[Federal Register Volume 85, Number 92 (Tuesday, May 12, 2020)]
[Proposed Rules]
[Pages 27955-27976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08603]
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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: Notice of proposed rulemaking; supplemental notice of proposed
rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is proposing amendments to the regulations governing which swaps are
exempt from the clearing requirement set forth in the Commodity
Exchange Act (CEA). The proposed amendments would address the treatment
of swaps entered into by certain central banks, sovereign entities, and
international financial institutions. The Commission also is issuing a
supplemental notice of proposed rulemaking to further propose
amendments to exempt from required clearing swaps entered into by
certain bank holding companies, savings and loan holding companies, and
community development financial institutions. Lastly, the Commission is
proposing to publish a compliance schedule setting forth all the past
compliance dates for the 2012 and 2016 swap clearing requirement
regulations and to make certain other, non-substantive technical
amendments to the relevant part of its regulations.
DATES: Comments must be received on or before July 13, 2020.
ADDRESSES: You may submit comments, identified by RIN 3038-AE33, by any
of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods.
Submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (FOIA), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
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\1\ Commission regulation 145.9. Commission regulations referred
to herein are found on the Commission's website at: https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.
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 Part 50 Regulations
B. Swap Clearing Requirement
[[Page 27956]]
C. Swaps With Foreign Governments, Foreign Central Banks, and
International Financial Institutions Not Subject to the Clearing
Requirement
1. Foreign Governments and Foreign Central Banks
2. International Financial Institutions
D. DCR No-Action Letters for Relief From the Clearing Requirement
for International Financial Institutions
II. Newly Proposed Amendments to Part 50
A. New Subpart D for Swaps Not Subject to the Clearing Requirement
1. Proposed Definition of Central Bank
2. Proposed Definition of Sovereign Entity
3. Proposed Definition of International Financial Institution
4. Proposed Exemption From the Clearing Requirement for Swap
Transactions With Central Banks, Sovereign Entities, and
International Financial Institutions
B. Data Related to Swaps Entered Into by Central Banks, Sovereign
Entities, and International Financial Institutions
C. New Compliance Schedule for Subpart B
1. 2012 Clearing Requirement Determination
2. 2016 Clearing Requirement Determination
3. New Proposed Regulation 50.26
D. Technical Amendment to Subpart C for Banks, Savings Associations,
Farm Credit System Institutions, and Credit Unions
III. Supplemental Proposal of Proposed Rulemaking for Bank Holding
Companies, Savings and Loan Holdings Companies, and Community
Development Financial Institutions
A. Background on Prior Proposal and Supplemental Proposal
B. Changes to the Proposed Rule Text for CDFIs and Technical
Revisions to Proposed Rule Text for Bank Holding Companies and
Savings and Loan Holding Companies
1. CDFIs
2. Bank Holding Companies and Savings and Loan Holding Companies
C. Updated Data regarding the Use of Swaps by CDFIs, Bank Holding
Companies, and Savings and Loan Holding Companies
IV. Commission's Section 4(c) Authority
V. Proposed Rules Do Not Effect Margin Requirements for Uncleared Swaps
VI. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. Statutory and Regulatory Background
2. Consideration of the Costs and Benefits of the Commission's
Action
a. Costs
b. Benefits
3. Section 15(a) Factors
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness, and Financial Integrity of Swap
Markets
c. Price Discovery
d. Sound Risk Management Practices
e. Other Public Interest Considerations
D. General Request for Comment
E. Antitrust Considerations
I. Background
A. Ongoing Review of Part 50 Regulations
On May 9, 2017, the Commission published in the Federal Register a
request for information \2\ seeking suggestions from the public for
simplifying the Commission's regulations and practices, removing
unnecessary burdens, and reducing costs. In response, a number of
commenters asked the Commission to codify certain staff no-action
letters and Commission guidance through rulemakings.\3\ The Commission
also engaged in an agency-wide review of its rules, regulations, and
practices to make them simpler, less burdensome, and less costly.\4\
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\2\ See 82 FR 21494 (May 9, 2017) and 82 FR 23765 (May 24,
2017).
\3\ 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.
\4\ 82 FR at 21494; 82 FR at 23765.
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In its review, the Commission identified the treatment of swaps
entered into with central banks, foreign governments, and international
financial institutions, as set forth in the preamble to the 2012 End-
User Exception final rule as a provision that should be codified.\5\ In
the 2012 preamble, the Commission determined, for reasons discussed
below, that central banks, foreign governments, and international
financial institutions should not be subject to the clearing
requirement set forth in section 2(h)(1) of the CEA (Clearing
Requirement).\6\ The Commission is proposing regulatory revisions to
codify the treatment of swaps entered into with certain central banks,
foreign governments,\7\ and international financial institutions.\8\
The proposed rulemaking also addresses four no-action letters that the
Commission's Division of Clearing and Risk (DCR) issued in 2013 and
2017 \9\ in response to requests from four international financial
institutions for assurance that DCR would not recommend the Commission
take enforcement action for not clearing swaps covered by the Clearing
Requirement, if the international financial institution satisfies the
provisions in the letter. The proposed revisions to part 50 of the
Commission's regulations would exempt swaps entered into with certain
central banks, sovereign entities, and international financial
institutions from the Clearing Requirement.\10\ The Commission believes
that this rule proposal is consistent with the Commission's approach
set out in the preamble to the 2012 End-User Exception final rule.\11\
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\5\ End-User Exception to the Clearing Requirement for Swaps, 77
FR 42560 (Jul. 19, 2012) (hereinafter, the 2012 End-User Exception
final rule).
\6\ Id. at 42562.
\7\ For purposes of this proposal, foreign governments will be
referred to as ``sovereign entities'' for the reasons discussed
below.
\8\ The Commission is proposing the following definitions for
these three terms: (1) The Commission is proposing to define a
``central bank'' in a new regulation 50.75(a) as meaning 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;
(2) the Commission is proposing to define a ``sovereign entity'' in
new regulation 50.75(b) as meaning a central government (including
the U.S. government), or an agency, department, or ministry of a
central government; and (3) the Commission is proposing to define an
``international financial institution'' in new regulation 50.76(b)
as one of 22 named entities, or any other entity that provides
financing for national or regional development in which the U.S.
government is a shareholder or contributing member.
\9\ 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 CFTC Letter No. 17-59 (Nov. 7, 2017)
(providing no-action relief to the North American Development Bank).
\10\ The swap clearing requirement of section 2(h)(1)(A) of the
CEA is codified in part 50 of the Commission's regulations.
\11\ See 77 FR at 42561-62.
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This proposal includes additional revisions to part 50 of the
Commission's regulations that are intended to simplify the text of the
requirements and to minimize the compliance obligations for market
participants. The Commission is proposing to include a chart of
compliance dates for all swaps that the Commission has determined are
required to be cleared under Commission regulation 50.4. In addition,
the Commission took this opportunity to consider the structure and
organization of part 50 of the Commission's regulations and is
proposing minor heading changes and restructuring amendments. The
Commission is proposing to re-codify the regulatory provisions
exempting eligible banks, savings associations, farm credit
institutions, and credit unions from the definition of ``financial
entity'' for purposes of section 2(h)(7)(A) of the CEA by moving the
current requirements to a separate rule so that the exemption is easier
to locate in the Commission's regulations and the conditions to claim
the exemption are set forth more clearly. The Commission is not
proposing to alter the substance of this exemption.
[[Page 27957]]
Finally, on August 29, 2018, the Commission issued a notice of
proposed rulemaking that would codify existing relief and exempt swaps
entered into by certain bank holding companies, savings and loan
holding companies, and community development financial institutions
(CDFIs) from the swap clearing requirement in section 2(h)(1)(A) of the
CEA.\12\ The Commission is supplementing that notice of proposed
rulemaking with minor amendments to the regulation rule text proposed,
as well as with technical revisions, and is soliciting additional input
from the public regarding this proposed exemption.\13\
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\12\ 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, the 2018 Proposal).
\13\ The Commission confirms that this supplemental proposal is
not a replacement or withdrawal of the 2018 Proposal. Unless
specifically amended in this release, all regulatory provisions
proposed in the 2018 Proposal remain under active consideration for
adoption as final rules. As discussed further below, the Commission
received only one comment letter on its 2018 Proposal.
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The Commission is requesting comments on all of these proposed
rules and rule amendments.
B. Swap Clearing Requirement
The CEA, as amended by Title VII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act),\14\ establishes a
comprehensive regulatory framework for swaps. The CEA requires a swap:
(1) To be cleared through a derivatives clearing organization (DCO)
that is registered under the CEA or a DCO that is exempt from
registration under the CEA if the Commission has determined that the
swap is required to be cleared, unless an exception to the clearing
requirement applies; \15\ (2) to be reported to a swap data repository
(SDR) or the Commission; \16\ and (3) if the swap is subject to the
Clearing Requirement, to be executed on a designated contract market
(DCM), or swap execution facility (SEF) that is registered with the
Commission pursuant to section 5h of the CEA or a SEF that has been
exempted from registration pursuant to section 5h(g) of the CEA, unless
no DCM or SEF has made the swap available to trade.\17\
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\14\ Pub. L. 111-203, 124 Stat. 1376 (2010).
\15\ Section 2(h)(1) of the CEA.
\16\ Sections 2(a)(13), 4r, and 21(b) of the CEA.
\17\ Section 2(h)(8) of the CEA.
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Pursuant to section 2(h)(1)(A) of the CEA, if a swap is subject to
the Clearing Requirement, it shall be unlawful for any person to engage
in a swap unless that person submits such swap for clearing to a DCO
that is registered under the CEA or a DCO that is exempt from
registration under the CEA if the swap is required to be cleared.\18\
In 2012, the Commission issued its first clearing requirement
determination pertaining to four classes of interest rate swaps and two
classes of credit default swaps.\19\ In 2016, the Commission expanded
the classes of interest rate swaps subject to the clearing requirement
to cover fixed-floating interest rate swaps denominated in nine
additional currencies, as well as certain additional basis swaps,
forward rate agreements, and overnight index swaps.\20\ The regulations
implementing the Clearing Requirement are in Commission regulation
50.4.
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\18\ Section 2(h)(1)(A) of the CEA.
\19\ Clearing Requirement Determination Under Section 2(h) of
the CEA, 77 FR 74284 (Dec. 13, 2012) (hereinafter, the 2012 Clearing
Requirement Determination).
\20\ Clearing Requirement Determination Under Section 2(h) of
the CEA for Interest Rate Swaps, 81 FR 71202 (Oct. 14, 2016)
(hereinafter, the 2016 Clearing Requirement Determination).
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C. Swaps With Foreign Governments, Foreign Central Banks, and
International Financial Institutions Not Subject to the Clearing
Requirement
In the preamble to the 2012 End-User Exception final rule, in
response to specific requests from commenters that the Commission
determine certain entities, or types of entities, be permitted to elect
the End-User Exception, the Commission stated that based on
considerations of comity and in keeping with the traditions of the
international system, swaps entered into with certain foreign
governments, foreign central banks, and international financial
institutions should not be subject to the clearing requirement under
section 2(h)(1) of the CEA.\21\ The Commission did not, however, codify
its determination in rule text.
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\21\ 77 FR at 42561-62. The Commission noted 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. Id.
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The Commission provided several reasons for its determination that
foreign governments, foreign central banks, and international financial
institutions should not be subject to the Clearing Requirement. First,
the Commission noted that the Federal Reserve Banks and the Federal
Government are not subject to the Clearing Requirement under the Dodd-
Frank Act.\22\ The Commission stated it would therefore expect that if
any part 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 a foreign jurisdiction,
the actions of those entities with respect to those transactions should
not be subject to foreign regulation.\23\ 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.' '' \24\ In addition, the Commission noted
that international financial institutions operate with the benefit of
certain privileges and immunities under U.S. law indicating that such
entities may be treated similarly under certain circumstances.\25\ 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 governments, foreign central
banks, or international financial institutions to the Clearing
Requirement set forth in section 2(h)(1) of the CEA.\26\
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\22\ Id. 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. Only
swaps are subject to the Clearing Requirement under the Dodd-Frank
Act. See section 2(h) of the CEA.
\23\ 77 FR at 42561-62.
\24\ Id. at 42562 (citing F. Hoffman-LaRoche Ltd. v. Empagran
S.A., 542 U.S. 155, 164 (2004)).
\25\ Id. at 42562 (citing various provisions of the U.S. Code, a
Commission staff interpretative letter (stating ``[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''), and 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).
\26\ Id. at 42562. The Commission also noted that if a foreign
government, foreign central bank, or international financial
institution enters into a non-cleared 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 the CEA
and Commission recordkeeping and recording requirements that apply
to non-cleared swaps.
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1. Foreign Governments and Foreign Central Banks
As noted in the 2012 End-User Exception final rule preamble, the
Federal Reserve Banks and the Federal Government are not subject to the
Clearing Requirement under the Dodd-
[[Page 27958]]
Frank Act, and the Commission would expect that the swaps activities of
these entities would not be subject to foreign regulation.\27\ In order
to apply consistent treatment to foreign governments and foreign
central banks, the Commission stated in the preamble to the 2012 End-
User Exception final rule that transactions with these entities should
not be subject to the Clearing Requirement.\28\
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\27\ 77 FR at 42561-62. In 2013, central banks and public bodies
charged with or intervening in the management of the public debt in
the United States were excluded from EMIR. See Commission Delegated
Regulation (EU) No 1002/2013 of 12 July 2013, 2013 O.J. (L 279) 2
(Oct. 19, 2013), available at http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32013R1002. See also Commission Delegated
Regulation (EU) 2017/979 of 2 March 2017 (amending Regulation (EU)
No 648/2012 of the European Parliament and of the Council on OTC
derivatives, central counterparties and trade repositories to exempt
central banks and public bodies from Australia, Canada, Hong Kong,
Mexico, Singapore, and Switzerland).
\28\ 77 FR at 42562.
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The Commission also stated that for the purpose of the Clearing
Requirement, the Commission considers the Bank for International
Settlements (BIS), of which the Federal Reserve and foreign central
banks are members, to be a foreign central bank, and, therefore,
transactions with BIS should not be subject to the Clearing
Requirement.\29\
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\29\ Id. at 42561, n.13.
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The Commission's position with regard to the treatment of swaps
with foreign governments and foreign central banks for purposes of the
clearing requirement has not changed since the adoption of the 2012
End-User Exception final rule. Swaps with foreign governments and
foreign central banks are not required to be cleared currently and, if
this proposal is codified, would not be subject to any additional
requirements.
2. International Financial Institutions
In the preamble to the 2012 End-User Exception final rule, the
Commission identified 17 entities whose transactions should not be
subject to the Clearing Requirement.\30\ The entities include the
international financial institutions defined as such in section
262r(c)(2) of Title 22 of the U.S. Code,\31\ and the multilateral
development banks additionally referenced in a provision of the
European Market Infrastructure Regulation (EMIR) that exempts such
entities from all but the reporting obligation under EMIR.\32\ The
Commission did not extend its determination to sovereign wealth funds
or similar entities because the Commission believed these entities were
similar to investment funds. The Commission stated that ``[t]he
foregoing rationale and considerations do not, however, extend to
sovereign wealth funds or similar entities due to the predominantly
commercial nature of their activities.'' \33\ The Commission's position
with regard to international financial institutions has not changed
since the adoption of the 2012 End-User Exception final rule.
Consistent with that position, there have been four supplemental CFTC
staff no-action letters that expanded the scope of international
financial institutions afforded relief from the Clearing Requirement.
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\30\ The 17 international financial institutions identified in
the preamble to 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. 77 FR at 42561-62
n.14.
\31\ 22 U.S.C. 262r(c)(2).
\32\ The twelve entities exempt from certain requirements under
EMIR, which were also named in the 2012 End-User Exception final
rule, are 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. See EMIR Article 1(5)(a) of Regulation (EU) No.
648/2012; 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. The Commission noted that the
exemption for international financial institutions would be
consistent with EMIR and other foreign laws. 77 FR at 42561 n.14.
\33\ Id. at 42562, n.18.
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D. DCR No-Action Letters for Relief From the Clearing Requirement for
International Financial Institutions
After the publication of the 2012 End-User Exception final rule, in
2013, DCR issued a no-action letter to Corporaci[oacute]n Andina de
Fomento (CAF), an economic development financing institution
established pursuant to a treaty among 10 Latin American countries,
stating DCR would not recommend that the Commission take enforcement
action against CAF for failure to comply with the Clearing
Requirement.\34\ DCR was persuaded by CAF's representation that its
organization and functions were similar to the international financial
institutions addressed by the preamble to the 2012 End-User Exception
final rule. DCR accepted CAF's statement that, like a number of the
multilateral development banks that are named as international
financial institutions in the adopting release, its purpose is to
foster and promote sustainable development and economic integration.
CAF also indicated it pursues its mission primarily through project and
corporate lending and trade finance, generally in circumstances under
which borrowers would not have access to traditional commercial lending
sources.\35\ DCR accepted that CAF used derivatives to hedge and reduce
exposure to interest and exchange rate risks, and that it does not hold
or issue derivatives for trading or speculative purposes.\36\
Furthermore, DCR agreed that CAF was established pursuant to an
international treaty, with strict limitations on ownership which ensure
that the sovereign nations are the controlling shareholders.
Additionally, the Minister of Finance or equivalent officeholder of
each principal shareholder country usually serves as a board member.
Due to a combination of shareholdings, share classifications and voting
rights, limitations on share transfers and other governance mechanisms,
DCR agreed that the principal shareholder countries are assured control
over CAF. DCR agreed that CAF has been granted various immunities and
privileges from the principal shareholder countries, including, among
other things: Immunity from expropriation; free convertibility and
transferability of its assets; exemption from all taxes and tariffs on
income, properties, or assets; and exemption from any restrictions,
regulations, controls, or moratoria with respect to its property or
assets.
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\34\ CFTC Letter No. 13-25 (June 10, 2013). The letter required
CAF to comply with other provisions of the CEA and Commission
regulations, such as the recordkeeping and reporting requirements
under parts 23 and 45 of the Commission's regulations, which would
apply to a non-cleared swaps entered into by CAF opposite a
counterparty who is subject to the CEA and Commission regulations
with regard to that transaction.
\35\ Id. at 3.
\36\ Id.
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In 2017, DCR received three more requests for no-action relief from
the Clearing Requirement from three other international financial
institutions: (1) Banco Centroamericano de Integraci[oacute]n
Econ[oacute]mica (CABEI) (an economic development financing institution
established pursuant to a treaty among
[[Page 27959]]
11 Latin American countries, Spain, and Taiwan), (2) 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), and (3) 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).\37\
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\37\ CFTC Letter No. 17-57, at 3 n.10; CFTC Letter No. 17-58, at
3 n.11, and CFTC Letter No. 17-59 at 3.
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CABEI, ESM, and NADB each requested to have their transactions
treated like CAF and the transactions with the international financial
institutions addressed by the preamble to the 2012 End-User Exception
final rule. In their request letters, CABEI, ESM, and NADB argued that
their functions, missions, and ownership structures are analogous to
the functions, missions, and ownership structures of CAF and the
international financial institutions referenced in the End-User
Exception final rule.\38\ Based on their representations, DCR issued no
action letters to each of the requesting institutions.\39\
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\38\ NADB is listed as a ``multilateral development bank'' by
the four most recent Reports to Congress from the Chairman of the
National Advisory Council on International Monetary and Financial
Policies, dated March 2016, July 2017, June 2018, and April 2019,
available at
https://www.treasury.gov/resource-center/international/development-banks/Pages/congress-index.aspx.
\39\ CFTC Letter Nos. 17-57, 17-58, and 17-59, respectively.
Consistent with the CAF letter, DCR required each international
financial institution 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 international financial institution opposite a counterparty that
is subject to the CEA and Commission regulations with regard to that
transaction.
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II. Newly Proposed Amendments to Part 50
A. New Subpart D for Swaps Not Subject to the Clearing Requirement
The Commission proposes to exempt swaps entered into with a central
bank, sovereign entity, or international financial institution from the
Clearing Requirement. In proposing to adopt an exemption for swaps
entered into with central banks and sovereign entities in new
regulation 50.75, and an exemption for swaps entered into with
international financial institutions in new regulation 50.76, the
Commission would be providing legal certainty to a narrowly defined
group of entities that the swaps into which they enter are not subject
to the Clearing Requirement, provided such swaps are reported to a swap
data repository. The Commission is proposing to create a new subpart D
in part 50 of the Commission's regulations for proposed regulations
50.75 and 50.76, as well as three other regulations discussed below.
The creation of this new subpart is 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
proposed exemptions for swaps under subpart D would not be eligible for
an analogous exemption from margin for uncleared swaps, as discussed
below. Also, some of the proposed subpart D exemptions for swaps are
more limited and, in some cases, have additional conditions.\40\
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\40\ For example, the proposed exemption for swaps entered into
by CDFIs in proposed regulation 50.77 of subpart D would be
available only for certain types of interest rate swaps. The
exceptions and exemptions under subpart C of part 50 of the
Commission's regulations apply generally to an entity that satisfies
certain conditions.
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The Commission notes that the proposed exemptions are intended to
be consistent with the Commission's determination set forth in the 2012
End-User Exception final rule and would not limit the applicability of
any CEA provision or Commission regulation to any person or transaction
except as provided in the proposed rulemaking.\41\ This proposal
modifies some of the terms that will be used to refer to the entities
that are exempt from the Clearing Requirement, but this modification is
not intended to change the scope or substance of the exemption. For
example, in the 2012 End-User Exception final rule the Commission
referred to ``foreign central banks.'' Under this proposal, the
Commission is proposing to use the term ``central bank'' and to include
U.S. central bank entities such as the Board of Governors of the
Federal Reserve System and other Federal Reserve Banks in the
definition of ``central banks'' proposed to be exempted from the
Clearing Requirement. This approach is similar to the one taken by the
Commission and the prudential regulators in promulgating the margin
requirements for uncleared swaps.\42\
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\41\ The Commission notes that uncleared swaps with a
counterparty that is subject to the CEA and Commission regulations
with regard to such swaps must still comply with the CEA and
Commission regulations as they pertain to uncleared swaps.
\42\ See definition of ``sovereign entity'' in Commission
regulation 23.151.
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In addition, in the 2012 End-User Exception final rule, the
Commission referred to certain exempt swap counterparties as ``foreign
governments.'' The term ``foreign government'' was intended to refer to
sovereigns, similar to the U.S. Federal Government, that were located
outside of the U.S. Because the Commission distinguished the Federal
Government from state and local government entities, the term ``foreign
government'' was intended to apply only to the federal level of
governmental organizations.\43\ In an effort to make that distinction
clear and to emphasize the fact that state level governmental bodies
would not be eligible for this exemption, the Commission is proposing
to use the term ``sovereign entities'' in this rule proposal rather
than ``foreign government,'' which was the term used in the 2012 End-
User Exception final rule.
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\43\ 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), 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.
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The Commission seeks comment regarding the terms and definitions
proposed below.
1. Proposed Definition of Central Bank
Proposed regulation 50.75(a) would set forth a definition of
``central bank.'' The proposed definition would define central bank to
mean 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.\44\ The Commission believes an exemption from the Clearing
Requirement for central banks is appropriate because these entities are
created by statute, are authorized to work to promote the public
interest, and are part of, or aligned with, a central government. The
authorizing statutes generally provide that the government owns all or
part of the capital stock or equity interest of the central bank.\45\
The
[[Page 27960]]
proposed definition also includes the Bank for International
Settlements (BIS) for clarity. BIS is made up of only central banks and
monetary authorities. The Commission therefore believes it is
appropriate to include BIS in the definition of central bank for
purposes of this proposal.
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\44\ 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. The proposed definition includes ``any of the
Federal Reserve Banks'' for clarity.
\45\ E.g., Article 28.2, Capital of the ECB Protocol on the
Statute of the European System of Central Banks and of the European
Central Bank, available at https://www.ecb.europa.eu/ecb/legal/pdf/en_statute_2.pdf.
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In Commission regulation 23.151, the definition of ``financial end
user'' for purposes of the Commission's uncleared swap margin
requirements excludes the Bank for International Settlements from the
uncleared margin requirements.\46\ Part 23 of the Commission's
regulations include a separate definition for the term ``sovereign
entity.'' Under Commission regulation 23.151, sovereign entity means a
central government (including the U.S. government) or an agency,
department, ministry, or central bank of a central government.\47\ The
Commission is not proposing to use identical definitions in new subpart
D of part 50 as it adopted in part 23 of the Commission's
regulations.\48\ Certain types of entities may be defined differently
for purposes of either rule set, but as an overall matter, the
Commission believes this proposal to define ``sovereign entity'' and
``central bank'' is broadly consistent with part 23 of the Commission's
regulations.
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\46\ Commission regulation 23.151 states, in part, that the term
financial end user does not include any counterparty that is (i) a
sovereign entity; (ii) a multilateral development bank; (iii) The
Bank for International Settlements; (iv) an entity that is exempt
from the definition of financial entity pursuant to section
2(h)(7)(C)(iii) of the CEA and implementing regulations; (v) an
affiliate that qualifies for the exemption from clearing pursuant to
section 2(h)(7)(D) of the CEA; or (vi) an eligible treasury
affiliate that the Commission exempts from the requirements of
Sec. Sec. 23.150 through 23.161 by rule.
\47\ Id.
\48\ Under part 23 of the Commission's regulations, the Bank for
International Settlements is excluded from the term ``financial end
user'' for purposes of the uncleared margin rules. Commission
regulations 23.154 and 23.155 require calculations of initial and
variation margin for counterparties that are either swap entities or
financial end users. As such, the Bank for International Settlements
is not subject to the uncleared initial or variation margin
requirements under part 23. Under proposed regulation 50.75(a), the
Bank for International Settlements would be a ``central bank'' and
swaps entered into with a central bank would not be subject to the
Clearing Requirement. Although the Commission is using different
terminology, the Bank for International Settlements would be exempt
from requirements under both parts of the Commission's regulations.
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Request for Comment. The Commission requests comment on the scope
of its proposed definition of central bank. Are there any central banks
that are not established and operating pursuant to a statute? If so,
should such a central bank be treated differently? Should the
Commission distinguish between national central banks and regional
central banks? Should the Commission consider adopting an alternative
definition for ``central bank,'' such as the definition included in
section 25B of the Federal Reserve Act? \49\
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\49\ Section 25B of the Federal Reserve Act states that the term
``central bank'' includes any foreign bank or banker authorized to
perform any one or more of the functions of a central bank. 12
U.S.C. 632.
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2. Proposed Definition of Sovereign Entity
Proposed regulation 50.75(b) would set forth a definition of
``sovereign entity'' for purposes of the Clearing Requirement. Under
the proposed definition, sovereign entity would mean a central
government (including the U.S. government) or an agency, department, or
ministry of a central government.\50\ The Commission believes this
definition limits the exemption to national governments and provides
clarity regarding the scope of the counterparties whose transactions
would be excluded from the Clearing Requirement, as discussed in the
2012 End-User Exception preamble,\51\ as well as the counterparties
whose transactions are excluded by statute from the definition of a
swap.\52\ Under this definition, ``sovereign entity'' would not include
state, regional, provincial, or municipal governments.\53\ The
Commission continues to believe, as it did in 2012, that most of these
entities are predominantly engaged in non-banking and non-financial
activities related to their core public purposes and 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.\54\
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\50\ As with the proposed definition of ``central bank,'' the
regulation would clarify that the definition of ``central
government'' would include the U.S. government.
\51\ 77 FR at 42562.
\52\ See section 1a(47)(B)(ix) of the CEA.
\53\ Accord 77 FR at 42562-63 (``A per se exclusion for state
and local government entities from the `financial entity' definition
is inappropriate.'').
\54\ Id. at 42562-63 (explaining that the activities of state
and local government entities that might be considered to be in the
business of banking or financial in nature under section
2(h)(7)(C)(i)(VIII) ``are likely to be incidental, not primary,
activities of those entities.'').
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Request for Comment. The Commission requests comment on the scope
of its proposed definition of sovereign entity. Should the Commission
consider adopting an alternate definition for ``sovereign entity?'' If
so, what definition should the Commission consider? Should there be
criteria for determining if transactions with a sovereign entity should
be exempt from the Clearing Requirement and, if so, what criteria would
be appropriate?
3. Proposed Definition of International Financial Institution
Proposed regulation 50.76 would define ``international financial
institution'' to mean the entities the Commission identified as
international financial institutions in the 2012 End-User Exception
final rule, the entities to whom DCR issued no-action letters in 2013
and 2017,\55\ the Islamic Development Bank,\56\ and any other entity
that provides financing for national or regional development in which
the U.S. government is a shareholder or contributing member.
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\55\ The proposed list of named entities that would be defined
as ``international financial institutions'' includes: (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; (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; and (22) North American Development
Bank.
\56\ The Commission is proposing to add the Islamic Development
Bank to the current list of international financial institutions in
an effort to harmonize the exemptions from required clearing with
the exemptions from margin for uncleared swaps requirements. The
Islamic Development Bank is included as a multilateral development
bank under Commission regulation 23.151, and thus is exempt from
margin requirements. In addition, this development bank is similarly
situated to those entities the Commission identified in the 2012
End-User Exception final rule and in DCR no-action letters.
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The Commission believes that an entity may be an international
financial institution for purposes of an exemption from the Clearing
Requirement if it has the following common qualities: A significant
proportion of the entity's shareholders are limited to sovereign
governments or other international financial institutions/multilateral
development banks; the entity has been granted legal privileges and
immunities that are typical of those enjoyed by other international
financial institutions/multilateral development banks; the entity is
governed by representatives from the public sector; the entity is a
not-for-profit entity whose mission is to foster and promote economic
development in developing areas; the entity's financing is used to
[[Page 27961]]
support activities that are in the public interest, i.e., socioeconomic
development projects; the entity uses swaps only to hedge credit,
interest rate, or currency risk incurred during financing activities in
support of their public interest missions; swaps are not used for
speculative purposes; and the entity satisfies other considerations
deemed important by the Commission, including the public interest. The
Commission believes these qualities appropriately describe
international financial institutions for purposes of an exemption from
the Clearing Requirement.
The proposed definition of international financial institution
includes a provision ``23'' encompassing ``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 believes that if the U.S. government is a shareholder or
member of an international financial institution that provides
financing for national or regional development activities that are in
the public interest, then that entity is an international financial
institution that should be exempt from the Clearing Requirement. The
Commission preliminarily believes that this definition is appropriate
because it would allow newly established entities meeting this
criterion to be included as international financial institutions
enumerated in proposed regulation 50.76.
In addition, the Commission believes that this proposed rule will
encourage international comity and continued cross-border cooperation
with authorities abroad, particularly with EU authorities in light of
the several EU institutions that would be exempted under the proposed
rule. An important example of the Commission's cooperation with EU
authorities is the 2016 announcement by the CFTC and the European
Commission regarding requirements for cross-border central
counterparties.\57\ The principles of international comity counsel
mutual respect for the important interests of foreign sovereigns.\58\
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\57\ On February 10, 2016, the CFTC and the European Commission
announced ``A Common Approach for Transatlantic CCPs.'' See Press
Release and Related Statements, available at https://www.cftc.gov/PressRoom/PressReleases/cftc_euapproach021016.
\58\ 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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Request for Comment. Are there additional public interest
considerations the Commission should consider? Should the factors
listed be important in determining eligibility for a clearing
exemption? Are there additional international financial institutions
that should be added to the list? The Commission seeks comment
regarding this definition.
4. Proposed Exemption from the Clearing Requirement for Swap
Transactions With Central Banks, Sovereign Entities, and International
Financial Institutions
Proposed regulation 50.75 would exempt from the Clearing
Requirement swaps entered into with central banks and sovereign
entities. Similarly, proposed regulation 50.76 would exempt from the
Clearing Requirement swaps entered into with international financial
institutions. Under new proposed regulations 50.75 and 50.76 the swap
must be reported to an SDR to qualify for the exemption.
The new proposed regulations 50.75 and 50.76 would codify the
Commission's determination that based on considerations of comity and
in keeping with the traditions of the international system, swaps
entered into with central banks (including BIS), sovereign entities,
and international financial institutions should be treated like swaps
entered into with the Federal Reserve Banks, the Federal Government, or
a Federal agency and should not be subject to the Clearing Requirement.
The Commission preliminarily believes these entities only use swaps to
mitigate credit, interest rate, or currency risk incurred during
financing activities in support of the public interest and the public
good. As such, the Commission believes that it is appropriate to
exclude swaps entered into with these entities from the Clearing
Requirement. This exemption therefore would allow swaps entered into by
these entities to be treated in the same manner as the statutory
exclusion for a Federal Reserve Bank, the Federal Government, or a
Federal agency that is backed by the full faith and credit of the
United States.\59\
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\59\ The Commission is not proposing to exempt these
transactions from the definition of a swap.
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Consistent with the other exemptions in effect under current
Commission regulation 50.5,\60\ new proposed regulations 50.75 and
50.76 would exempt swaps entered into by a central bank, a sovereign
entity, or an international financial institution from the Clearing
Requirement, provided that the swap is reported to a swap data
repository pursuant to part 45 of the Commission's regulations.\61\
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\60\ Under existing Commission regulation 50.5(a), swaps entered
into before July 10, 2010, are exempt from the clearing requirement
under Commission regulation 50.2 if reported to a swap data
repository pursuant to section 2(h)(5)(A) of the CEA and Commission
regulation 46.3(a). Existing Commission regulation 50.5(b) exempts
swaps entered into after July 10, 2010, but before the application
of the clearing requirement under Commission regulations 50.2 and
50.4 for a particular class of swaps if reported to a swap data
repository pursuant to 46.3(a), 45.3 and 45.4 of the Commission's
regulations.
\61\ In most instances, the central bank, sovereign entity, or
international financial institution would not be the reporting
counterparty, rather the swap dealer would report the transaction to
the SDR.
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Request for Comment. The Commission requests comment on the
proposed exemption from the Clearing Requirement for swaps entered into
with central banks, sovereign entities, and international financial
institutions. The Commission requests comment on the use of swaps by
central banks, sovereign entities, and international financial
institutions, including quantitative data where available.
B. Data Related to Swaps Entered Into by Central Banks, Sovereign
Entities, and International Financial Institutions
The Commission has gathered preliminary data regarding the use of
swaps by international financial institutions from the Depository Trust
& Clearing Corporation's (DTCC's) swap data repository, DTCC Data
Repository (DDR). From January 1, 2018 to December 31, 2018, 16
international financial institutions 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 international financial
institutions entered into approximately 2,500 uncleared interest rate
swaps with an estimated total notional value of $220 billion. Of the 16
international financial institutions, four 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
international financial institutions 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 the
international financial institutions increased from 381 swaps totaling
$59.8 billion to approximately 2,500 swaps totaling $220 billion.
[[Page 27962]]
The Commission is not providing data estimates for swaps entered
into by central banks and sovereign entities because it believes that
the number of such swaps is likely to be small and could reveal
confidential swaps trading and position information. In addition, it is
difficult to define a representative set of central banks and sovereign
entities for purposes of collecting such data. The Commission invites
public comment from affected central banks, sovereign entities, and
their counterparties, including the submission of any data or other
relevant information.
C. New Compliance Schedule for Subpart B
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.
1. 2012 Clearing Requirement Determination
In order to facilitate an orderly transition to the new swap
clearing regime established by the Dodd-Frank Act, the Commission
decided to phase-in the 2012 Clearing Requirement Determination by type
of market participant. The Commission adopted a swap clearing
requirement compliance schedule in Commission regulation 50.25.\62\
Commission regulation 50.25 contains definitions for Category 1
Entities and Category 2 Entities,\63\ as well as other terms that are
referenced in the implementation section of the 2012 Clearing
Requirement Determination.\64\ For all interest rate swaps and CDX
credit default swaps that were required to be cleared pursuant to the
2012 Clearing Requirement Determination, the applicable implementation
schedule was published by the Commission in the final rulemaking
preamble. However, the compliance dates were delayed for iTraxx credit
default swaps until February 25, 2013, because no DCO offered client
clearing.\65\ Once client clearing was offered for iTraxx credit
default swaps, specified credit default swaps subject to the Clearing
Requirement in Commission regulation 50.4(b) were required to be
cleared after sixty days. This information was publicized through
Commission press releases, but is not reflected in part 50 of the
Commission's regulations.
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\62\ Swap Transaction Compliance and Implementation Schedule:
Clearing Requirement Under Section 2(h) of the CEA, 77 FR 44441
(Jul. 30, 2012).
\63\ Commission regulation 50.25(a).
\64\ 2012 Clearing Requirement Determination at 74319-21.
\65\ CFTC Press Release No. 6521-13 (Feb. 25, 2013), available
at https://www.cftc.gov/PressRoom/PressReleases/pr6521-13.
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2. 2016 Clearing Requirement Determination
In 2016, the Commission expanded the set of interest rate swaps
subject to the Clearing Requirement under Commission regulation 50.4(a)
in order to harmonize the CFTC's swap clearing requirement with those
in non-U.S. jurisdictions. When the Commission adopted the
implementation schedule for the 2016 Clearing Requirement
Determination, it elected not to phase-in compliance by the type of
market participant and instead phased-in compliance based on when the
corresponding non-U.S. jurisdiction's interest rate swap clearing
mandate had gone into effect. Under the Commission's 2016 Clearing
Requirement Determination, certain categories of interest rate swaps
were required to be cleared on the earlier of: (i) 60 calendar days
after any person was first required to comply with an analogous
clearing requirement that has been adopted by a regulator in a non-U.S.
jurisdiction, or (ii) two years after the final rule was published in
the Federal Register.\66\ All swaps that were subject to the
Commission's 2016 Clearing Requirement Determination are now required
to be cleared and the last compliance date for a category of interest
rate swaps under Commission regulation 50.4(a) was October 15, 2018. As
in 2012, the compliance schedule was outlined in the preamble
discussion, but the compliance dates were not published in the final
rule.
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\66\ Id. at 71227-28.
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In addition, the compliance dates for each category of interest
rate swap subject to the expansion under the 2016 Clearing Requirement
Determination were based on the product type, and in some cases, the
tenor of the swap. For this reason, the Commission believes that
publishing the compliance dates in a detailed format will be useful for
market participants.
3. New Proposed Regulation 50.26
The Commission seeks to improve transparency and to provide the
information about the compliance dates for both of the Commission's
Clearing Requirements in one location that will be convenient for
market participants to reference. In the new proposed regulation 50.26,
the Commission has taken information that was available in different
formats and repackaged it in a single table. Earlier press releases
provided small pieces of information but did not provide a
comprehensive statement of all Clearing Requirement compliance dates.
In addition, as detailed above, the Commission's 2016 Clearing
Requirement Determination compliance dates were not all published in
the final rule. Now that all of the swaps covered in Commission
regulation 50.4 have a compliance date, that information can be
collected and published in one location in part 50 of the Commission's
regulations instead of located in various places throughout the Federal
Register and on the Commission's website.
The Commission believes that these compliance dates are static and
not subject to change. Including a table of compliance dates in the
Commission's regulations will be useful for market participants trying
to confirm whether their swaps are required to be cleared under the
Clearing Requirement or would be considered to be legacy swaps not
required to be cleared under regulation 50.5. This codification may be
particularly useful for groups, such as the International Organization
of Securities Commissions and others, that collect and disseminate such
information.\67\
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\67\ E.g., the International Organization of Securities
Commissions' Information Repository for Central Clearing
Requirements for OTC Derivatives, available at https://www.iosco.org/publications/?subsection=information_repositories.
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Request for Comment. The Commission requests comment on the
proposed table headings and structure included in Table 1 and Table 2
of new proposed regulation 50.26. Are the tables sufficiently clear to
communicate the specific dates on which compliance with the Clearing
Requirement is required? If not, why not? Do market participants think
that any additional compliance date information should be included in
the tables or in this new section?
D. Technical Amendment to Subpart C for Banks, Savings Associations,
Farm Credit System Institutions, and Credit Unions
In addition to proposing to codify exemptions from the Clearing
Requirement, the Commission is proposing technical amendments to
subpart C of part 50 to reorganize the
[[Page 27963]]
subpart so that market participants find it easier to read and identify
applicable regulations. The Commission preliminarily believes that re-
codifying the existing regulatory provision for certain banks, savings
associations, farm credit system institutions, and credit unions
(together, small financial institutions) with a new numbered section
and heading specifically will facilitate swap counterparties' use and
understanding of part 50 of the Commission's regulations.
The current exemption for small financial institutions is located
in paragraph (d) of Commission regulation 50.50 without any heading or
other demarcation. Commission regulation 50.50 generally excepts non-
financial entities from the Clearing Requirement if they satisfy
certain conditions. In the final paragraph of Commission regulation
50.50, there is a separate category of relief for small financial
institutions that are exempt from the definition of ``financial
entity'' if the financial institution satisfies certain requirements.
In order to promote transparency about the operation of exceptions and
exemptions to the Clearing Requirement, the Commission is proposing to
separate the small financial institutions 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 would serve only to clarify and update the requirements in
light of current swap reporting conventions, specifically related to
SDR reporting by entities eligible for an exception or exemption from
the Clearing Requirement.
Current Commission regulation 50.50(d) limits the exemption to
certain small financial institutions with two key definitional
requirements. First, the small financial institution must be an entity
that satisfies the statutory requirements under Commission regulation
50.50(d)(1). Second, the small financial institution must have total
assets of $10 billion or less on the last day of such entity's most
recent fiscal year. The Commission is leaving these requirements
unchanged and has moved these requirements to new proposed regulation
50.53(a) and 50.53(b), respectively.
New proposed regulation 50.53 will require small financial
institutions to satisfy the same reporting requirements in Commission
regulation 50.50(b) that apply to entities qualifying for the exemption
under Commission regulation 50.50(d) currently. The Commission believes
that the language proposed in new regulation 50.53(c) incorporates the
requirements under Commission regulation 50.50(b) by reference and
matches the current structure of a similar provision requiring exempt
cooperatives to report specific information by reference to Commission
regulation 50.50(b).\68\ The Commission is proposing a small difference
in new regulation 50.53(c) that does not match the language in 50.50(b)
exactly. Proposed regulation 50.53(c) would make it clear that rather
than ``provide'' the information to a SDR, the entity electing the
exception will be expected to ``report'' the information to a SDR. In a
few places in the new regulatory text of proposed regulation 50.53(c),
the Commission is using the word ``report'' or ``cause to be reported''
instead of ``provide'' or ``cause to be provided.'' The Commission
believes the words ``provide'' and ``report'' have similar meaning, but
the word ``report'' is more precise in this instance. The word
``report'' is the predominant term used under Commission regulations in
part 45 and this term aligns with the obligations that parties are
required to comply with under Commission regulations 45.3 and 45.4.
Under this proposal, the Commission does not intend to alter how swap
counterparties currently subject to Commission regulation 50.50(d)
comply with the reporting provisions under existing Commission
regulation 50.50(b). The Commission believes the obligations of banks
and other entities eligible for relief from the Clearing Requirement
under Commission regulation 50.50(d) would not change under new
proposed regulation 50.53.
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\68\ Commission regulation 50.51(c) states that an exempt
cooperative that elects the exemption provided in that section shall
comply with the requirements of Commission regulation 50.50(b).
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Under Commission regulation 50.50(b) electing entities are given
the option to provide information to a registered SDR or to provide the
information directly to the Commission. The Commission believed such
flexibility was necessary during the initial implementation phase of
the Dodd-Frank Act. Now that SDRs have been established and are a
reliable infrastructure resource, the Commission is proposing to
eliminate the option for small financial institutions to submit
information directly to the Commission. The Commission processes data
from the SDRs and uses this data to monitor and track compliance with
the Clearing Requirement. This change to require reporting of
information through an SDR would further the Commission's goals of
improving the quality and comprehensiveness of SDR data as well. The
Commission notes that it is taking this approach to require reporting
directly to SDRs (and not to permit reporting directly to the
Commission) for all of the other exemptions for swaps with certain
entities under proposed regulations 50.75 through 50.79. The Commission
believes that the reporting methods employed by small financial
institutions currently would satisfy the requirements in proposed
regulation 50.53(c).
Finally, proposed regulation 50.53 includes a paragraph (d) that
would require small financial entities to use the swap to hedge or
mitigate commercial risk. This requirement is the same as current
requirements under Commission regulation 50.50(d) and should not create
new or different obligations on small financial institutions electing
the exemption from the Clearing Requirement. The Commission reiterates
its view that proposed regulation 50.53 would not substantively change
the exemption for small financial institutions and is intended to be a
clarifying amendment to part 50 of the Commission's regulations.
Request for Comment. The Commission requests comment on whether the
proposed changes could materially alter the compliance requirements
that exist currently for eligible banks, savings associations, farm
credit system institutions, and credit unions.
III. Supplemental Proposal of Proposed Rulemaking for Bank Holding
Companies, Savings and Loan Holding Companies, and Community
Development Financial Institutions
A. Background on Prior Proposal and Supplemental Proposal
In August 2018, the Commission proposed regulations that would
exempt from the Clearing Requirement, set forth in section 2(h)(1) of
the CEA, certain swaps entered into by certain bank holding companies,
savings and loan holding companies, and CDFIs.\69\ Under the CEA, these
entities are not eligible for an exemption from the definition of
``financial entity'' for purposes of an exemption from the Clearing
Requirement that is afforded banks, savings associations, farm credit
systems, and credit unions with total assets of $10 billion or
less.\70\
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\69\ See 2018 Proposal.
\70\ See sections 2(h)(1)(A) and 2(h)(7)(A) of the CEA.
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The proposed amendments to the Commission's regulations under part
50 would exempt from the Clearing Requirement a swap entered into to
[[Page 27964]]
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) a CDFI transacting in certain types and quantities of interest
rate swaps. The proposed amendments would codify two no-action letters
issued by DCR in 2016.\71\ As the Commission noted in the 2018
Proposal, it believes that codifying both of these staff no-action
letters would be 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 final
rule.\72\
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\71\ CFTC Letter No. 16-01 (request from the American Bankers
Association) and CFTC Letter No. 16-02 (request from a coalition of
CDFIs).
\72\ See 2018 Proposal at 44004. See also End-User Exception
Final Rule, 77 FR at 42590-91.
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The 2018 Proposal received only one comment on the proposal.\73\ In
light of the proposed restructuring of part 50 of the Commission's
regulations, the Commission is requesting additional comments on the
2018 Proposal, is proposing minor revisions to the rule text for CDFIs,
and is proposing technical revisions as described below.\74\
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\73\ American Bankers Association (Oct. 22, 2018). The American
Bankers Association supported the 2018 Proposal to codify CFTC
Letters No. 16-01 and 16-02, and also recommended that the
Commission treat all non-swap dealer or non-major swap participant
banks, bank holding companies, savings associations, and savings and
loan holding companies as end-users and exempt all of these entities
from the Clearing Requirement.
\74\ Procedurally, this supplemental proposal is not a
replacement or withdrawal of the 2018 Proposal. Unless specifically
amended in this release, all regulatory provisions proposed in the
2018 Proposal remain under active consideration for adoption as
final rules. The Commission welcomes comment on both the 2018
Proposal and this supplemental proposal.
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B. Changes to the Proposed Rule Text for CDFIs and Technical Revisions
to Proposed Rule Text for Bank Holding Companies and Savings and Loan
Holding Companies
As proposed in August 2018, swaps entered into with certain bank
holding companies, savings and loan holding companies, and CDFIs would
be exempt from the Clearing Requirement. The 2018 Proposal would have
amended Commission regulation 50.5 by adding definitions for CDFI, bank
holding company, and savings and loan holding company to Commission
regulation 50.5(a), and by adding the conditions of the exemption in
new subparts (e) and (f). In this supplemental proposal, the Commission
is proposing to include the definitions and exemptions in a new subpart
D of part 50 as Commission regulations 50.77, 50.78, and 50.79 as
described further below.
1. CDFIs
In this supplemental proposal, the Commission is proposing to make
the following clarifying revisions to the regulations that would exempt
certain interest rate swaps and forward rate agreements entered into by
CDFIs from the Clearing Requirement. First, these regulations, if
adopted, would be set forth in regulation 50.77 rather than in
Commission regulation 50.5. Second, the 2018 Proposal's definition of
the term ``community development financial institution'' in proposed
regulation 50.5(a) remains unchanged, but would be codified as
regulation 50.77(a).\75\ Third, proposed regulation 50.5(f) would
become new regulation 50.77(b). The supplemental proposal would clarify
the rule by adding the statutory authority for the exemption to the
rule text and referencing the subpart. New proposed regulation 50.77(b)
would state in relevant part that ``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 [CEA] and this part if. . .
.''
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\75\ New proposed regulation 50.77(a) would state that, for the
purposes of that 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
Treasury's Community Development Financial Institution Fund as
meeting the requirements set forth in 12 CFR 1805.201(b).
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The supplemental proposal includes a technical change to the 2018
Proposal's reference to Commission regulation 50.2 that was included in
previously proposed regulation 50.5(f)(2). Under the supplemental
proposal, newly proposed regulation 50.77(b)(1) would reference
Commission regulation 50.4(a) and state that 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).
In the 2018 Proposal, under previously proposed regulation
50.5(f)(3), swaps entered into by a CDFI would not be subject to the
Clearing Requirement of section 2(h)(1)(A) of the CEA, and Commission
regulation 50.2, if the total aggregate notional value of all swaps
entered into by the community development financial institution during
the twelve-month calendar is less than or equal to $200,000,000. To
clarify the exemption, the Commission proposes to revise the language
in proposed regulation 50.77(b)(2) to state 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. Likewise,
previously proposed regulation 50.5(f)(4) would be codified as proposed
regulation 50.77(b)(3), and the Commission is proposing to include a
technical revision that changes the time frame from ``within a twelve-
month calendar year'' to ``within a period of 365 calendar days.'' The
Commission believes both revisions from measuring in months to calendar
days are more accurate descriptions of the scope of the requirement and
is consistent with the current requirement in Commission regulation
50.50(b)(2). Commission regulation 50.50(b)(2) states that reporting
for certain entities that are eligible for an exception to the Clearing
Requirement will remain effective for ``365 days following the date of
such reporting.'' The Commission believes this minor technical change
will improve internal consistency within part 50 of the Commission's
regulations by measuring time periods in days in all relevant places
rather than using days in some regulations and months in other
regulations.
Previously proposed regulation 50.5(f)(1) would remain the same
except it would be presented in this supplemental proposal as proposed
regulation 50.77(b)(4). Previously proposed regulation 50.5(f)(5) would
be presented by this proposal as proposed regulation 50.77(b)(5) with a
technical change to the text such that the regulation would change from
``the swap is used to hedge or mitigate commercial risk, as defined
under Sec. 50.50(c) of this part'' and would instead state that the
swap is used to hedge or mitigate commercial risk as provided in
paragraph (c) of Sec. 50.50.
2. Bank Holding Companies and Savings and Loan Holding Companies
In this supplemental proposal, the Commission is proposing to have
separate regulations for exemptions for swaps with bank holding
companies and savings and loan holding companies. Under the 2018
Proposal, the proposed definitions for a bank holding company and a
savings and loan holding company were included in existing regulation
50.5(a). This supplemental proposal would move the definition for bank
holding company to
[[Page 27965]]
proposed regulation 50.78(a) and savings and loan holding company to
proposed regulation 50.79(b).
Previously proposed regulation 50.5(e) would become proposed
regulations 50.78(b) for bank holding companies and 50.79(b) for
savings and loan holding companies. The supplemental proposal would
clarify the text for each exemption by adding the statutory authority
for the exemption to the text of the regulation and referencing the
subpart.
This supplemental proposal would renumber previously proposed
regulation section and paragraphs 50.5(e)(1), (2), and (3) as new
proposed regulation section and paragraphs 50.78(b)(1), (2), and (3)
for bank holding companies, and new proposed regulation section and
paragraphs 50.79(b)(1), (2), and (3) for savings and loan holding
companies. The regulations remain unchanged from the text of the 2018
Proposal with the exception of the technical change to paragraph (b)(3)
of each proposed regulation. Those paragraphs would now state that the
swap is used to hedge or mitigate commercial risk as provided in
paragraph (c) of Sec. 50.50.
C. Updated Data Regarding the Use of Swaps by CDFIs, Bank Holding
Companies, and Savings and Loan Holding Companies
When the Commission considered its 2018 Proposal, it included data
about the number of swaps entered into by entities that would be
eligible to elect the proposed exemption from the Clearing Requirement.
The Commission is updating some of the data from DDR that it considered
in the 2018 Proposal. All interest rate swaps data included in this
section was reported to DDR as events-based data and was analyzed by
Commission staff.\76\ This information about past swaps activity is not
used as a predictive measure of future swaps activity, but rather, it
is included here to provide context about the current use of uncleared
swaps by the entities discussed in this proposal.
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\76\ This section does not include credit default swaps data
because the relief provided to CDFIs does not extend to credit
default swaps and there was no credit default swaps activity
reported by eligible bank holding companies or savings and loan
holding companies in the time periods analyzed.
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In the most recent calendar year--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.
During this one year period, 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.\77\
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).
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\77\ 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.
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The Commission is also updating the data 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.\78\ 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.
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\78\ 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.
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The increase in the number of uncleared swaps entered into by these
entities may be the result of better information and more awareness by
eligible entities about the relief provided under CFTC Letter Nos. 16-
01 and 16-02, or it may be the result of different economic or market
conditions. The data demonstrates that these entities have an ongoing
interest in entering into uncleared swaps and likely would benefit from
the Commission's proposal to codify the relief currently afforded under
CFTC staff letters.
Request for Comment. The Commission requests comment on all aspects
of the new proposed regulations, including the specific revisions to
the proposed rule text as well as the technical amendments to the
proposed regulations. In addition, the Commission requests additional
comment on the use of swaps by CDFIs, bank holding companies, and
savings and loan holding companies, including quantitative data where
available.
IV. Commission's Section 4(c) Authority
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).\79\ 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.\80\ 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 material adverse effect on the ability of the
Commission or any contract market to discharge its regulatory or self-
regulatory responsibilities under the CEA.
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\79\ 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 CEA section 4(c), 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 proposing to
promulgate this exemptive rule pursuant to sections 4(c)(1) and
8a(5) of the CEA.
\80\ 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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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 international financial institutions, as discussed above. In 2012,
the Commission stated its view that transactions with central banks,
sovereign entities, and certain international financial institutions
should be exempted from clearing on the basis of comity and in keeping
with
[[Page 27966]]
the traditions of the international system. The Commission continues to
believe, as it did in 2012, that based on canons of statutory
construction and considerations of comity, and in keeping with the
traditions of the international system, foreign governments and central
banks should not be subject to section 2(h)(1) of the CEA.\81\ With
respect to international financial institutions, the member governments
generally have majority control and governance over the entities. The
Commission therefore continues to believe that an exemption is
appropriate because in a real sense, an international financial
institution is not separable from its government owners. Codifying the
Commission's 2012 determination through a section 4(c) exemption will
provide further clarity to market participants. As with the other
exemptions from the Clearing Requirement, the Commission reminds the
counterparties that these swaps exempted from the Clearing Requirement
by this proposal and the existing 2012 determination must be reported
to an SDR. The Commission also believes it is appropriate to exempt
swaps entered into with international financial institutions because
these entities serve an important public policy purpose.
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\81\ 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 77 FR at 42562, n.18 (``The foregoing
rationale and considerations do not apply to sovereign wealth funds
or similar entities due to the predominantly commercial nature of
their activities.'').
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The Commission believes that the specific amendments to exempt
swaps entered into by central banks, sovereign entities, and certain
international financial institutions, as well as the previously
approved proposal to exempt certain swaps entered into by bank holding
companies, savings and loan holding companies, and CDFIs from the
Clearing Requirement would be available to only ``appropriate
persons.'' 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.\82\
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\82\ Section 4(c)(3)(H) of the CEA.
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The Commission preliminarily believes that central banks, sovereign
entities, and international financial institutions are appropriate
persons within the scope of section 4(c)(3)(H) of the CEA. The
Commission notes that these entities would also be considered eligible
contract participants (ECPs) as set forth in section 1a(18)(A)(vii) of
the CEA. The Commission continues to believe that eligible bank holding
companies, savings and loan holding companies, and CDFIs are ECPs
pursuant to section 1a(18)(A)(i) of the CEA.\83\
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\83\ 2018 Proposal, at 44008.
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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 the proposed exemptions from the Clearing
Requirement. For purposes of this proposal, the Commission believes
that the class of persons eligible to rely on the proposed exemptions
that would be codified in new proposed regulations 50.75 through 50.79
will be limited to ``appropriate persons'' within the scope of section
4(c) of the CEA.
The Commission believes that the applicable central banks,
sovereign entities, and international financial institutions have been
relying on the language in the preamble exempting their swap
transactions from the Clearing Requirement since issuance of the 2012
End-User Exception final rule. The Commission is not aware of any
increase in counterparty risk attributable to affected entities'
reliance on the 2012 Commission determination and the subsequent staff
no-action letters. The proposed exemptions from the Clearing
Requirement are limited in scope and, as described further below, the
Commission will continue to have access to information regarding the
swaps subject to this exemption because they will be reported to an
SDR.\84\ The Commission notes that the proposed exemptions are intended
to be consistent with the Commission's determination set forth in the
2012 End-User Exception final rule and would not limit the
applicability of any CEA provision or Commission regulation to any
person or transaction except as provided in the proposed 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
preliminarily believes the exemption would not have a material adverse
effect on the ability of the Commission to discharge its regulatory
responsibilities under the CEA.
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\84\ The Commission notes that uncleared swaps with a
counterparty that is subject to the CEA and Commission regulations
with regard to such swaps would still be required to comply with the
CEA and Commission regulations as they pertain to uncleared swaps.
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For the reasons described in this proposal, the Commission believes
it would be appropriate and consistent with the public interest to
adopt new proposed regulations 50.75, 50.76, 50.77, 50.78, and 50.79.
Request for Comment. The Commission requests general comments
regarding the proposal and on whether it should exercise its authority
under section 4(c) of the CEA, including whether the proposed
exemptions promote the public interest. Additionally, the Commission
requests comment on whether the proposed exemptions provide certainty
and stability to existing and emerging markets so that financial
innovation and market development can proceed in an effective and
competitive manner.
V. Proposed Rules Do Not Effect Margin Requirements for Uncleared Swaps
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.\85\
Commission regulation 23.150(b) was added to the final margin rules
after the Terrorism Risk Insurance Program Reauthorization Act of 2015
(TRIPRA) \86\ 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.\87\
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\85\ Commission regulation 23.150(b)(1).
\86\ Public Law 114-1, 129 Stat. 3.
\87\ 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,
Commission regulation 23.150(b)(3), which pertains to affiliated
entities, does not apply in this context.
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The proposed rules are not implementing section 2(h)(7)(A) of the
CEA. The Commission, pursuant to its
[[Page 27967]]
4(c) authority (as discussed above), is proposing to exempt swaps
entered into by central banks, sovereign entities, and international
financial institutions, as well as eligible bank holding companies,
savings and loan holding companies, and CDFIs from the Clearing
Requirement. The Commission is not proposing to exclude these entities
from the ``financial entity'' definition of section 2(h)(7)(C) of the
CEA.
For the reasons stated above, the new proposed rules 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.\88\
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\88\ The Commission believes that the proposed 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).
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VI. 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.\89\ 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.\90\ The proposed regulations
would not affect any small entities as that term is used in the RFA.
The proposed rule would affect specific counterparties to an uncleared
swap: Central banks, sovereign entities, and international financial
institutions. Sections 2(e) and 5(d)(11)(A) of the CEA provide that
only ECPs may enter into uncleared swaps.\91\ The Commission has
previously stated that ECPs, by the nature of the definition, should
not be considered small entities for RFA purposes.\92\ 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 proposed rules on ECPs.
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\89\ 5 U.S.C. 601 et seq.
\90\ 47 FR 18618 (Apr. 30, 1982).
\91\ Section 2(e) of the CEA limits non-ECPs to executing swap
transactions on DCMs and section 5(d)(11)(A) of the CEA requires all
DCM transactions to be cleared. Accordingly, the two provisions read
together only permit ECPs to execute uncleared swap transactions.
\92\ See 66 FR 20740, 20743 (Apr. 25, 2001).
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the proposed 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) \93\ 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. This proposed rulemaking would not
impose a new collection of any information or any new recordkeeping
requirements from any persons or entities and would not require
approval of the Office of Management and Budget (OMB) under the
PRA.\94\ The Commission invites public comment on its determination
that no additional recordkeeping or information collection
requirements, or changes to existing collection requirements, would
result from the proposed rulemaking.
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\93\ 44 U.S.C. 3501 et seq.
\94\ 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.
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C. Cost-Benefit Considerations
1. Statutory and Regulatory Background
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\95\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness, and financial integrity; (3) price discovery; (4)
sound risk management practices; and (5) other public interest
considerations (collectively referred to herein as the Section 15(a)
Factors).
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\95\ Section 15(a) of the CEA.
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The baseline for the Commission's consideration of the costs and
benefits of this proposed rulemaking is the existing statutory and
regulatory framework under which any swap subject to the Clearing
Requirement would be required to be cleared by central banks, sovereign
entities, and international financial institutions. As a practical
matter, however, the regulatory baseline has been affected by
Commission action and staff no-action relief such that central banks,
sovereign entities, international financial institutions, and their
counterparties have relied on Commission statements in the 2012 End-
User Exception final rule and staff no-action relief when entering into
swaps that otherwise would be subject to the Clearing Requirement.
This proposal would codify current practice by exempting certain
swaps with central banks (including BIS), sovereign entities, and
international financial institutions from the Clearing Requirement. The
Commission believes that the entities whose swaps would be exempted by
this proposing release are the same entities governed by the
determination set forth in the 2012 End-User Exception final rule and
the entities that received staff no-action relief.\96\ Consequently,
the Commission expects that the actual costs and benefits of the
proposed rule, as realized in the market, may not be as significant as
compared to the baseline.
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\96\ The one modification to the proposed list is to include the
Islamic Development Bank as an additional entity that would be
eligible for the exemption under proposed regulation 50.76(b). The
Islamic Development Bank is not subject to the Commission's margin
requirements for uncleared swaps.
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The Commission notes that this proposal would not change the
eligibility to enter into uncleared swaps for any entity that has been
relying on the 2012 End-User Exception final rule determination and has
not been clearing swaps subject to the Clearing Requirement. Entities
named in the 2012 End-User Exception final rule \97\ may continue to
rely on the Commission's statement that they are not subject to section
2(h)(1) of the CEA and may choose not to clear a swap subject to the
Clearing Requirement. The Commission has endeavored to assess the
expected costs and benefits of the proposed rule in quantitative terms
where possible. Where estimation or quantification is not feasible, the
Commission has provided its discussion in qualitative terms.
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\97\ 77 FR at 42561-62 n.14.
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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
[[Page 27968]]
discussion of costs and benefits refers to the effects of the proposed
rule on all activity subject to the proposed and amended regulations,
whether by virtue of the activity's physical location in the United
States or by virtue of the activity's connection with or effect on U.S.
commerce under section 2(i) of the CEA.\98\ In particular, the
Commission notes that some entities affected by this proposed
rulemaking are located outside of the United States.
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\98\ Section 2(i) of the CEA.
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In the sections that follow, the Commission considers: (1) The
costs and benefits of the exemption to the Clearing Requirement for
entities that meet the definitions of central bank, sovereign entity,
and international financial institution, as identified in this proposed
rule; and (2) the impact of the exemption for central banks, sovereign
entities, and international financial institutions on the Section 15(a)
Factors.
The Commission is including by reference the costs and benefits of
the supplemental proposal to exempt swaps entered into by certain bank
holding companies, savings and loan holding companies, and CDFIs.\99\
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\99\ The Commission notes that the costs and benefits of the
proposed changes in the 2018 Proposal were discussed in that release
and remain under active consideration by the Commission. As the
Commission noted in the 2018 Proposal, bank holding companies,
savings and loan holding companies, and CDFIs are likely to have
limited swap exposure, in terms of value and number of swaps. These
entities would have relatively modest contributions to systemic risk
and are expected to have some degree of protection against default
because they would be required to indicate how they will meet
financial obligations associated with uncleared swaps. Bank holding
companies and savings and loan holding companies will benefit from
an exemption from the Clearing Requirement through internal
accounting efficiencies and all of the entities would benefit from
the cost savings of not having to clear a swap. See 2018 Proposal at
44009-11.
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2. Consideration of the Costs and Benefits of the Commission's Action
a. Costs
New proposed regulations 50.75 and 50.76 would exempt swaps entered
into with central banks, sovereign entities, and certain international
financial institutions from the Clearing Requirement. By exempting
transactions with central banks, sovereign entities, and international
financial institutions from the Clearing Requirement, the Commission
recognizes that the benefits of central clearing will not accrue to
swaps entered into by these entities. However, as discussed above,
Congress exempted swaps with the Federal Reserve Banks, the Federal
Government, and Federal agencies expressly backed by the full faith and
credit of the United States by excluding any agreement, contract, or
transaction entered into by these entities from the definition of a
swap and consequently from the Clearing Requirement.\100\ The proposed
amendments to part 50 of the Commission's regulations would codify the
Commission's 2012 End-User Exception final rule determination that
based on considerations of comity, and in keeping with the traditions
of the international system, swaps entered into with certain central
banks (including BIS), sovereign entities, and international financial
institutions should be treated like swaps entered into with the Federal
Reserve Banks, the Federal Government, or a Federal agency and should
not be subject to the Clearing Requirement.
---------------------------------------------------------------------------
\100\ Section 1a(47)(B)(ix) of the CEA.
---------------------------------------------------------------------------
The primary cost of the proposed amendments is, therefore, that
swaps entered into with central banks, sovereign entities, and
international financial institutions would not be subject to the
Clearing Requirement.
In general, the principal risk to the financial system that central
clearing seeks to address is counterparty credit risk. A DCO manages
this risk by collecting initial and variation margin from its clearing
members. The collection of margin allows a DCO to mitigate the
possibility of a default, and to cover the losses due to default of a
clearing member in many cases. By exempting transactions with these
entities from the Clearing Requirement, the Commission recognizes that
the risk-mitigating benefits of clearing will not attach to those
transactions. In addition, the Commission is also aware that some of
these entities may be covered under the Commission's uncleared margin
requirements. In that case, the cost that may result from not requiring
clearing these transactions may be mitigated. To the extent that these
entities do not pay margin, there is a possibility of increased
counterparty risk.
Request for Comment. The Commission requests comment, including any
available quantitative data and analysis, on the risks resulting from
the proposed amendment to the Clearing Requirement.
b. Benefits
Set against these costs are the benefits of allowing these entities
to enter into swaps at a potentially lower cost. Specifically, the
Commission believes that central banks (including BIS), sovereign
entities, and international financial institutions would benefit from
an exemption because project financing and risk management transactions
with these entities would not be subject to required clearing or have
the added expense of required clearing. The Commission believes that
the cost savings achieved through an exemption from the Clearing
Requirement would allow these entities to enter into more public
service projects in furtherance of their missions.
The Commission believes there is an important benefit associated
with the proposed amendments. If foreign governments (sovereign
entities), central banks, or international financial institutions of
which foreign governments are a member were subjected to regulation by
the Commission in connection with their swaps, foreign regulators could
treat the Federal Government, Federal Reserve Banks, or international
financial institutions of which the United States is a member in a
similar manner. The Commission expects that the proposed exemption from
the Clearing Requirement will mean 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
swaps in foreign jurisdictions, the actions of those entities with
respect to those transactions would not be subject to foreign
regulation. By allowing swaps entered into with central banks
(including BIS), sovereign entities, and international financial
institutions to be treated like swaps entered into with the Federal
Reserve Banks, the Federal Government, and Federal agencies, the
Commission is facilitating similar treatment for transactions by
foreign regulators.\101\
---------------------------------------------------------------------------
\101\ See 77 FR at 42562.
---------------------------------------------------------------------------
The Commission believes that most of the central banks, sovereign
entities, and international financial institutions that would benefit
from the proposed regulations would benefit from relief from the
uncleared margin requirements under part 23 of the Commission's
regulations, as well. For entities that would be required to comply
with the Commission's uncleared margin requirements, their benefit from
an exemption would be mitigated. Actual benefits may be less than
expected if counterparties to eligible swaps by central banks,
sovereign entities, and international financial institutions choose to
voluntarily clear the swaps instead of electing an exemption from the
Clearing Requirement.
As a practical matter, we believe that the entities for which the
proposed rule would apply currently are not clearing all of their swaps
subject to the Clearing
[[Page 27969]]
Requirement.\102\ In that regard, the practical effect of the proposed
exception is to provide regulatory certainty. The Commission believes
that regulatory certainty would reduce the legal costs faced by these
entities.
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\102\ 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 international financial institutions
elected to clear a portion of their interest rate swaps.
---------------------------------------------------------------------------
Request for Comment. The Commission requests comment on the
benefits, such as the expected cost savings to these entities, of
codifying the Commission's determination and staff no-action relief
that swaps entered into with central banks, sovereign entities, or
international financial institutions should be exempt from the Clearing
Requirement.
3. 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 proposed rule in terms of the factors set
forth in section 15(a) of the CEA.
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 proposed regulation in light of
considerations of protection of market participants and the public. The
Commission considers the costs and benefits of the proposed exemption
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 review all
swaps that are offered for clearing by DCOs to determine whether such
swaps should be required to be cleared. In developing the proposed
rule, the Commission was 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 proposal, the Commission would be
extending similar treatment for swap transactions with central banks
and sovereign entities, as discussed above.
The Commission notes that the proposed exemption from the Clearing
Requirement means that counterparties entering into swaps with certain
entities would 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. In proposing a similar exemption from the
Clearing Requirement for swaps with central banks and sovereign
entities, as discussed above, the Commission is applying a similar
rationale.
As discussed above, the Commission believes that international
comity would support similar regulatory treatment for swap transactions
with central banks, sovereign entities, and international financial
institutions. The Commission preliminarily believes these entities
generally enter into limited swap transactions in support 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 transactions with these
entities would not pose a significant risk to market participants and
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 proposed regulation in light of efficiency,
competitiveness, and financial integrity considerations. The Commission
believes that proposed regulations 50.75 and 50.76 would lower the cost
of using swaps for central banks, sovereign entities, and international
financial institutions, and in that sense, make trading more efficient.
A potential effect of the proposal would be to increase liquidity in
swap markets, as entering into swaps would be less costly and these
entities may engage in increased trading, which may in turn potentially
improve the competitiveness of swaps markets for all participants. The
Commission notes that to the extent that transactions with these
counterparties are currently not cleared because of reliance on the
Commission statements made in the 2012 End-User Exception final rule
and DCR no-action letters, the impact of the proposed exemption on the
efficiency, competitiveness, and financial integrity of the swap
markets may be mitigated.
c. Price Discovery
Section 15(a)(2)(C) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of price
discovery considerations. The Commission preliminarily believes that
the proposed rule would 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, swap transactions, 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.
d. Sound Risk Management Practices
Section 15(a)(2)(D) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed regulation in light of sound risk
management practices. The Commission believes that by eliminating the
costs associated with clearing for central banks, sovereign entities,
and international financial institutions, the Commission is
facilitating the use of swaps by these entities. To the extent that
these entities use swaps to hedge existing risk, then the Commission
preliminarily believes the proposed exemption from the clearing
requirement will enable better risk management.
e. Other Public Interest Considerations
Section 15(a)(2)(E) of the CEA requires the Commission to evaluate
the costs and benefits of a proposed 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 international financial institutions. 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. The Commission requests comment on other
public interest considerations raised by the proposed exemption from
the Clearing Requirement for swaps with central banks, sovereign
entities, and international financial institutions.
[[Page 27970]]
D. General Request for Comment
The Commission requests comment on all aspects of the costs and
benefits relating to the proposed exemption of these transactions from
the Clearing Requirement. The Commission requests that commenters
provide any data or other information that would be useful in
estimating the quantifiable costs and benefits of this rulemaking.
E. Antitrust Considerations
Section 15(b) of the Act requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
objectives of the Act, as well as the policies and purposes of the Act,
in issuing any order or adopting any Commission rule or regulation
(including any exemption under section 4(c) or 4c(b)), or in requiring
or approving any bylaw, rule, or regulation of a contract market or
registered futures association established pursuant to section 17 of
the Act.\103\ The Commission believes that the public interest to be
protected by the antitrust laws is generally to protect competition.
The Commission requests comment on whether the proposal implicates any
other specific public interest to be protected by the antitrust laws.
---------------------------------------------------------------------------
\103\ Section 15(b) of the CEA.
---------------------------------------------------------------------------
The Commission has considered the proposal to determine whether it
is anticompetitive and has preliminarily identified no anticompetitive
effects. The Commission requests comment on whether the proposal is
anticompetitive and, if it is, what the anticompetitive effects are.
Because the Commission has preliminarily determined that the
proposal is not anticompetitive and has no anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the Act. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the Act that would otherwise be served by adopting the
proposal.
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 proposes to amend 17 CFR chapter I as set forth
below:
PART 50--CLEARING REQUIREMENT AND RELATED RULES
0
1. The authority citation for part 50 is revised to read as follows:
Authority: 7 U.S.C. 2(h), 6(c), and 7a-1 as amended by Pub. L.
111-203, 124 Stat. 1376.
0
2. Revise the 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 table below.
Table 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Currency and floating rate Stated termination date Clearing requirement
Swap asset class Swap class subtype index range compliance date
--------------------------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Swap................ Fixed-to-Floating............ Euro (EUR) EURIBOR........ 28 days to 50 years.......... Category 1 entities 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) LIBOR...... 28 days to 50 years.......... Category 1 entities 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) LIBOR... 28 days to 50 years.......... Category 1 entities 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 years.......... Category 1 entities 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 (AUD) 28 days to 30 years.......... All entities December 13,
BBSW. 2016.
Interest Rate Swap................ Fixed-to-Floating............ Canadian Dollar (CAD) CDOR 28 days to 30 years.......... All entities July 10,
2017.
Interest Rate Swap................ Fixed-to-Floating............ Hong Kong Dollar (HKD) 28 days to 10 years.......... All entities August 30,
HIBOR. 2017.
Interest Rate Swap................ Fixed-to-Floating............ Mexican Peso (MXN) TIIE- 28 days to 21 years.......... All entities December 13,
BANXICO. 2016.
Interest Rate Swap................ Fixed-to-Floating............ Norwegian Krone (NOK) 28 days to 10 years.......... All entities April 10,
NIBOR. 2017.
[[Page 27971]]
Interest Rate Swap................ Fixed-to-Floating............ Polish Zloty (PLN) WIBOR.. 28 days to 10 years.......... All entities April 10,
2017.
Interest Rate Swap................ Fixed-to-Floating............ Singapore Dollar (SGD) SOR- 28 days to 10 years.......... All entities October 15,
VWAP. 2018.
Interest Rate Swap................ Fixed-to-Floating............ Swedish Krona (SEK) STIBOR 28 days to 15 years.......... All entities April 10,
2017.
Interest Rate Swap................ Fixed-to-Floating............ Swiss Franc (CHF) LIBOR... 28 days to 30 years.......... All entities October 15,
2018.
Interest Rate Swap................ Basis........................ Euro (EUR) EURIBOR........ 28 days to 50 years.......... Category 1 entities March
11, 2013.
All non-Category 2
entities June 10, 2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap................ Basis........................ Sterling (GBP) LIBOR...... 28 days to 50 years.......... Category 1 entities 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) LIBOR... 28 days to 50 years.......... Category 1 entities 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 years.......... Category 1 entities March
11, 2013.
All non-Category 2
entities June 10, 2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap................ Basis........................ Australian Dollar (AUD) 28 days to 30 years.......... All entities December 13,
BBSW. 2016.
Interest Rate Swap................ Forward Rate Agreement....... Euro (EUR) EURIBOR........ 3 days to 3 years............ Category 1 entities March
11, 2013.
All non-Category 2
entities June 10, 2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap................ Forward Rate Agreement....... Sterling (GBP) LIBOR...... 3 days to 3 years............ Category 1 entities March
11, 2013.
All non-Category 2
entities June 10, 2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap................ Forward Rate Agreement....... U.S. Dollar (USD) LIBOR... 3 days to 3 years............ Category 1 entities March
11, 2013.
All non-Category 2
entities June 10, 2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap................ Forward Rate Agreement....... Yen (JPY) LIBOR........... 3 days to 3 years............ Category 1 entities March
11, 2013.
All non-Category 2
entities June 10, 2013.
Category 2 entities
September 9, 2013.
Interest Rate Swap................ Forward Rate Agreement....... Polish Zloty (PLN) WIBOR.. 3 days to 2 years............ All entities April 10,
2017.
Interest Rate Swap................ Forward Rate Agreement....... Norwegian Krone (NOK) 3 days to 2 years............ All entities April 10,
NIBOR. 2017.
Interest Rate Swap................ Forward Rate Agreement....... Swedish Krona (SEK) STIBOR 3 days to 3 years............ All entities April 10,
2017.
Interest Rate Swap................ Overnight Index Swap......... Euro (EUR) EONIA.......... 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.
[[Page 27972]]
2 years + 1 day to 3 years... All entities December 13,
2016.
Interest Rate Swap................ Overnight Index Swap......... Sterling (GBP) SONIA...... 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.
2 years + 1 day to 3 years... All entities December 13,
2016.
Interest Rate Swap................ Overnight Index Swap......... U.S. Dollar (USD) FedFunds 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.
2 years + 1 day to 3 years... All entities December 13,
2016.
Interest Rate Swap................ Overnight Index Swap......... Australian Dollar (AUD) 7 days to 2 years............ All entities December 13,
AONIA-OIS. 2016.
Interest Rate Swap................ Overnight Index Swap......... Canadian Dollar (CAD) 7 days to 2 years............ All entities July 10,
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 table below.
Table 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Clearing requirement
Swap asset class Swap class subtype Indices Tenor compliance date
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Default Swap................ North American untranched CDX.NA.IG................... 3Y, 5Y, 7Y, 10Y............. Category 1 entities March
CDS indices. 11, 2013.
All non-Category 2
entities June 10, 2013.
Category 2 entities
September 9, 2013.
Credit Default Swap................ North American untranched CDX.NA.HY................... 5Y.......................... Category 1 entities March
CDS indices. 11, 2013.
All non-Category 2
entities June 10, 2013.
Category 2 entities
September 9, 2013.
Credit Default Swap................ European untranched CSD iTraxx Europe............... 5Y, 10Y..................... Category 1 entities April
indices. 26, 2013.
Category 2 entities July
25, 2013.
All non-Category 2
entities October 23,
2013.
Credit Default Swap................ European untranched CSD iTraxx Europe Crossover..... 5Y.......................... Category 1 entities April
indices. 26, 2013.
Category 2 entities July
25, 2013.
All non-Category 2
entities October 23,
2013.
Credit Default Swap................ European untranched CSD iTraxx Europe HiVol......... 5Y.......................... Category 1 entities April
indices. 26, 2013.
Category 2 entities July
25, 2013.
All non-Category 2
entities October 23,
2013.
--------------------------------------------------------------------------------------------------------------------------------------------------------
0
4. Revise the subpart C heading to read as follows:
Subpart C--Exceptions and Exemptions from the Clearing Requirement
Sec. 50.50 [Amended]
0
5. Amend Sec. 50.50 as follows:
0
a. Revise the section heading; and
0
b. Remove and reserve paragraph (d).
The revision reads as follows:
Sec. 50.50 Non-financial end-user exception to the clearing
requirement.
Sec. 50.51 [Amended]
0
6. Revise the Sec. 50.51 heading to read as follows:
[[Page 27973]]
Sec. 50.51 Cooperatives exempt from the clearing requirement.
Sec. 50.52 [Amended]
0
7. Revise the 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
and this part if reported to a swap data repository pursuant to
Sec. Sec. 45.3 and 45.4 of this chapter.
(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 and this part if reported to a swap data repository pursuant to
Sec. Sec. 45.3 and 45.4 of this chapter.
(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;
(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
[[Page 27974]]
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 April 17, 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 proposal to amend 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 proposed Part 50 amendments would create new regulations 50.75 and
50.76, which would codify existing exemptions from the Clearing
Requirement for swaps entered into with certain central banks,
sovereign entities, and international financial institutions.\1\
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\1\ The majority of the entities covered by the proposed rule
were previously identified in the preamble to the 2012 End-User
Exception final rule as entities that should not be subject to the
Clearing Requirement. See End-User Exception to the Clearing
Requirement for Swaps, 77 FR 42560 (Jul. 19, 2012). Four
international financial institutions covered by the proposed
amendment separately obtained staff no-action letters concerning the
clearing requirement. 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. 17-59 (Nov. 7, 2017) (providing
no-action relief to the North American Development Bank); and CFTC
Letter No. 17-58 (Nov. 7, 2017) and CFTC Letter No. 19-23 (Oct. 16,
2019) (providing no-action relief to the European Stability
Mechanism).
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Separately, today's proposal would create new regulations 50.77,
50.78, and 50.79, which would exempt from the Clearing Requirement
certain swaps entered into by small bank holding companies, savings and
loan holding companies, and community development financial
institutions.\2\ The proposal also provides a compliance schedule
setting forth all the past compliance dates for the 2012 and 2016 swap
clearing requirement rules and contemplates certain technical
amendments to various other provisions within Part 50.
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\2\ In 2018, the Commission proposed to exempt these entities
from the Clearing Requirement, but today we are supplementing that
earlier proposal with technical amendments to the rule text, and we
are soliciting additional public comment. 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).
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Together, these amendments to the Clearing Requirement would
clarify existing exemptions for banks, savings associations, farm
credit systems, and credit units with total assets under $10
billion.\3\ While these entities are small, they play outsized roles in
supporting the U.S. economy. These are not Wall Street banks, but
primarily local institutions that support American communities,
businesses, and families. Clarifying their relief from the Clearing
Requirement advances the CFTC's strategic goal of regulating the
derivatives markets to promote the interests of all Americans.\4\
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\3\ See proposed new regulations 50.77, 50.78, and 50.79.
\4\ See Remarks of CFTC Chairman Heath P. Tarbert to the 35th
Annual FIA Expo 2019 (Oct. 30, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opatarbert2 (outlining the
CFTC's strategic goals).
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In addition, today's proposed amendments to the Clearing
Requirement will significantly reduce costs and regulatory burdens for
entities that pose little or no systemic risk to the United States--
i.e., foreign governmental institutions on the one hand, and small
domestic lenders on the other. By codifying existing exemptions, the
Commission will give certainty to market participants by etching their
clearing exemptions--now fragmented among various no-action letters--
into the text of our Part 50 rules. Doing so is especially important in
these challenging times: More than ever, certainty will help our market
participants continue to perform their important functions. Today's
proposed amendments to the Clearing Requirement take an important step
in that direction.
Appendix 3--Statement of Support of Commissioner Brian D. 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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[[Page 27975]]
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 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 42560, 42561-62 (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 44001 (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
[[Page 27976]]
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 issuing the notice of proposed rulemaking (``Proposal'')
to codify certain exemptions from the swap clearing requirement that
currently exist through Commission guidance or staff no action relief.
Each of the proposed exemptions is consistent with longstanding
Commission policy and the Commission's experience in implementing the
swap clearing requirement over the past eight years. Codifying these
exemptions will provide certainty and transparency for market
participants.
First, the Proposal would codify in rule text a list of foreign
central banks, sovereign entities at the national level, and
international institutions that are currently excepted from the
clearing requirement through no action relief or guidance. This
codification would provide regulatory certainty that executing the
swaps on an uncleared basis will not run afoul of our rules. This
certainty benefits not only to the named entities, but also to their
counterparties, most of which are swap dealers registered with the
Commission. As described in the preamble to the Proposal, it has been
the Commission's policy since the adoption of the clearing requirement
to exempt these institutions due to considerations of international
comity, the reduced risks arising from swaps entered into by these
institutions, and the public purposes for which these institutions
enter into such swaps.
Second, the Proposal includes a supplemental proposal making
technical changes to a 2018 Commission proposal. This proposal would
provide clearing exemptions for (i) certain interest rate swaps entered
into by community development financial institutions to hedge or
mitigate commercial risks, and (ii) for swaps entered into by bank or
savings and loan holding companies that each have no more than $10
billion in consolidated assets if they enter into the swaps to hedge or
mitigate commercial risks. This supplemental proposal also would codify
relief from the clearing requirement currently provided by two no-
action letters. Commodity Exchange Act section 2(h)(7)(A) in essence
excludes from the clearing requirement banks and savings associations
with less than $10 billion in assets to the extent determined by the
Commission. Since the Commission has already provided the exemption to
individual banks and savings associations,\1\ it makes sense to codify
this exemption for holding companies for those entities that also have
no more than $10 billion in consolidated assets. As described in the
preamble, swap data repository data indicates that over the past
several years the number and scope of such swaps entered into by these
institutions that would be included within these exemptions has been
relatively limited.
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\1\ See Regulation 50.50(d).
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I commend the staff of the Division of Clearing and Risk for this
well developed and drafted Proposal. Providing certainty to market
participants is important and the Proposal would do so for the entities
involved in the exempted swaps.
[FR Doc. 2020-08603 Filed 5-11-20; 8:45 am]
BILLING CODE 6351-01-P