[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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \17\ See proposed rule, Appendix A.
    \18\ See proposed rule Sec. Sec.  ----.2(l), ----.3(a), ----.8.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \19\ See proposed rule Sec. Sec.  ----.2(m), ----.3(a)(2).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \23\ See proposed rule Sec.  ----.6.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \43\ See proposed rule Sec.  ----.2(n).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \44\ See 75 FR 80,174 (Dec. 10, 2010).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \45\ See 7 U.S.C. 1a(33)(A)(i)(I); 15 U.S.C. 
78c(a)(67)(a)(ii)(I).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \46\ See 7 U.S.C. 1a(33)(A)(iii)(I); 15 U.S.C. 
78c(a)(67)(a)(ii)(III)(aa).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \49\ See proposed rule Sec. Sec.  ----.2(k)(2), ----.3(a).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.''
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \82\ See proposed rule Sec.  ----.9(a).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \85\ See proposed rule Sec.  ----.9(c).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \86\ See proposed rule Sec.  ----.10.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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