[Federal Register Volume 79, Number 185 (Wednesday, September 24, 2014)]
[Proposed Rules]
[Pages 57348-57400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-22001]



[[Page 57347]]

Vol. 79

Wednesday,

No. 185

September 24, 2014

Part III





Department of the Treasury





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Office of the Comptroller of the Currency





 Board of Governors of The Federal Reserve System





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 Federal Deposit Insurance Corporation





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 Farm Credit Administration





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 Federal Housing Finance Agency





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12 CFR Parts 45, 237, 349, et al.





 Margin and Capital Requirements for Covered Swap Entities; Proposed 
Rule

  Federal Register / Vol. 79 , No. 185 / Wednesday, September 24, 2014 
/ Proposed Rules  

[[Page 57348]]


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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 349

RIN 3064-AE21

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 and request for comment.

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SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (each an ``Agency'' and, 
collectively, the ``Agencies'') are seeking comment on a proposed joint 
rule 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 and their counterparties 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 November 24, 2014.

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.
    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 
email, if possible. Please use the title ``Margin and Capital 
Requirements for Covered Swap Entities'' 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. Enter ``Docket ID OCC-2011-0008'' in the 
Search Box and click ``Search''. Results can be filtered using the 
filtering tools on the left side of the screen. Click on ``Comment 
Now'' to submit public comments.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW., Suite 
3E-218, Mail Stop 9W-11, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, 
Mail Stop 9W-11, Washington, DC 20219.
     Fax: (571) 465-4326.
    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, email 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 rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov. Enter ``Docket ID OCC-2011-0008'' in the Search 
box and click ``Search''. Comments can be filtered by Agency using the 
filtering tools on the left side of the screen.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
viewing public comments, viewing other supporting and related 
materials, and viewing the docket after the close of the comment 
period.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 400 7th 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) 649-
6700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to a 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/apps/foia/proposedregs.aspx.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Robert deV. Frierson, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/apps/foia/proposedregs.aspx 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

[[Page 57349]]

paper in Room MP-500 of the Board's Martin Building (20th and C Streets 
NW.) between 9:00 a.m. and 5:00 p.m. on weekdays.
    Federal Deposit Insurance Corporation: You may submit comments, 
identified by RIN 3064-AE21, 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.
     Email: [email protected]. Include RIN 3064-AE21 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 7:00 a.m. and 5:00 p.m.
    Instructions: All comments received must include the agency name 
and RIN for this rulemaking and will be posted without change to 
https://www.fdic.gov/regulations/laws/federal/index.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:
     Agency Web site: www.fhfa.gov/open-for-comment-or-input.
     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 email 
to FHFA at [email protected] to ensure timely receipt by the Agency. 
Please include ``RIN 2590-AA45'' in the subject line of the message.
     Hand Delivery/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA45, 
Federal Housing Finance Agency, Constitution Center (OGC Eighth Floor), 
400 7th St. SW., Washington, DC 20024. Deliver the package to the 
Seventh Street entrance Guard Desk, First Floor, on business days 
between 9:00 a.m. and 5:00 p.m.
     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, Constitution Center (OGC Eighth Floor), 400 7th 
St. SW., Washington, DC 20024.
    All comments received by the deadline will be posted for public 
inspection without change, including any personal information you 
provide, such as your name, address, email address and telephone number 
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) 649-3804.
    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 email 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:
     Email: Send us an email at [email protected].
     FCA Web site: http://www.fca.gov. Select ``Law & 
Regulation,'' then ``FCA Regulations,'' then ``Public Comments,'' then 
follow the directions for ``Submitting a Comment.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Barry F. Mardock, Deputy 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 ``Law & Regulation,'' then ``FCA Regulations,'' 
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 email 
addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Kurt Wilhelm, Director, Financial Markets Group, (202) 649-
6437, Carl Kaminski, Counsel, Legislative and Regulatory Activities 
Division, (202) 649-5490, or Laura Gardy, Counsel, Securities and 
Corporate Practices, (202) 649-5510, for persons who are deaf or hard 
of hearing, TTY (202) 649-5597, Office of the Comptroller of the 
Currency, 400 7th Street SW., Washington, DC 20219.
    Board: Sean D. Campbell, Deputy Associate Director, Division of 
Research and Statistics, (202) 452-3760, Victoria M. Szybillo, Counsel, 
(202) 475-6325, or Anna M. Harrington, Senior Attorney, Legal Division, 
(202) 452-6406, Elizabeth MacDonald, Senior Supervisory Financial 
Analyst, Banking Supervision and Regulation, (202) 475-6316, Board of 
Governors of the Federal Reserve System, 20th and C Streets NW., 
Washington, DC 20551.
    FDIC: Bobby R. Bean, Associate Director, Capital Markets Branch, 
[email protected], John Feid, Senior Policy Analyst, [email protected], Ryan 
Clougherty, Capital Markets Policy Analyst, [email protected], Jacob 
Doyle, Capital Markets Policy Analyst, [email protected], Division of 
Risk Management Supervision, (202) 898-6888; Thomas F. Hearn, Counsel, 
[email protected], or Catherine Topping, Counsel, [email protected], 
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) 649-3196, [email protected], or 
Peggy K. Balsawer, Associate General Counsel, Office of General 
Counsel, (202) 649-3060, [email protected], Federal Housing 
Finance Agency, Constitution Center, 400 7th St. SW., Washington, DC 
20024. The telephone number for the Telecommunications Device for the 
Hearing Impaired is (800) 877-8339.
    FCA: Timothy T. Nerdahl, Senior Financial Analyst, Jeremy R. 
Edelstein, Financial Analyst, Office of Regulatory Policy, (703) 883-
4414, TTY (703) 883-4056, or Richard A. Katz, Senior Counsel, Office of 
General Counsel, (703) 883-4020, TTY (703) 883-4056, Farm Credit 
Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.

SUPPLEMENTARY INFORMATION: 

I. Background

A. The Dodd-Frank Act

    The Dodd-Frank Wall Street Reform and Consumer Protection Act (the 
``Act'' or ``Dodd-Frank Act'') was enacted on July 21, 2010.\1\ Title 
VII of the Dodd-

[[Page 57350]]

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\ For the remainder of this preamble, the term 
``swaps'' refers to swaps and security-based swaps unless the context 
requires otherwise.
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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).
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    As part of this new regulatory framework, sections 731 and 764 of 
the Dodd-Frank Act add a new section, section 4s, to the Commodity 
Exchange Act of 1936, as amended (``Commodity Exchange Act'') and a new 
section, section 15F, to the Securities Exchange Act of 1934, as 
amended (``Exchange Act''), respectively, which require the 
registration by the Commodity Futures Trading Commission (the ``CFTC'') 
and the Securities and Exchange Commission (the ``SEC'') of swap 
dealers, major swap participants, security-based swap dealers, and 
major security-based swap participants (each a ``swap entity'' and, 
collectively, ``swap entities'').\3\ For 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 
swaps not cleared by a central counterparty (``CCP'').\5\ Swap entities 
that are prudentially regulated by one of 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-10. Section 731 of the Dodd-
Frank Act requires swap dealers and major swap participants to 
register with the CFTC, which is vested with primary responsibility 
for the oversight of the swaps market under Title VII 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 SEC, which is vested with primary responsibility for the 
oversight of the security-based swaps market under Title VII of the 
Dodd-Frank Act. Section 712(d)(1) of the Dodd-Frank Act requires the 
CFTC and SEC to issue joint rules further defining the terms swap, 
security-based swap, swap dealer, major swap participant, security-
based swap dealer, and major security-based swap participant. The 
CFTC and SEC issued final joint rulemakings with respect to these 
definitions in May 2012 and August 2012, respectively. See 77 FR 
30596 (May 23, 2012); 77 FR 39626 (July 5, 2012) (correction of 
footnote in the SUPPLEMENTARY INFORMATION accompanying the rule); 
and 77 FR 48207 (August 13, 2012). 17 CFR part 1; 17 CFR parts 230, 
240 and 241.
    \4\ Section 1a(39) of the Commodity 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, as amended, 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 (i) a national bank, (ii) a federally 
chartered branch or agency of a foreign bank, or (iii) 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 
(the ``Farm Credit Act''). 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, as amended 
(the ``Federal Housing Enterprises Financial Safety and Soundness 
Act'') (i.e., the Federal National Mortgage Association (``Fannie 
Mae'') and its affiliates, the Federal Home Loan Mortgage 
Corporation (``Freddie Mac'') and its affiliates, and the Federal 
Home Loan Banks). See 7 U.S.C. 1a(39). In addition, OCC regulations 
provide that an operating subsidiary may engage only in activities 
that are permissible for its parent to conduct directly and require 
operating subsidiaries to conduct activities subject to the same 
authorization, terms, and conditions as apply to the conduct of 
those activities by the parent bank. FDIC regulations for 
subsidiaries of state-chartered banks incorporate similar limits to 
those imposed by the OCC for operating subsidiaries. Thus, if 
operating subsidiaries of a national bank or subsidiaries of a 
state-chartered bank engage in swap dealing below the aggregate de 
minimis dealer registration exemption thresholds established by the 
CFTC and SEC for registration as a swap dealer or security-based 
swap dealer, those subsidiaries must comply with the banking 
agencies' swap counterparty credit risk exposure safety and 
soundness requirements, regardless of whether the parent bank is 
registered as a swap dealer. If those subsidiaries engage in dealing 
activities above the CFTC and SEC registration thresholds, the 
subsidiaries must also comply with the margin requirements of this 
rule.
    \5\ See 7 U.S.C. 6s(e)(2)(A); 15 U.S.C. 78o-10(e)(2)(A). Section 
6s(e)(1)(A) of the Commodity Exchange Act 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 6s(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-10(e)(1) generally parallels 
section 6s(e)(1), except that section 78o-10(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-10(e)(1)(A) to have 
been included by mistake, in conflict with section 78o-10(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-10(e).
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    Sections 731 and 764 of the Dodd-Frank Act also require the CFTC 
and SEC separately to 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-10(e)(2)(B).
    \7\ See 7 U.S.C. 6s(e)(2)(A); 6s(e)(3)(D); 15 U.S.C. 78o-
10(e)(2)(A), 78o-10(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 
non-cleared swaps.\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 non-cleared swaps.\9\ In addition, sections 731 
and 764 of the Dodd-Frank Act require the Agencies, in establishing 
capital requirements for entities designated as covered swap entities 
for a single type or single class or category of swap or

[[Page 57351]]

activities, to take into account the risks associated with other types, 
classes, or categories of swaps engaged in, and the other activities 
conducted by swap entities that are not otherwise subject to 
regulation.\10\ Sections 731 and 764 become effective not less than 60 
days after publication of the final rule or regulation implementing 
these sections.
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    \8\ See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-10(e)(3)(A).
    \9\ See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-10(e)(3)(A). In 
addition, section 1313 of the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 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 Fannie Mae and 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 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-10(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 (ii) preserving the stability of the U.S. 
financial system. See 7 U.S.C. 6s(e)(3)(C); 15 U.S.C. 78o-
10(e)(3)(C).
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    In addition to the Dodd-Frank Act authorities mentioned above, the 
Agencies also have safety and soundness authority over the entities 
they supervise.\11\ The Dodd-Frank Act specified that the provisions of 
its Title VII shall not be construed as divesting any Agency of its 
authority to establish or enforce prudential or other standards under 
other law.\12\
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    \11\ 12 U.S.C. 221 et seq., 12 U.S.C. 1818, 12 U.S.C. 1841 et 
seq., 12 U.S.C. 3101 et seq. and 12 U.S.C. 1461 et seq. (Board); 12 
U.S.C. 2001 et seq.; 12 U.S.C. 2241 through 2274; 12 U.S.C. 2279aa-
11; 12 U.S.C. 2279bb through bb-7 (FCA); 12 U.S.C. 4513 (FHFA).
    \12\ See Dodd-Frank Act sections 741(c) and 764(b).
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    The capital and margin requirements for non-cleared swaps under 
sections 731 and 764 of the Dodd-Frank Act complement other Dodd-Frank 
Act provisions that require all sufficiently standardized swaps to be 
cleared through a derivatives clearing organization or clearing 
agency.\13\ This requirement is consistent with the consensus of the G-
20 leaders to clear derivatives through central counterparties where 
appropriate.\14\
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    \13\ 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 to hedge or mitigate commercial risks) are 
exempt from this mandatory clearing requirement and may elect not to 
clear a swap that would otherwise be subject to the clearing 
requirement.
    \14\ G-20 Leaders, June 2010 Toronto Summit Declaration, Annex 
II, ] 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 (June 2, 2009), available at www.newyorkfed.org/newsevents/news/markets/2009/ma090602.html.
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    In the derivatives clearing process, CCPs manage 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.\15\ Thus, the mandatory clearing 
requirement established by the Dodd-Frank Act for swaps effectively 
will require any party to any transaction subject to the clearing 
mandate to post initial and variation margin in connection with that 
transaction.
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    \15\ CCPs interpose themselves between counterparties to a swap 
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 swaps 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 is not cleared because it is not 
subject to the mandatory clearing requirement (or because one of the 
parties to a particular swap is eligible for, and uses, an exemption 
from the mandatory clearing requirement), that swap will be a ``non-
cleared'' swap and may be subject to the capital and margin 
requirements for such transactions established under sections 731 and 
764 of the Dodd-Frank Act.
    The swaps-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 swaps markets that were revealed during 
the financial crisis of 2008 and 2009. During the financial crisis, the 
opacity of swap transactions among dealers and between dealers 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 reduces the uncertainty around the 
possible exposures arising from non-cleared swaps.
    Further, the most recent financial crisis revealed that a number of 
significant participants in the swaps markets had taken on excessive 
risk through the use of swaps without sufficient financial resources to 
make good on their contracts. By imposing an initial and variation 
margin requirement on non-cleared swaps, 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. 
Additionally, the minimum margin requirement will reduce the amount by 
which firms can leverage the underlying risk associated with the swap 
contract.
    The Agencies originally published proposed rules to implement 
sections 731 and 764 of the Act in May 2011 (the ``2011 
proposal'').\16\ Over 100 comments were received in response to the 
2011 proposal from a variety of commenters, including banks, asset 
managers, commercial end users, and various trade associations. Like 
the current proposal, the 2011 proposal was issued pursuant to the 
Dodd-Frank Act and each Agency's safety and soundness authority.
---------------------------------------------------------------------------

    \16\ 76 FR 27564 (May 11, 2011).
---------------------------------------------------------------------------

B. Other Dodd-Frank Act Provisions Affecting the Margin and Capital 
Rule

    The applicability of the prudential regulators' margin requirements 
rely in part on regulatory action taken by the CFTC, the SEC, and the 
Secretary of the Treasury. The margin requirements will apply to an 
entity listed as prudentially regulated by the Agencies under the 
definition of ``prudential regulator'' in the Commodity Exchange Act 
\17\ if that entity: (1) Is a swap dealer, major swap participant, 
security-based swap dealer, major security-based swap participant and 
(2) enters into a non-cleared swap. In addition, as a means of ensuring 
the safety and soundness of the covered swap entity's non-cleared swap 
activities under the proposed rule, the requirements would apply to all 
of a covered swap entity's swap and security-based swap activities 
without regard to whether the entity has registered as both a swaps 
entity and a security-based swaps entity. Thus, for example, for an 
entity that is a swap dealer but not a security-based swap dealer or 
major security-based swap participant, the proposed rule's requirements 
would apply to all of that swap dealer's non-cleared swaps and 
security-based swaps.
---------------------------------------------------------------------------

    \17\ See Dodd-Frank Act section 721; 7 U.S.C. 1(a)(39).
---------------------------------------------------------------------------

    On May 23, 2012, the CFTC and SEC adopted a final joint rule 
defining ``swap dealer,'' ``major swap participant,'' ``security-based 
swap dealer,'' and ``major security-based swap dealer.'' These 
definitions include quantitative thresholds in the relevant activity 
that affect whether an entity subject to the ``prudential regulator'' 
definition also will be subject to the margin regulations being 
proposed.\18\
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    \18\ See 77 FR 30596 (May 23, 2012), 77 FR 39626 (July 5, 2012) 
(correction of footnote in SUPPLEMENTARY INFORMATION accompanying 
the rule) and 77 FR 48207 (August 13, 2012); 17 CFR part 1; 17 CFR 
parts 230, 240, and 241.
---------------------------------------------------------------------------

    On August 13, 2012, the CFTC and SEC adopted a final joint rule 
defining ``swap,'' ``security-based swap,'' ``foreign exchange swap,'' 
and ``foreign

[[Page 57352]]

exchange forward.'' \19\ On November 16, 2012, the Secretary of the 
Treasury made a determination pursuant to sections 1a(47)(E) and 1(b) 
of the Commodity Exchange Act to exempt foreign exchange swaps and 
foreign exchange forwards from certain swap requirements, including 
margin requirements, that Title VII of the Dodd-Frank Act added to the 
Commodity Exchange Act.\20\
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    \19\ See 77 FR 48207 (August 13, 2012); 17 CFR part 1; 17 CFR 
parts 230, 240, and 241.
    \20\ 77 FR 69694 (November 20, 2013).
---------------------------------------------------------------------------

    The CFTC has adopted a final rule requiring registration by 
entities meeting the substantive definition of swap dealer or major 
swap participant and engaging in relevant activities above the 
applicable quantitative thresholds.\21\ As of June 29, 2014, 102 
entities have registered as swap dealers, and 2 entities have 
registered as major swap participants, neither of which are insured 
depository institutions or otherwise among the entities listed in the 
prudential regulator definition. The SEC has not yet imposed a 
registration requirement on entities that meet the definition of 
``security-based swap dealer,'' or ``major security-based swap 
participant.''
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    \21\ 77 FR 2613 (January 1, 2012); 17 CFR 23.21.
---------------------------------------------------------------------------

    The CFTC and SEC have also adopted policies addressing how the 
Commodity Exchange Act's and Exchange Act's swap requirements will 
apply to ``cross-border swaps.'' \22\
---------------------------------------------------------------------------

    \22\ 78 FR 45292 (July 26, 2013); 17 CFR part 1; 79 FR 39067 
(July 9, 2014); 17 CFR parts 240, 241, and 250.
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C. The 2013 International Framework

    Following the release of the Agencies' 2011 proposal, the Basel 
Committee on Banking Supervision (``BCBS'') and the Board of the 
International Organization of Securities Commissions (``IOSCO'') 
proposed an international framework for margin requirements on non-
cleared swaps with the goal of creating an international standard for 
non-cleared swaps (the ``2012 international framework'').\23\ Following 
the issuance of the 2012 international framework, the Agencies re-
opened the comment period on the Agencies' 2011 proposal to allow for 
additional comment in relation to the 2012 international framework.\24\ 
The 2012 international framework was also subject to extensive public 
comment before being finalized in September 2013 (the ``2013 
international framework'').\25\
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    \23\ See BCBS and IOSCO ``Consultative Document--Margin 
requirements for non-centrally cleared derivatives'' (July 2012), 
available at http://www.bis.org/publ/bcbs226.pdf and ``Second 
consultative document--Margin requirements for non-centrally cleared 
derivatives'' (February 2013), available at http://www.bis.org/publ/bcbs242.pdf.
    \24\ 77 FR 60057 (October 2, 2012).
    \25\ See BCBS and IOSCO ``Margin requirements for non-centrally 
cleared derivatives,'' (September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
---------------------------------------------------------------------------

    The 2013 international framework articulates eight key principles 
for non-cleared derivatives margin rules, which are described in 
further detail below. These principles represent the minimum standards 
approved by BCBS and IOSCO and recommended to the regulatory 
authorities in member jurisdictions of these organizations. Key 
principles 1 through 8 are described below.\26\
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    \26\ The 2013 international framework refers to swaps as 
``derivatives.'' For purposes of the discussion in this section, the 
terms ``swaps'' and ``derivatives'' can be used interchangeably.
---------------------------------------------------------------------------

1. Appropriate Margining Practices Should Be in Place With Respect to 
All Non-Cleared Derivative Transactions
    The 2013 international framework recommends that appropriate 
margining practices be in place with respect to all derivative 
transactions that are not cleared by CCPs. The 2013 international 
framework does not include a margin requirement for physically settled 
foreign exchange (FX) forwards and swaps.\27\ The framework would also 
not apply initial margin requirements to the fixed physically settled 
FX component of cross-currency swaps.
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    \27\ The 2013 international framework states that variation 
margin standards for physically settled FX forwards and swaps should 
be addressed by national supervisors in a manner consistent with the 
BCBS supervisory guidance recommendations for these products. See 
BCBS ``Supervisory guidance for managing risks associated with the 
settlement of foreign exchange transactions,'' (February 2013), 
available at: https://www.bis.org/publ/bcbs241.pdf (BCBS FX 
supervisory guidance). The Board implemented the BCBS FX supervisory 
guidance in SR letter 13-24 ``Managing Foreign Exchange Settlement 
Risks for Physically Settled Transactions'' (December 23, 2013) 
available at http://www.federalreserve.gov/bankinforeg/srletters/sr1324.htm. As discussed elsewhere in this preamble, in 2012, the 
Secretary of the Treasury made a determination that physically-
settled foreign exchange forwards and swaps are not to be considered 
swaps under the Dodd-Frank Act. 77 FR 69694 (November 20, 2012).
---------------------------------------------------------------------------

2. Financial Firms and Systemically Important Nonfinancial Entities 
(Covered Entities) Must Exchange Initial and Variation Margin
    The 2013 international framework recommends bilateral exchange of 
initial and variation margin for non-cleared derivatives between 
covered entities. The precise definition of ``covered entities'' is to 
be determined by each national regulator, but in general should include 
financial firms and systemically important nonfinancial entities. 
Sovereigns, central banks, certain multilateral development banks, the 
Bank for International Settlements (BIS), and non-systemic, 
nonfinancial firms are not included as covered entities.
    Under the 2013 international framework, all covered entities that 
engage in non-cleared derivatives should exchange, on a bilateral 
basis, the full amount of variation margin with a zero threshold on a 
regular basis (e.g., daily). All covered entities are also expected to 
exchange, on a bilateral basis, initial margin with a threshold not to 
exceed [euro]50 million. The threshold applies on a consolidated group, 
rather than legal entity, basis. In addition, and in light of the 
permitted initial margin threshold, the 2013 international framework 
recommends that entities with non-cleared derivative activity of 
[euro]8 billion notional or more would be subject to initial margin 
requirements.
3. The Methodologies for Calculating Initial and Variation Margin 
Should (i) Be Consistent Across Covered Entities, and (ii) Ensure That 
All Counterparty Risk Exposures Are Covered With a High Degree of 
Confidence
    The 2013 international framework states that the potential future 
exposure of a non-cleared derivative should reflect an estimate of an 
increase in the value of the instrument that is consistent with a one-
tailed 99% confidence level over a 10-day horizon (or longer, if 
variation margin is not collected on a daily basis), based on 
historical data that incorporates a period of significant financial 
stress.
    The 2013 international framework permits the amount of initial 
margin to be calculated by reference to internal models approved by the 
relevant national regulator or a standardized margin schedule, but 
covered entities should not ``cherry pick'' between the two calculation 
methods. Models may allow for conceptually sound and empirically 
demonstrable portfolio risk offsets where there is an enforceable 
netting agreement in effect. However, portfolio risk offsets may only 
be recognized within, and not across, certain well-defined asset 
classes: Credit, equity, interest rates and foreign exchange, and 
commodities. A covered entity using the standardized margin schedule 
may adjust the gross initial margin amount (notional exposure 
multiplied by the relevant percentage in the table) by a ``net-to-gross 
ratio,'' which is also used in the bank counterparty credit risk 
capital rules to reflect a degree of netting of derivative

[[Page 57353]]

positions that are subject to an enforceable netting agreement.
4. To Ensure That Assets Collected as Collateral Can Be Liquidated in a 
Reasonable Amount of Time To Generate Proceeds That Could Sufficiently 
Protect Covered Entities From Losses in the Event of a Counterparty 
Default, These Assets Should Be Highly Liquid and Should, After 
Accounting for an Appropriate Haircut, Be Able To Hold Their Value in a 
Time of Financial Stress
    The 2013 international framework recommends that national 
supervisors develop a definitive list of eligible collateral assets. 
The 2013 international framework includes examples of permissible 
collateral types, provides a schedule of standardized haircuts, and 
indicates that model-based haircuts may be appropriate. In the event 
that a dispute arises over the value of eligible collateral, the 2013 
international framework provides that both parties should make all 
necessary and appropriate efforts, including timely initiation of 
dispute resolution protocols, to resolve the dispute and exchange any 
required margin in a timely fashion.
5. Initial Margin Should Be Exchanged on a Gross Basis and Held in Such 
a Way as To Ensure That (i) the Margin Collected Is Immediately 
Available to the Collecting Party in the Event of the Counterparty's 
Default, and (ii) the Collected Margin Is Subject to Arrangements That 
Fully Protect the Posting Party
    The 2013 international framework provides that collateral collected 
as initial margin from a ``customer'' (defined as a ``buy-side 
financial firm'') should be segregated from the initial margin 
collector's proprietary assets. The initial margin collector also 
should give the customer the option to individually segregate its 
initial margin from other customers' margin. In very specific 
circumstances, the initial margin collector may use margin provided by 
the customer to hedge the risks associated with the customer's 
positions with a third party. To the extent that the customer consents 
to rehypothecation, it should be permitted only where applicable 
insolvency law gives the customer protection from risk of loss of 
initial margin in instances where either the initial margin collector 
or the third party become insolvent, or they both do. Where a customer 
has consented to rehypothecation and adequate legal safeguards are in 
place, the margin collector and the third party to whom customer 
collateral is rehypothecated should comply with additional restrictions 
detailed in the 2013 international framework, including a prohibition 
on any further rehypothecation of the customer's collateral by the 
third party.
6. Requirements for Transactions Between Affiliates Are Left to the 
National Supervisors
    The 2013 international framework recommends that national 
supervisors establish margin requirements for transactions between 
affiliates as appropriate in a manner consistent with each 
jurisdiction's legal and regulatory framework.
7. Requirements for Margining Non-Cleared Derivatives Should Be 
Consistent and Non-Duplicative Across Jurisdictions
    Under the 2013 international framework, home-country supervisors 
may allow a covered entity to comply with a host-country's margin 
regime if the host-country margin regime is consistent with the 2013 
international framework. A branch may be subject to the margin 
requirements of either the headquarters' jurisdiction or the host 
country.
8. Margin Requirements Should Be Phased in Over an Appropriate Period 
of Time
    The 2013 international framework phases in margin requirements 
between December 2015 and December 2019. Covered entities should begin 
exchanging variation margin by December 1, 2015. The date on which a 
covered entity should begin to exchange initial margin with a 
counterparty depends on the notional amount of non-cleared derivatives 
(including physically settled FX forwards and swaps) entered into both 
by its consolidated corporate group and by the counterparty's 
consolidated corporate group.
    Currency denomination. The 2013 international framework generally 
lays out a broad conceptual framework for margining requirements on 
non-cleared derivatives. It also recommends specific quantitative 
levels for several parameters such as the level of notional derivative 
exposure that results in an entity being subject to the margin 
requirements ([euro]8 billion), permitted initial margin thresholds 
([euro]50 million), and minimum transfer amounts ([euro]500,000). In 
the 2013 international framework, all such amounts are denominated in 
Euros. In this proposal all such amounts are denominated in U.S. 
dollars. The Agencies are aware that, over time, amounts that are 
denominated in different currencies in different jurisdictions may 
fluctuate relative to one another due to changes in exchange rates. The 
Agencies seek comment on whether and how fluctuations resulting from 
exchange rate movements should be addressed. In particular, should 
these amounts be expressed in terms of a single currency in all 
jurisdictions to prevent such fluctuations? Should the amounts be 
adjusted over time if and when exchange rate movements necessitate 
realignment? Are there other approaches to deal with fluctuations 
resulting from significant exchange rate movements? Are there other 
issues that should be considered in connection to the effects of 
fluctuating exchange rates?

II. Overview of Proposed Rule

A. Margin Requirements

    The Agencies have reviewed the comments received on the 2011 
proposal and the 2013 international framework. The Agencies believe 
that a number of changes to the 2011 proposal are warranted in order to 
reflect certain comments received, as well as to achieve the 2013 
international framework's goal of promoting global consistency and 
reducing regulatory arbitrage opportunities. In light of the 
significant differences from the 2011 proposal, the Agencies are 
seeking comment on a revised proposed rule to implement section 4s of 
the Commodity Exchange Act and section 15F of the Exchange Act (the 
``proposal'' or the ``proposed rule'').
    The Agencies are proposing to adopt a risk-based approach that 
would establish initial and variation margin requirements for covered 
swap entities. Consistent with the statutory requirement, the proposed 
rule would help ensure the safety and soundness of the covered swap 
entity and would be appropriate for the risk to the financial system 
associated with non-cleared swaps held by covered swap entities. The 
proposed rule takes into account the risk posed by a covered swap 
entity's counterparties in establishing the minimum amount of initial 
and variation margin that the covered swap entity must exchange with 
its counterparties.
    In implementing this risk-based approach, the proposed rule 
distinguishes among four separate types of swap counterparties: (i) 
Counterparties that are themselves swap entities; (ii) counterparties 
that are financial end users with a material swaps exposure; (iii) 
counterparties that are financial end users without a material swaps 
exposure, and (iv) other

[[Page 57354]]

counterparties, including nonfinancial end users, sovereigns, and 
multilateral development banks.\28\ These categories reflect the 
Agencies' current belief that risk-based distinctions can be made 
between these types of swap counterparties.
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    \28\ See Sec.  .2 of the proposed rule for the 
various constituent definitions that identify these four types of 
swap counterparties.
---------------------------------------------------------------------------

    The proposed rule's initial and variation margin requirements 
generally apply to the posting, as well as the collection, of minimum 
initial and variation margin amounts by a covered swap entity from and 
to its counterparties. This proposal represents a refinement to the 
Agencies' original collection-only approach to margin requirements 
based on consideration of comments made on the 2011 proposal and the 
2013 international framework. While the Agencies believe that imposing 
requirements with respect to the minimum amount of initial and 
variation margin to be collected 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 non-cleared swap exposure, the 
Agencies also believe that requiring a covered swap entity to post 
margin to other financial entities could forestall a build-up of 
potentially destabilizing exposures in the financial system. The 
proposed rule's approach therefore is designed to ensure that covered 
swap entities transacting with other swap entities and with financial 
end users in non-cleared swaps will be collecting and posting 
appropriate minimum margin amounts with respect to those transactions.
    For initial margin, the proposed rule would require a covered swap 
entity to calculate its minimum initial margin requirement in one of 
two ways. The covered swap entity may use a standardized margin 
schedule, which is set out in Appendix A of the proposed rule. The 
standardized margin schedule allows for certain types of netting and 
offsetting of exposures. In the alternative, a covered swap entity may 
use an internal margin model that satisfies certain criteria outlined 
within Sec.  .8 of the proposed rule and that has 
been approved by the relevant prudential regulator.\29\
---------------------------------------------------------------------------

    \29\ See Sec.  .8 and Appendix A of the 
proposed rule for a complete description of the requirements for 
initial margin models and standardized minimum initial margin 
requirements.
---------------------------------------------------------------------------

    Where a covered swap entity transacts with another swap entity 
(regardless of whether the other swap entity meets the definition of a 
``covered swap entity'' under the proposed rule), the covered swap 
entity must collect at least the amount of initial margin required 
under the proposed rule. Likewise, the swap entity counterparty also 
will be required, under margin rules that are applicable to that swap 
entity,\30\ to collect a minimum amount of initial margin from the 
covered swap entity.\31\ Accordingly, covered swap entities will both 
collect and post a minimum amount of initial margin when transacting 
with another swap entity. A covered swap entity transacting with a 
financial end user with a material swaps exposure as specified by this 
proposed rule must collect at least the amount of initial margin 
required by the proposed rule and must post at least the amount of 
initial margin that the covered swap entity would be required by the 
proposal to collect if the covered swap entity were in the place of the 
counterparty. In addition, a covered swap entity must post or collect 
initial margin on at least a daily basis as required under the proposed 
rule in response to changes in the required initial margin amounts 
stemming from changes in portfolio composition or any other factors 
that result in a change in the required initial margin amounts.\32\
---------------------------------------------------------------------------

    \30\ All swap entities will be subject to a rule on minimum 
margin for non-cleared swaps promulgated by one of the Agencies, the 
SEC or the CFTC.
    \31\ The counterparty may be a covered swap entity subject to 
this proposed rule or a swap entity that is subject to the margin 
rules of the CFTC or SEC. If the counterparty is a covered swap 
entity, it must collect at least the amount of margin required under 
this proposal. If the counterparty is a swap entity subject to the 
margin rules of the CFTC or SEC, it must collect the amount of 
margin required under the CFTC or SEC margin rules.
    \32\ Under the proposed rule, when entering into a swap 
transaction, the first collection and posting of initial margin may 
be delayed for one day following the day the swap transaction is 
executed. Thereafter, posting and collecting initial margin must be 
made on at least a daily basis in response to changes in portfolio 
composition or any other factors that would change the required 
initial margin amounts.
---------------------------------------------------------------------------

    The proposed rule permits a covered swap entity to adopt a maximum 
initial margin threshold amount of $65 million, below which it need not 
collect or post initial margin from or to swap entities and financial 
end users with material swaps exposures. The threshold would be applied 
on a consolidated basis, and would apply both to the consolidated 
covered swap entity as well as to the consolidated counterparty.\33\
---------------------------------------------------------------------------

    \33\ See Sec. Sec.  .3 and 
.8 of the proposed rule for a complete 
description of the initial margin requirements.
---------------------------------------------------------------------------

    With respect to variation margin, the proposed rule generally 
requires a covered swap entity to collect or post variation margin on 
swaps with a swap entity or a financial end user (regardless of whether 
the financial end user has a material swaps exposure) in an amount that 
is at least equal to the increase or decrease in the value of the swap 
since the counterparties' previous exchange of variation margin. The 
proposed rule would not permit a covered swap entity to adopt a 
threshold amount below which it need not collect or post variation 
margin on swaps with swap entity and financial end user counterparties. 
In addition, a covered swap entity must collect or post variation 
margin with swap entities and financial end user counterparties under 
the proposed rule on at least a daily basis.\34\
---------------------------------------------------------------------------

    \34\ See Sec.  .4 of the proposed rule for a 
complete description of the variation margin requirements.
---------------------------------------------------------------------------

    The proposed rule's margin provisions establish only minimum 
requirements with respect to initial and variation margin. Nothing in 
the proposed rule is intended to prevent or discourage a covered swap 
entity from collecting or posting margin in amounts greater than is 
required under the proposed rule.
    Under the proposal, a covered swap entity's collection of margin 
from ``other counterparties'' that are not swap entities or financial 
end users (e.g., nonfinancial or ``commercial'' end users that 
generally engage in swaps to hedge commercial risk, sovereigns, and 
multilateral developments banks), is subject to the judgment of the 
covered swap entity. That is, under the proposed rule, a covered swap 
entity is not required to collect initial and variation margin from 
these ``other counterparties'' as a matter of course. However, a 
covered swap entity should continue with the current practice of 
collecting initial or variation margin at such times and in such forms 
and amounts (if any) as the covered swap entity determines in its 
overall credit risk management of the swap entity's exposure to the 
customer.
    Although covered swap entities would be required to collect 
variation margin from all financial end user counterparties under the 
proposed rule, no minimum initial margin requirement would apply to 
transactions with those financial end users that are not swap entities 
and that do not have a material swaps exposure. Thus, for the purpose 
of the initial margin requirements, financial end users that are not 
swap entities and that do not have a material swaps exposure would be 
treated in the same manner as entities characterized as ``other 
counterparties.''
    The Agencies believe that differential treatment of ``other 
counterparties'' is consistent with the Dodd-Frank Act's

[[Page 57355]]

risk-based approach to establishing margin requirements. However, the 
Agencies recognize that a covered swap entity may find it prudent from 
a risk management perspective to collect margin from one or more of 
these ``other counterparties.'' \35\
---------------------------------------------------------------------------

    \35\ See Sec.  .3 and Sec.  
.4 of the proposed rule for a complete description 
of the initial and variation margin requirements that apply to 
``other counterparties.''
---------------------------------------------------------------------------

    The proposed rule limits the types of collateral that are eligible 
to be used to satisfy both the initial and variation margin 
requirements. Eligible collateral is generally limited to high-quality, 
liquid assets that are expected to remain liquid and retain their 
value, after accounting for an appropriate risk-based ``haircut,'' 
during a severe economic downturn. Eligible collateral for variation 
margin is limited to cash only. Eligible collateral for initial margin 
includes cash, debt securities that are issued or guaranteed by the 
U.S. Department of Treasury or by another U.S. government agency, the 
Bank for International Settlements, the International Monetary Fund, 
the European Central Bank, multilateral development banks, certain U.S. 
Government-sponsored enterprises' (``GSEs'') debt securities, certain 
foreign government debt securities, certain corporate debt securities, 
certain listed equities, and gold.\36\ When determining the 
collateral's value for purposes of satisfying the proposed rule's 
margin requirements, non-cash collateral and cash collateral that is 
not denominated in U.S. dollars or the currency in which payment 
obligations under the swap are required to be settled would be subject 
to an additional ``haircut'' as determined using Appendix B of the 
proposed rule.\37\ The limits on eligible collateral and application of 
a haircut would not apply to margin collected in excess of what is 
required by the rule.
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    \36\ An asset-backed security guaranteed by a U.S. Government-
sponsored enterprise is eligible collateral for purposes of initial 
margin if the GSE is operating with capital support or another form 
of direct financial assistance from the U.S. government (Sec.  
.6(a)(2)(iii)).
    \37\ See Sec.  .6 and Appendix B of the 
proposed rule for a complete description of the eligible collateral 
requirements.
---------------------------------------------------------------------------

    Separate from the proposed rule's requirements with respect to the 
collection and posting of initial and variation margin, the proposed 
rule also would require a covered swap entity to require that any 
collateral other than variation margin that it posts to its 
counterparty (even collateral in excess of any required by the proposed 
rule) be segregated at one or more custodians that are not affiliates 
of the covered swap entity or the counterparty (``third-party 
custodian''). The proposed rule would also require a covered swap 
entity to place the initial margin it collects (in accordance with the 
proposed rule) from a swap entity or a financial end user with material 
swaps exposure at a third-party custodian.\38\ In both of the foregoing 
cases, the proposed rule would require that the third-party custodian 
be prohibited by agreement from certain actions with respect to any of 
the funds or other property it holds as initial margin. First, the 
custodial agreement must prohibit rehypothecating, repledging, reusing 
or otherwise transferring, any of the funds or other property the 
third-party custodian holds. Second, with respect to initial margin 
required to be posted or collected, the custodial agreement must 
prohibit substituting or reinvesting any funds or other property in any 
asset that would not qualify as eligible collateral under the proposed 
rule. Third, the custodial agreement must require that after such 
substitution or reinvestment, the amount net of applicable discounts 
described in Appendix B continue to be sufficient to meet the 
requirements for initial margin under the proposal.\39\ Funds or other 
property held by a third-party custodian but not required to be posted 
or collected under the rule are not subject to any of these 
restrictions on collateral substitution or reinvestment.
---------------------------------------------------------------------------

    \38\ The segregation requirement therefore applies only to the 
minimum amount of initial margin that a covered swap entity is 
required to collect by the rule from a swap entity or financial end 
user with a material swaps exposure, but applies to all collateral 
(other than variation margin) that the covered swap entity posts to 
any counterparty.
    \39\ See Sec.  .7 of the proposed rule for a 
complete description of the segregation requirements.
---------------------------------------------------------------------------

    Given the global nature of swaps markets and swap transactions, 
margin requirements will be applied to transactions across different 
jurisdictions. As required by the Dodd-Frank Act, the Agencies are 
proposing a specific approach to address cross-border non-cleared swap 
transactions. Under the proposal, foreign swaps of foreign covered swap 
entities would not be subject to the margin requirements of the 
proposed rule.\40\ In addition, certain covered swap entities that are 
operating in a foreign jurisdiction and covered swap entities that are 
organized as U.S. branches of foreign banks may choose to abide by the 
swap margin requirements of the foreign jurisdiction if the Agencies 
determine that the foreign regulator's swap margin requirements are 
comparable to those of the proposed rule.\41\
---------------------------------------------------------------------------

    \40\ See Sec.  .9 of the proposed rule.
    \41\ See Sec.  .9 of the proposed rule for a 
complete description of the treatment of cross-border swap 
transactions.
---------------------------------------------------------------------------

B. Capital Requirements

    Sections 731 and 764 of the Dodd-Frank Act also require each Agency 
to issue, in addition to margin rules, joint rules on capital for 
covered swap entities for which it is the prudential regulator.\42\ The 
Board, FDIC, and OCC (each a ``banking agency'' and, collectively, the 
``banking agencies'') have had risk-based capital rules in place for 
banks to address over-the-counter (``OTC'') swaps since 1989 when the 
banking agencies implemented their risk-based capital adequacy 
standards (general banking risk-based capital rules) \43\ based on the 
first Basel Accord.\44\ The general banking risk-based capital rules 
have been amended and supplemented over time to take into account 
developments in the swaps market. These supplements include the 
addition of the market risk rule 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.\45\ In addition, certain large, complex 
banks and bank holding companies are subject to the banking agencies' 
advanced approaches risk-based capital rule (advanced approaches 
rules), based on the advanced approaches of the Basel II Accord.\46\
---------------------------------------------------------------------------

    \42\ 7 U.S.C. 6s(e)(2); 15 U.S.C. 78o-10(e)(2).
    \43\ See 54 FR 4186 (January 27, 1989). The general banking 
risk-based capital rules are at 12 CFR part 3, Appendices A, B, and 
C (national banks); 12 CFR part 167 (federal savings banks); 12 CFR 
part 208, Appendices A, B, and E (state member banks); 12 CFR part 
225, Appendices A, D, and E (bank holding companies); 12 CFR part 
325, Appendices A, B, C, and D (state nonmember banks); 12 CFR part 
390, subpart Z (state savings associations). The general risk-based 
capital rules are supplemented by the market risk capital rules.
    \44\ The Basel Committee on Banking Supervision developed the 
first international banking capital framework in 1988, entitled, 
International Convergence of Capital Measurement and Capital 
Standards.
    \45\ The banking agencies' market risk capital rules are 
currently at 12 CFR part 3, Appendix B (OCC); 12 CFR parts 208 and 
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.
    \46\ See BCBS, International Convergence of Capital Measurement 
and Capital Standards: A Revised Framework (2006). The banking 
agencies implemented the advanced approaches of the Basel II Accord 
in 2007. See 72 FR 69288 (December 7, 2010). The advanced approaches 
rules are codified at 12 CFR part 3, Appendix C (OCC); 12 CFR part 
208, Appendix F and 12 CFR part 225, Appendix G (Board); and 12 CFR 
part 325, Appendix D (FDIC).

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[[Page 57356]]

    In July 2013 the Board and the OCC issued a final rule (revised 
capital framework) implementing regulatory capital reforms reflecting 
agreements reached by the BCBS in ``Basel III: A Global Regulatory 
Framework for More Resilient Banks and Banking Systems.'' \47\ The 
revised capital framework includes the capital requirements for OTC 
swaps described above. The FDIC adopted an interim final rule that was 
substantively identical to the revised capital framework in July 2013 
and later issued a final rule in April 2014 identical to the Board's 
and the OCC's final rule.\48\
---------------------------------------------------------------------------

    \47\ See BCBS, Basel III: A Global Regulatory Framework For More 
Resilient Banks and Banking Systems (2010), available at 
www.bis.org/publ.bcbs189.htm.
    \48\ 78 FR 62018 (October 11, 2013) (Board and OCC); 78 FR 20754 
(April 14, 2014) (FDIC). These rules are codified at 12 CFR part 3 
(national banks and federal savings associations), 12 CFR part 217 
(state member banks, bank holding companies, and savings and loan 
holding companies), and 12 CFR part 324 (state nonmember banks and 
state savings associations).
---------------------------------------------------------------------------

    FHFA's predecessor agencies used a methodology similar to that 
endorsed by the BCBS prior to the development of its recent revised and 
enhanced framework to develop the risk-based capital rules applicable 
to those entities now regulated by FHFA. Those rules still apply to all 
FHFA-regulated entities.\49\ FHFA is in the process of revising and 
updating these regulations for the Federal Home Loan Banks. The FCA's 
risk-based capital regulations for Farm Credit System (``FCS'') 
institutions, except for the Federal Agricultural Mortgage Corporation 
(``Farmer Mac''), have been in place since 1988 and were last updated 
in 2005.\50\ The FCA's risk-based capital regulations for Farmer Mac 
have been in place since 2001 and were updated in 2011.\51\ On May 8, 
2014, the FCA proposed revisions to its capital rules for all FCS 
institutions, except Farmer Mac, that are comparable to the Basel III 
framework.\52\
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    \49\ For the duration of the conservatorships of Fannie Mae and 
Freddie Mac (together, the ``Enterprises''), FHFA has directed that 
its 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 U.S. Department of the 
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.
    \50\ See 53 FR 40033 (October 13, 1988); 70 FR 35336 (June 17, 
2005); 12 CFR part 615, subpart H.
    \51\ See 66 FR 19048 (April 12, 2001); 76 FR 23459 (April 27, 
2011); 12 CFR part 652.
    \52\ The FCA recently proposed revisions to its capital rules 
for all FCS institutions, except Farmer Mac, that are comparable to 
the Basel III Framework.
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    As described below, the proposed rule 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. Given that these existing regulatory capital rules specifically 
take into account and address the unique risks arising from swap 
transactions and activities, the Agencies are proposing to rely on 
these existing rules as appropriate and sufficient to offset the 
greater risk to the covered swap entity and the financial system 
arising from the use of swaps that are not cleared and to protect the 
safety and soundness of the covered swap entity.

C. 2011 FCA and FHFA Special Section

    In the 2011 proposal, FHFA and FCA (but not the other Agencies) had 
proposed an additional provision, Sec.  .11 of FHFA's 
and FCA's proposed rules. Proposed Sec.  .11 would 
have required any entity that was regulated by FHFA or FCA, but was not 
itself a covered swap entity, to collect initial margin and variation 
margin from its swap entity counterparty when entering into a non-
cleared swap.\53\ Federal Home Loan Banks, Fannie Mae and its 
affiliates, Freddie Mac and its affiliates, and all Farm Credit System 
institutions including Farmer Mac (each a ``regulated entity'' and, 
collectively, ``regulated entities'') would have been subject to this 
provision. Regulated entities that were covered swap entities would 
have been subject to Sec. Sec.  1 through 9 of the 2011 proposal with 
respect to margin.
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    \53\ See 76 FR 27564, 27582-83 (May 11, 2011). Section 
.11 of the 2011 proposal would have required 
regulated entities to collect initial and variation margin from 
their swap entity counterparties on parallel terms to the 
requirements governing collection by covered swap entities under 
other sections of the 2011 proposal, including with respect to 
initial margin calculation methods (via the use of a model or a 
standardized ``lookup'' table), documentation standards and 
segregation requirements. Section .11 of the 2011 
proposal would not have applied to swaps entered into between 
regulated entities and end users.
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    FHFA and FCA proposed Sec.  .11 to account for 
the fact that the 2011 proposal only required covered swap entities to 
collect initial and variation margin from, but did not require them to 
post initial and variation margin to, their counterparties.\54\ The 
approach that FHFA and FCA proposed in Sec.  .11 
recognized that a default by a swap counterparty to a regulated entity 
could adversely affect the safe and sound operations of the regulated 
entity. FHFA and FCA proposed Sec.  .11 pursuant to 
each Agency's role as safety and soundness regulator for its respective 
regulated entities.
---------------------------------------------------------------------------

    \54\ Where a covered swap entity's counterparty was another 
covered swap entity, the collection requirement would have applied 
in both directions to make the requirement effectively bilateral.
---------------------------------------------------------------------------

    FHFA and FCA are not re-proposing as part of this proposal a 
provision similar to that found in Sec.  .11 of the 
2011 proposal. Unlike the 2011 proposal, this proposal generally would 
require two-way margining in swap transactions between covered swap 
entities and FHFA- and FCA-regulated entities.\55\ This two-way 
margining regime effectively reduces systemic risk by protecting both 
the regulated entity and its covered swap entity counterparty from the 
effects of a counterparty default, thereby eliminating the need for 
FHFA and FCA to propose a separate provision similar to the earlier 
proposed Sec.  .11. However, should any changes 
adopted as part of the final joint rule alter the current proposed two-
way margining regime in ways that raise safety and soundness concerns 
for FHFA or FCA with regard to their respective regulated entities, 
FHFA or FCA may decide to exercise its authority to adopt a provision 
similar to Sec.  .11 of the 2011 proposal to address 
these concerns.\56\

[[Page 57357]]

Furthermore, FHFA and FCA each reserves the right and authority to 
address its safety and soundness concerns through the Agencies' final 
joint rulemaking or through a separate rulemaking or guidance 
applicable only to its respective regulated entities.
---------------------------------------------------------------------------

    \55\ Two-way margining would not necessarily apply in all 
circumstances. A regulated entity that is not itself a swap entity 
would meet the proposed definition of financial end user. As a 
result, if it engaged in swap activity above the threshold set in 
the definition of material swaps exposure, then the rule would 
require two-way margining as to both initial and variation margin, 
with respect to its transactions with covered swap entities. If a 
regulated entity does not have material swaps exposure, then a 
covered swap entity and the regulated entity would be required to 
exchange variation margin with each other but would only be required 
to collect or post initial margin in such amounts as the parties 
determine to be appropriate. In such circumstances, no specific 
amount of initial margin would be required to be collected or posted 
pursuant to this proposal.
    \56\ Any final joint rule issued by the Agencies, once 
effective, would address these safety and soundness concerns only in 
circumstances where a regulated entity is transacting with a covered 
swap entity regulated by a prudential regulator. Where a regulated 
entity is instead engaged in a non-cleared swap with a swap entity 
that is not subject to the oversight of one of the prudential 
regulators, the applicable margin requirements would be those issued 
by the regulator having jurisdiction over the swap entity, namely 
the CFTC or the SEC. If one of those agencies were to diverge from 
the two-way margining regime proposed here (and recommended by the 
2013 international framework) in a manner that raises safety and 
soundness concerns for FHFA or FCA with regard to their respective 
regulated entities, FHFA or FCA also may exercise its authority to 
adopt a special section to account for those situations as well, 
either in the final joint rulemaking, or in a separate rulemaking or 
guidance at a later date.
---------------------------------------------------------------------------

D. The Proposed Rule and Community Banks

    The Agencies expect that the proposed rule likely will have minimal 
impact on community banks. The Agencies anticipate that community banks 
will not engage in swap activity to the level necessary to meet the 
definition of a swap dealer, major swap participant, security-based 
swap dealer, or major security-based swap participant; and therefore, 
are unlikely to fall within the proposed definition of a covered swap 
entity. Because the proposed rule imposes requirements on covered swap 
entities, no community bank will likely be directly subject to the 
rule. Thus, a community bank that enters into non-cleared interest rate 
swaps with its commercial customers would not be required to apply to 
those swaps the proposed rule's requirements for initial margin or 
variation margin.
    When a community bank enters into a swap with a covered swap 
entity, the covered swap entity would be required to post and collect 
initial margin pursuant to the rule only if the community bank had a 
material swaps exposure.\57\ The Agencies believe that the vast 
majority of community banks do not engage in swaps at or near that 
level of activity. Thus, for most, if not all community banks, the 
proposed rule would only require a covered swap entity to collect 
initial margin that it determines is appropriate to address the credit 
risk posed by such a community bank. The Agencies believe covered swap 
entities currently apply this approach as part of their credit risk 
management practices.
---------------------------------------------------------------------------

    \57\ The proposed rule defines material swaps exposure as an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps with all counterparties for June, July, and August of 
the previous calendar year that exceeds $3 billion, where such 
amount is calculated only for business days.
---------------------------------------------------------------------------

    The proposed rule would require a covered swap entity to exchange 
daily variation margin with a community bank, regardless of whether the 
community bank had material swaps exposure. However, the covered swap 
entity would only be required to collect variation margin from a 
community bank when the amount of both initial margin and variation 
margin required to be collected daily exceeded $650,000. The Agencies 
expect that the vast majority of community banks will have a daily 
margin requirement that is below this amount.
    The Agencies seek comment on the potential impact that this 
proposed rule might have on community banks.

E. The Proposed Rule and Farm Credit System Institutions

    Similar to community banks, the proposed rule will have a minimal 
impact on the Farm Credit System. Currently, no FCS institution, 
including Farmer Mac, engage in swap activity at the level necessary to 
meet the definition of a swap dealer, major swap participant, security-
based swap dealer, or a major security-based swap participant. For this 
reason, no FCS institution, including Farmer Mac, would fall within the 
proposed definition of a covered swap entity and, therefore, become 
directly subject to this rule. Furthermore, an overwhelming majority of 
FCS institutions do not currently engage in non-cleared swaps at or 
near the level that they would have a material swaps exposure. 
Therefore, a majority of FCS institutions would not be required by this 
rule to exchange initial margin with a covered swap entity. For those 
few FCS institutions that currently have a material swaps exposure, 
initial margin exchange would be mandated only when non-cleared swap 
transactions with an individual counterparty and its affiliates exceed 
the $65 million threshold. All FCS institutions, including Farmer Mac, 
are financial end users and, therefore, they must exchange variation 
margin daily once the parties reach the $650,000 minimum transfer 
amount.
    The Agencies also seek specific comments on the potential impact of 
this proposal on FCS institutions.

III. Section by Section Summary of Proposed Rule

A. Section .1: Authority, Purpose, Scope, and 
Compliance Dates

    Sections .1(a)-(c) of the proposal are agency-
specific. Section .1(a) sets out each Agency's 
specific authority, and Sec.  .1(b) describes the 
purpose of the rule, including the specific entities covered by each 
Agency's rule. Section .1(c) of the proposal 
specifies the scope of the transactions to which the margin 
requirements apply. It provides that the margin requirements apply to 
all non-cleared swaps into which a covered swap entity enters. Each 
prudential regulator is proposing rule text for its Agency-specific 
version of Sec.  .1(c) that specifies the entities to 
which that prudential regulator's rule applies. Section 
.1(c) further states that the margin requirements 
apply only to swap and security-based swap transactions that are 
entered into on or after the relevant compliance date set forth in 
Sec.  .1(d). This section also provides that nothing 
in this proposal is intended to prevent, and nothing in this proposal 
is intended to require, a covered swap entity from independently 
collecting margin in amounts greater than are required under this 
proposed rule.
1. Treatment of Swaps With Commercial End User Counterparties
    Following passage of the Dodd-Frank Act, various parties 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 
is neither a swap entity nor a financial end user and engages in swaps 
to hedge commercial risk).\58\ Pursuant to other provisions of the 
Dodd-Frank Act, nonfinancial end users that engage in swaps to hedge 
their commercial risks are exempt from the requirement that all swaps 
designated for clearing by the CFTC or SEC be cleared by a CCP, and, 
therefore they are exempt from the requirement to post initial margin 
and variation margin to the CCP. Commenters to the 2011 proposal argued 
that swaps with commercial end users should also be excluded from the 
scope of margin requirements imposed for non-cleared swaps under 
sections 731 and 764, asserting that commercial firms engaged in 
hedging activities pose a reduced risk to their counterparties and the 
stability of the U.S. financial system and that including these types 
of counterparties in the scope of the proposal would undermine the 
goals of excluding these firms from the clearing requirements.\59\
---------------------------------------------------------------------------

    \58\ 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 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).
    \59\ Statements in the legislative history of sections 731 and 
764 suggest that at least some members of 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 with swap entities. See, e.g., 156 
Cong. Rec. S5904 (daily ed. July 15, 2010) (statement of Sen. 
Lincoln).

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[[Page 57358]]

    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, sections 731 
and 764 also direct the Agencies to 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. Thus, the statute requires the Agencies to take a risk-based 
approach to establishing margin requirements. Further, the Dodd-Frank 
Act does not contain an express exemption for commercial end users from 
the margin requirements of sections 731 and 764 of the Dodd-Frank Act. 
The Agencies note that the application of margin requirements to non-
cleared swaps with nonfinancial end users could be viewed as lessening 
the effectiveness of the clearing requirement exemption for these 
nonfinancial end users.
    The 2011 proposal permitted a covered swap entity to adopt, where 
appropriate, initial and variation margin thresholds below which the 
covered swap entity would not be required to collect initial or 
variation margin from nonfinancial end users. The proposal noted 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 received many comments on this aspect of the 
2011 proposal. In particular, commenters requested that swap 
transactions with nonfinancial end users and a number of other 
counterparties, including sovereigns and multilateral development 
banks, be explicitly excluded from the margin requirements.
    The proposal takes a different approach to nonfinancial end users 
than the 2011 proposal. Like the 2011 proposal, this proposal follows 
the statutory framework and proposes a risk-based approach to imposing 
margin requirements. Unlike the 2011 proposal, this proposal does not 
require that the covered swap entity determine a specific, numerical 
threshold for each nonfinancial end user counterparty. Rather, the 
proposed rule does not require a covered swap entity to collect initial 
margin and variation margin from nonfinancial end users and certain 
other counterparties as a matter of course, but instead requires it to 
collect initial and variation margin at such times and in such forms 
and amounts (if any) as the covered swap entity determines would 
appropriately address the credit risk posed by swaps entered into with 
``other counterparties.'' \60\ The Agencies believe that this approach 
is consistent with current market practice as well as with well-
established internal credit processes and standards of swap entities, 
based on safety and soundness, that require covered swap entities to 
use an integrated approach in evaluating the risk of their 
counterparties in extending credit, including in the form of a swap, 
and manage the overall credit exposure to the counterparty.
---------------------------------------------------------------------------

    \60\ In the case of a nonfinancial end user with a strong credit 
profile, under current market practices, a swap dealer would likely 
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 swap dealer would 
likely make a different credit decision and require the counterparty 
to post margin.
---------------------------------------------------------------------------

    The proposal takes a similar approach to margin requirements for 
transactions between covered swap entities and sovereign entities; 
multilateral development banks; the Bank for International Settlements; 
captive finance companies exempt from clearing pursuant to the Dodd-
Frank Act; and Treasury affiliates exempt from clearing pursuant to the 
Dodd-Frank Act.\61\ The Agencies believe that this approach is 
consistent with the statute, which requires the margin requirements to 
be risk-based, and is appropriate in light of the lower risks that 
these types of counterparties generally pose to the safety and 
soundness of covered swap entities and U.S. financial stability.
---------------------------------------------------------------------------

    \61\ See 7 U.S.C. 2(h)(7)(C)(iii), 7 U.S.C. 2(h)(7)(D) and 15 
U.S.C. 78c-3(g)(4).
---------------------------------------------------------------------------

2. Compliance Dates
    Section .1(d) of the proposal includes a set of 
compliance dates by which covered swap entities must comply with the 
minimum margin requirements for non-cleared swaps. The compliance dates 
of the proposal are consistent with the 2013 international framework. 
The proposed rule would be effective with respect to any swap to which 
a covered swap entity becomes a party on or after the relevant 
compliance date and would continue to apply regardless of future 
changes in the measured swaps exposure of the covered swap entity and 
its affiliates or the counterparty and its affiliates.
    For variation margin, the compliance date is December 1, 2015 for 
all covered swap entities with respect to covered swaps with any 
counterparty. The Agencies believe that the collection of daily 
variation margin is currently a best practice and, as such, current 
swaps business operations for covered swap entities of all sizes will 
be able to achieve compliance with the proposed rule by December 1, 
2015. Therefore, there is no phase-in for the variation margin 
requirements.
    As reflected in the table below, for initial margin, the compliance 
dates range from December 1, 2015 to December 1, 2019 depending on the 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps (``covered swaps'') of the covered swap entity and its 
counterparty for June, July and August of that year.\62\
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    \62\ ``Foreign exchange forward and foreign exchange swap'' is 
defined to mean any foreign exchange forward, as that term is 
defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 
1a(24)), and foreign exchange swap, as that term is defined in 
section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)).

               Compliance Date Schedule for Initial Margin
------------------------------------------------------------------------
          Compliance date                Initial margin requirements
------------------------------------------------------------------------
December 1, 2015..................  Initial margin where both the
                                     covered swap entity combined with
                                     its affiliates and the counterparty
                                     combined with its affiliates have
                                     an average daily aggregate notional
                                     amount of covered swaps for June,
                                     July and August of 2015 that
                                     exceeds $4 trillion.
December 1, 2016..................  Initial margin where both the
                                     covered swap entity combined with
                                     its affiliates and the counterparty
                                     combined with its affiliates have
                                     an average daily aggregate notional
                                     amount of covered swaps for June,
                                     July and August of 2016 that
                                     exceeds $3 trillion.
December 1, 2017..................  Initial margin where both the
                                     covered swap entity combined with
                                     its affiliates and the counterparty
                                     combined with its affiliates have
                                     an average daily aggregate notional
                                     amount of covered swaps for June,
                                     July and August of 2017 that
                                     exceeds $2 trillion.

[[Page 57359]]

 
December 1, 2018..................  Initial margin where both the
                                     covered swap entity combined with
                                     its affiliates and the counterparty
                                     combined with its affiliates have
                                     an average daily aggregate notional
                                     amount of covered swaps for June,
                                     July and August of 2018 that
                                     exceeds $1 trillion.
December 1, 2019..................  Initial margin for any other covered
                                     swap entity with respect to covered
                                     swaps with any other counterparty.
------------------------------------------------------------------------

    The Agencies expect that covered swap entities likely will need to 
make a number of operational and legal changes to their current swaps 
business operations in order to achieve compliance with the proposed 
rule, 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. Accordingly, the 
compliance dates have been structured to ensure that the largest and 
most sophisticated covered swap entities and counterparties that 
present the greatest potential risk to the financial system comply with 
the requirements first. These swap market participants should be able 
to make the required operational and legal changes more rapidly and 
easily than smaller entities that engage in swaps less frequently and 
pose less risk to the financial system.
    Section .1(e) provides that once a covered swap 
entity and its counterparty must comply with the margin requirements 
for non-cleared swaps based on the compliance dates in Sec.  
.1(d), the covered swap entity and its counterparty 
shall remain subject to the margin requirements from that point 
forward. As an example, December 1, 2016 is the relevant compliance 
date where both the covered swap entity combined with its affiliates 
and its counterparty combined with its affiliates have an average 
aggregate daily notional amount of covered swaps that exceeds $3 
trillion. If the notional amount of the swap activity for the covered 
swap entity or the counterparty drops below that threshold amount of 
covered swaps in subsequent years, their swaps would nonetheless remain 
subject to the margin requirements. On December 1, 2019, any covered 
swap entity that did not have an earlier compliance date becomes 
subject to the margin requirements with respect to non-cleared swaps 
entered into with any counterparty.
3. Treatment of Swaps Executed Prior to the Applicable Compliance Date 
under a Netting Agreement
    The Agencies note that a covered swap entity may enter into swaps 
on or after the proposed rule's compliance date pursuant to the same 
master netting agreement that governs existing swaps entered into with 
a counterparty prior to the compliance date. As discussed below, the 
proposed rule permits a covered swap entity to (i) calculate initial 
margin requirements for swaps under an eligible master netting 
agreement (``EMNA'') with the counterparty on a portfolio basis in 
certain circumstances, if it does so using an initial margin model; and 
(ii) calculate variation margin requirements under the proposed rule on 
an aggregate, net basis under an EMNA with the counterparty. Applying 
the proposed rule in such a way would, in some cases, have the effect 
of applying it retroactively to swaps entered into prior to the 
compliance date under the EMNA. The Agencies expect that the covered 
swap entity will comply with the margin requirements with respect to 
all swaps governed by an EMNA, regardless of the date on which they 
were entered into, consistent with current industry practice.\63\ A 
covered swap entity would need to enter into a separate master netting 
agreement for swaps entered into after the proposed rule's compliance 
date in order to exclude swaps entered into with a counterparty prior 
to the compliance date.
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    \63\ See proposed rule Sec. Sec.  .4(d) and 
.8(b).
---------------------------------------------------------------------------

4. Non-Cleared Swaps Between Covered Swap Entities and Their Affiliates
    The proposed rule prescribes margin requirements on all non-cleared 
swaps between a covered swap entity and its counterparties. In 
particular, the proposal generally would cover swaps between banks that 
are covered swap entities and their affiliates that are financial end 
users, including affiliates that are subsidiaries of a bank, such as 
operating subsidiaries, Edge Act subsidiaries, agreement corporation 
subsidiaries, financial subsidiaries, and lower-tier subsidiaries of 
such subsidiaries. The Agencies note that other applicable laws require 
transactions between banks and their affiliates to be on an arm's 
length basis. In particular, section 23B of the Federal Reserve Act 
provides that many transactions between a bank and its affiliates must 
be on terms and under circumstances, including credit standards, that 
are substantially the same or at least as favorable to the bank as 
those prevailing at the time for comparable transactions with or 
involving nonaffiliated companies.\64\ The requirements of section 23B 
generally would mean that a bank engaging in a swap with an affiliate 
should do so on the same terms (including the posting and collecting of 
margin) that would prevail in a swap between the bank and a 
nonaffiliated company. Since the proposed rule will apply to a swap 
between a bank and a nonaffiliated company, it will also apply to a 
swap between a bank and an affiliate.
---------------------------------------------------------------------------

    \64\ 12 U.S.C. 371c-1(a).
---------------------------------------------------------------------------

    While section 23B applies to transactions between a bank and its 
financial subsidiary, it does not apply to transactions between a bank 
and other subsidiaries, such as an operating subsidiary, an Edge Act 
subsidiary, or an agreement corporation subsidiary. The proposed rule 
does not exempt a bank's swaps with these affiliates and would 
therefore impose margin requirements on all swaps between a bank and a 
subsidiary, including a subsidiary that is not covered by section 23B.

B. Section .2: Definitions

    Section .2 of the 2011 proposal defined its key 
terms. In particular, the 2011 proposal defined the four types of swap 
counterparties that formed the basis of the 2011 proposal's risk-based 
approach to margin requirements. Section .2 
also provided other key operative terms needed to calculate the amount 
of initial and variation margin required under other sections of the 
2011 proposal.

[[Page 57360]]

1. Overview of 2011 Proposal and Comments on Swap Counterparty 
Definitions
    The four types of counterparties defined in the 2011 proposal were 
(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. The 2011 proposal defined ``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.\65\
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    \65\ See 2011 proposal Sec.  .2(y) (2011).
---------------------------------------------------------------------------

    Section .2 of the 2011 proposal defined a 
financial end user largely based on the definition of a ``financial 
entity'' that is ineligible for the exemption from the mandatory 
clearing requirements of sections 723 and 763 of the Dodd-Frank Act, 
and also included foreign governments.\66\ As noted above, the 2011 
proposal also distinguished between margin requirements for high-risk 
and low-risk financial end users. Section .2 of the 
2011 proposal defined a financial end user counterparty as a low-risk 
financial end user only if (i) its swaps fall below a specified 
``significant swaps exposure'' threshold; (ii) it predominantly uses 
swaps to hedge or mitigate the risks of its business activities; and 
(iii) it is subject to capital requirements established by a prudential 
regulator or state insurance regulator. The 2011 proposal defined a 
nonfinancial end user as any counterparty that is an end user but is 
not a financial end user.\67\
---------------------------------------------------------------------------

    \66\ See 7 U.S.C. 2(h)(7); 15 U.S.C. 78c-3(g).
    \67\ See 2011 proposal Sec.  .2(r) (2011).
---------------------------------------------------------------------------

    The Agencies requested comment on whether the 2011 proposal's 
categorization of various types of counterparties by risk, and the key 
definitions used to implement this risk-based approach, were 
appropriate, or whether alternative approaches or definitions would 
better reflect the purposes of sections 731 and 764 of the Dodd-Frank 
Act. As discussed above, many commenters argued that nonfinancial end 
users should not be subject to the margin requirements and urged that 
the language and intent of the statute did not require the imposition 
of margin on nonfinancial end users.
    Many commenters also argued that particular types of entities 
should either be excluded from the term financial end user or be 
classified as a low-risk financial end user instead of a high-risk 
financial end user.\68\ In particular, commenters argued that the 
following entities should be excluded from the definition of financial 
end user: (i) Foreign sovereigns; (ii) states and municipalities; (iii) 
multilateral development banks; (iv) captive finance companies; (v) 
Treasury affiliates; (vi) cooperatives exempt from clearing; (vii) 
pension plans; (viii) payment card networks; and (ix) special purpose 
vehicles. A few commenters contended that small financial end users 
should be treated as nonfinancial end users because these entities use 
swaps mostly to hedge risk.
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    \68\ As described further below, the proposal does not 
distinguish between high-risk and low-risk financial end users in 
this manner.
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2. 2014 Proposal for Swap Counterparty Definitions
    Section .2 of the proposal defines key terms used 
in the proposed rule, including the types of counterparties that form 
the basis of the proposal's risk-based approach to margin requirements 
and other key terms needed to calculate the required amount of initial 
margin and variation margin.\69\ As noted above, this proposal 
distinguishes among four separate types of counterparties: \70\ (i) 
Counterparties that are themselves swap entities; (ii) counterparties 
that are financial end users with a material swaps exposure; (iii) 
counterparties that are financial end users without a material swaps 
exposure; and (iv) other counterparties, including nonfinancial end 
users, sovereigns, and multilateral development banks. Below is a 
general description of the significant terms defined in Sec.  
.2.\71\
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    \69\ Initial margin means the collateral as calculated in 
accordance with Sec.  .8 that is posted or 
collected in connection with a non-cleared swap. See proposed rule 
Sec.  .2; see also proposed rule Sec.  
.3 (describing initial margin requirements). 
Variation margin means a payment by one party to its counterparty to 
meet performance of its obligations under one or more non-cleared 
swaps between the parties as a result of a change in value of such 
obligations since the last time such payment was made. See proposed 
rule Sec.  .2; see also proposed rule Sec.  
.4 (describing variation margin requirements).
    \70\ Counterparty is defined to mean, with respect to any non-
cleared swap or non-cleared security-based swap to which a covered 
swap entity is a party, each other party to such non-cleared swap or 
non-cleared security-based swap. 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)) and 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. Clearing agency is defined to have 
the meaning specified in section 3(a)(2) of the Securities Exchange 
Act (15 U.S.C. 78c(a)(23)) and derivatives clearing organization is 
defined to have the meaning specified in section 1a(15) of the 
Commodity Exchange Act (7 U.S.C. 1a(15)). See proposed rule Sec.  
.2.
    \71\ The term ``nonfinancial end user'' is not used in the 
proposal. Nonfinancial end users would be treated as ``other 
counterparties'' in the proposal. See proposed rule Sec.  
.3(d) & .4(c).
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a. Swap Entity
    Similar to the 2011 proposal, this proposal defines ``swap entity'' 
by reference to the Securities Exchange Act and the Commodity Exchange 
Act to mean a security-based swap dealer, a major security-based swap 
participant, a swap dealer, or a major swap participant.
b. Financial End User
    The proposal's definition of financial end user takes a different 
approach than the 2011 proposal, which, as noted above, was based on 
the definition of a ``financial entity'' that is ineligible for the 
exemption from mandatory clearing requirements of sections 723 and 763 
of the Dodd-Frank Act. In order to provide certainty and clarity to 
counterparties as to whether they would be financial end users for 
purposes of this proposal, the financial end user definition provides a 
list of entities that would be financial end users as well as a list of 
entities excluded from the definition. This approach would mean that 
covered swap entities would not need to make a determination regarding 
whether their counterparties are predominantly engaged in activities 
that are financial in nature, as defined in section 4(k) of the Bank 
Holding Company Act of 1956, as amended (the ``BHC Act'').\72\ In 
contrast to the 2011 proposal, the Agencies now are proposing to rely, 
to the greatest extent possible, on the counterparty's legal status as 
a regulated financial entity.
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    \72\ The financial entity definition in the 2011 proposal 
includes 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 BHC Act. See 7 U.S.C. 
2(h)(7); 15 U.S.C. 78c-3(g). The Agencies requested comment on how 
covered swap entities should make this determination, and whether 
they should use an approach similar to that developed by the Board 
for purposes of Title I of the Dodd-Frank Act. See 68 FR 20756 
(April 5, 2013). Section 4(k) of the BHC Act includes conditions 
that do not define whether an activity is itself financial but were 
imposed on bank holding companies to ensure that the activity is 
conducted by bank holding companies in a safe and sound manner or to 
comply with another provision of law. Staff of the Agencies 
recognize that by simply choosing not to comply with the conditions 
imposed on the manner in which those activities must be conducted by 
bank holding companies, a firm could avoid being considered to be 
engaged in activities that are financial in nature.
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    Under the proposal, financial end user includes a counterparty that 
is not a swap entity but is:
     A bank holding company or an affiliate thereof; a savings 
and loan holding company; a nonbank financial institution supervised by 
the Board of Governors of the Federal Reserve System under Title I of 
the Dodd-Frank

[[Page 57361]]

Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323);
     A depository institution; a foreign bank; a Federal credit 
union, State credit union as defined in section 2 of the Federal Credit 
Union Act (12 U.S.C. 1752(1) & (6)); an institution that functions 
solely in a trust or fiduciary capacity as described in section 
2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); 
an industrial loan company, an industrial bank, or other similar 
institution described in section 2(c)(2)(H) of the Bank Holding Company 
Act (12 U.S.C. 1841(c)(2)(H));
     An entity that is state-licensed or registered as a credit 
or lending entity, including a finance company; money lender; 
installment lender; consumer lender or lending company; mortgage 
lender, broker, or bank; motor vehicle title pledge lender; payday or 
deferred deposit lender; premium finance company; commercial finance or 
lending company; or commercial mortgage company; but excluding entities 
registered or licensed solely on account of financing the entity's 
direct sales of goods or services to customers;
     A money services business, including a check casher; money 
transmitter; currency dealer or exchange; or money order or traveler's 
check issuer;
     A 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)) and any entity for which the Federal Housing 
Finance Agency or its successor is the primary federal regulator;
     Any institution chartered and regulated by the Farm Credit 
Administration in accordance with the Farm Credit Act of 1971, as 
amended, 12 U.S.C. 2001 et seq.;
     A securities holding company; a broker or dealer; an 
investment adviser as defined in section 202(a) of the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company 
registered with the SEC under the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as 
a business development company pursuant to section 54(a) of the 
Investment Company (15 U.S.C. 80a-53);
     A private fund as defined in section 202(a) of the 
Investment Advisers Act of 1940 (15 U.S.C. 80-b-2(a)); an entity that 
would be an investment company under section 3 of the Investment 
Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an 
entity that is deemed not to be an investment company under section 3 
of the Investment Company Act of 1940 pursuant to Investment Company 
Act Rule 3a-7 of the Securities and Exchange Commission (17 CFR 270.3a-
7);
     A commodity pool, a commodity pool operator, or a 
commodity trading advisor as defined in, respectively, sections 1a(10), 
1a(11), and 1a(12) of the Commodity Exchange Act (7 U.S.C. 1a(10), 7 
U.S.C. 1a(11), 7 U.S.C. 1a(12)); or a futures commission merchant;
     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);
     An entity that is organized as an insurance company, 
primarily engaged in writing insurance or reinsuring risks underwritten 
by insurance companies, or is subject to supervision as such by a State 
insurance regulator or foreign insurance regulator;
     An entity that is, or holds itself out as being, an entity 
or arrangement that raises money from investors primarily for the 
purpose of investing in loans, securities, swaps, funds or other assets 
for resale or other disposition or otherwise trading in loans, 
securities, swaps, funds or other assets;
     An entity that would be a financial end user as described 
above or a swap entity, if it were organized under the laws of the 
United States or any State thereof; or
     Notwithstanding the specified exclusions described below, 
any other entity that [Agency] has determined should be treated as a 
financial end user.
    In developing this definition of financial end user, the Agencies 
sought to provide certainty and clarity to covered swap entities and 
their counterparties regarding whether particular counterparties would 
qualify as financial end users and be subject to the margin 
requirements of the proposed rule. The Agencies tried to strike a 
balance between the desire to capture all financial counterparties, 
without being overly broad and capturing commercial firms and 
sovereigns. Financial firms present a higher level of risk than other 
types of counterparties because the profitability and viability of 
financial firms is more tightly linked to the health of the financial 
system than other types of counterparties. 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. In case the list of financial end 
users in the proposal does not capture a particular entity, the last 
part of this definition would allow an Agency to require a covered swap 
entity to treat a counterparty as a financial end user for margin 
purposes, where appropriate for safety and soundness purposes or to 
address systemic risk.
    In developing the list of financial entities, the Agencies sought 
to include entities subject to Federal statutes that impose 
registration or chartering requirements on entities that engage in 
specified financial activities, such as deposit taking and lending, 
securities and swaps dealing, or investment advisory activities; as 
well as asset management and securitization entities. For example, 
certain securities investment funds as well as securitization vehicles 
are covered, to the extent those entities would qualify as private 
funds defined in section 202(a) of the Investment Advisers Act of 1940, 
as amended (the ``Advisers Act''). In addition, certain real estate 
investment companies would be included as financial end users as 
entities that would be investment companies under section 3 of the 
Investment Company Act of 1940, as amended (the ``Investment Company 
Act''), but for section 3(c)(5)(C), and certain other securitization 
vehicles would be included as entities deemed not to be investment 
companies pursuant to Rule 3a-7 of the Investment Company Act.
    Because Federal law largely looks to the States for the regulation 
of the business of insurance, the proposed definition broadly includes 
entities organized as insurance companies or supervised as such by a 
State insurance regulator. This element of the proposed definition 
would extend to reinsurance and monoline insurance firms, as well as 
insurance firms supervised by a foreign insurance regulator.
    The Agencies are also proposing to cover, as financial end users, 
the broad variety and number of nonbank lending and retail payment 
firms that operate in the market. To this end, the Agencies are 
proposing to include State-licensed or registered credit or lending 
entities and money services businesses, under proposed regulatory 
language incorporating an inclusive list of the types of firms subject 
to State law.\73\ However, the Agencies recognize that the licensing of 
nonbank lenders in some states extends to commercial firms

[[Page 57362]]

that provide credit to the firm's customers in the ordinary course of 
business. Accordingly, the Agencies are proposing to exclude an entity 
registered or licensed solely on account of financing the entity's 
direct sales of goods or services to customers. The Agencies request 
comment on whether this aspect of the proposed rule adequately 
maintains a distinction between financial end users and commercial end 
users.
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    \73\ The Agencies expect that state-chartered financial 
cooperatives that provide financial services to their members, such 
as lending to their members and entering into swaps in connection 
with those loans, would be treated as financial end users, pursuant 
to this aspect of the proposed rule's coverage of credit or lending 
entities.
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    Under the proposed rule, those cooperatives that are financial 
institutions, such as credit unions, FCS banks and associations, and 
other financial cooperatives \74\ are financial end users because their 
sole business is lending and providing other financial services to 
their members, including engaging in swaps in connection with such 
loans.\75\ Cooperatives that are financial end users may qualify for an 
exemption from clearing,\76\ and therefore, they may enter into non-
cleared swaps with covered swap entities that are subject to the 
proposed rule.
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    \74\ The National Rural Utility Cooperative Finance Cooperation 
is an example of another financial cooperative.
    \75\ Most cooperatives are producer, consumer, or supply 
cooperatives and, therefore, they are not financial end users. 
However, many of these cooperatives have financing subsidiaries and 
affiliates. These financing subsidiaries and affiliates would not be 
financial end users under this proposal if they qualify for an 
exemption under sections 2(h)(7)(C)(iii) or 2(h)(7)(D) of the 
Commodity Exchange Act or section 3C(g)(4) of the Securities 
Exchange Act of 1934.
    \76\ Section 2(h)(7)(c)(ii) of the Commodity Exchange Act and 
section 3C(g)(4) of the Securities Exchange Act of 1934 authorize 
the CFTC and the SEC, respectively, to exempt small depository 
institutions, small Farm Credit System institutions, and small 
credit unions with total assets of $10 billion or less from the 
mandatory clearing requirements for swaps and security-based swaps. 
See 7 U.S.C. 2(h)(7) and 15 U.S.C. 78c-3(g). Additionally, the CFTC, 
pursuant to its authority under section 2(h)(1)(A) of the Commodity 
Exchange Act, enacted 17 CFR part 50, subpart C, section 50.51, 
which allows cooperative financial entities, including those with 
total assets in excess of $10 billion, to elect an exemption from 
mandatory clearing of swaps that: (1) They enter into in connection 
with originating loans for their members; or (2) hedge or mitigate 
commercial risk related to loans or swaps with their members.
---------------------------------------------------------------------------

    The Agencies remain concerned, however, that now or in the future, 
one or more types of financial entities might escape classification 
under the specific Federal or State regulatory regimes included in the 
proposed definition of a financial end user. The Agencies have 
accordingly included two additional prongs in the definition. First, 
the Agencies have included language that would cover an entity that is, 
or holds itself out as being, an entity or arrangement that raises 
money from investors primarily for the purpose of investing in loans, 
securities, swaps, funds or other assets for resale or other 
disposition or otherwise trading in loans, securities, swaps, funds or 
other assets. The Agencies request comment on the extent to which there 
are (or may be in the future) pooled investment vehicles that are not 
captured by the other prongs of the definition (such as the provisions 
covering private funds under the Advisers Act or commodity pools under 
the Commodity Exchange Act). The Agencies also request comment on 
whether this aspect of the definition of financial end user provides 
sufficiently clear guidance to covered swap entities and market 
participants as to its intended scope, and whether it adequately 
maintains a distinction between financial end users and commercial end 
users.
    Second, as previously explained, the proposed rule would allow an 
Agency to require a covered swap entity to treat an entity as a 
financial end user for margin purposes, as appropriate for safety and 
soundness purposes, or to mitigate systemic risks. In such case, 
consistent with the Agency's supervisory procedures, the Agency that is 
the covered swap entity's prudential regulator would notify the covered 
swap entity in writing of the regulator's intention to require 
treatment of the counterparty as a financial end user, and the date by 
which such treatment is to be implemented.\77\
---------------------------------------------------------------------------

    \77\ The Agencies' procedures would generally provide an 
adequate opportunity for the covered swap entity to raise objections 
to the Agency's proposed action and for the Agency to respond.
---------------------------------------------------------------------------

    To address the classification of foreign entities as financial end 
users, the Agencies are proposing to require the covered swap entity to 
determine whether a foreign counterparty would fall within another 
prong of the financial end user definition if the foreign entity was 
organized under the laws of the United States or any State. The 
Agencies recognize that this approach would impose upon covered swap 
entities the difficulties associated with analyzing a foreign 
counterparty's business activities in light of a broad array of U.S. 
regulatory requirements. The alternative, however, would require 
covered swap entities to gather a foreign counterparty's financial 
reporting data and determine the relative amount of enumerated 
financial activities in which the counterparty is engaged over a 
rolling period.\78\ The Agencies request comment on whether some other 
method or approach would adequately assure that the rule's objectives 
with respect to covered swap entity safety and soundness and reductions 
of systemic risk can be achieved, in a fashion that can be more readily 
operationalized by covered swap entities.
---------------------------------------------------------------------------

    \78\ See, e.g., 68 FR 20756 (April 5, 2013).
---------------------------------------------------------------------------

    Unlike the 2011 proposal, the proposal excludes certain types of 
counterparties from the definition of financial end user. In 
particular, the proposal states that the term ``financial end user'' 
does not generally include any counterparty that is:
     A sovereign entity; \79\
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    \79\ Sovereign entity is defined to mean a central government 
(including the U.S. government) or an agency, department, or central 
bank of a central government. See proposed rule Sec.  .2. A 
sovereign entity would include the European Central Bank for 
purposes of this exclusion.
---------------------------------------------------------------------------

     A multilateral development bank; \80\
---------------------------------------------------------------------------

    \80\ Multilateral development bank is defined to mean the 
International Bank for Reconstruction and Development, the 
Multilateral Investment Guarantee Agency, the International Finance 
Corporation, the Inter-American Development Bank, the Asian 
Development Bank, the African Development Bank, the European Bank 
for Reconstruction and Development, the European Investment Bank, 
the European Investment Fund, the Nordic Investment Bank, the 
Caribbean Development Bank, the Islamic Development Bank, the 
Council of Europe Development Bank, and any other entity that 
provides financing for national or regional development in which the 
U.S. government is a shareholder or contributing member or which the 
[AGENCY] determines poses comparable credit risk. See proposed rule 
Sec.  .2.
---------------------------------------------------------------------------

     The Bank for International Settlements;
     A captive finance company that qualifies for the exemption 
from clearing under section 2(h)(7)(C)(iii) of the Commodity Exchange 
Act and implementing regulations; or
     A person that qualifies for the affiliate exemption from 
clearing pursuant to section 2(h)(7)(D) of the Commodity Exchange Act 
or section 3C(g)(4) of the Securities Exchange Act and implementing 
regulations.
    The Agencies note the exclusion for sovereign entities, 
multilateral development banks and the Bank for International 
Settlements is generally consistent with the 2013 international 
framework which recommended that margin requirements not apply to 
sovereigns, central banks, multilateral development banks or the Bank 
for International Settlements. The last two categories that are 
excluded from the financial end user definition were excluded by Title 
VII of the Dodd-Frank Act from the definition of financial entity 
subject to mandatory clearing. The Agencies also believe that this 
approach is appropriate as these entities generally pose less systemic 
risk to the financial system in addition to posing less counterparty 
risk to a swap entity. Thus, the Agencies believe that application of 
the margin requirements

[[Page 57363]]

to swaps with these counterparties is not necessary to achieve the 
objectives of this rule.
    The Agencies note that States would not be excluded from the 
definition of financial end user, as the term ``sovereign entity'' 
includes only central governments. The categorization of a State or 
particular part of a State as a financial end user depends on whether 
that part of the State is otherwise captured by the definition of 
financial end user. For example, a State entity that is a 
``governmental plan'' under the Employment Retirement Income Security 
Act of 1974, as amended, would meet the definition of financial end 
user.
    The Agencies believe that the proposal addresses many of the 
commenters' concerns about the definition of ``financial end user'' 
contained in the 2011 proposal. Entities that are neither financial end 
users nor swap entities are treated as ``other counterparties'' in this 
proposal.\81\ The Agencies seek comment on all aspects of the financial 
end user definition including whether the definition has succeeded in 
capturing all entities that should be treated as financial end users. 
The Agencies request comment on whether there are additional entities 
that should be included as financial end users and, if so, how those 
entities should be defined. Further, the Agencies also request comment 
on whether there are additional entities that should be excluded from 
the definition of financial end user and why those particular entities 
should be excluded. The Agencies also request comment on whether 
another approach to defining financial end user (e.g., basing the 
financial end user definition on the financial entity definition as in 
the 2011 proposal) would provide more appropriate coverage and clarity, 
and whether covered swap entities could operationalize such an approach 
as part of their regular procedures for taking on new counterparties.
---------------------------------------------------------------------------

    \81\ As is further discussed below, these entities excluded from 
the definition of ``financial end users,'' as well as nonfinancial 
counterparties, are treated as ``other counterparties'' with respect 
to the proposed variation margin requirements. With respect to the 
proposed initial margin requirements, the ``other counterparties'' 
category also includes financial end users that do not have a 
material swaps exposure.
---------------------------------------------------------------------------

c. Material Swaps Exposure
    The proposal differs from the 2011 proposal by distinguishing 
between swaps with financial end user counterparties that have a 
material swaps exposure and swaps with financial end user 
counterparties that do not have a material swaps exposure. ``Material 
swaps exposure'' for an entity is defined to mean that the entity and 
its affiliates have an average daily aggregate notional amount of non-
cleared swaps, non-cleared security-based swaps, foreign exchange 
forwards and foreign exchange swaps with all counterparties for June, 
July and August of the previous year that exceeds $3 billion, where 
such amount is calculated only for business days. The Agencies believe 
that using the average daily aggregate notional amount during June, 
July, and August of the previous year, instead of a single as-of date, 
is appropriate to gather a more comprehensive assessment of the 
financial end user's participation in the swaps market, and address the 
possibility that a market participant might ``window dress'' its 
exposure on an as-of date such as year-end, in order to avoid the 
Agencies' margin requirements. Material swaps exposure would be 
calculated based on the previous year. For example, on January 1, 2015, 
an entity would determine whether it had a material swaps exposure in 
June, July and August of 2014 that exceeded $3 billion.\82\
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    \82\ As a specific example of the calculation for material swaps 
exposure, consider a financial end user (together with its 
affiliates) with a portfolio consisting of two non-cleared swaps 
(e.g., an equity swap, an interest rate swap) and one non-cleared 
security-based credit swap. Suppose that the notional value of each 
swap is exactly $10 billion on each business day of June, July, and 
August of 2015. Furthermore, suppose that a foreign exchange forward 
is added to the entity's portfolio at the end of the day on July 31, 
2015, and that its notional value is $10 billion on every business 
day of August 2015. On each business day of June and July 2015, the 
aggregate notional amount of non-cleared swaps, security-based swaps 
and foreign exchange forwards and swaps is $30 billion. Beginning on 
August 1, 2015 the aggregate notional amount of non-cleared swaps, 
security-based swaps and foreign exchange forwards and swaps is $40 
billion. The daily average aggregate notional value for June, July 
and August of 2015 is then (22 x $30 billion +23 x $30 billion + 21 
x $40 billion)/(22 + 23 + 21) = $33.18 billion, in which case this 
entity would be considered to have a material swaps exposure for 
every date in 2016.
---------------------------------------------------------------------------

d. Other Definitions
    The proposal also defines a number of other terms that were not 
defined in the 2011 proposal. The Agencies believe that these 
definitions will help provide additional clarity regarding the 
application of the margin requirements contained in the proposed rule.
i. Affiliate
    The proposal defines ``affiliate'' to mean any company that 
controls, is controlled by, or is under common control with another 
company. This definition of affiliate is the same as that in the BHC 
Act and consequently should be familiar to market participants.\83\ The 
proposal also defines subsidiary to mean a company that is controlled 
by another company, which is similar to the definition in the BHC Act 
and the Board's Regulation Y.\84\
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    \83\ See section 2(k) of the Bank Holding Company Act, 12 U.S.C. 
1841(k).
    \84\ See section 2(d) of the Bank Holding Company Act, 12 U.S.C. 
1841(d); 12 CFR 225.2(o).
---------------------------------------------------------------------------

    The term affiliate is used in the definition of initial margin 
threshold amount which means a credit exposure of $65 million that is 
applicable to non-cleared swaps between a covered swap entity and its 
affiliates with a counterparty and its affiliates. The inclusion of 
affiliates in this definition is meant to make clear that the initial 
margin threshold amount applies to an entity and its affiliates. 
Similarly, the term ``affiliate'' is also used in the definition of 
``material swaps exposure,'' as material swaps exposure takes into 
account the exposures of an entity and its affiliates.
ii. Control
    The definitions of ``affiliate'' and ``subsidiary'' use the term 
``control,'' which is also a defined term in the proposal.\85\ The 
proposal provides that control of another company means: (i) Ownership, 
control, or power to vote 25 percent or more of a class of voting 
securities of the company, directly or indirectly or acting through one 
or more other persons; (ii) ownership or control of 25 percent or more 
of the total equity of the company, directly or indirectly or acting 
through one or more other persons; or (iii) control in any manner of 
the election of a majority of the directors or trustees of the company. 
This definition of control is similar to the definition under the BHC 
Act and consequently should be familiar to many market 
participants.\86\
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    \85\ The term subsidiary is used in Sec.  .9 
to describe certain entities that are eligible for substituted 
compliance.
    \86\ See, e.g., section 2(a)(2) of the Bank Holding Company Act, 
12 U.S.C. 1841(a)(2).
---------------------------------------------------------------------------

    The Agencies seek comment on the definition of control in this 
proposal. In particular, the Agencies request comment on this 
definition of control as it relates to advised and sponsored funds and 
sponsored securitization vehicles. The Agencies believe that advised 
and sponsored funds and sponsored securitization vehicles would not be 
affiliates of the investment adviser or sponsor unless the adviser or 
sponsor meets the definition of control (e.g., owning 25 percent or 
more of the voting securities or total equity or controlling the 
election of the majority

[[Page 57364]]

of the directors or trustees). The 2013 international framework states 
that investment funds that are managed by an investment adviser are 
considered distinct entities that are treated separately when applying 
the threshold as long as the funds are distinct legal entities that are 
not collateralized by or otherwise guaranteed or supported by other 
investment funds or the investment adviser in the event of fund 
insolvency or bankruptcy. The intent of the Agencies is to follow the 
approach of the 2013 international framework for investment funds and 
securitization vehicles, including with respect to guarantees and other 
collateral support arrangements. The Agencies request comment on 
whether the proposal's definition of control would allow investment 
funds and securitization vehicles to be treated separately in the 
manner described in the 2013 international framework.
iii. Cross-Currency Swap
    The proposal defines a cross-currency swap as a swap in which one 
party exchanges with another party principal and interest rate payments 
in one currency for principal and interest rate payments in another 
currency, and the exchange of principal occurs upon the inception of 
the swap, with a reversal of the exchange at a later date that is 
agreed upon at the inception of the swap. As explained in greater 
detail below, the proposal provides that the proposed initial margin 
requirements for cross-currency swaps do not apply to the portion of 
the swap that is the fixed exchange of principal. This treatment of 
cross-currency swaps is consistent with the treatment recommended in 
the 2013 international framework. This treatment of cross-currency 
swaps also aligns with the determination by the Secretary of the 
Treasury to exempt foreign exchange swaps from the definition of swap 
as explained further below. Non-deliverable forwards would not be 
treated as cross-currency swaps for purposes of the proposal, and thus 
would be subject to the margin requirements set forth under the 
proposed rule.
iv. Major Currencies
    Major currencies is defined to mean: (i) United States Dollar 
(USD); (ii) Canadian Dollar (CAD); (iii) Euro (EUR); (iv) United 
Kingdom Pound (GBP); (v) Japanese Yen (JPY); (vi) Swiss Franc (CHF); 
(vii) New Zealand Dollar (NZD); (viii) Australian Dollar (AUD); (ix) 
Swedish Kronor (SEK); (x) Danish Kroner (DKK); (xi) Norwegian Krone 
(NOK); and (xii) any other currency as determined by the relevant 
Agency.\87\ Major currencies are eligible collateral for initial margin 
as described further in Sec.  .6.
---------------------------------------------------------------------------

    \87\ See the CFTC's regulation of Off-Exchange Retail Foreign 
Exchange Transactions and Intermediaries for this list of major 
currencies, 75 FR 55410 at 55412 (September 10, 2010).
---------------------------------------------------------------------------

v. Prudential Regulator
    The proposal defines prudential regulator to have the meaning 
specified in section 1a(39) of the Commodity Exchange Act.\88\ Section 
1a(39) of the Commodity 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 entities 
for which each of the Agencies is the prudential regulator is set out 
in Sec.  .1 of each Agency's rule text.
---------------------------------------------------------------------------

    \88\ See 7 U.S.C. 1a(39).
---------------------------------------------------------------------------

vi. Eligible Master Netting Agreement
    Qualifying master netting agreement (``QMNA'') was defined in the 
2011 proposal, based on the definition of the term in the Federal 
banking agencies' risk-based capital rules applicable to derivatives 
positions held by insured depository institutions and bank holding 
companies.\89\ A few commenters expressed concern with the 2011 
proposal's definition of QMNA. These commenters argued that a 
requirement providing that any exercise of rights under the agreement 
will not be stayed or avoided under applicable law and would not allow 
for rights to be stayed as required under certain bankruptcy, 
receivership or liquidation regimes.
---------------------------------------------------------------------------

    \89\ See 76 FR 27564 at 27576 (May 11, 2011).
---------------------------------------------------------------------------

    Since the 2011 proposal, the Federal banking agencies have modified 
the definition of QMNA used in their risk-based capital rules.\90\ The 
proposal contains a revised definition based on the new QMNA definition 
in the risk-based capital rules. However, the proposal uses the term 
``eligible master netting agreement'' (``EMNA'') to avoid confusion 
with and distinguish from the term used under the capital rules. The 
Agencies believe that the modifications to the definition address the 
concerns raised by commenters.
---------------------------------------------------------------------------

    \90\ See 12 CFR part 3.2, 12 CFR part 217.2, and 12 CFR part 
324.2.
---------------------------------------------------------------------------

    The proposal defines EMNA as any written, legally enforceable 
netting agreement that creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default (including receivership, insolvency, liquidation, or similar 
proceeding) provided that certain conditions are met. These conditions 
include requirements with respect to the covered swap entity's right to 
terminate the contract and liquidate collateral and certain standards 
with respect to legal review of the agreement to ensure it meets the 
criteria in the definition. The legal review must be sufficient so that 
the covered swap entity may conclude with a well-founded basis that, 
among other things, the contract would be found legal, binding, and 
enforceable under the law of the relevant jurisdiction and that the 
contract meets the other requirements of the definition.
    The Agencies believe that the revised EMNA definition addresses 
commenters' concerns regarding certain insolvency regimes where rights 
can be stayed. In particular, the second criteria has been modified to 
provide that any exercise of rights under the agreement will not be 
stayed or avoided under applicable law in the relevant jurisdictions, 
other than (i) in receivership, conservatorship, or resolution by an 
Agency exercising its statutory authority, or similar laws in foreign 
jurisdictions that provide for limited stays to facilitate the orderly 
resolution of financial institutions, or (ii) in a contractual 
agreement subject by its terms to any of the foregoing laws.\91\
---------------------------------------------------------------------------

    \91\ See proposed rule Sec.  .2.
---------------------------------------------------------------------------

    The Agencies request comment on whether the proposed definition of 
EMNA provides sufficient clarity regarding the laws of foreign 
jurisdictions that provide for limited stays to facilitate the orderly 
resolution of financial institutions or whether additional specificity 
should be provided regarding additional factors required in order for a 
foreign law to qualify under the EMNA definition. For example, should 
the definition include a limitation of the duration of the limited 
stay? If so, what should such limitation be (e.g., one or two-business 
days)? The Agencies also seek comment regarding whether the provision 
for a contractual agreement made subject by its terms to limited stays 
under resolution regimes adequately encompasses potential contractual 
agreements of this nature or whether this provision needs to be 
broadened, limited, clarified or modified in some manner.
vii. State
    State is defined in the proposal to mean any State, commonwealth, 
territory, or possession of the United States, the District of 
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the 
Northern Mariana

[[Page 57365]]

Islands, American Samoa, Guam, or the United States Virgin Islands. The 
purpose of this definition is to make clear these regions would be 
included as States for purposes of Sec.  .9 that 
addresses the cross-border application of margin requirements.
viii. U.S. Government-Sponsored Enterprises
    The 2011 proposal did not specifically define U.S. Government-
sponsored enterprises, although it allowed the securities of these 
entities to be pledged as eligible collateral. Under the 2014 proposal, 
U.S. Government-sponsored enterprise means an entity established or 
chartered by the U.S. government to serve public purposes specified by 
Federal statute, but whose debt obligations are not explicitly 
guaranteed by the full faith and credit of the United States. U.S. 
Government-sponsored enterprises currently include Farm Credit System 
banks, associations, and service corporations, Farmer Mac, the Federal 
Home Loan Banks, Fannie Mae, Freddie Mac, the Financing Corporation, 
and the Resolution Funding Corporation. In the future, Congress may 
create new U.S Government-sponsored enterprises, or terminate the 
status of existing U.S. Government-sponsored entities. This term is 
used in the definition of eligible collateral as described further in 
Sec.  .6.
ix. Entity Definitions
    The Agencies are including a number of other definitions including 
``bank holding company,'' ``broker,'' ``dealer,'' ``depository 
institution,'' ``foreign bank,'' ``futures commission merchant,'' 
``savings and loan holding company,'' and ``securities holding 
company'' that are defined by cross-reference to the relevant statute. 
Many of these terms are also used in the definition of ``financial end 
user'' or ``market intermediary,'' which is defined to mean a 
securities holding company, a broker, a dealer, a futures commission 
merchant, a swap dealer, or a security-based swap dealer.

C. Section .3: Initial Margin

1. Overview of 2011 Proposal and Public Comments
    Section .3 of the 2011 proposal set out the 
initial margin amounts for a covered swap entity to collect from its 
counterparty for its non-cleared swaps. The 2011 proposal specified, 
among other things, the manner in which a covered swap entity must 
calculate the initial margin requirements applicable to its non-cleared 
swaps. These initial margin requirements applied only to the amount of 
initial margin that a covered swap entity would be required to collect 
from its counterparties. In general, these requirements did not address 
whether, or in what amounts, a covered swap entity must post initial 
margin to a counterparty.\92\
---------------------------------------------------------------------------

    \92\ As previously discussed, Sec.  .11 of the 
FHFA and FCA versions of the 2011 proposal required all institutions 
supervised by FHFA and the FCA to collect initial and variation 
margin from their swap entity counterparties.
---------------------------------------------------------------------------

    The 2011 proposal requested comment on whether the rule should 
incorporate two-way margining. A number of commenters stated that the 
Agencies should require covered swap entities to post margin. 
Commenters raised a number of concerns regarding the lack of any 
requirement for covered swap entities to post both initial margin and 
variation margin to their counterparties. For example, one commenter 
argued that covered swap entities that do not post collateral present a 
risk to the system in the event that such covered swap entities 
experience financial distress. Commenters also said that by requiring 
two-way margining, overall leverage exposure would be reduced to an 
appropriate level.
    Under the 2011 proposal, a covered swap entity would have been 
permitted to select from two alternatives to calculate its initial 
margin requirements. A covered swap entity could calculate its initial 
margin requirements using a standardized ``look-up'' table that 
specified the minimum initial margin that was required to be collected. 
Alternatively, a covered swap entity could calculate its minimum 
initial margin requirements using an internal margin model that met 
certain criteria and that had been approved by the relevant prudential 
regulator.
    In the 2011 proposal, the Agencies proposed initial margin 
threshold amounts, which varied based on the relative risk posed by the 
counterparty; high-risk financial end users were subject to lower 
threshold amounts than low-risk financial end users; and nonfinancial 
end users were subject to thresholds that were set according to the 
covered swap entity's internal credit policies. Commenters expressed 
varying views on the proposed thresholds. For example, one commenter 
stated that establishing thresholds by counterparty type was too broad 
and did not appropriately reflect risk. Another commenter suggested 
that low-risk financial end users should not be subject to a threshold, 
while a third commenter stated that dollar threshold amounts were 
arbitrary and should be eliminated altogether.
    Under the 2011 proposal, a covered swap entity was required to 
collect initial margin on or before the date it entered into a swap. 
Some commenters indicated that this requirement was operationally 
infeasible due to timing cutoffs and time differences between time 
zones, and for this reason, commenters requested that the Agencies 
permit covered swap entities to collect initial margin one to three 
days after entering into the transaction.
2. 2014 Proposal
a. Collecting and Posting Initial Margin
    Consistent with the 2013 international framework and comments 
received relating to the 2011 proposal, the Agencies are proposing that 
swap entities that are transacting in non-cleared swaps with one 
another or with financial end users with material swaps exposure 
collect and post initial margin with respect to those non-cleared 
swaps. Assuming all swap entities will be subject to an Agency, CFTC, 
or SEC margin rule that requires collection of initial margin, the 
proposed rule will result in a collect-and-post system for all non-
cleared swaps between swap entities. Under this proposal, a covered 
swap entity transacting with a financial end user with material swaps 
exposure must (i) calculate its initial margin collection amount using 
an approved internal model or the standardized look-up table, (ii) 
collect an amount of initial margin that is at least as large as the 
initial margin collection amount less any permitted initial margin 
threshold amount (which is discussed in more detail below), and (iii) 
post at least as much initial margin to the financial end user with 
material swaps exposure as the covered swap entity would be required to 
collect if it were in the place of the financial end user with material 
swaps exposure.
b. Calculation Alternatives
    Similar to the 2011 proposal, the proposed rule permits a covered 
swap entity to select from two methods (the standardized look-up table 
or the internal margin model) 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) in such forms 
and amounts as the covered swap entity believes is appropriate. These 
methods are discussed further below under Appendix A and Sec.  
.8,

[[Page 57366]]

respectively. Section .8 also addresses the use of 
EMNAs for initial margin.
c. Initial Margin Thresholds
    As part of the proposed rule's initial margin requirements and 
consistent with the 2013 international framework, a covered swap entity 
using either calculation method may adopt an initial margin threshold 
amount of up to $65 million, below which the covered swap entity need 
not collect or post initial margin from and to a swap entity or 
financial end user with a material swaps exposure.\93\ This feature of 
the proposed threshold serves two purposes. First, covered swap 
entities would be able to make greater use of their own internal credit 
assessments when making a threshold determination as to the credit and 
other risks presented by a specific counterparty. Covered swap entities 
dealing with counterparties that are judged to be of high credit 
quality may determine a counterparty-specific threshold (of up to $65 
million) so credit extensions made by covered swap entities can be more 
flexible and better informed by granular, internal credit 
determinations. Second, allowing the use of initial margin thresholds, 
to the extent prudently applied by covered swap entities, may reduce 
the potential liquidity burden of the proposed margin requirements. A 
number of commenters on the 2011 proposal indicated that the liquidity 
costs of the proposed requirements were inappropriately high. Unlike 
the 2011 proposal, the current proposal requires both collection and 
posting of initial margin. Moreover, the Agencies anticipate that 
allowing for the use of initial margin thresholds of up to $65 million 
will provide relief to smaller and less systemically risky 
counterparties while ensuring that initial margin is collected from 
those counterparties that pose the greatest systemic risk to the 
financial system.
---------------------------------------------------------------------------

    \93\ This credit exposure limit is defined in the proposed rule 
as the initial margin threshold amount. See proposed rule Sec. Sec.  
.2, .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.
---------------------------------------------------------------------------

    The proposed initial margin threshold of $65 million would be 
applied on a consolidated entity level, and therefore, would apply 
across all non-cleared swaps between a covered swap entity and its 
affiliates and the counterparty and its affiliates. For example, 
suppose that a firm engages in separate swap transactions, executed 
under separate legally enforceable EMNAs, with three counterparties, 
all belonging to the same larger consolidated group, such as a bank 
holding company. Suppose further that the initial margin requirement is 
$100 million for each of the firm's netting sets with each of the three 
counterparties. The firm dealing with these three affiliates must 
collect at least $235 million (235 = $100 + $100 + $100 - $65) from the 
consolidated group. Exactly how the firm allocates the $65 million 
threshold among the three netting sets is subject to agreement between 
the firm and its counterparties. The firm may not extend the $65 
million threshold to each netting set so that the total amount of 
initial margin collected is only $105 million (105 = 100 - 65 + 100 - 
65 + 100 - 65). The requirement to apply the threshold on a fully 
consolidated basis applies to both the counterparty to which the 
threshold is being extended and the counterparty that is extending the 
threshold.\94\ Applying this threshold on a consolidated entity level 
precludes the possibility that covered swap entities and their 
counterparties would create legal entities and netting sets that have 
no economic basis and are constructed solely for the purpose of 
applying additional thresholds to evade margin requirements.
---------------------------------------------------------------------------

    \94\ Suppose that in the example set out above, the firm is 
organized into three subsidiaries (A, B, and C) and each of these 
subsidiaries engages in non-centrally cleared swaps with the 
counterparties. In this case, the extension of the $65 million 
threshold by the firm to the counterparties is considered across the 
entirety of the firm, including the affiliates A, B and C, so that 
all affiliates of the firm extend in the aggregate no more than $65 
million in an initial margin threshold to all of the counterparties.
---------------------------------------------------------------------------

    The Agencies' preliminary view is that the proposed initial margin 
threshold of $65 million is appropriate and reflects a risk-based 
approach to the margin requirements. However, the Agencies seek comment 
on the use of such a threshold in the margin requirements and the 
proposed size of $65 million. Importantly, the Agencies recognize that 
allowing for a significant initial margin threshold subjects covered 
swap entities and their counterparties to credit risk that may 
materialize quickly in the event of a significant period of financial 
stress. Is the proposed use of an initial margin threshold appropriate 
in light of the risks associated with its use? Does the proposed level 
of the threshold appropriately balance the need to limit the liquidity 
impact of the requirements with the need to limit credit exposures in 
non-cleared swaps markets? Are there other approaches that could be 
taken in this regard that would be more effective than the proposed 
initial margin threshold approach?
d. Material Swaps Exposure
    Under the proposed rule and consistent with the 2013 international 
framework, covered swap entities are required to collect and post 
initial margin only with financial end user counterparties that have a 
material swaps exposure. The Agencies do not propose to require the 
exchange of initial margin with financial end users with small 
exposures, as it is assumed that these entities, in most circumstances, 
would have an initial margin requirement that is significantly less 
than the proposed $65 million threshold amount.\95\ Requiring covered 
swap entities to subject financial end users with exposures that would 
generally result in initial margin requirements substantially below $65 
million could create significant operational burdens, as the initial 
margin collection amounts would need to be calculated on a daily basis 
even though no initial margin would be expected to be collected given 
that these amounts would be below the permitted initial margin 
threshold of $65 million.
---------------------------------------------------------------------------

    \95\ To be consistent, both ``initial margin threshold'' and 
``material swaps exposure'' are defined to include the counterparty 
and its affiliates.
---------------------------------------------------------------------------

    Under the proposed rule and consistent with the 2013 international 
framework, the Agencies have adopted a simple and transparent approach 
to defining material swaps exposure that depends on a counterparty's 
gross notional derivative exposure for non-cleared swaps. The Agencies' 
preliminary view is that this approach is appropriate as gross notional 
derivative exposure is broadly related to a counterparty's overall size 
and risk exposure and provides for a simple and transparent measurement 
of exposure that presents only a modest operational burden. Under the 
proposed rule, a covered swap entity would not be required to collect 
or post initial margin to or from a financial end user counterparty 
without a material swaps exposure, that is, if its average daily 
aggregate notional amount of covered swaps over a defined period 
exceeds $3 billion.\96\ This amount differs from that set forth in the 
2013 international framework, which defines smaller financial end users 
as those counterparties that have a gross aggregate amount of covered 
swaps below [euro]8 billion, which, at current exchange rates, is 
approximately equal to $11 billion.
---------------------------------------------------------------------------

    \96\ The definition of ``material swaps exposure'' can be found 
in Sec.  .2 of the proposed rule.
---------------------------------------------------------------------------

    The Agencies' preliminary view is that defining material swaps 
exposure

[[Page 57367]]

as a gross notional exposure of $3 billion, rather than $11 billion, is 
appropriate because it reduces systemic risk without imposing undue 
burdens on covered swap entities, and therefore, is consistent with the 
objectives of the Dodd-Frank Act. This view is based on data and 
analyses that have been conducted since the publication of the 2013 
international framework.
    Specifically, the Agencies have reviewed actual initial margin 
requirements for a sample of cleared swaps. These analyses indicate 
that there are a significant number of cases in which a financial end 
user counterparty would have a material swaps exposure level below $11 
billion but would have a swap portfolio with an initial margin 
collection amount that significantly exceeds the proposed permitted 
initial margin threshold amount of $65 million. The intent of both the 
Agencies and the 2013 international framework is that the initial 
margin threshold provide smaller counterparties with relief from the 
operational burden of measuring and tracking initial margin collection 
amounts that are expected to be below $65 million. Setting the material 
swaps exposure threshold at $11 billion appears to be inconsistent with 
this intent, based on the recent analyses.
    The table below summarizes actual initial margin requirements for 
4,686 counterparties engaged in cleared interest rate swaps. Each 
counterparty represents a particular portfolio of cleared interest rate 
swaps. Each counterparty had a swap portfolio with a total gross 
notional amount less than $11 billion and each is a customer of a CCP's 
clearing member (no customer is itself a CCP clearing member). Column 
(1) displays the initial margin amount as a percentage of the gross 
notional amount. Column (2) reports the initial margin, in millions of 
dollars that would be required on a portfolio with a gross notional 
amount of $11 billion.

  Initial Margin Amounts on 4,686 Cleared Interest Rate Swap Portfolios
------------------------------------------------------------------------
                                                     Column (2)  Initial
                               Column (1)  Initial   margin amount on an
                                margin amount as      $11 billion gross
                               percentage of gross   notional  portfolio
                              notional amount  (%)          ($MM)
------------------------------------------------------------------------
Average.....................                   2.1                   231
25th Percentile.............                   0.6                    66
50th Percentile.............                   1.4                   154
75th Percentile.............                   2.7                   297
------------------------------------------------------------------------

    As shown in the table above, the average initial margin rate across 
all 4,686 counterparties, reported in Column (1), is 2.1 percent, which 
would equate to an initial margin collection amount, reported in Column 
(2), of $231 million on an interest rate swap portfolio with a gross 
notional amount of $11 billion. This average initial margin collection 
amount significantly exceeds the proposed permitted threshold amount of 
$65 million. Seventy-five percent of the 4,686 cleared interest rate 
swap portfolios exhibit an initial margin rate in excess of 0.6 
percent, which equates to an initial margin amount on a cleared 
interest rate swap portfolio of $66 million (approximately equal to the 
proposed permitted threshold amount).
    The data above represent actual margin requirements on a sample of 
interest rate swap portfolios that are cleared by a single CCP. Some 
CCPs also provide information on the initial margin requirements on 
specific and representative swaps that they clear. The Chicago 
Mercantile Exchange (``CME''), for example, provides information on the 
initial margin requirements for cleared interest rate swaps and credit 
default swaps that it clears. This information does not represent 
actual margin requirements on actual swap portfolios that are cleared 
by the CME but does represent the initial margin that would be required 
on specific swaps if they were cleared at the CME. The table below 
presents the initial margin requirements for two swaps that are cleared 
by the CME.

 Initial Margin Amounts on CME Cleared Interest Rate and Credit Default
                                  Swaps
------------------------------------------------------------------------
                                                     Column (2)  Initial
                               Column (1)  Initial   margin amount on an
                                margin amount as      $11 billion gross
                               percentage of gross   notional  portfolio
                              notional amount  (%)          ($MM)
------------------------------------------------------------------------
5 year, receive fixed and                      2.0                   216
 pay floating rate interest
 rate swap..................
5 year, sold CDS protection                    1.9                   213
 on the CDX IG Series 20
 Version 22 Index...........
------------------------------------------------------------------------

    According to the CME, the initial margin requirement on the 
interest rate swap and the credit default swap are both roughly two 
percent of the gross notional amount. This initial margin rate 
translates to an initial margin amount of roughly $216 million on a 
swap portfolio with a gross notional amount of $11 billion. 
Accordingly, this data also indicates that the initial margin 
collection amount on a swap portfolio with a gross notional size of $11 
billion could be significantly larger than the proposed permitted 
initial margin threshold of $65 million.
    In addition to the information provided in the tables above, the 
Agencies' preliminary view is that additional considerations suggest 
that the initial margin collection amounts associated with non-cleared 
swaps could be even greater than those reported in the tables above. 
The tables above represent initial margin requirements on cleared 
interest rate and credit default index swaps. Non-cleared swaps in 
other asset classes, such as single name equity or single name credit 
default swaps, are likely to be riskier and hence would require even 
more initial margin. In addition, non-cleared swaps often contain 
complex features, such as nonlinearities, that

[[Page 57368]]

make them even riskier and would hence require more initial margin. 
Finally, non-cleared swaps are generally expected to be less liquid 
than cleared swaps and must be margined, under the proposed rule, 
according to a ten-day close-out period rather than the five-day period 
required for cleared swaps. The data presented above pertains to 
cleared swaps that are margined according to a five-day and not a ten-
day close-out period. The requirement to use a ten-day close-out period 
would further increase the initial margin requirements of non-cleared 
versus cleared swaps.
    In light of the data and considerations noted above, the Agencies' 
preliminary view is that it is appropriate and consistent with the 
intent of the 2013 international framework to identify a material swaps 
exposure with a gross notional amount of $3 billion rather than $11 
billion ([euro]8 billion) as is suggested by the 2013 international 
framework. Identifying a material swaps exposure with a gross notional 
amount of $3 billion is more likely to result in an outcome in which 
entities with a gross notional exposure below the material swaps 
exposure amount would be likely to have an initial margin collection 
amount below the proposed permitted initial margin threshold of $65 
million. The Agencies do recognize, however, that even at the lower 
amount of $3 billion, there are likely to be some cases in which the 
initial margin collection amount of a portfolio that is below the 
material swaps exposure amount will exceed the proposed permitted 
initial margin threshold amount of $65 million. The Agencies' 
preliminary view is that such instances should be relatively rare and 
that the operational benefits of using a simple and transparent gross 
notional measure to define the material swaps exposure amount are 
substantial.
    The Agencies seek comment on the use and definition of material 
swaps exposure. In particular, is the proposed $3 billion level of the 
material swaps exposure appropriate? Should the amount be higher or 
lower and if so, why? Are there alternative measurement methodologies 
that do not rely on gross notional amounts that should be used? Does 
the proposed rule's use and definition of the material swaps exposure 
raise any competitive equity issues that should be considered? Are 
there any other aspects of the material swaps exposure that should be 
considered by the Agencies?
d. Timing
    The proposed rule establishes the timing under which a covered swap 
entity must comply with the initial margin requirements set out in 
Sec. Sec.  .3(a) and (b). Under the proposed rule, a 
covered swap entity, with respect to any non-cleared swap to which it 
is a party, must, on a daily basis, comply with the initial margin 
requirements for a period beginning on or before the business day 
following the day it enters into the transaction and ending on the date 
the non-cleared swap is terminated or expires. This requirement will 
cause covered swap entities to recalculate their initial margin 
requirements per their internal margin models or the standardized look-
up table each business day. As a result, covered swap entities may need 
to adjust the amount of initial margin they collect or post on a daily 
basis.
    Under the 2011 proposal, a covered swap entity was required to 
collect initial margin on or before the date it entered into a non-
cleared swap. In the proposed rule, the Agencies have changed the 
timing provision in Sec.  .3 to require a covered swap entity 
to comply with the initial margin requirements beginning on or before 
the business day following the day it enters into the swap. Providing 
an additional day is intended to address the operational concerns 
raised by the commenters to the 2011 proposal.
e. Other Counterparties
    Under the proposed rule, a covered swap entity is not required as a 
matter of course to collect initial margin with respect to any non-
cleared swap with a counterparty other than a financial end user with 
material swaps exposure or a swap entity, but shall collect initial 
margin at such times and in such forms and amounts (if any) that the 
covered swap entity determines appropriately address the credit risk 
posed by the counterparty and the risks of such swaps. Thus, the 
specific provisions of the Agencies' rules on initial margin 
requirements, documentation, and eligible collateral would not apply to 
non-cleared swaps between covered swap entities and these ``other 
counterparties.'' These ``other counterparties'' would include 
nonfinancial end users, entities that are excluded from the definition 
of financial end user, and financial end users without material swaps 
exposure. The Agencies' preliminary view is that this treatment of 
``other counterparties'' is consistent with the Dodd-Frank Act's risk-
based approach to establishing margin requirements. In particular, the 
Agencies intend for the proposed requirements with respect to ``other 
counterparties'' to be consistent with current market practice and 
understand that in many cases a covered swap entity would exchange 
little or no margin with these counterparty types. There may be 
circumstances, however, in which a covered swap entity finds it prudent 
to collect initial margin from these counterparty types, for example, 
if a covered swap entity chose to incorporate margin to mitigate the 
safety and soundness effects of its credit exposures to these 
counterparty types.

D. Section .4: Variation Margin

1. Overview of 2011 Proposal and Public Comments
    Section .4 of the 2011 proposal specified the variation 
margin requirements applicable to non-cleared swaps. Consistent with 
the treatment of initial margin in the 2011 proposal, the variation 
margin requirements applied only to the collection of variation margin 
by covered swap entities from their counterparties, and not to the 
posting of variation margin to their counterparties. Under the 2011 
proposal, covered swap entities and their counterparties were free to 
negotiate the extent to which a covered swap entity could have been 
required to post variation margin to a counterparty (other than a swap 
entity that is itself subject to margin requirements). In the 2011 
proposal, the Agencies requested comment on whether the margin rules 
should impose a separate, additional requirement that a covered swap 
entity post variation margin to financial end users and nonfinancial 
end users. Consistent with the comments received relating to initial 
margin, many commenters recommended two-way posting of variation margin 
for transactions between covered swap entities and financial end users. 
Specifically, commenters argued that the bilateral exchange of 
variation margin would reduce systemic risk, increase transparency, and 
facilitate central clearing.
    The 2011 proposal also established a minimum amount of variation 
margin that must be collected, leaving covered swap entities free to 
collect larger amounts if they elected to do so. Under the 2011 
proposal, a covered swap entity would have been permitted to establish, 
for certain counterparties that are end users, a credit exposure limit 
that acts as a threshold below which the covered swap entity need not 
collect variation margin. Specifically, the variation margin threshold 
amount that a covered swap entity could establish for a low-risk 
financial end user counterparty could be calculated in the same way as 
the proposed initial margin threshold amounts for such counterparties. 
The 2011 proposal

[[Page 57369]]

would not have allowed a variation margin threshold amount for swap 
entity or high-risk financial end user counterparties. The 2011 
proposal permitted a covered swap entity to calculate variation margin 
requirements on an aggregate basis across all non-cleared swaps with a 
counterparty that were executed under the same QMNA. The Agencies 
requested comment regarding whether permitting the aggregate 
calculation of variation margin requirements was appropriate and, if 
so, whether the 2011 proposal's definition of ``QMNA'' raised practical 
or implementation difficulties or was inconsistent with market 
practices. Commenters generally supported netting and argued that 
netting diversification should be allowed across asset classes.
    The 2011 proposal also specified that covered swap entities 
calculate and collect variation margin from counterparties that were 
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 once the relevant credit threshold was exceeded.
2. 2014 Proposal
a. Collecting and Paying Variation Margin
    Consistent with the initial margin requirements of this proposal, 
the Agencies are proposing that swap entities transacting with one 
another and with financial end users be required to collect and pay 
variation margin with respect to non-cleared swaps. As with initial 
margin, the Agencies believe that requiring covered swap entities both 
to collect and pay margin with these counterparties effectively reduces 
systemic risk by protecting both the covered swap entity and its 
counterparty from the effects of a counterparty default.
    In response to the comments received and consistent with the 2013 
international framework, the proposed rule would require a covered swap 
entity to collect variation margin from all swap entities and from 
financial end users regardless of whether the financial end user has a 
material swaps exposure. The proposed rule generally requires a covered 
swap entity to collect and pay variation margin on non-cleared swaps in 
an amount that is at least equal to the increase or decrease (as 
applicable) in the value of such swaps since the previous exchange of 
variation margin. Unlike the 2011 proposal, and the initial margin 
requirements set out in Sec. Sec.  .3(a) and (b) of this 
proposal, a covered swap entity may not adopt a threshold amount below 
which it need not collect or pay variation margin on swaps with a swap 
entity or financial end user counterparty (although transfers below a 
minimum transfer amount would not be required, as discussed in Sec.  
.5, below).
    The terms ``pay'' and ``paid'' are used when referring to variation 
margin. This terminology is being proposed based on a preliminary 
understanding that market participants view the economic substance of 
variation margin as settling the daily exposure of non-cleared swaps 
between counterparties. This perception is reinforced by the current 
market practice among swap participants of requiring that variation 
margin, where required under the parties' negotiated agreements, be 
provided in cash. As noted below, Sec.  .6 of the proposed 
rule would limit eligible collateral for variation margin to cash.
    The market perception that variation margin essentially settles the 
current exposure may not always align with the underlying legal 
requirement or with contracts that document the parties' rights and 
obligations with respect to swaps. On the one hand, for cleared swaps, 
derivatives clearing organizations are required by law to settle the 
exposure with counterparties at least daily, and thus the legal 
requirement is aligned with market participants' perceptions about the 
underlying economic substance of such transfers.\97\ On the other hand, 
for non-cleared swaps, there is currently no statutory requirement that 
counterparties settle their exposures daily, leaving parties to 
negotiate such settlement.
---------------------------------------------------------------------------

    \97\ Section 5b(c)(2)(E) of the Commodity Exchange Act requires 
derivatives clearing organizations to ``complete money settlements 
on a timely basis (but not less frequently than once each business 
day).'' CFTC regulations define ``settlement'' as, among other 
things, ``payment and receipt of variation margin for futures, 
options, and swaps.'' 17 CFR 39.14(a)(1). Further, CFTC regulations 
require that ``except as otherwise provided by Commission order, 
derivatives clearing organizations shall effect a settlement with 
each clearing member at least once each business day.'' 17 CFR 
39.14(b).
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    It is the Agencies' understanding that standard swap documentation 
may treat variation margin differently depending on the underlying 
legal structure. For example, swap agreements under New York law might 
refer to variation margin as being ``posted'' pursuant to a security 
interest. Swap documentation referencing English law, however, may be 
aligned with a title transfer regime under which variation margin is 
not furnished pursuant to a security interest.
    By proposing to use ``pay'' and ``paid'' terminology with respect 
to variation margin, the Agencies do not intend to propose to mandate, 
as a legal matter, to alter current practices under which variation 
margin is characterized as being ``posted'' pursuant to an agreement 
that establishes a security interest. Also, the Agencies, by proposing 
``pay'' and ``paid'' terminology, do not intend to alter the 
characterization of such transfer of variation margin funds for 
accounting, tax, or other purposes. The Agencies invite comment on the 
appropriateness of the proposed terminology and whether other 
terminology may better address the underlying purpose of the legal 
requirements for the Agencies to establish requirements related 
variation margin requirements.
b. Frequency
    Section .4(b) of the proposed rule establishes the 
frequency at which a covered swap entity must comply with the variation 
margin requirements set out in Sec.  .4(a). Under the proposed 
rule, a covered swap entity must collect or pay variation margin with 
swap entities and financial end user counterparties no less frequently 
than once per business day.
c. Other Counterparties
    Like the proposed initial margin requirements set out in Sec.  
.3, the proposed rule permits a covered swap entity to collect 
variation margin from counterparties other than swap entities and 
financial end users at such times and in such forms and amounts (if 
any) that the covered swap entity determines appropriately address the 
credit risk posed by the counterparty and the risks of such non-cleared 
swaps. The specific provisions of the Agencies' rules on variation 
margin requirements, documentation, eligible collateral, segregation, 
and rehypothecation would not apply to swaps between covered swap 
entities and these ``other counterparties.'' As with initial margin, 
the Agencies intend for the proposed requirements to be consistent with 
current market practice and understand that, in many cases, a covered 
swap entity would exchange little or no margin with these counterparty 
types.
    An important difference between the treatment of ``other 
counterparties'' in the cases of initial margin and of variation margin 
is that the scope of ``other counterparties'' for variation margin 
requirements is narrower than for the initial margin requirements. 
Specifically, under the proposed rule, financial end users without 
material swaps exposures are treated similarly as ``other 
counterparties'' in the context of the initial margin requirements but 
not the variation margin requirements.

[[Page 57370]]

    In other words, all financial end user counterparties are subject 
to the variation margin requirements, while only financial end user 
counterparties with material swaps exposure are subject to initial 
margin requirements. The different composition of ``other 
counterparties'' between the proposed initial and variation margin 
requirements reflects the Agencies' view that variation margin is an 
important risk mitigant that (i) reduces the build-up of risk that may 
ultimately pose systemic risk; (ii) imposes a lesser liquidity burden 
than does initial margin; and (iii) reflects current market practice 
and a risk management best practice by providing for the regular 
exchange of variation margin between covered swap entities and 
financial end users.
e. Netting Arrangements
    Similar to the 2011 proposal, the proposed rule permits a covered 
swap entity to calculate variation margin requirements on an aggregate 
net basis across all non-cleared swap transactions with a counterparty 
that are executed under a single EMNA. If an EMNA covers non-cleared 
swaps that were entered into before the applicable compliance date, 
those swaps must be included in the aggregate for purposes of 
calculating the required variation margin. As discussed previously, 
under the proposed rule, the margin requirements would not be applied 
retroactively, and therefore, no new initial margin or variation margin 
requirements would be imposed on non-cleared swaps entered into prior 
to the relevant compliance date until those transactions are rolled-
over or renewed. The only requirements that would apply to a pre-
compliance date transaction would be the initial margin and variation 
margin requirements to which the parties to the transaction had 
previously agreed by contract. However, if non-cleared swaps that were 
entered into prior to the applicable compliance date were included in 
the EMNA, those swaps would be subject to the proposed variation margin 
requirements. A covered swap entity would need to establish a new EMNA 
to cover only swaps entered into after the compliance date in order to 
not include pre-compliance date swaps. Like the 2011 proposal, the 
proposed rule defines an EMNA as a legally enforceable agreement to 
offset positive and negative mark-to-market values of one or more 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.\98\
---------------------------------------------------------------------------

    \98\ EMNAs are discussed in more detail in Sec.  .2 of 
the proposed rule.
---------------------------------------------------------------------------

E. Section .5: Minimum Transfer Amount and Satisfaction of 
Collecting and Posting Requirements

1. Minimum Transfer Amount
    The 2011 proposal included a minimum transfer amount for the 
collection of initial and variation margin by covered swap entities. 
Under the 2011 proposal, a covered swap entity was not required to 
collect margin from any individual counterparty otherwise required 
under the rule until the required cumulative amount was $100,000 or 
more.
    The proposed rule also provides for a minimum transfer amount for 
the collection and posting of margin by covered swap entities. Under 
the proposal, a covered swap entity need not collect or post initial or 
variation margin from or to any individual counterparty otherwise 
required unless and until the required cumulative amount of initial and 
variation margin is greater than $650,000.\99\ This minimum transfer 
amount is consistent with the 2013 international framework and 
addresses a number of comments received on the 2011 proposal indicating 
that the $100,000 minimum transfer amount was too low and inconsistent 
with market practice. The Agencies' preliminary view is that the higher 
minimum transfer amount is consistent with the mandate to mitigate risk 
to swap entities and to the financial system.
---------------------------------------------------------------------------

    \99\ See proposed rule Sec.  .5(a). 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 
$650,000 threshold is crossed. For example, if the margin 
requirement were to increase from $500,000 to $800,000, the covered 
swap entity would be required to collect the entire $800,000 
(subject to application of any applicable initial margin threshold 
amount).
---------------------------------------------------------------------------

2. Satisfaction of Collecting and Posting Requirements
    The 2011 proposal addressed the situation where a counterparty 
refused or otherwise failed to make variation margin payments to a 
covered swap entity. The 2011 proposal provided that the covered swap 
entity would not be in violation of the rule in this situation so long 
as it took certain steps to collect the margin or commenced termination 
of the swap.
    This proposal includes similar provisions with respect to both 
initial and variation margin. Specifically, under Sec.  .5(b), 
a covered swap entity shall not be deemed to have violated its 
obligation to collect or post initial or variation margin from or to a 
counterparty if: (1) The counterparty has refused or otherwise failed 
to provide or accept the required margin to or from the covered swap 
entity; and (2) the covered swap entity has (i) made the necessary 
efforts to collect or post the required margin, or has otherwise 
demonstrated upon request to the satisfaction of the appropriate Agency 
that it has made appropriate efforts to collect the required margin, or 
(ii) commenced termination of the non-cleared swap with the 
counterparty promptly following the applicable cure period and 
notification requirements.

F. Section .6: Eligible Collateral

1. Overview of 2011 Proposal and Public Comments
    The 2011 proposal placed strict limits on the collateral that 
covered swap entities could collect to meet their minimum margin 
requirements. For minimum variation margin requirements, the Agencies 
proposed to recognize only immediately available cash (denominated 
either in U.S. dollars or in the currency in which payment obligations 
under the swap contract would be settled) and obligations issued by or 
fully guaranteed by the U.S. government. For minimum initial margin 
requirements, the Agencies proposed to recognize the aforementioned 
assets plus senior debt obligations issued by Fannie Mae, Freddie Mac, 
the Federal Home Loan Banks, or Farmer Mac, and ``insured obligations'' 
of the Farm Credit Banks.\100\
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    \100\ ``Insured obligations'' of FCS banks are consolidated and 
System-wide obligations issued by FCS 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. See 12 U.S.C. 
2277a-3.
---------------------------------------------------------------------------

    Most commenters that addressed the eligible collateral section of 
the 2011 proposal, including industry groups and members of Congress, 
stated that the Agencies should expand the list of eligible collateral 
to include a broader range of high-quality, liquid and readily 
marketable assets. These commenters stated that a more expansive list 
of eligible collateral would be consistent with market practice, 
legislative intent, and international standards. Many commenters 
suggested that the minimum margin requirements included in the 2011 
proposal could disrupt financial markets by significantly increasing 
the demand for certain liquid assets, inadvertently

[[Page 57371]]

restrict liquidity and, in turn, slow economic growth. Additionally, 
commenters suggested that increased demand for ``eligible'' assets 
could inappropriately distort the market for those assets relative to 
other high-quality, liquid, and readily marketable assets.
2. 2014 Proposal
a. Variation Margin Collateral
    Under the proposal, the Agencies are proposing to require the 
collection or payment of immediately available cash funds to satisfy 
the minimum variation margin requirements. Such payment must be 
denominated either in U.S. dollars or in the currency in which payment 
obligations under the swap are required to be settled. When determining 
the currency in which payment obligations under the swap are required 
to be settled, a covered swap entity must consider the entirety of the 
contractual obligation. As an example, in cases where a number of 
swaps, each potentially denominated in a different currency, are 
subject to a single master agreement that requires all swap cash flows 
to be settled in a single currency, such as the Euro, then that 
currency (Euro) may be considered the currency in which payment 
obligations are required to be settled. The Agencies request comment on 
whether there are current market practices that would raise 
difficulties or concerns about identifying the appropriate settlement 
currency in applying this aspect of the proposed rule, from a 
contractual or other operational standpoint.
    Limiting variation margin to cash should sharply reduce the 
potential for disputes over the value of variation margin collateral. 
Additionally, this proposed change is consistent with regulatory and 
industry initiatives to improve standardization and efficiency in the 
OTC swaps market. For example, in June 2013, ISDA published the 2013 
Standard Credit Support Annex (SCSA), which provides for the sole use 
of cash for variation margin. Additionally, the Agencies note that 
central counterparties generally require variation margin to be paid in 
cash.
    Under this proposed rule, the value of cash paid to satisfy 
variation margin requirements is not subject to a haircut. Variation 
margin payments reflect gains and losses on a swap transaction, and 
payment or receipt of variation margin generally represents a transfer 
of ownership in the collateral. Therefore, haircuts are not a necessary 
component of the regulatory requirements for cash variation margin.
    The Agencies seek comment on the appropriateness of limiting 
variation margin to cash, and on any other revisions that commenters 
believe would be appropriate to better align the variation margin 
requirements applicable with arrangements that are currently observed 
in the OTC swap market.
b. Initial Margin Collateral
    The Agencies are proposing to expand the list of eligible 
collateral with respect to the collection and posting of initial 
margin. The standards for eligible initial margin collateral in the 
2014 proposal pertain to collateral collected or posted in connection 
with the proposed minimum requirements. This proposal in no way 
restricts the types of collateral that may be collected or posted to 
satisfy margin terms that are bilaterally negotiated and not required 
under the proposal. For example, under the proposal a covered swap 
entity may extend an initial margin threshold of up to $65 million on 
an aggregate basis to each swap entity or financial end user 
counterparty and its affiliates. If a covered swap entity extended such 
an initial margin threshold to a counterparty and the resulting minimum 
initial margin requirement was zero, but the covered swap entity 
decided to collect initial margin collateral to protect itself against 
counterparty credit risk, then the covered swap entity could choose to 
collect that initial margin in any form of collateral, including forms 
other than the types of collateral specified in the rule.
    Relatedly, under the 2014 proposal, covered swap entities need to 
collect initial margin for non-cleared swaps with certain entities 
(``other counterparties'') in such forms and amounts (if any) and at 
such times that the covered swap entity determines appropriately 
address the credit risk posed by the counterparty and the risks of such 
transactions. For such a transaction, a covered swap entity is 
responsible for determining the amount, the form, and the time for the 
margin to be collected. Accordingly, margin collected by a covered swap 
entity in connection with a non-cleared swap with an ``other 
counterparty'' can be in any form of collateral, including in forms 
other than the types of collateral specified in the rule.
    Although the list of eligible collateral in the 2014 proposal for 
initial margin is more expansive than the 2011 proposal, the Agencies 
continue to believe that it is necessary to impose limits on the types 
of assets eligible to satisfy the minimum margin requirements. 
Therefore, the Agencies are limiting the recognition of collateral to 
certain assets deemed to be highly liquid, particularly during a period 
of financial stress as suggested by the 2013 international framework. 
To support this approach, the Agencies note that to protect a covered 
swap entity during periods of financial stress, collateral eligible to 
satisfy the proposed minimum margin requirements should not have 
excessive exposures to credit, market, or foreign exchange risk.
    The Agencies are proposing to permit a broader range of collateral 
to be pledged to satisfy the minimum initial margin requirements, which 
includes cash collateral (subject to the same requirements applicable 
to variation margin) and any of the following:
    (1) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, the U.S. Department 
of the Treasury;
    (2) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, a U.S. government 
agency (other than the U.S. Department of the Treasury) whose 
obligations are fully guaranteed by the full faith and credit of the 
United States government;
    (3) A publicly traded debt security issued by, or an asset-backed 
security fully guaranteed as to the timely payment of principal and 
interest by, a U.S. Government-sponsored enterprise that is operating 
with capital support or another form of direct financial assistance 
received from the U.S. government that enables the repayments of the 
U.S. Government-sponsored enterprise's eligible securities;
    (4) Any major currency, regardless of whether it is the currency in 
which payment obligations under the swap are required to be settled;
    (5) A security that is issued by the European Central Bank or by a 
sovereign entity that receives no higher than a 20 percent risk weight 
under subpart D of the Federal banking agencies' risk-based capital 
rules; \101\
---------------------------------------------------------------------------

    \101\ See 12 CFR part 3, subpart D, 12 CFR part 217, subpart D, 
and 12 CFR part 324, subpart D.
---------------------------------------------------------------------------

    (6) A security that is issued by or unconditionally guaranteed as 
to the timely payment of principal and interest by the Bank for 
International Settlements, the International Monetary Fund, or a 
multilateral development bank;
    (7) A publicly traded debt security for which the issuer has 
adequate capacity to meet financial commitments (as defined by the 
appropriate Federal

[[Page 57372]]

agency),\102\ including such a security issued by a U.S. Government-
sponsored enterprise not covered in (3), above;
---------------------------------------------------------------------------

    \102\ The FCA is proposing a new definition of ``investment 
grade'' only for FCS institutions in Sec.  .2 that is 
identical to 12 CFR 1.2(d).
---------------------------------------------------------------------------

    (8) A publicly traded common equity security that is included in 
the Standard and Poor's Composite 1500 Index, an index that a covered 
swap entity's supervisor in a foreign jurisdiction recognizes for the 
purposes of including publicly traded common equity as initial margin, 
or any other index for which the covered swap entity can demonstrate 
that the equities represented are as liquid and readily marketable as 
those included in the Standard and Poor's Composite 1500 Index; and
    (9) Gold.
    Notably, any debt security issued by a U.S. Government-sponsored 
enterprise that is not operating with capital support or another form 
of direct financial assistance from the U.S. government would be 
eligible collateral only if the security met the requirements for debt 
securities discussed above. The Agencies seek comment on how the 
likelihood of financial assistance from the United States not 
authorized under current law (that is, the perceived ``implicit 
guarantee'') influences the determination that a U.S. Government-
sponsored enterprise has ``adequate capacity to meet financial 
commitments'' when its debt securities are considered for acceptance as 
collateral for initial margin. The Agencies also request comment on 
whether the final rule should state that debt securities of a U.S. 
Government-sponsored enterprise that is not operating with capital 
support or other financial assistance from the U.S. government are 
eligible collateral for initial margin only if: (1) The U.S. 
Government-sponsored enterprise has adequate capacity to meet financial 
commitments (as defined in each agency's rule) and (2) the 
determination of ``adequate capacity'' is not reliant on financial 
assistance from the U.S. Government.
    In the context of corporate securities, initial margin collateral 
is further restricted to exclude any corporate securities (equity or 
debt) issued by the counterparty or any of its affiliates, a bank 
holding company, a savings and loan holding company, a foreign bank, a 
depository institution, a market intermediary, or any company that 
would be one of the foregoing if it were organized under the laws of 
the United States or any State, or an affiliate of one of the foregoing 
institutions. These restrictions reflect the Agencies' view that 
securities issued by the foregoing entities are very likely to come 
under significant pressure during a period of financial stress when a 
covered swap entity may be resolving a counterparty's defaulted swap 
position and present a general source of wrong-way risk. Accordingly, 
the Agencies believe that it is prudent to restrict initial margin 
collateral in this manner and that these restrictions will not unduly 
reduce the scope of collateral that is eligible to satisfy the minimum 
initial margin requirements.
    The Agencies request comment on the securities subject to this 
restriction, and, in particular, on whether securities issued by other 
entities, such as non-bank systemically important financial 
institutions designated by the Financial Stability Oversight Council, 
also should be excluded from the list of eligible collateral.
    For the purpose of the initial margin requirements, the recognized 
value of assets posted as initial margin collateral, except U.S. 
dollars and the currency in which the payment obligations of the swap 
is required, is subject to haircuts. These collateral haircuts reduce 
the value of the initial margin to an amount that is equal to the 
market value of the initial margin collateral multiplied by one minus 
the specific collateral haircut. Collateral haircuts guard against the 
possibility that the value of initial margin collateral could decline 
during the period that a defaulted swap position has to be closed out 
by a covered swap entity. The proposed collateral haircuts, which 
appear in Appendix B, have been calibrated to be broadly consistent 
with valuation changes observed during periods of financial stress.
    The Agencies request comment on whether the proposed rule's list of 
eligible collateral for minimum initial and variation margin 
requirements, and the haircuts applied to initial margin, are 
appropriate.
    The approach taken to initial margin collateral in the proposal, 
which is consistent with the 2013 international framework, recognizes a 
broad array of financial collateral ranging from high quality sovereign 
bonds to corporate securities and commodities. The Agencies believe 
that broadening the scope of eligible collateral addresses concerns 
about collateral availability and market impact without exposing 
covered swap entities to undue risk. In particular, the Agencies 
believe that this proposal appropriately restricts eligible collateral 
to liquid and high-quality assets with limited market and credit risk. 
In addition, initial margin collateral is subject to robust collateral 
haircuts that will further reduce risk.
    Because the value of collateral may change, a covered swap entity 
must monitor the value and quality of collateral previously collected 
to satisfy minimum initial margin requirements. If the value of such 
collateral has decreased, or if the quality of the collateral has 
deteriorated so that it no longer qualifies as eligible collateral, the 
covered swap entity must collect additional collateral of sufficient 
value and quality to ensure that all applicable minimum margin 
requirements remain satisfied on a daily basis.
    The proposal does not allow a covered swap entity to fulfill the 
minimum margin requirements with any forms of non-cash collateral not 
included in the list of liquid and readily marketable assets described 
above. The use of alternative types of collateral to fulfill regulatory 
margin requirements is complicated by pro-cyclical considerations (for 
example, the changes in the liquidity, price volatility, or wrong-way 
risk of collateral during a period of financial stress could exacerbate 
that stress) and the need to ensure that the collateral is subject to 
low credit, market, and liquidity risk. Therefore, this proposed rule 
limits the recognition of collateral to the aforementioned list of 
assets.
    However, counterparties that wish to rely on assets that do not 
qualify as eligible collateral under the proposed rule still would be 
able to pledge those assets with a lender in a separate arrangement, 
using the cash or other eligible collateral received from that separate 
arrangement to meet the minimum margin requirements.

G. Section .7: Segregation of Collateral

1. 2011 Proposal and Public Comment
    The 2011 proposal established minimum safekeeping standards for 
collateral posted by covered swap entities to assure that collateral is 
available to support the swaps and not housed in a jurisdiction where 
it is not available if defaults occur. The 2011 proposal required the 
covered swap entity to require a counterparty that is a swap entity to 
hold funds or other property posted as initial margin at an independent 
third-party custodian. The 2011 proposal also required that the 
independent third-party custodian 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

[[Page 57373]]

not qualify as eligible collateral for initial margin under the 2011 
proposal. Further, the 2011 proposal required that the custodian be 
located in a jurisdiction that applies the same insolvency regime to 
the custodian as would apply to the covered swap entity. These 
custodian and related requirements applied only to initial margin, not 
variation margin, and did not apply to transactions with a counterparty 
that was not a swap entity. Collateral collected from counterparties 
that were not swap entities could be segregated at the discretion of 
the counterparties.
    The third-party custodian requirement in the 2011 proposal was 
based on a preliminary view by the Agencies that requiring a covered 
swap entity's initial margin to be segregated at a third-party 
custodian was necessary to offset the greater risk to the covered swap 
entity and the financial system arising from the use of non-cleared 
swaps, and protect the safety and soundness of the covered swap entity.
    Commenters generally supported the protections described in the 
2011 proposal as reasonable to protect the pledged or transferred 
collateral but several commenters noted that these types of protections 
would be costly and have large liquidity impacts and may increase 
systemic risk, given that much of the collateral would likely be held 
by a relatively few large custodians. In addition, concerns were 
expressed by some commenters with the ability of custodians to meet the 
requirement that the jurisdiction of insolvency of the custodian be the 
same as the covered swap entity.
2. 2014 Proposal
    The proposal retains and expands on most of the collateral 
safekeeping requirements of the 2011 proposal and revises requirements 
related to the custodial agreement.
    Section .7(a) of the proposal addresses 
requirements for when a covered swap entity posts any collateral other 
than variation margin. Posting collateral to a counterparty exposes a 
covered swap entity to risks in recovering such collateral in the event 
of its counterparty's insolvency. To address this risk and to protect 
the safety and soundness of the covered swap entity, Sec.  
.7(a) requires a covered swap entity that posts any 
collateral other than variation margin with respect to a non-cleared 
swap to require that such collateral be held by one or more custodians 
that are not affiliates of the covered swap entity or the counterparty. 
This requirement would apply to initial margin posted by a covered swap 
entity pursuant to Sec.  .3(b), as well as initial 
margin that is not required by this rule but is posted by a covered 
swap entity as a result of negotiations with its counterparty, such as 
initial margin posted to a financial end user that does not have 
material swaps exposure or initial margin posted to another covered 
swap entity even though the amount was less than the $65 million 
initial margin threshold amount.
    Section .7(b) of the proposal addresses 
requirements for when a covered swap entity collects initial margin 
required by Sec.  .3(a). Under Sec.  
.7(b), the covered swap entity shall require that 
initial margin collateral collected pursuant to Sec.  
.3(a) be held at one or more custodians that are not 
affiliates of either party. Because the collection of initial margin 
does not expose the covered swap entity to the same risk of 
counterparty default as is created when a covered swap entity posts 
collateral, the scope of the requirements for initial margin that a 
covered swap entity collects is narrower than the scope for 
requirements for posting collateral. As a result, Sec.  
.7(b) applies only to initial margin that a covered 
swap entity collects as required by Sec.  .3(a), 
rather than all collateral collected.
    For collateral subject to Sec.  .7(a) or Sec.  
.7(b), Sec.  .7(c) requires the custodian to act 
pursuant to a custodial agreement that is legal, valid, binding, and 
enforceable under the laws of all relevant jurisdictions including in 
the event of bankruptcy, insolvency, or similar proceedings. Such a 
custodian agreement must prohibit the custodian from rehypothecating, 
repledging, reusing or otherwise transferring (through securities 
lending, repurchase agreement, reverse repurchase agreement, or other 
means) the funds or other property held by the custodian. Section 
.7(d) provides that, notwithstanding this prohibition on 
rehypothecating, repledging, reusing or otherwise transferring the 
funds or property held by the custodian, the posting party may 
substitute or direct any reinvestment of collateral, including, under 
certain conditions, collateral collected pursuant to Sec.  
.3(a) or posted pursuant to Sec.  
.3(b).
    In particular, for initial margin collected pursuant to Sec.  
.3(a) or posted pursuant to Sec.  .3(b), the posting 
party may substitute only funds or other property that meet the 
requirements for initial margin under Sec.  .6 and where the 
amount net of applicable discounts described in Appendix B would be 
sufficient to meet the requirements of Sec.  .3. The 
posting party also may direct the custodian to reinvest funds only in 
assets that would qualify as eligible collateral under Sec.  
.6 and ensure that the amount net of applicable 
discounts described in Appendix B would be sufficient to meet the 
requirements of Sec.  .3. In the cases of both 
substitution and reinvestment, the proposed rule requires the posting 
party to ensure that the value of eligible collateral net of haircuts 
remains equal to or above the minimum requirements contained in Sec.  
.3. In addition, the restrictions on the substitution 
of collateral described above do not apply to cases where a covered 
swap entity has posted or collected more initial margin than is 
required under Sec.  .3. In such cases the initial 
margin that has been posted or collected in satisfaction of Sec.  
.3 is subject to the restrictions on collateral 
substitution but any additional collateral that has been posted is not 
subject to the restrictions on collateral substitution and, as noted 
above, any additional collateral that has been collected by the covered 
swap entity is not subject to any of the requirements of Sec.  
.7.
    The segregation limits on rehypothecation, repledge, or reuse 
contained in Sec.  .7 apply only with respect to the 
initial margin requirement and not with respect to variation 
margin.\103\ The Agencies' preliminary view is that requiring covered 
swap entities to segregate and limit the rehypothecation, repledge, or 
reuse of funds and other property held in satisfaction of the initial 
margin requirement is necessary to (i) offset the greater risk to the 
covered swap entity and the financial system arising from the use of 
swaps that are not cleared and (ii) protect the safety and soundness of 
the covered swap entity. In developing this proposal, the Agencies have 
considered 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 funds or other 
property received by the failing covered swap entity to satisfy the 
initial margin requirement cannot be quickly recovered by nondefaulting 
counterparties during a period of financial stress. To the extent that 
initial margin requirements are intended to constrain risk-taking, a 
lack of

[[Page 57374]]

restrictions on rehypothecation, repledging, and reusing initial margin 
and a lack of segregation at an unaffiliated custodian will weaken 
their effect.
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    \103\ 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 derivative swap transaction rather 
than to secure potential exposure arising from future changes in the 
market value of the swap transaction during the closeout of the 
exposure.
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    The Agencies are concerned that not requiring funds or other 
property held to satisfy the initial margin requirement to be held at 
an unaffiliated custodian and limiting its rehypothecation, repledging, 
or reuse at the outset may cause an entity that incurs a severe loss, 
due to credit or market events, to face liquidity challenges during 
periods of stress. Requiring the protection of pledged initial margin 
bilaterally between the counterparties provides assurance that the 
pledging counterparty is much less likely to face additional losses 
(due to the loss of its transferred or pledged initial margin) above 
the replacement cost of the non-cleared swaps portfolio. During a 
period of stress, the custodian will provide assurance that the 
counterparties' initial margin is indeed only available to meet 
incremental losses during the closeout of the defaulting counterparty's 
non-cleared swaps and has not been used to secure other obligations. As 
such, this reduces the incentive for the nondefaulting counterparty to 
become concerned with meeting its obligations to other nondefaulting 
counterparties, reducing the interconnected risk associated with non-
cleared swaps.
    As discussed above, the limitations on rehypothecation, repledging, 
or reusing pledged collateral will likely increase funding costs for 
some market participants required to post initial margin, including 
some covered swap entities. Moreover, when a covered swap entity 
intermediates non-cleared swaps between two financial end users with 
material swaps exposure the proposed rule would require that the 
covered swap entity post initial margin to each financial end user and 
that the covered swap entity collect initial margin from each financial 
end user and that these funds or other property be held at a third-
party custodian that will not rehypothecate, repledge, or reuse such 
assets. These proposed requirements will result in a significant amount 
of initial margin collateral that will be held and segregated to guard 
against the risk of counterparty default.
    The 2013 international framework sets out parameters for member 
countries to permit a limited degree of rehypothecation, repledging, 
and reuse of initial margin collateral when a covered swap entity is 
dealing with a financial end user if certain safeguards for protecting 
the financial end user's rights in such collateral are available under 
applicable law. If such protections exist, under the 2013 international 
framework, a member country may allow a swap entity to rehypothecate, 
repledge, or reuse initial margin provided by a non-dealer financial 
end user one time to hedge the covered swap entities exposure to the 
financial end user.\104\ The Agencies seek comment on the circumstances 
under which one-time rehypothecation, repledge, or reuse of initial 
margin posted by a non-dealer financial end user would be permitted 
under the 2013 international framework and whether this would be a 
commercially viable option for market participants.
---------------------------------------------------------------------------

    \104\ The prudential regulators note that on April 14, 2014, the 
European Supervisory Authorities (``ESA'') issued for comment a 
proposal to implement the 2013 international framework. Like the 
prudential regulators, the ESA did not propose to allow the 
rehypothecation, repledge, or reuse of initial margin. See ``Draft 
Regulatory Technical Standards on Risk-mitigation Techniques for 
OTC-derivative Contracts Not Cleared by a CCP under Article 11(15) 
of Regulation (EU) No. 648/2012'', pp 11, 42-43 (April 14, 2014), 
https://www.eba.europa.eu/documents/10180/655149/JC+CP+2014+03+%28CP+on+risk+mitigation+for+OTC+derivatives%29.pdf.
---------------------------------------------------------------------------

H. Section .8: Initial Margin Models and Standardized 
Amounts

1. Overview of 2011 Proposal and Public Comments
    Section .8 of the 2011 proposal set out modeling 
standards that an initial margin model must meet for a covered swap 
entity to calculate initial margin under such a model. In situations 
where these requirements would not be met, initial margin would be 
calculated according to a standardized look-up table (Appendix A of the 
2011 proposal). Under the 2011 proposal, all initial margin models had 
to calculate the potential future exposure of the swap consistent with 
a one-tailed 99 percent confidence level over a 10-day close-out 
period. In addition, the initial margin model had to be calibrated to 
be consistent with a period of financial stress. Initial margin models 
were permitted to recognize portfolio effects and offsets within a 
portfolio of swaps with a counterparty if they were conducted under the 
same QMNA. The recognition of portfolio effects and offsets was 
limited, however, to swaps within the following broad asset classes: 
Commodity, credit, equity, and interest rates and foreign exchange 
(considered as a single asset class). No portfolio effects or offsets 
were recognized across transactions in different asset classes.
    The 2011 proposal requested comment on the requirements for initial 
margin models as well as the standardized look-up table based initial 
margin requirements. A number of commenters indicated that the 
assumption of a 10-day close-out period was too long and that many non-
cleared swaps could effectively be replaced in less than 10 days. More 
specifically, a number of commenters agreed that the close-out period 
applied to non-cleared swaps should be longer than that applied to 
listed futures (1 day) and cleared swaps (5 days) but suggested that 10 
days was too long. Other commenters indicated that the appropriate 
close-out period varied significantly across transactions and that a 
single close-out period would not be appropriate. One commenter 
suggested that covered swap entities should be allowed to use self-
determined close-out period assumptions based on their specific 
knowledge of the transaction and its market characteristics. A number 
of commenters suggested that the standardized look-up table did not 
appropriately recognize the kind of portfolio risk offsets that are 
allowed in the context of initial margin models.
2. 2014 Proposal
a. Internal Initial Margin Models
    As in the 2011 proposal, the Agencies are now proposing an approach 
whereby covered swap entities may calculate initial margin requirements 
using an approved initial margin model. As in the case of the 2011 
proposal, the proposed rule also requires that the initial margin 
amount be set equal to a model's calculation of the potential future 
exposure of the non-cleared swap consistent with a one-tailed 99 
percent confidence level over a 10-day close-out period. Generally, the 
modeling standards for the initial margin model 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, are no less conservative than 
those generally used by CCPs, and are also consistent with the 
standards of the 2013 international framework.\105\ More specifically, 
under the proposed rule initial margin models must capture all of the 
material risks that affect the non-cleared swap including material non-
linear price characteristics of the swap.\106\ For example, the initial 
margin calculation for a swap that is an option on an underlying asset, 
such as a credit default swap contract, would be

[[Page 57375]]

required to capture material non-linearities arising from changes in 
the price of the underlying asset or changes in its volatility. 
Accordingly, the Agencies' preliminary view is that these modeling 
standards should ensure that a non-cleared swap does not pose a greater 
systemic risk than a cleared swap.
---------------------------------------------------------------------------

    \105\ 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.
    \106\ See proposed rule Sec.  .8(d)(9).
---------------------------------------------------------------------------

    All initial margin models must be approved by a covered swap 
entity's prudential regulator before being used for margin calculation 
purposes. In the event that a model is not approved, initial margin 
calculations would have to be performed according to the standardized 
initial margin approach that is detailed in Appendix A and discussed 
below.
    In addition to the requirement that the models appropriately 
capture all material sources of risk, as discussed above, the proposed 
rule contains a number of standards and criteria that must be satisfied 
by initial margin models. These standards relate to the technical 
aspects of the model as well as broader oversight and governance 
standards. These standards are broadly similar to modeling standards 
that are already required for internal regulatory capital models.
    Initial margin models will be reviewed for approval by the 
appropriate Agency upon the request of a covered swap entity. Models 
that are reviewed for approval will be analyzed and subjected to a 
number of tests to ensure that the model complies with the requirements 
of the proposed rule. Given that covered swap entities may engage in 
highly specialized business lines with varying degrees of intensity, it 
is expected that specific initial margin models will vary across 
covered swap entities. Accordingly, the specific analyses that will be 
undertaken in the context of any single model review will have to be 
tailored to the specific uses for which the model is intended. The 
nature and scope of initial margin model reviews are expected to be 
generally similar to reviews that are conducted in the context of other 
model review processes such as those relating to the approval of 
internal models for regulatory capital purposes. Initial margin models 
will also undergo periodic supervisory reviews to ensure that they 
remain compliant with the requirements of the proposed rule and are 
consistent with existing best practices over time.
i. Ten-Day Close-Out Period Assumption
    Since non-cleared swaps are expected to be less liquid than cleared 
swaps, the proposed rule specifies a minimum close-out period for the 
initial margin model of 10 business days, compared with a typical 
requirement of 3 to 5 business days used by CCPs.\107\ Moreover, the 
required 10-day close-out period assumption is consistent with 
counterparty credit risk capital requirements for banks. Accordingly, 
to the extent that non-cleared swaps are expected to be less liquid 
than cleared swaps and to the extent that related capital rules which 
also mitigate counterparty credit risk similarly require a 10-day 
close-out period assumption, the Agencies' preliminary view is that a 
10-day close-out period assumption for margin purposes is 
appropriate.\108\
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    \107\ See proposed rule Sec.  .8(d)(1).
    \108\ In cases where a swap has a remaining maturity of less 
than 10 days, the remaining maturity of the swap, rather than 10 
days, may be used as the close-out period in the margin model 
calculation.
---------------------------------------------------------------------------

    Under the proposed rule, the initial margin model calculation must 
be performed directly over a 10-day close out period. In the context of 
bank regulatory capital rules, a long horizon calculation (such as 10 
days) may, under certain circumstances, be indirectly computed by 
making a calculation over a shorter horizon (such as 1 day) and then 
scaling the result of the shorter horizon calculation to be consistent 
with the longer horizon. The proposed rule does not provide this option 
to covered swap entities using an approved initial margin model. The 
Agencies' preliminary view is that the rationale for allowing such 
indirect calculations that rely on scaling shorter horizon calculations 
has largely been based on computational and cost considerations that 
were material in the past but are much less so in light of advances in 
computational speeds and reduced computing costs. The Agencies seek 
comment on whether the option to make use of such indirect calculations 
has a material effect on the burden of complying with the proposed 
rule, and whether such indirect methods are appropriate in light of 
current computing methods and costs.
ii. Recognition of Portfolio Risk Offsets
    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 seven broad risk 
categories: Agricultural commodities, energy commodities, metal 
commodities, other commodities, credit, equity, and foreign exchange 
and interest rates (as a single asset class) when calculating initial 
margin for a particular counterparty if the swaps are executed under 
the same EMNA.\109\ The proposed rule does not permit an initial margin 
model to reflect offsetting exposures, diversification, or other 
hedging benefits across broad risk categories.\110\ As a specific 
example, if a covered swap entity entered into two credit swaps and two 
energy commodity swaps with a single counterparty under an EMNA then 
the covered swap entity could use an approved initial margin model to 
perform two separate calculations: The initial margin collection amount 
calculation for the credit swaps and the initial margin collection 
amount calculation for the energy commodity swaps. Each calculation 
could recognize offsetting and diversification within the credit swaps 
and within the energy commodity swaps. The result of the two separate 
calculations would then be summed together to arrive at the total 
initial margin collection amount for the four swaps (two credit swaps 
and two energy commodity swaps).
---------------------------------------------------------------------------

    \109\ See proposed rule Sec.  .8(d)(3).
    \110\ Id.
---------------------------------------------------------------------------

    It is the preliminary view of the Agencies that the correlations of 
exposures across unrelated risk categories, such as credit and energy 
commodity, are not stable enough over time, and, importantly, during 
periods of financial stress, to be recognized in a regulatory margin 
model requirement. The Agencies note that in the case of commodities 
the number of distinct asset classes has been increased from one to 
four since the 2011 proposal. The Agencies' preliminary view is that a 
single commodity asset class is too broad and that the relationship 
between disparate commodity types, such as aluminum and corn, are not 
stable enough to warrant hedging benefits within the initial margin 
model. The Agencies seek comment on this specific treatment of 
commodities for initial margin purposes and whether greater or fewer 
distinctions should be made.
    Also, the Agencies are aware that some swaps may be difficult to 
classify into one and only one asset class as some swaps may have 
characteristics that relate to more than one asset class. Under the 
proposal, the Agencies expect that the covered swap entity would make a 
determination as to which asset class best represents the swap based on 
a holistic view of the underlying swap. As a specific example, many 
swaps may have some sensitivity to interest rates even though the 
majority of the swap's sensitivity relates to another asset class such 
as equity or credit. The Agencies seek comment on whether or not this 
approach is reasonable and whether or

[[Page 57376]]

not instances in which the classification of a swap into one of the 
broad asset classes described above is problematic and material. If 
such instances are material, the Agencies seek comment on alternative 
approaches to dealing with such swaps. Should the Agencies, for 
example, identify an additional asset class of ``unclassified swaps'' 
that would not be classified into one or another broad asset class and 
then require that swaps in this ``unclassified swaps'' category be 
margined separately from all other swaps? Are there other approaches to 
handling such swaps that should be considered by the Agencies?
iii. Stress Calibration
    In addition to a time horizon of 10 trading days and a one-tailed 
confidence level of 99 percent, the proposed rule requires the initial 
margin model to be calibrated to a period of financial stress.\111\ In 
particular, the initial margin model must employ a stress period 
calibration for each broad asset class (agricultural commodity, energy 
commodity, metal commodity, other commodity, credit, equity, and 
interest rate and foreign exchange). The stress period calibration 
employed for each broad asset class must be appropriate to the specific 
asset class in question. While a common stress period calibration may 
be appropriate for some asset classes, a common stress period 
calibration for all asset classes would only be considered appropriate 
if it is appropriate for each specific underlying asset class. Also, 
the time period used to inform the stress period calibration must 
include at least one year, but no more than five years of equally-
weighted historical data. This proposed requirement is intended to 
balance the tradeoff between shorter and longer data spans. Shorter 
data spans are sensitive to evolving market conditions but may also 
overreact to short-term and idiosyncratic spikes in volatility, 
resulting in procyclical margin requirements. Longer data spans are 
less sensitive to short-term market developments but may also place too 
little emphasis on periods of financial stress, resulting in less 
robust initial margins. Also, the requirement that the data be equally 
weighted is intended to establish a degree of consistency in model 
calibration while also ensuring that particular weighting schemes do 
not result in procyclical margin requirements during short-term bouts 
of heightened volatility.
---------------------------------------------------------------------------

    \111\ See proposed rule Sec.  .8(d)(13).
---------------------------------------------------------------------------

    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 end user counterparties are more 
likely to default, and counterparties handling a default are more 
likely to be under pressure. The stress calibration requirement also 
reduces the systemic risk associated with any increase in margin 
requirements that might occur in response to an abrupt increase in 
volatility during a period of financial stress as initial margin 
requirements will already reflect a historical stress event.
iv. Cross-Currency Swaps
    As discussed above, an approved initial margin model must generally 
account for all of the material risks that affect the non-cleared swap. 
An exception to this requirement has been made in the specific case of 
cross-currency swaps. In a cross-currency swap, one party exchanges 
with another party principal and interest rate payments in one currency 
for principal and interest rate payments in another currency, and the 
exchange of principal occurs upon the inception of the swap, with a 
reversal of the exchange of principal at a later date that is agreed 
upon at the inception of the swap.
    An initial margin model need not recognize any risks or risk 
factors associated with the foreign exchange transactions associated 
with the fixed exchange of principal embedded in the cross-currency 
swap. The initial margin model must recognize all risks and risk 
factors associated with all other payments and cash flows that occur 
during the life of the cross-currency swap. In the context of the 
standardized margin approach, described in Appendix A and further 
below, the gross initial margin rates have been set equal to those for 
interest rate swaps. This treatment recognizes that cross-currency 
swaps are subject to risks arising from fluctuations in interest rates 
but does not recognize any risks associated with the fixed exchange of 
principal since principal is typically not exchanged on interest rate 
swaps.
    The foreign exchange transactions associated with the fixed 
exchange of principal in a cross-currency swap are closely related to 
the exchange of principal that occurs in the context of a foreign 
exchange forward or swap. In 2012, the U.S. Treasury made a 
determination that foreign exchange forwards and swaps are not to be 
considered swaps under the Dodd-Frank Act, in part, because of their 
low risk profile.\112\ As a result, foreign exchange forwards and swaps 
are not subject to the proposed rule's margin requirements. 
Accordingly, the Agencies' preliminary view is that it is appropriate 
to treat that portion of a cross-currency swap that is a fixed exchange 
of principal in a manner that is consistent with the treatment of 
foreign exchange forwards and swaps. This treatment of cross-currency 
swaps is limited to only cross-currency swaps and does not extend to 
any other swaps such as non-deliverable currency forwards. The Agencies 
note that this treatment is consistent with the 2013 international 
framework and seek comment on (i) whether or not this treatment of 
cross-currency swaps is appropriate and (ii) whether the proposed 
treatment of cross-currency swaps creates any additional burdens or 
complexities that should be considered.
---------------------------------------------------------------------------

    \112\ 77 FR 69694 (November 20, 2012).
---------------------------------------------------------------------------

v. Frequency of Margin Calculation
    The proposed rule requires that an approved initial margin model be 
used to calculate the required initial margin collection amount on a 
daily basis. In cases where the initial margin collection amount 
increases, this new amount must be used as the basis for determining 
the amount of initial margin that must be collected from a financial 
end user with material swaps exposure or a swap entity counterparty. In 
addition, when a covered swap entity faces a financial end user with 
material swaps exposure, the covered swap entity must also calculate 
the initial margin collection amount from the perspective of its 
counterparty on a daily basis. In the event that this amount increases, 
the covered swap entity must use this new amount as the basis for 
determining the amount of initial margin that it must post to its 
counterparty.
    The use of an approved initial margin model may result in changes 
to the initial margin collection amount on a daily basis for a number 
of reasons. First, the characteristics of the swaps that have a 
material effect on their risk may change over time. As an example, the 
credit quality of a corporate reference entity upon which a credit 
default swap contract is written may undergo a measurable decline. A 
decline in the credit quality of the reference entity would be expected 
to have a material impact on the initial margin model's risk assessment 
and the resulting initial margin collection amount. More generally, as 
characteristics that are relevant to the risk of the swap change, so 
too will the initial margin collection amount. Importantly, any change 
to the composition of the swap portfolio that results in the addition 
or deletion of

[[Page 57377]]

swaps from the portfolio would result in a change in the initial margin 
collection amount. Second, the underlying parameters and data that are 
used in the model may change over time as underlying conditions change. 
As an example, in the event that a new period of financial stress is 
encountered in one or more asset classes, the initial margin model's 
risk assessment of a swap's overall risk may change as a result. While 
the stress period calibration is intended to reduce the extent to which 
small or moderate changes in the risk environment influence the initial 
margin model's risk assessment, a significant change in the risk 
environment that affects the required stress period calibration could 
influence the margin model's overall assessment of the risk of a swap. 
Third, quantitative initial margin models are expected to be maintained 
and refined on a continuous basis to reflect the most accurate risk 
assessment possible with available best practices and methods. As best 
practice risk management models and methods change, so too may the risk 
assessments of initial margin models.
vi. 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 CCP would require for similar 
transactions.\113\ This benchmarking requirement is intended to ensure 
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 swaps to CCPs by setting 
lower initial margin amounts for non-cleared transactions than for 
similar cleared transactions.
---------------------------------------------------------------------------

    \113\ See proposed rule Sec.  .8(f)(2)(ii).
---------------------------------------------------------------------------

b. Standardized Initial Margins
    Covered swap entities that are either unable or unwilling to make 
the technology and related infrastructure investments necessary to 
maintain an initial margin model may elect to use standardized initial 
margins. The standardized initial margins are detailed in Appendix A of 
the proposed rule.
i. Gross Initial Margins and Recognition of Offsets Through the 
Application of the Net-to-Gross Ratio
    The Agencies have proposed standardized initial margins that depend 
on the asset class (agricultural commodity, energy commodity, metal 
commodity, other commodity, equity, credit, foreign exchange and 
interest rate) and, in the case of credit and interest rate asset 
classes, further depend on the duration of the underlying non-cleared 
swap.
    In addition, the proposed standardized initial margin requirement 
allows for the recognition of risk offsets through the use of a net-to-
gross ratio in cases where a portfolio of non-cleared swaps is executed 
under an EMNA. The net-to-gross ratio compares the net current 
replacement cost of the non-cleared portfolio (in the numerator) with 
the gross current replacement cost of the non-cleared portfolio (in the 
denominator). The net current replacement cost is the cost of replacing 
the entire portfolio of swaps that are covered under the EMNA. The 
gross current replacement cost is the cost of replacing those swaps 
that have a strictly positive replacement cost under the EMNA. As an 
example, consider a portfolio that consists of two non-cleared swaps 
under an EMNA in which the mark-to-market value of the first swap is 
$10 (i.e., the covered swap entity is owed $10 from its counterparty) 
and the mark-to-market value of the second swap is -$5 (i.e., the 
covered swap entity owes $5 to its counterparty). Then the net current 
replacement cost is $5 ($10 - $5), the gross current replacement cost 
is $10, and the net-to-gross ratio would be 5/10 or 0.5.\114\
---------------------------------------------------------------------------

    \114\ Note that in this example, whether or not the 
counterparties have agreed to exchange variation margin has no 
effect on the net-to-gross ratio calculation, i.e., the calculation 
is performed without considering any variation margin payments. This 
is intended to ensure that the net-to-gross ratio calculation 
reflects the extent to which the non-cleared swaps generally offset 
each other and not whether the counterparties have agreed to 
exchange variation margin. As an example, if a swap dealer engaged 
in a single sold credit derivative with a counterparty, then the 
net-to-gross calculation would be 1.0 whether or not the dealer 
received variation margin from its counterparty.
---------------------------------------------------------------------------

    The net-to-gross ratio and gross standardized initial margin 
amounts (provided in Appendix A) are used in conjunction with the 
notional amount of the transactions in the underlying swap portfolio to 
arrive at the total initial margin requirement as follows:

Standardized Initial Margin = 0.4 x Gross Initial Margin + 0.6 x NGR 
x Gross Initial Margin

Where:

Gross Initial Margin = the sum of the notional value multiplied by 
the appropriate initial margin requirement percentage from Appendix 
A of each non-cleared swap under the EMNA; and
NGR = net-to-gross ratio

As a specific example, consider the two-swap portfolio discussed above. 
Suppose further that the swap with the mark-to-market value of $10 is a 
sold 5-year credit default swap with a notional value of $100 and the 
swap with the mark-to-market value of -$5 is an equity swap with a 
notional value of $100. The standardized initial margin requirement 
would then be:

[0.4 x (100 x 0.05 + 100 x 0.15) + 0.6 x 0.5 x (100 x 0.05 + 100 x 
0.15)] = 8 + 6 = 14.

    The Agencies further note that the calculation of the net-to-gross 
ratio for margin purposes must be applied only to swaps subject to the 
same EMNA and that the calculation is performed across transactions in 
disparate asset classes within a single EMNA such as credit and equity 
in the above example (i.e., all non-cleared swaps subject to the same 
EMNA can net against each other in the calculation of the net-to-gross 
ratio, as opposed to the modeling approach that allows netting only 
within each asset class). This approach is consistent with the 
standardized counterparty credit risk capital requirements. Also, the 
equations are designed such that benefits provided by the net-to-gross 
ratio calculation are limited by the standardized initial margin term 
that is independent of the net-to-gross ratio, i.e., the first term of 
the standardized initial margin equation which is 0.4 x Gross Initial 
Margin. Finally, if a counterparty maintains multiple swap portfolios 
under multiple EMNAs, the standardized initial margin amounts would be 
calculated separately for each portfolio with each calculation using 
the gross initial margin and net-to-gross ratio that is relevant to 
each portfolio. The total standardized initial margin would be the sum 
of the standardized initial margin amounts for each portfolio.
    The Agencies also note that the BCBS has recently adopted a new 
method for the purpose of capitalizing counterparty credit risk.\115\ 
While this alternative approach for recognizing risk offsets in a 
standardized framework may also be appropriate in a standardized margin 
context, the Agencies have preliminarily decided to adopt the net-to-
gross ratio approach described here to recognize risk offsets. The 
Agencies seek comment on whether the BCBS's recently adopted 
standardized approach would represent a material improvement relative 
to the

[[Page 57378]]

proposed method that employs the net-to-gross ratio.
---------------------------------------------------------------------------

    \115\ See BCBS, ``The Standardised Approach for Measuring 
Counterparty Credit Risk Exposures,'' (March 2014, revised April 
2014), available at: http://www.bis.org/press/p140331.htm.
---------------------------------------------------------------------------

ii. Calculation of the Net-to-Gross Ratio for Initial Margin Purposes
    The proposed standardized approach to initial margin depends on the 
calculation of a net-to-gross ratio. In the context of performing 
margin calculations, it must be recognized that at the time non-cleared 
swaps are entered into it is often the case that both the net and gross 
current replacement cost is zero. This precludes the calculation of the 
net-to-gross ratio. In cases where a new swap is being added to an 
existing portfolio that is being executed under an existing EMNA, the 
net-to-gross ratio may be calculated with respect to the existing 
portfolio of swaps. In cases where an entirely new swap portfolio is 
being established, the initial value of the net-to-gross ratio should 
be set to 1.0. After the first day's mark-to-market valuation has been 
recorded for the portfolio, the net-to-gross ratio may be re-calculated 
and the initial margin amount may be adjusted based on the revised net-
to-gross ratio.
iii. Frequency of Margin Calculation
    The proposed rule requires that the standardized initial margin 
collection amount be calculated on a daily basis. In cases where the 
initial margin collection amount increases, this new amount must be 
used as the basis for determining the amount of initial margin that 
must be collected from a financial end user with material swaps 
exposure or a swap entity. In addition, when a covered swap entity 
faces a financial end user with material swaps exposure, the covered 
swap entity must also calculate the initial margin collection amount 
from the perspective of its counterparty on a daily basis. In the event 
that this amount increases, the covered swap entity must use this new 
amount as the basis for determining the amount of initial margin that 
it must post to its counterparty.
c. Daily Calculation
    As in the case of internal-model-generated initial margins, the 
margin calculation under the standardized approach must also be 
performed on a daily basis. Since the standardized initial margin 
calculation depends on a standardized look-up table (presented in 
Appendix A), there is somewhat less scope for the initial margin 
collection amounts to vary on a daily basis. At the same time, however, 
there are some factors that may result in daily changes in the initial 
margin collection amount resulting from standardized margin 
calculations. First, any changes to the notional size of the swap 
portfolio that arise from any addition or deletion of swaps from the 
portfolio would result in a change in the standardized margin amount. 
As an example, if the notional amount of the swap portfolio increases 
as a result of adding a new swap to the portfolio then the standardized 
initial margin collection amount would increase. Second, changes in the 
net-to-gross ratio that result from changes in the mark-to-market 
valuation of the underlying swaps would result in a change in the 
standardized initial margin collection amount. Third, changes to 
characteristics of the swap that determine the gross initial margin 
(presented in Appendix A) would result in a change in the standardized 
initial margin collection amount. As an example, the gross initial 
margin applied to interest rate swaps depends on the duration of the 
swap. An interest rate swap with a duration between zero and two years 
has a gross initial margin of one percent while an interest rate swap 
with duration of greater than two years and less than five years has a 
gross initial margin of two percent. Accordingly, if an interest rate 
swap's duration declines from above two years to below two years, the 
gross initial margin applied to it would decline from two to one 
percent. Accordingly, the standardized initial margin collection amount 
will need to be computed on a daily basis to reflect all of the factors 
described above.
d. Combined Use of Internal Model Based and Standardized Initial 
Margins
    The Agencies expect that some covered swap entities may choose to 
adopt a mix of internal models and standardized approaches to 
calculating initial margin requirements. As a specific example, it may 
be the case that a covered swap entity engages in some swap 
transactions on an infrequent basis to meet client demands but the 
level of activity does not warrant all of the costs associated with 
building, maintaining and overseeing a quantitative initial margin 
model. Further, some covered swap entity clients may value the 
transparency and simplicity of the standardized approach. In such 
cases, the Agencies expect that it would be acceptable to use the 
standardized approach to margin such swaps.
    As discussed in the 2013 international framework, under certain 
circumstances it is appropriate to employ both a model based and 
standardized approach to calculating initial margins. At the same time, 
and as discussed in the 2013 international framework, the Agencies are 
aware that differences between the standardized approach and internal 
model based margins across different types of swaps could be used to 
``cherry pick'' the method that results in the lowest margin 
requirement. The Agencies would not view such an approach to choosing 
between a standardized and model based margin method as being 
appropriate and would raise safety and soundness concerns regarding the 
swap activities themselves. Rather, the choice to use one method over 
the other should be based on fundamental considerations apart from 
which method produces the most favorable margin results. Similarly, the 
Agencies do not anticipate there should be a need for covered swap 
entities to switch between the standardized or model-based margin 
method for a particular counterparty, absent a significant change in 
the nature of the entity's swap activities. The Agencies expect covered 
swap entities to provide a rationale for changing methodologies to 
their supervisory Agency if requested.

I. Section .9: Cross-Border Application of Margin 
Requirements

    In global markets, counterparties organized in different 
jurisdictions often transact in non-cleared swaps. Section 9 addresses 
the cross-border applicability of the proposed margin rules to covered 
swap entities.
1. Overview of 2011 Proposal and Public Comments
    The 2011 proposal provided an exclusion from the margin 
requirements for certain covered swap entities that operate in foreign 
jurisdictions.\116\ The 2011 proposal excluded any ``foreign non-
cleared swap or foreign non-cleared security-based swap'' of a 
``foreign covered swap entity,'' as those terms were defined in the 
2011 proposal, from application of the margin requirements. With this 
approach, the Agencies intended to limit the extraterritorial 
application of the margin requirements while preserving, to the extent 
possible, competitive equality among U.S. and foreign firms in the 
United States.
---------------------------------------------------------------------------

    \116\ When the prudential regulators proposed their margin 
requirements in 2011, neither the CFTC nor the SEC had yet adopted 
policies addressing various issues raised by cross-border swaps, 
including which swaps a U.S. entity and a foreign entity should 
count toward the de minimis thresholds for registration as a swap 
dealer or major swap participant.
---------------------------------------------------------------------------

    The 2011 proposal defined 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

[[Page 57379]]

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. 
Accordingly, only a covered swap entity that is organized under foreign 
law and not controlled, directly or indirectly, by a U.S. company (such 
as a foreign bank) would have been eligible for treatment as a foreign 
covered swap entity; neither a foreign branch of a U.S. bank nor a 
foreign subsidiary of a U.S. company would have been considered a 
foreign covered swap entity under the 2011 proposal. This treatment 
reflected the potential that legal, contractual, or reputational 
factors could expose the U.S. bank, or U.S. parent of the foreign 
subsidiary, to the risks of the foreign branch's or subsidiary's swap 
activities. Transactions of a foreign branch or subsidiary of a U.S. 
company could also have direct and significant connection with 
activities in, and effect on, commerce of the United States and 
therefore affect systemic risk in the United States. Similarly, neither 
a U.S. branch of a foreign bank nor a U.S. subsidiary of a foreign 
company would have been considered a foreign covered swap entity under 
the 2011 proposal.
    Under the 2011 proposal, foreign swaps would generally have 
included only swaps where the foreign covered swap entity's 
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 swap.\117\ 
Specifically, the 2011 proposal defined 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 
is not an entity, nor a branch or office of an entity, 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 under the swap or security-based swap has not been 
guaranteed by an affiliate of the counterparty that is an entity, or a 
branch of an entity, organized under the laws of the United States or 
any State, or a person resident in the United States.
---------------------------------------------------------------------------

    \117\ Under the 2011 proposal, swap and security-based swaps 
with U.S. counterparties would have been subject to the rule's 
margin requirements regardless of whether the covered swap entity is 
U.S. or foreign.
---------------------------------------------------------------------------

    The requirement that no U.S. affiliate may guarantee the 
counterparty's obligation was intended to prevent instances where such 
an affiliate, through a guarantee, effectively assumes ultimate 
responsibility for the performance of the counterparty's obligations 
under the swap. In particular, the Agencies were concerned that, 
without such a requirement, 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. 
swaps. Swaps guaranteed by a U.S. entity would also have a direct and 
significant connection with activities in, and an effect on, commerce 
of the U. S. and thus affect systemic risk in the United States.
    A number of commenters argued that the 2011 proposal would put U.S. 
firms that do business globally at a competitive disadvantage by 
applying U.S. rules to U.S. firms regardless of where their operations 
are conducted. These commenters suggested that U.S. firms operating 
abroad should be subject to the same margin requirements as other 
foreign firms to establish competitive equity. Other commenters argued 
that the 2011 proposal could create situations in which a U.S. firm 
operating abroad could be subjected to two different and potentially 
conflicting margin requirements, as the foreign jurisdiction could also 
impose margin requirements on the foreign operations of U.S. firms.
2. 2014 Proposal
    Excluded swaps. The 2014 proposal retains a slightly modified 
version of the exclusion proposed in 2011. Section .9 
of the proposed rule would exclude from coverage of the rule's margin 
requirements any foreign non-cleared swap of a foreign covered swap 
entity.\118\ Similar to the 2011 proposal, a ``foreign covered swap 
entity'' is any covered swap entity that is not (i) an entity organized 
under U.S. or State law, including a U.S. branch, agency, or subsidiary 
of a foreign bank; (ii) a branch or office of an entity organized under 
U.S. or State law; or (iii) an entity controlled by an entity organized 
under U.S. or State law.
---------------------------------------------------------------------------

    \118\ 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, as amended by section 722 of the 
Commodity Exchange Act relating to swaps ``shall not apply to 
activities outside the United States unless those activities . . . 
have a direct and significant connection with activities in, or 
effect on, commerce of the United States.''
---------------------------------------------------------------------------

    The proposed rule's definition of ``foreign non-cleared swap or 
foreign non-cleared security-based swap'' would cover any non-cleared 
swap of a foreign covered swap entity to which neither the counterparty 
nor any guarantor (on either side) is (i) an entity organized under 
U.S. or State law, including a U.S. branch, agency, or subsidiary of a 
foreign bank; (ii) a branch or office of an entity organized under U.S. 
or State law; or (iii) a covered swap entity controlled by an entity 
organized under U.S. or State law. Under this definition, foreign swaps 
could include swaps with a foreign bank or with a foreign subsidiary of 
a U.S. bank or bank holding company, so long as that subsidiary is not 
itself a covered swap entity. A foreign swap would not include a swap 
with a foreign branch of a U.S. bank or a U.S. branch or subsidiary of 
a foreign bank.
    Comparability determinations. In addition to the exclusion for 
certain swaps described above, the proposed rule would permit certain 
covered swap entities to comply with a foreign regulatory framework for 
non-cleared swaps if the Agencies determine that such foreign 
regulatory framework is comparable to the requirements of the proposed 
rule. At the time of the 2011 proposal it was unclear what margin 
requirements would be applied in foreign jurisdictions, making it 
difficult to rely on foreign regulatory regimes. However, the 
development of the 2013 international framework makes it more likely 
that regulators in multiple jurisdictions will adopt margin rules for 
non-cleared swaps that are comparable. In light of the 2013 
international framework, the Agencies are requesting comment on a 
proposal to allow certain non-U.S. covered swap entities to comply with 
the margin requirements of the proposed rule by complying with a 
foreign jurisdiction's margin requirements, subject to the Agencies' 
determination that the foreign rule is comparable to this proposed 
rule. These determinations would be made on a jurisdiction-by-
jurisdiction basis. Furthermore, the Agencies' determination may be 
conditional or unconditional. The Agencies could, for example, 
determine that certain provisions of the foreign regulatory framework 
are comparable to the requirements of the proposed rule but that other 
aspects are not comparable for purposes of substituted compliance.
    Under the proposed rule, certain types of covered swap entities 
operating in foreign jurisdictions would be able to meet the 
requirement of the proposed rule by complying with the foreign 
requirement in the event that a comparability determination is made by 
the Agencies, regardless of the location of the counterparty, provided 
that the covered swap entity's obligations under the swap are not 
guaranteed by a U.S. entity. If a covered swap entity's

[[Page 57380]]

obligations under a swap are guaranteed by a U.S. entity, the Agencies 
propose that the swap be subject to the proposed rule. Foreign covered 
swap entities (defined as discussed above) and foreign subsidiaries of 
U.S. entities that are covered swap entities would be eligible to take 
advantage of a comparability determination. The Agencies seek comment 
on whether a guarantee by a person organized under the laws of the 
United States or of any State should affect the availability of 
substituted compliance.
    The Agencies are also interested in commenters' views on whether 
the rule should clarify and define the concept of ``guarantee'' to 
better ensure that those swaps that pose risks to U.S. insured 
depository institutions would be included within the scope of the rule. 
For example, many swaps agreements contain cross-default provisions 
that give swaps counterparties legal rights against certain ``specified 
entities.'' In these arrangements, a swaps counterparty of a foreign 
subsidiary of a U.S. covered swap entity may have a contractual right 
to close out and settle its swaps positions with the U.S. entity if the 
foreign subsidiary of the U.S. entity defaults on its own swaps 
positions with the counterparty. While not technically a guarantee of 
the foreign subsidiary's swaps, these provisions may be viewed as 
reassuring counterparties to foreign subsidiaries that the U.S. bank 
stands behind its foreign subsidiaries' swaps. Other similar 
arrangements may include keep well agreements or liquidity puts. 
Moreover, depending on the magnitudes of the swaps positions involved, 
such agreements can expose the U.S. bank to the risk of unexpected and 
disorderly termination of a subset of its own swaps positions based on 
the swaps activities of its foreign subsidiary.
    In addition, U.S. branches and agencies of foreign banks would be 
permitted to comply with the foreign requirement for which a 
determination was made, provided their obligations under the swap are 
not guaranteed by a U.S. entity. While such branches and agencies 
clearly operate within the U.S., the proposed treatment reflects the 
principle that branches and agencies are part of the parent 
organization. Under this approach, foreign branches and agencies of 
U.S. banks would not be eligible for substituted compliance and would 
be required to comply with the U.S. requirement for the same reason. 
The Agencies are aware of concerns regarding potential competitive 
disadvantages that could arise as U.S. covered swap entities compete 
with U.S. branches and agencies of foreign banks in the market for non-
cleared swaps. The Agencies' preliminary view is that this concern can 
be addressed through the comparability determination process. A foreign 
jurisdiction with a substantially different margin requirement that 
resulted in a demonstrable competitive advantage over U.S. covered swap 
entities is unlikely to have processes that are comparable to the U.S. 
compliance requirements. Moreover, a foreign margin requirement that 
would confer a significant competitive advantage on foreign entities 
through a lower margin requirement or similar means would likely 
represent a general increase in systemic risk and weaker incentives for 
central clearing relative to the U.S. requirement. Accordingly, it is 
unlikely that such foreign requirements would be determined comparable 
by the Agencies, in which case the U.S. branch or agency of a foreign 
bank would be required to comply with the U.S. requirement.
    Under the proposed rule, if a foreign counterparty is subject to a 
foreign regulatory framework that has been determined to be comparable 
by the Agencies, a covered swap entity's posting requirement would be 
satisfied by posting (in amount, form, and at such time) as required by 
the foreign counterparty's margin collection requirement, provided that 
the counterparty is subject to the foreign regulatory framework. In 
these cases, the collection requirement of the foreign counterparty 
would suffice to ensure two-way exchange of margin. For example, if a 
U.S. bank that is a covered swap entity enters into a swap with a 
foreign hedge fund that is subject to a foreign regulatory framework 
for which the Agencies have made a comparability determination, the 
U.S. bank must collect the amount of margin as required under the U.S. 
rule, but need post only the amount of margin that the foreign hedge 
fund is required to collect under the foreign regulatory framework.
    The proposed rule provides that the Agencies will jointly make a 
determination regarding the comparability of a foreign regulatory 
framework that will focus on the outcomes produced by the foreign 
framework as compared to the U.S. framework. Moreover, as margin 
requirements are complex and have a number of related aspects, e.g., 
margin posting requirements, margin collection requirements, model 
requirements, eligible collateral, and segregation requirements, the 
Agencies propose to take a holistic view of the foreign regulatory 
framework that appropriately considers the outcomes produced by the 
entire framework. More specifically, the Agencies propose that they 
generally will not require that every aspect of a foreign regulatory 
framework be comparable to every aspect of the U.S. framework but will 
require that the outcomes achieved by both frameworks are comparable. 
The Agencies propose to consider factors such as the scope, objectives, 
and specific provisions of the foreign regulatory framework and the 
effectiveness of the supervisory compliance program administered, and 
the enforcement authority exercised, by the relevant foreign regulatory 
authorities.
    The Agencies propose to accept requests for a determination from a 
covered swap entity that it be allowed to comply with the foreign 
regulatory framework if a comparability determination were made to 
support such result. Once the Agencies make a favorable comparability 
determination for a foreign regulatory framework, any covered swap 
entity that could comply with the foreign framework will be allowed to 
do so (i.e., they will not have to make a specific request). The 
Agencies expect to consult with the relevant foreign regulatory 
authorities before making a determination.
    Entities not covered by the rule. The Agencies engage in this 
rulemaking pursuant to sections 731 and 764 of the Dodd-Frank Act, 
requiring registered swap dealers and security-based swap dealers for 
which one of the Agencies is the ``prudential regulator'' for purposes 
of Title VII, to comply with that Agency's margin rule for non-cleared 
swaps. Title VII's registration requirements are implemented by the 
CFTC and SEC, not the Agencies. After the prudential regulators issued 
their 2011 proposal, the CFTC adopted guidance and the SEC adopted a 
rule to address cross-border issues in swap regulation, including the 
circumstances in which foreign firms are required to register as swap 
entities.\119\ This guidance clarifies that foreign subsidiaries of 
U.S. firms engaging in swaps activities abroad are not required to 
register with the CFTC or SEC solely on account of their parent's 
presence in the United States. Accordingly, there may be notable 
circumstances in which, for example, a foreign subsidiary of a U.S. 
insured depository institution, including foreign subsidiaries of Edge 
Act Corporations, may engage in non-

[[Page 57381]]

cleared swaps activities abroad, without having to register with the 
CFTC or SEC, and accordingly without being covered by the margin rules 
being proposed by the Agencies in this Federal Register notice.
---------------------------------------------------------------------------

    \119\ 78 FR 45292 (July 26, 2013) (CFTC Interpretive Guidance); 
79 FR 39067 (July 9, 2014) (SEC rule). A central aspect of these 
policies is the definition of ``U.S. person,'' which is used to 
categorize a swap dealer, its counterparty, or major swap 
participant as either a person with substantial contacts to the 
United States or as a foreign person.
---------------------------------------------------------------------------

    The Agencies note that a substantial amount of swaps activities are 
currently conducted through foreign subsidiaries that may not be 
subject to certain elements of Title VII of the Dodd-Frank Act.\120\ If 
these foreign subsidiaries became fully consolidated with insured 
depository institutions for accounting purposes, the risks of such 
foreign activities could be borne by insured depository institutions. 
As noted above, in cases where the foreign subsidiaries are not 
registered as swap entities, the margin rules proposed by the Agencies 
likely would not apply by their own terms. The Agencies seek comment as 
to whether the proposed margin rules should be applied pursuant to the 
Agencies' general safety and soundness and other authority to foreign 
subsidiaries of such entities in all cases, irrespective of whether 
such subsidiaries are registered as swap entities.
---------------------------------------------------------------------------

    \120\ See section 722 of the Dodd-Frank Act.
---------------------------------------------------------------------------

    The Agencies seek comment on the proposed cross-border provisions 
of the proposed rule. In particular, are there any reasons not to 
recognize foreign regulatory frameworks in the manner that has been 
proposed? Does the recognition of foreign regulatory frameworks raise 
any competitive equity or related issues that the Agencies should 
consider? Are there any additional types of covered swap entities that 
should be permitted to comply with the U.S. framework by complying with 
a foreign framework? Are there any other covered swap entities that 
should not be permitted to comply with the U.S. rule in this manner? 
Are there any issues or potential negative consequences associated with 
the comparability determination process as described in the proposal?

J. Section .10: Documentation of Margin Matters

1. Overview of 2011 Proposal and Public Comments
    The 2011 proposal included documentation requirements for covered 
swap entities. Under the 2011 proposal, a covered swap entity would 
have had to execute trading documentation with each counterparty that 
included credit support arrangements that granted the covered swap 
entity the contractual right to collect initial margin and variation 
margin in such amounts, in such form, and under such circumstances as 
would have been necessary to meet the initial margin and variation 
margin requirements set forth in the rule.\121\ The trading 
documentation also would have had to specify (i) the methods, 
procedures, rules, and inputs for determining the value of each swap 
for purposes of calculating variation margin requirements, and (ii) the 
procedures by which any disputes concerning the valuation of swaps, or 
the valuation of assets collected or posted as initial margin or 
variation margin, would be resolved.
---------------------------------------------------------------------------

    \121\ See 2011 proposal Sec.  .5.
---------------------------------------------------------------------------

    A number of commenters suggested that formal documentation should 
not be required with each of a covered swap entity's counterparties. In 
particular, some commenters indicated that swaps with counterparties 
(e.g., nonfinancial end users) that would not generally be expected to 
post margin to a covered swap entity should not require formal 
documentation.
2. 2014 Proposal
    Section .10(a) of the proposal would retain the 
documentation requirements substantially as proposed in the 2011 
proposal, except that the requirements would apply only to swaps with 
counterparties that are swap entities or financial end users. Under the 
proposal, a covered swap entity must execute trading documentation with 
each counterparty that is a swap entity or a financial end user that 
includes a credit support arrangement that grants the covered swap 
entity the contractual right to collect and post initial and variation 
margin in such amounts, in such form, and under such circumstances as 
are required by the rule. The documentation must also specify the 
methods, procedures, rules, and inputs for determining the value of 
each non-cleared swap for purposes of calculating variation margin 
requirements and the procedures by which any disputes concerning the 
valuation of non-cleared swaps or the valuation of assets collected or 
posted as initial margin or variation margin may be resolved.
    The CFTC and SEC are responsible for specifying swap trading 
relationship documentation requirements for all swap entities. In the 
case of the CFTC, these requirements have been adopted.\122\ In the 
case of the SEC, these requirements have been proposed.\123\ The 
Agencies request comment on whether the proposal should deem compliance 
with the applicable CFTC or SEC documentation requirements as 
compliance with this proposed rule. Allowing compliance with CFTC and 
SEC documentation requirements to satisfy the proposed rule's 
requirements in these cases will reduce the burden on covered swap 
entities and avoid duplicative requirements while ensuring that the 
goals of the proposed rule's requirements are achieved. Alternatively, 
the Agencies request comment on whether documentation requirements in 
this rule are necessary to ensure that appropriate minimum 
documentation standards are in effect for all covered swap entities.
---------------------------------------------------------------------------

    \122\ 17 CFR part 23, subpart I (2014). See 77 FR 55903 
(September 11, 2012).
    \123\ 76 FR 3859 (January 21, 2011); 78 FR 30800 (May 23, 2013) 
(reopening of comment period).
---------------------------------------------------------------------------

K. Section .11: Capital

    The 2011 proposal would have required a covered swap entity to 
comply with any risk-based and leverage capital requirements already 
applicable to that covered swap entity as part of its prudential 
regulatory regime. A few commenters urged that capital should not be 
required with respect to covered swap entities' swaps exposures to 
nonfinancial end user counterparties. Other commenters argued that 
capital and collateral requirements for swaps should work together, so 
there is no need for both capital and margin requirements.
    In the period since the 2011 proposal, the banking agencies have 
strengthened regulatory capital requirements for banking organizations 
through adoption of the revised capital framework as well as through 
other rulemakings.\124\ The revised capital framework introduced a new 
common equity tier 1 capital ratio and a supplementary leverage ratio, 
raised the minimum tier 1 ratio and, for certain banking organizations, 
raised the leverage ratio, implemented strict eligibility criteria for 
regulatory capital instruments, and introduced a standardized 
methodology for calculating risk-weighted assets.
---------------------------------------------------------------------------

    \124\ See 78 FR 62018 (October 11, 2013) and 79 FR 20754 (April 
14, 2014). The revised capital framework also reorganized the 
banking agencies' capital adequacy guidelines into a harmonized, 
codified set of rules, located at 12 CFR part 3 (national banks and 
Federal savings associations); 12 CFR part 217 (state member banks, 
bank holding companies, and savings and loan holding companies); 12 
CFR part 324 (state nonmember banks and state savings associations). 
The requirements of 12 CFR parts 3, 217 and 324 became effective on 
January 1, 2014, for banking organizations subject to the advanced 
approaches capital rules, and as of January 1, 2015 for all other 
banking organizations.

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[[Page 57382]]

    The proposal similarly would require a covered swap entity to 
comply with risk-based and leverage capital requirements already 
applicable to the covered swap entity as follows:
     In the case of covered swap entities that are banking 
organizations,\125\ the elements of the revised capital framework that 
are applicable to the covered entity and have been adopted by the 
appropriate Federal banking agency under 12 U.S.C. 3907 and 3909 
(International Lending Supervision Act), 12 U.S.C. 1462(s) (Home 
Owner's Loan Act), and section 38 of the Federal Deposit Insurance Act 
(12 U.S.C. 1831o);
---------------------------------------------------------------------------

    \125\ ``Banking organization'' includes national banks, state 
member banks, state nonmember banks, Federal savings associations, 
state savings associations, U.S. intermediate holding companies 
formed pursuant to the Board's Regulation YY (12 CFR part 252) and 
top-tier bank holding companies domiciled in the United States not 
subject to the Board's Small Bank Holding Company Policy Statement 
(12 CFR part 225, Appendix C), as well as top-tier savings and loan 
holding companies domiciled in the United States except certain 
savings and loan holding companies that are substantially engaged in 
insurance underwriting or commercial activities.
---------------------------------------------------------------------------

     In the case of a foreign bank, any state branch or state 
agency of a foreign bank, the capital standards that are applicable to 
such covered entity under the Board's Regulation Y (12 CFR 225.2(r)(3)) 
or the Board's Regulation YY (12 CFR part 252);
     In the case of an Edge corporation or an Agreement 
corporation, the capital standards applicable to an Edge corporation 
engaged in banking pursuant to the Board's Regulation K (12 CFR 
211.12(c));
     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 FCS institution (other than Farmer 
Mac), the capital regulations set forth in 12 CFR part 615.\126\ On May 
8, 2014, the FCA proposed revisions to the capital rules for all FCS 
institutions, except Farmer Mac, that are broadly consistent with Basel 
III.\127\
---------------------------------------------------------------------------

    \126\ See proposed rule Sec.  .11.
    \127\ The FCA recently proposed revisions to its capital rules 
for all FCS institutions, except Farmer Mac, that are comparable to 
the Basel III Framework.
---------------------------------------------------------------------------

    The Agencies have determined that compliance with the regulatory 
capital rules described above is sufficient to offset the greater risk, 
relative to the risk of centrally cleared swaps, to the swap entity and 
the financial system arising from the use of non-cleared swaps, and 
helps ensure the safety and soundness of the covered swap entity. In 
particular, the Agencies note that the regulatory 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 swaps positions.\128\ In addition, the 
Agencies believe that these regulatory capital rules sufficiently take 
into account and address the risks associated with the swaps positions 
of a covered swap entity.\129\ As a result, the Agencies are not 
proposing separate capital requirements in the proposal.
---------------------------------------------------------------------------

    \128\ For example, with respect to interest rate, foreign 
exchange rate, credit, equity and precious metal derivative 
contracts that are not cleared, banking organizations subject to the 
revised capital framework are subject to a capital requirement based 
on the type of contract and remaining maturity, and takes into 
account counterparty credit risk as well as the credit risk 
mitigating factors of collateral. Banking organizations subject to 
the advanced approaches rules may use internal models for 
calculating capital requirements for non-cleared derivatives. See 12 
CFR part 3, subparts D and E (OCC); 12 CFR part 217, subparts D and 
E (Board); 12 CFR 324, subparts D and E (FDIC), each as applicable. 
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.
    \129\ See footnote 49, 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.
---------------------------------------------------------------------------

    In response to commenters that argued that the Agencies should not 
impose both capital and margin requirements, the Agencies note that the 
relevant statutory provisions require both capital and margin 
requirements. Moreover, the revised capital framework adopted by the 
banking agencies and this proposal are intended to operate as 
complementary regimes that minimize or eliminate duplication of 
requirements. To the extent that a covered swap entity collects margin 
on a non-cleared swap, the revised capital framework would recognize 
the risk mitigation effects of the margin that the covered swap entity 
has collected, which would in turn reduce the covered swap entity's 
risk-based capital requirement.

IV. Quantitative Impact of Margin Requirements

A. Overview

    The proposed rule would apply the initial margin and variation 
margin requirements to non-cleared swaps that are entered into by a 
covered swap entity over a substantial phase-in period that begins in 
December 2015. The proposed rule would not require an immediate or 
retroactive application of initial margin or variation margin for any 
swap entered into prior to the relevant compliance 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 
non-cleared swaps entered into prior to the relevant compliance date 
until those transactions are rolled over or renewed. The only 
requirements that would apply to a pre-compliance date transaction 
would be the initial margin and variation margin requirements to which 
the parties to the transaction had previously agreed by contract.
    The new requirements will have an impact on the costs of engaging 
in new non-cleared swaps after the applicable compliance date. 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. Since the 2011 proposal was 
released, a number of analyses have been conducted that attempt to 
estimate the total amount of liquidity that will be required by the new 
margin requirements. Given the complexity of this proposal and its 
inter-relationship to other rulemakings, these analyses are subject to 
considerable uncertainty. In particular, these analyses make a number 
of assumptions regarding: (i) The level of market activity in the 
future, (ii) the amount of central clearing in the future, and (iii) 
the level of financial market volatility and risk that will determine 
initial margin requirements. These studies also make a number of 
additional assumptions which may have a measurable influence on the 
analysis. Notwithstanding these uncertainties, the Agencies' 
preliminary view is that the analysis and data that appear in these 
studies are useful to gauge the approximate amount of liquidity that 
will be required by the new requirements for non-cleared swaps.

[[Page 57383]]

    Below is a discussion of a selection of studies that have been 
conducted in the recent past that relate to a margin framework similar 
to the proposed rule. Specifically, each of these studies uses the 2013 
international framework described above in estimating the total amount 
of initial margin collateral that will be required. While this proposal 
is largely consistent with the 2013 international framework, the two 
are not identical. Therefore, the results of these studies are limited 
by these differences.

B. Initial Margin Requirements

    The proposed rule will require an exchange of initial margin by 
many market participants, which represents a significant change in 
market practice. The total amount of initial margin that would be 
required at a point in time is an important input into an estimate of 
the liquidity costs of the new requirements. The table below presents 
estimates of the total amount of initial margin that would be required 
by U.S. swap entities and their counterparties once the requirements 
are fully implemented, that is, at the end of the phase-in period and 
after existing swaps are rolled into new swaps.

                  Estimated Initial Margin Requirements
------------------------------------------------------------------------
                                                          Initial margin
                         Source                              estimate
                                                               ($BN)
------------------------------------------------------------------------
BCBS-IOSCO--Model Based.................................             315
ISDA--Model Based.......................................             280
ISDA--Standardized......................................           3,570
------------------------------------------------------------------------

    The initial margin estimates provided in the table above are taken 
from two different studies that have examined the impact of the 2013 
international framework on overall liquidity needs. The studies were 
conducted by the BCBS and IOSCO \130\ and ISDA.\131\ Each of these 
studies reports an estimate of the global impact of margin 
requirements. In particular, these estimates include the impact of 
margin requirements on foreign financial institutions and their 
counterparties, in addition to U.S. financial institutions and their 
counterparties. In order to better align the studies' estimates with 
the impact of the proposed U.S. rule, the estimates in Table X have 
been reduced by 65 percent to reflect the fact that U.S. financial 
institutions and their counterparties account for roughly 35 percent of 
the global derivatives market.\132\ The estimate reported in the table 
above from the BCBS-IOSCO study reflects the estimate among those 
provided in the study that is most consistent with the proposed 
rule.\133\ Two estimates from the ISDA study are presented in the table 
above reflecting a high and low estimate. Both the ISDA low estimate 
and the BCBS-IOSCO estimate assume that all initial margin requirements 
are calculated according to an internal model with parameters 
consistent with those required by the proposed rule. The ISDA high 
estimate assumes that all initial margin requirements are calculated 
according to a standardized margin approach. Further, the standardized 
approach assumed in the ISDA study does not allow for the recognition 
of any offsets which would be allowed by the application of the net-to-
gross ratio under the proposed rule.\134\
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    \130\ See Basel Committee on Banking Supervision and the 
International Organization of Securities Commissions (2013), Margin 
Requirements for Non-Centrally Cleared Derivatives: Second 
Consultative Document, report (Basel, Switzerland: Bank for 
International Settlements, February).
    \131\ Documents on initial margin requirements are available on 
the International Swaps and Derivatives Association Web site.
    \132\ See ISDA Research Notes: Concentration of OTC Derivatives 
Among Major Dealers, Issue 4, 2010.
    \133\ The BCBS-IOSCO impact study discusses the impact of 
several different margin regimes, e.g., regimes with and without an 
initial margin threshold.
    \134\ The ISDA study was conducted based on the BCBS-IOSCO 
February 2013 consultative document which did not include any 
recognition of offsets in the standardized initial margin regime. 
Recognition of offsets was included in the final 2013 international 
framework.
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    As discussed above, these estimates represent the total amount of 
initial margin that will be required at a point in time once the 
requirements have been fully phased in and all existing non-cleared 
swaps have been rolled over into new non-cleared swaps. Accordingly, 
the full amount of initial margin amount estimates provided in the 
table above would not be realized until, at the earliest, 2019.
    The amounts reported in the table above reflect estimated amounts 
of initial margin that will be required under this proposal but do not 
reflect the cost of providing these amounts by covered swap entities 
and their counterparties. The cost of providing initial margin 
collateral depends on the difference between the cost of raising 
additional funds and the rate of return on the assets that are 
ultimately pledged as initial margin. In some cases, it may be that 
some entities providing initial margin, such as pension funds and asset 
managers, will provide assets as initial margin that they already own 
and would have owned even if no requirements were in place. In such 
cases, the economic cost of providing initial margin collateral is 
expected to be low. In other cases, entities engaging in non-cleared 
swaps will have to raise additional funds to secure assets that can be 
pledged as initial margin. The greater the cost of their marginal 
funding relative to the rate of return on the initial margin 
collateral, the greater the cost of providing collateral assets. It is 
difficult, however, to estimate these costs due to differences in 
marginal funding costs across different types of entities as well as 
differences in marginal funding costs over time and differences in the 
rate of return on different collateral assets that may be used to 
satisfy the initial margin requirements.

C. Variation Margin Requirements

    The proposal will also require that variation margin be exchanged 
between covered swap entities and certain of their counterparties. The 
Agencies' preliminary view is that the impact of such requirements are 
low in the aggregate because: (i) regular exchange of variation margin 
is already a well-established market practice among a large number of 
market participants, and (ii) exchange of variation margin simply 
redistributes resources from one entity to another in a manner that 
imposes no aggregate liquidity costs. An entity that suffers a 
reduction in liquidity from posting variation margin is offset by an 
increase in the liquidity enjoyed by the entity receiving the variation 
margin.

D. Request for Comment

    While the Agencies' preliminary view is that the studies referenced 
above are broadly useful for considering the overall liquidity costs of 
the new requirements, they do not provide useful estimates of other 
aspects of cost including, for example, the operational costs of 
complying with the requirements. Also, commenters may have additional 
information on the economic and liquidity costs that are not addressed 
in the studies referenced above. 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: (i) The expected costs of, or additional liquidity 
required by, the initial margin and variation margin requirements, and 
(ii) the potential benefits of the initial margin and variation margin 
requirements to covered swap entities, their counterparties, and the 
financial system as a whole. The analyses should also (i) address 
operational and other

[[Page 57384]]

business related costs associated with implementing the proposed rule, 
and (ii) take into consideration and disclose any expected effects of 
the likely clearing of certain swaps through central counterparties in 
the future.

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, sec. 
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 (PRA) of 1995 (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 OMB control number for the OCC is 
1557-0251. The FDIC will obtain an OMB control number. The OMB control 
number for the Board is 7100-0361. In addition, as permitted by the 
PRA, the Board proposes to extend for three years, with revision, the 
Reporting Requirements Associated with Regulation KK (Margin and 
Capital Requirements for Covered Swaps Entities) (Reg KK; OMB No. 7100-
0361). The information collection requirements contained in this joint 
notice of proposed rulemaking have been submitted to OMB for review and 
approval by the OCC and FDIC under section 3507(d) of the PRA and 
section 1320.11 of OMB's implementing regulations (5 CFR 1320). The 
Board reviewed the proposed rule under the authority delegated to the 
Board by OMB. The proposed rule contains requirements subject to the 
PRA. The reporting requirements are found in Sec. Sec.  
.8(c)(1), .8(c)(2), .8(c)(3), 
.8(d)(5), .8(d)(10), .8(d)(11), 
.8(d)(12), .8(d)(13), and .9(e). The 
recordkeeping requirements are found in Sec. Sec.  .2 
definition of ``eligible master netting agreement,'' paragraph (4), 
.5(b)(2)(i), .8(e), .8(f)(2), 
.8(f)(3), .8(f)(4), .8(g), .8(h), 
and .10. These information collection requirements would 
implement sections 731 and 764 of the Dodd-Frank Act, as mentioned in 
the Abstract below.
    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. Comments on 
aspects of this notice that may affect reporting or recordkeeping 
requirements and burden estimates should be sent to 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 to 
202-395-5806, Attention, Commission and Federal Banking Agency Desk 
Officer.
Proposed Information Collection
    Title of Information Collection: Reporting and Recordkeeping 
Requirements Associated with Margin and Capital Requirements for 
Covered Swap Entities.
    Frequency of Response: Event-generated and annual.
    Affected Public: The affected public of the OCC, FDIC, and Board is 
assigned generally in accordance with the entities covered by the scope 
and authority section of their respective proposed rule. Businesses or 
other for-profit.
    Respondents:
    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.
    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.
    Board: Any state member bank (as defined in 12 CFR 208.2(g)), bank 
holding company (as defined in 12 U.S.C. 1841), savings and loan 
holding company (as defined in 12 U.S.C. 1467a), foreign banking 
organization (as defined in 12 CF. 211.21(o)), foreign bank that does 
not operate an insured branch, 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(2) of the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992 (12 U.S.C. 4502(2)), the proposed rule does not 
contain any collection of information that requires the approval of the 
OMB under the PRA.\135\
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    \135\ For the 2011 proposal, FHFA noted that with respect to any 
of its regulated entities, the rule would not have contained any 
collection of information pursuant to the PRA. However, provisions 
in Sec.  .11(e) of FHFA's 2011 proposal allowing a 
third party that is not subject to regulation by a prudential 
regulator to request prior written approval of an initial margin 
model for use by Fannie Mae, Freddie Mac or the Federal Home Loan 
Banks would have been a collection of information under the PRA. See 
76 FR 27564 at 27584. As already noted, FHFA is not re-proposing as 
part of the proposed rule a provision similar to that found in Sec.  
.11(e) of the 2011 proposal. As a consequence, the 
provision that triggered a FHFA request for OMB approval of an 
information collection in 2011 is no longer part of the proposed 
rule.

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[[Page 57385]]

    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.
    Abstract: Sections 731 and 764 of the Dodd-Frank Act would 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.
Reporting Requirements
    Section .8 establishes standards for initial margin 
models. These standards include (1) 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)); (2) a requirement 
that a covered swap entity notify the relevant Agency in writing 60 
days 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)); (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 
incorporation of any proxy or approximation used to capture the risks 
of the covered swap entity's non-cleared swaps or non-cleared security-
based swaps 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)(5), .8(d)(10), 
.8(d)(11), .8(d)(12), and .8(d)(13)).
    Section .9(e) allows a covered swap entity to request that 
the prudential regulators make a substituted compliance determination 
and must provide the reasons therefore and other required supporting 
documentation. A request for a substituted compliance determination 
must include a description of the scope and objectives of the foreign 
regulatory framework for non-cleared swaps and non-cleared security-
based swaps; the specific provisions of the foreign regulatory 
framework for non-cleared swaps and security-based swaps (scope of 
transactions covered; determination of the amount of initial and 
variation margin required; timing of margin requirements; documentation 
requirements; forms of eligible collateral; segregation and 
rehypothecation requirements; and approval process and standards for 
models); the supervisory compliance program and enforcement authority 
exercised by a foreign financial regulatory authority or authorities in 
such system to support its oversight of the application of the non-
cleared swap and security-based swap regulatory framework; and any 
other descriptions and documentation that the prudential regulators 
determine are appropriate. A covered swap entity may make a request 
under this section only if directly supervised by the authorities 
administering the foreign regulatory framework for non-cleared swaps 
and non-cleared security-based swaps.
Recordkeeping Requirements
    Section .2 defines terms used in the proposed rule, 
including the definition of ``eligible master netting agreement,'' 
which provides that a covered swap entity that relies on the agreement 
for purpose of calculating the required margin must (1) conduct 
sufficient legal review of the agreement to conclude with a well-
founded basis that the agreement meets specified criteria and (2) 
establish and maintain written procedures for monitoring relevant 
changes in law and to ensure that the agreement continues to satisfy 
the requirements of this section. The term ``eligible master netting 
agreement'' is used elsewhere in the proposed rule to specify instances 
in which a covered swap entity may (1) calculate variation margin on an 
aggregate basis across multiple non-cleared swaps and security-based 
swaps and (2) calculate initial margin requirements under an initial 
margin model for one or more swaps and security-based swaps.
    Section .5(b)(2)(i) specifies that a covered swap entity 
shall not be deemed to have violated its obligation to collect or post 
margin from or to a counterparty if the covered swap entity has made 
the necessary efforts to collect or post the required margin, including 
the timely initiation and continued pursuit of formal dispute 
resolution mechanisms, or has otherwise demonstrated upon request to 
the satisfaction of the agency that it has made appropriate efforts to 
collect or post the required margin.
    Section .8 establishes standards for initial margin 
models. These standards include (1) a requirement that a covered swap 
entity review its initial margin model annually (Sec.  .8(e)); 
(2) 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)); (3) a requirement that the covered swap entity 
adequately document all material aspects of its initial margin model 
(Sec.  .8(g)); and (4) that the covered swap entity must 
adequately document internal authorization procedures, including 
escalation procedures, that require review and approval of any change 
to the initial margin calculation under the initial margin model, 
demonstrable analysis that any basis for any such change is consistent 
with the requirements of this section, and independent review of such 
demonstrable analysis and approval (Sec.  .8(h)).
    Section .10 requires a covered swap entity to execute 
trading documentation with each counterparty that is either a swap 
entity or financial end user regarding credit support arrangements that 
(1) provides the contractual right to collect and post initial margin 
and variation margin in such amounts, in such form, and under such 
circumstances as are required; and (2) specifies the methods, 
procedures, rules, and inputs for determining the value of each non-
cleared swap or non-cleared security-based swap for purposes of 
calculating variation margin requirements, and the procedures for 
resolving any disputes concerning valuation.
    Estimated Burden per Response:
Reporting Burden
    Sec. Sec.  .8(c)(1), .8(c)(2), .8(c)(3), 
.8(d)(5), .8(d)(10), .8(d)(11), 
.8(d)(12), and .8(d)(13): 240 hours.
    Sec.  .9(e): 10 hours.
Recordkeeping Burden
    Sec. Sec.  .2, .5(b)(2)(i), .8(e), 
.8(f)(2), .8(f)(3), .8(f)(4), 
.8(g), .8(h), and .10: 69 hours.

[[Page 57386]]

OCC
    Number of respondents: 20.
    Total estimated annual burden: 6,780 hours.
FDIC
    Number of respondents: 3.
    Total estimated annual burden: 1,017 hours.
Board
    Number of respondents: 50.
    Proposed revisions only estimated annual burden: 16,950 hours 
(Subpart A).
    Total estimated annual burden: 17,048 hours.

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 welcomes 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-10), which were added 
by sections 731 and 764 of the Dodd-Frank Act, respectively, 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 covered swap entities enter. 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.\136\ 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. In 
addition, sections 731 and 764 of the Dodd-Frank Act require the 
Agencies, in establishing capital requirements 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 that are not otherwise subject to 
regulation by virtue of being a swap entity.\137\
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    \136\ See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-10(e)(3)(A).
    \137\ See 7 U.S.C. 6s(e)(2)(C); 15 U.S.C. 78o-10(e)(2)(C). The 
Agencies are referencing existing capital regulations that covered 
swap entities are already subject to and, as a consequence, do not 
expect an incremental impact as a result of these requirements.
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    This proposed rule implements the statutory provisions, which 
require the Agencies to adopt rules jointly to establish capital 
requirements and initial and variation margin requirements for covered 
swap 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.
    2. Small entities affected by the proposal. This proposal may have 
an effect predominantly on two types of small entities: (i) Covered 
swap entities that are subject to the proposed rule's capital and 
margin requirements; and (ii) counterparties that engage in swap 
transactions with covered swap entities.
    A financial institution generally is considered small if it has 
assets of $550 million or less.\138\ Based on 2014 Call Report data, no 
covered swap entities had total consolidated domestic assets of $550 
million or less. The Agencies do not expect that any small financial 
institution is likely to be a covered swap entity, because these small 
financial institutions are unlikely to engage in the level of swap 
activity that would require them to register as swap dealers or major 
swap participants.\139\
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    \138\ See 13 CFR 121.201 (effective July 14, 2014); see also 13 
CFR 121.103(a)(6) (noting factors that the Small Business 
Administration considers in determining whether an entity qualifies 
as a small business, including receipts, employees, and other 
measures of its domestic and foreign affiliates).
    \139\ The CFTC has published a list of provisionally registered 
swap dealers as of July 29, 2014 and provisionally registered major 
swap participants that does not include any small financial 
institutions. See http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer and http://www.cftc.gov/LawRegulation/DoddFrankAct/registermajorswappart. The SEC has not yet imposed a 
registration requirement on entities that meet the definition of 
security-based swap dealer or major security-based swap participant.
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    The initial and variation margin requirements of the proposed rule 
apply to non-cleared swap transactions entered into by a covered swap 
entity with counterparties that are swap entities or financial end 
users. Non-financial or ``commercial'' end users would not be subject 
to specific requirements under the proposed rule, and a covered swap 
entity's collection of margin from these types of counterparties is 
subject to the judgment of the covered swap entity. That is, under the 
proposed rule, a covered swap entity is not required to collect initial 
or variation margin with respect to any non-cleared swap or non-cleared 
security-based swap with a counterparty that is a nonfinancial end user 
but shall collect initial and variation margin at such times and in 
such forms and such amounts (if any) that the covered swap entity 
determines appropriately address the credit risk posed by the 
counterparty and the risks of such non-cleared swaps and non-cleared 
security-based swaps. In this respect, the Agencies intend for the 
proposed requirements to be consistent with current market practice for 
such end users, with the understanding that in many cases little or no 
margin is, or will be, exchanged with these counterparties. The 
documentation requirements of the proposed rule likewise would not 
apply to these nonfinancial end users. The segregation requirement of 
the proposed rule could apply in cases where the covered swap entity 
posts margin to a nonfinancial end user, even though a covered swap 
entity is not required to post margin to nonfinancial end users under 
the proposed rule. In particular, under the proposal, a covered swap 
entity that posts any collateral other than variation margin shall 
require that all funds or other property other than variation margin 
provided by the covered swap entity be held by one or more custodians 
that are not affiliates of the covered swap entity or the counterparty. 
The Agencies believe that the treatment of nonfinancial end users under 
the proposal should reduce the burden on nonfinancial end users 
including those that are small entities.
    The rule would require covered swap entities to post margin to and 
collect margin on non-cleared swaps from counterparties that are swap 
entities or financial end users. The number of such counterparties and 
the extent to which certain types of companies are likely to be 
counterparties are unknown. As noted above, the CFTC has provided a 
list of provisionally registered swap dealers that includes 102 
institutions and provisionally registered major swap participants that 
includes 2 institutions.\140\ Swap entities also would

[[Page 57387]]

include security-based swap dealers and major security-based swap 
dealers of which the number is unknown.\141\ The number of financial 
end user counterparties is also unknown.
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    \140\ http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer and http://www.cftc.gov/LawRegulation/DoddFrankAct/registermajorswappart.
    \141\ The number of security-based swap dealers and major 
security-based swap dealers is unknown because, unlike the CFTC, the 
SEC has not yet set up their registration system.
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    The application of initial margin requirements to swaps with 
financial end user counterparties is limited, depending on the 
counterparty's level of swap activity. With respect to financial end 
user counterparties that engage in swap transactions with swap entities 
that are subject to the proposed rule's margin requirements, the 
proposed rule minimizes the burden on small entities by requiring that 
such counterparties have a material swaps exposure in order to be 
subject to initial margin requirements. Material swaps exposure for an 
entity is defined to mean that an entity and its affiliates have an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps with all counterparties for June, July and August of the 
previous calendar year that exceeds $3 billion, where such amount is 
calculated only for business days. In addition, the proposed rule 
provides an initial margin threshold resulting in an aggregate credit 
exposure of $65 million from all non-cleared swaps and non-cleared 
security-based swaps between a covered swap entity and its affiliates 
and a counterparty and its affiliates. A covered swap entity would not 
need to collect initial margin from a counterparty to the extent the 
amount is below the initial margin threshold. The Agencies expect the 
initial margin threshold should further reduce the impact of the 
proposal on small entities.
    Under regulations issued by the Small Business Administration, a 
``small entity'' includes firms within the ``Securities, Commodity 
Contracts, and Other Financial Investments and Related Activities'' 
sector with assets of $38.5 million or less and ``Funds, Trusts and 
Other Financial Vehicles'' with assets of $32.5 million or less.\142\ 
The Agencies do not expect that there will be a significant number of 
small entities that will have material swaps exposure or meet the 
initial margin threshold amount. In particular, according to 2014 Call 
Report data, banks with $550 million or less in total assets had an 
average notional derivative exposure of approximately $4 million and a 
large number of these entities reported no notional derivative 
exposure.
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    \142\ 13 CFR 121.201.
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    As noted above, all financial end users would be subject to the 
variation margin requirements and documentation requirements of the 
proposed rule. However, the Agencies believe that such treatment is 
consistent with current market practice and should not represent a 
significant burden on small financial end users. Consequently, the 
proposed rule would not appear to have a significant economic impact on 
a substantial number of small entities.
    3. Compliance requirements. With respect to initial and variation 
margin requirements, the Agencies' proposed rule does not apply 
directly to counterparties that engage in swap transactions with swap 
entities. However, the proposed rule requires a covered swap entity to 
collect and post a minimum amount of initial margin (subject to a 
threshold) from all counterparties that are swap entities and financial 
end users with material swaps exposure and to collect and post a 
minimum amount of variation margin from all swap entity and financial 
end user counterparties. Certain aspects of the segregation requirement 
of the proposal would also apply regardless of the size of the 
counterparty. In particular, the proposal provides that a covered swap 
entity that posts any collateral other than variation margin with 
respect to a non-cleared swap or non-cleared security-based swap shall 
require that all funds or other property other than variation margin 
provided by the covered swap entity be held by one or more custodians 
that are not affiliates of the covered swap entity or the 
counterparty.\143\ As a consequence, the margin requirements may affect 
the amount of margin that counterparties that are small entities are 
required to collect and post to covered swap entity counterparties when 
transacting in swaps 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 post or 
collect initial margin or variation margin from those counterparties 
but would be required to do so under the proposed rule.
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    \143\ By contrast, a covered swap entity is only required to 
segregate margin collected pursuant to section .3(a) of the 
rule from financial end users with material swaps exposure and swap 
entities.
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    4. Other Federal rules. Sections 731 and 764 of the Dodd-Frank Act 
require the CFTC and SEC separately to adopt rules imposing capital and 
margin requirements for swap entities for which there is no prudential 
regulator.\144\ 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.\145\ Assuming all swap entities will be subject to 
an Agency, CFTC, or SEC margin rule that requires collection of initial 
margin, this rule will result in a collect-and-post system for all non-
cleared swaps between swap entities.
---------------------------------------------------------------------------

    \144\ See 7 U.S.C. 6s(e)(2)(B); 15 U.S.C. 78o-10(e)(2)(B).
    \145\ See 7 U.S.C. 6s(e)(2)(A); 6s(e)(3)(D); 15 U.S.C. 78o-
10(e)(2)(A), 78o-10(e)(3)(D). Staff of the Agencies have consulted 
with staff of the CFTC and SEC in developing the proposed rule.
---------------------------------------------------------------------------

    The Agencies acknowledge that both the CFTC and SEC are responsible 
for specifying swap trading relationship documentation requirements for 
all registered swap dealers, major swap participants, security-based 
swap dealers and major security-based swap participants. In the case of 
the CFTC, these requirements have been adopted.\146\ In the case of the 
SEC, these requirements have been proposed.\147\ The Agencies request 
comment on whether the 2014 proposal should deem compliance with the 
applicable CFTC or SEC documentation requirements as compliance with 
this rule. Allowing compliance with CFTC and SEC documentation 
requirements to satisfy the proposed rule's requirements in these cases 
will reduce the burden on covered swap entities and avoid duplicative 
requirements while ensuring that the goals of the proposed rule's 
requirements are achieved. Alternatively, the Agencies request comment 
on whether documentation requirements in this rule are necessary to 
ensure that appropriate minimum documentation standards are in effect 
for all covered swap entities.
---------------------------------------------------------------------------

    \146\ See Confirmation, Portfolio Reconciliation, Portfolio 
Compression, and Swap Trading Relationship Documentation 
Requirements for Swap Dealers and Major Swap Participants, 77 FR 
55903 (Sept. 11, 2012), available at http://www.gpo.gov/fdsys/pkg/FR-2012-09-11/pdf/2012-21414.pdf.
    \147\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 76 FR 3,859 (Jan. 2011).
---------------------------------------------------------------------------

    Section 7 of the proposal also contains requirements regarding 
segregation and rehypothecation of initial margin for non-cleared for 
swaps. Under the Dodd-Frank Act, the CFTC and SEC have authority to 
separately adopt requirements for swap entities with respect to the 
treatment of collateral posted by their counterparties

[[Page 57388]]

to margin, guarantee, or secure non-cleared swaps pursuant to sections 
724 and 763 of the Dodd-Frank Act. The CFTC has adopted such 
requirements, and the SEC has proposed such requirements.\148\ To the 
extent that the CFTC and SEC segregation requirements differ from those 
of this proposal, the covered swap entity would be expected to comply 
with the stricter segregation rule.
---------------------------------------------------------------------------

    \148\ The CFTC issued a final rule regarding these arrangements 
and the SEC has proposed a rule. See Protection of Collateral of 
Counterparties to Uncleared Swaps; Treatment of Securities in a 
Portfolio Margining Account in a Commodity Broker Bankruptcy, 78 FR 
66621 (Nov. 6, 2013); Capital, Margin, and Segregation Requirements 
for Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital Requirements for Broker-Dealers, 78 FR 4365 
(Jan. 22, 2013).
---------------------------------------------------------------------------

    Section 9 of the proposed rule also allows for recognition of other 
regulatory regimes in certain circumstances. Pursuant to this section, 
certain types of covered swap entities operating in foreign 
jurisdictions would be able to meet the U.S. requirement by complying 
with the foreign requirement in the event that a comparability 
determination is made by the Agencies, regardless of the location of 
the counterparty. The Agencies are seeking comment on the proposal's 
approach to recognizing other regulatory regimes. Allowing compliance 
with other regulatory regimes to satisfy the proposed rule's 
requirements in these cases will reduce the burden on covered swap 
entities and avoid duplicative requirements while ensuring that the 
goals of the proposed rule's requirements are achieved.
    The proposed rule prescribes margin requirements on all non-cleared 
swap transactions between a covered swap entity and its counterparties 
including transactions between banks that are covered swap entities and 
their affiliates that are financial end users including subsidiaries of 
banks. To the extent that the proposed rule covers interaffiliate swap 
transactions, sections 23A and 23B of the Federal Reserve Act (``FRA'') 
might also be applicable. Section 608 of the Dodd-Frank Act amended 
section 23A of the FRA to include as a covered transaction a derivative 
transaction with an affiliate, to the extent that the transaction 
causes a member bank or a subsidiary to have credit exposure to the 
affiliate. Banks that are swap entities may have collateral 
requirements as a result of this proposal and section 608 of the Dodd-
Frank Act with respect to their swap transactions with affiliates. To 
the extent there are differences, the stricter rule would apply.
    5. Significant alternatives to the proposed rule. As discussed 
above, the Agencies have mitigated the impact of the margin 
requirements on nonfinancial end users from which swap entities may be 
required to collect initial margin and/or variation margin by leaving 
the collection of margin from these types of counterparties to the 
judgment of the covered swap entity consistent with current market 
practice. In addition, the Agencies have proposed to reduce the effect 
of the proposed rule on counterparties to covered swap entities, 
including small entities, by requiring a material swaps exposure for a 
financial end user counterparty to be subject to initial margin 
requirements and through the implementation of an initial margin 
threshold amount. The Agencies have also requested comment on a variety 
of alternative approaches to implementing margin requirements. The 
Agencies welcome comment on any significant alternatives that would 
minimize the impact of the proposal on small entities.
    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 the rule would 
not substantially affect any business that its regulated entities might 
conduct with such 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.

C. OCC Unfunded Mandates Reform Act of 1995 Determination

    The OCC has analyzed the proposed rule under the factors in the 
Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this 
analysis, the OCC considered whether the proposed rule includes a 
Federal mandate that may result in the expenditure by State, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year (adjusted annually for inflation).
    The OCC has determined this proposed rule is likely to result in 
the expenditure by the private sector of $100 million or more in any 
one year (adjusted annually for inflation). The OCC has prepared a 
budgetary impact analysis and identified and considered alternative 
approaches. When the proposed rule is published in the Federal 
Register, the full text of the OCC's analysis will 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/SUBPART [ ]--[RESERVED]

MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES


.1 Authority, purpose, scope, and compliance dates.
.2 Definitions.
.3 Initial margin.
.4 Variation margin.
.5 Minimum transfer amount and satisfaction of collecting 
and posting requirements.
.6 Eligible collateral.
.7 Segregation of collateral.
.8 Initial margin models and standardized amounts.
.9 Cross-border application of margin requirements.
.10 Documentation of margin matters.
.11 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 Cash and Noncash Initial 
Margin Collateral


Sec.  .1  Authority, purpose, scope, and compliance dates.

    (a) [Reserved]
    (b) [Reserved]
    (c) [Reserved]
    (d) Compliance dates. Covered swap entities must comply with the 
minimum margin requirements for non-cleared swaps and non-cleared 
security-based swaps on or before the following dates for non-cleared 
swaps and non-cleared security-based swaps entered into on or after the 
following dates--
    (1) December 1, 2015 with respect to the requirements in Sec.  
.4 for variation margin for non-cleared swaps and non-cleared 
security-based swaps.
    (2) December 1, 2015 with respect to the requirements in Sec.  
.3 for initial margin for any non-cleared swaps and non-
cleared security-based swaps, where both:

[[Page 57389]]

    (i) The covered swap entity combined with all its affiliates; and
    (ii) its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps for June, July and August 2015 that exceeds $4 trillion, 
where such amounts are calculated only for business days.
    (3) December 1, 2016 with respect to the requirements in Sec.  
.3 for initial margin for any non-cleared swaps and non-
cleared security-based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps for June, July and August 2016 that exceeds $3 trillion, 
where such amounts are calculated only for business days.
    (4) December 1, 2017 with respect to the requirements in Sec.  
.3 for initial margin for any non-cleared swaps and non-
cleared security-based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps for June, July and August 2017 that exceeds $2 trillion, 
where such amounts are calculated only for business days.
    (5) December 1, 2018 with respect to the requirements in Sec.  
.3 for initial margin for any non-cleared swaps and non-
cleared security-based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, non-
cleared security-based swaps, foreign exchange forwards and foreign 
exchange swaps for June, July and August 2018 that exceeds $1 trillion, 
where such amounts are calculated only for business days.
    (6) December 1, 2019 with respect to the requirements in Sec.  
.3 for initial margin for any other covered swap entity with 
respect to non-cleared swaps and non-cleared security-based swaps 
entered into with any other counterparty.
    (e) Once a covered swap entity and its counterparty must comply 
with the margin requirements for non-cleared swaps and non-cleared 
security-based swaps based on the compliance dates in paragraph (d), 
the covered swap entity and its counterparty shall remain subject to 
the requirements of this [subpart].


Sec.  .2  Definitions.

    Affiliate means any company that controls, is controlled by, or is 
under common control with another company.
    Bank holding company has the meaning specified in section 2 of the 
Bank Holding Company Act of 1956 (12 U.S.C. 1841).
    Broker has the meaning specified in section 3(a)(4) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
    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)).
    Control of another company means:
    (1) Ownership, control, or power to vote 25 percent or more of a 
class of voting securities of the company, directly or indirectly or 
acting through one or more other persons;
    (2) Ownership or control of 25 percent or more of the total equity 
of the company, directly or indirectly or acting through one or more 
other persons; or
    (3) Control in any manner of the election of a majority of the 
directors or trustees of the company.
    Counterparty means, with respect to any non-cleared swap or non-
cleared security-based swap to which a covered swap entity is a party, 
each other party to such non-cleared swap or non-cleared security-based 
swap.
    Cross-currency swap means a swap in which one party exchanges with 
another party principal and interest rate payments in one currency for 
principal and interest rate payments in another currency, and the 
exchange of principal occurs upon the inception of the swap, with a 
reversal of the exchange of principal at a later date that is agreed 
upon at the inception of the swap.
    Dealer has the meaning specified in section 3(a)(5) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
    Depository institution has the meaning specified in section 3(c) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    Derivatives clearing organization has the meaning specified in 
section 1a(15) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(15)).
    Eligible collateral means collateral described in Sec.  
.6.
    Eligible master netting agreement means a written, legally 
enforceable agreement provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default following any stay permitted by paragraph (2) of this 
definition, including upon an event of receivership, insolvency, 
liquidation, 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 apply collateral promptly upon 
an event of default, including upon an event of receivership, 
insolvency, liquidation, 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, other than:
    (i) In receivership, conservatorship, resolution under the Federal 
Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the Dodd-
Frank Act (12 U.S.C. 5381 et seq.), the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 as amended (12 U.S.C. 4617), 
or the Farm Credit Act of 1971 (12 U.S.C. 2183 and 2279cc), or similar 
laws of foreign jurisdictions that provide for limited stays to 
facilitate the orderly resolution of financial institutions, or
    (ii) In a contractual agreement subject by its terms to any of the 
laws referenced in paragraph (2)(i) of this definiton;
    (3) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it otherwise would make under the agreement, or no payment 
at all, or suspends or conditions payment, to a defaulter or the estate 
of a defaulter, even if the defaulter or the estate of the defaulter is 
or otherwise would be, a net creditor under the agreement); and
    (4) A covered swap entity that relies on the agreement for purposes 
of calculating the margin required by this part:
    (i) Conducts sufficient legal review (and maintains sufficient 
written documentation of that legal review) to conclude with a well-
founded basis that:
    (A) The agreement meets the requirements of paragraphs (1)-(3) of 
this definition;
    (B) In the event of a legal challenge (including one resulting from 
default or from receivership, insolvency, liquidation, or similar 
proceeding), the relevant court and administrative authorities would 
find the agreement to be legal, valid, binding, and enforceable

[[Page 57390]]

under the law of the relevant jurisdictions; and
    (ii) Establishes and maintains written procedures to monitor 
possible changes in relevant law and to ensure that the agreement 
continues to satisfy the requirements of this definition.
    Financial end user means
    (1) Any counterparty that is not a swap entity and that is:
    (i) A bank holding company or an affiliate thereof; a savings and 
loan holding company; or a nonbank financial institution supervised by 
the Board of Governors of the Federal Reserve System under Title I of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 
U.S.C. 5323);
    (ii) A depository institution; a foreign bank; a Federal credit 
union or State credit union as defined in section 2 of the Federal 
Credit Union Act (12 U.S.C. 1752(1) & (6); an institution that 
functions solely in a trust or fiduciary capacity as described in 
section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 
1841(c)(2)(D)); an industrial loan company, an industrial bank, or 
other similar institution described in section 2(c)(2)(H) of the Bank 
Holding Company Act (12 U.S.C. 1841(c)(2)(H));
    (iii) An entity that is state-licensed or registered as--
    (A) A credit or lending entity, including a finance company; money 
lender; installment lender; consumer lender or lending company; 
mortgage lender, broker, or bank; motor vehicle title pledge lender; 
payday or deferred deposit lender; premium finance company; commercial 
finance or lending company; or commercial mortgage company; except 
entities registered or licensed solely on account of financing the 
entity's direct sales of goods or services to customers;
    (B) A money services business, including a check casher; money 
transmitter; currency dealer or exchange; or money order or traveler's 
check issuer;
    (iv) A 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)) and any entity for which the Federal Housing 
Finance Agency or its successor is the primary federal regulator;
    (v) Any institution chartered and regulated by the Farm Credit 
Administration in accordance with the Farm Credit Act of 1971, as 
amended, 12 U.S.C. 2001 et. seq.;
    (vi) A securities holding company; a broker or dealer; an 
investment adviser as defined in section 202(a) of the Investment 
Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company 
registered with the SEC under the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as 
a business development company pursuant to section 54(a) of the 
Investment Company (15 U.S.C. 80a-53(a));
    (vii) A private fund as defined in section 202(a) of the Investment 
Advisers Act of 1940 (15 U.S.C. 80-b-2(a)); an entity that would be an 
investment company under section 3 of the Investment Company Act of 
1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is 
deemed not to be an investment company under section 3 of the 
Investment Company Act of 1940 pursuant to Investment Company Act Rule 
3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
    (viii) A commodity pool, a commodity pool operator, or a commodity 
trading advisor as defined, respectively, in section 1a(10), 1a(11), 
and 1a(12) of the Commodity Exchange Act (7 U.S.C. 1a(10), 1a(11), and 
1a(12)); or a futures commission merchant;
    (ix) 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);
    (x) An entity that is organized as an insurance company, primarily 
engaged in writing insurance or reinsuring risks underwritten by 
insurance companies, or is subject to supervision as such by a State 
insurance regulator or foreign insurance regulator;
    (xi) An entity that is, or holds itself out as being, an entity or 
arrangement that raises money from investors primarily for the purpose 
of investing in loans, securities, swaps, funds or other assets for 
resale or other disposition or otherwise trading in loans, securities, 
swaps, funds or other assets;
    (xii) An entity that would be a financial end user described in 
paragraph (1) of this section, if it were organized under the laws of 
the United States or any State thereof; or
    (xiii) Notwithstanding paragraph (2) below, any other entity that 
[Agency] has determined should be treated as a financial end user.
    (2) The term ``financial end user'' does not include any 
counterparty that is:
    (i) A sovereign entity;
    (ii) A multilateral development bank;
    (iii) The Bank for International Settlements;
    (iv) An entity that is exempt from the definition of financial 
entity pursuant to section 2(h)(7)(C)(iii) of the Commodity Exchange 
Act (7 U.S.C. 2(h)(7)(C)(iii)) and implementing regulations; or
    (v) An affiliate that qualifies for the exemption from clearing 
pursuant to section 2(h)(7)(D) of the Commodity Exchange Act (7 U.S.C. 
2(h)(7)(D)) or section 3C(g)(4) of the Securities Exchange Act of 1934 
(15 U.S.C. 78c-3(g)(4)) and implementing regulations.
    Foreign bank has the meaning specified in section 1 of the 
International Banking Act of 1978 (12 U.S.C. 3101).
    Foreign exchange forward and foreign exchange swap mean any foreign 
exchange forward, as that term is defined in section 1a(24) of the 
Commodity Exchange Act (7 U.S.C. 1a(24)), and foreign exchange swap, as 
that term is defined in section 1a(25) of the Commodity Exchange Act (7 
U.S.C. 1a(25)).
    Futures commission merchant has the meaning specified in section 
1a(28) of the Commodity Exchange Act (7 U.S.C. 1a(28)).
    Initial margin means the collateral as calculated in accordance 
with Sec.  .8 that is posted or collected in connection with a 
non-cleared swap or non-cleared security-based swap.
    Initial margin collection amount means--
    (1) In the case of a covered swap entity that does not use an 
initial margin model, the amount of initial margin with respect to a 
non-cleared swap or non-cleared security-based swap that is required 
under Appendix A of this part; and
    (2) In the case of a covered swap entity that uses an initial 
margin model, the amount of initial margin with respect to a non-
cleared swap or non-cleared security-based swap that is required under 
the initial margin model.
    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 non-cleared swaps or non-cleared 
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.
    Initial margin threshold amount means an aggregate credit exposure 
of $65 million resulting from all non-cleared swaps and non-cleared 
security-based swaps between a covered swap entity and its affiliates, 
and a counterparty and its affiliates.
    Major currencies means:
    (1) United States Dollar (USD);
    (2) Canadian Dollar (CAD);

[[Page 57391]]

    (3) Euro (EUR);
    (4) United Kingdom Pound (GBP);
    (5) Japanese Yen (JPY);
    (6) Swiss Franc (CHF);
    (7) New Zealand Dollar (NZD);
    (8) Australian Dollar (AUD);
    (9) Swedish Kronor (SEK);
    (10) Danish Kroner (DKK);
    (11) Norwegian Krone (NOK); and
    (12) Any other currency as determined by [Agency].
    Margin means initial margin and variation margin.
    Market intermediary means a securities holding company; a broker or 
dealer; a futures commission merchant; a swap dealer as defined in 
section 1a of the Commodity Exchange Act (7 U.S.C. 1a); or a security-
based swap dealer as defined in section 3 of the Securities Exchange 
Act of 1934 (15 U.S.C. 78c).
    Material swaps exposure for an entity means that an entity and its 
affiliates have an average daily aggregate notional amount of non-
cleared swaps, non-cleared security-based swaps, foreign exchange 
forwards and foreign exchange swaps with all counterparties for June, 
July and August of the previous calendar year that exceeds $3 billion, 
where such amount is calculated only for business days.
    Multilateral development bank means the International Bank for 
Reconstruction and Development, the Multilateral Investment Guarantee 
Agency, the International Finance Corporation, the Inter-American 
Development Bank, the Asian Development Bank, the African Development 
Bank, the European Bank for Reconstruction and Development, the 
European Investment Bank, the European Investment Fund, the Nordic 
Investment Bank, the Caribbean Development Bank, the Islamic 
Development Bank, the Council of Europe Development Bank, and any other 
entity that provides financing for national or regional development in 
which the U.S. government is a shareholder or contributing member or 
which the [AGENCY] determines poses comparable credit risk.
    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)).
    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 U.S. Securities and Exchange Commission.
    Prudential regulator has the meaning specified in section 1a(39) of 
the Commodity Exchange Act (7 U.S.C. 1a(39)).
    Savings and loan holding company has the meaning specified in 
section 10(n) of the Home Owners' Loan Act, 12 U.S.C. 1467a(n)).
    Securities holding company has the meaning specified in section 618 
of the Dodd-Frank Act (12 U.S.C. 1850a).
    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)).
    Sovereign entity means a central government (including the U.S. 
government) or an agency, department, ministry, or central bank of a 
central government.
    State means any State, commonwealth, territory, or possession of 
the United States, the District of Columbia, the Commonwealth of Puerto 
Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, 
Guam, or the United States Virgin Islands.
    Subsidiary means a company that is controlled by another company.
    Swap has the meaning specified in section 1a(47) of the Commodity 
Exchange Act (7 U.S.C. 1a(47)).
    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)).
    U.S. Government-sponsored enterprise means an entity established or 
chartered by the U.S. government to serve public purposes specified by 
federal statute but whose debt obligations are not explicitly 
guaranteed by the full faith and credit of the U.S. government.
    Variation margin means a payment by one party to its counterparty 
to meet the performance of its obligations under one or more non-
cleared swaps or non-cleared security-based swaps between the parties 
as a result of a change in value of such obligations since the last 
time such payment was made.
    Variation margin amount means the cumulative mark-to-market change 
in value to a covered swap entity of a non-cleared swap or non-cleared 
security-based swap, as measured from the date it is entered into (or, 
in the case of a non-cleared swap or non-cleared security-based swap 
that has a 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 non-cleared swap or non-cleared security-based swap after such date), 
less the value of all variation margin previously collected, plus the 
value of all variation margin previously paid with respect to such non-
cleared swap or non-cleared security-based swap.


Sec.  .3  Initial margin.

    (a) Collection of margin. A covered swap entity shall collect 
initial margin with respect to any non-cleared swap or non-cleared 
security-based swap from a counterparty that is a financial end user 
with material swaps exposure or that is a swap entity in an amount that 
is no less than the greater of--
    (1) Zero; or
    (2) The initial margin collection amount for such non-cleared swap 
or non-cleared security-based swap less the initial margin threshold 
amount (not including any portion of the initial margin threshold 
amount already applied by the covered swap entity or its affiliates to 
other non-cleared swaps or non-cleared security-based swaps with the 
counterparty or its affiliates), as applicable.
    (b) Posting of margin. A covered swap entity shall post initial 
margin with respect to any non-cleared swap or non-cleared security-
based swap to a counterparty that is a financial end user with material 
swaps exposure. Such initial margin shall be in an amount at least as 
large as the covered swap entity would be required to collect under 
paragraph (a) of this section if it were in the place of the 
counterparty.
    (c) 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) 
and (b) of this section on a daily basis for a period beginning on or 
before the business day following the day it enters into such non-
cleared swap or non-cleared security-based swap and ending on the date 
the non-cleared swap or non-cleared security-based swap is terminated 
or expires.
    (d) Other counterparties. A covered swap entity is not required to 
collect initial margin with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is neither a 
financial end user with material swaps exposure nor a swap entity but 
shall collect initial margin at such times and in such forms and such 
amounts (if any), that the covered swap entity determines appropriately 
address the credit risk posed by the counterparty

[[Page 57392]]

and the risks of such non-cleared swaps and non-cleared security-based 
swaps.


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 with 
a swap entity or financial end user, the covered swap entity shall 
collect the variation margin amount from the counterparty to such non-
cleared swap or non-cleared security-based swap when the amount is 
positive and pay the variation margin amount to the counterparty to 
such non-cleared swap or non-cleared security-based swap when the 
amount is negative.
    (b) Frequency. A covered swap entity shall comply with the 
variation margin requirements described in paragraph (a) of this 
section no less frequently than once per business day.
    (c) Other counterparties. A covered swap entity is not required to 
collect variation margin with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is neither a 
financial end user nor a swap entity but shall collect variation margin 
at such times and in such forms and such amounts (if any), that the 
covered swap entity determines appropriately address the credit risk 
posed by the counterparty and the risks of such non-cleared swaps and 
non-cleared security-based swaps.
    (d) Netting arrangements. To the extent that one or more non-
cleared swaps or non-cleared security-based swaps are executed pursuant 
to an eligible master netting agreement between a covered swap entity 
and its counterparty that is a swap entity or financial end user, a 
covered swap entity may calculate and comply with the variation margin 
requirements of this paragraph on an aggregate net basis with respect 
to all non-cleared swaps and non-cleared security-based swaps governed 
by such agreement. If the agreement covers non-cleared swaps and non-
cleared security-based swaps entered into before the applicable 
compliance date set forth in Sec.  .1(d), those non-cleared 
swaps and non-cleared security-based swaps must be included in the 
aggregate for the purposes of calculating and complying with the 
variation margin requirements of this paragraph.


Sec.  .5  Minimum transfer amount and satisfaction of 
collecting and posting requirements.

    (a) Minimum transfer amount. Notwithstanding Sec.  .3 or 
Sec.  .4, a covered swap entity is not required to collect or 
post margin pursuant to this part with respect to a particular 
counterparty unless and until the total amount of margin that is 
required pursuant to this part to be collected or posted and that has 
not yet been collected or posted with respect to the counterparty is 
greater than $650,000.
    (b) Satisfaction of Collecting and Posting Requirements. A covered 
swap entity shall not be deemed to have violated its obligation to 
collect or post margin from or to a counterparty under Sec.  
.3, .4 or .6(d) if--
    (1) The counterparty has refused or otherwise failed to provide or 
accept the required margin to or from the covered swap entity; and
    (2) The covered swap entity has--
    (i) Made the necessary efforts to collect or post the required 
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 or post the required margin; or
    (ii) Commenced termination of the non-cleared swap or non-cleared 
security-based swap with the counterparty promptly following the 
applicable cure period and notification requirements.


Sec.  .6  Eligible collateral.

    (a) A covered swap entity shall collect and post initial margin and 
variation margin required pursuant to this part from or to a swap 
entity or financial end user 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) With respect to initial margin only--
    (i) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, the U.S. Department 
of the Treasury;
    (ii) A security that is issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, a U.S. government 
agency (other than the U.S. Department of Treasury) whose obligations 
are fully guaranteed by the full faith and credit of the United States 
government;
    (iii) A publicly traded debt security issued by, or an asset-backed 
security fully guaranteed as to the payment of principal and interest 
by, a U.S. Government-sponsored enterprise that is operating with 
capital support or another form of direct financial assistance received 
from the U.S. government that enables the repayments of the U.S. 
Government-sponsored enterprise's eligible securities;
    (iv) A major currency;
    (v) A security that is issued by, or fully guaranteed as to the 
payment of principal and interest by, the European Central Bank or a 
sovereign entity that is assigned no higher than a 20 percent risk 
weight under the capital rules applicable to the covered swap entity as 
set forth in Sec.  .11 of this part;
    (vi) A security that is issued by, or fully guaranteed as to the 
payment of principal and interest by, the Bank for International 
Settlements, the International Monetary Fund, or a multilateral 
development bank;
    (vii) Subject to paragraph (c) of this section, a security solely 
in the form of:
    (A) Publicly traded debt, including a debt security issued by a 
U.S. Government-sponsored enterprise (other than one described in Sec.  
.6(a)(2)(iii)), that meets the terms of [RESERVED] 
and is not an asset-backed security;
    (B) Publicly traded common equity that is included in:
    (1) The Standard & Poor's Composite 1500 Index or any other similar 
index of liquid and readily marketable equity securities as determined 
by [Agency]; or
    (2) An index that a covered swap entity's supervisor in a foreign 
jurisdiction recognizes for purposes of including publicly traded 
common equity as initial margin under applicable regulatory policy, if 
held in that foreign jurisdiction; or
    (viii) Gold.
    (b) The value of any eligible collateral described in paragraph 
(a)(2) of this section that is collected and held to satisfy initial 
margin requirements is subject to the discounts described in Appendix B 
of this part.
    (c) Eligible collateral for initial margin required by this part 
does not include a security issued by--
    (1) The counterparty or affiliate of the counterparty pledging such 
collateral; or
    (2) A bank holding company, a savings and loan holding company, a 
foreign bank, a depository institution, a market intermediary, a 
company that would be any of the foregoing if it were organized under 
the laws of the United States or any State, or an affiliate of any of 
the foregoing institutions.
    (d) A covered swap entity shall monitor the market value and 
eligibility of all collateral collected and held to satisfy its initial 
margin required by this part. To the extent that the market value of 
such collateral has declined, the covered swap entity shall promptly 
collect such additional eligible collateral as is necessary to bring 
itself

[[Page 57393]]

into compliance with the margin requirements of this part. To the 
extent that the collateral is no longer eligible, the covered swap 
entity shall promptly obtain sufficient eligible replacement collateral 
to comply with this part.
    (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) A covered swap entity that posts any collateral other than 
variation margin with respect to a non-cleared swap or a non-cleared 
security-based swap shall require that all funds or other property 
other than variation margin provided by the covered swap entity be held 
by one or more custodians that are not affiliates of the covered swap 
entity or the counterparty.
    (b) A covered swap entity that collects initial margin amounts 
required by Sec.  .3(a) with respect to a non-cleared 
swap or a non-cleared security-based swap shall require that such 
initial margin collateral be held by one or more custodians that are 
not affiliates of the covered swap entity or the counterparty.
    (c) For purposes of paragraphs (a) and (b) of this section, the 
custodian must act pursuant to a custody agreement that:
    (1) Prohibits the custodian from rehypothecating, repledging, 
reusing, or otherwise transferring (through securities lending, 
repurchase agreement, reverse repurchase agreement or other means) the 
funds or other property held by the custodian; and
    (2) Is a legal, valid, binding, and enforceable agreement under the 
laws of all relevant jurisdictions, including in the event of 
bankruptcy, insolvency, or a similar proceeding.
    (d) Notwithstanding paragraph (c)(1) of this section, a custody 
agreement may permit the posting party to substitute or direct any 
reinvestment of posted collateral held by the custodian, provided that, 
with respect to collateral collected by a covered swap entity pursuant 
to Sec.  .3(a) or posted by a covered swap entity 
pursuant to Sec.  .3(b), the agreement requires the 
posting party to:
    (1) Substitute only funds or other property that would qualify as 
eligible collateral under Sec.  .6, and for which the 
amount net of applicable discounts described in Appendix B would be 
sufficient to meet the requirements of Sec.  .3; and
    (2) Direct reinvestment of funds only in assets that would qualify 
as eligible collateral under Sec.  .6, and for which 
the amount net of applicable discounts described in Appendix B would be 
sufficient to meet the requirements of Sec.  .3.


Sec.  .8  Initial margin models and standardized 
amounts.

    (a) Standardized amounts. 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 on a 
daily basis pursuant to Appendix A of this part.
    (b) Use of initial margin models.
    (1) A covered swap entity may calculate the amount of initial 
margin required to be collected or posted for one or more non-cleared 
swaps or non-cleared security-based swaps with a given counterparty 
pursuant to Sec.  .3 on a daily basis using an 
initial margin model only if the initial margin model meets the 
requirements of this section.
    (2) To the extent that one or more non-cleared swaps or non-cleared 
security-based swaps are executed pursuant to an eligible master 
netting agreement between a covered swap entity and its counterparty 
that is a swap entity or financial end user, a covered swap entity may 
use its initial margin model to calculate and comply with the initial 
margin requirements pursuant to Sec.  .3 on an 
aggregate basis with respect to all non-cleared swaps and non-cleared 
security-based swaps governed by such agreement. If the agreement 
covers non-cleared swaps and non-cleared security-based swaps entered 
into before the applicable compliance date set forth in Sec.  
.1(d), those non-cleared swaps and non-
cleared security-based swaps must be included in the aggregate in the 
initial margin model for the purposes of calculating and complying with 
the initial margin requirements pursuant to Sec.  .3.
    (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 notify [Agency] in writing 60 days 
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, in its sole discretion, that 
the initial margin model no longer complies with this section.
    (d) Quantitative requirements.
    (1) The covered swap entity's initial margin model must calculate 
an amount of initial margin that is equal to the potential future 
exposure of the non-cleared swap, non-cleared security-based swap or 
netting set of non-cleared swaps or non-cleared security-based swaps 
covered by an eligible master netting agreement. Potential future 
exposure is an estimate of the one-tailed 99 percent confidence 
interval for an increase in the value of the non-cleared swap, non-
cleared security-based swap or netting set of non-cleared swaps or non-
cleared 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 non-cleared 
swap or non-cleared security-based swap.
    (2) All data used to calibrate the initial margin model must be 
based on an equally weighted historical observation period of at least 
one year and not more than five years and must incorporate a period of 
significant financial stress for each broad asset class that is 
appropriate to the non-cleared swaps and non-cleared security-based 
swaps to which the initial margin model is applied.
    (3) The covered swap entity's initial margin model must use risk 
factors sufficient to measure all material price risks inherent in the 
transactions for which initial margin is being calculated. The risk 
categories must include, but should not be limited to, foreign exchange 
or interest rate risk, credit risk, equity risk, agricultural commodity 
risk, energy commodity risk, metal commodity risk and other commodity 
risk, as appropriate. For material exposures in significant 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.

[[Page 57394]]

    (4) In the case of a non-cleared cross-currency swap, the covered 
swap entity's initial margin model need not recognize any risks or risk 
factors associated with the fixed, physically-settled foreign exchange 
transactions associated with the exchange of principal embedded in the 
non-cleared cross-currency swap. The initial margin model must 
recognize all material risks and risk factors associated with all other 
payments and cash flows that occur during the life of the non-cleared 
cross-currency swap.
    (5) The initial margin model may calculate initial margin for a 
non-cleared swap or non-cleared security-based swap or a netting set of 
non-cleared swaps or non-cleared security-based swaps covered by an 
eligible master netting agreement. It may reflect offsetting exposures, 
diversification, and other hedging benefits for swaps and security-
based swaps that are governed by the same eligible master netting 
agreement by incorporating empirical correlations within the following 
broad risk categories, provided the covered swap entity validates and 
demonstrates the reasonableness of its process for modeling and 
measuring hedging benefits: agricultural commodity, energy commodity, 
metal commodity and other commodity, credit, equity, and foreign 
exchange or interest rate. Empirical correlations under an eligible 
master netting agreement may be recognized by the initial margin model 
within each broad risk category, but not across broad risk categories.
    (6) If the initial margin model does not explicitly reflect 
offsetting exposures, diversification, and hedging benefits between 
subsets of non-cleared swaps within a broad risk category, the covered 
swap entity must calculate an amount of initial margin separately for 
each subset of non-cleared swaps and non-cleared 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 non-cleared 
swaps and non-cleared 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 non-cleared swaps and non-cleared 
security-based swaps within the broad risk category.
    (7) 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.
    (8) The initial margin model may not permit the calculation of any 
initial margin collection amount to be 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.
    (9) The initial margin model must include all material risks 
arising from the nonlinear price characteristics of option 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.
    (10) 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 first demonstrated to the 
satisfaction of [Agency] that such omission is appropriate.
    (11) The covered swap entity may not incorporate any proxy or 
approximation used to capture the risks of the covered swap entity's 
non-cleared swaps or non-cleared security-based swaps unless it has 
first demonstrated to the satisfaction of [Agency] that such proxy or 
approximation is appropriate.
    (12) The covered swap entity must have a rigorous and well-defined 
process for re-estimating, re-evaluating, and updating its internal 
models to ensure continued applicability and relevance.
    (13) 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 non-cleared swaps and non-cleared security-based swaps to which 
the initial margin model is applied.
    (14) The level of sophistication of the initial margin model must 
be commensurate with the complexity of the non-cleared swaps and non-
cleared security-based swaps to which it is 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.
    (15) [The Agency] may in its sole discretion 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 if [the Agency] determines that the additional 
collateral is appropriate due to the nature, structure, or 
characteristics of the covered swap entity's transaction(s), or is 
commensurate with the risks associated with the transaction(s).
    (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 maintain a risk control unit that 
reports directly to senior management and is independent from the 
business trading units.
    (2) The covered swap entity's risk control unit must validate its 
initial margin model prior to implementation 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 subject 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;
    (ii) 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, including benchmarking 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 cleared transactions.
    (iii) An outcomes analysis process that includes backtesting the 
initial margin model.
    (3) If the validation process reveals any material 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 ensure 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 and the risk control unit 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

[[Page 57395]]

units and 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 the 
management and valuation of the non-cleared swaps and non-cleared 
security-based swaps to which it applies, the control, oversight, and 
validation of the initial margin model, any review processes and the 
results of such processes.
    (h) Escalation procedures. The covered swap entity must adequately 
document internal authorization procedures, including escalation 
procedures, that require review and approval of any change to the 
initial margin calculation under the initial margin model, demonstrable 
analysis that any basis for any such change is consistent with the 
requirements of this section, and independent review of such 
demonstrable analysis and approval.


Sec.  .9  Cross-border application of margin 
requirements.

    (a) Transactions to which this rule does not apply. The 
requirements of Sec. Sec.  .3 through 
.8 and .10 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 neither 
the counterparty to the foreign covered swap entity nor any guarantor 
of either party's obligations under the non-cleared swap or non-cleared 
security-based swap is--
    (1) An entity organized under the laws of the United States or any 
State, including a U.S. branch, agency, or subsidiary of a foreign 
bank;
    (2) A branch or office of an entity organized under the laws of the 
United States or any State; or
    (3) A covered swap entity that is controlled, directly or 
indirectly, by an entity that is organized under the laws of the United 
States or any State.
    (c) For purposes of this section, a foreign covered swap entity is 
any covered swap entity that is not--
    (1) An entity organized under the laws of the United States or any 
State, including a U.S. branch, agency, or subsidiary of a foreign 
bank;
    (2) A branch or office of an entity organized under the laws of the 
United States or any State; or
    (3) An entity controlled, directly or indirectly, by an entity that 
is organized under the laws of the United States or any State.
    (d) Transactions for which substituted compliance determination may 
apply.
    (1) Determinations and reliance. For non-cleared swaps and non-
cleared security-based swaps described in paragraph (d)(3) of this 
section, a covered swap entity may satisfy the provisions of this part 
by complying with the foreign regulatory framework for non-cleared 
swaps and non-cleared security-based swaps that the prudential 
regulators jointly, conditionally or unconditionally, determine by 
public order satisfy the corresponding requirements of Sec. Sec.  
.3 through .8 and 
.10.
    (2) Standard. In determining whether to make a determination under 
paragraph (d)(1) of this section, the prudential regulators will 
consider whether the requirements of such foreign regulatory framework 
for non-cleared swaps and non-cleared security-based swaps applicable 
to such covered swap entities are comparable to the otherwise 
applicable requirements of this part and appropriate for the safe and 
sound operation of the covered swap entity, taking into account the 
risks associated with non-cleared swaps and non-cleared security-based 
swaps.
    (3) Covered swap entities eligible for substituted compliance. A 
covered swap entity may rely on a determination under paragraph (d)(1) 
of this section only if the covered swap entity's obligations under the 
non-cleared swap or non-cleared security-based swap are not guaranteed 
by an entity organized under the laws of the United States or any State 
and the covered swap entity is--
    (i) A foreign covered swap entity;
    (ii) A foreign bank or a U.S. branch or agency of a foreign bank; 
or
    (iii) A foreign subsidiary of a depository institution, Edge 
corporation, or agreement corporation.
    (4) Compliance with foreign margin collection requirement. A 
covered swap entity satisfies its requirement to post initial margin 
under Sec.  .3(b) of this part by posting initial 
margin in the form and amount, and at such times, that its counterparty 
is required to collect pursuant to a foreign regulatory framework, 
provided that the counterparty is subject to the foreign regulatory 
framework and the prudential regulators have made a determination under 
paragraph (d)(1) of this section, unless otherwise stated in that 
determination.
    (e) Requests for determinations.
    (1) A covered swap entity described in paragraph (d)(3) of this 
section may request that the prudential regulators make a determination 
pursuant to this section. A request for a determination must include a 
description of:
    (i) The scope and objectives of the foreign regulatory framework 
for non-cleared swaps and non-cleared security-based swaps;
    (ii) The specific provisions of the foreign regulatory framework 
for non-cleared swaps and non-cleared security-based swaps that govern:
    (A) The scope of transactions covered;
    (B) The determination of the amount of initial and variation margin 
required and how that amount is calculated;
    (C) The timing of margin requirements;
    (D) Any documentation requirements;
    (E) The forms of eligible collateral;
    (F) Any segregation and rehypothecation requirements; and
    (G) The approval process and standards for models used in 
calculating initial and variation margin;
    (iii) The supervisory compliance program and enforcement authority 
exercised by a foreign financial regulatory authority or authorities in 
such system to support its oversight of the application of the non-
cleared swap and non-cleared security-based swap regulatory framework 
and how that framework applies to the non-cleared swaps and non-cleared 
security-based swaps of the covered swap entity; and
    (iv) Any other descriptions and documentation that the prudential 
regulators determine are appropriate.
    (2) A covered swap entity described in paragraph (d)(3) of this 
section may make a request under this section only if the non-cleared 
swap and non-cleared security-based swap activities of the covered swap 
entity are directly supervised by the authorities administering the 
foreign regulatory framework for non-cleared swaps and non-cleared 
security-based swaps.


Sec.  .10  Documentation of margin matters.

    (a) A covered swap entity shall execute trading documentation with 
each counterparty that is either a swap entity or financial end user 
regarding credit support arrangements that--
    (1) Provides the covered swap entity and its counterparty with the 
contractual right to collect and post initial margin and variation 
margin in such amounts, in such form, and under such circumstances as 
are required by this part; and
    (2) Specifies--

[[Page 57396]]

    (i) The methods, procedures, rules, and inputs for determining the 
value of each non-cleared swap or non-cleared security-based swap for 
purposes of calculating variation margin requirements; and
    (ii) The procedures by which any disputes concerning the valuation 
of non-cleared swaps or non-cleared security-based swaps, or the 
valuation of assets collected or posted as initial margin or variation 
margin, may be resolved.


Sec.  .11  [Reserved]

Appendix A to Part [ ]--Standardized Minimum Initial Margin 
Requirements for Non-Cleared Swaps and Non-Cleared Security-Based Swaps

Table A--Standardized Minimum Gross Initial Margin Requirements for Non-
         Cleared Swaps and Non-Cleared Security-Based Swaps \1\
------------------------------------------------------------------------
                                                   Gross initial margin
                  Asset class                         (% of notional
                                                        exposure)
------------------------------------------------------------------------
Credit: 0-2 year duration......................                        2
Credit: 2-5 year duration......................                        5
Credit: 5+ year duration.......................                       10
Commodity......................................                       15
Equity.........................................                       15
Foreign Exchange/Currency......................                        6
Cross Currency Swaps: 0-2 year duration........                        1
Cross-Currency Swaps: 2-5 year duration........                        2
Cross-Currency Swaps: 5+ year duration.........                        4
Interest Rate: 0-2 year duration...............                        1
Interest Rate: 2-5 year duration...............                        2
Interest Rate: 5+ year duration................                        4
Other..........................................                       15
------------------------------------------------------------------------
\1\ The initial margin amount applicable to multiple non-cleared swaps
  or non-cleared security-based swaps subject to an eligible master
  netting agreement that is calculated according to Appendix A will be
  computed as follows:
Initial Margin = 0.4 x Gross Initial Margin + 0.6 x NGR x Gross Initial
  Margin where;
Gross Initial Margin = the sum of the product of each non-cleared swap's
  or non-cleared security-based swap's effective notional amount and the
  gross initial margin requirement for all non-cleared swaps and non-
  cleared security-based swaps subject to the eligible master netting
  agreement;
and
NGR = the net-to-gross ratio (that is, the ratio of the net current
  replacement cost to the gross current replacement cost). In
  calculating NGR, the gross current replacement cost equals the sum of
  the replacement cost for each non-cleared swap and non-cleared
  security-based swap subject to the eligible master netting agreement
  for which the cost is positive. The net current replacement cost
  equals the total replacement cost for all non-cleared swaps and non-
  cleared security-based swaps subject to the eligible master netting
  agreement.

Appendix B to Part [ ]--Margin Values for Cash and Noncash Initial 
Margin Collateral.

  Table B--Margin Values for Cash and Noncash Initial Margin Collateral
                                   \1\
------------------------------------------------------------------------
                                                  Haircut  (% of market
                  Asset class                             value)
------------------------------------------------------------------------
Cash in same currency as swap obligation.......                      0.0
Eligible government and related (e.g., central                       0.5
 bank, multilateral development bank, GSE
 securities identified in Sec.   .6(a)(2)(iii))
 debt: residual maturity less than one-year....
Eligible government and related (e.g., central                       2.0
 bank, multilateral development bank, GSE
 securities identified in Sec.   .6(a)(2)(iii))
 debt: residual maturity between one and five
 years.........................................
Eligible government and related (e.g., central                       4.0
 bank, multilateral development bank, GSE
 securities identified in Sec.   .6(a)(2)(iii))
 debt: residual maturity greater than five
 years.........................................
Eligible corporate (including eligible GSE debt                      1.0
 securities not identified in Sec.
 .6(a)(2)(iii)) debt: residual maturity less
 than one-year.................................
Eligible corporate (including eligible GSE debt                      4.0
 securities not identified in Sec.
 .6(a)(2)(iii)) debt: residual maturity between
 one and five years:...........................
Eligible corporate (including eligible GSE debt                      8.0
 securities not identified in Sec.
 .6(a)(2)(iii)) debt: residual maturity greater
 than five years:..............................
Equities included in S&P 500 or related index..                     15.0
Equities included in S&P 1500 Composite or                          25.0
 related index but not S&P 500 or related index
Gold...........................................                     15.0
                                                                     8.0
------------------------------------------------------------------------
\1\ The value of initial margin collateral that is calculated according
  to Appendix B will be computed as follows: the value of initial margin
  collateral for any collateral asset class will be computed as the
  product of the total value of collateral in any asset class and one
  minus the applicable haircut expressed in percentage terms. The total
  value of all initial margin collateral is calculated as the sum of the
  value of each type of collateral asset.


[[Page 57397]]

    [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

12 CFR Chapter I

List of Subjects in 12 CFR Part 45

    Administrative practice and procedure, Capital, Margin 
requirements, National Banks, Federal Savings Associations, Reporting 
and recordkeeping requirements, Risk.

Authority and issuance

    For the reasons stated in the Common Preamble and under the 
authority of 12 U.S.C. 93a and 5412(b)(2)(B), 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

0
1. Part 45 is added as set forth at the end of the Common Preamble.
0
2. 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., 12 U.S.C. 93a, 
161, 1818, 3907, 3909, 5412(b)(2)(B), and 15 U.S.C. 78o-10(e).

0
3. Part 45 is amended by:
0
a. Removing ``[Agency]'' wherever it appears and adding in its place 
``the OCC'';
0
b. Removing ``[The Agency]'' wherever it appears and adding in its 
place ``The OCC.''
0
4. Paragraphs (a), (b), and (c) of Sec.  45.1 are added to read as 
follows:


Sec.  45.1  Authority, purpose, scope, and compliance dates.

    (a) Authority. This part 45 is issued under the authority of 7 
U.S.C. 6s(e), 12 U.S.C. 1 et seq., 93a, 161, 1818, 3907, 3909, 
5412(b)(2)(B), 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-
10) require the OCC to establish capital and margin requirements for 
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 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 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 the relevant 
compliance date set forth in paragraph (d) of this section. Nothing in 
this part is intended to prevent a covered swap entity from collecting 
margin in amounts greater than are required under this part.
* * * * *
0
5. Section 45.2 is amended by adding a definition of ``covered swap 
entity'' in alphabetical order to read as follows:


Sec.  45.2  Definitions.

* * * * *
    Covered swap entity means any national bank, Federal savings 
association, or Federal branch or agency of a foreign bank that is a 
swap entity, or any other entity that the OCC determines.
* * * * *


Sec.  45.6  [Amended]

0
6. Section 45.6(a)(2)(vi)(A) is amended by removing ``[RESERVED]'' and 
adding in its place ``12 CFR Part 1'';
0
7. Section 45.11 is added to read as follows:


Sec.  45.11  Capital.

    A covered swap entity shall comply with:
    (a) In the case of a covered swap entity that is a national bank or 
Federal savings association, the minimum capital requirements 12 CFR 
Part 3.
    (b) In the case of a covered swap entity that is a Federal branch 
or agency of a foreign bank, the capital adequacy guidelines applicable 
as generally provided under 12 CFR 28.14.

Board of Governors of the Federal Reserve System

12 CFR Chapter II

List of Subjects in 12 CFR Part 237

    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--SWAPS MARGIN AND SWAPS PUSH-OUT

Subpart A--Margin and Capital Requirements for Covered Swap 
Entities (Regulation)

0
8. 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., 12 U.S.C. 3101 et 
seq. and 12 U.S.C. 1461 et seq.

0
9. Amend part 237 by adding the common text as set forth in the 
preamble as Subpart A.
0
10. Revise the heading for Subpart A, as set forth above.
0
11. Amend subpart A by removing ``[Agency]'' wherever it appears and 
adding in its place ``the Board'';
0
12. Amend subpart A removing ``[The Agency]'' wherever it appears and 
adding in its place ``The Board''; and
0
13. Amend Sec.   237.1 by adding paragraphs (a) through (c) to read as 
follows:


Sec.  237.1  Authority, purpose, scope and compliance dates.

    (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, as amended (7 U.S.C. 6s(e)) and section 
15F(e) of the Securities Exchange Act of 1934, as amended (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.); the International Banking Act of 
1978, as amended (12 U.S.C. 3101 et seq.), and the Home Owners' Loan 
Act, as amended1461 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-
10) 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. 1841), savings and loan holding 
company (as defined in 12 U.S.C. 1467a (on or after the transfer 
established under Section 311 of the

[[Page 57398]]

Dodd-Frank Act) (12 U.S.C. 5411)), foreign banking organization (as 
defined in 12 CFR 211.21(o)), foreign bank that does not operate an 
insured branch, 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 the relevant 
compliance date set forth in Sec.  237.1(d). Nothing in this part is 
intended to prevent a covered swap entity from collecting margin in 
amounts greater than are required under this part.
* * * * *
0
14. In Sec.  237.2, add, in alphabetical order, the definition of 
``covered swap entity.''.


Sec.  237.2  Definitions.

* * * * *
    Covered swap entity means any swap entity that is a state member 
bank (as defined in 12 CFR 208.2(g)), bank holding company (as defined 
in 12 U.S.C. 1841), savings and loan holding company (as defined in 12 
U.S.C. 1467a), foreign banking organization (as defined in 12 CFR 
211.21(o)), foreign bank that does not operate an insured branch, state 
branch or state agency of a foreign bank (as defined in 12 U.S.C. 
3101(b)(11) and (12)), Edge or agreement corporation (as defined in 12 
CFR 211.1(c)(2) and (3)) or covered swap entity as determined by the 
Board. Covered swap entity would not include an affiliate of an entity 
listed in the first sentence of this definition for which the Office of 
the Comptroller of the Currency or the Federal Deposit Insurance 
Corporation is the prudential regulator or that is required to be 
registered with the U.S. Commodity Futures Trading Commission as a swap 
dealer or major swap participant or with the U.S. Securities and 
Exchange Commission as a security-based swap dealer or major security-
based swap participant.
* * * * *


Sec.  237.6  [Amended]

0
15. Section 237.6 is amended by removing [RESERVED] and adding in its 
place ``12 CFR 1.2(d)''.
0
16. Section 237.11 is added to read as follows:


Sec.  237.11  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 provisions of the Board's 
Regulation Q (12 CFR 217) applicable to the state member bank;
    (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 provisions of the Board's 
Regulation Q (12 CFR part 217) applicable to the covered swap entity;
    (c) In the case of a covered swap entity that is a foreign banking 
organization (as defined in 12 CFR 211.21(o)), a U.S. intermediate 
holding company subsidiary of a foreign banking organization (as 
defined in 12 CFR 252.3(y)) 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 standards that are applicable to such covered swap entity under 
Sec.  225.2(r)(3) of the Board's Regulation Y (12 CFR 225.2(r)(3)) or 
the Board's Regulation YY (12 CFR part 252); 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 standards applicable to an Edge corporation under Sec.  
211.12(c) of the Board's Regulation K (12 CFR 211.12(c)) and to an 
agreement corporation under Sec.  211.5(g) and Sec.  211.12(c) of the 
Board's Regulation K (12 CFR 211.5(g) and 211.12(c)).

Federal Deposit Insurance Corporation

12 CFR Chapter III

List of Subjects in 12 CFR Part 349

    Banks, Holding companies, Reporting and recordkeeping requirements, 
Savings associations.

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 Common Preamble as subpart A 
of part 349 to chapter III of Title 12, Code of Federal Regulations, 
modified as follows:

PART 349--DERIVATIVES

0
17. The part heading is revised to read as set forth above.
0
18. The authority citation for part 349 is revised 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), 12 U.S.C. 1813(q), 1818, 1819, 
and 3108; 7 U.S.C. 2(c)(2)(E), 27 et seq.

Subpart B--Retail Foreign Exchange Transactions

0
19. Redesignate Sec. Sec.  349.1 through 349.16 as Sec. Sec.  349.20 
through 349.36
0
20. Designate redesignated Sec. Sec.  349.20 through 349.36 as Subpart 
B and add a heading to subpart B as set forth above.

Subpart A--Margin and Capital Requirements for Covered Swap 
Entities

0
21. Part 349, subpart A is added as set forth at the end of the Common 
Preamble.
0
22. Part 349, subpart A is amended by:
0
a. Removing ``[Agency]'' wherever it appears and adding in its place 
``the FDIC''; and
0
b. Removing ``[The Agency]'' wherever it appears and adding in its 
place ``The FDIC''.
0
23. Amend Sec.   349.1 by adding paragraphs (a) through (c) to read as 
follows:


Sec.  349.1  Authority, purpose, and scope.

    (a) Authority. This subpart 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-
10) 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

[[Page 57399]]

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 the relevant 
compliance date set forth in paragraph (d) of this section. Nothing in 
this part is intended to prevent a covered swap entity from collecting 
margin in amounts greater than are required under this part.
* * * * *


Sec.  349.2  [Amended]

0
24. Amend Sec.   349.2 by adding, in alphabetical order, the definition 
for ``covered swap entity.''
* * * * *
    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.
* * * * *


Sec.  349.6  [Amended]

0
25. Section 349.6 is amended by removing ``[Reserved]'' wherever it 
appears and adding in its place ``12 CFR 1.2(d)'';
0
26. Section 349.11 is revised to read as follows:


Sec.  349.11  Capital requirement.

    A covered swap entity shall comply with the capital requirements 
that are applicable to the covered swap entity under part 324.

Farm Credit Administration

List of Subjects in 12 CFR Part 624

    Accounting, Agriculture, Banks, Banking, Capital, Cooperatives, 
Credit, Margin requirements, Reporting and recordkeeping requirements, 
Risk, Rural areas, Swaps.

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

0
27. 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).

0
28. Part 624 is added as set forth at the end of the Common Preamble.
0
29. Part 624 is amended by:
0
a. Removing ``[Agency]'' wherever it appears and adding in its place 
``the FCA'';
0
b. Removing ``[The Agency]'' wherever it appears and adding in its 
place ``The FCA''; and
0
30. Revise Sec.   624.1 by adding paragraphs (a) through (c) 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-
10) 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 
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 the relevant 
compliance date set forth in Sec.  624.1(d). Nothing in this part is 
intended to prevent a covered swap entity from collecting margin in 
amounts greater than are required under this part.
* * * * *
0
31. Amend Sec.  624.2 by adding, in alphabetical order, the definitions 
for `Covered swap entity,'' and ``Investment grade'':


Sec.  624.2  Definitions.

* * * * *
    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, or any other entity that the FCA determines.
* * * * *
    Investment grade means the issuer of a security has an adequate 
capacity to meet financial commitments under the security for the 
projected life of the asset or exposure. An issuer has an adequate 
capacity to meet financial commitments if the risk of default by the 
obligor is low and the full and timely repayment of principal and 
interest is expected.
* * * * *


Sec.  624.6  [Amended]

0
32. Section 624.6 is amended by removing ``[Reserved]'' wherever it 
appears and adding in its place ``investment grade as defined in Sec.  
624.2 of this chapter'';
0
33. Section 624.11 is added to read as follows:


Sec.  624.11  Capital.

    A covered swap entity shall comply with:
    (a) In the case of the Federal Agricultural Mortgage Corporation, 
the capital adequacy regulations set forth in part 652 of this chapter; 
and
    (b) In the case of any Farm Credit System institution other than 
the Federal Agricultural Mortgage Corporation, the capital regulations 
set forth in part 615 of this chapter.

Federal Housing Finance Agency

Lists of Subjects in 12 CFR Part 1221

    Government-sponsored enterprises, Mortgages, Securities.

Authority and Issuance

    For the reasons set forth in the Supplementary Information, and 
under the authority of 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 
4513 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:

[[Page 57400]]

Chapter XII--Federal Housing Finance Agency

Subchapter B--Entity Regulations

PART 1221--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP 
ENTITIES

0
34. 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).

0
35. Part 1221 is amended by:
0
a. Removing ``[Agency]'' wherever it appears and adding in its place 
``FHFA''; and
0
b. Removing ``[The Agency]'' wherever it appears and adding in its 
place ``FHFA''.
0
36. Section 1221.1 is amended by adding paragraphs (a), (b) and (c) to 
read as follows:


Sec.  1221.1  Authority, purpose, scope and compliance dates.

    (a) Authority. This part is issued by 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 4(s) 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-10) 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 the related 
compliance date set forth in paragraph (d) of this section. Nothing in 
this part is intended to prevent a covered swap entity from collecting 
margin in amounts greater than are required under this part.
* * * * *
0
37. Section 1221.2 is amended by adding in correct alphabetical order 
the following terms:


Sec.  1221.2  Definitions.

* * * * *
    Covered swap entity means any regulated entity that is a swap 
entity or any other entity that FHFA determines.
* * * * *
    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)).
* * * * *


Sec.  1221.6  Eligible Collateral.

0
38. Section 1221.6 is amended by:
0
a. Removing in paragraph (a)(2)(v) the phrase ``the capital rules 
applicable to the covered swap entity as set forth in Sec.  
.11 of this part'' and adding in its place ``12 CFR 
part 324''; and
0
b. Removing the words ``terms of [RESERVED]'' where they appear in 
paragraph (a)(2)(vii)(A) and adding in their place the phrase 
``definition of investment quality in Sec.  1267.1 of this chapter''.
0
39. Section 1221.11 is added to read as follows:


Sec.  1221.11  Capital.

    A covered swap entity shall comply with the capital levels or such 
other amounts applicable to it as required by the Director of FHFA 
pursuant to 12 U.S.C. 4611.

    Dated: September 3, 2014.
Thomas J. Curry,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, September 9, 2014.
Robert deV. Frierson,
Secretary of the Board.
    Dated at Washington, DC, this 3rd of September 2014.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
    Dated: September 3, 2014.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
    Dated: September 3, 2014.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2014-22001 Filed 9-23-14; 8:45 am]
BILLING CODE 6210-01-P; 4810-33-P; 6210-01-P; 8070-01-P; 6705-01-P; 
6714-01-P