[Federal Register Volume 76, Number 91 (Wednesday, May 11, 2011)]
[Proposed Rules]
[Pages 27564-27596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10432]
[[Page 27563]]
Vol. 76
Wednesday,
No. 91
May 11, 2011
Part IV
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 45
Board of Governors of the Federal Reserve System
12 CFR Part 237
Federal Deposit Insurance Corporation
12 CFR Part 324
Farm Credit Administration
12 CFR Part 624
Federal Housing Finance Agency
12 CFR Part 1221
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Margin and Capital Requirements for Covered Swap Entities; Proposed
Rule
Federal Register / Vol. 76 , No. 91 / Wednesday, May 11, 2011 /
Proposed Rules
[[Page 27564]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 45
[Docket No. OCC-2011-0008]
RIN 1557-AD43
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
12 CFR Part 237
[Docket No. R-1415]
RIN 7100 AD74
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AD79
FARM CREDIT ADMINISTRATION
12 CFR Part 624
RIN 3052-AC69
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1221
RIN 2590-AA45
Margin and Capital Requirements for Covered Swap Entities
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Farm Credit Administration (FCA);
and the Federal Housing Finance Agency (FHFA).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (collectively, the
Agencies) are requesting comment on a proposal to establish minimum
margin and capital requirements for registered swap dealers, major swap
participants, security-based swap dealers, and major security-based
swap participants for which one of the Agencies is the prudential
regulator. This proposed rule implements sections 731 and 764 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, which
require the Agencies to adopt rules jointly to establish capital
requirements and initial and variation margin requirements for such
entities on all non-cleared swaps and non-cleared security-based swaps
in order to offset the greater risk to such entities and the financial
system arising from the use of swaps and security-based swaps that are
not cleared.
DATES: Comments should be received on or before June 24, 2011.
ADDRESSES: Interested parties are encouraged to submit written comments
jointly to all of the Agencies. Commenters are encouraged to use the
title ``Margin and Capital Requirements for Covered Swap Entities'' to
facilitate the organization and distribution of comments among the
Agencies. Commenters are also encouraged to identify the number of the
specific question for comment to which they are responding.
Office of the Comptroller of the Currency: Because paper mail in
the Washington, DC area and at the OCC is subject to delay, commenters
are encouraged to submit comments by the Federal eRulemaking Portal or
e-mail, if possible. Please use the title ``Margin and Capital
Requirements'' to facilitate the organization and distribution of the
comments. You may submit comments by any of the following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
http://www.regulations.gov. Select ``Document Type'' of ``Proposed
Rules,'' and in the ``Enter Keyword or ID Box,'' enter Docket ID ``OCC-
2011-0008,'' and click ``Search.'' On ``View By Relevance'' tab at the
bottom of screen, in the ``Agency'' column, locate the Proposed Rule
for the OCC, in the ``Action'' column, click on ``Submit a Comment'' or
``Open Docket Folder'' to submit or view public comments and to view
supporting and related materials for this rulemaking action.
Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting or viewing public comments, viewing other supporting and
related materials, and viewing the docket after the close of the
comment period.
E-mail: [email protected].
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 2-3, Washington, DC 20219.
Fax: (202) 874-5274.
Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2011-0008'' in your comment. In general, OCC will enter
all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, e-mail addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this proposed rulemaking by any of the following methods:
Viewing Comments Electronically: Go to http://www.regulations.gov. Select ``Document Type'' of ``Public
Submissions,'' and in the ``Enter Keyword or ID Box,'' enter Docket ID
``OCC-2011-0008,'' and click ``Search.'' Comments will be listed under
``View By Relevance'' tab at the bottom of screen. If comments from
more than one agency are listed, the ``Agency'' column will indicate
which comments were received by the OCC.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC, 250 E Street, SW., Washington, DC.
For security reasons, the OCC requires that visitors make an
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid
government-issued photo identification and submit to security screening
in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board of Governors of the Federal Reserve System
You may submit comments, identified by Docket No. R-1415 and RIN
7100 AD74, by any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Address to Jennifer J. Johnson, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551.
[[Page 27565]]
All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between
9 a.m. and 5 p.m. on weekdays.
Federal Deposit Insurance Corporation: You may submit comments,
identified by RIN number, by any of the following methods:
Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency Web site.
E-mail: [email protected]. Include the RIN number on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
Instructions: All comments received must include the agency name
and RIN for this rulemaking and will be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html, including any
personal information provided.
Federal Housing Finance Agency: You may submit your written
comments on the proposed rulemaking, identified by regulatory
information number (RIN) 2590-AA45, by any of the following methods:
E-mail: Comments to Alfred M. Pollard, General Counsel,
may be sent by e-mail at [email protected]. Please include ``RIN
2590-AA45'' in the subject line of the message.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at [email protected] to ensure timely receipt by the
Agency. Please include ``RIN 2590-AA45'' in the subject line of the
message.
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA45, Federal
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington,
DC 20552.
Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA45,
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552. A hand-delivered package should be logged at the
Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.
All comments received by the deadline will be posted for public
inspection without change, including any personal information you
provide, such as your name and address, on the FHFA Web site at http://www.fhfa.gov. Copies of all comments timely received will be available
for public inspection and copying at the address above on government-
business days between the hours of 10 a.m. and 3 p.m. To make an
appointment to inspect comments please call the Office of General
Counsel at (202) 414-6924.
Farm Credit Administration: We offer a variety of methods for you
to submit your comments. For accuracy and efficiency reasons,
commenters are encouraged to submit comments by e-mail or through the
FCA's Web site. As facsimiles (fax) are difficult for us to process and
achieve compliance with section 508 of the Rehabilitation Act, we are
no longer accepting comments submitted by fax. Regardless of the method
you use, please do not submit your comments multiple times via
different methods. You may submit comments by any of the following
methods:
E-mail: Send us an e-mail at [email protected].
FCA Web site: http://www.fca.gov. Select ``Public
Commenters,'' then ``Public Comments,'' and follow the directions for
``Submitting a Comment.''
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Gary K. Van Meter, Acting Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
You may review copies of all comments we receive at our office in
McLean, Virginia or on our Web site at http://www.fca.gov. Once you are
in the Web site, select ``Public Commenters,'' then ``Public
Comments,'' and follow the directions for ``Reading Submitted Public
Comments.'' We will show your comments as submitted, including any
supporting data provided, but for technical reasons we may omit items
such as logos and special characters. Identifying information that you
provide, such as phone numbers and addresses, will be publicly
available. However, we will attempt to remove e-mail addresses to help
reduce Internet spam.
FOR FURTHER INFORMATION CONTACT: OCC: Michael Sullivan, Market RAD
(202) 874-3978, Kurt Wilhelm, Director, Financial Markets Group (202)
874-4479, Jamey Basham, Assistant Director, Legislative and Regulatory
Activities Division (202) 874-5090, or Ron Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities Division (202) 874-5090, Office
of the Comptroller of the Currency, 250 E Street, SW., Washington, DC
20219.
Board: Sean D. Campbell, Deputy Associate Director, Division of
Research and Statistics, (202) 452-3761, Michael Gibson, Senior
Associate Director, Division of Research and Statistics, (202) 452-
2495, or Jeremy R. Newell, Senior Attorney, Legal Division, (202) 452-
3239, Board of Governors of the Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551.
FDIC: Bobby R. Bean, Chief, Policy Section, (202) 898-6705, John
Feid, Senior Capital Markets Specialist, (202) 898-8649, Division of
Risk Management Supervision, Thomas F. Hearn, Counsel, (202) 898-6967,
or Ryan K. Clougherty, Senior Attorney, (202) 898-3843, Legal Division,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
FHFA: Robert Collender, Principal Policy Analyst, Office of Policy
Analysis and Research, (202) 343-1510, [email protected], Peggy
Balsawer, Assistant General Counsel, Office of General Counsel, (202)
343-1529, [email protected]. or James Carley, Senior Associate
Director, Division of FHLBank Regulation, (202) 408-2507,
[email protected], Federal Housing Finance Agency, Fourth Floor,
1700 G Street, NW., Washington, DC 20552. The telephone number for the
Telecommunications Device for the Hearing Impaired is (800) 877-8339.
FCA: William G. Dunn, Acting Associate Director, Finance and
Capital Markets Team, Office of Regulatory Policy, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4414, TTY (703) 883-
4434, Joseph T. Connor, Associate Director for Policy and Analysis,
Office of Secondary Market Oversight, Farm Credit Administration,
McLean, VA 22102-5090, (703) 883-4280, TTY (703) 883-4434, or Rebecca
S. Orlich, Senior Counsel, Office of General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.
SUPPLEMENTARY INFORMATION:
[[Page 27566]]
I. Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act) was enacted on July 21, 2010.\1\ Title VII of the Dodd-
Frank Act established a comprehensive new regulatory framework for
derivatives, which the Act generally characterizes as ``swaps'' (which
are defined in section 721 of the Dodd-Frank Act to include interest
rate swaps, commodity-based swaps, and broad-based credit swaps) and
``security-based swaps'' (which are defined in section 761 of the Dodd-
Frank Act to include single-name and narrow-based credit swaps and
equity-based swaps).\2\
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\2\ See 7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68). Swaps and
security-based swaps are sometimes referred to herein collectively
as ``derivatives.''
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As part of this new regulatory framework, sections 731 and 764 of
the Dodd-Frank Act add a new section 4s to the Commodity Exchange Act
and a new section 15F to the Securities Exchange Act of 1934,
respectively, which require the registration and regulation of swap
dealers and major swap participants and security-based swap dealers and
major security-based swap participants (collectively, swap
entities).\3\ For certain types of swap entities that are prudentially
regulated by one of the Agencies,\4\ sections 731 and 764 of the Dodd-
Frank Act require the Agencies to adopt rules jointly for swap entities
under their respective jurisdictions imposing (i) capital requirements
and (ii) initial and variation margin requirements on all non-cleared
swaps and non-cleared security-based swaps.\5\ Swap entities that are
prudentially regulated by the Agencies and therefore subject to the
proposed rule are referred to herein as ``covered swap entities.''
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\3\ See 7 U.S.C. 6s; 15 U.S.C. 78o-8. Section 731 of the Dodd-
Frank Act requires swap dealers and major swap participants to
register with the Commodity Futures Trading Commission (the
``CFTC''), which is vested with primary responsibility for the
oversight of the swaps market under title 7 of the Dodd Frank Act.
Section 764 of the Dodd-Frank Act requires security-based swap
dealers and major security-based swap participants to register with
the Securities and Exchange Commission (the ``SEC''), which is
vested with primary responsibility for the oversight of the
security-based swaps market under title 7 of the Dodd-Frank Act.
Section 713(d)(1) of the Dodd-Frank Act requires the CFTC and SEC to
issue joint rules further defining the terms swap dealer, major swap
participant, security-based swap dealer, and major security-based
swap participant. The CFTC and SEC issued a joint notice of proposed
rulemaking with respect to these definitions in December, 2010. See
75 FR 80,174 (Dec. 21, 2010) (proposed rule).
\4\ Section 1a(39) of the Commodities Exchange Act defines the
term ``prudential regulator'' for purposes of the capital and margin
requirements applicable to swap dealers, major swap participants,
security-based swap dealers and major security-based swap
participants. The Board is the prudential regulator for any swap
entity that is (i) a State-chartered bank that is a member of the
Federal Reserve System, (ii) a State-chartered branch or agency of a
foreign bank, (iii) a foreign bank which does not operate an insured
branch, (iv) an organization operating under section 25A of the
Federal Reserve Act (an Edge corporation) or having an agreement
with the Board under section 25 of the Federal Reserve Act (an
Agreement corporation), and (v) a bank holding company, a foreign
bank that is treated as a bank holding company under section 8(a) of
the International Banking Act of 1978, or a savings and loan holding
company (on or after the transfer date established under section 311
of the Dodd-Frank Act), or a subsidiary of such a company or foreign
bank (other than a subsidiary for which the OCC or FDIC is the
prudential regulator or that is required to be registered with the
CFTC or SEC as a swap dealer or major swap participant or a
security-based swap dealer or major security-based swap participant,
respectively). The OCC is the prudential regulator for any swap
entity that is a national bank, a Federally chartered branch or
agency of a foreign bank, or a Federal savings association. The FDIC
is the prudential regulator for any swap entity that is (i) a State-
chartered bank that is not a member of the Federal Reserve System or
(ii) a State savings association. The FCA is the prudential
regulator for any swap entity that is an institution chartered under
the Farm Credit Act of 1971, as amended. FHFA is the prudential
regulator for any swap entity that is a ``regulated entity'' under
the Federal Housing Enterprises Financial Safety and Soundness Act
of 1992 (i.e., the Federal National Mortgage Association and its
affiliates, the Federal Home Loan Mortgage Corporation and its
affiliates, and the Federal Home Loan Banks). See 7 U.S.C. 1a(39).
\5\ See 7 U.S.C. 6s(e)(2)(A); 15 U.S.C. 78o-8(e)(2)(A). Section
6(s)(e)(1)(A) directs registered swap dealers and major swap
participants for which there is a prudential regulator to comply
with margin and capital rules issued by the prudential regulators,
while section 6(s)(e)(1)(B) directs registered swap dealers and
major swap participants for which there is not a prudential
regulator to comply with margin and capital rules issued by the CFTC
and SEC. Section 78o-8(e)(1) generally parallels section 6s(e)(1),
except that section 78o-8(e)(1)(A) refers to registered security-
based swap dealers and major security-based swap participants for
which ``there is not a prudential regulator.'' The Agencies construe
the ``not'' in section 78o-8(e)(1)(A) to have been included by
mistake, in conflict with section 78o-8(e)(2)(A), and of no
substantive meaning. Otherwise, registered security-based swap
dealers and major security-based swap participants for which there
is not a prudential regulator could be subject to multiple capital
and margin rules, and institutions regulated by the prudential
regulators and registered as security-based swap dealers and major
security-based swap participants might not be subject to any capital
and margin requirements under section 78o-8(e).
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Sections 731 and 764 of the Dodd-Frank Act require the CFTC and SEC
to separately adopt rules imposing capital and margin requirements for
swap entities for which there is no prudential regulator.\6\ The Dodd-
Frank Act requires the CFTC, SEC, and the Agencies to establish and
maintain, to the maximum extent practicable, capital and margin
requirements that are comparable, and to consult with each other
periodically (but no less than annually) regarding these
requirements.\7\
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\6\ See 7 U.S.C. 6s(e)(2)(B); 15 U.S.C. 78o-8(e)(2)(B).
\7\ See 7 U.S.C. 6s(e)(2)(A); 6s(e)(3)(D); 15 U.S.C. 78o-
8(e)(2)(A), 78o-8(e)(3)(D). Staff of the Agencies have consulted
with staff of the CFTC and SEC in developing the proposed rule.
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The capital and margin standards for swap entities imposed under
sections 731 and 764 of the Dodd-Frank Act are intended to offset the
greater risk to the swap entity and the financial system arising from
the use of swaps and security-based swaps that are not cleared.\8\
Sections 731 and 764 of the Dodd-Frank Act require that the capital and
margin requirements imposed on swap entities must, to offset such risk,
(i) help ensure the safety and soundness of the swap entity and (ii) be
appropriate for the greater risk associated with the non-cleared swaps
and non-cleared security-based swaps held as a swap entity.\9\ In
addition, Sections 731 and 764 of the Dodd-Frank Act require the
Agencies, in establishing capital rules for covered swap entities, to
take into account the risks associated with other types, classes or
categories of swaps or security-based swaps engaged in, and the other
activities conducted by that person that are not otherwise subject to
regulation applicable to that person by virtue of the status of the
person as a swap dealer or a major swap participant.\10\ Sections 731
and 764 become effective not less than 60 days after publication of the
final rule or regulation implementing these sections.\11\
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\8\ See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-8(e)(3)(A).
\9\ See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-8(e)(3)(A). In
addition, Section 1201 of Housing and Economic Recovery Act of 2008
(Pub. L. 110-289, 122 Stat. 2654) requires the Director of FHFA,
when promulgating regulations relating to the Federal Home Loan
Banks, to consider the following differences between the Federal
Home Loan Banks and the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac): cooperative ownership structure; mission of providing
liquidity to members; affordable housing and community development
mission; capital structure; and joint and several liability. See
section 1201 Public Law 110-289, 122 Stat. 2782-83 (amending 12
U.S.C. 4513). The Director of FHFA also may consider any other
differences that are deemed appropriate. For purposes of this
proposed rule, FHFA considered the differences as they relate to the
above factors. FHFA requests comments from the public about whether
differences related to these factors should result in any revisions
to the proposal.
\10\ See 7 U.S.C. 6s(e)(2)(C); 15 U.S.C. 78o-8(e)(2)(C). In
addition, the margin requirements imposed by the Agencies must
permit the use of noncash collateral, as the Agencies determine to
be consistent with (i) preserving the financial integrity of the
markets trading swaps and security-based swaps and (ii) preserving
the stability of the U.S. financial system. See 7 U.S.C.
6s(e)(3)(C); 15 U.S.C. 78o-8(e)(3)(C).
\11\ See Dodd Frank Act Sec. Sec. 754, 774.
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The capital and margin requirements that must be established with
respect to
[[Page 27567]]
non-cleared derivatives under sections 731 and 764 of the Dodd-Frank
Act complement changes made elsewhere in the Act that require all
sufficiently standardized swaps and security-based swaps be cleared
through a derivatives clearing organization or clearing agency.\12\
This clearing mandate reflects the consensus of the G-20 leaders: ``All
standardized over-the-counter derivatives contracts should be traded on
exchanges or electronic trading platforms, where appropriate, and
cleared through central counterparties by end of 2012 at the latest.''
\13\
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\12\ See 7 U.S.C. 2(h); 15 U.S.C. 78c-3. Certain types of
counterparties (e.g., counterparties that are not financial entities
and are using swaps or security-based swaps to hedge or mitigate
commercial risks) are exempt from this mandatory clearing
requirement and may elect not to clear a swap or security-based swap
that would otherwise be subject to the clearing requirement.
\13\ G-20 Leaders, June 2010 Toronto Summit Declaration, ] 25.
The dealer community has also recognized the importance of
clearing--beginning in 2009, in an effort led by the Federal Reserve
Bank of New York, the dealer community agreed to increase central
clearing for certain credit derivatives and interest rate
derivatives. See Press Release, Federal Reserve Bank of New York,
New York Fed Welcomes Further Industry Commitments on Over-the-
Counter Derivatives press release (June 2, 2009), available at
http://www.newyorkfed.org/newsevents/news/markets/2009/ma090602.html.
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In the derivatives clearing process, central counterparties (CCPs)
manage the credit risk through a range of controls and methods,
including a margining regime that imposes both initial margin and
variation margin requirements on parties to cleared transactions.\14\
Thus, the mandatory clearing requirement established by the Dodd-Frank
Act for swaps and security-based swaps will effectively require any
party to any transaction subject to the clearing mandate to post
initial and variation margin to the CCP in connection with that
transaction.
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\14\ CCPs interpose themselves between counterparties to a
derivative transaction, becoming the buyer to the seller and the
seller to the buyer and, in the process, taking on the credit risk
that each party poses to the other. For example, when a derivatives
contract between two parties that are members of a CCP is executed
and submitted for clearing, it is typically replaced by two new
contracts--separate contracts between the CCP and each of the two
original counterparties. At that point, the original counterparties
are no longer counterparties to each other; instead, each faces the
CCP as its counterparty, and the CCP assumes the counterparty credit
risk of each of the original counterparties.
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However, if a particular swap or security-based swap is not cleared
because it is not subject to the mandatory clearing requirement (or
because one of the parties to a particular swap or security-based swap
is eligible for, and uses, an exemption from the mandatory clearing
requirement), that swap or security-based swap will be a ``non-
cleared'' swap or security-based swap and will be subject to the
capital and margin requirements for such transactions established under
sections 731 and 764 of the Dodd-Frank Act.
The comprehensive derivatives-related provisions of title VII of
the Dodd-Frank Act, including sections 731 and 764, are intended in
general to reduce risk, increase transparency, promote market integrity
within the financial system, and, in particular, address a number of
weaknesses in the regulation and structure of the derivatives markets
that were revealed during the financial crisis experienced in 2008 and
2009. During the financial crisis, the opacity of derivatives
transactions among dealer banks and between dealer banks and their
counterparties created uncertainty about whether market participants
were significantly exposed to the risk of a default by a swap
counterparty. By imposing a regulatory margin requirement on non-
cleared swaps, the Dodd-Frank Act will reduce the uncertainty around
the possible exposures arising from non-cleared swaps.
The recent financial crisis also revealed that some participants in
the derivatives markets had used derivatives to take on excessive
risks. By imposing a minimum margin requirement on non-cleared
derivatives, sections 731 and 764 of the Dodd-Frank Act will reduce the
ability of firms to take on excessive risks through swaps without
sufficient financial resources to make good on their contracts. Because
the Dodd-Frank Act requires that the margin requirements be based on
the risks posed by the non-cleared derivatives and derivatives
counterparties, firms that take significant risks through derivatives
will face more stringent margin requirements with respect to non-
cleared derivatives, while firms that take lower risks will face less
stringent margin requirements.
II. Overview of Proposed Rule
A. Margin Requirements
The Agencies have generally adopted a risk-based approach in
proposing rules to establish initial and variation margin requirements
for covered swap entities, consistent with the statutory requirement
that these rules help ensure the safety and soundness of the covered
swap entity and be appropriate for the risk to the financial system
associated with non-cleared swaps and non-cleared security-based swaps
held by covered swap entities. As a result, the proposed rule takes
into account the relative risk of a covered swap entity's activities in
establishing both (i) the minimum amount of initial and variation
margin that it must collect from its counterparties and (ii) the
frequency with which a covered swap entity must calculate and collect
variation margin from its counterparty.
In implementing this risk-based approach, the proposed rule
distinguishes among four separate types of derivatives counterparties:
(i) Counterparties that are themselves swap entities; (ii)
counterparties that are high-risk financial end users of derivatives;
(iii) counterparties that are low-risk financial end users of
derivatives; and (iv) counterparties that are nonfinancial end users of
derivatives.\15\ These categories reflect the Agencies' preliminary
belief that distinctions can be made between types of derivatives
counterparties that are useful in distinguishing the risks posed by
each type.
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\15\ See proposed rule Sec. Sec. ----.2(b), (g), (h), (i), (n),
(r) and (y) for the various constituent definitions that identify
these four types of swap counterparties.
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The proposed rule's initial and variation margin requirements
generally apply only to the collection of minimum margin amounts by a
covered swap entity from its counterparties; they do not contain
specific requirements as to the amount of initial or variation margin
that a covered swap entity must post to its counterparties.\16\ This
approach, which emphasizes the collection rather than the posting of
margin, is based primarily on the Agencies' preliminary view that
imposing requirements with respect to the minimum amount of margin to
be collected (but not posted) is a critical aspect of offsetting the
greater risk to the covered swap entity and the financial system
arising from the covered swap entity's holdings of swaps and security-
based swaps that are not cleared and helps ensure the safety and
soundness of the covered swap entity. The proposed rule's approach
would also assure that swap entities transacting with one another will
effectively be collecting and posting margin with respect to those
transactions as a result of the margin collection requirements imposed
on each.
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\16\ Section ----.11 of the proposed rule adopted by FHFA and
FCA (but not the other Agencies) requires that their regulated
entities collect initial and variation margin from swap entities, as
described in section III.K of this notice.
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With respect to initial margin, the proposed rule permits a covered
swap entity to select from two alternatives to calculate its initial
margin requirements. A covered swap entity may calculate its initial
margin requirements using a standardized ``lookup'' table that
[[Page 27568]]
specifies the minimum initial margin that must be collected, expressed
as a percentage of the notional amount of the swap or security-based
swap. These percentages depend on the broad asset class of the swap or
security-based swap.\17\ Alternatively, a covered swap entity may
calculate its minimum initial margin requirements using an internal
margin model that meets certain criteria and that has been approved by
the relevant prudential regulator.\18\
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\17\ See proposed rule, Appendix A.
\18\ See proposed rule Sec. Sec. ----.2(l), ----.3(a), ----.8.
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A covered swap entity adopting the first alternative generally must
collect at least the amount of initial margin required under the
standardized look-up table, regardless of the relative risk of its
counterparty. A covered swap entity adopting the second alternative
generally must collect at least the amount of initial margin required
under its initial margin model. Both alternatives permit a covered swap
entity to adopt a threshold amount below which it need not collect
initial margin from certain types of counterparties.\19\ Under the
proposed rule, the maximum threshold amount permitted varies based on
the relative risk posed by the counterparty, as determined by
counterparty type.
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\19\ See proposed rule Sec. Sec. ----.2(m), ----.3(a)(2).
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With respect to variation margin, the proposed rule generally
requires a covered swap entity to collect variation margin periodically
in an amount that is at least equal to the increase in the value of the
swap to the covered swap entity.\20\ As with initial margin, a covered
swap entity may adopt a threshold amount below which it need not
collect variation margin from certain types of lower-risk
counterparties.\21\ Consistent with the approach taken to initial
margin, the maximum threshold amount permitted for variation margin
varies based on the relative risk of the counterparty, as determined by
counterparty type. In addition, the frequency with which a covered swap
entity must periodically recalculate and collect variation margin under
the proposed rule also varies based on the relative risk of the
counterparty, as determined by counterparty type, and generally
decreases as the relative risk of the counterparty type decreases.\22\
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\20\ See proposed rule Sec. Sec. ----.2(z), ----.4(a).
\21\ See proposed rule Sec. Sec. ----.2(bb), ----.4(a)(2).
\22\ See proposed rule Sec. ----.4(b).
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The proposed rule's margin provisions establish only minimum
requirements with respect to initial margin and variation that must be
collected. Nothing in the proposed rule is intended to prevent or
discourage a covered swap entity from collecting margin in amounts
greater than is required under the proposed rule.
The proposed rule also specifies the types of collateral that are
eligible to be collected to satisfy both the initial and variation
margin requirements. Eligible collateral is generally limited to (i)
immediately available cash funds and (ii) certain high-quality, highly-
liquid U.S. government and agency obligations and, in the case of
initial margin only, certain government-sponsored enterprise
obligations, subject to specified minimum ``haircuts'' for purposes of
determining their value for margin purposes.\23\
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\23\ See proposed rule Sec. ----.6.
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Separate from the proposed rule's requirements with respect to the
collection of initial and variation margin, the proposed rule also
requires a covered swap entity to ensure that its counterparty
segregates the initial margin that the covered swap entity posts when
engaging in swap or security-based swap transactions with another swap
entity.\24\ The Agencies have proposed a requirement that segregation
of initial margin be mandatory, not optional, for swap transactions by
a covered swap entity with another swap entity in order to (i) offset
the greater risk to the covered swap entity and the financial system
arising from the use of swaps and security-based swaps that are not
cleared and (ii) protect the safety and soundness of the covered swap
entity.
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\24\ See proposed rule Sec. ----.7. The Agencies note that
sections 724 and 763 of Dodd-Frank Act require a swap entity to
offer its swap and security-based swap counterparties the option of
requiring segregation of initial margin they post to the swap
entity.
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B. Capital Requirements
Sections 731 and 764 of the Dodd-Frank Act also require the
Agencies to issue, in addition to margin rules, joint rules on capital
for covered swap entities for which they are the prudential
regulator.\25\ The Board, FDIC, and OCC (collectively, the banking
agencies) have had risk-based capital rules in place for banks to
address over-the-counter derivatives since 1989 when the banking
agencies implemented their risk-based capital adequacy standards
(general banking risk-based capital rules) \26\ based on the first
Basel Accord.\27\ The general banking risk-based capital rules have
been amended and supplemented over time to take into account
developments in the derivatives market. These supplements include the
addition of the market risk amendment to the first Basel Accord which
requires banks and bank holding companies meeting certain thresholds to
calculate their capital requirements for trading positions through
models approved by their primary Federal supervisor.\28\ In addition,
certain large, complex banks and bank holding companies are subject to
the banking agencies' advanced risk-based capital standards (advanced
approaches rules), based on the advanced approaches of the Basel II
Accord.\29\
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\25\ 7 U.S.C. 6s(e)(2); 15 U.S.C. 78o-8(e)(2).
\26\ See 54 FR 4186 (January 27, 1989). The general banking
risk-based capital rules are codified at 12 CFR part 3, Appendix A
(OCC); 12 CFR parts 208 and 225, Appendix A (Board); and 12 CFR part
325, Appendix A (FDIC).
\27\ The Basel Committee on Banking Supervision (BCBS) developed
the first international banking capital framework in 1988, entitled
International Convergence of Capital Measurement and Capital
Standards.
\28\ 61 FR 47358 (September 6, 1996). The banking agencies'
market risk capital rules are at 12 CFR part 3, Appendix B (OCC); 12
CFR part 208, Appendix E and 12 CFR part 225, Appendix E (Board);
and 12 CFR part 325, Appendix C (FDIC). The rules apply to banks and
bank holding companies with trading activity (on a worldwide
consolidated basis) that equals 10 percent or more of the
institution's total assets, or $1 billion or more.
\29\ See BCBS, International Convergence of Capital Measurement
and Capital Standards: A Revised Framework (2006). The banking
agencies implemented the advanced approaches of the Basel II Accord
in 2007. See 72 FR 69288 (December 7, 2010). The advanced approaches
rules are codified at 12 CFR part 3, Appendix C (OCC); 12 CFR part
208, Appendix F and 12 CFR part 225, Appendix G (Board); and 12 CFR
part 325, Appendix D (FDIC).
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FHFA's predecessor agencies used a similar methodology to frame the
risk-based capital rules applicable to those entities now regulated by
FHFA. The FCA's risk-based capital regulations for Farm Credit System
institutions, except for the Federal Agricultural Mortgage Corporation
(Farmer Mac), have been in place since 1988 and were updated in
2005.\30\ The FCA's risk-based capital regulations for Farmer Mac have
been in place since 2001 and were updated in 2006.\31\
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\30\ See 53 FR 40.033 (Oct. 13, 1988); 70 FR 35.336 (June 17,
2005); 12 CFR part 615 subpart H.
\31\ See 66 FR 19,048 (April 12, 2001); 71 FR 77,247 (Dec. 26,
2006); 12 CFR part 652.
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The Basel Committee on Banking Supervision has recently revised and
enhanced its capital framework for internationally active banks,\32\
and the banking agencies expect to propose these changes in the United
States in the near future through a separate notice of proposed
rulemaking.
---------------------------------------------------------------------------
\32\ See BCBS, Basel III: A Global Regulatory Framework for More
Resilient Banks and Banking Systems (2010), available at http://www.bis.org/publ.bcbs189.htm.
---------------------------------------------------------------------------
As described in section III.J below, the proposed rule requires a
covered swap entity to comply with regulatory capital
[[Page 27569]]
rules already made applicable to that covered swap entity as part of
its prudential regulatory regime. As discussed further below, given
that these existing regulatory capital rules already specifically take
into account and address the unique risks arising from derivatives
transactions and activities, the Agencies are proposing to rely on
these existing rules, subject to the future notice of proposed
rulemaking described above, as appropriate and sufficient to offset the
greater risk to the covered swap entity and the financial system
arising from the use of swaps and security-based swaps that are not
cleared and to protect the safety and soundness of the covered swap
entity.\33\
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\33\ For the duration of the conservatorships of Fannie Mae and
Freddie Mac (together, the Enterprises), FHFA has directed that
their existing regulatory capital requirements would not be binding.
However, FHFA continues to closely monitor the Enterprises'
activities. Such monitoring, coupled with the unique financial
support available to the Enterprises from the United States Treasury
and the likelihood that FHFA will promulgate new risk-based capital
rules in due course to apply to the Enterprises (or their
successors) once the conservatorships have ended, lead to FHFA's
preliminary view that the reference to existing capital rules is
sufficient to address the risks discussed in the text above as to
the Enterprises.
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III. Section-by-Section Summary of Proposed Rule
A. Section ----.1: Authority, Purpose and Scope
Section ----.1 of the proposed rule specifies the scope of swap and
security-based swap transactions to which the margin requirements
apply. It provides that the margin requirements apply to all non-
cleared swaps and security-based swaps into which a covered swap entity
enters, regardless of the type of transaction or the nature of the
counterparty. It also provides that the margin requirements apply only
to swap and security-based swap transactions that are entered into on
or after the date on which the proposed rule becomes effective.
1. Treatment of Pre-Effective Date Derivatives
The Agencies note that it is possible that a covered swap entity
may enter into swap or security-based swap transactions on or after the
proposed rule's effective date pursuant to the same master netting
agreement with a counterparty that governs existing swaps or security-
based swaps entered into prior to the effective date. As discussed
below, the proposed rules permit a covered swap entity to (i) calculate
initial margin requirements for swaps and security-based swaps under a
qualifying master netting agreement with the counterparty on a
portfolio basis in certain circumstances, if it is using an initial
margin model to do so, and (ii) calculate variation margin requirements
under the proposed rule on an aggregate, net basis under a qualifying
master netting agreement with the counterparty. Applying the new margin
rules in such a way would, in some cases, have the effect of applying
the margin rules retroactively to pre-effective-date swaps under the
master agreement. Accordingly, in the case of initial margin, a covered
swap entity using an initial margin model would be permitted, at its
option, to calculate the initial margin requirements on a portfolio
basis but include only post-effective-date derivatives in the relevant
portfolio.\34\ With respect to variation margin, the Agencies expect
that the covered swap entity will comply with the margin requirements
with respect to all swaps and security-based swaps governed by a master
agreement, regardless of the date on which they were entered into,
consistent with current industry practice. The Agencies request comment
on (i) what, if any, practical difficulties might be raised by the
proposed approach to application of the margin requirements under
master agreements governing both pre- and post-effective-date swaps and
security-based swaps and (ii) whether there are alternative approaches
that might better address the issues raised by such master agreements.
---------------------------------------------------------------------------
\34\ See proposed rule Sec. ----.8(b). The covered swap entity
would not be permitted to selectively incorporate only certain pre-
effective-date derivatives.
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2. Treatment of Derivatives With Commercial End User Counterparties
Following passage of the Dodd-Frank Act, various observers
expressed concerns regarding whether sections 731 and 764 of the Dodd-
Frank Act authorize or require the CFTC, SEC, and Agencies to establish
margin requirements with respect to transactions between a covered swap
entity and a ``commercial end user'' (i.e., a nonfinancial counterparty
that engages in derivatives activities to hedge commercial risk),\35\
and have argued that swaps and security-based swap transactions with
these types of counterparties should be excluded from the scope of
margin requirements imposed under sections 731 and 764 because
commercial firms engaged in hedging activities pose a reduced risk to
their counterparties and the stability of the U.S. financial system. In
addition, statements in the legislative history of sections 731 and 764
suggest that Congress did not intend, in enacting these sections, to
impose margin requirements on nonfinancial end users engaged in hedging
activities, even in cases where they entered into swaps or security-
based swaps with swap entities.\36\
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\35\ Although the term ``commercial end user'' is not defined in
the Dodd-Frank Act, it is generally understood to mean a company
that is eligible for the exception to the mandatory clearing
requirement for swaps and security-based swaps under section 2(h)(7)
of the Commodity Exchange Act and section 3C(g) of the Securities
Exchange Act, respectively. This exception is generally available to
a person that (i) is not a financial entity, (ii) is using the swap
to hedge or mitigate commercial risk, and (iii) has notified the
CFTC or SEC how it generally meets its financial obligations with
respect to non-cleared swaps or security-based swaps, respectively.
See 7 U.S.C. 2(h)(7) and 15 U.S.C. 78c-3(g).
\36\ See, e.g., 156 Cong. Rec. S5904 (daily ed. July 15, 2010)
(statement of Sen. Lincoln).
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In formulating the proposed rule, the Agencies have carefully
considered these concerns and statements. The plain language of
sections 731 and 764 provides that the Agencies adopt rules for covered
swap entities imposing margin requirements on all non-cleared swaps.
Those sections do not, by their terms, exclude a swap with a
counterparty that is a commercial end user.
Importantly, those sections also provide that the Agencies adopt
margin requirements that (i) help ensure the safety and soundness of
the covered swap entity and (ii) are appropriate for the risk
associated with the non-cleared swaps and non-cleared security-based
swaps it holds as a swap entity. Thus, the statute requires the
Agencies to take a risk-based approach to establishing margin
requirements.
The proposed rule follows this statutory framework and proposes a
risk-based approach to imposing margin requirements in which
nonfinancial end users are categorized as lower-risk counterparties
than financial end users. In particular, the proposed rule permits
covered swap entities to adopt, where appropriate, initial and
variation margin thresholds below which a covered swap entity is not
required to collect initial and/or variation margin from counterparties
that are end users because of the lesser risk posed by these types of
counterparties to covered swap entities and financial stability with
respect to exposures below these thresholds. The Agencies note that
this threshold-based approach is consistent with current market
practices with respect to nonfinancial end users, in which derivatives
dealers view the
[[Page 27570]]
question of whether and to what extent to require margin from their
counterparties as a credit decision.\37\
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\37\ In the case of a nonfinancial end user with a strong credit
profile, under current market practices a derivatives dealer would
not require margin--in essence, it would extend unsecured credit to
the end user with respect to the underlying exposure. For
counterparties with a weak credit profile, a derivatives dealer
would likely make a different credit decision and require the
counterparty to post margin.
---------------------------------------------------------------------------
Under the proposed rule, a covered swap entity would not be
required to collect initial or variation margin from a nonfinancial end
user counterparty as long as the covered swap entity's exposures to the
nonfinancial end user were below the credit exposure limits that the
covered swap entity has established under appropriate credit processes
and standards. The Agencies preliminarily believe that this approach is
consistent with the statutory requirement that the margin requirements
be risk-based, and is appropriate in light of the minimal risks that
nonfinancial end users pose to the safety and soundness of covered swap
entities and U.S. financial stability, particularly in cases of
relatively small margin exposures.
To the extent that a covered swap entity has adopted an initial
margin threshold amount or a variation margin threshold amount for a
nonfinancial end user counterparty but the cumulative required initial
margin or variation margin, respectively, for transactions with that
end user exceeds the initial margin threshold amount or variation
margin threshold amount, respectively, the covered swap entity would be
required to collect the excess amount. The Agencies preliminarily
believe that this approach is appropriate for the greater risk posed by
such counterparties where margin exposures are relatively large.
The Agencies request comment on the appropriateness of the proposed
rule's approach to a covered swap entity's transactions with
nonfinancial end users and whether there are alternative approaches
that would better achieve the objective of sections 731 and 764 of the
Dodd-Frank Act. In particular, the Agencies note that under other
provisions of the Dodd-Frank Act, nonfinancial end users that engage in
derivatives to hedge their commercial risks are exempt from the
requirement that all designated swaps and security-based swaps be
cleared by a derivatives clearing organization or clearing agency,
respectively. A major consequence of clearing a swap or security-based
swap is a requirement that each party to the transaction post initial
margin and variation margin to the derivatives clearing organization or
clearing agency, and the exemption from the clearing requirement
permits a nonfinancial end user taking advantage of the exemption to
avoid posting margin to such central CCPs. Although the Dodd-Frank Act
does not contain an express exemption from the margin requirement of
sections 731 and 764 of the Dodd-Frank Act that is similar to the
exemption for commercial end users from the mandatory clearing
requirements of sections 723 and 763 of the Dodd-Frank Act, the
Agencies note that the proposed rule's approach to margin requirements
for derivatives with nonfinancial end users could be viewed as
lessening the effectiveness of the clearing requirement exemption for
these nonfinancial end users as concerns margin.
In particular, the Agencies request comment on the following
questions:
Question 1(a). Does the nonfinancial end user exemption from the
mandatory clearing requirement suggest or require that swaps and
security-based swaps involving a nonfinancial end user should or must
be exempt from initial margin and variation margin requirements for
non-cleared swaps and security-based swaps? 1(b) If so, upon what
statutory basis would such an exemption rely? 1(c) Should that
determination vary based on whether a particular non-cleared swap or
non-cleared security-based swap is subject to the mandatory clearing
regime or not (i.e., whether the nonfinancial end user is actually
using the clearing exemption)?
Question 2. Should counterparties that are small financial
institutions using derivatives to hedge their risks be treated in the
same manner as nonfinancial end users for purposes of the margin
requirements?
3. Effective Date
Section ----.1 of the proposed rule provides that the proposed rule
shall be effective with respect to any swap or security-based swap to
which a covered swap entity becomes a party on or after the date that
is 180 days following publication of the final rule in the Federal
Register. The Agencies request comment regarding the appropriateness of
this 180-day period.
The Agencies expect that covered swap entities are likely to need
to make a number of changes to their current derivatives business
operations in order to achieve compliance with the proposed rules,
including potential changes to internal risk management and other
systems, trading documentation, collateral arrangements, and
operational technology and infrastructure. In addition, the Agencies
expect that covered swap entities that wish to calculate initial margin
using an initial margin model will need sufficient time to develop such
models and obtain regulatory approval for their use. The Agencies
request comment on the following implementation questions:
Question 3(a). What changes to internal risk management and other
systems, trading documentation, collateral arrangements, operational
technology and infrastructure or other aspects of a covered swap
entity's derivatives operations will likely need to be made as part of
the implementation of the proposed rule, and how much time will likely
be required to make such changes? 3(b) Is the proposed rule's 180-day
period sufficient?
Question 4(a). How much time will covered swap entities that wish
to calculate initial margin using an initial margin model need to
develop such models? 4(b) Is the proposed rule's 180-day period
sufficient?
B. Section ----.2: Definitions
Section ----.2 of the proposed rule provides definitions of the key
terms used in the proposed rule. In particular, Sec. ----.2 (i)
defines the four types of swap and security-based swap counterparties
that form the basis of the proposed rule's risk-based approach to
margin requirements and (ii) provides other key operative terms that
are needed to calculate the amount of initial and variation margin
required under other sections of the proposed rule.
1. Counterparty Definitions
The four types of counterparties defined in the proposed rule are
(in order of highest to lowest risk): (i) Swap entities; (ii) high-risk
financial end users; (iii) low-risk financial end users; and (iv)
nonfinancial end users.
a. ``Swap entities''
The proposed rule defines ``swap entity'' as any entity that is
required to register as a swap dealer, major swap participant,
security-based swap dealer or major security-based swap
participant.\38\ Non-cleared swaps transactions with counterparties
that are themselves swap entities pose risk to the financial system
because swap entities are large players in swap and security-based swap
markets and therefore have the potential to generate systemic risk
through their swap activities. Because of their interconnectedness and
large presence in the market, the failure of a single
[[Page 27571]]
swap entity could cause severe stress throughout the financial
system.\39\ Accordingly, it is the preliminary view of the Agencies
that all non-cleared swap transactions with swap entities should
require margin.
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\38\ See proposed rule Sec. ----.2(y).
\39\ This is consistent with the Dodd-Frank Act's requirement
that the Agencies set margin and capital requirements appropriate
for the risk to the financial system associated with non-cleared
swaps held as a swap dealer or major swap participant. 7 U.S.C.
6(e)(3)(A); 15 U.S.C. 78o-8(e)(3)(A).
---------------------------------------------------------------------------
b. ``Financial end users'' and ``nonfinancial end users''
Non-cleared swap transactions with end users (i.e., those
counterparties that are not themselves swap entities) can also pose
risks to covered swap entities. Among end users, financial end users
are considered more risky than nonfinancial end users because the
profitability and viability of financial end users is more tightly
linked to the health of the financial system than nonfinancial end
users. Because financial counterparties are more likely to default
during a period of financial stress, they pose greater systemic risk
and risk to the safety and soundness of the covered swap entity.
Section ----.2 of the proposed rule defines a financial end user as any
counterparty, other than a swap entity, that is: (i) A commodity pool
(as defined in section 1a(5) of the Commodity Exchange Act (7 U.S.C.
1a(5))); (ii) a private fund (as defined in section 202(a) of the
Investment Advisors Act of 1940 (15 U.S.C. 80-b-2(a))); (iii) an
employee benefit plan (as defined in paragraphs (3) and (32) of section
3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C.
1002)); (iv) a person predominantly engaged in activities that are in
the business of banking, or in activities that are financial in nature,
as defined in section 4(k) of the Bank Holding Company of 1956 (12
U.S.C. 1843(k)); \40\ (v) a person that would be a commodity pool or
private fund if it were organized under the laws of the United States
or any State thereof; and (vi) any other person that one of the
Agencies may designate with respect to covered swap entities for which
it is the prudential regulator.\41\
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\40\ Although the proposed rule does not define a person
predominantly engaged in activities that are in the business of
banking, or in activities that are financial in nature, as defined
in section 4(k) of the Bank Holding Company of 1956 (12 U.S.C.
1843(k)), the Agencies note that the Board has recently issued a
proposed rule for comment defining a similar term for purposes of
Title I of the Dodd-Frank Act. See 76 FR 7,731 (Feb. 11, 2011)
(proposed rule). The Agencies request comment on whether they should
apply the same methodology as is adopted for purposes of Title I of
the Dodd-Frank Act for purposes of this clause of the proposed
rule's definition of a financial end user, or whether an alternative
methodology is appropriate.
\41\ See proposed rule Sec. ----.2(h). This definition of
``financial end user'' is based upon, and substantially similar to,
the definition of a ``financial entity'' that is ineligible to use
the end user exemption from the mandatory clearing requirements of
sections 723 and 763 of the Dodd-Frank Act. See 7 U.S.C. 2(h)(7); 15
U.S.C. 78c-3(g).
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The proposed definition of a counterparty that is a financial end
user also includes any government of any foreign country or any
political subdivision, agency, or instrumentality thereof.\42\ The
Agencies note that these types of sovereign counterparties do not fit
easily into the proposed rule's categories of financial and
nonfinancial end users. In comparing the characteristics of sovereign
counterparties with those of financial and nonfinancial end users, the
Agencies preliminarily believe that the financial condition of a
sovereign will tend to be closely linked with the financial condition
of its domestic banking system, through common effects of the business
cycle on both government finances and bank losses, as well as through
the safety net that many sovereigns provide to banks. Such a tight link
with the health of its domestic banking system, and by extension with
the broader global financial system, makes a sovereign counterparty
similar to a financial end user both in the nature of the systemic risk
and the risk to the safety and soundness of the covered swap entity. As
a result, the Agencies propose to treat sovereign counterparties as
financial end users for purposes of the proposed rule's margin
requirements.
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\42\ See proposed rule Sec. ----.2(h)(6).
---------------------------------------------------------------------------
The proposed rule defines a nonfinancial end user as any
counterparty that is an end user but is not a financial end user.
c. ``High-risk financial end user'' and ``low-risk financial end user''
A financial end user counterparty whose derivatives activities are
relatively limited and pose little or no risk is classified as a low-
risk financial end user; other end user counterparties are classified
as high-risk financial end users. The likelihood of a financial end
user counterparty's failure with respect to a covered swap entity
during stressed market conditions increases with, among other things,
the size and riskiness of its derivatives activity, and the potential
impact to the covered swap entity's safety and soundness increases with
the size of its non-cleared swaps exposure to the end user
counterparty. Accordingly, the proposed rule is structured so that a
covered swap entity would generally be required to reduce its
counterparty exposure through more stringent margin collection
requirements with respect to non-cleared derivatives with financial end
user counterparties having greater and riskier derivatives activities.
Section ----.2 of the proposed rule deems a financial end user
counterparty to be a low-risk financial end user only if it meets all
of the following three criteria:
Its swaps or security-based swaps fall below a specified
``significant swaps exposure'' threshold;
It predominantly uses swaps to hedge or mitigate the risks
of its business activities, including balance sheet, interest rate, or
other risk arising from the business of the counterparty; and
It is subject to capital requirements established by a
prudential regulator or state insurance regulator.\43\
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\43\ See proposed rule Sec. ----.2(n).
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With respect to the first criterion, the definition of
``significant swaps exposure'' under the proposed rule is very similar
to the definition of ``substantial counterparty exposure'' proposed by
the CFTC and SEC for purposes of establishing what level of swap and
security-based swap counterparty exposure would require a person to
register as a major swap participant or major security-based swap
participant under the Commodity Exchange Act or the Securities Exchange
Act, respectively, except that the threshold amounts are established at
half the level that would require registration as a major swap
participant or major security-based swap participant.\44\ The proposed
rule's definition is thus intended to capture persons that, while not
having derivatives positions rising to the level requiring margin
requirements and comprehensive regulation as a major swap participant,
nonetheless have substantial activity in the market and are more likely
to pose greater risk to covered swap entities with which they transact
than persons with only minor activity in the market. The Agencies
request comment on whether this definition of significant swaps
exposure is appropriate, or whether an alternative threshold amount or
definition would be more consistent with the purposes of sections 731
and 764 of the Dodd-Frank Act.
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\44\ See 75 FR 80,174 (Dec. 10, 2010).
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The second criterion of the proposed definition of a low-risk
financial end user references the purpose for which the financial end
user enters into swaps or security-based swaps. This criterion
[[Page 27572]]
generally mirrors the description of hedging-related swaps and
security-based swaps that are excluded for purposes of determining
whether a person maintains a substantial position in swaps or security-
based swaps and therefore meets the definition of a major swap
participant or major security-based swap participant under the
Commodity Exchange Act and Securities Exchange Act, respectively.\45\
This distinction reflects the fact that persons using derivatives
predominantly to hedge or mitigate risks arising from their business,
rather than to speculate for profit, are likely to pose less risk to
the covered swap entity (e.g., because losses on a hedging-related swap
will usually be accompanied by offsetting gains on the related position
that it hedges).
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\45\ See 7 U.S.C. 1a(33)(A)(i)(I); 15 U.S.C.
78c(a)(67)(a)(ii)(I).
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The third criterion of the proposed definition of low-risk
financial end user references whether the financial end user is subject
to regulatory capital requirements. This criterion also generally
mirrors the description of certain financial companies that are
excluded from one prong of the definition of a major swap participant
or major security-based swap participant under the Commodity Exchange
Act and the Securities Exchange Act, respectively.\46\ This distinction
reflects the fact that financial end users that are subject to
regulatory capital requirements are likely to pose less risk as
counterparties (e.g., because the requirements ensure that minimum
amounts of capital will be available to absorb any losses on their
derivatives transactions).
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\46\ See 7 U.S.C. 1a(33)(A)(iii)(I); 15 U.S.C.
78c(a)(67)(a)(ii)(III)(aa).
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The Agencies request comment on whether the proposed rule's
categorization of various types of counterparties by risk, and the key
definitions used to implement this risk-based approach, are
appropriate, or whether alternative approaches or definitions would
better reflect the purposes of sections 731 and 764 of the Dodd-Frank
Act.
Question 5. Do the definitions adequately identify financial end
user counterparties that are high-risk and low-risk?
Question 6(a). Should nonfinancial end users also be separated into
high-risk and low-risk categories for purposes of the margin
requirements? 6(b) If so, on what basis (e.g., in a manner similar to
the classification of high-risk and low-risk financial end users)? 6(c)
If so, how should the margin requirement apply differently to such
high-risk and low-risk nonfinancial end users?
Question 7(a). Is the classification of sovereign counterparties as
financial end users appropriate in light of the risks posed by these
counterparties? 7(b) If not, what other classification would be
appropriate, and why?
Question 8(a). Should sovereign counterparties receive their own
distinct counterparty classification that is different from those
classifications in the proposed rule? 8(b) If so, why? 8(c) How should
the permitted uncollateralized exposures to a sovereign counterparty
differ from those that are allowed for financial or nonfinancial end
users?
Question 9. Is it appropriate to distinguish between financial and
non-financial counterparties for the purpose of this risk-based
approach?
Question 10. What other factors or tests should be used to
determine the relative risk of an end user counterparty?
Question 11(a). Does the proposed rule require greater clarity with
respect to the treatment of U.S. Federal, state, or municipal
government counterparties? 11(b) If so, how should such counterparties
be treated?
Question 12. Should a counterparty that is a bank holding company
or nonbank financial firm subject to enhanced prudential standards
under Section 165 of the Dodd-Frank Act be treated similarly to swap
entity counterparties?
The Agencies also request comment on the other definitions included
in the proposed rule, including those discussed in further detail
below.
C. Section ----.3: Initial Margin
Section ----.3 of the proposed rules specifies the manner in which
a covered swap entity must calculate the initial margin requirement
applicable to its swaps and security-based swaps. These initial margin
requirements apply only to the amount of initial margin that a covered
swap entity is required to collect from its counterparties; they do not
address whether, or in what amounts, a covered swap entity must post
initial margin to a derivatives counterparty. Except as described below
in the summary of Sec. ----.6 of the proposed rule, the posting of
initial margin by a covered swap entity to a counterparty is generally
left to the mutual agreement of the covered swap entity and its
counterparty. In the case where a covered swap entity enters into a
swap with a counterparty that itself is a swap entity, its counterparty
is likely to be subject to a regulatory margin requirement under
section 731 or section 764 requiring it to collect margin from its
counterparties. Thus, both parties to a non-cleared swap between two
swap entities will have to collect and post margin as required by the
SEC, CFTC or their prudential regulator, as applicable.\47\
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\47\ Separately, in the case of institutions regulated by FHFA
and FCA, the effect of Sec. ----.11 of the proposed rule, when
combined with the margin requirements contained in other parts of
the proposed rule, would also be to effectively require both parties
to a non-cleared swap or non-cleared security-based swap between a
swap entity and an institution regulated by FHFA or FCA to both
collect and post initial margin.
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1. Calculation Alternatives
The proposed rule permits a covered swap entity to select from two
alternatives for calculating its initial margin requirements. In all
cases, the initial margin amount required under the proposed rule is a
minimum requirement; covered swap entities are not precluded from
collecting additional initial margin (whether by contract or subsequent
agreement with the counterparty) when they believe it is appropriate or
preferable to do so.
Under the first alternative, a covered swap entity may calculate
its initial margin requirements using a standardized ``lookup'' table
that specifies the minimum initial margin that must be collected as a
percentage of the swap or security-based swap notional amount, which
percentage varies depending on the broad asset class of the swap or
security-based swap.\48\ If the covered swap entity has entered into
more than one swap or security-based swap with a counterparty (i.e., a
portfolio of swaps), the aggregate minimum initial margin required on
those swaps and security-based swaps would be determined by summing the
minimum initial margin requirement for each individual swap.
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\48\ See proposed rule Sec. Sec. ----.2(k)(1), ----.3(a).
Although the Agencies intend to specify a particular percentage in
the final rule, the proposed rule provides a potential range of
percentages for comment.
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In many cases, however, the use of a standardized table may not
accurately reflect the risk of a portfolio of swaps or security-based
swaps, because the swaps or security-based swaps themselves vary in
ways not reflected by the standardized table or because no reduction in
required initial margin to reflect offsetting exposures,
diversification, and other hedging benefits is permitted, as discussed
below. For this reason, the proposed rule includes a second
alternative.
Under the second alternative, a covered swap entity may calculate
its minimum initial margin requirements
[[Page 27573]]
using an internal margin model that meets certain criteria and has been
approved by the relevant prudential regulator.\49\ Specifically, the
covered swap entity must collect at least the amount of initial margin
that is required under its internal model calculations (subject to any
applicable initial margin threshold amount, as described below).
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\49\ See proposed rule Sec. Sec. ----.2(k)(2), ----.3(a).
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The Agencies request comment on whether the use of internal models
or Appendix A is appropriate for the calculation of initial margin
requirements. In particular, the Agencies request comment on the
following questions:
Question 13. As an alternative to Appendix A, should the rule allow
an alternative calculation method that would link the margin on a non-
cleared swap or non-cleared security-based swap to the margin required
by a derivatives clearing organization for a cleared swap or cleared
security-based swap whose terms and conditions closely resemble the
terms and conditions of the non-cleared swap or non-cleared security-
based swap?
Question 14. Would there be enough similarity between cleared and
non-cleared swaps or security-based swaps to make this approach
workable?
Question 15. With respect to either alternative for calculating
initial margin requirements, should swap or security-based swap
positions that pose no counterparty risk to the covered swap entity,
such as a sold call option with the full premium paid at inception of
the trade, be excluded from the initial margin calculation?
The Agencies also request comment on whether offsetting exposures,
diversification, and other hedging benefits of multiple derivatives
transactions can or should be more accurately represented in Appendix
A's standardized table. The Agencies note that although the use of an
initial margin model will allow for significant recognition of
offsetting exposures, diversification, and other hedging benefits of
swap and security-based swap positions that are conducted under a
qualifying master netting agreement, Appendix A's standardized table is
based upon gross notional amounts and recognizes no offsetting
exposures, diversification, or other hedging benefits. In particular,
the gross notional amount may not accurately reflect the size or
riskiness of the actual position in many circumstances. For example,
with respect to a swap portfolio containing (i) a one year pay fixed
and receive floating interest rate swap with a notional value of $10
million and (ii) a two year pay floating and receive fixed interest
rate swap with a notional value of $10 million, an initial margin model
would recognize that much of the risk of the one year swap is offset by
the risk of the two year swap--changes in the level of interest rates
that increase the value of the one year swap will simultaneously
decrease the value of the two year swap. Under Appendix A, however, the
gross notional interest rate swap position would be $20 million and the
initial margin on the portfolio would be twice the initial margin of
either $10 million swap even though the trades are, in fact, risk
reducing.
The Agencies are concerned that the use of gross notional amounts
alone in determining initial margin may not adequately recognize
offsetting exposures, diversification, and other hedging benefits that
are well understood as in the above example. This lack of recognition
might lead to large disparities between a firm that uses a model to set
initial margin and a firm that uses the standardized initial margin
requirements. These disparities may give rise to significant
competitive inequities between firms that do and do not adopt an
approved initial margin model.
The Agencies request comment on possible changes to the
standardized method of calculating initial margin requirements to
better reflect the effect of offsets and hedging when swaps and
security-based swaps are conducted under a qualifying master netting
agreement. In particular, the Agencies seek comment on the following
questions:
Question 16. Would calculating the standardized initial margin for
a particular risk category by separately calculating the initial margin
required on the long positions and short positions and then using only
the higher of these two amounts adequately account for offsetting
exposures, diversification, and other hedging benefits within a
standardized initial margin framework?
Question 17. Would the method described above systematically
overestimate or underestimate offsetting exposures, diversification,
and other hedging benefits? Is this method prone to manipulation or
other gaming concerns?
Question 18. Should the Agencies consider some degree of offset
across risk categories? If so how should these offsets be determined?
Question 19. Would adjusting the gross notional amount of swap
positions in a particular risk category (e.g., commodity, credit,
equity, or foreign exchange/interest rate) by a net-to-gross ratio or a
netting factor in a manner that is similar to the method used for
adjusting potential future exposure calculations for purposes of the
Federal banking agencies' risk-based capital rules adequately capture
offsetting exposures, diversification, and other hedging benefits?
Question 20. Would adjustment of gross notional amounts with a net-
to-gross ratio or a netting factor systematically overestimate or
underestimate offsetting exposures, diversification, and other hedging
benefits?
Question 21. Are there additional methods that could be used in
conjunction with a standardized lookup initial margin table that
adequately recognize offsetting exposures, diversification, and other
hedging benefits?
Question 22(a). Are such methods transparent and implementable?
22(b) Can they be generalized across multiple risk categories and swap
types?
As an alternative, the Agencies request comment on whether Appendix
A should be revised to adopt a method that more fully reflects the
offsetting of positions at default. For example, such a method might
rely on a calculation of an adjusted gross notional amount that would
reduce the amount of initial margin required when a counterparty has
many offsetting trades under a qualifying master netting agreement. To
calculate the adjusted gross notional amount for an asset class, one
would first calculate the net notional to gross notional ratio. This
netting factor would be the absolute value of the difference between
the long notional contracts and the short notional contracts divided by
the total gross notional amount of the contracts. This value would then
be used as a type of correlation factor among the contracts. The
adjusted gross notional amount would then be calculated as follows,
where n is the gross notional value of trades in an asset class and
``NF'' is the netting factor:
[[Page 27574]]
[GRAPHIC] [TIFF OMITTED] TP11MY11.016
The adjusted gross notional amount, rather than the gross notional
amount, would then be used to calculate initial margin using Appendix
A.
When the netting factor is zero, initial margin would still be
required to be collected, and when the net to gross ratio is one (all
positions are one way) the netting factor is also one so that the
adjusted gross notional is equal to the gross notional. This method
would allow offsetting transactions that reduce risk to reduce initial
margin, but would not allow the offset to ever be perfect, so that
initial margin would always be required to be collected. The adjusted
gross notional method would be applied to the initial margin
calculation by using gross notional amounts within an asset class. The
Agencies seek comment on these methods, as well as alternative methods
for calculating initial margin requirements under Appendix A and
potential ways in which Appendix A might better capture the offsetting
exposures, diversification, and other hedging benefits.
2. Initial Margin Thresholds
As part of the proposed rule's initial margin requirements, a
covered swap entity using either alternative is also permitted to
establish, for counterparties that are low-risk financial end users or
nonfinancial end users, a credit exposure limit below which it need not
collect initial margin.\50\ A covered swap entity is not permitted to
establish an initial margin threshold amount for a counterparty that is
either (i) a covered swap entity itself or (ii) a high-risk financial
end user.\51\
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\50\ See proposed rule Sec. Sec. ----.2(m), ----.3(a). A
covered swap entity that has established an initial margin threshold
amount for a counterparty need only collect initial margin if the
required amount exceeds the initial margin threshold amount, and in
such cases is only required to collect the excess amount.
\51\ See proposed rule Sec. ----.2(m)(1).
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This credit exposure limit is defined in the proposed rule as the
initial margin threshold amount.\52\ The maximum initial margin
threshold amount that a covered swap entity may establish varies based
on the relative risk of the counterparty, as determined by counterparty
type (e.g., financial versus nonfinancial end user). With respect to a
counterparty that is a low-risk financial end user, the proposed rule
limits the maximum initial margin threshold amount that a covered swap
entity may establish for a particular counterparty to the lower of (i)
a range of $15 to $45 million or (ii) a range of 0.1 to 0.3 percent of
the covered swap entity's tier 1 capital.\53\ Although the Agencies
have proposed a range of specific maximum initial margin threshold
amounts for a counterparty that is a low-risk financial end user, the
Agencies' preliminary view is that the midpoint of each range would in
each case be an appropriate amount. With respect to counterparties that
are nonfinancial end users, the proposed rule does not place a specific
limit on the maximum initial margin threshold amount that a covered
swap entity may establish.
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\52\ See proposed rule Sec. ----.2(m).
\53\ Although the Agencies intend to specify particular amounts
in the final rule, the proposed rule provides a potential range of
numbers for comment. Since tier 1 capital is not a concept that is
applicable to covered swap entities for which FHFA or the FCA is the
prudential regulator, the thresholds as applied to such entities
instead reference (i) in the case of covered swap entities for which
FHFA is the prudential regulator, the term ``total capital,'' as
separately defined within the proposed regulatory text of FHFA's
proposed rule, and (ii) in the case of covered swap entities for
which the FCA is the prudential regulator, the term ``applicable
core surplus or core capital (or successor high quality capital
requirement),'' as separately defined within the proposed regulatory
text of the FCA's proposed rule.
---------------------------------------------------------------------------
The proposed rule allows uncollateralized exposures below the
initial margin threshold amount for certain counterparties because
taking uncollateralized credit exposure to counterparties is a long
established business practice at the firms regulated by the Agencies.
When well managed, taking on credit exposure does not automatically
lead to unacceptable levels of systemic risk. Credit exposure can arise
from a number of activities that regulated firms are permitted to
engage in with a counterparty--making a loan, opening a committed line
of credit, providing payments processing or transaction services, or
engaging in swaps transactions. Although the proposal permits such
credit exposure in certain circumstances, the proposed rule seeks to
ensure that initial margin is collected in amounts that are appropriate
to the risks posed by counterparties that are low-risk financial end
users or nonfinancial end users.
The proposed rule requires that any credit exposure limit that a
covered swap entity establishes as an initial threshold amount for a
counterparty (i) appropriately take into account and address the credit
risk posed by the counterparty and the risks of such swaps and
security-based swaps and (ii) be reviewed, monitored, and approved in
accordance with the swap entity's credit processes. Threshold amounts
that are established in accordance with these standards are unlikely to
generate meaningful risk to the safety and soundness of the covered
swap entity and do not pose systemic risk.\54\ In addition, in the case
of counterparties that are low-risk financial end users, which the
Agencies preliminarily believe pose greater risk than nonfinancial end
users, the proposed rule imposes additional restrictions by limiting
the maximum initial margin threshold amount that a covered swap entity
may establish.
---------------------------------------------------------------------------
\54\ The Agencies also note that the categories of
counterparties for which the proposed rule permits a covered swap
entity to establish an initial margin threshold amount are roughly
aligned with the Dodd-Frank Act exemption of non-financial end users
from the Dodd-Frank Act mandatory clearing requirement. See 7 U.S.C.
2(h)(7); 15 U.S.C. 78c-3(g).
---------------------------------------------------------------------------
The Agencies expect that covered swap entities will establish
initial margin threshold amounts only when they have meaningfully
evaluated the creditworthiness of the counterparty and have made a
credit and risk management decision to expose themselves to the
unsecured credit of the counterparty pursuant to their generally
applicable credit approval processes. The Agencies also expect that
covered swap entities will monitor initial margin threshold amounts and
adjust them downward to reflect any deterioration in the credit quality
of the counterparty or other increase in the risks the counterparties'
swaps and security-based swaps pose. Under the proposed rule, even
where an initial margin threshold amount is established, the covered
swap entity must still calculate the initial margin amount for the
counterparty pursuant to Sec. ----.3 of the proposed rule and, to the
extent that the initial margin amount exceeds the initial margin
threshold amount that has been established, collect initial margin
equal to the excess amount.
For those counterparties that pose the greatest threat to systemic
stability by virtue of their interconnectedness and the size of their
uncollateralized and potential outward exposures--namely, other swap
entities and high-risk financial end users--the proposed rule
[[Page 27575]]
does not permit any exposure to remain uncollateralized; the threshold
amount is effectively zero. It is the preliminary view of the Agencies
that the potential systemic risk from other swap entities should lead
to an amount of initial margin being actually collected. Margin should
also be collected for all non-cleared swaps and non-cleared security-
based swaps with high-risk financial end users because, as previously
discussed, they are more likely to default during periods of financial
stress and thus pose greater systemic risk and risk to the safety and
soundness of the covered swap entity.
The Agencies request comment regarding whether it is appropriate to
permit covered swap entities to establish initial margin threshold
amounts for certain counterparties in the manner proposed. In
particular, the Agencies request comment on the following questions:
Question 23(a). Does the maximum initial margin threshold amount
proposed for counterparties that are low-risk financial end users
strike an appropriate balance between traditional credit extension
practices and the potential for systemic risk or risk to the safety and
soundness of a covered swap entity? 23(b) Should threshold amounts for
nonfinancial end users be subject to a similar limit? 23(c) If so, at
what maximum amount or amounts? 23(d) Do the derivatives activities and
exposures of nonfinancial end users have the potential to create
systemic risk, either individually or in aggregate?
Question 24. Is it appropriate for the threshold amounts to be
capped at a fixed dollar amount?
Question 25. Should the rule also place a limit on the threshold
amounts that a covered swap entity establishes for all counterparties
in the aggregate?
Question 26(a). Is it appropriate for the threshold amounts to be
determined by reference to the tier 1 or other measure of capital of a
covered swap entity? 26(b) What other measures might be used to
determine appropriate threshold amounts?
Question 27(a). Should the various threshold amounts be subject to
an automatic adjustment for inflation on a periodic basis? 27(b) If so,
what type of adjustment would be appropriate?
3. Minimum Transfer Amount
In addition, the proposed rule provides for a minimum transfer
amount for the collection of margin by covered swap entities, under
which a covered swap entity need not collect initial margin from any
individual counterparty otherwise required under the proposed rule
until the required cumulative amount is $100,000 or more.\55\
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\55\ See proposed rule Sec. ----.3(c). The minimum transfer
amount only affects the timing of margin collection; it does not
change the amount of margin that must be collected once the $100,000
threshold is crossed. For example, if the initial margin requirement
were to increase from $50,000 to $110,000, the covered swap entity
would be required to collect the entire $110,000 (subject to
application of any applicable initial margin threshold amount).
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4. Alternative Approach to Initial Margin Requirements
The Agencies also request comment on several alternative approaches
to implementation of the initial margin requirements.
First, the Agencies request comment on whether the proposed rule
should be augmented by (i) imposing a separate, additional requirement
that a covered swap entity post initial margin to any counterparty that
is an end user, including both financial and nonfinancial end users and
(ii) requiring the covered swap entity to ensure that any such initial
margin posted is segregated at a third-party custodian. In particular,
the Agencies request comment on the following questions:
Question 28. Would requiring a covered swap entity to post initial
margin to end user counterparties reduce systemic risk (e.g., by
reducing leverage in the financial system or reducing systemic
vulnerability to the failure of a covered swap entity)?
Question 29. Are there alternatives that address those risks more
efficiently or with greater transparency?
Question 30. Would requiring a covered swap entity to post initial
margin to end user counterparties raise any concerns with respect to
the safety and soundness of the covered swap entity, taking into
consideration the requirement that initial margin be segregated and
held with a third party custodian?
Question 31. Would requiring a covered swap entity to post initial
margin to end user counterparties remove one or more incentives for
that covered swap entity to choose, where possible, to structure a
transaction so that it need not be cleared through a CCP in order to
avoid pledging initial margin?
Question 32. Would this approach be consistent with the statutory
factors the Agencies are directed to take into account under sections
731 and 764 of the Dodd-Frank Act?
Second, the Agencies request comment on whether the proposed rule
should be augmented by (i) imposing a separate, additional requirement
that a covered swap entity post initial margin to any end user
counterparty that is a systemically significant financial institution
under Title I of Dodd-Frank Act, and (ii) requiring the covered swap
entity to ensure that any such initial margin posted is segregated at a
third-party custodian. In particular, the Agencies request comment on
the following questions:
Question 33. Would requiring a covered swap entity to post initial
margin to systemically-significant end user counterparties reduce
systemic risk (e.g., by reducing leverage in the financial system or
reducing systemic vulnerability to the failure of a covered swap
entity)?
Question 34. Are there alternatives that address those risks more
efficiently or with greater transparency?
Question 35. Would requiring a covered swap entity to post initial
margin to systemically-significant end user counterparties raise any
concerns with respect to the safety and soundness of the covered swap
entity, taking into consideration the requirement that initial margin
be segregated and held with a third party custodian?
Question 36. Would requiring a covered swap entity to post initial
margin to systemically-significant end user counterparties remove one
or more incentives for that covered swap entity to choose, where
possible, to structure a transaction so that it need not be cleared
through a CCP in order to avoid pledging initial margin?
Question 37. Would this approach be consistent with the statutory
factors the Agencies are directed to take into account under sections
731 and 764 of the Dodd-Frank Act?
Third, the Agencies request comment on whether the proposed rule
should establish a distinct category of covered swap entities that,
because of the relatively small size of the derivatives activities and
the lesser risk they pose to U.S. financial stability, would be subject
to less stringent initial margin requirement. In particular, such an
approach would (i) permit such ``low-risk'' covered swap entities to
establish larger initial or additional margin threshold amounts (e.g.,
for counterparties that are swap entities) and (ii) not require such
``low-risk'' covered swap entities to comply with the segregation
requirements of Sec. ----.7 of the proposed rule. Such low-risk
covered swap entities could be defined by identifying a particular
threshold amount of derivatives activities below which one would be
considered a low-risk covered swap entity. For example, under this
approach, a low-risk covered swap entity might be defined as a covered
swap entity whose total
[[Page 27576]]
positions in swaps and security-based swaps are below the applicable
thresholds established by the SEC and CFTC for determining whether a
firm is a major swap participant or major security-based swap
participant, respectively. In particular, the Agencies request comment
on the following questions:
Question 38. Would establishing a category of low-risk covered swap
entity and subjecting that category to less stringent initial margin
requirements enhance or reduce systemic risk?
Question 39. Would establishing a category of low-risk covered swap
entity and subjecting that category to less stringent initial margin
requirements raise any concerns with respect to the safety and
soundness of such an entity?
Question 40. If the Agencies adopted such an approach, how should a
low-risk covered swap entity be defined? Should the definition
reference the thresholds established by the SEC and CFTC for
determining whether a firm is a major swap participant or major
security-based swap participant, or some variant of those thresholds?
Question 41. What less stringent initial margin requirements should
apply to such low-risk covered swap entities? What, if any, segregation
requirement should apply to such low-risk covered swap entities?
Question 42. Would such an approach encourage covered swap entities
to separate their derivatives activities into multiple entities so as
to avail themselves of the exemption?
Question 43. Would this approach be consistent with the statutory
factors the Agencies are directed to take into account under sections
731 and 764 of the Dodd-Frank Act?
D. Section ----.4: Variation Margin
Section ----.4 of the proposed rules specifies the manner in which
a covered swap entity must calculate the variation margin requirement
applicable to swaps and security-based swaps it enters into. As with
initial margin requirements, (i) these variation margin requirements
apply only to collection of variation margin by covered swap entities
from their counterparties, and not to the posting of variation margin
to their counterparties,\56\ and (ii) establish only a minimum amount
of variation margin that must be collected, leaving covered swap
entities free to collect larger amounts if they so choose. Consistent
with current practice, covered swap entities and their counterparties
would remain free to negotiate the extent to which a covered swap
entity may be required to post variation margin to a counterparty
(other than a swap entity that is itself subject to margin
requirements).
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\56\ As described in section III.K of this notice, FHFA's and
the FCA's proposed rules contain an additional provision that will
have a different effect with respect to entities regulated by FHFA
and the FCA.
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The proposed rule generally requires a covered swap entity to
collect variation margin from its counterparties on a periodic
basis.\57\ The amount of variation margin that is required to be
periodically collected must be equal to or greater than (i) the
cumulative mark-to-market change in value to the covered swap entity of
a swap or security-based swap, as measured from the date it is entered
into, less (ii) the value of all variation margin previously collected
but not returned by the covered swap entity with respect to such swap
or security-based swap.\58\
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\57\ See proposed rule Sec. ----.4(a).
\58\ The proposed rule defines this required amount as the
``variation margin amount.'' See proposed rule Sec. ----.2(bb). In
the case of swap or security-based swap that is out-of-the-money or
in-the-money to a covered swap entity at the time it enters into the
transaction, that amount is also included within the definition of
variation margin amount and subject to the variation margin
requirements.
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1. Variation Margin Thresholds and Minimum Transfer Amounts
Similar to the initial margin requirement under Sec. ----.3 of the
proposed rule, Sec. ----.4 permits a covered swap entity to establish,
for certain counterparties that are end users, a credit exposure limit
that acts as a variation margin threshold below which it need not
collect variation margin.\59\ Although the variation margin threshold
is separate from, and may be applied independently from, the initial
margin threshold with respect to qualifying counterparties, the
variation margin threshold amount that a covered swap entity may
establish for counterparties that are low-risk financial end users is
subject to the same specified maximum amount that governs initial
margin threshold amounts for such counterparties. As with initial
margin threshold amounts, a covered swap entity may not establish a
variation margin threshold amount for counterparties that are swap
entities or high-risk financial end users.
---------------------------------------------------------------------------
\59\ See proposed rule Sec. Sec. ----.2(bb), ----.4(a).
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In addition, the proposed rule's variation margin requirements
contain provisions similar to those governing initial margin with
respect to minimum transfer amounts.
2. Aggregate Calculation of Variation Margin Requirements Under a
Qualifying Master Netting Agreement
The proposed rule permits a covered swap entity to calculate
variation margin requirements on an aggregate basis across all swap or
security-based swap transactions with a counterparty that are executed
under the same qualifying master netting agreement.\60\ The proposed
rule defines a qualifying master netting agreement as a legally
enforceable agreement to offset positive and negative mark-to-market
values of one or more swaps or security-based swaps that meet a number
of specific criteria designed to ensure that these offset rights are
fully enforceable, documented and monitored by the covered swap
entity.\61\ The Agencies request comment regarding whether permitting
the aggregate calculation of variation margin requirements is
appropriate and, if so, whether the proposed rule's definition of
qualifying master netting agreement raises practical or implementation
difficulties or is inconsistent with current market practices.
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\60\ See proposed rule Sec. ----.4(d).
\61\ See proposed rule Sec. ----.2(t). The proposed rule's
definition of qualifying master netting agreement generally mirrors
the definition given to that term in the Federal banking agencies'
risk-based capital rules applicable to derivatives positions held by
insured depository institutions and bank holding companies. See,
e.g., 12 CFR part 225, App. G.I.2.
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3. Frequency of Variation Margin Calculation and Collection
The proposed rule also specifies the minimum frequency with which a
covered swap entity must calculate and collect initial margin.
Consistent with the approach of the proposed rule generally, the
minimum frequency varies based on the systemic and safety and soundness
risk of the counterparty type. Covered swap entities must calculate and
collect variation margin from counterparties that are themselves swap
entities or financial end users at least once per business day, and
from counterparties that are nonfinancial end users at least once per
week. The Agencies request comment on whether the proposed rule's
approach to the frequency with which the variation margin requirements
must be met is consistent with current market practices, and whether
alternative approaches to imposing variation margin requirements would
better reflect the purposes of section 731 and 764 of the Dodd-Frank
Act.
[[Page 27577]]
4. Counterparty Refusal to Provide Required Variation Margin
Section ----.4(e) of the proposed rule addresses potential
circumstances in which a counterparty may refuse to provide required
variation margin to a covered swap entity. Specifically, it provides
that a covered swap entity shall not be deemed to have violated its
regulatory obligation to collect required variation margin from a
counterparty if the counterparty has refused or otherwise failed to
provide the required variation margin to the covered swap entity and
the covered swap entity has either (i) made the necessary efforts to
attempt to collect the required variation margin, including the timely
initiation and continued pursuit of formal dispute resolution
mechanisms, or has otherwise demonstrated upon request to the
satisfaction of the relevant Agency that it has made appropriate
efforts to collect the required variation margin, or (ii) commenced
termination of the swap or security-based based swap with the
counterparty.\62\ The Agencies note that, in each such case, the
covered swap entity will have been required, under Sec. ----.5 of the
proposed rule, to obtain the contractual right to collect such
variation margin as is necessary to permit it to comply with the
requirements of Sec. ----.4 of the proposed rule and set out valuation
dispute resolution procedures.
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\62\ See proposed rule Sec. ----.4(e). The Agencies note that
there is no similar reference to appropriate efforts in the proposed
rule initial margin requirements; since initial margin is collected
at the time a swap or security-based swap is entered into, a covered
swap entity can and must collect any required initial margin as
prerequisite to executing the transaction.
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5. Alternative Approach to Variation Margin Requirements
The Agencies also request comment on several alternative approaches
to implementation of the variation margin requirements.
First, the Agencies request comment on whether the proposed rule
should be augmented by imposing a separate, additional requirement that
a covered swap entity post variation margin to any counterparty that is
an end user, including both financial and nonfinancial end users. In
particular, the Agencies request comment on the following questions:
Question 44. Would requiring a covered swap entity to post
variation margin to end user counterparties reduce systemic risk (e.g.,
by reducing leverage in the financial system or reducing systemic
vulnerability to the failure of a covered swap entity)?
Question 45. Are there alternatives that address those risks more
efficiently or with greater regulatory transparency?
Question 46. Would requiring a covered swap entity to post
variation margin to end user counterparties raise any concerns with
respect to the safety and soundness of the covered swap entity?
Question 47. Would requiring a covered swap entity to post
variation margin to end user counterparties remove one or more
incentives for that covered swap entity to choose, where possible, to
structure a transaction so that it need not be cleared through a CCP in
order to avoid pledging variation margin?
Question 48. Would this approach be consistent with the statutory
factors the Agencies are directed to take into account under sections
731 and 764 of the Dodd-Frank Act?
Second, the Agencies request comment on whether the proposed rule
should be augmented by imposing a separate, additional requirement that
a covered swap entity post variation margin to any end user
counterparty that is a systemically significant financial institution
under Title I of Dodd-Frank Act. In particular, the Agencies request
comment on the following questions:
Question 49. Would requiring a covered swap entity to post
variation margin to systemically-significant end user counterparties
reduce systemic risk (e.g., by reducing leverage in the financial
system or reducing systemic vulnerability to the failure of a covered
swap entity)?
Question 50. Are there alternatives that address those risks more
efficiently or with greater regulatory transparency?
Question 51. Would requiring a covered swap entity to post
variation margin to systemically-significant end user counterparties
raise any concerns with respect to the safety and soundness of the
covered swap entity?
Question 52. Would requiring a covered swap entity to post
variation margin to systemically-significant end user counterparties
remove one or more incentives for that covered swap entity to choose,
where possible, to structure a transaction so that it need not be
cleared through a CCP in order to avoid pledging variation margin?
Question 53. Would this approach be consistent with the statutory
factors the Agencies are directed to take into account under sections
731 and 764 of the Dodd-Frank Act?
Third, the Agencies request comment on whether the proposed rule
should establish a distinct category of swap entities that, because of
the relatively small size of the derivatives activities and the lesser
risk they pose to U.S. financial stability, would be subject to less
stringent variation margin requirement. In particular, such an approach
would permit such ``low- risk'' covered swap entities to establish
larger variation margin threshold amounts. Such low-risk covered swap
entities could be defined as described in section III.C.4 of this
notice. In particular, the Agencies request comment on the following
questions:
Question 54. Would establishing a category of low-risk covered swap
entity and subjecting such an entity to less stringent variation margin
requirements enhance or reduce systemic risk?
Question 55. Would establishing a category of low-risk covered swap
entity and subjecting such an entity to less stringent variation margin
requirements raise any concerns with respect to the safety and
soundness of such an entity?
Question 56. If the Agencies adopted such an approach, how should a
low-risk covered swap entity be defined? What less stringent variation
margin requirements should apply to such low risk covered swap
entities?
Question 57. Would such an approach encourage covered swap entities
to separate their derivatives activities into multiple entities so as
to avail themselves of the exemption?
Question 58. Would this approach be consistent with the statutory
factors the Agencies are directed to take into account under sections
731 and 764 of the Dodd-Frank Act?
E. Section ----.5: Documentation of Margin Matters
The proposed rule requires a covered swap entity to execute trading
documentation with each counterparty that includes credit support
arrangements that grant the covered swap entity the contractual right
to collect initial margin and variation margin in such amounts, in such
form, and such circumstances as are required by the initial margin and
variation margin requirements set forth in the proposed rule.\63\ The
trading documentation must also specify (i) the methods, procedures,
rules, and inputs for determining the value of each swap or security-
based swap for purposes of calculating variation margin requirements
and (ii) the procedures by which any disputes concerning the valuation
of swaps or security-based swaps, or the valuation of assets
[[Page 27578]]
collected or posted as initial margin or variation margin, may be
resolved.\64\
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\63\ See proposed rule Sec. ----.5.
\64\ See id.
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F. Section ----.6: Eligible Collateral
The proposed rule specifies the types of collateral that are
eligible to be collected to satisfy either the initial margin or
variation margin requirements. Under the proposed rule, eligible
collateral is limited to: (i) Immediately available cash funds
(denominated in either U.S. dollars or in the currency in which payment
obligations under the swap are required to be settled); (ii) any
obligation which is a direct obligation of, or fully guaranteed as to
principal and interest by, the United States; (iii) with respect to
initial margin only, any senior debt obligations of the Federal
National Mortgage Association, the Federal Home Loan Mortgage
Corporation, the Federal Home Loan Banks and Farmer Mac; and (iv) with
respect to initial margin only, any obligation that is an ``insured
obligation,'' as that term is defined in 12 U.S.C. 2277a(3), of the
Farm Credit System banks.\65\ Other than immediately-available cash
funds, all types of eligible collateral are subject to discounts or
minimum ``haircuts'' for purposes of determining their value for margin
purposes, which haircuts are identified in Appendix B of the proposed
rule.\66\ Because the value of noncash collateral may vary, the
proposed rule requires covered swap entities to monitor the value of
noncash collateral previously collected to satisfy initial or variation
margin requirements and, to the extent the value of such noncash
collateral has decreased, to collect additional collateral with a
sufficient value to ensure that all applicable initial and variation
margin requirements remain satisfied.\67\ The proposed rule also
prohibits a covered swap entity from collecting, as required initial
margin or variation margin, collateral that is an obligation of the
counterparty pledging such collateral.\68\
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\65\ See proposed rule Sec. --6(a). An obligation will be
considered to be fully guaranteed as to principal and interest by
the United States if the guarantee commits the full faith and credit
of the United States for the repayment of principal and interest on
the obligation. ``Insured obligations'' of Farm Credit System banks
are consolidated and System-wide obligations issued by Farm Credit
System banks. These obligations are insured by the Farm Credit
System Insurance Corporation out of funds in the Farm Credit
Insurance Fund. Should the Farm Credit Insurance Fund ever be
exhausted, Farm Credit System banks are jointly and severally liable
for payment on insured obligations.
\66\ See proposed rule Sec. --6(b). With respect to these
haircuts, although the Agencies intend to specify particular haircut
amounts in the final rule, the proposed rule provides a potential
range of haircuts for comment.
\67\ See proposed rule Sec. --6(d).
\68\ See proposed rule Sec. --6(c).
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The proposed rule does not allow for the use of non-cash
collateral, other than the limited types of highly-liquid, high-quality
debt securities described above, to satisfy the margin requirements.
The appropriateness of using non-cash collateral to fulfill margin
requirements is complicated by procyclical considerations. During a
period of financial stress, the value of non-cash collateral pledged as
margin may also come under stress just as counterparties default and
the non-cash collateral is required to offset the cost of replacing
defaulted swap positions. In addition, given the infinite variety of
potential types of noncash collateral, it is extremely difficult to
establish accurate haircuts by regulation. Also, for nonfinancial end
users, who are the most likely type of counterparty to wish to post
noncash collateral, the proposed rules provide credit exposure
thresholds, under which a covered swap entity may determine the extent
to which available noncash collateral appropriately reduces the covered
swap entity's credit risk, consistent with its credit underwriting
expertise. Similarly, counterparties that wish to rely on other non-
cash assets to meet margin requirements could pledge those assets with
a bank or group of banks in a separate arrangement, such as a secured
financing facility, and could draw cash from that arrangement to meet
margin requirements.
The Agencies request comment on whether the proposed rule's list of
eligible noncash collateral for initial margin and variation margin is
appropriate in scope. In particular, the Agencies request comment on
the following questions:
Question 59(a). Should the types of eligible collateral listed be
broadened to include other types of assets (e.g. securities backed by
high-quality mortgages or issued with a third-party guarantee)? 59(b)
If so, how might the systemic risk issue described above be effectively
mitigated?
Question 60(a). Should the types of eligible collateral listed be
broadened to include immediately-available cash funds denominated in
foreign currency, even where such currency is not the currency in which
payment obligations under the swap are required to be settled? 60(b) If
so, which currencies (e.g., those accepted by a derivatives clearing
organization as initial margin for a cleared swap)? 60(c) If so, what
haircut, if any, should apply to such foreign currency?
Question 61. What criteria and factors could be used to determine
the set of acceptable non-cash collateral?
Question 62. How could appropriate haircuts be determined for
valuing these assets for margin purposes?
Question 63(a). Should the types of eligible collateral listed be
broadened to include foreign sovereign debt securities? 63(b) If so,
which foreign sovereign debt securities (e.g., those accepted by a
derivatives clearing organization as initial margin for a cleared
swap)? 63(c) If so, what haircut, if any, should apply?
Question 64(a). Should fixed income securities issued by a well-
known seasoned issuer that has a high credit standing, are
unsubordinated, historically display low volatility, are traded in
highly liquid markets, and have valuations that are readily calculated
be added to the list of eligible collateral for initial margin? 64(b)
If so, how should the concept of a ``high credit standing'' be defined
in a way that does not reference credit ratings?
G. Section ----.7: Segregation of Collateral
The proposed rule provides that each covered swap entity must
require each derivative's counterparty that it faces that is a swap
entity to segregate any funds or collateral that the covered swap
entity has posted as initial margin for a non-cleared swap or non-
cleared security-based swap transaction at an independent, third-party
custodian.\69\ This independent, third-party custodian must be
prohibited by contract from (i) rehypothecating or otherwise
transferring any initial margin it holds for the covered swap entity
and (ii) reinvesting any initial margin held by the custodian in any
asset that would not qualify as eligible collateral for initial margin
under the proposed rule.\70\ The custodian must also be located in a
jurisdiction that applies the same insolvency regime to the custodian
as would apply to the covered swap entity.\71\ This segregation
requirement applies only to initial margin, not variation margin, and
does not apply to transactions with a counterparty that is an end user
of any type.\72\
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\69\ See proposed rule Sec. --7(a).
\70\ See proposed rule Sec. Sec. --7(b), (c).
\71\ See proposed rule Sec. --7(d).
\72\ The proposed rule does not apply the segregation
requirement to variation margin because variation margin is
generally used to offset the current exposure arising from actual
changes in the market value of the derivative position, rather than
to secure potential exposure arising from future changes in the
market value of the derivative position. Under section ----.11 of
FHFA's and the FCA's proposed rules, entities regulated by FHFA and
the FCA that are end users would have to require that any initial
margin and variation margin they post to swap entities be
segregated.
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[[Page 27579]]
The Agencies' preliminary view is that requiring covered swap
entities to ensure segregation of initial margin is necessary to (i)
offset the greater risk to the covered swap entity and the financial
system arising from the use of swaps and security-based swaps that are
not cleared and (ii) protect the safety and soundness of the covered
swap entity. In developing this proposal, the Agencies have taken into
account the fact that the failure of a covered swap entity could pose
significant systemic risks to the financial system and losses borne by
the financial system in such a failure could have significant
consequences. The consequences could be magnified if the initial margin
posted to the failing swap entity cannot be quickly recovered by the
nondefaulting party during a period of financial stress when the
liquidity value of the funds is high. Moreover, swap entities typically
have roughly offsetting exposures with one another. As a result, it is
to be expected that the amount of initial margin required to be posted
by two swap entities will be similar. If swap entities exchange similar
amounts of initial margin and these funds are available for general use
and rehypothecation by the swap entities, then the net effect is as if
little initial margin was exchanged. To the extent that initial margin
requirements are intended to constrain risk-taking, a lack of
segregation will weaken their effect.\73\
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\73\ For example, if dealer A and dealer B entered into a swap
with each other under which each was required to collect $100 from
the other in initial margin without segregation, each would collect
$100 in initial margin from the other and no net initial margin
would be exchanged. In the case of a bankruptcy of dealer B, dealer
A would be permitted to set off the $100 loss that may be incurred
in replacing the swap against the $100 in initial margin it
``collected'' from dealer B, but then would face the potential loss
of the $100 in initial margin it provided to dealer B, for which it
would only have a claim in bankruptcy. If instead the initial margin
for such a swap had been segregated, dealer A would be permitted to
set off the $100 loss that may be incurred in replacing the swap
against the $100 in initial margin that dealer B pledged to dealer A
at a third-party custodian, and dealer A could also recover the $100
in initial margin that it pledged to dealer B at a third-party
custodian, with the result that dealer A would incur no loss upon
dealer B's bankruptcy.
---------------------------------------------------------------------------
Swap entities that engage in cleared swap transactions will be
required to post initial margin to the CCP. Consequently, the initial
margin that is posted on cleared transactions will not be available for
rehypothecation by swap entities. Allowing for rehypothecation of
initial margin by swap entities would create an incentive for swap
entities to engage in non-cleared transactions even though other
provisions of Dodd-Frank Act are intended to promote central clearing
of swaps. However, the segregation of initial margin is likely to
significantly reduce the availability of liquid assets to covered swap
entities to meet payment obligations, as liquid assets held or pledged
as the initial margin would be unavailable to the swap entity for other
purposes. The requirement to segregate initial margin could result in
covered swap entities having to seek alternative methods of funding.
The loss in liquidity could be severe, and could require covered swap
entities to raise liquidity through other sources.
The Agencies are concerned that not requiring segregation at the
outset may cause covered swap entities that incur a severe loss due to
credit or market events to face liquidity challenges because their
counterparties may require segregation immediately after the loss,
depleting the covered swap entity's liquid assets before it can raise
additional funds through other means.\74\ Requiring swap entities to
segregate at the outset addresses this concern at the time a swap
entity suffers a loss, but depletes the liquid assets at the inception
of the swap transaction--a time when the swap entity is more likely to
be able to raise additional liquid funds. The Agencies request comment
on whether the proposed segregation requirement is appropriate, or
whether an alternative approach would better reflect the purposes of
sections 731 and 764 of the Dodd-Frank Act. In particular, the Agencies
request comment on the following questions:
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\74\ Although the agreements between the counterparties might
not allow for requests for segregation after a swap transaction has
been confirmed, as a practical matter counterparties might refuse to
enter into any additional transactions with a financially-stressed
swaps entity absent an accommodation to segregate some amount of
initial margin for the existing portfolio of swaps between the two
parties.
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Question 65(a). Is it necessary to require segregation of initial
margin in order to address the systemic risk issues discussed above?
65(b) What alternatives to segregation would effectively address these
systemic risk issues? 65(c) As an alternative to requiring segregation
at the outset, should the Agencies impose rules that provide additional
time for a swap dealer to raise funds without requiring segregation?
Question 66(a). What are the potential operational, liquidity and
credit costs of requiring segregation of initial margin by swap
entities? 66(b) What would be the expected liquidity impact and cost of
the proposed segregation requirement on market participants? How can
the impact of the proposed rule on the liquidity and costs of swaps
market participants be mitigated?
Question 67. Is segregation of initial margin and not variation
margin sufficient to achieve the purposes of sections 731 and 764 of
the Dodd-Frank Act? If not, how might such purposes be achieved?
Question 68(a). Are the limitations placed on rehypothecation and
reinvestment under the proposed rule appropriate or necessary? 68(b)
What additional or alternative limitations may be appropriate? 68(c)
Should certain forms of rehypothecation (e.g., the lending of
securities pledged as collateral) or additional types of reinvestment
be permitted?
Question 69(a). Is the proposed rule's requirement that the
custodian must be located in a jurisdiction that applies the same
insolvency regime to the custodian as would apply to the covered swap
entity necessary or appropriate? 69(b) What additional or alternative
requirements regarding the location of the custodian may be
appropriate?
H. Section ----.8: Approved Initial Margin Models
Section ----.8 of the proposed rule contains modeling standards
that an initial margin model must meet in order for a covered swap
entity to calculate initial margin under such a model. Generally, the
modeling standards are consistent with current regulatory rules and
best practices for such models in the context of risk-based capital
rules applicable to insured depository institutions and bank holding
companies, and are no less conservative than those generally used by
derivatives clearing organizations and clearing agencies.\75\ As a
result, the Agencies preliminarily believe that these modeling
standards should ensure that a non-cleared swap does not pose a greater
systemic risk than a cleared swap. In particular, because non-cleared
swaps are expected to be less liquid than cleared swaps, the proposed
rule specifies a minimum time horizon for the initial margin model of
10 business days, compared with a typical requirement of 3 to 5
business days used by derivatives CCPs.\76\
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\75\ This conservative approach also incorporates the practices
associated with model validation, independent review and other
qualitative requirements associated with the use of internal models
for regulatory capital purposes.
\76\ See proposed rule Sec. ----.8(d)(1).
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The proposed rule permits a covered swap entity to use an internal
initial margin model that reflects offsetting exposures,
diversification, and other hedging benefits within four broad risk
categories (commodity, credit, equity,
[[Page 27580]]
foreign exchange/interest rates) when calculating initial margin for a
particular counterparty if the relevant swaps or security-based swaps
are executed under the same qualifying master netting agreement.\77\
The proposed rule does not permit an initial margin model to reflect
offsetting exposures, diversification, or other hedging benefits across
broad risk categories.\78\ It is the preliminary view of the Agencies
that the correlations of exposures across broad risk categories are not
stable enough to be incorporated into a regulatory margin requirement.
---------------------------------------------------------------------------
\77\ See proposed rule Sec. ----.8(b).
\78\ Id.
---------------------------------------------------------------------------
The Agencies request comment on whether the standards for initial
margin models specified in the proposed rule are sufficient to ensure
the integrity of initial margin calculations using such a model. In
particular, the Agencies request comment on the following questions:
Question 70(a). Should such models be limited to models based on
value-at-risk concepts, or are other models appropriate to measure
initial margin? 70(b) If so, how should those models apply and be
incorporated into the various aspects of the proposed rule?
Question 71(a). Should offsetting exposures, diversification, and
other hedging benefits be recognized more broadly across substantially
dissimilar asset classes? 71(b) If so, what limits, if any, would be
placed on the recognition of offsetting exposures, diversification, and
other hedging benefits, and how could these be measured, monitored and
validated on an ongoing and consistent basis across substantially
dissimilar asset classes?
Question 72(a). Should the minimum time horizon vary across swaps?
72(b) For example, should it vary based on the broad asset classes:
commodity, credit, equity, and foreign exchange/interest rate? 72(c) If
so, how should the horizons differ and what would be the basis for the
different horizons?
1. Stress Calibration
In addition to a time horizon of 10 trading days, the proposed rule
requires the initial margin model to be calibrated to a period of
financial stress.\79\ Calibration to a stress period ensures that the
resulting initial margin requirement is robust to a period of financial
stress during which swap entities and financial counterparties are more
likely to default. Such calibration also reduces the systemic risk
associated with any increase in margin requirements that might occur in
response to a large increase in volatility during a period of financial
stress.
---------------------------------------------------------------------------
\79\ See proposed rule Sec. ----.8(d)(11).
---------------------------------------------------------------------------
The Agencies request comment on whether the proposed requirement
that an initial margin model take into account financial stress is
appropriate given the purpose the initial margin model is intended to
serve. In particular, the Agencies request comment on the following
questions:
Question 73. Can initial margin models be robustly calibrated to a
stress period in a transparent and consistent manner?
Question 74. Are there any other systemic risk implications of
requiring that initial margin be calibrated to a period of financial
stress rather than to a recent or normal historical period?
Question 75. Is the proposed prudential standard for initial margin
of a 99th percentile price move over a 10-day horizon, calibrated using
historical data incorporating a period of significant financial stress,
appropriate?
Question 76. Is a 10-day horizon sufficient to cover the likely
liquidation period on non-cleared swaps?
Question 76. Will the requirement to calibrate to a period of
significant financial stress reduce the potential procyclicality of the
margin requirement sufficiently? For example, would a minimum margin
requirement as a backstop to the modeled initial margin amounts be a
prudent approach to addressing procyclicality concerns?
Question 77. Is ``period of significant financial stress'' a well-
understood concept? How might it be clarified?
Question 78. What would be the benefits and costs of replacing the
requirement to calibrate the initial margin model using a period of
significant financial stress with a requirement to calibrate the
initial margin model using a longer historical data sample (such as 10
years), as an alternative way to reduce the potential procyclicality of
the margin requirement?
Question 79. Should market participants be able to comply with the
requirement to calibrate the initial margin requirement to a historical
period of significant financial stress for newer products with little,
if any, market history? If so, how?
2. Benchmarking
The proposed rule requires that an initial margin model used for
calculating initial margin requirements be benchmarked periodically
against observable margin standards to ensure that the initial margin
required is not less than what a derivatives clearing organization or a
clearing agency would require for similar transactions.\80\ This
benchmarking requirement is intended to insure that any initial margin
amount produced by an initial margin model is subject to a readily
observable minimum. It will also have the effect of limiting the extent
to which the use of initial margin models might disadvantage the
movement of certain types of derivatives to CCPs by setting lower
initial margin amounts for non-cleared transactions than for similar
cleared transactions.
---------------------------------------------------------------------------
\80\ See proposed rule Sec. ----.8(d)(14).
---------------------------------------------------------------------------
The Agencies request comment on the proposed requirement for
covered swap entities to benchmark any initial margin model to a model
used by a derivatives clearing organization or clearing agency model
for calculating initial margin, as well as the following questions:
Question 80. What are the operational costs associated with the
benchmarking exercise?
Question 81. Can portfolio effects be captured during the
benchmarking exercise?
Question 82. How would a banking organization fulfill the
requirement in the event that a derivatives clearing organization or
clearing agency does not clear a similar derivative transaction?
I. Section ----.9: Application of Margin Requirements to Certain
Foreign Covered Swap Entities
Section ----.9 of the proposed rule addresses the manner in which
the proposed rule's margin requirements apply to certain foreign
covered swap entities. In the absence of Sec. ----.9, the proposed
rule's margin requirements would apply to all of a covered swap
entity's non-cleared swap and non-cleared security-based swap
transactions, without regard to whether (i) the covered swap entity is
organized under U.S. or foreign law or (ii) the covered swap entity's
counterparty is located inside or outside of the United States.
However, the potential application of the margin rules to foreign
covered swap entities, or to transactions by U.S. covered swap entities
with foreign counterparties, raises several important questions. First,
the potential application of the proposed rule to activities conducted
by a foreign covered swap entity wholly outside of the United States
raises questions regarding the permissible territorial scope of the
proposed rule.\81\
[[Page 27581]]
Second, to the extent that the proposed margin requirements apply to
transactions involving foreign covered swap entities or foreign
counterparties, such application could subject these transactions to
multiple, and potentially conflicting, margin requirements established
by U.S. and foreign regulators. Third, the potentially different
treatment of U.S. covered swap entities and foreign covered swap
entities raises questions of competitive equality among the two types
of firms.
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\81\ Section 2(i) of the Commodity Exchange Act, as amended by
section 722 of the Dodd-Frank Act, provides that the provisions of
the Commodity Exchange Act relating to swaps ``shall not apply to
activities outside of the United States unless those activities * *
* have a direct and significant connection with activities in, or
effect on, commerce of the United States.''
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With respect to U.S. covered swap entities, the Agencies propose to
apply the margin requirements to U.S. covered swap entities' swap and
security-based swap transactions without regard to whether the
counterparty is located inside or outside the United States. This
approach acknowledges that the foreign swap and security-based swap
transactions of a U.S. covered swap entity pose no lesser risk to the
covered swap entity's safety and soundness and to financial stability
based on the location of the counterparty. The proposed rule applies
that same approach to covered swap entities that are foreign
subsidiaries and offices of U.S. firms.
With respect to foreign covered swap entities, the Agencies propose
to exclude certain qualifying foreign derivative transactions of such
entities from application of the proposed rule's margin requirements.
Specifically, Sec. ----.9 of the proposed rule provides that the
proposed rule's margin requirements would not apply to any ``foreign
non-cleared swap or foreign non-cleared security-based swap'' of a
``foreign covered swap entity,'' as those terms are defined in Sec. --
--.9 of the proposed rule.\82\ This proposed approach limits the extra-
territorial application of the margin requirements while preserving, to
the extent possible, competitive equality among U.S. and foreign firms
in the United States.
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\82\ See proposed rule Sec. ----.9(a).
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For these purposes, the proposed rule defines a ``foreign non-
cleared swap or foreign non-cleared security-based swap'' as a non-
cleared swap or non-cleared security-based swap with respect to which:
(i) The counterparty to the foreign covered swap entity is not a
company organized under the laws of the United States or any State, not
a branch or office of a company organized under the laws of the United
States or any State, and not a person resident in the United States;
and (ii) performance of the counterparty's obligations to the foreign
covered swap entity under the swap or security-based swap has not been
guaranteed by an affiliate of the counterparty that is a company
organized under the laws of the United States or any State, a branch of
a company organized under the laws of the United States or any State,
or a person resident in the United States.\83\ As a result, foreign
swaps and security-based swaps would generally only include
transactions where the counterparty is not organized under U.S. law or
otherwise located in the United States, and no U.S. affiliate of the
counterparty has guaranteed the counterparty's obligations under the
transaction.\84\
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\83\ See proposed rule Sec. ----.9(b).
\84\ Under the proposed rule, swap and security-based swaps with
U.S. counterparties are subject to the proposed rule's margin
requirements regardless of whether the covered swap entity is U.S.
or foreign.
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The additional requirement that no U.S. affiliate guarantee the
counterparty's obligation is intended to exclude instances where such
an affiliate has, through a guarantee, effectively assumed ultimate
responsibility for the performance of the counterparty's obligations
under the transaction. In particular, the Agencies are concerned that
without such a requirement, swaps and security-based swaps with a U.S.
counterparty could be structured, through the use of an overseas
affiliate, in a manner that would evade application of the proposed
margin requirements to U.S. transactions. Transactions guaranteed by a
U.S. affiliate would also have direct and significant connection with
activities in, and effect on, commerce of the United States.
The proposed rule defines a ``foreign covered swap entity'' as a
covered swap entity that: (i) Is not a company organized under the laws
of the United States or any State; (ii) is not a branch or office of a
company organized under the laws of the United States or any State;
(iii) is not a U.S. branch, agency or subsidiary of a foreign bank; and
(iv) is not controlled, directly or indirectly, by a company that is
organized under the laws of the United States or any State.\85\
Accordingly, only a covered swap entity that is organized under foreign
law and not controlled, directly or indirectly, by a U.S. company would
be eligible for treatment as a foreign covered swap entity for these
purposes; neither a foreign branch of a U.S. insured depository
institution nor a foreign subsidiary of a U.S. company would be
considered a foreign covered swap entity under the proposed rule. In
cases where a U.S. company has a foreign subsidiary that is a covered
swap entity, the proposed rule would treat that foreign subsidiary in
the same manner as a U.S. covered swap entity for purposes of the
margin requirements because the U.S. parent company's ownership of the
subsidiary is likely to expose the U.S parent company, as a result of
legal, contractual or reputational factors, to the risks of the foreign
subsidiary's derivatives activities. Transactions of a foreign
subsidiary of a U.S. company would also have direct and significant
connection with activities in, and effect on, commerce of the United
States. Similarly, neither a U.S. branch of a foreign bank nor a U.S.
subsidiary of a foreign company would be a foreign covered swap entity
under the proposed rule.
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\85\ See proposed rule Sec. ----.9(c).
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The Agencies request comment on the proposed rule's application to
the U.S. and foreign swap and security-based swap activities of U.S.
covered swap entities and foreign swap entities, respectively. In
particular, the Agencies request comment on the following questions:
Question 83. Does the proposed rule's treatment of the swap and
security-based swap transactions of foreign covered swap entities
appropriately limit application of the margin requirements in a manner
consistent with the territorial scope of sections 731 and 764 of the
Dodd-Frank Act?
Question 84(a). Is the proposed rule's treatment of the foreign
swap and security-based swap transactions of U.S. covered swap entities
appropriate? 84(b) Should such transactions be subject to the same
exclusion that has been proposed for the foreign swap and security-
based swap transactions of foreign covered swap entities? 84(c) If so,
why?
Question 85(a). Should the proposed rule expand the definition of
foreign covered swap entity to include (i) the foreign subsidiaries of
U.S. companies or (ii) the foreign branches of U.S. insured depository
institutions? 85(b) If so, why? 85(c) How could the potential risks to
the U.S. parent company or insured depository institution related to
its subsidiary or branch's activity be limited or eliminated? 85(d) Is
this operationally feasible?
Question 86. What impact is the proposed rule's treatment of the
foreign swap and security-based swap transactions of U.S. covered swap
entities likely to have on the structure, management, and/or
competitiveness of U.S. covered swap entities?
Question 87(a). Is the proposed rule's definition of a foreign swap
or security-based swap transaction appropriate? 87(b) In particular, is
the requirement that no U.S. affiliate guarantee the
[[Page 27582]]
foreign counterparty's obligations under the swap or security-based
swap transaction appropriate? 87(c) Would an alternative definition
more appropriately differentiate between U.S. and foreign
counterparties for these purposes? 87(d) If so, what should that
definition be?
Question 88(a). Is the proposed rule's definition of a foreign
covered swap entity appropriate? 88(b) Would an alternative definition
more appropriately differentiate between U.S. and foreign
counterparties for these purposes? 88(c) If so, what should that
definition be?
Question 89(a). Is the proposed rule's application of the margin
requirements to all U.S. swaps and security-based swaps of a covered
swap entity, regardless of whether that covered swap entity is U.S. or
foreign, appropriate? 89(b) Should the proposed rule treat such
transactions differently? 89(c) If so, how?
Question 90. What impact is the proposed rule's treatment of the
swap and security-based swap transactions of foreign covered swap
entities likely to have on the structure, management, and/or
competitiveness of foreign covered swap entities?
J. Section ----.10: Capital
The proposed rule generally requires a covered swap entity to
comply with regulatory capital rules already made applicable to that
covered swap entity as part of its prudential regulatory regime, as
follows:
In the case of insured depository institutions, the
capital adequacy guidelines that are applicable to the covered entity
and have been adopted by the appropriate Federal banking agency under
section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o);
In the case of a bank holding company or savings and loan
holding company (on or after the transfer established under Section 311
of the Dodd-Frank Act), the capital adequacy guidelines applicable to
bank holding companies under the Board's Regulation Y (12 CFR part
225);
In the case of a foreign bank or the U.S. branch or agency
of a foreign bank, the capital rules that are made applicable to such
covered entity pursuant to Sec. 225.2(r)(3) of the Board's Regulation
Y (12 CFR 225.2(r)(3);
In the case of an Edge corporation or an Agreement
corporation, the capital adequacy guidelines that are made applicable
to an Edge corporation engaged in banking pursuant to Sec.
211.12(c)(2) of the Board's Regulation K (12 CFR 211.12(c)(2);
In the case of any ``regulated entity'' under the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992 (i.e.,
Fannie Mae and its affiliates, Freddie Mac and its affiliates, and the
Federal Home Loan Banks), the risk-based capital level or such other
amount applicable to the covered swap entity as required by the
Director of FHFA pursuant to 12 U.S.C. 4611;
In the case of Farmer Mac, the capital adequacy
regulations set forth in 12 CFR part 652; and
In the case of any Farm Credit System institution (other
than Farmer Mac), the capital regulations set forth in 12 CFR part
615.\86\
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\86\ See proposed rule Sec. ----.10.
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The Agencies have preliminarily determined that compliance with
these regulatory capital requirements is sufficient to offset the
greater risk to the swap entity and the financial system arising from
the use of non-cleared swaps, helps ensure the safety and soundness of
the covered swap entity, and is appropriate for the greater risk
associated with the non-cleared swaps and non-cleared security-based
swaps held as a covered swap entity. In particular, the Agencies note
that the capital rules incorporated by reference into the proposed rule
already address, in a risk-sensitive and comprehensive manner, the
safety and soundness risks posed by a covered swap entity's derivatives
positions.\87\ In addition, the Agencies preliminarily believe that
these capital rules sufficiently take into account and address the
risks associated with the derivatives positions that a covered swap
entity holds and the other activities conducted by a covered swap
entity.\88\
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\87\ For example, under the banking agencies' capital adequacy
standards for banks and bank holding companies based on the first
Basel Accord, interest-rate, exchange-rate, commodity, and equity-
linked derivative contracts that are not traded on an exchange are
subject to a capital charge based on type of contract, remaining
maturity, and the risk category of the counterparty to the contract.
See 12 CFR part 3, Appendix A Sec. 3(b)(7) (OCC); 12 CFR parts 208
and 225, Appendix A Sec. III.E (Board); 12 CFR part 325, Appendix A
Sec. II.E (FDIC). As another example, under the bank agencies'
advanced risk-based capital adequacy standards based on the advanced
approaches of the Basel II Accord (``advanced approaches''), banks
and bank holding companies that use the advanced approaches
determine capital requirements for over-the-counter derivatives
based on a formula that takes into account collateral in mitigating
counterparty credit risk. See 12 CFR part 3, Appendix C, part IV
(OCC); 12 CFR part 208, Appendix F, part IV and 12 CFR part 225,
Appendix G, part IV (Board); and 12 CFR part 325, Appendix D, part
IV (FDIC). The FCA's capital requirements for FCS institutions other
than Farmer Mac expressly address derivatives transactions. See 12
CFR 615.5201 and 615.5212. The FCA's capital requirements for Farmer
Mac indirectly address derivatives transactions in the operational
risk component of the statutorily mandated risk-based capital stress
test model. See 12 CFR part 652 Subpart B Appendix A. The FCA,
through the Office of Secondary Market Oversight, closely monitors
and supervises all aspects of Farmer Mac's derivatives activities,
and the FCA believes existing requirements and supervision are
sufficient to ensure safe and sound operations in this area.
However, the FCA is considering enhancements to the model and in the
future may revise the model to more specifically address derivatives
transactions.
\88\ See footnote 33, supra, for a discussion of the basis for
FHFA's preliminary view that the reference to existing statutory
authority is sufficient to address the risks discussed in the text
above as to the Enterprises notwithstanding their current
conservatorship status.
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The Agencies request comment regarding whether application of these
capital regimes is appropriate.
Question 91. Is an alternative or additional capital requirement
appropriate for some or all of the covered swap entities subject to the
proposed rule?
Question 92. Are there particular issues or concerns raised in the
context of foreign banks or their U.S. branches and agencies that would
be better addressed through a different approach to the capital
requirement for such entities?
K. Section ----.11: Special Requirements for Transactions Between Swap
Entities and Regulated Entities
FHFA and FCA (but not the other Agencies) are proposing an
additional provision, Sec. ----.11 of FHFA's and FCA's proposed rules.
Proposed Sec. ----.11 would require that any entity that is regulated
by FHFA or FCA, but is not itself a covered swap entity, collect
initial margin and variation margin from its counterparty when entering
into a non-cleared swap or non-cleared security-based swap with a swap
entity.\89\ Regulated entities subject to this provision include the
Federal Home Loan Banks, Fannie Mae and its affiliates, Freddie Mac and
its affiliates, and all Farm Credit System institutions including
Farmer Mac (collectively, regulated entities, and each a regulated
entity). Regulated entities that are swap entities would be subject to
Sec. Sec. 1 through 9 of the proposed rule by virtue of being covered
swap entities. This section also does not apply to swaps entered into
between regulated entities and end users.
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\89\ See FCA and FHFA proposed rule Sec. ----.11. FCA and FHFA
note that in sections III.C and III.D of this notice of proposed
rulemaking, the Agencies have requested comment on alternative
approaches to margin requirements, including whether covered swap
entities should be required to post margin to end users. In the
event such an alternative approach is adopted as part of a final
rule, as to both initial and variation margin requirements, FCA and
FHFA note that this proposed Sec. ----.11 may not need to be
adopted as part of that final rule.
---------------------------------------------------------------------------
Proposed Sec. ----.11 is consistent with the risk-based approach
to margin
[[Page 27583]]
proposed by the Agencies and parallels the requirements that swap
entities collect initial and variation margin from their
counterparties. Moreover, this approach recognizes that a default by a
swap counterparty to a regulated entity could adversely affect the safe
and sound operations of the regulated entity. The requirement reflects
current practice in that the regulated entities generally obtain
collateral to secure their swaps exposure to swap dealer
counterparties, although current practice generally does not include
posting of initial margin by or to any counterparty.
FHFA and FCA are proposing these provisions pursuant to each
agency's role as safety and soundness regulator for its respective
regulated entities, and each agency's authority to ensure that the
regulated entities operate in a safe and sound manner, including that
they maintain adequate capital and internal controls, that their
activities foster liquid, efficient, competitive and resilient national
finance markets for housing, agriculture, and rural markets, and that
they carry out their public policy missions through authorized
activities.\90\
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\90\ See 12 U.S.C. 2154, 2248, 2252, 4513, 4526.
---------------------------------------------------------------------------
Section ----.11(a)(1) of the proposed rule requires a regulated
entity to collect initial margin when it enters into a swap transaction
with a swap entity. The proposal provides that the amount of initial
margin the regulated entity must collect shall be in accordance with
Sec. ----.3 of the proposed rule, which permits the use of either an
initial margin model or the use of a standardized ``look up'' table
specifying the minimum initial margin that must be collected as a
percentage of the notional amount of the transaction. The minimum
initial margin levels set out in Appendix A apply only in the absence
of an initial margin model. FHFA and FCA, however, seek comment on
whether a minimum initial margin requirement should apply as a backstop
even to modeled initial margin amounts, as a prudent approach to
address concerns about procyclicality and competitive pressures to
reduce margin requirements. If not, how should such concerns be
addressed?
Section ----.11(a)(1) of the proposed rule permits a regulated
entity to use its initial margin model to determine initial margin and
provides that if the regulated entity does not have an initial margin
model, it may engage a third party to calculate initial margin on its
behalf, provided that the third party is itself independent of the swap
entity that is the counterparty to the transaction. Any initial margin
model used to determine margin posted to a regulated entity must meet
all of the requirements of Sec. ----.8 of the proposed rule. FHFA and
FCA preliminarily believe that permitting a swap entity to use its own
model to calculate the amount of initial margin it would be required to
post to a regulated entity may introduce a conflict of interest to the
transaction. That concern could be addressed by establishing a process
through which the regulated entity could verify the reasonableness of
the counterparty's model calculation. FHFA and FCA each seeks comment
on whether it should allow its regulated entities to use the
counterparty's model to calculate initial margin, and if so, what
provisions should be included to mitigate conflicts of interest.
Section ----.11(a)(2) of the proposed rule requires that a
regulated entity collect variation margin daily from the swap entity in
accordance with the requirements of Sec. ----.4 of the proposed rule,
which permits the amounts of variation margin posted to be adjusted to
account for qualifying master netting agreements and applies a minimum
transfer amount of $100,000.
Section ----.11(b) of the proposed rule requires that any regulated
entity entering into a non-cleared swap or a non-cleared security-based
swap with a swap entity must execute trading documentation with such
counterparty in accordance with Sec. ----.5 of the proposed rule.
Section ----.11(c) of the proposed rule provides that any collateral
that a regulated entity is required to collect as initial or variation
margin must meet the eligible collateral requirements of Sec. ----.6
of the proposed rule. That section applies the same eligibility
requirements to the regulated entities that are required of the swap
entities.
Section ----.11(d) of the proposed rule provides that a regulated
entity must require that any initial margin it posts to a counterparty
be held by an independent custodian. That provision is consistent with
the requirement in Sec. ----.7 of the proposed rule that a covered
swap entity require segregation with an independent custodian of any
initial margin that it posts to another swap entity. Section ----.11(d)
of the proposed rule applies this segregation requirement to variation
margin as well as initial margin and thereby reflects current practice
of at least some of the regulated entities. FHFA and FCA seek comments
on whether such a requirement should be applied to variation margin and
if it is not applied, how the regulated entities would be protected in
the event variation margin is posted to a swap entity that subsequently
fails.
IV. Quantitative Impact of Margin Requirements
The proposed rule would apply the initial margin and variation
margin requirements to non-cleared swaps and security-based swaps that
are entered into by a covered swap entity after the effective date,
which is proposed to be 180 days after publication of a final rule in
the Federal Register. The proposed rule would not require an immediate
or retroactive application of initial margin or variation margin for
any derivative transaction entered into prior to the effective date of
the final rule.
Because the requirements would not be applied retroactively, no new
initial margin or variation margin requirements would be imposed on
derivatives transactions entered into prior to the effective date until
such time as those transactions are rolled-over or renewed. The only
requirements that would apply to a pre-effective date covered
derivative would be the initial margin and variation margin
requirements to which the parties to the transaction had previously
agreed to by contract.
The new requirements will have an impact on the costs of engaging
in new swap transactions. In particular, the proposed rule sets out
requirements for initial and variation margin that represent a
significant change from current industry practice in many
circumstances. Assessing the quantitative impact of the proposed
requirements is particularly difficult in light of the wide ranging and
as yet undetermined changes that are occurring to the derivatives
market as a result of regulatory reform. Specifically there is
significant uncertainty with respect to (i) which entities would be
classified as swap entities; (ii) the extent to which existing
derivatives would be rolled-over or renewed; and (iii) the extent to
which derivatives currently traded on an over-the-counter basis will
move to central clearing by a CCP. In addition, there are a number of
specific and technical aspects of the proposed rule, such as number and
composition of counterparties that would be classified as high-risk
financial end users, low-risk financial end users, and nonfinancial end
users, respectively, that are difficult to assess without a large
amount of highly detailed data on the size of derivative positions as
well as the underlying rationale for maintaining those positions. These
and other complicating factors make it difficult to make precise
statements about the quantitative impact of the
[[Page 27584]]
margin rule specified under the proposed rule.
Accordingly, the Agencies request commenters to provide their own
detailed quantitative impact analyses. The Agencies encourage
commenters to include the following elements in their analyses
categorized between swaps entities, high-risk financial end users, low-
risk financial end users, and nonfinancial end users: (i) Required
initial margin if internal models were applied; (ii) required initial
margin if the standardized chart in Appendix A were applied; (iii)
required variation margin; (iv) the expected costs of, or additional
liquidity required by, the initial margin and variation margin
requirements; and (v) the potential benefits of the initial margin and
variation margin requirements to covered swap entities, their
counterparties, and financial stability. The analyses should also (i)
address operational and other business related costs associated with
implementing the proposed rule and (ii) take into consideration and
disclose the expected effect of the likely clearing of certain
derivative transactions through CCPs in the future.
In order to better understand the effect that broader clearing
requirements will have on the impact of the proposed rules, the
Agencies also request comment on the levels of covered derivatives,
including the roll-over or renewal of prior derivatives that would
become covered under the proposed rule, that can be expected over the
following time horizons after the effective date: (i) 1 year, (ii) 3
years, and (iii) 5 years. To maximize the usefulness of such comments,
the Agencies request that commenters break down such projections by
covered derivatives that are likely to be cleared and uncleared, as
well as by product class.
V. Request for Comments
The Agencies are interested in receiving comments on all aspects of
the proposed rule.
VI. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102,
section 722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the OCC,
Board and FDIC to use plain language in all proposed and final rules
published after January 1, 2000. The OCC, Board and FDIC invite your
comments on how to make this proposal easier to understand. For
example:
Have we organized the material to suit your needs? If not,
how could this material be better organized?
Are the requirements in the proposed regulation clearly
stated? If not, how could the regulation be more clearly stated?
Does the proposed regulation contain language or jargon
that is not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes to the format would make the regulation
easier to understand?
What else could we do to make the regulation easier to
understand?
VII. Administrative Law Matters
A. Paperwork Reduction Act Analysis
Request for Comment on Proposed Information Collection
Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA''), 44 U.S.C. 3501-3521. In accordance
with the requirements of the PRA, the Agencies may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. The information collection
requirements contained in this joint notice of proposed rulemaking have
been submitted by the FDIC, OCC, and FHFA to OMB for approval under
section 3506 of the PRA and Sec. 1320.11 of OMB's implementing
regulations (5 CFR part 1320). The Board reviewed the proposed rule
under the authority delegated to the Board by OMB.
Comments are invited on:
(a) Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collections, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Commenters may
submit comments on aspects of this notice that may affect disclosure
requirements and burden estimates at the addresses listed in the
ADDRESSES section of this Supplementary Information. A copy of the
comments may also be submitted to the OMB desk officer for the
agencies: By mail to U.S. Office of Management and Budget, 725 17th
Street, NW., 10235, Washington, DC 20503 or by facsimile (202-
395-5806).
Title of Information Collection: Margin and Capital Requirements
for Certain Swap Entities.
Frequency of Response: Event-generated and annual.
Affected Public: The affected public of the FDIC, OCC, and Board is
assigned generally in accordance with the entities covered by the scope
and authority section of their respective proposed rule. The affected
public of FHFA generally would be those third parties not regulated by
a prudential regulator that request prior written approval of an
initial margin model for use by a regulated entity.
FDIC: Any FDIC-insured state-chartered bank that is not a member of
the Federal Reserve System or FDIC-insured state-chartered savings
association that is registered as a swap dealer, major swap
participant, security-based swap dealer, or major security-based swap
participant.
OCC: Any national bank, Federal savings association, or Federal
branch or agency of a foreign bank that is registered as a swap dealer,
major swap participant, security-based swap dealer, or major security-
based swap participant.
Board: Any state member bank (as defined in 12 CFR 208.2(g)), bank
holding company (as defined in 12 U.S.C. 1842), savings and loan
holding company (as defined in 12 U.S.C. 1467a, (on or after the
transfer established under Section 311 of the Dodd-Frank Act)12 U.S.C.
5411), foreign banking organization (as defined in 12 CFR 211.21(o)),
state branch or state agency of a foreign bank (as defined in 12 U.S.C.
3101(b)(11) and (12)), or Edge or agreement corporation (as defined in
12 CFR 211.1(c)(2) and (3)) that is registered as a swap dealer, major
swap participant, security-based swap dealer, or major security-based
swap participant.
FHFA: With respect to any regulated entity as defined in section
1303(20) of the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 (12 U.S.C. 4502(20)), the proposed rule would not
contain any collection of information pursuant to the PRA. However, the
provisions in proposed Sec. ----.11(e) allowing a third party that is
not subject to regulation by a prudential
[[Page 27585]]
regulator to request prior written approval of an initial margin model
for use by a regulated entity, would be a collection of information
under the PRA.
Abstract: The notice sets forth proposed margin and capital
requirements with respect to non-cleared swaps and non-cleared
security-based swaps for covered swap entities. The information
requirements in joint regulations proposed by the Agencies are found in
Sec. Sec. ----.2(t)(3), --.2(t)(4), --.4(e)(2)(i), ----5, --
--.6(d)(2)(i), ----.8(c)(1), ----.8(c)(2), ----8(c)(3), ----8(d)(3), --
--8(d)(8), ----.8(d)(9), ----.8(d)(10), ----.8(d)(12), ----.8(e)(1), --
--.8(f)(2), ----.8(f)(3), ----.8(f)(4), and ----.8(g). Compliance with
the information collections found in sections ----.2(t)(3) and
--.2(t)(4) would be mandatory for any covered swap entity wishing to
take a qualifying master netting agreement into account for purposes of
calculating initial margin or variation margin. Compliance with the
information collections found in Sec. Sec. ----.4(e)(2)(i), ----.5,
and --.6(d)(2)(i) would be mandatory for all covered swap entities.
Compliance with the information collections found in Sec. Sec. --
--.8(c)(1), ----.8(c)(2), ----.8(c)(3), ----.8(d)(3), ----.8(d)(8), --
--.8(d)(9), ----.8(d)(10), ----.8(d)(12), ----.8(e)(1), ----.8(f)(2),
----.8(f)(3), ----.8(f)(4), and ----.8(g) would be mandatory for all
covered swap entities wishing to use an initial margin model to
calculate initial margin requirements.
In addition, Sec. ----.11(e) of FHFA's proposed rule contains an
information collection that would be for all third parties that are not
subject to regulation by a prudential regulator and that request prior
written approval of an initial margin model for use by an FHFA-
regulated entity.
Section-by-Section Analysis
Section --.2 defines terms used in the proposed rule, including the
definition of ``qualifying master netting agreement'' contained in
Sec. ----2(t). Sections ----.2(t)(3) and ----.2(t)(4) provide that,
with respect to a qualifying master netting agreement, a covered swap
entity must (i) conduct sufficient legal review of the agreement to
conclude with a well-founded basis that the agreement meets specified
criteria and (ii) establish and maintain procedures for monitoring
relevant changes in law. The term ``qualifying master netting
agreement'' is used elsewhere in the proposed rule to specify instances
in which a covered swap entity may (i) calculate variation margin on an
aggregate basis across multiple swaps and security-based swaps and (ii)
calculate initial margin requirements under an initial margin model on
a portfolio basis.
Section --.4 requires that on and after the date on which a covered
swap entity enters into a non-cleared swap or non-cleared security-
based swap, the covered swap entity shall collect variation margin from
the counterparty to such swap or security-based swap in specified
amounts. Section ----.4(e)(2)(i) requires that, in cases where a
counterparty refuses to provide required variation margin, a covered
swap entity demonstrated upon request to the satisfaction of the
relevant Agency that it has made appropriate efforts to collect the
required variation margin unless it has otherwise made the necessary
efforts to attempt to collect the required variation margin, including
the timely initiation and continued pursuit of formal dispute
resolution mechanisms.
Section ----.5 requires a covered swap entity to execute trading
documentation with each counterparty that (i) includes credit support
arrangements that grant the covered swap entity the contractual right
to collect initial margin and variation margin in such amounts, in such
form, and such circumstances as are required by the initial margin and
variation margin requirements set forth in the proposed rule and (ii)
meets other specified criteria.
Section ----.6 establishes certain forms of eligible collateral
that a covered swap entity shall collect for initial margin and
variation margin required pursuant to this part and requires a covered
swap entity to monitor the market value of any eligible collateral it
has collected to satisfy initial margin or variation margin required by
this part and, to the extent that the market value of such collateral
has declined, collect such additional eligible collateral as is
necessary to bring itself into compliance with the margin requirements
of this part. Section ----.6(d)(2)(i) requires that, in cases where a
counterparty refuses to provide required additional margin, a covered
swap entity demonstrated upon request to the satisfaction of the
relevant Agency that it has made appropriate efforts to collect the
required additional margin unless it has otherwise made the necessary
efforts to attempt to collect the required additional margin, including
the timely initiation and continued pursuit of formal dispute
resolution mechanisms.
Section ----.8 establishes standards for initial margin models.
These standards include:
A requirement that the covered swap entity receive prior
approval from the relevant Agency based on demonstration that the
initial margin model meets specific requirements (Sec. Sec. --
--.8(c)(1) and ----.8(c)(2));
A requirement that a covered swap entity notify the
relevant Agency in writing before extending use of the model to
additional product types, making certain changes to the initial margin
model, or making material changes to modeling assumptions (Sec. --
--.8(c)(3));
A variety of quantitative requirements, including
requirements that the covered swap entity validate and demonstrate the
reasonableness of its process for modeling and measuring hedging
benefits, demonstrate to the satisfaction of the relevant Agency that
the omission of any risk factor from the calculation of its initial
margin is appropriate, demonstrate to the satisfaction of the relevant
Agency that any conversion of initial margin calculated using a
different holding period is appropriate, periodically review and, as
necessary, revise the data used to calibrate the initial margin model
to ensure that the data incorporate an appropriate period of
significant financial stress (Sec. Sec. ----.8(d)(3), ----.8(d)(8), --
--.8(d)(9), ----.8(d)10), ----.8(d)(12));
A requirement that a covered swap entity review its
initial margin model annually (Sec. ----.8(e));
A requirement that the covered swap entity validate its
initial margin model initially and on an ongoing basis, describe to the
relevant Agency any remedial actions being taken, and report internal
audit findings regarding the effectiveness of the initial margin model
to the covered swap entity's board of directors or a committee thereof
(Sec. Sec. ----.8(f)(2), ----.8(f)(3), and ----.8(f)(4)); and
A requirement that the covered swap entity adequately
document all material aspects of its initial margin model (Sec. --
--.8(g)).
Section ----.11(e) of FHFA's proposed rule applies Sec. ----.8 of
the proposed rule, the information collection of which is described
above, to any third party that is not subject to regulation by a
prudential regulator and requests prior written approval of an initial
margin model for use by an FHFA-regulated entity.
Estimated Paperwork Burden
Estimated Burden Per Response:
Sec. ----.2--Definitions, Sec. ----.5--Documentation of margin
matters, and Sec. ----.8(g)--Documentation: recordkeeping--5 hours.
Sec. ----.4(e)(2)(i)--Variation margin and Sec. ----.6(d)(2)(i)--
Eligible collateral: recordkeeping--4 hours.
[[Page 27586]]
Sec. ----.8(c) and (d)--Initial margin model: reporting--240
hours.
Sec. ----.8(e)--Periodic review and Sec. ----.8 (f)--Control,
oversight and validation mechanisms: recordkeeping--40 hours.
Sec. ----.11(e)--Special requirements for transactions between
swap entities and regulated entities: Initial margin models:
recordkeeping--220 hours.
FDIC
Number of Respondents: 3.
Total Estimated Annual Burden: 867 hours.
OCC
Number of Respondents: 20.
Total Estimated Annual Burden: 5,780 hours.
Board
Number of Respondents: 30.
Total Estimated Annual Burden: 8,670 hours.
FHFA
Number of Respondents: 2.
Total Estimated Annual Burden: 440 hours.
FCA: The FCA collects information from Farm Credit System
institutions, which are Federal instrumentalities, in the FCA's
capacity as their safety and soundness regulator, and, therefore, OMB
approval is not required for this collection.
B. Initial Regulatory Flexibility Act Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (RFA), the Agencies are publishing an initial
regulatory flexibility analysis for the proposed rule. The RFA requires
an agency to provide an initial regulatory flexibility analysis with
the proposed rule or to certify that the proposed rule will not have a
significant economic impact on a substantial number of small entities.
The Agencies welcome comment on all aspects of the initial regulatory
flexibility analysis. A final regulatory flexibility analysis will be
conducted after consideration of comments received during the public
comment period.
1. Statement of the objectives of the proposal. As required by
section 4s of the Commodity Exchange Act (7 U.S.C. 6(s)) and section
15F of the Securities Exchange Act (15 U.S.C. 78o-8), the Agencies are
proposing new regulations to establish rules imposing (i) capital
requirements and (ii) initial and variation margin requirements on all
non-cleared swaps into which the covered swap entities enter.
2. Small entities affected by the proposal. This proposal may have
an effect predominantly on two types of small entities: (i) Financial
institutions that are swap entities that are subject to the proposed
rule's capital and margin requirements; and (ii) counterparties that
engage in derivatives transactions with swap entities that are subject
to the proposed rule's margin requirements.
With respect to financial institutions that are swap entities that
are subject to the proposed rule's margin requirement, a financial
institution generally is considered small if it has assets of $175
million or less.\91\ Based on 2010 Call Report data, approximately
4,200 depository institutions had total domestic assets of $175 million
or less. Of this number, however, the Agencies do not expect that any
is likely to be a swap entity that is subject to the proposed rule's
capital and margin requirements. With respect to counterparties that
engage in derivatives transactions with swap entities that are subject
to the proposed rule's margin requirements, the number of such
counterparties and the extent to which certain types of companies are
likely to be counterparties are unknown. However, of the 4,200
depository institutions described above, fewer than 250 are party to
non-cleared derivative contracts.
---------------------------------------------------------------------------
\91\ U.S. Small Business Administration, Table of Small Business
Size Standards Matched to North American Industry Classification
System Codes, available at http://www.sba.gov/sites/default/files/Size_Standards_Table.pdf.
---------------------------------------------------------------------------
3. Compliance requirements. With respect to the initial margin and
variation margin requirements, the Agencies' proposed rule does not
apply directly to counterparties that engage in derivatives
transactions with swap entities. However, because the proposed rule
requires a covered swap entity to collect a minimum amount of margin
(subject to a threshold in some cases) from all counterparties,
including small entities, the margin requirements may affect the amount
of margin that counterparties that are small entities are required to
post to dealer counterparties when transacting in the derivatives
markets. Accordingly, the Agencies expect any economic impact on
counterparties that are small entities to be negative to the extent
that swap entities currently do not collect initial margin or variation
margin from those counterparties but would be required to do so under
the proposed rule.
4. Other Federal rules. The Agencies believe that no Federal rules
duplicate, overlap, or conflict with the proposed rule.
5. Significant alternatives to the proposed rule. As discussed
above, the Agencies have requested comment on the impact of the margin
requirements on end users from which swap entities may be required to
collect initial margin and/or variation margin and have solicited
comment on any approaches that would reduce the burden on all
counterparties, including small entities. In addition, the Agencies
have proposed to reduce the effect of the proposed rule on
counterparties to covered swap entities, including small entities,
through the implementation of initial margin threshold amounts and
variation margin threshold amounts. The Agencies have also requested
comment on a variety of alternative approaches to implementing margin
requirements with respect to swaps and security-based swaps with
counterparties that are end users. The Agencies welcome comment on any
significant alternatives that would minimize the impact of the proposal
on small entities.
FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act,
5 U.S.C. 601 et seq., FCA hereby certifies that the proposed rule will
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the Farm Credit System, considered
together with its affiliated associations, has assets and annual income
in excess of the amounts that would qualify them as small entities; nor
does the Federal Agricultural Mortgage Corporation meet the definition
of ``small entity.'' Therefore, System institutions are not ``small
entities'' as defined in the Regulatory Flexibility Act.
FHFA: FHFA believes that the proposed rule, if promulgated as a
final rule, would not have a significant economic impact on a
substantial number of small entities, since none of FHFA's regulated
entities come within the meaning of small entities as defined in the
Regulatory Flexibility Act (see 5 U.S.C. 601(6)), and would not
substantially affect any business that its regulated entities might do
with small entities.
C. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million (adjusted for inflation) or more in any one year. The current
inflation-adjusted expenditure threshold is $126.4 million. If a
budgetary impact statement is
[[Page 27587]]
required, section 205 of the UMRA also requires an agency to identify
and consider a reasonable number of regulatory alternatives before
promulgating a rule. The OCC has determined this proposed rule is
likely to result in the expenditure by the private sector of $126.4
million or more. Therefore, the OCC has prepared a budgetary impact
analysis and identified and considered alternative approaches. The full
text of the OCC's analyses under the Unfunded Mandates Act is available
at: http://www.regulations.gov, Docket ID OCC-2011-0008.
Text of the Proposed Common Rules (All Agencies)
The text of the proposed common rules appears below:
PART [ ]--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
----.1 Authority, purpose, and scope.
----.2 Definitions.
----.3 Initial margin.
----.4 Variation margin.
----.5 Documentation of margin matters.
----.6 Eligible collateral.
----.7 Segregation of collateral.
----.8 Initial margin models.
----.9 Application of margin requirements to certain foreign covered
swap entities.
----.10 Capital.
Appendix A to Part [ ]--Standardized Minimum Initial Margin
Requirements for Non-cleared Swaps and Non-cleared Security-based Swaps
Appendix B to Part [ ]--Margin Values for Noncash Collateral
Sec. ----.1 Authority, purpose, and scope. [Reserved]
Sec. ----.2 Definitions.
(a) Clearing agency has the meaning specified in section 3(a)(23)
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(23)).
(b) Counterparty means, with respect to any swap or security-based
swap to which a covered swap entity is a party, the counterparty to
such swap or security-based swap, other than a counterparty that is a
derivatives clearing organization or clearing agency.
(c) [Reserved]
(d) Derivatives clearing organization has the meaning specified in
section 1a(15) of the Commodity Exchange Act (7 U.S.C. 1a(15)).
(e) Eligible collateral means collateral described in Sec. ----.6.
(f) Effective date means [DATE THAT IS 180 DAYS AFTER PUBLICATION
OF THE FINAL RULE IN THE FEDERAL REGISTER].
(g) End user means a counterparty that is not a swap entity.
(h) Financial end user means any counterparty that is an end user
that is--
(1) A commodity pool as defined in section 1a(5) of the Commodity
Exchange Act (7 U.S.C. 1a(5));
(2) A private fund as defined in section 202(a) of the Investment
Advisors Act of 1940 (15 U.S.C. 80-b-2(a));
(3) An employee benefit plan as defined in paragraphs (3) and (32)
of section 3 of the Employee Retirement Income and Security Act of 1974
(29 U.S.C. 1002);
(4) A person predominantly engaged in activities that are in the
business of banking, or in activities that are financial in nature, as
defined in section 4(k) of the Bank Holding Company of 1956 (12 U.S.C.
1843(k));
(5) A person that would be a financial end user described in
paragraph (h)(1) or (h)(2) of this section, if it were organized under
the laws of the United States or any State thereof;
(6) A government of any foreign country or a political subdivision,
agency, or instrumentality thereof; or
(7) Any other person that [Agency] may designate.
(i) High-risk financial end user means a counterparty that is a
financial end user but is not a low-risk financial end user.
(j) Initial margin means eligible collateral that is pledged in
connection with entering into a swap or security-based swap by a party
thereto to secure the performance of its obligations to its
counterparty under one or more swaps or security-based swaps.
(k) Initial margin collection amount means--
(1) In the case of a covered swap entity that does not have an
initial margin model, the amount of initial margin with respect to a
swap or security-based swap that is required under Appendix A of this
part; and
(2) In the case of a covered swap entity that does have an initial
margin model, the amount of initial margin with respect to a swap or
security-based swap that is required under the initial margin model.
(l) Initial margin model means an internal risk management model
that--
(1) Has been developed and designed to identify an appropriate,
risk-based amount of initial margin that the covered swap entity must
collect with respect to one or more swaps or security-based swaps to
which the covered swap entity is a party; and
(2) Has been approved by [Agency] pursuant to Sec. ----.8 of this
part.
(m) Initial margin threshold amount means a credit exposure limit
that has been established by a covered swap entity with respect to its
swaps and security-based swaps with a counterparty, that appropriately
takes into account and addresses the credit risk posed by the
counterparty and the risks of such swaps and security-based swaps, and
that has been reviewed, monitored and approved in accordance with the
covered swap entity's credit processes, except that in no case shall
the threshold amount be greater than--
(1) Zero, if the counterparty is either a swap entity or a high-
risk financial end user; or
(2) The lesser of [$15 to $45] million and [0.1 to 0.3] percent of
the covered swap entity's [capital metric], if the counterparty is a
low-risk financial end user.
(n) Low-risk financial end user means a counterparty that is a
financial end user and makes the following representations to a covered
swap entity in connection with entering into a swap or security-based
swap with the covered swap entity--
(1) The counterparty does not have a significant swaps exposure;
(2) The counterparty predominantly uses swaps or security-based
swaps to hedge or mitigate the risks of its business activities,
including balance sheet, interest rate, or other risk arising from the
business of the counterparty; and
(3) The counterparty is subject to capital requirements established
by a prudential regulator or state insurance regulator.
(o) Margin means initial margin and variation margin.
(p) Non-cleared swap means a swap that is not a cleared swap, as
that term is defined in section 1a(7) of the Commodity Exchange Act (7
U.S.C. 1a(7)).
(q) Non-cleared security-based swap means a security-based swap
that is not, directly or indirectly, submitted to and cleared by a
clearing agency registered with the SEC.
(r) Nonfinancial end user means any counterparty that is an end
user but is not a financial end user.
(s) Prudential regulator has the meaning specified in section
1a(39) of the Commodity Exchange Act (7 U.S.C. 1a(39)).
(t) Qualifying master netting agreement means an agreement
governing one or more swaps or security-based swaps to which a covered
swap entity is a party that satisfies the following criteria--
(1) The agreement creates a single legal obligation for all
individual
[[Page 27588]]
transactions covered by the agreement upon an event of default,
including bankruptcy, insolvency, or similar proceeding, of the
counterparty;
(2) The agreement provides the covered swap entity the right to
accelerate, terminate, and close-out on a net basis all transactions
under the agreement and to liquidate or set off collateral promptly
upon an event of default, including upon an event of bankruptcy,
insolvency, or similar proceeding, of the counterparty, provided that,
in any such case, any exercise of rights under the agreement will not
be stayed or avoided under applicable law in the relevant
jurisdictions;
(3) The covered swap entity has conducted sufficient legal review
to conclude with a well-founded basis (and maintains sufficient written
documentation of that legal review) that--
(i) The agreement meets the requirements of paragraph (t)(2) of
this definition; and
(ii) In the event of a legal challenge (including one resulting
from default or from bankruptcy, insolvency, or similar proceeding) the
relevant court and administrative authorities would find the agreement
to be legal, valid, binding, and enforceable under the law of the
relevant jurisdictions;
(4) The covered swap entity establishes and maintains procedures to
monitor possible changes in relevant law and to ensure that the
agreement continues to satisfy the requirements of this definition; and
(5) The agreement does not contain a provision that permits a non-
defaulting counterparty to make a lower payment than it would make
otherwise under the agreement, or no payment at all, to a defaulter or
the estate of a defaulter, even if the defaulter or the estate of the
defaulter is a net creditor under the agreement.
(u) Security-based swap has the meaning specified in section
3(a)(68) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)).
(v) Significant swaps exposure means--
(1) Swap positions that equal or exceed any of the following
thresholds--
(i) $2.5 billion in daily average aggregate uncollateralized
outward exposure; or
(ii) $4 billion in daily average aggregate uncollateralized outward
exposure plus daily average aggregate potential outward exposure; or
(2) Security-based swap positions that equal or exceed any of the
following thresholds--
(i) $1 billion in daily average aggregate uncollateralized outward
exposure; or
(ii) $2 billion in daily average aggregate uncollateralized outward
exposure plus daily average aggregate potential outward exposure.
(3) For purposes of this definition--
(i) The terms daily average aggregate uncollateralized outward
exposure and daily average aggregate potential outward exposure, when
used with respect to swaps, each has the meaning specified for that
term in [17 CFR 1.3(uuu)] for purposes of calculating substantial
counterparty exposure under that regulation.
(ii) The terms daily average aggregate uncollateralized outward
exposure and daily average aggregate potential outward exposure, when
used with respect to security-based swaps, each has the meaning
specified for that term in [15 CFR 240.3a67-5] for purposes of
calculating substantial counterparty exposure under that regulation.
(w) State insurance regulator means an insurance authority of a
State that is engaged in the supervision of insurance companies under
State insurance law.
(x) Swap has the meaning specified in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)).
(y) Swap entity means a security-based swap dealer as defined in
section 3(a)(71) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(71)), a major security-based swap participant as defined in
section 3(a)(67) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(67)), a swap dealer as defined in section 1a(49) of the
Commodity Exchange Act (7 U.S.C. 1a(49)), or a major swap participant
as defined in section 1a(33) of the Commodity Exchange Act (7 U.S.C.
1a(33)).
(z) Variation margin means eligible collateral pledged or paid on
an intraday, daily or other periodic basis by one party to a swap or
security-based swap to its counterparty to offset a change in the value
of one or more swaps or security-based swaps between the parties, as
calculated in accordance with the contractual terms of such swaps or
security-based swaps.
(aa) Variation margin amount means the cumulative mark-to-market
change in value to a covered swap entity of a swap or security-based
swap, as measured from the date it is entered into (or, in the case of
swap or security-based swap that has a current positive or negative
value to a covered swap entity on the date it is entered into, such
positive or negative value plus any cumulative mark-to-market change in
value to the covered swap entity of a swap or security-based swap after
such date), less the value of all variation margin previously collected
but not returned by the covered swap entity (expressed as a positive
amount) with respect to such swap or security-based swap.
(bb) Variation margin threshold amount means a credit exposure
limit that has been established by a covered swap entity with respect
to its swaps and security-based swaps with a counterparty, that
appropriately takes into account and addresses the credit risk posed by
the counterparty and the risks of such swaps and security-based swaps,
and that has been reviewed, monitored and approved in accordance with
the covered swap entity's credit processes, except that in no case
shall the threshold amount be greater than--
(1) Zero, if the counterparty is a either a swap entity or a high-
risk financial end user; or
(2) The lesser of [$15 to 45] million and [0.1 to 0.3]% of the
covered swap entity's [capital metric], if the counterparty is a low-
risk financial end user.
Sec. ----.3 Initial margin.
(a) General. A covered swap entity shall collect initial margin
with respect to any non-cleared swap or non-cleared security-based swap
from the counterparty to such swap or security-based swap in an amount
that is no less than the greater of--
(1) Zero; or
(2) The initial margin collection amount for such swap or security-
based swap less the initial margin threshold amount for the
counterparty (not including any portion of the initial margin threshold
amount being applied to other swaps or security-based swaps with the
counterparty), as applicable.
(b) Timing. A covered swap entity shall, with respect to any non-
cleared swap or non-cleared security-based swap to which it is a party,
comply with the initial margin requirements described in paragraph (a)
for a period beginning on or before the date it enters into such swap
or security-based swap and ending on the date the non-cleared swap or
non-cleared security-based swap is terminated or expires.
(c) Minimum Transfer Amount. Notwithstanding anything else in this
section, a covered swap entity is not required to collect initial
margin pursuant to this section with respect to a particular
counterparty unless and until the total amount of initial margin that
is required pursuant to this section to be collected, but has not yet
been collected, with respect to the counterparty is greater than
$100,000.
[[Page 27589]]
Sec. ----.4 Variation margin.
(a) General. On and after the date on which a covered swap entity
enters into a non-cleared swap or non-cleared security-based swap, the
covered swap entity shall, to the extent the variation margin amount
for such swap or security-based swap is positive, collect variation
margin from the counterparty to such swap or security-based swap in an
amount that is no less than the greater of--
(1) Zero; or
(2) The variation margin amount for such swap or security-based
swap less the variation margin threshold amount for the counterparty
(not including any portion of the variation margin threshold amount
being applied to other swaps or security-based swaps with the
counterparty), as applicable.
(b) Frequency. A covered swap entity shall comply with the
variation margin requirements described in paragraph (a) of this
section--
(1) No less than once per business day with respect to a
counterparty that is a swap entity or a financial end user; and
(2) No less than once per week with respect to a counterparty that
is a nonfinancial end user.
(c) Minimum transfer amount. Notwithstanding anything else in this
section, a covered swap entity is not required to collect variation
margin pursuant to this section unless and until the total amount of
variation margin that is required pursuant to this section to be
collected, but has not yet been collected, with respect to the
counterparty is greater than $100,000.
(d) Netting arrangements. To the extent that one or more non-
cleared swaps or non-cleared security-based swaps are executed pursuant
to a qualifying master netting agreement between a covered swap entity
and its counterparty, a covered swap entity may calculate and comply
with the variation margin requirements of this paragraph on an
aggregate basis with respect to all swaps and security-based swaps
governed by such agreement, so long as the covered swap entity complies
with these variation margin requirements with respect to all swaps and
security-based swaps governed by such agreement regardless of whether
the swaps and security-based swaps were entered into on or after the
effective date.
(e) A covered swap entity shall not be deemed to have violated its
obligation under paragraph (a) of this section to collect variation
margin from a counterparty if--
(1) The counterparty has refused or otherwise failed to provide the
required variation margin to the covered swap entity; and
(2) The covered swap entity has--
(i) Made the necessary efforts to attempt to collect the required
variation margin, including the timely initiation and continued pursuit
of formal dispute resolution mechanisms, or has otherwise demonstrated
upon request to the satisfaction of [Agency] that it has made
appropriate efforts to collect the required variation margin; or
(ii) Commenced termination of the swap or security-based swap with
the counterparty.
Sec. ----.5 Documentation of margin matters.
A covered swap entity shall execute trading documentation with each
counterparty regarding credit support arrangements that--
(a) Provides the covered swap entity with the contractual right to
collect initial margin and variation margin in such amounts, in such
form, and under such circumstances as are required by this part; and
(b) Specifies--
(1) The methods, procedures, rules, and inputs for determining the
value of each swap or security-based swap for purposes of calculating
variation margin requirements; and
(2) The procedures by which any disputes concerning the valuation
of swaps or security-based swaps, or the valuation of assets collected
or posted as initial margin or variation margin, may be resolved.
Sec. ----.6 Eligible collateral.
(a) A covered swap entity shall collect initial margin and
variation margin required pursuant to this part solely in the form of
one or more of the following types of eligible collateral--
(1) Immediately available cash funds that are denominated in--
(i) U.S. dollars; or
(ii) The currency in which payment obligations under the swap are
required to be settled;
(2) Any obligation which is a direct obligation of, or fully
guaranteed as to principal and interest by, the United States; and
(3) With respect to initial margin only--
(i) Any senior debt obligation of the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, the Federal
Home Loan Banks and the Federal Agricultural Mortgage Corporation; and
(ii) Any obligation that is an ``insured obligation,'' as that term
is defined in 12 U.S.C. 2277a(3), of a Farm Credit System bank.
(b) The value of any eligible collateral described in paragraphs
(a)(2) or (a)(3) of this section, for purposes of satisfying the
initial margin or variation margin requirements of this part shall be
subject to, and limited by, the discounts described in Appendix B of
this part.
(c) A covered swap entity may not collect, as initial margin or
variation margin required by this part, any collateral that is an
obligation of the counterparty pledging such collateral.
(d) A covered swap entity shall monitor the market value of any
eligible collateral it has collected to satisfy initial margin or
variation margin required by this part and, to the extent that the
market value of such collateral has declined, shall collect such
additional eligible collateral as is necessary to bring itself into
compliance with the margin requirements of this part. A covered swap
entity shall not be deemed to have violated its obligation under this
paragraph (d) to collect additional eligible collateral from a
counterparty if--
(1) The counterparty has refused or otherwise failed to provide the
required additional eligible collateral to the covered swap entity; and
(2) The covered swap entity--
(i) Has made the necessary efforts to attempt to collect the
required additional eligible collateral, including the timely
initiation and continued pursuit of formal dispute resolution
mechanisms, or has otherwise demonstrated upon request to the
satisfaction of [Agency] that it has made appropriate efforts to
collect the required additional eligible collateral; or
(ii) Has commenced termination of the swap or security-based swap
with the counterparty.
(e) A covered swap entity may collect initial margin and variation
margin that is not required pursuant to this part in any form of
collateral.
Sec. ----.7 Segregation of collateral.
A covered swap entity that enters into a non-cleared swap or non-
cleared security-based swap with a swap entity and posts initial margin
to the swap entity with respect to that swap or security-based swap
shall require that--
(a) All funds or other property the covered swap entity provides as
initial margin are held by a third-party custodian that is independent
of the covered swap entity and the counterparty;
(b) The independent custodian is prohibited by contract from
rehypothecating or otherwise transferring any initial margin held by
the custodian;
(c) The independent custodian is prohibited by contract from
reinvesting any initial margin held by the custodian
[[Page 27590]]
in any asset that would not qualify as eligible collateral under Sec.
----.6 for purposes of satisfying the initial margin requirements of
this part; and
(d) The independent custodian is located in a jurisdiction that
applies the same insolvency regime to the independent custodian as
would apply to the covered swap entity.
Sec. ----.8 Initial margin models.
(a) General adequacy of initial margin model. Unless a covered swap
entity's initial margin model conforms to the requirements of this
section, the covered swap entity shall calculate all initial margin
collection amounts pursuant to Appendix A of this part.
(b) Applicability to swaps and security-based swaps. Any initial
margin model that a covered swap entity wishes to use to calculate the
amount of initial margin required to be collected for a single swap or
security-based swap transaction or a portfolio of swap and/or security-
based swap transactions with a given counterparty pursuant to Sec. --
--.3 must meet each requirement of this section. An initial margin
model may be designed to calculate initial margin for a portfolio of
swaps and/or security-based swaps only if all such swaps and/or
security-based swaps are governed by the same qualifying master netting
agreement. To the extent that a qualifying master netting agreement
between a covered swap entity and its counterparty governs swaps or
security-based swaps that were entered into before, on, and after the
effective date, the covered swap entity may use its initial margin
model to calculate the amount of initial margin required to be
collected pursuant to Sec. ----.3 either--
(1) With respect to only those swaps and/or security-based swaps
transactions entered into on and after the effective date; or
(2) With respect to all swaps and/or security-based swaps
transactions governed by such qualifying master netting agreement,
regardless of whether they were entered into before, on, or after the
effective date.
(c) Requirements for initial margin model.
(1) A covered swap entity must obtain the prior written approval of
[Agency] before using any initial margin model to calculate the initial
margin required in this part.
(2) A covered swap entity must demonstrate that the initial margin
model satisfies all of the requirements of this section on an ongoing
basis.
(3) A covered swap entity must promptly notify [Agency] in writing
prior to:
(i) Extending the use of an initial margin model that [Agency] has
approved under this section to an additional product type;
(ii) Making any change to any initial margin model approved by
[Agency] under this section that would result in a material change in
the covered swap entity's assessment of initial margin requirements; or
(iii) Making any material change to modeling assumptions used by
the initial margin model.
(4) [The Agency] may rescind its approval of the use of any initial
margin model, in whole or in part, or may impose additional conditions
or requirements if [Agency] determines that the initial margin model no
longer complies with this section.
(d) Quantitative requirements.
(1) The covered entity's initial margin model must calculate an
amount of initial margin that is equal to the potential future exposure
of the swap, security-based swap or portfolio of swaps and/or security-
based swaps. Potential future exposure is an estimate of the one-tailed
99 percent confidence interval for an increase in the value of the
swap, security-based swap or portfolio of swaps and/or security-based
swaps due to an instantaneous price shock that is equivalent to a
movement in all material underlying risk factors, including prices,
rates, and spreads, over a holding period equal to the shorter of ten
business days or the maturity of the swap or security-based swap. If a
covered swap entity elects to calculate initial margin using an initial
margin model on a portfolio of swaps and/or security-based swaps under
the same qualifying master netting agreement, the covered entity must
calculate an amount of initial margin for that portfolio each time a
new swap or security-based swap is added to that portfolio and collect
any incremental initial margin collection amount that is required.
(2) The covered swap entity's initial margin model must use risk
factors sufficient to measure all material price risks inherent in the
swap transactions for which initial margin is being calculated. The
risk categories must include, but should not be limited to, foreign
exchange/interest rate risk, credit risk, equity risk, and commodity
risk, as appropriate. For material exposures in the major currencies
and markets, modeling techniques must capture spread and basis risk and
must incorporate a sufficient number of segments of the yield curve to
capture differences in volatility and imperfect correlation of rates
along the yield curve.
(3) The initial margin model may calculate initial margin for a
portfolio of swaps and/or security-based swaps and reflect offsetting
exposures, diversification, and other hedging benefits for swaps and
security-based swaps that are governed by the same qualifying master
netting agreement by incorporating empirical correlations within the
following four broad risk categories, provided the covered swap entity
validates and demonstrates the reasonableness of its process for
modeling and measuring hedging benefits: Commodity, credit, equity, and
foreign exchange/interest rate. Offsetting exposures, diversification,
and other hedging benefits under a qualifying master netting agreement
may be recognized by the initial margin model within each broad risk
category, but not across broad risk categories.
(4) If the initial margin model does not explicitly reflect
offsetting exposures, diversification, and hedging benefits within a
broad risk category, the covered swap entity must calculate an amount
of initial margin separately for each subset of swaps and security-
based swaps for which offsetting exposures, diversification, and other
hedging benefits are explicitly recognized by the initial margin model.
The sum of the initial margin amounts calculated for each subset of
swaps and security-based swaps within a broad risk category will be
used to determine the aggregate initial margin due from the
counterparty for the portfolio of swaps and security-based swaps within
the broad risk category.
(5) The sum of the initial margins calculated for each broad risk
category will be used to determine the aggregate initial margin due
from the counterparty.
(6) The initial margin model may not permit the calculation of any
initial margin collection amount to be subject to offset by, or
otherwise take into account, any initial margin that may be owed or
otherwise payable by the covered swap entity to the counterparty.
(7) The initial margin model must include all material risks
arising from the nonlinear price characteristics of options positions
or positions with embedded optionality and the sensitivity of the
market value of the positions to changes in the volatility of the
underlying rates, prices, or other material risk factors. As an
example, a covered swap entity with a large or complex options
portfolio must measure the volatility of options positions or positions
with embedded optionality by different maturities and/or strike prices,
where material.
[[Page 27591]]
(8) The covered swap entity may not omit any risk factor from the
calculation of its initial margin that the covered swap entity uses in
its initial margin model unless it has previously demonstrated to the
satisfaction of [Agency] that such omission is appropriate.
(9) The covered swap entity may not incorporate any proxy or
approximation used to capture the risks of the covered swap entity's
actual swap or security-based swap transactions unless it has
previously demonstrated to the satisfaction of [Agency] that such proxy
or approximation is appropriate.
(10) The covered swap entity may calculate initial margin over the
holding period directly or it may convert an initial margin calculated
using a different holding period. A covered swap entity may not convert
its initial margin calculation in such a manner unless it has
previously demonstrated to the satisfaction of [Agency] that such
conversion is appropriate.
(11) All data used to calibrate the initial margin model must be
based on a historical observation period of at least one year and must
incorporate a period of significant financial stress appropriate to the
swap and/or security-based swap transactions to which the initial
margin model is applied.
(12) The covered swap entity must review and, as necessary, revise
the data used to calibrate the initial margin model at least monthly,
and more frequently as market conditions warrant, to ensure that the
data incorporate a period of significant financial stress appropriate
to the swap and/or security-based swap transactions to which the
initial margin model is applied.
(13) The level of sophistication of the initial margin model must
be commensurate with the complexity of the swap and/or security-based
swap transactions to which they are applied. In calculating an initial
margin collection amount, the initial margin model may make use of any
of the generally accepted approaches for modeling the risk of a single
instrument or portfolio of instruments.
(14) The covered swap entity must periodically benchmark the
initial margin model against observable margin standards to ensure that
the initial margin required is not less than what a derivatives
clearing organization or a clearing agency would require for similar
transactions.
(15) [The Agency] may require a covered swap entity using an
initial margin model to collect a greater amount of initial margin than
that determined by the covered swap entity's initial margin model.
(e) Periodic review. A covered swap entity must periodically, but
no less frequently than annually, review its initial margin model in
light of developments in financial markets and modeling technologies,
and enhance the initial margin model as appropriate to ensure that the
initial margin model continues to meet the requirements for approval in
this section.
(f) Control, oversight, and validation mechanisms.
(1) The covered swap entity must have a risk control unit that
reports directly to senior management and is independent from the
business trading units.
(2) The covered swap entity must validate its initial margin model
initially and on an ongoing basis. The covered swap entity's validation
process must be independent of the development, implementation, and
operation of the initial margin model, or the validation process must
be subjected to an independent review of its adequacy and
effectiveness. The validation process must include:
(i) An evaluation of the conceptual soundness of (including
developmental evidence supporting) the initial margin model;
(i) An ongoing monitoring process that includes verification of
processes and benchmarking by comparing the covered swap entity's
initial margin model outputs (estimation of initial margin) with
relevant alternative internal and external data sources or estimation
techniques; and
(ii) An outcomes analysis process that includes backtesting of the
initial margin model.
(3) If the validation process reveals any significant problems with
the initial margin model, the covered swap entity must notify [Agency]
of the problems, describe to [Agency] any remedial actions being taken,
and adjust the initial margin model to insure an appropriately
conservative amount of required initial margin is being calculated.
(4) The covered swap entity must have an internal audit function
independent of business-line management that at least annually assesses
the effectiveness of the controls supporting the covered swap entity's
initial margin model measurement systems, including the activities of
the business trading units and independent risk control unit,
compliance with policies and procedures, and calculation of the covered
swap entity's initial margin requirements under this part. At least
annually, the internal audit function must report its findings to the
covered swap entity's board of directors or a committee thereof.
(g) Documentation. The covered swap entity must adequately document
all material aspects of its initial margin model, including management
and valuation of swap and/or security-based swap transactions to which
they apply, the control, oversight, and validation of the initial
margin model, any review processes and the results of such processes.
Sec. ----.9 Application of margin requirements to certain foreign
covered swap entities.
(a) The requirements of Sec. Sec. ----.3 through ----.8 shall not
apply to any foreign non-cleared swap or foreign non-cleared security-
based swap of a foreign covered swap entity.
(b) For purposes of this section, a foreign non-cleared swap or
foreign non-cleared security-based swap is any non-cleared swap or non-
cleared security-based swap transaction with respect to which--
(1) The counterparty to the foreign covered swap entity is--
(i) Not an entity organized under the laws of the United States or
any State;
(ii) Not a branch or office of an entity organized under the laws
of the United States or any State; and
(iii) Not a person resident in the United States; and
(2) Performance of the counterparty's obligations to the foreign
covered swap entity under the swap or security-based swap has not been
guaranteed by an affiliate of the counterparty that is--
(i) An entity organized under the laws of the United States or any
State;
(ii) A branch or office of an entity organized under the laws of
the United States or any State; or
(iii) A person resident in the United States.
(c) For purposes of this section, a foreign covered swap entity is
any covered swap entity that is--
(1) Not a company organized under the laws of the United States or
any State;
(2) Not a branch or office of a company organized under the laws of
the United States or any State;
(3) Not a U.S. branch, agency or subsidiary of a foreign bank; and
(4) Not controlled, directly or indirectly, by a company that is
organized under the laws of the United States or any State.
[[Page 27592]]
Sec. ----.10 Capital.
[Reserved]
Appendix A to Part [ ]--Standardized Minimum Initial Margin
Requirements for Non-cleared Swaps and Non-cleared Security-based
Swaps.
Standardized Minimum Initial Margin Requirements for Non-cleared Swaps
and Non-cleared Security-Based Swaps
------------------------------------------------------------------------
Initial margin requirement
Asset Class (% of notional exposure)
---------------------------------------------------------------------
Credit: 0-2 year duration............... [1-3].....................
Credit: 2-5 year duration............... [2-8].....................
Credit: 5+ year duration................ [5-15]....................
Commodity............................... [10-20]...................
Equity.................................. [10-20]...................
Foreign Exchange/Currency............... [3-9].....................
Interest Rate: 0-2 year duration........ [0-2].....................
Interest Rate: 2-5 year duration........ [1-3].....................
Interest rate: 5+ year duration......... [2-6].....................
Other................................... [10-20]...................
------------------------------------------------------------------------
Appendix B to Part [ ]--Margin Values for Noncash Collateral.
Margin Values for Noncash Collateral
------------------------------------------------------------------------
Margin value (% of market value)
duration (years)
--------------------------------------
0-5 5-10 >10
------------------------------------------------------------------------
U.S. Treasuries and Fully
Guaranteed Agencies:
Bills/Notes/Bonds/Inflation [98-100] [95-99] [94-98]
Indexed.....................
Zero Coupon, STRIPs.......... [97-99] [94-98] [90-94]
Senior Debt Obligations of FHFA
Regulated Entities and the
Federal Agricultural Mortgage
Corporation, and Insured
Obligations of Farm Credit
System Banks:
Bills/Notes/Bonds............ [96-100] [94-98] [93-97]
Zero Coupon.................. [95-99] [93-97] [89-93]
------------------------------------------------------------------------
[END OF COMMON TEXT]
Adoption of the Common Rule Text
The proposed adoption of the common rules by the agencies, as
modified by agency-specific text, is set forth below:
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
List of Subjects in 12 CFR Part 45
12 CFR Chapter I
Administrative practice and procedure, Capital, Margin
requirements, National banks, Reporting and recordkeeping requirements,
Risk.
Authority and Issuance
For the reasons stated in the Common Preamble, the Office of the
Comptroller of the Currency proposes to amend chapter I of Title 12,
Code of Federal Regulations as follows:
PART 45--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
1. The authority citation for part 45 is added to read as follows:
Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et seq., 93a, 161, 1818,
3907, 3090, and 15 U.S.C. 78o-10(e).
2. Part 45 is added as set forth at the end of the Common Preamble.
3. Part 45 is amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``the OCC'';
b. Removing ``[The Agency]'' wherever it appears and adding in its
place ``The OCC''; and
c. Removing ``[capital metric]'' wherever it appears and adding in
its place ``Tier 1 capital''.
4. Section 45.1 is added to read as follows:
Sec. 45.1 Authority, purpose, and scope.
(a) Authority. This part is issued under the authority of 7 U.S.C.
6s(e), 12 U.S.C. 1 et seq., 93a, 161, 1818, 3907, 3090, and 15 U.S.C.
78o-10(e).
(b) Purpose. Section 4s of the Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
8) require the OCC to establish capital and margin requirements for any
national bank, Federal savings association, or Federal branch or agency
of a foreign banks that is registered as a swap dealer, major swap
participant, security-based swap dealer, or major security-based swap
participant with respect to all non-cleared swaps and non-cleared
security-based swaps. This regulation implements section 4s of the
Commodity Exchange Act and section 15F of the Securities Exchange Act
of 1934 by defining terms used in the statute and related terms,
establishing capital and margin requirements, and explaining the
statutes' requirements.
(c) Scope. This part establishes minimum capital and margin
requirements for each covered swap entity subject to this part with
respect to all non-cleared swaps and non-cleared security-based swaps.
This part applies to any non-cleared swap or non-cleared security-based
swap entered into by a covered swap entity on or after [INSERT DATE
THAT IS 180 DAYS AFTER PUBLICATION OF THE FINAL RULE IN THE FEDERAL
REGISTER]. Nothing in this part is intended to prevent a covered swap
entity from collecting margin in amounts greater than are required
under this part.
5. Paragraph (c) of Sec. 45.2 is added to read as follows:
Sec. 45.2 Definitions.
* * * * *
(c) Covered swap entity means any national bank, Federal savings
association, or Federal branch and agency of a foreign bank that is a
swap
[[Page 27593]]
entity, or any other entity that the OCC determines.
* * * * *
6. Section 45.10 is added to read as follows:
Sec. 45.10 Capital.
A covered swap entity shall comply with:
(a) In the case of a covered swap entity that is a national bank,
the minimum capital requirements in 12 CFR part 3;
(b) In the case of a covered swap entity that is a Federal savings
association, the minimum capital requirements in 12 CFR part 567; and
(c) In the case of a covered swap entity that is a Federal branch
or agency of a foreign bank, the capital adequacy guidelines that are
applicable as generally provided under 12 CFR 28.14.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
List of Subjects in 12 CFR Part 237
12 CFR Chapter II
Administrative practice and procedure, Banks and banking, Capital,
Foreign banking, Holding companies, Margin requirements, Reporting and
recordkeeping requirements, Risk.
Authority and Issuance
For the reasons set forth in the Supplementary Information, the
Board of Governors of the Federal Reserve System proposes to add the
text of the common rule as set forth at the end of the Supplementary
Information as part 237 to 12 CFR chapter II as follows:
PART 237--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
(REGULATION KK)
7. The authority citation for part 237 is added to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 221
et seq., 12 U.S.C. 1818, 12 U.S.C. 1841 et seq., and 12 U.S.C. 3103
et seq.
8. Part 237 is added as set forth at the end of the Common
Preamble.
9. Part 237 is amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``the Board'';
b. Removing ``[The Agency]'' wherever it appears and adding in its
place ``The Board''; and
c. Removing ``[capital metric]'' wherever it appears and adding in
its place ``tier 1 capital''.
10. Section 237.1 is added to read as follows:
Sec. 237.1 Authority, purpose, and scope.
(a) Authority. This part (Regulation KK) is issued by the Board of
Governors of the Federal Reserve System (Board) under section 4s(e) of
the Commodity Exchange Act (7 U.S.C. 6s(e)) and section 15F(e) of the
Securities Exchange Act of 1934 (15 U.S.C. 78o-10(e)), as well as under
the Federal Reserve Act, as amended (12 U.S.C. 221 et seq.); section 8
of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818); the
Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.);
and the International Banking Act of 1978, as amended (12 U.S.C. 3101
et seq.).
(b) Purpose. Section 4s of the Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
8) require the Board to establish capital and margin requirements for
any state member bank (as defined in 12 CFR 208.2(g)), bank holding
company (as defined in 12 U.S.C. 1842), savings and loan holding
company (as defined in 12 U.S.C. 1467a (on or after the transfer
established under Section 311 of the Dodd-Frank Act) 12 U.S.C. 5411)),
foreign banking organization (as defined in 12 CFR 211.21(o)), state
branch or state agency of a foreign bank (as defined in 12 U.S.C.
3101(b)(11) and (12)), or Edge or agreement corporation (as defined in
12 CFR 211.1(c)(2) and (3)) that is registered as a swap dealer, major
swap participant, security-based swap dealer, or major security-based
swap participant with respect to all non-cleared swaps and non-cleared
security-based swaps. This regulation implements section 4s of the
Commodity Exchange Act and section 15F of the Securities Exchange Act
of 1934 by defining terms used in the statute and related terms,
establishing capital and margin requirements, and explaining the
statutes' requirements.
(c) Scope. This part establishes minimum capital and margin
requirements for each covered swap entity subject to this part with
respect to all non-cleared swaps and non-cleared security-based swaps.
This part applies to any non-cleared swap or non-cleared security-based
swap entered into by a covered swap entity on or after [INSERT DATE
THAT IS 180 DAYS AFTER PUBLICATION OF THE FINAL RULE IN THE FEDERAL
REGISTER]. Nothing in this part is intended to prevent a covered swap
entity from collecting margin in amounts greater than are required
under this part.
11. Paragraph (c) of Sec. 237.2 is added to read as follows:
Sec. 237.2 Definitions.
* * * * *
(c) Covered swap entity means any state member bank (as defined in
12 CFR 208.2(g)), bank holding company (as defined in 12 U.S.C. 1842),
savings and loan holding company (as defined in 12 U.S.C. 1467a (on or
after the transfer established under Section 311 of the Dodd-Frank Act)
12 U.S.C. 5411)), foreign banking organization (as defined in 12 CFR
211.21(o)), any state branch or state agency of a foreign bank (as
defined in 12 U.S.C. 3101(b)(11) and (12)), or Edge or agreement
corporation (as defined in 12 CFR 211.1(c)(2) and (3)) that is a swap
entity, or any other entity that the Board determines.
* * * * *
12. Section 237.10 is added to read as follows:
Sec. 237.10 Capital.
A covered swap entity shall comply with:
(a) In the case of a covered swap entity that is a state member
bank (as defined in 12 CFR 208.2(g)), the capital adequacy guidelines
that are applicable to the covered swap entity and have been adopted by
the Board under section 38 of the Federal Deposit Insurance Act (12
U.S.C. 1831o);
(b) In the case of a covered swap entity that is a bank holding
company (as defined in 12 U.S.C. 1842) or a savings and loan holding
company (as defined in 12 U.S.C. 1467a), the capital adequacy
guidelines applicable to bank holding companies under the Board's
Regulation Y (12 CFR part 225);
(c) In the case of a covered swap entity that is foreign banking
organization (as defined in 12 CFR 211.21(o)) or any state branch or
state agency of a foreign bank (as defined in 12 U.S.C. 3101(b)(11) and
(12)), the capital rules that are made applicable to such covered swap
entity pursuant to Sec. 225.2(r)(3) of the Board's Regulation Y (12
CFR 225.2(r)(3)); and
(d) In the case of a covered swap entity that is an Edge or
agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)), the
capital adequacy guidelines that are made applicable to an Edge
corporation engaged in banking pursuant to Sec. 211.12(c)(2) of the
Board's Regulation K (12 CFR 211.12(c)(2)).
FEDERAL DEPOSIT INSURANCE CORPORATION
List of Subjects in 12 CFR Part 324
12 CFR Chapter III
Banks, Reporting and recordkeeping requirements, Holding companies,
Savings associations.
[[Page 27594]]
Authority and Issuance
For the reasons set forth in the Supplementary Information, the
Federal Deposit Insurance Corporation proposes to add the text of the
common rule as set forth at the end of the Supplementary Information as
part 324 to chapter III of Title 12, Code of Federal Regulations,
modified as follows:
PART 324--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
13. The authority citation for part 324 is added to read as
follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), and 12 U.S.C.
1818 and 12 U.S.C. 1819(a)(Tenth).
14. Part 324 is added as set forth at the end of the Common
Preamble.
15. Part 324 is amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``the FDIC'';
b. Removing ``[The Agency]'' wherever it appears and adding in its
place ``The FDIC''; and
c. Removing ``[capital metric]'' wherever it appears and adding in
its place ``tier 1 capital''.
16. Section 324.1 is added to read as follows:
Sec. ----.1 Authority, purpose, and scope.
(a) Authority. This part is issued by the Federal Deposit Insurance
Corporation (FDIC) under section 4s(e) of the Commodity Exchange Act (7
U.S.C. 6s(e)), section 15F(e) of the Securities Exchange Act of 1934
(15 U.S.C. 78o-10(e)), and section 8 of the Federal Deposit Insurance
Act (12 U.S.C. 1818).
(b) Purpose. Section 4s of the Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
8) require the FDIC to establish capital and margin requirements for
any FDIC-insured state-chartered bank that is not a member of the
Federal Reserve System or FDIC-insured state-chartered savings
association that is registered as a swap dealer, major swap
participant, security-based swap dealer, or major security-based swap
participant with respect to all non-cleared swaps and non-cleared
security-based swaps. This part implements section 4s of the Commodity
Exchange Act and section 15F of the Securities Exchange Act of 1934 by
defining terms used in the statutes and related terms, establishing
capital and margin requirements, and explaining the statutes'
requirements.
(c) Scope. This part establishes minimum capital and margin
requirements for each covered swap entity subject to this part with
respect to all non-cleared swaps and non-cleared security-based swaps.
This part applies to any non-cleared swap or non-cleared security-based
swap entered into by a covered swap entity on or after [INSERT DATE
THAT IS 180 DAYS AFTER PUBLICATION OF THE FINAL RULE IN THE FEDERAL
REGISTER]. Nothing in this part is intended to prevent a covered swap
entity from collecting margin in amounts greater than are required
under this part.
17. Paragraph (c) of Sec. 324.2 is added to read as follows:
* * * * *
(c) Covered swap entity means any FDIC-insured state-chartered bank
that is not a member of the Federal Reserve System or FDIC-insured
state-chartered savings association that is a swap entity, or any other
entity that the FDIC determines.
* * * * *
18. Section 324.10 is added to read as follows:
Sec. ----.10 Capital requirement.
A covered swap entity shall comply with the capital adequacy
guidelines that are applicable to the covered swap entity and have been
adopted by the FDIC under section 38 of the Federal Deposit Insurance
Act (12 U.S.C. 1831o).
FARM CREDIT ADMINISTRATION
List of Subjects in 12 CFR Part 624
Agriculture, Banks, Banking, Credit, Rural areas.
Authority and Issuance
For the reasons set forth in the Supplementary Information, the
Farm Credit Administration proposes to add the text of the common rule
as set forth at the end of the Supplementary Information as part 624 to
chapter VI of Title 12, Code of Federal Regulations, modified as
follows:
PART 624--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
19. The authority citation for part 624 is added to read as
follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), and secs. 4.3,
5.9, 5.17, and 8.32 of the Farm Credit Act (12 U.S.C. 2154, 12
U.S.C. 2243, 12 U.S.C. 2252, and 12 U.S.C. 2279bb-1).
20. Part 624 is added as set forth at the end of the Common
Preamble.
21. Part 624 is amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``the FCA'';
a. Removing ``[The Agency]'' wherever it appears and adding in its
place ``The FCA''; and
c. Removing ``[capital metric]'' wherever it appears and adding in
its place ``core surplus or core capital, as applicable''.
22. Section 624.1 is added to read as follows:
Sec. 624.1 Authority, purpose, and scope.
(a) Authority. This part is issued by the Farm Credit
Administration (FCA) under section 4s(e) of the Commodity Exchange Act
(7 U.S.C. 6s(e)), section 15F(e) of the Securities Exchange Act of 1934
(15 U.S.C. 78o-10(e)), and sections 4.3, 5.9, 5.17, and 8.32 of the
Farm Credit Act (12 U.S.C. 2154, 12 U.S.C. 2243, 12 U.S.C. 2252, and 12
U.S.C. 2279bb-1).
(b) Purpose. Section 4s of the Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
8) require the FCA to establish capital and margin requirements for any
System institution, including the Federal Agricultural Mortgage
Corporation, chartered under the Farm Credit Act of 1971, as amended
(12 U.S.C. 2001 et seq.) that is registered as a swap dealer, major
swap participant, security-based swap dealer, or major security-based
swap participant with respect to all non-cleared swaps and non-cleared
security-based swaps. This regulation implements section 4s of the
Commodity Exchange Act and section 15F of the Securities Exchange Act
of 1934 by defining terms used in the statute and related terms,
establishing capital and margin requirements, and explaining the
statute's requirements.
(c) Scope. This part establishes minimum capital and margin
requirements for each covered swap entity subject to this part with
respect to all non-cleared swaps and non-cleared security-based swaps.
This part applies to any non-cleared swap or non-cleared security-based
swap entered into by a covered swap entity on or after [INSERT DATE
THAT IS 180 DAYS AFTER PUBLICATION OF THE FINAL RULE IN THE FEDERAL
REGISTER]. Nothing in this part is intended to prevent a covered swap
entity from collecting margin in amounts greater than are required
under this part.
23. Paragraph (c) of Sec. 624.2 is added to read as follows:
Sec. 624.2 Definitions.
* * * * *
(c) Covered swap entity means any institution chartered under the
Farm Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.) that is a
swap entity,
[[Page 27595]]
or any other entity that the FCA determines.
* * * * *
24. Section 624.10 is added to read as follows:
Sec. 624.10 Capital requirement.
A covered swap entity shall comply with:
(a) In the case of the Federal Agricultural Mortgage Corporation,
the capital adequacy regulations set forth in 12 CFR part 652; and
(b) In the case of any Farm Credit System institution other than
the Federal Agricultural Mortgage Corporation, the capital regulations
set forth in 12 CFR part 615.
25. Section 624.11 is added to read as follows:
Sec. 624.11 Special requirements for transactions between swap
entities and System institutions.
(a) Margin requirements. To the extent that a System institution,
including the Federal Agricultural Mortgage Corporation, that is not a
covered swap entity enters into a non-cleared swap or a non-cleared
security-based swap with a swap entity, the System institution shall:
(1) Collect initial margin from the swap entity in an amount and at
such times as would be in accordance with the requirements of Sec.
624.3, provided that for purposes of this Sec. 624.10 any reference to
``initial margin model'' in the definition of ``initial margin
collection amount'' shall mean:
(i) The System institution's initial margin model, if any, or
(ii)(A) If the System institution does not have an initial margin
model, an initial margin model used by a third party to calculate
initial margin on behalf of the System institution in accordance with
Sec. 624.3, provided that the third party is itself independent of the
swap entity that is the counterparty in the transaction at issue.
(B) The amounts of initial margin collected under this paragraph
(a) may be adjusted for minimum transfer amounts as allowed under Sec.
624.3(c).
(2) Collect variation margin daily from the swap entity in an
amount that would be in accordance with the requirements in Sec. Sec.
624.4(a) and 624.4(e). The amounts of variation margin collected under
this paragraph may be adjusted as allowed for minimum transfer amounts
under Sec. 624.4(c) and for qualifying master netting agreements under
Sec. 624.4(d).
(b) Documentation. To the extent that a System institution enters
into a non-cleared swap or a non-cleared security-based swap with a
swap entity, the System institution shall execute trading documentation
with such swap entity in accordance with the requirements of Sec.
624.5.
(c) Collateral. Any initial or variation margin that a System
institution is required to collect from a swap entity under paragraph
(a) of this section shall meet the eligible collateral requirements of
Sec. 624.6.
(d) Segregation. A System institution shall require that any funds
or other property that it posts to a swap entity as initial or
variation margin be held by a third-party custodian that is independent
of the swap entity and the System institution, is located in a
jurisdiction that applies the same insolvency regime to the third-party
custodian as would apply to the System institution, and is subject to
the rehypothecation, reinvestment, and other transfer restrictions of
Sec. 624.7
(e) Initial margin models. To the extent the initial margin
collection amount that the System institution is required to collect
from a swap entity under paragraph (a)(1) of this section is calculated
by the System institution using an initial margin model, such model
must meet all the requirements of Sec. 624.8, provided that the
appropriate prudential regulator responsible for making or rescinding
any approvals to the extent required or allowed under Sec. 624.8 shall
be:
(1) In the case where the initial margin model is that of a third
party that is subject to regulation by a prudential regulator, the
prudential regulator having such jurisdiction; or
(2) In the case where the initial margin model is that of either
the System institution or a third party that is not subject to
regulation by a prudential regulator, the FCA.
FEDERAL HOUSING FINANCE AGENCY
List of Subjects in 12 CFR Part 1221
Government-sponsored enterprises, Mortgages, Securities.
Authority and Issuance
For the reasons stated in the Supplementary Information, and under
the authority of 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), and 12 U.S.C.
4526, the Federal Housing Finance Agency proposes to add the text of
the common rule as set forth at the end of the Supplementary
Information as part 1221 of subchapter B of chapter XII of title 12 of
the Code of Federal Regulations, modified as follows:
CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
SUBCHAPTER B--ENTITY REGULATIONS
PART 1221--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP
ENTITIES
26. The authority citation for part 1221 is added to read as
follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 4513
and 12 U.S.C. 4526(a).
27. Part 1221 is added as set forth at the end of the Common
Preamble.
28. Part 1221 is amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``FHFA'';
b. Removing ``[The Agency]'' wherever it appears and adding in its
place ``FHFA''; and
c. Removing ``[capital metric]'' wherever it appears and adding in
its place ``total capital''.
29. Section 1221.1 is added to read as follows:
Sec. 1221.1 Authority, purpose, and scope.
(a) Authority. This part is issued by the Federal Housing Finance
Authority (FHFA) under section 4s(e) of the Commodity Exchange Act (7
U.S.C. 6s(e)), section 15F(e) of the Securities Exchange Act of 1934
(15 U.S.C. 78o-10(e)), 12 U.S.C. 4513 and 12 U.S.C. 4526(a).
(b) Purpose. Section 4s of the Commodity Exchange Act (7 U.S.C. 6s)
and section 15F of the Securities Exchange Act of 1934 (15 U.S.C. 78o-
8) require FHFA to establish capital and margin requirements for any
regulated entity that is registered as a swap dealer, major swap
participant, security-based swap dealer, or major security-based swap
participant with respect to all non-cleared swaps and non-cleared
security-based swaps. This regulation implements section 4s of the
Commodity Exchange Act and section 15F of the Securities Exchange Act
of 1934 by defining terms used in the statute and related terms,
establishing capital and margin requirements, and explaining the
statute's requirements.
(c) Scope. This part establishes minimum capital and margin
requirements for each covered swap entity subject to this part with
respect to all non-cleared swaps and non-cleared security-based swaps.
This part applies to any non-cleared swap or non-cleared security-based
swap entered into by a covered swap entity on or after [INSERT DATE
THAT IS 180 DAYS AFTER PUBLICATION OF THE FINAL RULE IN THE FEDERAL
REGISTER]. Nothing in this part is intended to prevent a covered swap
entity from
[[Page 27596]]
collecting margin in amounts greater than is required under this part.
30. Section 1221.2 is amended as follows:
a. Add paragraph (c);
b. Redesignate paragraphs (z), (aa) and (bb) as paragraphs (bb),
(cc), and (dd), respectively;
c. Redesignate paragraphs (u) through (y) as (v) through (z); and
d. Add new paragraphs (u) and (aa).
Sec. 1221.2 Definitions.
* * * * *
(c) Covered swap entity means any regulated entity that is a swap
entity, or any other entity that FHFA determines.
* * * * *
(u) Regulated entity means any regulated entity as defined in
section 1303(20) of the Federal Housing Enterprises Financial Safety
and Soundness Act of 1992 (12 U.S.C. 4502(20)).
* * * * *
(aa) Total capital means:
(1) In the case of any Federal Home Loan Bank, ``total capital'' as
such term is defined in 12 CFR 1229.1; and
(2) In the case of the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation, or any of their respective
affiliates, ``total capital'' as such term is defined in 12 CFR
1750.11.
* * * * *
31. Section 1221.10 is added to read as follows:
Sec. 1221.10 Capital.
A covered swap entity shall comply with the risk-based capital
level or such other amount applicable to the covered swap entity as
required by the Director of FHFA pursuant to 12 U.S.C. 4611.
32. Section 1221.11 is added to read as follows:
Sec. 1221.11 Special requirements for transactions between swap
entities and regulated entities.
(a) Margin requirements. To the extent that a regulated entity that
is not a covered swap entity enters into a non-cleared swap or a non-
cleared security-based swap with a swap entity, the regulated entity
shall:
(1) Collect initial margin from the swap entity in an amount and at
such times as would be in accordance with the requirements of Sec.
1221.3, provided that for purposes of this section any reference to
``initial margin model'' in the definition of ``initial margin
collection amount'' shall mean:
(i) The regulated entity's initial margin model, if any, or
(ii) (A) If the regulated entity does not have an initial margin
model, an initial margin model used by a third party to calculate
initial margin on behalf of the regulated entity in accordance with
Sec. 1121.3, provided that the third party is itself independent of
the swap entity that is the counterparty in the transaction at issue.
(B) The amounts of initial margin collected under this paragraph
may be adjusted for minimum transfer amounts as allowed under Sec.
1221.3(c).
(2) Collect variation margin daily from the swap entity in an
amount that would be in accordance with the requirements in Sec.
1221.4(a) and Sec. 1221.4(e). The amounts of variation margin
collected under this paragraph may be adjusted as allowed for minimum
transfer amounts under Sec. 1221.4(c) and for qualifying master
netting agreements under Sec. 1221.4(d).
(b) Documentation. To the extent that a regulated entity enters
into a non-cleared swap or a non-cleared security-based swap with a
swap entity, the regulated entity shall execute trading documentation
with such swap entity in accordance with the requirements of Sec.
1221.5.
(c) Collateral. Any initial or variation margin that a regulated
entity is required to collect from a swap entity under paragraph (a) of
this section shall meet the eligible collateral requirements of Sec.
1221.6.
(d) Segregation. A regulated entity shall require that any funds or
other property that it posts to a swap entity as initial or variation
margin be held by a third-party custodian that is independent of the
swap entity and the regulated entity, is located in a jurisdiction that
applies the same insolvency regime to the third-party custodian as
would apply to the regulated entity, and is subject to the
rehypothecation, reinvestment, and other transfer restrictions of Sec.
1221.7.
(e) Initial margin models. To the extent the initial margin
collection amount that the regulated entity is required to collect from
a swap entity under paragraph (a)(1) of this section is calculated by
the regulated entity using an initial margin model, such model must
meet all the requirements of Sec. 1221.8, provided that the
appropriate prudential regulator responsible for making or rescinding
any approvals or taking other action to the extent required or allowed
under Sec. 1221.8 shall be:
(1) In the case where the initial margin model is that of a third
party that is subject to regulation by a prudential regulator, the
prudential regulator having such jurisdiction; or
(2) In the case where the initial margin model is that of either
the regulated entity or a third party that is not subject to regulation
by a prudential regulator, FHFA.
Dated: April 11, 2011.
John Walsh,
Acting Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, April 12, 2011.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 12th of April 2011.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: April 11, 2011.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
Dated: April 11, 2011.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2011-10432 Filed 5-10-11; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6705-01-P; 8070-01-P