[Federal Register Volume 85, Number 91 (Monday, May 11, 2020)]
[Rules and Regulations]
[Pages 27674-27680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08601]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AE77
Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is amending the margin requirements for uncleared swaps for
swap dealers (``SD'') and major swap participants (``MSP'') for which
there is no prudential regulator to add the European Stability
Mechanism (``ESM'') to the list of entities that are expressly excluded
from the definition of financial end user under Commission regulations
and to correct an erroneous cross-reference in Commission regulations
(``Final Rules'').
DATES: This final rule is effective June 10, 2020.
[[Page 27675]]
FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, 202-418-
6056, jsterling@cftc.gov; Thomas J. Smith, Deputy Director, 202-418-
5495, tsmith@cftc.gov; Warren Gorlick, Associate Director, 202-418-
5195, wgorlick@cftc.gov; Carmen Moncada-Terry, Special Counsel, 202-
418-5795, cmoncada-terry@cftc.gov; or Rafael Martinez, Senior Financial
Risk Analyst, 202-418-5462, rmartinez@cftc.gov, Division of Swap Dealer
and Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
In January 2016, the Commission adopted regulation Sec. Sec.
23.150 through 23.161 (collectively, ``CFTC Margin Rule'') to implement
section 4s(e) of the Commodity Exchange Act (``CEA''),\1\ which
requires SDs and MSPs for which there is not a prudential regulator
(``CSEs'') to meet minimum initial and variation margin requirements
adopted by the Commission by rule or regulation.\2\
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\1\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (``Final
Margin Rule''); Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants--Cross-Border Application of the
Margin Requirements, 81 FR 34818 (May 31, 2016).
\2\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a
``Prudential Regulator'' must meet the margin requirements for
uncleared swaps established by the applicable ``Prudential
Regulator.'' 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39)
(defining the term ``Prudential Regulator'' to include the Board of
Governors of the Federal Reserve System; the Office of the
Comptroller of the Currency; the Federal Deposit Insurance
Corporation; the Farm Credit Administration; and the Federal Housing
Finance Agency, and specifying the entities for which these agencies
act as Prudential Regulators). The Prudential Regulators published
final margin requirements in November 2015. See Margin and Capital
Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015).
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Since adopting the CFTC Margin Rule, the Commission's Division of
Swap Dealer and Intermediary Oversight (``DSIO'') has issued staff
guidance, including no-action letters, addressing the application of
the rule. In July 2017, DSIO issued CFTC Letter No. 17-34 in response
to a request for relief submitted by the ESM.\3\ The ESM sought relief
with respect to uncleared swaps transactions it entered into with SDs,
representing that it was similar to multilateral development banks, as
the term is defined in Commission regulation Sec. 23.151, which are
excluded from the definition of financial end user and whose swaps are
exempt from the CFTC Margin Rule.
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\3\ CFTC Letter No. 17-34, Commission regulation Sec. Sec.
23.150 through 23.159, 23.161; No-Action Position with Respect to
Uncleared Swaps with the European Stability Mechanism (July 24,
2017) (``CFTC Letter No. 17-34''), available at http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-34.pdf.
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In October 2019, the Commission proposed to codify CFTC Letter No.
17-34 and amend Commission regulation Sec. 23.151 to exclude the ESM
from the definition of financial end user and thus exempt from the CFTC
Margin Rule uncleared swaps entered into by the ESM.\4\ The Commission
also proposed to correct a typographical error in Commission regulation
Sec. 23.157.\5\
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\4\ Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 84 FR 56392 (Oct. 22, 2019) (the
``Proposal''), at 56393-4.
\5\ Id. at 56394.
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II. Final Rules
The Commission is adopting the amendments to Commission regulation
Sec. Sec. 23.151 and 23.157 as proposed. The Commission received three
comments in the file for the Proposal,\6\ only one of which directly
addressed the Proposal.\7\ The Futures Industry Association (``FIA'')
indicated, among other things, that its commodities members generally
support the Proposal.\8\
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\6\ Comments for the Proposal are available on the Commission
website at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3038. Comment letter no. 62275 dated Dec. 23,
2019 from the Asset Management Group of the Securities Industry and
Financial Markets Association, available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62275&SearchText=, discussed other margin issues
outside the scope of the Proposal. In addition, an anonymous
commenter submitted a comment addressing issues unrelated to margin.
Comment no. 62220 dated Oct. 22, 2019, available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62220&SearchText=.
\7\ Comment letter no. 62272 dated Dec. 23, 2019 from FIA,
available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62272&SearchText= (the ``FIA letter''),
discussed other margin issues outside the scope of the Proposal.
\8\ FIA letter at 2.
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A. Commission Regulation Sec. 23.151--Definition of Financial end user
The CFTC Margin Rule applies to swap transactions between CSEs and
counterparties that are SDs, MSPs or financial end users. Commission
regulation Sec. 23.151 defines the term ``financial end user,'' \9\
excluding from the definition sovereign entities, multilateral
development banks, the Bank for International Settlements, entities
exempt from the definition of financial entity pursuant to section
2(h)(7)(C)(iii) of the Act and implementing regulations, affiliates
that qualify for the exemption from clearing pursuant to section
2(h)(7)(D) of the Act, and eligible treasury affiliates that the
Commission exempts from the requirements of Commission regulation
Sec. Sec. 23.150 through 23.161 by rule.\10\
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\9\ 17 CFR 23.151.
\10\ See id.
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The Commission is adopting the proposed amendment to Commission
regulation Sec. 23.151. As amended, Commission regulation Sec. 23.151
excludes the ESM from the definition of financial end user, effectively
exempting uncleared swaps transactions entered into by the ESM from the
CFTC Margin Rule. With respect to the proposed amendment, FIA stated
that its commodity members generally support the Commission's efforts
to amend its rules to relieve burdens on market participants.
The amendment to Commission regulation Sec. 23.151 codifies the
relief provided by CFTC Letter No. 17-34, which extends no-action
relief from the CFTC Margin Rule with respect to uncleared swaps
between SDs and the ESM. The no-action relief was granted based on the
ESM's representations concerning the nature of its operations. The no-
action letter stated that the ESM is an intergovernmental financial
institution that provides financial assistance for national or regional
development to Euro area member states that are in or are threatened by
severe financial distress, similar to multilateral development banks,
which are excluded from the definition of financial end user in
Commission regulation Sec. 23.151. To accomplish its policy goals, the
ESM utilizes several financial assistance instruments, including loans
in various forms which can be used for multiple purposes and are
offered only subject to bespoke specified conditions, including
economic reforms. The ESM enters into uncleared swaps with SDs to hedge
the interest rate and currency risks it faces as a result of entering
into and funding loans and to hedge risks associated with its invested
capital. The ESM does not, and will not, enter into uncleared swaps for
speculative purposes.
In granting no-action relief, DSIO noted that the ESM, like
multilateral development banks excluded from the financial end user
definition, has a lower risk profile, posing less counterparty risk to
an SD and less systemic risk to the financial system. While not
explicitly finding that the ESM was a multilateral development bank,
DSIO recognized that its functions and credit profile justified
relief.\11\
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\11\ The Basel Committee on Banking Supervision ascribes to the
ESM a 0% risk weight. The ESM has been included in the list of
entities that receive a 0% risk weight in the document entitled
``Basel II: International Convergence of Capital Measurement and
Capital Standards: A Revised Framework--Comprehensive Version, June
2006.'' See BIS, Risk Weight for the European Stability Mechanism
(ESM) and European Financial Stability Facility (EFSF), https://www.bis.org/publ/bcbs_nl17.htm.
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[[Page 27676]]
Based on the aforementioned considerations, the Commission amends
paragraph (2)(iii) of the definition of Financial end user in
Commission regulation Sec. 23.151 by adding the ESM to the list of
entities that are excluded from the definition of financial end user.
As a result of the ESM's exclusion from the definition of financial end
user, uncleared swaps entered into between the ESM and CSEs are exempt
from the CFTC Margin Rule. The Commission believes that the amendment,
as adopted, provides clarity and certainty to CSEs that are
counterparties to the ESM that uncleared swaps entered into with the
ESM are not subject to the CFTC Margin Rule. The Commission is adopting
the amendment because activities conducted by the ESM, like activities
conducted by multilateral development banks that are excluded from the
financial end user definition, generally have a different purpose in
the financial system. These types of entities are established by
governments and their financial activities are designed to further
governmental purposes, posing less counterparty risk to CSEs and less
systemic risk to the financial system.
Furthermore, the Commission believes that the amendment encourages
international comity and continued cooperation between the Commission
and the European Union (``EU'') authorities. In this regard, the
Commission notes that the ESM is exempt from the European Market
Infrastructure Regulation or EMIR's margin rules for OTC derivatives
contracts not cleared by a central counterparty.\12\ By taking this
action, the Commission acknowledges the unique interests of the EU
authorities in the ESM and recognizes that the principles of
international comity counsel mutual respect for the important interests
of foreign sovereigns.\13\
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\12\ See Regulation (EU) No 648/2012 of the European Parliament
and the Council of the European Union of July 4, 2012.
\13\ See Restatement (Third) of Foreign Relations Law of the
United States sec. 403 (Am. Law Inst. 2018) (the Restatement). The
Restatement provides that even where a country has a basis for
jurisdiction, it should not prescribe law with respect to a person
or activity in another country when the exercise of such
jurisdiction is unreasonable. See Restatement section 403(1).
Notably, the Restatement recognizes that, in the exercise of
international comity, reciprocity is an appropriate consideration in
determining whether to exercise jurisdiction extraterritorially.
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B. Amendment of Commission Regulation Sec. 23.157--Correction of
Cross-Reference
The Commission is adopting a corrective amendment to Commission
regulation Sec. 23.157. In its comment letter, FIA indicated that its
commodities members generally support the Commission's efforts to amend
its rules when necessary to correct errors.\14\
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\14\ FIA letter at 2.
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Commission regulation Sec. 23.157 requires initial margin
collected from or posted by a CSE to be held by one or more independent
custodians. The CSE must enter into a custodial agreement with each
custodian that holds the initial margin collateral. In particular,
paragraph (c)(1) of Commission regulation Sec. 23.157 provides that
the custodial agreement must prohibit the custodian from
rehypothecating, repledging, reusing, or otherwise transferring the
collateral except that cash collateral may be held in a general deposit
account with the custodian if the funds in the account are used to
purchase an asset described in Commission regulation Sec.
23.156(a)(1)(iv) through (xii).
In administering the Commission's regulations, DSIO staff noticed
that the cross-reference to ``Sec. 23.156(a)(1)(iv) through (xii)'' in
paragraph (c)(1) of Commission regulation Sec. 23.157 was erroneous.
First, the existing cross-reference incorrectly refers to non-existing
paragraphs. Second, the existing cross-reference excludes treasury
securities and U.S. Government agency securities, which are included in
the list of eligible collateral set forth in Commission regulation
Sec. 23.156(a)(1), and which the Commission intended to include as
eligible assets into which cash collateral can be converted.\15\ To
administer the CFTC Margin Rule and prevent confusion in its
application, the Commission is hereby amending Commission regulation
Sec. 23.157(c)(1) to remove the erroneous cross-reference to ``Sec.
23.156(a)(1)(iv) through (xii)'' and replace it with the corrected
cross-reference ``Sec. 23.156(a)(1)(ii) through (x).''
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\15\ In the Final Margin Rule, the Commission explained that its
intent was to exclude ``immediately available cash funds,'' which is
one form of eligible collateral in Commission regulation Sec.
23.156(a)(1), because allowing such eligible collateral to be held
in the form of a deposit liability of the custodian bank would be
incompatible with Commission regulation Sec. 23.157(c)'s
prohibition against rehypothecation of collateral. See Final Margin
Rule, 81 FR at 671. However, the Commission expressly stated that
the custodian could use cash funds to purchase other forms of
eligible collateral. See id.
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III. Administrative Compliance
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires Federal agencies,
in promulgating regulations, to consider whether the rules they propose
will have a significant economic impact on a substantial number of
small entities and, if so, provide a regulatory flexibility analysis
respecting the impact.\16\ The Commission certified that the Proposal
would not have a significant economic impact on a substantial number of
small entities. The Commission requested comments with respect to the
RFA and received no comments.
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\16\ 5 U.S.C. 601 et seq.
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As discussed in the Proposal, the Final Rules only affect SDs and
MSPs that are subject to the CFTC Margin Rule and their covered
counterparties, all of which are required to be eligible contract
participants (``ECPs'').\17\ The Commission has previously determined
that SDs, MSPs, and ECPs are not small entities for purposes of the
RFA.\18\ Therefore, the Commission believes that the Final Rules will
not have a significant economic impact on a substantial number of small
entities, as defined in the RFA.
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\17\ Each counterparty to an uncleared swap must be an ECP, as
the term is defined in section 1a(18) of the CEA, 7 U.S.C. 1a(18)
and Commission regulation Sec. 1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
\18\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001)
(ECPs).
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the Final Rules will not
have a significant economic impact on a substantial number of small
entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \19\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget control number. The Final Rules, as adopted, contain no
requirements subject to the PRA.
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\19\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before
[[Page 27677]]
promulgating a regulation under the CEA. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) considerations.
In addition, the Commission notes that the consideration of costs
and benefits below is based on the understanding that the markets
function internationally, with many transactions involving U.S. firms
taking place across international boundaries; with some Commission
registrants being organized outside of the United States; with leading
industry members typically conducting operations both within and
outside the United States; and with industry members commonly following
substantially similar business practices wherever located. Where the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to the effects of the
Final Rules on all activities subject to the Proposal, whether by
virtue of the activity's physical location in the United States or by
virtue of the activities' connection with or effect on U.S. commerce
under CEA section 2(i).\20\
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\20\ See 7 U.S.C. 2(i).
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1. Baseline and Rule Summary
The baseline for the Commission's consideration of the costs and
benefits of these Final Rules is the CFTC Margin Rule. The Commission
recognizes that to the extent market participants have relied on CFTC
Letter No. 17-34, the actual costs and benefits of the amendment to
Commission regulation Sec. 23.151, as realized in the market, may not
be as significant. The amendment, as adopted, revises the definition of
financial end user in Commission regulation Sec. 23.151 to exclude the
ESM from the definition. The amendment codifies CFTC Letter No. 17-34
and confirms that uncleared swaps with the ESM as a counterparty are
not subject to the CFTC Margin Rule. As a result, CSEs facing the ESM
will not be required to exchange margin with the ESM, resulting in the
collection of lesser amounts of margin to mitigate the risk of
uncleared swaps, which could increase the possibility of a systemic
event. Nevertheless, after analyzing the swap data repository (``SDR'')
data, the Commission believes that by classifying the ESM as a non-
financial end-user and excluding it from the margin requirements, it is
unlikely that the Final Rule will result in substantial systemic
risk.\21\
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\21\ Recent review of data from the SDRs indicates that the ESM
engages in limited swap trading activity.
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The Commission notes that the ESM has a lower risk profile,
maintaining high capital levels with ultimate financial backing from
the EU, and thus poses less counterparty risk to CSEs and less systemic
risk to the financial system. In addition, in the Commission's view,
relief from the margin requirements will enable the ESM to fulfill its
mission of providing support to member states of the EU in financial
distress, in particular, in times of tight liquidity, contributing to
the stability of the EU financial system and the reduction of risk.
The Commission is also adopting an amendment to Commission
regulation Sec. 23.157(c)(1) to remove the erroneous cross-reference
to ``Sec. 23.156(a)(1)(iv) through (xii)'' and to replace it with the
corrected cross-reference ``Sec. 23.156(a)(1)(ii) through (x).'' The
Commission believes that custodial banks will benefit from being able
to convert cash posted as initial margin into treasury and U.S.
Government agency securities as was originally intended by the
Commission.
The Commission sought comment on all aspects of the cost and
benefit considerations in the Proposal but received no substantive
comments.
2. Section 15(a) Considerations
a. Protection of Market Participants and Public
The amendment to Commission regulation Sec. 23.151, as adopted,
codifies CFTC Letter No. 17-34 and confirms that uncleared swaps with
the ESM as a counterparty are not subject to the CFTC Margin Rule. As
discussed in the Proposal, given the limited activity of the ESM in the
swaps markets, the Commission believes that the unmargined exposure
resulting from uncleared swaps between CSEs and the ESM is unlikely to
result in significant risk to the financial system. Inasmuch as margin
is posted to protect counterparties against credit risk, the
creditworthiness of the ESM is critical to this analysis. The ESM has
maintained high capital levels and has ultimate backing from the
EU.\22\ Consequently, the Commission is of the view that the ESM does
not pose substantial counterparty credit risk. Thus, the Commission
believes that there will be no material impact on market participants
and the general public relative to the status quo baseline.
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\22\ CFTC Letter No. 17-34 states that ``[w]ith respect to its
credit risk, as part of its emergency procedure, the ESM's member
states have irrevocably agreed to contribute a total of
approximately [euro]624 billion in additional capital should the ESM
face financial distress. Further, the ESM is subject to limits on
its lending and borrowing, and the ESM's property, funding, and
assets in its member states are immune from search, requisition,
confiscation, expropriation, or any other form of seizure, taking,
or foreclosure. In addition, to the extent necessary to carry out
its activities, all property, funding, and assets of the ESM are
free from restrictions, regulations, controls, and moratoria of any
nature. The combined application of these rules and limits is
effective in keeping the ESM's total liabilities well below its
available capital.''
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b. Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission believes that the efficiency, competitiveness, and
financial integrity of markets will not be significantly impacted by
amending Commission regulation Sec. 23.151 to exclude the ESM from the
definition of financial end user and therefore removing the requirement
to post and collect margin in uncleared swap transactions with the ESM.
One of the main functions of the ESM is to provide emergency
assistance to members states of the EU in financial distress.\23\ The
Commission believes that relief from the margin requirements will allow
the ESM to meet its mission, in particular, in times of tight
liquidity, contributing to the stability of the EU financial system and
the reduction of risk. Moreover, given the nature of its operations,
the ESM is motivated to choose sensible, creditworthy counterparties
and to limit its credit risk exposure.
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\23\ See CFTC Letter No. 17-34.
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c. Price Discovery
The amendment to Commission regulation Sec. 23.151 codifies CFTC
Letter No. 17-34, relieving the ESM and its counterparties from the
CFTC Margin Rule. The codification of the no-action relief as a rule
formalizes a no-action position held by DSIO and promotes transparency
concerning the applicability of the CFTC Margin Rule. Because there
will not be a legal requirement that margin be posted in uncleared swap
transactions with the ESM, such transactions will likely be for prices
that deviate from similar uncleared swap transactions with financial
end users but be in line with swaps with non-financial entities. As a
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result, uncleared swaps entered into with the ESM could increase, which
could enhance, or at least not harm, the price discovery process.
d. Sound Risk Management
The ESM is an intergovernmental financial institution established
by the EU and its financial activities are designed to advance EU
objectives. The ESM's purpose is to manage the potential for systemic
risk by providing support to member states that are in distress. The
exposures posed by the ESM are therefore relatively unique.
Accordingly, the amendment to Commission regulation Sec. 23.151 to
exclude the ESM from the definition of financial end user and thereby
remove it from the purview of the CFTC Margin Rule may result in CSEs
being more inclined to enter into uncleared swaps with the ESM,
benefiting from the overall diversification of their swap portfolios,
which is consistent with sound risk management. Also, while relief from
the margin requirements will result in the ESM collecting lesser
amounts of margin to mitigate the risk of uncleared swaps, increasing
the possibility of systemic risk, the Commission believes that the
ESM's uncleared swaps activity, as reflected in the SDR data, is
unlikely to result in substantial systemic risk.\24\
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\24\ See supra, n. 21.
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e. Other Public Interest Considerations
As discussed in the Proposal, the Commission believes that the
amendment to Commission regulation Sec. 23.151 is also warranted based
on the interests of comity and the Commission's continuing cross-border
coordination with EU authorities, such as the 2016 EC-CFTC Agreement,
which has fostered cooperation and mutual respect between the CFTC and
EU authorities.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or 4c(b)
of the CEA), or in requiring or approving any bylaw, rule, or
regulation of a contract market or registered futures association
established pursuant to section 17 of the CEA.\25\
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\25\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally fair competition. The Commission
requested comments on whether the Proposal implicated any other
specific public interest to be protected by the antitrust laws and
received no comments.
The Commission has considered the Final Rules to determine whether
they are anticompetitive and has identified no anticompetitive effects.
The Commission requested comments on whether the Proposal was
anticompetitive and, if it is, what the anticompetitive effects are,
and received no comments.
Because the Commission has determined that the Final Rules are not
anticompetitive and have no anticompetitive effects, the Commission has
not identified any less anticompetitive means of achieving the purposes
of the CEA.
List of Subjects in 17 CFR Part 23
Capital and margin requirements, Major swap participants, Swap
dealers, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 23 as set forth below:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).
0
2. In Sec. 23.151, revise paragraph (2)(iii) of the definition of
Financial end user to read as follows:
Sec. 23.151 Definitions applicable to margin requirements.
* * * * *
Financial end user * * *
(2) * * *
(iii) The Bank for International Settlements and the European
Stability Mechanism;
* * * * *
0
3. In Sec. 23.157, revise paragraph (c)(1) to read as follows:
Sec. 23.157 Custodial arrangements.
* * * * *
(c) * * *
(1) Prohibits the custodian from rehypothecating, repledging,
reusing, or otherwise transferring (through securities lending,
securities borrowing, repurchase agreement, reverse repurchase
agreement or other means) the collateral held by the custodian except
that cash collateral may be held in a general deposit account with the
custodian if the funds in the account are used to purchase an asset
described in Sec. 23.156(a)(1)(ii) through (x), such asset is held in
compliance with this section, and such purchase takes place within a
time period reasonably necessary to consummate such purchase after the
cash collateral is posted as initial margin; and
* * * * *
Issued in Washington, DC, on April 17, 2020, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Commission Voting Summary, Chairman's
Statement, and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Supporting Statement of Chairman Heath P. Tarbert
I am pleased to support today's final rule codifying relief from
the Margin Rule for the European Stability Mechanism (``ESM'').\1\
The Margin Rule requires the posting of initial and variation margin
for uncleared swaps entered into by certain swap dealers, major swap
participants, and ``financial end user[s].'' \2\ Today's final rule
will amend the definition of ``financial end user'' in Regulation
23.151 to exclude the ESM from the requirements of the Margin Rule.
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\1\ The Margin Rule is codified at Commission Regulations 23.150
through 23.161, 17 CFR 23.150-23.161 (2019).
\2\ Regulation 23.151 applies to swap dealers, major swap
participants, and financial end users that are not subject to
regulation by a ``Prudential Regulator,'' which term our laws use as
shorthand to mean what is essentially a banking regulator.
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As I explained when this amendment was proposed last October,\3\
the ESM provides financing and bond purchases to support Eurozone
member states, serving similar functions as a multilateral
development bank. Given that multilateral development banks and
related entities \4\ are excluded from
[[Page 27679]]
the Margin Rule, it makes good sense to codify the same relief for
the ESM.\5\ This is especially true given the ESM's role in the
market. As its name suggests, the ESM is an agent of stability and
does not raise concerns about risk in the derivatives markets.
Codifying the ESM's relief from the Margin Rule is particularly
important as Europe responds to the financial fallout of the global
coronavirus pandemic.
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\3\ See Statement of Chairman Heath P. Tarbert Before the Open
Commission Meeting on October 16, 2019 (Oct. 16, 2019), available at
https://www.cftc.gov/PressRoom/SpeechesTestimony/heathstatement101619.
\4\ The Margin Rule excludes from the definition of ``financial
end user'' sovereign entities, multilateral development banks, and
the Bank for International Settlements, among other entities. See
Regulation 23.151.
\5\ The ESM has had no-action relief from the Margin Rule since
July 24, 2017. See CFTC Letter 17-34 (July 24, 2017); see also CFTC
Letter 19-22 (Oct. 16, 2019).
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Erasmus observed long ago that ``humility is wisdom.'' Keeping
that perspective is especially important when it comes to financial
regulatory areas where nations have implemented a common set of core
principles internationally. Those internationally-shared frameworks
serve as a baseline, and national regulators have necessarily
tailored their specific rules to the unique attributes of their own
domestic markets. But we should be humble, and indeed wise enough,
to resist the temptation to insist that a foreign counterpart adopt
domestic regulations on a rule-by-rule basis. Cross-border
derivatives regulation that utilizes comity and deference can enable
the effective implementation of the post-crisis G20 derivatives
regulatory reforms.
As I have stated before, were financial regulators to insist
that their counterparts overseas import each other's specific rules
wholesale, it would lead to an absurd result ad infinitum.\6\ Just
as the G20, Financial Stability Board, and various standard-setting
bodies were established to prevent a global race to the bottom,
their work is also meant to prevent nations from forcing the
complete strictures of their domestic regimes onto others. For
example, the Principles for Financial Markets Infrastructure
(``PFMI'') represent international standards for, among other
things, central counterparties and trade repositories. All of the
G20 nations have adopted the PFMI, providing an opportunity for
meaningful dialogue with both the European Commission and the
European Securities and Markets Authority regarding the status of
American and European central counterparties.
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\6\ See Statement of Chairman Heath P. Tarbert in Support of the
Cross-Border Swaps Proposal (Dec. 18, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement121819
(``If we impose our regulations on non-U.S. persons whenever they
have a remote nexus to the United States, then we should be willing
for all other jurisdictions to do the same. The end result would be
absurdity, with everyone trying to regulate everyone else. And the
duplicative and overlapping regulations would inevitably lead to
fragmentation in the global swaps market--itself a potential source
of systemic risk.'').
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Those discussions are ongoing and have been productive. In
particular, we are working toward a potential cooperative framework
for the supervision of central counterparties engaged in
international markets. With an eye to this progress, I believe
today's final amendments to the Margin Rule are appropriate. I am
encouraged by the tone of the dialogue and the commitment of our EU
counterparts to reach a mutually beneficial arrangement that will
stand the test of time. I believe such an arrangement for the
supervision of third country central counterparties would entail a
great degree of regulatory deference and international comity
alongside extensive information sharing and regular communications
between supervisory authorities. I look forward to continuing to
engage with our European colleagues to advance our shared interests
in a robust and resilient transatlantic derivatives market. In that
context, I am pleased to support today's final rule to exclude the
ESM from the Margin Rule.\7\
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\7\ Today the Commission is also voting on a proposal to codify
the ESM's relief from the Clearing Requirement under Part 50 of the
CFTC's rules.
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Appendix 3--Supporting Statement of Commissioner Brian Quintenz
In March 2018, I articulated my approach to our current
regulatory relationship with our European counterparts in light of
their refusal to stand by or re-affirm their 2016 commitments in the
CFTC's and European Commission's common approach to the regulation
of cross-border central counterparties (CCPs) (CFTC-EC CCP
Agreement).\1\ Specifically, I believe that the absence of the
agreement's re-affirmation in the European Market Infrastructure
Regulation 2.2 (EMIR 2.2) directly implied the agreement's
abrogation.\2\ I therefore vowed that I would either object to or
vote against any relief provided to, or requested by, European Union
authorities until the agreement's clarity was restored. Since that
time, I have consistently voted against, or objected to, any
regulation or relief that provides special accommodations to
European entities, including the proposed exemption from margin
requirements for the European Stability Mechanism (ESM) that the
Commission seeks to finalize today.\3\
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\1\ Keynote Address of Commissioner Brian Quintenz before FIA
Annual Meeting, Boca Raton, Florida (March 14, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz9; and Joint
Statement from CFTC Chairman Timothy Massad and European
Commissioner Jonathan Hill, CFTC and the European Commission: Common
approach for transatlantic CCPs (Feb. 10, 2016), https://www.cftc.gov/PressRoom/PressReleases/pr7342-16.
\2\ The proposed implementation of EMIR 2.2 by ESMA is available
at, https://www.esma.europa.eu/press-news/esma-news/esma-consults-tiering-comparable-compliance-and-fees-under-emir-22.
\3\ Dissenting Statement by Commissioner Brian Quintenz before
the Open Commission Meeting: FBOT Registration (Nov. 5, 2019),
https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement110519; Dissenting Statement by Commissioner
Quintenz to the Proposed Exclusion for the European Stability
Mechanism from the Commission's Margin Requirements for Uncleared
Swaps (Oct. 16, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintentzstatement101619; Statement of
Commissioner Brian Quintenz on Staff No-Action Relief for Eurex
Clearing AG (December 20, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement122018.
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However, the unprecedented devastating economic and social
impacts of COVID-19 across the globe warrant a reprieve from that
position. In the United States, financial regulators have acted
swiftly, decisively, and boldly to mitigate economic disruptions and
support market liquidity, including providing regulatory relief
where necessary. I am very proud of the CFTC's decisive response to
the COVID-19 pandemic, which promoted the full functioning of
derivatives markets despite the extraordinary challenges facing
exchanges, clearinghouses, and market intermediaries as a result of
social distancing.\4\ I know the Commission, under the strong
leadership of Chairman Heath P. Tarbert, is committed to providing
any additional relief necessary to ensure that U.S. markets remain
accessible.
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\4\ Statement of CFTC Commissioner Brian Quintenz on Current
Market Dynamics and Commission Actions Related to COVID-19 (March
18, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatment031820.
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Our European counterparts are engaged in the same epic struggle
as we are to lessen the extraordinary economic and social harms of
this pandemic. Although I remain committed to ensuring the terms of
the CFTC-EC CCP Agreement are ultimately upheld, I also recognize
that issue is one facet of a much broader, deeper bond we share with
the European Union--a relationship that has been grounded in
goodwill, trust, and partnership. Many of the European institutions
affected by the rules and no-action relief before the Commission
today are likely to be central to the European Union's COVID-19
economic recovery efforts. As a result, I believe it is appropriate
to support the items before the Commission today, which, by
providing relief from CFTC clearing and margin requirements, may
bolster the ability of EU institutions to provide critical financial
assistance to their economies, businesses, and citizens.
For example, the European Commission, ESM, and European
Investment Bank (EIB) are working in concert to take unprecedented
actions at the European level to complement national measures to
mitigate the impacts of COVID-19.\5\ The ESM has many economic tools
at its disposal, including making loans to Eurozone member states,
purchasing the bonds of Eurozone members, providing precautionary
credit lines that can be drawn upon if needed, and directly
recapitalizing financial institutions.\6\
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\5\ The time for solidarity in Europe is now--a concerted
European financial response to the corona-crisis, https://www.esm.europa.eu/blog/time-solidarity-europe-concerted-european-financial-response-corona-crisis (April 2, 2020).
\6\ European Stability Mechanism, Lending Toolkit, https://www.esm.europa.eu/assistance/lending-toolkit.
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Similarly, the EIB, the lending arm of the European Union, and
the European Investment Fund (EIF), which specializes in finance for
small and medium sized businesses, are also working together to
respond to COVID-19. Together, the EIB and the EIF have proposed a
plan to provide immediate financing to combat the health and
economic effects of the pandemic.\7\ Each
[[Page 27680]]
of these EU institutions may seek to enter into swaps subject to the
CFTC's clearing or uncleared margin requirements in order to hedge
the risks associated with these lending and investment activities.
Accordingly, I support today's measures that provide relief from
those requirements, thereby freeing up additional capital that can
be immediately deployed in the European economy.
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\7\ Coronavirus outbreak: EIB Group's response to the pandemic,
https://www.eib.org/en/about/initiatives/covid-19-response/index.htm
(April 9, 2020).
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When the present hardship caused by COVID-19 abates, I look
forward to re-engaging with our European counterparts on the
critical issue of the oversight of U.S. CCPs. I believe the
possibility still exists for a successful implementation of EMIR 2.2
that fully respects the CFTC's ultimate authority over U.S. CCPs,
and I am committed to doing everything in my power to achieve this
outcome.
Amendments To Swap Clearing Requirement Exemptions Under Part 50
I am pleased to support this proposal, which codifies existing
relief, from the Commission's requirement that certain commonly
traded interest rate swaps and credit default swaps be cleared
following their execution.\8\ The new exemptions could be elected by
several classes of counterparties that may enter into these swaps,
namely: Sovereign nations; central banks; ``international financial
institutions'' of which sovereign nations are members; bank holding
companies, and savings and loan holding companies, whose assets
total no more than $10 billion; and community development financial
institutions recognized by the U.S. Treasury Department. Today's
proposal notes that many of these entities have actually relied on
existing relief, electing not to clear swaps that are generally
subject to the clearing requirement.
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\8\ The swap clearing requirement is codified in part 50 of the
Commission's regulations (17 CFR part 50).
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I strongly support the policy of international ``comity''
described in the proposal, recognizing that sovereign nations and
their instrumentalities should generally not be subject to the
Commission's regulations. I trust that by proposing this relief, the
United States, the Federal Reserve, and other U.S. government
instrumentalities will receive the same treatment in foreign
jurisdictions. As noted above, this policy is timely in light of the
current projects the ESM, the EIB, and the EIF are currently
undertaking in response to the pandemic. I am pleased that the
Commission can provide flexibility to these entities at this time
when entering into swaps with U.S. swap dealers. To this end, I also
support the decision of the Division of Clearing and Risk to extend
the current, time-limited no-action relief provided to the ESM \9\
pending the finalization of the amendments to part 50. I note that
the EIB, EIF, other international financial institutions, central
banks, and sovereign entities currently have relief that is not
time-limited.\10\
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\9\ CFTC Letter 19-23 (Oct. 16, 2019).
\10\ End-User Exception to the Clearing Requirement for Swaps,
77 FR 42,560, 42,561-62 (Jul. 19, 2012).
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As for the bank holding companies, savings and loan holding
companies, and community development financial institutions that
would be provided relief pursuant to this proposal, I am hopeful
that the Commission will ultimately finalize this relief, which it
first proposed for these entities in 2018.\11\ However, I note that
these entities currently have relief pursuant to no-action letters
issued in 2016 that have no expiration dates.\12\
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\11\ Amendments to Clearing Exemption for Swaps Entered Into by
Certain Bank Holding Companies, Savings and Loan Holding Companies,
and Community Development Financial Institutions, 83 FR 44,001 (Aug.
29, 2018).
\12\ CFTC Letters 16-01 and -02 (both Jan. 8, 2016).
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Final Rule Excluding the European Stability Mechanism From CFTC
Margin Requirements for Uncleared Swaps
I support today's final rule that would exempt a swap between
the European Stability Mechanism and a swap dealer from the
Commission's margin requirements applicable to uncleared swaps. This
rule is premised on the same policy of international comity
referenced in today's proposed exemption from the swap clearing
requirement. I would like to highlight that the EIB, EIF, and the
other international financial institutions referenced by the
proposed exemption from the swap clearing requirement, as well as
sovereign entities and central banks, are already exempted from the
Commission's margin requirements for uncleared swaps pursuant to
Commission regulations.\13\ Finally, I am pleased that the Division
of Swap Dealer and Intermediary Oversight is today extending
previously granted, time-limited no-action relief to the ESM,\14\
pending the effective date of today's final rule.
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\13\ CFTC regulation 23.151.
\14\ CFTC Letter 19-22 (Oct. 16, 2019).
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Appendix 4--Statement of Commissioner Dan M. Berkovitz
I support today's final rule that excludes the European
Stability Mechanism (``ESM'') from the definition of financial end
user in the Commission's margin rules. The final rule codifies no-
action relief that has been in effect since 2017 that exempts the
ESM from initial and variation margin requirements for uncleared
swaps with swap dealer or major swap participant counterparties. The
final rule recognizes the ESM's status as an intergovernmental
institution that assists Euro-area members in financial distress and
its similarity to multilateral development banks that are excluded
from the definition of financial end user. The ESM does not engage
in speculative swaps trading and its swaps activities are in
furtherance of its financial assistance programs. The final rule
provides certainty to both the ESM and its swap dealer
counterparties in uncleared swaps, facilitates the ESM's work in
mitigating systemic risk, and poses minimal risk to the U.S.
financial system.
The final rule also recognizes the importance of international
comity in regulating entities established by sovereign governments
for governmental purposes. I encourage continued cooperation between
the Commission and European authorities in maintaining mutual
respect for our corresponding regulatory interests and expertise.
I thank the staff of the Division of Swap Dealer and
Intermediary Oversight for their work on this final rule and their
responsiveness to suggestions from my office.
[FR Doc. 2020-08601 Filed 5-8-20; 8:45 am]
BILLING CODE 6351-01-P