Inter-American Investment Corporation;
    (15) International Bank for Reconstruction and Development;

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    (16) International Development Association;
    (17) International Finance Corporation;
    (18) International Monetary Fund;
    (19) Islamic Development Bank;
    (20) Multilateral Investment Guarantee Agency;
    (21) Nordic Investment Bank;
    (22) North American Development Bank; and
    (23) Any other entity that provides financing for national or 
regional development in which the U.S. Government is a shareholder or 
contributing member.


Sec.  50.77  Interest rate swaps entered into by community development 
financial institutions.

    (a) For the purposes of this section, the term community 
development financial institution means an entity that satisfies the 
definition in section 103(5) of the Community Development Banking and 
Financial Institutions Act of 1994, and is certified by the U.S. 
Department of the Treasury's Community Development Financial 
Institution Fund as meeting the requirements set forth in 12 CFR 
1805.201(b).
    (b) A swap entered into by a community development financial 
institution shall not be subject to the clearing requirement of section 
2(h)(1)(A) of the Act and this part if:
    (1) The swap is a U.S. dollar denominated interest rate swap in the 
fixed-to-floating class or the forward rate agreement class of swaps 
that would otherwise be subject to the clearing requirement under Sec.  
50.4(a);
    (2) The total aggregate notional value of all swaps entered into by 
the community development financial institution during the 365 calendar 
days prior to the day of execution of the swap is less than or equal to 
$200,000,000;
    (3) The swap is one of ten or fewer swap transactions that the 
community development financial institution enters into within a period 
of 365 calendar days;
    (4) One of the counterparties to the swap reports the swap to a 
swap data repository pursuant to Sec. Sec.  45.3 and 45.4 of this 
chapter, and reports all information as provided in paragraph (b) of 
Sec.  50.50 to a swap data repository; and
    (5) The swap is used to hedge or mitigate commercial risk as 
provided in paragraph (c) of Sec.  50.50.


Sec.  50.78  Swaps entered into by bank holding companies.

    (a) For purposes of this section, the term bank holding company 
means an entity that is organized as a bank holding company, as defined 
in section 2 of the Bank Holding Company Act of 1956.
    (b) A swap entered into by a bank holding company shall not be 
subject to the clearing requirement of section 2(h)(1)(A) of the Act 
and this part if:
    (1) The bank holding company has aggregated assets, including the 
assets of all of its subsidiaries, that do not exceed $10,000,000,000 
according to the value of assets of each subsidiary on the last day of 
each subsidiary's most recent fiscal year;
    (2) One of the counterparties to the swap reports the swap to a 
swap data repository pursuant to Sec. Sec.  45.3 and 45.4 of this 
chapter, and reports all information as provided in paragraph (b) of 
Sec.  50.50 to a swap data repository; and
    (3) The swap is used to hedge or mitigate commercial risk as 
provided in paragraph (c) of Sec.  50.50.


Sec.  50.79  Swaps entered into by savings and loan holding companies.

    (a) For purposes of this section, the term savings and loan holding 
company means an entity that is organized as a savings and loan holding 
company, as defined in section 10 of the Home Owners' Loan Act of 1933.
    (b) A swap entered into by a savings and loan holding company shall 
not be subject to the clearing requirement of section 2(h)(1)(A) of the 
Act and this part if:
    (1) The savings and loan holding company has aggregated assets, 
including the assets of all of its subsidiaries, that do not exceed 
$10,000,000,000 according to the value of assets of each subsidiary on 
the last day of each subsidiary's most recent fiscal year;
    (2) One of the counterparties to the swap reports the swap to a 
swap data repository pursuant to Sec. Sec.  45.3 and 45.4 of this 
chapter, and reports all information as provided in paragraph (b) of 
Sec.  50.50 to a swap data repository; and
    (3) The swap is used to hedge or mitigate commercial risk as 
provided in paragraph (c) of Sec.  50.50.

    Issued in Washington, DC, on November 12, 2020, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

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

Appendices to Swap Clearing Requirement Exemptions--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--Statement of Support of Chairman Heath P. Tarbert

    I am pleased to support today's final rule amending the CFTC's 
Part 50 rules, which implement the swap clearing requirement of 
section 2(h)(1) of the Commodity Exchange Act (the Clearing 
Requirement). The final rule concurrently achieves two ends--it 
demonstrates the CFTC's evolving philosophy on comity and deference 
towards our international counterparts while alleviating unnecessary 
regulatory burdens on small domestic institutions that look nothing 
like Wall Street banks.
    First, today's final rule creates new regulations 50.75 and 
50.76, which codify existing exemptions from the Clearing 
Requirement for swaps entered into with certain central banks, 
sovereign entities, and international financial institutions. Just 
as we would not expect a foreign regulator to impose clearing 
requirements on the United States Treasury or the Federal Reserve 
for entering into swaps on behalf of our government, the CFTC will 
not impose similar requirements on other nations' finance ministries 
and central banks. The same is true for multilateral governmental 
institutions such as the World Bank Group and the International 
Monetary Fund. Mutual respect and a two-way-street must be the 
cornerstone of our international regulatory relations.
    Second, the final rule establishes new regulations 50.77, 50.78, 
and 50.79, which exempt from the Clearing Requirement certain swaps 
entered into by small bank holding companies, savings and loan 
holding companies, and community development financial institutions. 
In addition, the final rule clarifies existing exemptions for banks, 
savings associations, farm credit systems, and credit unions with 
total assets of less than $10 billion. These entities are the 
engines of the real economy, providing financial support to American 
communities, businesses, and families. While exempting these 
entities from the Clearing Requirement makes sense in normal times, 
doing so is especially critical now. As we continue to manage the 
fallout of the COVID-19 (coronavirus) pandemic, it is particularly 
important that the CFTC advance our strategic goal of regulating the 
derivatives markets to promote the interests of all Americans.\1\ 
Today's final rule is a step in that direction.
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    \1\ CFTC Strategic Plan 2020-2024, at 6 (discussing Strategic 
Goal 2), https://www.cftc.gov/media/3871/CFTC2020_2024StrategicPlan/download.
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Appendix 3--Supporting Statement of Commissioner Brian D. Quintenz

    I am pleased to support this final rule, which codifies existing 
relief from the

[[Page 76450]]

Commission's requirement that certain commonly traded interest rate 
swaps and credit default swaps be cleared following their 
execution.\2\ The new exemptions may be elected by several classes 
of counterparties that may enter into these swaps, namely: Sovereign 
nations; central banks; ``international financial institutions'' of 
which sovereign nations are members; bank holding companies, and 
savings and loan holding companies, whose assets total no more than 
$10 billion; and community development financial institutions 
recognized by the U.S. Treasury Department. Today's final rule notes 
that many of these entities have actually relied on existing relief, 
electing not to clear swaps that are generally subject to the 
clearing requirement. I strongly support the policy of international 
``comity'' described in the final rule, recognizing that sovereign 
nations and their instrumentalities should generally not be subject 
to the Commission's regulations. I trust that by issuing this rule, 
the United States, the Federal Reserve, and other U.S. government 
instrumentalities will receive the same treatment in foreign 
jurisdictions.
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    \2\ The swap clearing requirement is codified in part 50 of the 
Commission's regulations (17 CFR part 50).
---------------------------------------------------------------------------

Appendix 4--Statement of Commissioner Dan M. Berkovitz

    I am voting for the final rule codifying certain limited 
exemptions from the swap clearing requirement that currently exist 
through Commission guidance or staff no action relief. The 
exemptions are consistent with longstanding Commission policies. 
Analysis of available historical data shows that the number and 
notional amount of swaps that would be exempted are relatively 
limited and not likely to materially impact systemic risk. 
Furthermore, the swaps exempted from clearing will be subject to 
uncleared swap margin requirements, if applicable, thereby 
mitigating the risks of not clearing these swaps.
    The final rule codifies in rule text exemptions for swaps 
entered into by foreign central banks, sovereign entities at the 
national level, and certain international institutions that 
previously have been exempted from the clearing requirement through 
no action relief or guidance. In this regard, the final rule 
represents a proper exercise of international comity in recognition 
of the governmental nature and non-speculative purposes of these 
sovereign entities and international institutions.
    The final rule also provides clearing exemptions for certain 
interest rate swaps of community development financial institutions, 
subject to a number of significant limits, and for swaps entered 
into by bank or savings and loan holding companies that have no more 
than $10 billion in consolidated assets. In each case, the exemption 
only applies if the swap is used to hedge or mitigate commercial 
risks. Congress provided in Commodity Exchange Act section 
2(h)(7)(C) for an exclusion from the clearing requirement for banks 
and savings associations with less than $10 billion in assets to the 
extent determined by the Commission. It is appropriate to apply this 
exemption to the holding companies of these financial entities.
    One commenter, Better Markets, expressed concern that the number 
of entities that will now have an exemption from the clearing 
requirement has grown over time, leading to the potential for 
greater risk, reduction in liquidity in cleared markets, and 
complexity in managing the exemptions. As described in the preamble 
to the final rule, swap data repository data indicates that over the 
past several years the number and scope of swaps entered into by 
these institutions that will be included within the exemptions has 
been relatively limited. Given this data, these concerns, today, do 
not outweigh the benefits of the final rule. However, the Commission 
should periodically review the SDR data to reassess whether the 
clearing requirement exemptions are cumulatively having a material 
impact on the extent of swap clearing given the intent of the Dodd-
Frank Act. The Commission can then evaluate whether, on a going 
forward basis, any changes to the exemptions may be warranted.
    I commend the staff of the Division of Clearing and Risk for 
this well developed and drafted final rule. The clarity and 
completeness of the final release helps establish a sound basis for 
the Commission to approve the final rule.

[FR Doc. 2020-25394 Filed 11-27-20; 8:45 am]
BILLING CODE 6351-01-P