[Federal Register Volume 85, Number 133 (Friday, July 10, 2020)]
[Proposed Rules]
[Pages 41463-41469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14254]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
RIN 3038-AF03
Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is seeking comment on a proposed amendment to the margin
requirements for uncleared swaps for swap dealers (``SD'') and major
swap participants (``MSP'') for which there is no prudential regulator
(the ``CFTC Margin Rule''). As adopted in January 2016, the CFTC Margin
Rule, which mandates the collection and posting of variation margin and
initial margin (``IM''), was to take effect under a phased compliance
schedule extending from September 1, 2016, to September 1, 2020. On
April 9, 2020, the Commission published in the Federal Register a final
rule extending the September 1, 2020 compliance date by one year to
September 1, 2021, for a portion of what was to be the final phase
consisting of entities with smaller average daily aggregate notional
amounts of swaps and certain other financial products (the ``Smaller
Portfolio Group'') to reduce the potential market disruption that could
result from a large number of entities coming into the scope of
compliance on September 1, 2020 (``April 2020 Final Rule'').
Subsequently, on May 28, 2020, to mitigate the operational challenges
faced by certain entities subject to the CFTC Margin Rule as a result
of the coronavirus disease 2019 (``COVID-19'') pandemic, the Commission
adopted an interim final rule (the ``IFR'') extending the September 1,
2020 compliance date for certain entities by one year (``IFR Extension
Group'') to September 1, 2021. This rulemaking proposal (``Proposal'')
would further delay the compliance date for the Smaller Portfolio Group
from September 1, 2021, to September 1, 2022, to avoid market
disruption due to a large number of entities being required to comply
by September 1, 2021, under the revised compliance schedule.
DATES: Comments must be received on or before September 8, 2020.
ADDRESSES: You may submit comments, identified by RIN 3038-AF03, 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\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I.
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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://comments.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: Joshua B. Sterling, Director, 202-418-
6056, jsterling@cftc.gov; Thomas J. Smith, Deputy Director, 202-418-
5495, tsmith@cftc.gov; Warren Gorlick, Associate Director, 202-418-
5195, wgorlick@cftc.gov; or Carmen Moncada-Terry, Special Counsel, 202-
418-5795, cmoncada-terry@cftc.gov, Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
[[Page 41464]]
I. Background
Section 4s(e) of the Commodity Exchange Act (``CEA'') \2\ requires
the Commission to adopt rules establishing minimum initial and
variation margin requirements for all swaps \3\ that are (i) entered
into by an SD or MSP for which there is no prudential regulator \4\
(collectively, ``covered swap entities'' or ``CSEs'') and (ii) not
cleared by a registered derivatives clearing organization (``uncleared
swaps'').\5\ To offset the greater risk to the SD \6\ or MSP \7\ and
the financial system arising from the use of uncleared swaps, these
requirements must (i) help ensure the safety and soundness of the SD or
MSP and (ii) be appropriate for the risk associated with the uncleared
swaps held by the SD or MSP.\8\
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\2\ 7 U.S.C. 6s(e) (capital and margin requirements).
\3\ CEA section 1a(47), 7 U.S.C. 1a(47) (swap definition);
Commission regulation 1.3, 17 CFR 1.3 (further definition of a
swap). A swap includes, among other things, an interest rate swap,
commodity swap, credit default swap, and currency swap.
\4\ CEA section 1a(39), 7 U.S.C. 1a(39) (defining the term
``prudential regulator'' to include the Board of Governors of the
Federal Reserve System; the Office of the Comptroller of the
Currency; the Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency). The
definition of prudential regulator further specifies the entities
for which these agencies act as prudential regulators. The
prudential regulators published final margin requirements in
November 2015. See generally Margin and Capital Requirements for
Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential
Margin Rule''). The Prudential Margin Rule is similar to the CFTC
Margin Rule, including with respect to the CFTC's phasing-in of
margin requirements, as discussed below.
\5\ CEA section 4s(e)(2)(B)(ii), 7 U.S.C. 6s(e)(2)(B)(ii). In
Commission regulation 23.151, the Commission further defined the
term uncleared swap to mean a swap that is not cleared by a
registered derivatives clearing organization or by a derivatives
clearing organization that the Commission has exempted from
registration as provided under the CEA. 17 CFR 23.151.
\6\ CEA section 1a(49), 7 U.S.C. 1a(49) (swap dealer
definition); Commission regulation 1.3 (further definition of swap
dealer).
\7\ CEA section 1a(32), 7 U.S.C. 1a(32) (major swap participant
definition); Commission regulation 1.3 (further definition of major
swap participant).
\8\ CEA section 4s(e)(3)(A), 7 U.S.C. 6s(e)(3)(A).
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The Basel Committee on Banking Supervision and the Board of the
International Organization of Securities Commissions (``BCBS/IOSCO'')
established an international framework for margin requirements for
uncleared derivatives in September 2013 (the ``BCBS/IOSCO
Framework'').\9\ After the establishment of the BCBS/IOSCO Framework,
on January 6, 2016, the CFTC, consistent with section 4s(e),
promulgated rules requiring CSEs to collect and post initial and
variation margin for uncleared swaps,\10\ adopting the implementation
schedule set forth in the BCBS/IOSCO Framework, including the revised
implementation schedule adopted on March 18, 2015.\11\
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\9\ See generally BCBS and IOSCO, Margin requirements for non-
centrally cleared derivatives (Sept. 2013), https://www.bis.org/publ/bcbs261.pdf.
\10\ See generally Margin Requirements for Uncleared Swaps for
Swap Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
The CFTC Margin Rule, which became effective April 1, 2016, is
codified in part 23 of the Commission's regulations. 17 CFR 23.150
through 23.159 and 23.161. In May 2016, the Commission amended the
CFTC Margin Rule to add Commission regulation 23.160, 17 CFR 23.160,
providing rules on its cross-border application. See generally
Margin Requirements for Uncleared Swaps for Swap Dealers and Major
Swap Participants--Cross-Border Application of the Margin
Requirements, 81 FR 34818 (May 31, 2016).
\11\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (March 2015), https://www.bis.org/bcbs/publ/d317.pdf.
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In July 2019, BCBS/IOSCO further revised the framework to extend
the implementation schedule to September 1, 2021.\12\ Consistent with
this revision to the international framework, the Commission
promulgated the April 2020 Final Rule, which amended the compliance
schedule for the IM requirements under the CFTC Margin Rule by
splitting the last phase of compliance into two compliance phases
beginning on September 1, 2020, and September 1, 2021,
respectively.\13\
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\12\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (July 2019), https://www.bis.org/bcbs/publ/d475.pdf (``2019 BCBS/IOSCO Margin Framework'').
\13\ See generally Margin Requirements for Uncleared Swaps for
Swap Dealers and Major Swap Participants, 85 FR 19878 (April 9,
2020).
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The World Health Organization declared the COVID-19 outbreak a
global pandemic on March 11, 2020.\14\ On March 13, 2020, President
Donald J. Trump declared a national emergency due to the COVID-19
pandemic.\15\ The disease has impacted individuals across the world and
severely disrupted domestic and international business, and adversely
impacted the global economy.
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\14\ WHO Director-General's opening remarks at the media
briefing on COVID-19 (March 11, 2020), https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19-11-march-2020.
\15\ Proclamation on Declaring a National Emergency Concerning
the Novel Coronavirus Disease (COVID-19) Outbreak (March 13, 2020),
https://www.whitehouse.gov/presidential-actions/proclamation-declaring-national-emergency-concerning-novel-coronavirus-disease-covid-19-outbreak/.
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In response to significant concerns regarding the COVID-19
outbreak, BCBS/IOSCO decided to amend its margin policy framework to
further extend the implementation schedule for the margin requirements
for non-centrally cleared derivatives by one year.\16\ BCBS/IOSCO, in a
joint statement, stated that the extension would provide additional
operational capacity for firms to respond to the immediate impact of
COVID-19 and at the same time facilitate firms' diligent efforts to
comply with the requirements by the revised deadlines.\17\
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\16\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (April 2020), https://www.bis.org/bcbs/publ/d499.htm (``2020 BCBS/IOSCO Margin Framework'') and Press
Release, April 3, 2020,https://www.bis.org/press/p200403a.htm
(``April 2020 BCBS/IOSCO Press Release'').
\17\ Basel Committee and IOSCO announce deferral of final
implementation phases of the margin requirements for non-centrally
cleared derivatives (April 3, 2020), https://www.bis.org/press/p200403a.htm.
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After taking into consideration the revised BCBS/IOSCO
implementation schedule, in May 2020, the Commission amended the IM
compliance schedule for the IFR Extension Group, which otherwise would
have been required to comply with the IM requirements beginning on
September 1, 2020, to extend the compliance date to September 1,
2021.\18\ The Commission accomplished this change by means of an
interim final rule in order to address the immediate impact of the
COVID-19 pandemic on the IFR Extension Group in an expedited and timely
manner; however, the Commission did not extend the compliance date for
the Smaller Portfolio Group, which is still September 1, 2021, the same
day as the revised IFR Extension Group compliance date.
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\18\ See CFTC Unanimously Approves an Interim Final Rule and a
Proposed Rule at May 28 Open Meeting (May 28, 2020) (announcing
unanimous approval by the Commission of an interim final rule
extending the September 1, 2020 compliance date for the IM
requirements to September 1, 2021). Recently, a Global Markets
Advisory Committee (``GMAC'') subcommittee encouraged the adoption
of the BCBS/IOSCO recommendation to extend the implementation
schedule given the circumstances brought about by the COVID-19
pandemic. See Recommendations to Improve Scoping and Implementation
of Initial Margin Requirements for Non-Cleared Swaps, Report to the
CFTC's Global Markets Advisory Committee by the Subcommittee on
Margin Requirements for Non-Cleared Swaps, at 3 (April 2020),
https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download. The GMAC adopted the subcommittee's report and recommended
to the Commission that it consider adopting the report's
recommendations. The GMAC subcommittee was not tasked to respond to
the COVID-19 pandemic. Rather, its establishment pre-dates the
pandemic's impact, and its directive was to address the ongoing
challenges involving the implementation of the CFTC margin
requirements during the last stages of the compliance schedule. See
CFTC Commissioner Stump Announces New GMAC Subcommittee on Margin
Requirements for Non-Cleared Swaps (Oct. 28, 2019), https://www.cftc.gov/PressRoom/PressReleases/8064-19.
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[[Page 41465]]
II. Proposed Changes to the CFTC Margin Rule
Covered swap entities are required to post and collect IM with
counterparties that are SDs, MSPs, or financial end users with material
swap exposure (``MSE'') \19\ (``covered counterparties'') in accordance
with a compliance schedule set forth in Commission regulation
23.161.\20\ After the amendments described above, the compliance
schedule comprises five compliance dates, from September 1, 2016 to
September 1, 2021, staggered such that CSEs and covered counterparties,
starting with the largest average daily aggregate notional amounts
(``AANA'') of uncleared swaps and certain other financial products, and
then successively lesser AANA, are required to come into compliance
with the IM requirements in a series of five phases.
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\19\ Commission regulation 23.151 provides that MSE for an
entity means that the entity and its margin affiliates have an
average daily aggregate notional amount of uncleared swaps,
uncleared security-based swaps, foreign exchange forwards, and
foreign exchange swaps with all counterparties for June, July or
August of the previous calendar year that exceeds $8 billion, where
such amount is calculated only for business days. A company is a
``margin affiliate'' of another company if: (i) Either company
consolidates the other on a financial statement prepared in
accordance with U.S. Generally Accepted Accounting Principles, the
International Financial Reporting Standards, or other similar
standards; (ii) both companies are consolidated with a third company
on a financial statement prepared in accordance with such principles
or standards; or (iii) for a company that is not subject to such
principles or standards, if consolidation as described in paragraph
(1) or (2) of this definition would have occurred if such principles
or standards had applied. 17 CFR 23.151.
\20\ 17 CFR 23.161.
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The fourth compliance date, September 1, 2019, brought within the
scope of compliance CSEs and covered counterparties each exceeding $750
billion in AANA. The fifth and last compliance date (``phase 5'') was
originally scheduled to occur on September 1, 2020 and as described in
Section I above, was split into two phases with the compliance date for
the Smaller Portfolio Group extended to September 1, 2021. Following
the adoption of the IFR, the IFR Extension Group compliance date was
also extended to September 1, 2021 and as a result, the IFR Extension
Group and Smaller Portfolio Group are currently required to begin IM
compliance on the same day.
The IFR Extension Group and the Smaller Portfolio Group, together,
comprise CSEs and their covered counterparties that are not yet subject
to the IM requirements, including financial end user counterparties
with an MSE exceeding $8 billion in AANA. The onset of the compliance
phase starting on September 1, 2021, would result in a very large
reduction in the AANA threshold for financial end user counterparties.
Specifically, entities in the fourth phase were subject to a $750
billion AANA threshold, and beginning on September 1, 2021, entities
would come within the scope of IM compliance if their AANA exceeds $8
billion.
According to the CFTC's Office of the Chief Economist (``OCE''),
compared with the first through fourth phase of compliance, which
brought approximately 40 entities into scope, the two groups now
subject to the September 1, 2021 compliance date would bring into scope
approximately 700 entities, along with 7,000 swap trading
relationships.\21\ This means that approximately 700 entities may have
to amend or enter into up to 7,000 new sets of credit support or other
IM agreements in order to continue to engage in swap transactions.
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\21\ Richard Haynes, Madison Lau, & Bruce Tuckman, Initial
Margin Phase 5, at 4-7 (Oct. 24, 2018), https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf (``OCE Initial Margin
Phase 5 Study''). The OCE Study defines ``a `relationship' as an
entity and a swap dealer, where the entity is an aggregation of
related affiliates.''
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The Commission adopted the April 2020 Final Rule postponing the
compliance date for the Smaller Portfolio Group in order to address
concerns that the large number of counterparties preparing to meet the
September 1, 2020 deadline would seek to engage the same limited number
of entities that provide IM required services, involving, among other
things, the preparation of IM-related documentation, the approval and
implementation of risk-based models for IM calculation, and in some
cases the establishment of custodial arrangements. In the preamble to
the April 2020 Final Rule, the Commission stated that compliance delays
could lead to disruption in the markets; for example, some
counterparties could, for a time, be restricted from entering into
uncleared swaps and therefore might be unable to use swaps to hedge
their financial risk.
Because the IFR postponed the compliance date for the IFR Extension
Group to the same date as the Smaller Portfolio Group in response to
the COVID-19 pandemic, both groups face again effectively the same
issues that the April 2020 Final Rule intended to address, including
the limited number of entities that provide IM required services. In
recognition of this concern, the most recent BCBS/IOSCO margin
framework revision recommended extending the September 1, 2021 deadline
for smaller entities to September 1, 2022.\22\ The Commission's
proposed amendment, which is consistent with both the revised BCBS/
IOSCO framework and the Commission's rationale for adopting the April
2020 Final Rule, would further delay the compliance date for the
Smaller Portfolio Group entities to alleviate the potential market
disruptions described above. The proposed amendment also would be
consistent with similar actions by the prudential regulators and the
Commission's international counterparts.\23\ By helping to achieve
regulatory harmonization with respect to uncleared swaps margin, the
Proposal may help to reduce regulatory arbitrage.
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\22\ See 2020 BCBS/IOSCO Margin Framework.
\23\ The prudential regulators recently issued an interim final
rule to, among other things, revise their margin compliance schedule
consistent with the revised BCBS/IOSCO implementation schedule. See
Agencies finalize amendments to swap margin rule (June 25, 2020),
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200625b.htm (``Prudential Regulators' June 2020 IFR''). In
addition, the European Securities and Markets Authority (ESMA), the
European Banking Authority (EBA) and the European Insurance and
Occupational Pensions Authority (EIOPA), collectively known as the
European Supervisory Authorities (ESAs), issued joint draft
Regulatory Technical Standards (RTS) proposing, among other
amendments, changes to the European Union margin rules to
effectively implement the 2020 BCBS/IOSCO Margin Framework
implementation schedule revisions. See Final Report, EMIR RTS on
Various Amendments to the Bilateral Margin Requirements in View of
the International Framework (May 4, 2020), https://www.esma.europa.eu/sites/default/files/library/esas_2020_09__-__final_report_-_bilateral_margin_amendments.pdf. The ESAs submitted
the draft RTS for endorsement by the European Commission.
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In proposing the change in the Smaller Portfolio Group compliance
date in the April 2020 Final Rule, the Commission also considered the
relatively small amount of swap activity of the financial end users
that would be subject to the one year extension. The OCE estimated in
2018 the average AANA per entity subject to the original September 1,
2020 compliance date to be $54 billion, compared to an average $12.71
trillion AANA for each entity in the earlier phases 1, 2, and 3 and $1
trillion in phase 4. OCE has also estimated that the total AANA for the
Smaller Portfolio Group that would be subject to the one year extension
is approximately four percent of the total AANA across all the
phases.\24\ Given the relatively small amount of swap activity of the
financial end users in the Smaller Portfolio Group, the Commission
[[Page 41466]]
believes the proposed compliance date extension would have a muted
impact on the systemic risk mitigating effects of the IM requirements
during the extension period.
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\24\ The methodology for calculating AANA is described in the
OCE Initial Margin Phase 5 Study at 3.
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The muted impact on systemic risk reflects the relatively small
size of portfolios of entities in the Smaller Portfolio Group compared
to the larger swap portfolios of entities that are already required to
exchange IM pursuant to the CFTC Margin Rule. In the Commission's view,
although the impact of Smaller Portfolio Group swap activity on
systemic risk is likely to be muted during the one year delay, the time
limited risk for the additional year should not be interpreted as
dismissive of the longer term regulatory implications of this swap
activity. The exchange of IM by entities with relatively small
portfolios supports the health and stability of the overall financial
system.
Accordingly, the Commission is committed to implementing the full
CFTC Margin Rule as directed by Congress.
Hence, the Commission proposes to further amend Commission
regulation 23.161(a), which sets forth the schedule for compliance with
the CFTC Margin Rule, to delay the compliance date for the Smaller
Portfolio Group by another year.
Request for comment: The Commission requests comment regarding the
proposed amendments to Commission regulation 23.161. The Commission
specifically requests comment on the following questions:
The CFTC Margin Rule, including the original compliance
schedule, was adopted in January 2016 and many, although not all, firms
in the Smaller Portfolio Group will have expected for some time that
they are likely to fall within that group. Given the amount of time
some of these firms have known of the need to establish IM-related
arrangements, is it necessary to provide another one year delay to
September 1, 2022 for these firms? Might a decision to delay the
compliance date by one year for the Smaller Portfolio Group result in
unnecessary expense if firms have already undertaken preparatory work,
which might need to be redone the following year? Are there other
approaches the Commission could take to bring about earlier compliance
with the IM requirements? For example, should the Commission include in
the rule text a stated expectation that Smaller Portfolio Group
entities proceed expeditiously to establish and implement IM
arrangements prior to September 1, 2022?
III. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \25\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget control number. This Proposal contains no requirements
subject to the PRA.
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\25\ 44 U.S.C. 3501 et seq.
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B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities.\26\ This
Proposal only affects SDs and MSPs that are subject to the CFTC Margin
Rule and their covered counterparties, all of which are required to be
eligible contract participants (``ECPs'').\27\ The Commission has
previously determined that SDs, MSPs, and ECPs are not small entities
for purposes of the RFA.\28\ Therefore, the Commission believes that
this Proposal will not have a significant economic impact on a
substantial number of small entities, as defined in the RFA.
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\26\ 5 U.S.C. 601 et seq.
\27\ Each counterparty to an uncleared swap must be an ECP, as
the term is defined in section 1a(18) of the CEA, 7 U.S.C. 1a(18)
and Commission regulation 1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
\28\ See Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001)
(ECPs).
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Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that this Proposal will not have
a significant economic impact on a substantial number of small
entities. The Commission invites comment on the impact of this Proposal
on small entities.
C. Cost-Benefit Considerations
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. Section 15(a) further specifies that the costs and
benefits shall be evaluated in light of the following five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the section 15(a) considerations.
Further, the Commission reflected upon the extraterritorial reach of
this Proposal and notes where this reach may be especially relevant.
This Proposal would delay the compliance schedule for the CFTC
Margin Rule for CSEs and covered counterparties in the Smaller
Portfolio Group, including financial end user counterparties exceeding
the MSE threshold of $8 billion in AANA. These entities would come into
scope in a final sixth phase, beginning September 1, 2022.
As discussed above, the Commission believes that with the adoption
of the IFR and the resulting reapplication of the same compliance
deadline for both the Smaller Portfolio Group and the IFR Extension
Group, the resulting large number of counterparties that would be
required to comply with the IM requirements for the first time on
September 1, 2021, could cause certain market disruptions. Some CSEs
and covered counterparties may be strained given the demand for
resources and services to meet the September 2021 deadline and
operationalize the exchange of IM, involving, among other things,
counterparty onboarding, approval and implementation of risk-based
models for the calculation of IM, and documentation associated with the
exchange of IM.
The baseline against which the benefits and costs associated with
this Proposal are compared is the uncleared swaps markets as they exist
today, including the impact of the current compliance schedule and the
implementation of the September 1, 2021 deadline. With this as the
baseline for this Proposal, the following are the benefits and costs of
this Proposal.
1. Benefits
As described above, this Proposal will extend the compliance
schedule for the IM requirements for the Smaller Portfolio Group to
September 1, 2022. The extension may benefit some entities in the
Smaller Portfolio Group by allowing them to trade uncleared swaps more
easily and cheaply over this period. It also may benefit entities in
the IFR Extension Group by making it easier for them to obtain the
resources needed to comply with IM requirements. The Proposal is
specifically intended to alleviate the potential market disruption
resulting from the large number of
[[Page 41467]]
counterparties that would come into scope under the current compliance
schedule and the strain on the uncleared swaps markets resulting from
the increased demand for limited resources and services to set up
operations to comply with the IM requirements, including counterparty
onboarding, adoption and implementation of risk-based models to
calculate IM, and documentation associated with the exchange of IM. In
contrast with the CFTC's existing requirements mandating that the
entities in the Smaller Portfolio Group comply with initial margin
requirements at the same time as entities in the IFR Extension Group,
the Proposal reduces the potential for bottlenecks by creating a one
year separation in the applicable compliance dates for the two
categories of entities.
The Proposal would provide a 12-month delay for smaller
counterparties that comprise the Smaller Portfolio Group to September
1, 2022, whose swap trading may not pose the same level of risk, to
prepare for their compliance with the IM requirements. The Proposal
therefore would promote the smooth and orderly transition into IM
compliance for both the IFR Extension Group and the Smaller Portfolio
Group.
The Proposal would amend the CFTC Margin Rule consistent with the
revised BCBS/IOSCO 2020 Margin Framework, and the Prudential
Regulators' June 2020 IFR amending the IM compliance schedule. The
Proposal therefore promotes harmonization with international and
domestic margin regulatory requirements thereby reducing the potential
for regulatory arbitrage.
2. Costs
The Proposal would extend the time frame for compliance with the IM
requirements for the smallest, in terms of notional amount, CSEs and
covered counterparties, including SDs and MSPs and financial end users
that exceed an MSE of $8 billion, by an additional 12 months. Swaps
entered into during this period with the smallest CSEs have the
potential to be treated as legacy swaps and thus would not be subject
to the IM requirements. In the event that IM would have been collected
on any of these swaps,\29\ by delaying the compliance date one year,
these positions would increase the level of counterparty credit risk to
the financial system. While potentially meaningful, this risk is a
relatively lesser concern because these legacy swap portfolios would be
entered into with counterparties that engage in lower levels of
notional trading.
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\29\ While all entities that are covered by the Commission's
margin requirements are required to exchange variation margin, the
Commission notes that some entities may not be required to post and
collect IM, as certain thresholds must be met before the posting and
collection of IM are required.
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3. Section 15(a) Considerations
In light of the foregoing, the CFTC has evaluated the costs and
benefits of this Proposal pursuant to the five considerations
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
This Proposal would protect market participants and the public
against the potential disruption that may be caused by the large number
of counterparties that would come into scope of the IM requirements at
the end of the current compliance schedule.
Under the proposed compliance schedule, fewer counterparties would
come into scope by September 1, 2021 and many small counterparties
would be able to defer compliance until the last compliance date on
September 1, 2022. As such, the demand for resources and services to
achieve operational readiness would be reduced, mitigating the
potential strain on the uncleared swaps markets.
Inasmuch as this Proposal delays the implementation of IM for the
smallest CSEs, there may not be as much IM posted to protect the
financial system as would otherwise be the case.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
The Proposal would be expected to make the uncleared swaps markets
more efficient by facilitating counterparties' transition into
compliance with the IM requirements, thus avoiding inefficiencies in
the documentation and implementation process. Counterparties would have
additional time to document their swap relationships and set up
adequate processes to operationalize the exchange of IM. As such, the
Proposal would promote more even competition among counterparties in
the uncleared swaps markets, as it would remove the potential incentive
of CSEs to prioritize arrangements with larger counterparties to the
detriment of smaller counterparties and would help maintain the current
state of market efficiency.
By preventing the market disruption that would result from the
large number of counterparties that would come into scope at the end of
the current compliance schedule, the Proposal promotes the financial
integrity of the markets, reducing the probability of disruption
resulting from the heightened demand for limited financial
infrastructure resources. On the other hand, for a one year period,
there would be less IM posted overall, making uncleared swaps markets
more susceptible to financial contagion where the default of one
counterparty could lead to subsequent defaults of other counterparties
potentially harming market integrity.
(c) Price Discovery
This Proposal may enhance or negatively impact price discovery.
Without the Proposal, counterparties, in particular smaller
counterparties, may be discouraged from trading uncleared swaps because
they may not be able to secure resources and services in a timely
manner to operationalize the exchange of IM, or may forgo such trading
absent relief from the requirement to post regulatory IM. The reduction
in uncleared swaps trading may reduce liquidity and harm price
discovery. Conversely, by further delaying implementation of the IM
requirements for the Smaller Portfolio Group, during the delay period,
the pricing of the swaps entered into by those counterparties may be
adjusted to incorporate additional risks that would otherwise have been
covered by IM. These additional adjustments, which may vary from swap
dealer to swap dealer, could result in pricing differentiations between
swaps entered into by some Smaller Portfolio Group entities and
comparable swaps entered into by entities already subject to the margin
requirements. As result, the ability of entities in the Smaller
Portfolio Group to compare prices may be reduced, harming effective
market price discovery by these entities.
(d) Sound Risk Management
As discussed above, by delaying the compliance date for the Smaller
Portfolio Group, swaps entered into during this period would not be
subject to the IM requirements, potentially increasing the level of
counterparty credit risk to the financial system. At the same time,
this Proposal would stave off the potential market disruption that
could result from the large number of counterparties that would come
into the scope of the IM requirements at the end of the current
compliance schedule. The delayed compliance schedule would alleviate
the potential disruption in establishing the financial infrastructure
for the exchange of IM between in-scope entities and would give
counterparties time to prepare for IM compliance and to establish
[[Page 41468]]
operational processes tailored to their uncleared swaps and associated
risks.
(e) Other Public Interest Considerations
The Proposal promotes harmonization with international and domestic
margin regulatory requirements, reducing the potential for regulatory
arbitrage. The Proposal would amend the CFTC Margin Rule consistent
with the revised BCBS/IOSCO margin framework, and the Prudential
Regulators' June 2020 IFR amending the IM compliance schedule.
4. Request for Comments on Cost-Benefit Considerations
The Commission invites public comment on its cost-benefit
considerations, including the section 15(a) factors described above.
Commenters are also invited to submit any data or other information
that they may have quantifying or qualifying the costs and benefits of
the proposed amendments with their comment letters. In particular, the
Commission seeks specific comment on the following:
(a) Has the Commission accurately identified all the benefits of
this Proposal? Are there other benefits to the Commission, market
participants, and/or the public that may result from the adoption of
this Proposal that the Commission should consider? Please provide
specific examples and explanations of any such benefits.
(b) Has the Commission accurately identified all the costs of this
Proposal? Are there additional costs to the Commission, market
participants, and/or the public that may result from the adoption of
this Proposal that the Commission should consider? Please provide
specific examples and explanations of any such costs. For example, is
there a potential for increased counterparty credit risk in trades or
contagion involving firms that will get the benefit of the proposed
margin deadline extension, i.e., with respect to trades for those
entities during the period between September 2021 and September 2022?
Is it possible to identify reliably the amount of any such increase in
potential risk? Should the margin amounts that these firms are required
to post by contract, rather than by CFTC regulations, be considered as
a risk mitigant during that period?
(c) Does this Proposal impact the section 15(a) factors in any way
that is not described above? Please provide specific examples and
explanations of any such impact.
D. Antitrust Laws
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the 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.\30\
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\30\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether this Proposal implicates any other specific
public interest to be protected by the antitrust laws.
The Commission has considered this Proposal to determine whether it
is anticompetitive and has preliminarily identified no anticompetitive
effects. The Commission requests comment on whether this Proposal is
anticompetitive and, if it is, what the anticompetitive effects are.
Because the Commission has preliminarily determined that this
Proposal is not anticompetitive and has no anticompetitive effects, the
Commission has not identified any less anticompetitive means of
achieving the purposes of the CEA. The Commission requests comment on
whether there are less anticompetitive means of achieving the relevant
purposes of the CEA that would otherwise be served by adopting this
Proposal.
List of Subjects in 17 CFR Part 23
Capital and margin requirements, Major swap participants, Swap
dealers, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 23 as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1,6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).
0
2. In Sec. 23.161, republish paragraph (a) introductory text and
revise paragraph (a)(7) to read as follows:
Sec. 23.161 Compliance dates.
(a) Covered swap entities shall comply with the minimum margin
requirements for uncleared swaps on or before the following dates for
uncleared swaps entered into on or after the following dates:
* * * * *
(7) September 1, 2022 for the requirements in Sec. 23.152 for
initial margin for any other covered swap entity for uncleared swaps
entered into with any other counterparty.
* * * * *
Issued in Washington, DC, on June 26, 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 Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Commission Voting Summary 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 Commissioner Rostin Behnam
Today's notice of proposed rulemaking (``NPRM'') is necessitated
as a result of global policy and domestic regulatory considerations
to address the impact of the COVID-19 pandemic on potential market
disruption that could result from a large number of entities
simultaneously coming into compliance with the initial margin (or
``IM'') requirements of the CFTC Margin Rule.\1\ In our attempts to
remain consistent with revisions to the BCBS/IOSCO international
framework's implementation schedule, we have now created an
additional compliance phase, moving from five to six, and postponing
full compliance by one year to September 1, 2021.\2\ This seems
reasonable, save for the fact that our last action to provide relief
for those who would have to come into compliance in September of
this year has resulted in a reuniting of phases five and six,
reintroducing the same set of concerns regarding potential market
disruptions we sought to avoid. Accordingly, we are here today with
a new NPRM to further postpone the compliance date for the final
phase, phase six, to September 1, 2022.
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\1\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 85 FR 19878 (Apr. 9, 2020).
\2\ 85 FR 19878; Interim Final Rule: Margin Requirements for
Uncleared Swaps for Swap Dealers and Major Swap Participants, _ FR
___ (___, 2020), voting draft available at https://www.cftc.gov/PressRoom/PressReleases/8168-20.
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I will support the NPRM today because it is, at this time, being
presented as the swiftest means to establish a realistic compliance
deadline for which we will hold
[[Page 41469]]
covered entities accountable. The circumstances of the COVID-19
pandemic are significant cause for concern, and I believe the
Commission has responded with workable, targeted solutions aimed at
ensuring our policies remain intact when the rigor of our
regulations prove too burdensome to balance with competing
overarching financial stability concerns.
However, as I have maintained throughout this process, delaying
IM requirements as a means to provide temporary, targeted relief to
address increased market volatility seems counterintuitive.\3\
Moreover, as we continue to prolong compliance, we inevitably invite
further requests for deferral of an indefinite nature. As the ten
year anniversary of the Dodd-Frank Act \4\ approaches, we cannot
presume that the risks this core-reform seeks to address have
morphed into anything of lesser concern, and I will not support any
further relief absent truly compelling facts and lockstep agreement
with the prudential regulators responsible for establishing margin
requirements for swap dealers and major swap participants within
their respective jurisdictions.
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\3\ Rostin Behnam, Commissioner, Statement of Commissioner
Rostin Behnam Regarding Interim Final Rule with Request for Comment
on Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants (May 28, 2020),https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement052820.
\4\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
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Appendix 3--Concurring Statement of Commissioner Dan M. Berkovitz
I concur with issuing for public comment the proposal to extend
the swap initial margin compliance date to September 1, 2022 for
certain financial entities that have smaller swap portfolios
(``Proposal'').
This is the second extension for these entities. The original
compliance date was September 1, 2020. The reasons for this proposed
extension are essentially the same as the first extension. The first
extension was meant to avoid congestion in negotiating and
implementing thousands of initial margin arrangements for the
approximately 700 entities that would otherwise have needed to enter
into initial margin arrangements by September 1, 2020. The extension
split the compliance timeline for the smaller swap portfolio
entities from the timeline for the entities with larger portfolios.
The larger portfolio entities were still expected to comply by
September 1, 2020, but the compliance date for the smaller entities
was extended to September 1, 2021. However, more recently, in light
of the disruptions caused by the Covid-19 pandemic, the compliance
date for the larger swap portfolio entities was extended to
September 1, 2021, thus again establishing the same compliance date
for both the larger and smaller swap portfolio groups.
Although the Proposal is based on essentially the same rationale
as the first extension for the smaller entities, I am not
presupposing that the full extension is necessary. The smaller swap
portfolio entities and their swap dealers will have had nearly six
years to prepare for the deadline as of September 1, 2021. These
entities, as well as the larger portfolio entities for which
September 1, 2021 is the deadline, will have had plenty of time to
spread the negotiation and implementation process out over those
many years. It is my understanding that many of the larger swap
portfolio entities were already well on the way to completing the
necessary documentation when the Covid-19 pandemic struck. The
Proposal includes several questions as to whether the further
extension in the Proposal could increase costs by possibly stopping
and restarting negotiations again. In determining whether an
extension will be finalized in regulation, the Commission will
benefit from input from the public through the notice and comment
process provided for in the Administrative Procedure Act.
For these reasons, I concur in the issuance of the Proposal and
look forward to comments from the public.
[FR Doc. 2020-14254 Filed 7-9-20; 8:45 am]
BILLING CODE 6351-01-P