[Federal Register Volume 80, Number 134 (Tuesday, July 14, 2015)]
[Proposed Rules]
[Pages 41376-41408]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16718]



[[Page 41375]]

Vol. 80

Tuesday,

No. 134

July 14, 2015

Part VI





Commodity Futures Trading Commission





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17 CFR Part 23





Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants--Cross-Border Application of the Margin Requirements; 
Proposed Rule

  Federal Register / Vol. 80 , No. 134 / Tuesday, July 14, 2015 / 
Proposed Rules  

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AC97


Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants--Cross-Border Application of the Margin 
Requirements

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: On October 3, 2014, the Commission published proposed 
regulations to implement section 4s(e) of the Commodity Exchange Act, 
as added by section 731 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act''). This provision requires 
the Commission to adopt initial and variation margin requirements for 
swap dealers (``SDs'') and major swap participants (``MSPs'') that do 
not have a Prudential Regulator (collectively, ``CSEs'' or ``Covered 
Swap Entities''). In the October 3, 2014 proposing release, the 
Commission also issued an Advance Notice of Proposed Rulemaking 
(``ANPR'') requesting public comment on the cross-border application of 
such margin requirements. In this release, the Commission is proposing 
a rule for the application of the Commission's margin requirements to 
cross-border transactions.

DATES: Comments must be received on or before September 14, 2015.

ADDRESSES: You may submit comments, identified by RIN 3038-AC97 and 
``Margin Requirements for Uncleared Swaps for Swap Dealers and Major 
Swap Participants--Cross-Border Application of the Margin 
Requirements'' by any of the following methods:
     CFTC Web site: http://comments.cftc.gov. Follow the 
instructions for submitting comments through the Comments Online 
process on the Web site.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail, above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one of these methods.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the established procedures in 
Sec.  145.9 of the Commission's regulations, 17 CFR 145.9.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted, or removed that contain comments on the merits of the 
rulemaking will be retained in the public comment file and will be 
considered as required under the Administrative Procedure Act and other 
applicable laws, and may be accessible under the Freedom of Information 
Act.

FOR FURTHER INFORMATION CONTACT: Laura B. Badian, Assistant General 
Counsel, 202-418-5969, [email protected], or Paul Schlichting, Assistant 
General Counsel, 202-418-5884, [email protected], Office of the 
General Counsel, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Dodd-Frank Act and the Scope of This Rulemaking
    B. Key Considerations in the Cross-Border Application of the 
Margin Regulations
    C. Advance Notice of Proposed Rulemaking
    1. Guidance Approach
    2. Prudential Regulators' Approach
    3. Entity-Level Approach
    4. Comments on the Alternative Approaches Discussed in the ANPR
II. The Proposed Rule
    A. Overview
    1. Use of Hybrid, Firm-Wide Approach
    B. Key Definitions
    1. U.S. Person
    2. Guarantees
    3. Foreign Consolidated Subsidiaries
    C. Applicability of Margin Requirements to Cross-Border 
Uncleared Swaps
    1. Uncleared Swaps of U.S. CSEs or Non-U.S. CSEs Whose 
Obligations Under the Relevant Swap Are Guaranteed by a U.S. Person
    2. Uncleared Swaps of Non-U.S. CSEs (Including Foreign 
Consolidated Subsidiaries) Whose Obligations Under the Relevant Swap 
Are Not Guaranteed by a U.S. Person
    3. Exclusion for Uncleared Swaps of Non-U.S. CSEs Where Neither 
Counterparty's Obligations Under the Relevant Swap Are Guaranteed by 
a U.S. Person and Neither Counterparty Is a Foreign Consolidated 
Subsidiary Nor a U.S. Branch of a Non-U.S. CSE
    4. U.S. Branches of Non-U.S. CSEs
    D. Substituted Compliance
    E. General Request for Comments
III. Related Matters
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    1. Introduction
    2. Proposed Rule
    a. U.S. Person
    b. Availability of Substituted Compliance and Exclusion
    i. Uncleared Swaps of U.S. CSEs or of Non-U.S. CSEs Whose 
Obligations Under the Relevant Swap Are Guaranteed by a U.S. Person
    ii. Uncleared Swaps of Non-U.S. CSEs Whose Obligations Under the 
Relevant Swap Are Not Guaranteed by a U.S. Person
    iii. Exclusion for Uncleared Swaps of Non-U.S. CSEs Where 
Neither Counterparty's Obligations Under the Relevant Swap Are 
Guaranteed by a U.S. Person and Neither Counterparty Is a Foreign 
Consolidated Subsidiary Nor a U.S. Branch of a Non-U.S. CSE
    iv. Foreign Consolidated Subsidiaries
    v. U.S. Branch of a Non-U.S. CSE
    c. Alternatives
    d. Comparability Determinations
    3. Section 15(a) Factors
    a. Protection of Market Participants and the Public
    b. Efficiency, Competitiveness, and Financial Integrity
    i. Efficiency
    ii. Competitiveness
    iii. Financial Integrity of Markets
    c. Price Discovery
    d. Sound Risk Management Practices
    e. Other Public Interest Considerations
    4. General Request for Comment

I. Background

A. Dodd-Frank Act and the Scope of This Rulemaking

    In the fall of 2008, as massive losses spread throughout the 
financial system and many major financial institutions failed or 
narrowly escaped failure with government intervention, confidence in 
the financial system was replaced by panic, credit markets seized up, 
and trading in many markets grounded to a halt. The financial crisis 
revealed the vulnerability of the U.S. financial system to widespread 
systemic risk resulting from, among other things, excessive leverage, 
poor risk management practices at financial firms, and the lack of 
integrated supervisory oversight of financial institutions and

[[Page 41377]]

financial markets.\1\ The financial crisis also highlighted the 
contagion risks of under-collateralized counterparty exposures in a 
highly interconnected financial system.\2\
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    \1\ See Financial Crisis Inquiry Commission, ``The Financial 
Crisis Inquiry Report: Final Report of the National Commission on 
the Causes of the Financial and Economic Crisis in the United 
States,'' Jan. 2011, at xviii-xxv, 307-8, 363-5, 386, available at 
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.
    \2\ Id. at xxiv-xxv, 49-51.
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    In the wake of the financial crisis, Congress enacted the 
provisions of the Commodity Exchange Act (``CEA'') relating to swaps in 
Title VII of the Dodd-Frank Act,\3\ which establishes a comprehensive 
new regulatory framework for swaps. One of the cornerstones of this 
regulatory framework is the reduction of systemic risk to the U.S. 
financial system through the establishment of margin requirements for 
uncleared swaps.\4\
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    \3\ Pub. L. 111-203, 124 Stat. 1376 (2010).
    \4\ The Financial Crisis Inquiry Commission stated in its report 
that the failure of American International Group, Inc. (``AIG'') was 
possible because the sweeping deregulation of over-the-counter 
derivatives (including credit default swaps) effectively eliminated 
federal and state regulation of these products, including capital 
and margin requirements that would have reduced the likelihood of 
AIG's failure. Id. at 352.
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    Section 731 of the Dodd-Frank Act added a new section 4s, which 
directs the Commission to adopt rules establishing minimum initial and 
variation margin requirements for SDs and MSPs on all swaps that are 
not cleared by a registered derivatives clearing organization. Section 
4s(e) further provides that the margin requirements must: (i) Help 
ensure the safety and soundness of the SD or MSP; and (ii) be 
appropriate for the risk associated with the uncleared swaps held as a 
SD or MSP.\5\
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    \5\ Section 4s(e)(3)(A)(i) of the CEA, 7 U.S.C. 6s(e)(3)(A)(i).
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    The Dodd-Frank Act also requires that the Prudential Regulators,\6\ 
in consultation with the Commission and the Securities and Exchange 
Commission (``SEC''), adopt a joint margin rule. Accordingly, each SD 
and MSP for which there is a Prudential Regulator must meet margin 
requirements established by the applicable Prudential Regulator, and 
each SD and MSP for which there is no Prudential Regulator must comply 
with the Commission's margin requirements. Further, the Dodd-Frank Act 
requires that the Commission, the Prudential Regulators and the SEC, to 
the maximum extent practicable, establish and maintain comparable 
minimum capital and minimum initial and variation margin requirements, 
including the use of noncash collateral, for SDs and MSPs.\7\
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    \6\ The term ``Prudential Regulator'' is defined in section 
1a(39) of the CEA, as amended by section 721 of the Dodd-Frank Act. 
This definition includes the Board of Governors of the Federal 
Reserve System (``FRB''); the Office of the Comptroller of the 
Currency (``OCC''); the Federal Deposit Insurance Corporation 
(``FDIC''); the Farm Credit Administration; and the Federal Housing 
Finance Agency.
    \7\ See section 4s(e)(3)(D)(ii) of the CEA, 7 U.S.C. 
6s(e)(3)(D)(ii), which was added by section 731 of the Dodd-Frank 
Act. The Prudential Regulators, the Commission, and the SEC are also 
required to consult periodically (but not less frequently than 
annually) on minimum capital requirements and minimum initial and 
variation margin requirements. See section 4s(e)(3)(D)(i) of the 
CEA, 7 U.S.C. 6s(e)(3)(D)(i).
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    In determining whether, and the extent to which, section 4s(e) 
should apply to a CSE's swap activities outside the United States, the 
Commission focused on the text and objectives of that provision 
together with the language of section 2(i) of the CEA.\8\ As discussed 
further below, the primary reason for the margin requirement is to 
protect CSEs in the event of a counterparty default. That is, in the 
event of a default by a counterparty, margin protects the CSE by 
allowing it to absorb the losses using collateral provided by the 
defaulting entity and to continue to meet all of its obligations. In 
addition, margin functions as a risk management tool by limiting the 
amount of leverage that a CSE can incur. Specifically, by requiring a 
CSE to post margin to its counterparties, the margin requirements 
ensure that a CSE has adequate eligible collateral to enter into an 
uncleared swap.
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    \8\ See 7 U.S.C. 2(i). Section 2(i) of the CEA states that the 
provisions of the Act relating to swaps that were enacted by the 
Wall Street Transparency and Accountability Act of 2010 (including 
any rule prescribed or regulation promulgated under that Act), shall 
not apply to activities outside the United States unless those 
activities--(1) have a direct and significant connection with 
activities in, or effect on, commerce of the United States; or (2) 
contravene such rules or regulations as the Commission may prescribe 
or promulgate as are necessary or appropriate to prevent the evasion 
of any provision of the Act [CEA] that was enacted by the Wall 
Street Transparency and Accountability Act of 2010.
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    Risk arising from uncleared swaps can potentially have a 
substantial adverse effect on any CSE--irrespective of its domicile or 
the domicile of its counterparties--and therefore the stability of the 
U.S. financial system because each CSE has a sufficient nexus to the 
U.S. financial system to require registration as a CSE. In light of the 
role of margin in ensuring the safety and soundness of CSEs and 
preserving the stability of the U.S. financial system, and consistent 
with section 2(i), section 4s(e)'s margin requirements extend to all 
CSEs on a cross-border basis.
    Pursuant to its new section 4s(e) authority, on October 3, 2014, 
the Commission published reproposed regulations to implement initial 
and variation margin requirements on uncleared swaps (``Proposed Margin 
Rules'') for SDs and MSPs that do not have a Prudential Regulator 
(collectively, ``CSEs'' or ``Covered Swap Entities'').\9\ In the same 
release, the Commission also published an ANPR requesting public 
comment on the cross-border application of such margin requirements. In 
this release, the Commission is proposing a rule for the application of 
the Commission's uncleared swap margin requirements to cross-border 
transactions (referred to herein as the ``Proposed Rule'').
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    \9\ The Commission's Proposed Margin Rules are set forth in 
proposed rules Sec. Sec.  23.150 through 23.159 of part 23 of the 
Commission's regulations, proposed as 17 CFR 23.150 through 23.159. 
See Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 79 FR 59898 (Oct. 3, 2014). In September 
2014, the Prudential Regulators published proposed regulations to 
implement initial and variation margin requirements for SDs and MSPs 
that have a Prudential Regulator. See Margin and Capital 
Requirements for Covered Swap Entities, 79 FR 53748 (Sept. 24, 
2014), available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf. The Commission originally proposed margin rules for 
public comment in 2011. See Margin Requirements for Uncleared Swaps 
for Swap Dealers and Major Swap Participants, 76 FR 23732 (April 28, 
2011).
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B. Key Considerations in the Cross-Border Application of the Margin 
Regulations

    The swaps market is global in nature. Swaps are routinely entered 
into between counterparties located in different jurisdictions. Dealers 
and other market participants conduct their swaps business through 
subsidiaries, affiliates, and branches dispersed across geographical 
boundaries. The global and highly interconnected nature of the swaps 
market heightens the potential that risks assumed by a firm overseas 
can be transmitted across national borders to cause or contribute to 
substantial losses to U.S. persons and threaten the stability of the 
entire U.S. financial system. Therefore, it is important that margin 
requirements for uncleared swaps apply on a cross-border basis in a 
manner that effectively addresses risks to U.S. persons and the U.S. 
financial system.
    The Commission recognizes that non-U.S. CSEs and non-U.S. 
counterparties may be subject to comparable or different rules in their 
home jurisdictions. Conflicting and duplicative requirements between 
U.S. and foreign margin regimes could potentially lead to market 
inefficiencies

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and regulatory arbitrage, as well as competitive disparities that 
undermine the relative position of U.S. CSEs and their counterparties. 
Therefore, it is essential that a cross-border margin framework takes 
into account the global nature of the swaps market and the supervisory 
interests of foreign regulators with respect to entities and 
transactions covered by the Commission's margin regime.\10\
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    \10\ In developing the proposed cross-border framework, the 
Commission is guided by principles of international comity, which 
counsels due regard for the important interests of foreign 
sovereigns. See Restatement (Third) of Foreign Relations Law of the 
United States (the ``Restatement''). The Restatement provides that 
even where a country has a basis for jurisdiction, it should not 
prescribe law with respect to a person or activity in another 
country when the exercise of such jurisdiction is unreasonable. See 
Restatement section 403(1). The reasonableness of such an exercise 
of jurisdiction, in turn, is to be determined by evaluating all 
relevant factors, including certain specifically enumerated factors 
where appropriate: (a) The link of the activity to the territory of 
the regulating state, i.e., the extent to which the activity takes 
place within the territory, or has substantial, direct, and 
foreseeable effect upon or in the territory; (b) the connections, 
such as nationality, residence, or economic activity, between the 
regulating state and the persons principally responsible for the 
activity to be regulated, or between that state and those whom the 
regulation is designed to protect; (c) the character of the activity 
to be regulated, the importance of regulation to the regulating 
state, the extent to which other states regulate such activities, 
and the degree to which the desirability of such regulation is 
generally accepted; (d) the existence of justified expectations that 
might be protected or hurt by the regulation; (e) the importance of 
the regulation to the international political, legal, or economic 
system; (f) the extent to which the regulation is consistent with 
the traditions of the international system; (g) the extent to which 
another state may have an interest in regulating the activity; and 
(h) the likelihood of conflict with regulation by another state. See 
Restatement section 403(2).
    Notably, the Restatement does not preclude concurrent regulation 
by multiple jurisdictions. However, where concurrent jurisdiction by 
two or more jurisdictions creates conflict, the Restatement 
recommends that each country evaluate its own interests in 
exercising jurisdiction and those of the other jurisdiction, and 
where possible, to consult with each other.
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    In granting the Commission new authorities under the Dodd-Frank 
Act, Congress also reaffirmed and called for coordination and 
cooperation among domestic and foreign regulators. Section 752(a) of 
the Dodd-Frank Act requires the Commission, the Prudential Regulators, 
and the SEC to consult and coordinate with foreign regulatory 
authorities on the ``establishment of consistent international 
standards'' with respect to the regulation of swaps.\11\ In this 
regard, the Commission recognizes that efforts are underway by other 
domestic and foreign regulators to implement margin reform and that 
regulatory harmonization and coordination are indispensable to 
achieving a workable cross-border framework.
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    \11\ 15 U.S.C. 8325(a) (added by section 752 of the Dodd-Frank 
Act). Also, before commencing any rulemaking or issuing an order 
regarding swaps, the Commission must consult and coordinate to the 
extent possible with the SEC and the Prudential Regulators for the 
purposes of assuring regulatory consistency and comparability, to 
the extent possible. See 15 U.S.C. 8302(a)(1) (added by section 
712(a)(1) of the Dodd-Frank Act).
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    In developing a cross-border framework for margin regulations, the 
Commission aims to strike the proper balance among these sometimes 
competing considerations. To that end, the Commission has consulted and 
coordinated with the Prudential Regulators and foreign regulatory 
authorities. Commission staff worked closely with the staff of the 
Prudential Regulators, and the Proposed Rule is closely aligned with 
the cross-border proposal that was published by the Prudential 
Regulators in September 2014. In addition, Commission staff has 
participated in numerous bilateral and multilateral discussions with 
foreign regulatory authorities addressing national efforts to implement 
margin reform and the possibility of conflicts and overlaps between 
U.S. and foreign regulatory regimes. Recognizing that systemic risks 
arising from global and interconnected swaps market must be addressed 
through coordinated regulatory requirements for margin across 
international jurisdictions, the Commission has played an active role 
in encouraging international harmonization and coordination of margin 
requirements for uncleared swaps.
    The Commission notes that its collaboration with the Basel 
Committee on Banking Supervision (``BCBS'') and the Board of the 
International Organization of Securities Commissions (``IOSCO'') as a 
member of the Working Group on Margining Requirements (``WGMR'') 
resulted in the issuance of a final margin policy framework for non-
cleared, bilateral derivatives in September 2013 (referred to herein as 
the ``BCBS-IOSCO framework'').\12\ Individual regulatory authorities 
across major jurisdictions (including the EU, Japan, and the United 
States) have since started to develop their own margin rules.\13\ The 
Proposed Rule is consistent with the standards in the final BCBS-IOSCO 
framework, and we have been in continuous communication with regulators 
in the EU and Japan as we developed our cross-border margin proposal. 
Although at this time foreign jurisdictions do not yet have their 
margin regimes in place, the Commission has participated in ongoing, 
collaborative discussions with regulatory authorities in the EU and 
Japan regarding their cross-border approaches to the margin rules, 
including the anticipated scope of application of margin requirements 
in their jurisdiction to cross-border swaps, their plans for 
recognizing foreign margin regimes, and their anticipated timelines.
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    \12\ See Margin Requirements for Non-centrally Cleared 
Derivatives (Sept. 2013), available at http://www.bis.org/publ/bcbs261.pdf.
    \13\ See European Banking Authority, European Securities and 
Markets Authority, and European Insurance and Occupational Pensions 
Authority, Consultation Paper on 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 (for the European Market Infrastructure Regulation) (April 14, 
2014), available at https://www.eba.europa.eu/documents/10180/655149/JC+CP+2014+03+%28CP+on+risk+mitigation+for+OTC+derivatives%29.pdf, and Second Consultation Paper on 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 (for the European Market Infrastructure Regulation) (Jun. 10, 
2015), available at https://www.eba.europa.eu/documents/10180/1106136/JC-CP-2015-002+JC+CP+on+Risk+Management+Techniques+for+OTC+derivatives+.pdf; 
Financial Services Agency of Japan, draft amendments to the 
``Cabinet Office Ordinance on Financial Instruments Business'' and 
``Comprehensive Guidelines for Supervision'' with regard to margin 
requirements for non-centrally cleared derivatives (July 3, 2014). 
Available in Japanese at http://www.fsa.go.jp/news/26/syouken/20140703-3.html.
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    The Commission believes that its ongoing bilateral and multilateral 
discussions with foreign regulatory authorities in major jurisdictions 
(including the EU and Japan) are critical to fostering international 
cooperation and harmonization and in reducing conflicting and 
duplicative regulatory requirements. The Commission expects that these 
discussions will continue as it finalizes and then implements its 
framework for the application of margin requirements to cross-border 
transactions, and as other jurisdictions develop their own respective 
approaches.

C. Advance Notice of Proposed Rulemaking

    The ANPR sought public comment on three potential alternative 
approaches to the cross-border application of its margin requirements: 
(1) A transaction-level approach that is consistent with the 
Commission's cross-border guidance (``Guidance Approach''); \14\ (2) an

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approach that is consistent with the approach proposed by the 
Prudential Regulators (the ``Prudential Regulators' Approach''); \15\ 
and (3) an entity-level approach described in the ANPR (``Entity-Level 
Approach''). To provide context for the discussion of the Proposed 
Rule, the three alternative approaches discussed in the ANPR are 
summarized below.
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    \14\ Interpretative Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 
2013) (``Guidance''). The Commission addressed, among other things, 
how the swap provisions in the Dodd-Frank Act (including the margin 
requirement for uncleared swaps) generally would apply on a cross-
border basis. In this regard, the Commission stated that as a 
general policy matter it expected to apply the margin requirement as 
a transaction-level requirement.
    \15\ See Margin and Capital Requirements for Covered Swap 
Entities, 79 FR 53748 (Sept. 24, 2014), available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf.
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1. Guidance Approach
    Under the first alternative discussed in the ANPR, the Commission's 
margin requirements would be applied on a transaction-level basis, 
consistent with its cross-border Guidance.\16\ The Commission stated in 
the Guidance that it would generally treat its margin requirements for 
uncleared swaps as a transaction-level requirement. Consistent with the 
rationale stated in the Guidance, under this transaction-level 
approach, the Commission's Proposed Margin Rules would apply to a U.S. 
SD/MSP (other than a foreign branch of a U.S. bank that is a SD/MSP) 
for all of its uncleared swaps, regardless of whether its counterparty 
is a U.S. person,\17\ without substituted compliance.
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    \16\ See Interpretative Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 
2013).
    \17\ The scope of the term ``U.S. person'' as used in the Cross-
Border Guidance Approach and the Entity-Level Approach would be the 
same as under the Guidance. See Guidance at 45316-45317 for a 
summary of the Commission's interpretation of the term ``U.S. 
person.''
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    However, under this approach the margin requirements would apply to 
a non-U.S. SD/MSP (whether or not it is a ``guaranteed affiliate'' \18\ 
or an ``affiliate conduit'' \19\) only with respect to its uncleared 
swaps with a U.S. person counterparty and a non-U.S. counterparty that 
is a guaranteed affiliate or an affiliate conduit; the margin 
requirements would not apply to uncleared swaps with a non-U.S. person 
counterparty that is not a guaranteed affiliate or an affiliate 
conduit. Where the non-U.S. counterparty is a guaranteed affiliate or 
an affiliate conduit, the Commission would allow substituted compliance 
(i.e., the non-U.S. SD/MSP would be permitted to comply with the margin 
requirements of its home country's regulator if the Commission 
determines that such requirements are comparable to the Commission's 
margin requirements).\20\
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    \18\ Under the Guidance, id. at 45318, the term ``guaranteed 
affiliate'' refers to a non-U.S. person that is an affiliate of a 
U.S. person and that is guaranteed by a U.S. person. The scope of 
the term ``guarantee'' under the Guidance Approach and the Entity-
Level Approach would be the same as under note 267 of the Guidance 
and accompanying text.
    \19\ Under the approach discussed in the Guidance, id. at 45359, 
the factors that are relevant to the consideration of whether a 
person is an ``affiliate conduit'' include whether: (i) The non-U.S. 
person is majority-owned, directly or indirectly, by a U.S. person; 
(ii) the non-U.S. person controls, is controlled by, or is under 
common control with the U.S. person; (iii) the non-U.S. person, in 
the regular course of business, engages in swaps with non-U.S. third 
party(ies) for the purpose of hedging or mitigating risks faced by, 
or to take positions on behalf of, its U.S. affiliate(s), and enters 
into offsetting swaps or other arrangements with such U.S. 
affiliate(s) in order to transfer the risks and benefits of such 
swaps with third-party(ies) to its U.S. affiliates; and (iv) the 
financial results of the non-U.S. person are included in the 
consolidated financial statements of the U.S. person. Other facts 
and circumstances also may be relevant.
    \20\ Where the uncleared swap is between a non-U.S. SD/MSP 
(whether or not it is a guaranteed affiliate or an affiliate 
conduit) and a foreign branch of a U.S. bank that is a SD/MSP, 
substituted compliance would be available if certain conditions are 
met.
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2. Prudential Regulators' Approach
    The second alternative discussed in the ANPR was the Prudential 
Regulators' Approach to cross-border application of the margin 
requirements.\21\ Under the Prudential Regulators' proposal issued in 
September 2014 (the ``September proposal''), the Prudential Regulators 
would apply the margin requirements to all uncleared swaps of CSEs 
under their supervision with a limited exception.\22\ Specifically, the 
Prudential Regulators would not apply their margin requirements to any 
foreign non-cleared swap of a foreign covered swap entity.\23\ This 
exclusion would only be available where neither the non-U.S. SD/MSP's 
nor the non-U.S. counterparty's obligations under the relevant swap are 
guaranteed by a U.S. person and neither party is ``controlled'' by a 
U.S. person. Under the ``control'' test used in the September proposal, 
the term ``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.
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    \21\ See section 9 of the proposed rule on Margin and Capital 
Requirements for Covered Swap Entities, 12 CFR part 237 (Sept. 24, 
2014) for a complete description of the proposed cross-border 
application of margin requirements to swaps by the Prudential 
Regulators, available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf.
    \22\ A summary of the Prudential Regulators' Approach to the 
cross-border application of their proposed margin requirements is 
included in the ANPR. See Margin Requirements for Uncleared Swaps 
for Swap Dealers and Major Swap Participants, 79 FR 59917(Oct. 3, 
2014). For further information on the Prudential Regulators' 
Approach generally, see Margin and Capital Requirements for Covered 
Swap Entities, 79 FR 53748 (Sept. 24, 2014), available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf.
    \23\ The Prudential Regulators define a ``foreign covered swap 
entity'' as 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. Under the 
Prudential Regulators' proposal, a ``foreign non-cleared swap'' 
would include 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.
---------------------------------------------------------------------------

3. Entity-Level Approach
    Under the third alternative discussed in the ANPR, margin 
requirements would be treated as an entity-level requirement. Under 
this Entity-Level Approach, the Commission would apply its proposed 
cross-border rules on margin on a firm-wide level--that is, to all 
uncleared swaps activities of a SD/MSP registered with the Commission, 
irrespective of whether the counterparty is a U.S. person, and with no 
possibility of exclusion. This approach takes into account that a non-
U.S. SD/MSP entering into uncleared swaps faces counterparty credit 
risk regardless of where the swap is executed or whether the 
counterparty is a U.S. person.\24\ That risk, if it leads to a default 
by the non-U.S. SD/MSP, could cause adverse consequences to its U.S. 
counterparties and the U.S. financial system. At the same time, in 
recognition of international comity, under this approach the Commission 
would consider, where appropriate, allowing CSEs to avail themselves of 
substituted compliance.
---------------------------------------------------------------------------

    \24\ A summary of the Entity-Level Approach to the cross-border 
application of the Proposed Margin Rules is included in the ANPR. 
See Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 79 FR 59917 (Oct. 3, 2014).
---------------------------------------------------------------------------

4. Comments on the Alternative Approaches Discussed in the ANPR
    After publishing the ANPR, the Commission received comments that 
responded to the three alternative approaches.\25\ There was no 
consensus

[[Page 41380]]

among commenters on a preferable approach.
---------------------------------------------------------------------------

    \25\ Comment letters received in response to the ANPR may be 
found on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1528.
---------------------------------------------------------------------------

    Several commenters supported the Guidance Approach, with 
modifications, on the basis that margin rules should not apply to swaps 
between a foreign swap dealer and a foreign, non-guaranteed 
counterparty.\26\ Some of these commenters suggested modifications to 
the availability of substituted compliance in the approach described in 
the Guidance.\27\ For example, one commenter suggested that the 
Commission should treat non-U.S. margin requirements that conform to 
the BCBS-IOSCO framework as ``essentially identical'' to the 
Commission's regime and therefore accessible to all SDs as a means of 
complying with the Commission's margin requirements.\28\ Another 
commenter suggested that the Commission modify its approach to 
substituted compliance outlined in the Guidance to allow substituted 
compliance for trades between U.S. persons and non-U.S. persons at such 
parties' mutual agreement.\29\ In addition, some commenters that 
supported the Guidance Approach expressed the view that it should 
include an emerging markets exception.\30\ Still another commenter 
argued that the Commission's Guidance correctly classified margin as a 
transaction-level rather than an entity-level requirement because, as 
with the clearing requirement, it is practicable to separate out 
transactions which are subject to the margin requirements and 
transactions which are not. This commenter stated that it would be an 
odd result if the Commission were to determine that the reach of the 
clearing requirement was not as great as that of the margin 
requirement, given that both requirements are intended to address 
counterparty credit risk.\31\
---------------------------------------------------------------------------

    \26\ See International Swaps and Derivatives Association, Inc. 
(``ISDA'') (Nov. 24, 2014), Managed Funds Association (``MFA'') 
(Dec. 2, 2014), and INTL FCStone Inc. (Dec. 3, 2014).
    \27\ See ISDA (Nov. 24, 2014) and MFA (Dec. 2, 2014).
    \28\ See ISDA (Nov. 24, 2014).
    \29\ See MFA (Dec. 2, 2014).
    \30\ See ISDA (Nov. 24, 2014) and American Bankers Association 
(Nov. 25, 2014).
    \31\ See INTL FCStone Inc. (Dec. 3, 2014).
---------------------------------------------------------------------------

    In contrast, some commenters argued against adopting the Guidance 
Approach. One commenter argued that the Guidance Approach has become a 
significant driver of conflict between U.S. and European regulatory 
requirements, and is undermining the goal of a globally coordinated 
regulatory framework.\32\ Another commenter argued that this approach 
provides an excessively broad exemption for ``non-guaranteed'' foreign 
affiliates of U.S. banks, and that it is completely inappropriate to 
apply such an exemption to a crucial prudential requirement such as 
derivatives margin, which could pose major risks to the financial 
system by encouraging a race to the bottom among jurisdictions 
concerning margin requirements.\33\
---------------------------------------------------------------------------

    \32\ See Alternative Investment Management Association 
(``AIMA'') (Dec. 2, 2014).
    \33\ See Americans for Financial Reform (``AFR'') (Dec. 2, 
2014).
---------------------------------------------------------------------------

    Other commenters generally supported the Entity-Level Approach, 
with modifications, on the basis that it captures all registrants' 
uncleared trades, regardless of the domicile of the registrant or the 
counterparty. These commenters generally favored this approach because, 
rather than exempting foreign to foreign transactions, it makes 
substituted compliance available for these transactions. One commenter 
stated that the Entity-Level Approach is the most appropriate choice 
because it provides market participants with more certainty in 
determining which jurisdiction's margin requirements apply. Further, 
this commenter stated that the Entity-Level Approach is consistent with 
how collateral is currently handled under a single master agreement and 
would mitigate legal uncertainty and operational errors that can arise 
if trades are subject to different margin requirements under the same 
master agreement.\34\ Another commenter favored the Entity-Level 
Approach because it imposes prudential rules on all swaps activities of 
U.S.-headquartered firms, regardless of where the swap transaction is 
booked. This commenter stated that both the Prudential Regulators' 
Approach and the Guidance Approach provide a means for U.S. firms to 
escape U.S. oversight.\35\
---------------------------------------------------------------------------

    \34\ See Securities Industry and Financial Markets Association, 
Asset Management Group (Nov. 24, 2014).
    \35\ See Public Citizen (Dec. 2, 2014).
---------------------------------------------------------------------------

    Another commenter supported a cross-border approach that combines 
the Guidance Approach with certain enhancements found in the Entity-
Level Approach. This commenter suggested that the Entity-Level Approach 
correctly subjects certain non-U.S. SDs and MSPs to U.S. regulations--
at least with respect to variation margin and the collection of initial 
margin--where the Guidance Approach would permit substituted compliance 
to both parties in all respects. However, this commenter stated that 
the Entity-Level Approach also contains provisions that are 
significantly weaker than the Guidance Approach, such as making 
substituted compliance available to certain non-U.S. counterparties of 
U.S. SDs or MSPs. This commenter also expressed the view that the 
Guidance Approach correctly requires both counterparties to fully 
comply with U.S. rules in all transactions involving a U.S. SD or 
MSP.\36\
---------------------------------------------------------------------------

    \36\ See Better Markets, Inc. (Dec. 2, 2014).
---------------------------------------------------------------------------

    Commenters generally did not support the Prudential Regulators' 
Approach as their first choice, but two commenters thought it might be 
workable with modifications. The first commenter stated that if the 
Commission elects not to adopt the ``Entity-Level'' Approach, the 
Prudential Regulators' Approach might be workable, although this 
commenter had reservations about situations where different 
jurisdictions' regimes apply to the same transaction.\37\ The other 
commenter argued that if its first choice, the Entity-Level Approach, 
is not adopted, the Prudential Regulators' Approach is greatly superior 
to the Guidance Approach, as it would apply margin requirements to 
foreign affiliates of U.S. banks that are classified as SDs or MSPs, 
regardless of whether such affiliates are nominally guaranteed. 
However, this commenter argued that the Prudential Regulators' Approach 
is flawed in that, like the Guidance Approach, it would exempt 
controlled foreign subsidiaries of U.S. banks that are not registered 
with the Commission as swaps entities.\38\
---------------------------------------------------------------------------

    \37\ See AIMA (Dec. 2, 2014).
    \38\ See AFR (Dec. 2, 2014).
---------------------------------------------------------------------------

    Two commenters specifically argued against the Prudential 
Regulators' Approach. One commenter contended that the Prudential 
Regulators' Approach provides limited clarity on how the ``control'' 
test should be applied, which means that foreign bank subsidiaries of 
U.S. banks cannot be certain whether they are subject to U.S. rules or 
foreign rules, and provides limited guidance as to how foreign covered 
swaps entities can determine whether a financial end-user counterparty 
is a U.S. entity or a foreign entity, in comparison to the clear ``U.S. 
person'' standard in the Guidance.\39\ The other commenter is concerned 
with the Prudential Regulators' Approach as it relates to funds. This 
commenter stated that the Prudential Regulators' definition of 
``foreign non-cleared swap'' effectively classifies funds organized 
outside of the United States, but with a U.S. principal place of 
business (e.g., funds with a U.S.-based manager), as foreign entities. 
This

[[Page 41381]]

commenter stated that if funds with a U.S.-based manager are not 
considered ``U.S. persons'' subject to U.S. derivatives regulation, 
even though they have a substantial U.S. nexus, they would likely be 
required to margin their covered swaps in accordance with the foreign 
margin rules to which their non-U.S. CSE counterparty is subject, which 
would give too much deference to the foreign regulatory regime.\40\
---------------------------------------------------------------------------

    \39\ See Committee on Capital Markets Regulation (Nov. 24, 
2014).
    \40\ See MFA (Dec. 2, 2014).
---------------------------------------------------------------------------

    One commenter asserted that both the Prudential Regulators' 
Approach and the Guidance Approach would appropriately exclude swaps 
between foreign-headquartered swap entities that are not controlled or 
guaranteed by a U.S. person and a non-U.S. person that is not 
guaranteed by a U.S. person from the scope of the margin rules, noting 
that if U.S. rules require the foreign-headquartered swap entity to 
post margin, this would create the potential for conflicts or 
inconsistencies with its home country margin requirements.\41\
---------------------------------------------------------------------------

    \41\ See Institute of International Bankers (Nov. 24, 2014). 
This commenter also stated that these foreign swaps would have 
little effect on the U.S. financial system in the event of a 
default; further, under the Dodd-Frank Act, the risk to the United 
States of a default by the foreign-headquartered swap entity on its 
swaps with U.S. counterparties would already be mitigated by capital 
and margin collection requirements.
---------------------------------------------------------------------------

    One commenter did not explicitly support any of the three 
approaches, noting that all of the proposals diverge in potentially 
significant ways from the final framework developed by BCBS and IOSCO 
and the OTC margin framework proposed in April 2014 by European 
supervisory agencies, and that none of the proposals embrace 
substituted compliance in a comprehensive manner that would address 
cross-border conflicts or inconsistencies that could arise. This 
commenter suggested that the Commission should use an outcomes-based 
approach that looks to whether giving full recognition to an equivalent 
foreign OTC margin framework as a whole would ensure an acceptable 
reduction of aggregate unmargined risk.\42\
---------------------------------------------------------------------------

    \42\ See Securities Industry and Financial Markets Association 
(``SIFMA'') (Nov. 24, 2014).
---------------------------------------------------------------------------

II. The Proposed Rule

A. Overview

    Based on, among other things, consideration of the comments to the 
ANPR and after close consultation with the Prudential Regulators, the 
Commission is proposing a rule for the application of the Commission's 
Proposed Margin Rules to cross-border transactions (as noted above, the 
proposed cross-border margin rule is referred to herein as the 
``Proposed Rule''). As discussed above, a cross-border framework for 
margin necessarily involves consideration of significant, and sometimes 
competing, legal and policy considerations, including the impact on 
market efficiency and competition.\43\ The Commission, in developing 
the Proposed Rule, aims to balance these considerations to effectively 
address the risk posed to the safety and soundness of CSEs, while 
creating a workable framework that reduces the potential for undue 
market disruptions and promotes global harmonization. The Commission 
also recognizes that there are other possible approaches to applying 
the margin rules in the cross-border context. Accordingly, the 
Commission invites public comment regarding all aspects of the Proposed 
Rule.
---------------------------------------------------------------------------

    \43\ The Commission's consideration of the costs and benefits 
associated with the Proposed Rule is discussed in section III.C. 
below.
---------------------------------------------------------------------------

1. Use of Hybrid, Firm-Wide Approach
    The Proposed Rule is a combination of the entity- and transaction-
level approaches and is closely aligned with the Prudential Regulators' 
Approach. In general, under the Proposed Rule, margin requirements are 
designed to address the risks to a CSE, as an entity, associated with 
its uncleared swaps (entity-level); nevertheless, certain uncleared 
swaps would be eligible for substituted compliance or excluded from the 
Commission's margin rules based on the counterparties' nexus to the 
United States relative to other jurisdictions (transaction-level).
    Although margin is calculated for individual transactions or 
positions, and therefore, could be applied on a transaction-level 
basis, the Commission believes that as a general matter margin 
requirements should apply on a firm-wide basis, irrespective of the 
domicile of the counterparties or where the trade is executed. The 
primary reason for collecting margin from counterparties is to protect 
an entity in the event of a counterparty default. That is, in the event 
of a default by a counterparty, margin protects the non-defaulting 
counterparty by allowing it to absorb the losses using collateral 
provided by the defaulting entity and to continue to meet all of its 
obligations. In addition, margin functions as a risk management tool by 
limiting the amount of leverage that a CSE can incur. Specifically, by 
requiring a CSE to post margin to its counterparties, the margin 
requirements ensure that a CSE has adequate eligible collateral to 
enter into an uncleared swap. In this way, margin serves as a first 
line of defense to protect a CSE as a whole from risk arising from 
uncleared swaps.
    The source of counterparty credit risk to a CSE, however, is not 
confined to its uncleared swaps with U.S. counterparties. Risk arising 
from uncleared swaps involving non-U.S. counterparties can potentially 
have a substantial adverse effect on a CSE--including a non-U.S. CSE--
and therefore the stability of the U.S. financial system because CSEs 
have a sufficient nexus to the U.S. financial system to require 
registration as a CSE. Given the function of margin, the Commission 
believes that margin should be treated as an entity-level requirement 
in the cross-border context, and thus not take into account the 
domicile of CSE counterparties or where the trade is executed.
    The Commission also believes that treating margin as an entity-
level requirement is consistent with the role of margin in a CSE's 
overall risk management program. Margin, by design, is complementary to 
capital.\44\ That is, margin and capital requirements serve different 
but equally important risk mitigation functions that are best 
implemented at the entity-level. Unlike margin, capital is difficult to 
rapidly adjust in response to changing risk exposures; thus, capital 
can be viewed as a backstop, in the event that the margin is not enough 
to cover all of the losses that resulted from the counterparty default. 
Standing alone, either capital or margin may not be enough to prevent a 
CSE from failing, but together, they are designed to reduce the 
probability of default by the CSE and limit the amount of leverage that 
can be undertaken by CSEs (and other market participants), which 
ultimately mitigates the possibility of a systemic event.\45\
---------------------------------------------------------------------------

    \44\ See BCBS and IOSCO, Margin requirements for non-centrally 
cleared derivatives (Sept. 2013) at 3, available at http://www.bis.org/publ/bcbs261.pdf.
    \45\ Section 4s(e) of the CEA, 7 U.S.C. 6s(e), directs the 
Commission to adopt capital requirements for SDs and MSPs. The 
Commission proposed capital rules in 2011. See Capital Requirements 
for Swap Dealers and Major Swap Participants, Notice of proposed 
rulemaking, 76 FR 27802 (May 12, 2011).
---------------------------------------------------------------------------

    At the same time, the Commission recognizes that a CSE's uncleared 
swaps with a particular counterparty may implicate the supervisory 
interests of foreign regulators and it is important to calibrate the 
cross-border application of the margin requirements to mitigate, to the 
extent possible and consistent with the Commission's regulatory 
interests, the potential for conflicts or duplication with other 
jurisdictions. Therefore, the Proposed Rule, while applying margin

[[Page 41382]]

requirements to a CSE as a whole, also permits a U.S. CSE or non-U.S. 
CSE to avail itself of substituted compliance (to the extent applicable 
under the Proposed Rule) by complying with the margin requirements of 
the relevant foreign jurisdiction in lieu of compliance with the 
Commission's margin requirements, provided that the Commission finds 
that such jurisdiction's margin requirements are comparable to the 
Commission's margin requirements, as further discussed in section II.D. 
below.
    In addition, the Proposed Rule provides for a limited exclusion of 
uncleared swaps between non-U.S. CSEs and non-U.S. counterparties (the 
``Exclusion'') in certain circumstances. The Commission recognizes that 
the supervisory interest of foreign regulators in certain uncleared 
swaps between non-U.S. CSEs and their non-U.S. counterparties may equal 
or exceed the supervisory interest of the United States. The Proposed 
Rule takes into account the interests of other jurisdictions and 
balances those interests with the supervisory interests of the United 
States in order to calibrate the application of margin rules to non-
U.S. CSEs' swaps with non-U.S. counterparties. Accordingly, the 
Commission believes that it would be appropriate to not apply the 
Commission's margin rules to uncleared swaps meeting the criteria for 
the Exclusion, which is described in section II.C.3. below.

B. Key Definitions

    The Proposed Rule uses certain key definitions to establish a 
proposed framework for the application of margin requirements in a 
cross-border context. Specifically, the Proposed Rule defines the terms 
``U.S. person,'' ``guarantee,'' and ``Foreign Consolidated Subsidiary'' 
in order to identify those persons or transactions that, because of 
their substantial connection or impact on the U.S. market, raise or 
implicate greater supervisory interest relative to other CSEs, 
counterparties, and uncleared swaps that are subject to the 
Commission's margin rules. These definitions are discussed below.
1. U.S. Person
    Generally speaking, the term ``U.S. person'' would be defined to 
include those individuals or entities whose activities have a 
significant nexus to the U.S. market by virtue of their organization or 
domicile in the United States or the depth of their connection to the 
U.S. market, even if domiciled or organized outside the United States. 
The proposed definition generally follows the traditional, territorial 
approach to defining a U.S. person, and the Commission believes that 
this definition provides an objective and clear basis for determining 
those individuals or entities that should be identified as a U.S. 
person.\46\
---------------------------------------------------------------------------

    \46\ In addition, the Commission notes that the proposed 
definition of ``U.S. person'' is similar to the definition of ``U.S. 
person'' used by the SEC in the context of cross-border security-
based swaps. In the SEC's August 2014 release adopting rules and 
providing guidance regarding the application of Title VII of the 
Dodd-Frank Act to cross-border security-based swap activities and 
persons engaged in those activities, the SEC defined the term ``U.S. 
person'' in Rule 240.3a71-3(a)(4)(i) under the Securities Exchange 
Act of 1934 to mean, except as provided in paragraph (a)(4)(iii) of 
the rule, any person that is (1) A natural person resident in the 
United States (Rule 240.3a71-3(a)(4)(i)(A)); (2) A partnership, 
corporation, trust, investment vehicle, or other legal person 
organized, incorporated, or established under the laws of the United 
States or having its principal place of business in the United 
States (Rule 240.3a71-3(a)(4)(i)(B)); (3) An account (whether 
discretionary or non-discretionary) of a U.S. person (Rule 240.3a71-
3(a)(4)(i)(C)); or (4) An estate of a decedent who was a resident of 
the United States at the time of death(Rule 240.3a71-3(a)(4)(i)(D)).
    Paragraph (a)(4)(ii) of SEC Rule 240.3a71-3 also defines, for 
purposes of that section, ``principal place of business'' to mean 
the location from which the officers, partners, or managers of the 
legal person primarily direct, control, and coordinate the 
activities of the legal person. With respect to an externally 
managed investment vehicle, this location is the office from which 
the manager of the vehicle primarily directs, controls, and 
coordinates the investment activities of the vehicle.
    Paragraph (a)(4)(iii) of SEC Rule 240.3a71-3 states that the 
term ``U.S. person'' does not include the International Monetary 
Fund, the International Bank for Reconstruction and Development, the 
Inter-American Development Bank, the Asian Development Bank, the 
African Development Bank, the United Nations, and their agencies and 
pension plans, and any other similar international organizations, 
their agencies and pension plans.
    Paragraph (a)(4)(iv) of SEC Rule 240.3a71-3 states that a person 
shall not be required to consider its counterparty to a security-
based swap to be a U.S. person if such person receives a 
representation from the counterparty that the counterparty does not 
satisfy the criteria set forth in paragraph (a)(4)(i) of that 
section, unless such person knows or has reason to know that the 
representation is not accurate; for the purposes of this final rule 
a person would have reason to know the representation is not 
accurate if a reasonable person should know, under all of the facts 
of which the person is aware, that it is not accurate.
    See Application of ``Security-Based Swap Dealer'' and ``Major 
Security-Based Swap Participant'' Definitions to Cross-Border 
Security-Based Swap Activities; Final rule; interpretation 
(Republication), 79 FR 47371 (Aug. 12, 2014).
---------------------------------------------------------------------------

    The Proposed Rule would define a ``U.S. person'' for purposes of 
the cross-border application of the margin rules to mean:
    (1) Any natural person who is a resident of the United States 
(Proposed Rule Sec.  23.160(a)(10)(i));
    (2) Any estate of a decedent who was a resident of the United 
States at the time of death (Proposed Rule Sec.  23.160(a)(10)(ii));
    (3) Any corporation, partnership, limited liability company, 
business or other trust, association, joint-stock company, fund or any 
form of entity similar to any of the foregoing (other than an entity 
described in paragraph (a)(10)(iv) or (v) of proposed Sec.  23.160) (a 
legal entity), in each case that is organized or incorporated under the 
laws of the United States or having its principal place of business in 
the United States, including any branch of the legal entity (Proposed 
Rule Sec.  23.160(a)(10)(iii));
    (4) Any pension plan for the employees, officers or principals of a 
legal entity described in paragraph (a)(10)(iii) of proposed Sec.  
23.160, unless the pension plan is primarily for foreign employees of 
such entity (Proposed Rule Sec.  23.160(a)(10)(iv));
    (5) Any trust governed by the laws of a state or other jurisdiction 
in the United States, if a court within the United States is able to 
exercise primary supervision over the administration of the trust 
(Proposed Rule Sec.  23.160(a)(10)(v));
    (6) Any legal entity (other than a limited liability company, 
limited liability partnership or similar entity where all of the owners 
of the entity have limited liability) owned by one or more persons 
described in paragraphs (a)(10)(i) through (a)(10)(v) of proposed Sec.  
23.160 who bear(s) unlimited responsibility for the obligations and 
liabilities of the legal entity, including any branch of the legal 
entity (Proposed Rule Sec.  23.160(a)(10)(vi)); and
    (7) Any individual account or joint account (discretionary or not) 
where the beneficial owner (or one of the beneficial owners in the case 
of a joint account) is a person described in paragraphs (a)(10)(i) 
through (a)(10)(vi) of proposed Sec.  23.160 (Proposed Rule Sec.  
23.160(a)(10)(vii)).\47\
---------------------------------------------------------------------------

    \47\ See Sec.  23.160(a)(10) of the Proposed Rule.
---------------------------------------------------------------------------

    A non-U.S. person is defined to be any person that is not a U.S. 
person.\48\
---------------------------------------------------------------------------

    \48\ See Sec.  23.160(a)(5) of the Proposed Rule.
---------------------------------------------------------------------------

    The proposed definition is generally consistent with the definition 
of this term set forth in the Guidance, with certain exceptions 
discussed below.
    Prongs (1), (2), (3), (4), (5), and (7) (Proposed Rule Sec.  
23.160(a)(10)(i), (ii), (iii), (iv), (v), and (vii)) identify certain 
persons as a ``U.S. person'' by virtue of their domicile or 
organization within the United States. The Commission has traditionally 
looked to where a legal entity is organized or incorporated (or in the 
case of a natural person, where he or she resides) to determine whether 
it

[[Page 41383]]

is a U.S. person.\49\ In the Commission's view, these persons--by 
virtue of their decision to organize or locate in the United States and 
because they are likely to have significant financial and legal 
relationships in the United States--are appropriately included within 
the definition of ``U.S. person'' for purposes of the proposed cross-
border margin framework.
---------------------------------------------------------------------------

    \49\ See, e.g., 17 CFR 4.7(a)(1)(iv) (defining ``Non-United 
States person'' for purposes of part 4 of the Commission regulations 
relating to commodity pool operators).
---------------------------------------------------------------------------

    Under prong (3) (Proposed Rule Sec.  23.160(a)(10)(iii)), 
consistent with its traditional approach, the Commission proposes to 
define ``U.S. person'' also to include persons that are organized or 
incorporated outside the United States, but have their principal place 
of business in the United States. For purposes of this prong, the 
Commission proposes to interpret ``principal place of business'' to 
mean the location from which the officers, partners, or managers of the 
legal person primarily direct, control, and coordinate the activities 
of the legal person. This interpretation is consistent with the Supreme 
Court's decision in Hertz Corp. v. Friend, which described a 
corporation's principal place of business, for purposes of diversity 
jurisdiction, as the ``place where the corporation's high level 
officers direct, control, and coordinate the corporation's 
activities.'' \50\
---------------------------------------------------------------------------

    \50\ See Hertz Corp. v. Friend, 559 U.S. 77, 80 (2010).
---------------------------------------------------------------------------

    The Commission is of the view that the application of the principal 
place of business concept to a fund may require consideration of 
additional factors beyond those applicable to operating companies. In 
the case of a fund, the Commission notes that the senior personnel that 
direct, control, and coordinate a fund's activities are generally not 
the persons who are named as directors or officers of the fund, but 
rather are persons who work for the fund's investment adviser or the 
fund's promoter. Therefore, consistent with the Guidance, the 
Commission generally would consider the principal place of business of 
a fund to be in the United States if the senior personnel responsible 
for either (1) the formation and promotion of the fund or (2) the 
implementation of the fund's investment strategy are located in the 
United States, depending on the facts and circumstances that are 
relevant to determining the center of direction, control and 
coordination of the fund.\51\
---------------------------------------------------------------------------

    \51\ See the Guidance, 78 FR 45309-45312, for guidance on 
application of the principal place of business test to funds and 
other collective investment vehicles in the context of cross-border 
swaps, including examples of how the Commission's approach could 
apply to a consideration of whether the ``principal place of 
business'' of a fund is in the United States in particular 
hypothetical situations. However, because of variations in the 
structure of collective investment vehicles as well as the factors 
that are relevant to the consideration of whether a collective 
investment vehicle has its principal place of business in the United 
States under the Guidance, these examples were included in the 
Guidance for illustrative purposes only.
---------------------------------------------------------------------------

    Prong (6) (Proposed Rule Sec.  23.160(a)(10)(vi)) of the proposed 
definition of ``U.S. person'' would include certain legal entities 
owned by one or more U.S. person(s) and for which such person(s) bear 
unlimited responsibility for the obligations and liabilities of the 
legal entity. As noted above, the Guidance included a similar concept 
in the definition of the term ``U.S. person;'' however the definition 
contained in the Guidance would generally characterize a legal entity 
as a U.S. person if the entity were ``directly or indirectly majority-
owned'' by one or more persons falling within the term ``U.S. person'' 
and such U.S. person(s) bears unlimited responsibility for the 
obligations and liabilities of the legal entity. Where a U.S. person 
serves as a financial backstop for all of a legal entity's obligations 
and liabilities, creditors and counterparties look to the U.S. person 
when assessing the risk in dealing with the entity, regardless of the 
amount of equity owned by the U.S. person. Under such circumstances, 
because the U.S. person has unlimited responsibility for all of the 
legal entity's obligations, the Commission believes that the legal 
entity should be deemed to be a U.S. person.
    The Proposed Rule would not include the U.S. majority-ownership 
prong that was included in the Guidance (50% U.S. person ownership of a 
fund or other collective investment vehicle).\52\ Some commenters have 
argued that a majority ownership test for funds should not be included 
on the basis that ownership alone is not indicative of whether the 
activities of a non-U.S. fund with a non-U.S.-based manager has a 
direct and significant effect on the U.S. financial system, and that it 
is difficult to determine the identity of the beneficial owner of a 
fund in certain fund structures (e.g., fund-of-funds or master-feeder). 
Alternatively, an argument for retaining the majority-ownership test 
would be that many of these funds have large U.S. investors, who can be 
adversely impacted in the event of a counterparty default. On balance, 
the Commission believes the majority-ownership test should not be 
included in the definition of U.S. person for purposes of the margin 
rules. Non-U.S. funds with U.S. majority-ownership, even if treated as 
a non-U.S. person, would be excluded from the Commission's margin rules 
only in limited circumstances (namely, when these funds trade with a 
non-U.S. CSE that is not a consolidated subsidiary of a U.S. entity or 
a U.S. branch of a non-U.S. CSE). This, coupled with the implementation 
issues raised by commenters, persuades the Commission not to propose to 
define those funds that are majority-owned by U.S. persons (and that 
would otherwise not fall within the definition of a ``U.S. person''), 
as U.S. persons.
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    \52\ The Commission's definition of the term ``U.S. person'' as 
used in the Guidance included a prong (iv) which covered ``any 
commodity pool, pooled account, or collective investment vehicle 
(whether or not it is organized or incorporated in the United 
States) of which a majority ownership is held, directly or 
indirectly, by a U.S. person(s).''
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    The proposed definition of ``U.S. person'' determines a legal 
person's status at the entity level and thus includes any foreign 
operations that are part of the U.S. legal person, regardless of their 
location. Consistent with this approach, the definition of ``U.S. 
person'' under the Proposed Rule would include a foreign branch of a 
U.S. person.
    Under the proposed definition, the status of a legal person as a 
U.S. person would not affect whether a separately incorporated or 
organized legal person in the affiliated corporate group is a U.S. 
person. Therefore, an affiliate or a subsidiary of a U.S. person that 
is organized or incorporated in a non-U.S. jurisdiction would not be 
deemed a ``U.S. person'' solely by virtue of its relationship with a 
U.S. person.
    The proposed ``U.S. person'' definition does not include the 
prefatory phrase ``includes, but is not limited to'' that was included 
in the Guidance. The Commission believes that this prefatory phrase 
should not be included in order to provide legal certainty regarding 
the application of U.S. margin requirements to cross-border swaps.
    The Commission understands that the information necessary for a 
swap counterparty to accurately assess the status of its counterparties 
as U.S. persons may not be available, or may be available only through 
overly burdensome due diligence. For this reason, the Commission 
believes that a swap counterparty generally should be permitted to 
reasonably rely on its counterparty's written representation in 
determining whether the counterparty is within the definition of the 
term ``U.S. person.'' In this context, the Commission's policy is to 
interpret the ``reasonable'' standard to be satisfied

[[Page 41384]]

when a party to a swap conducts reasonable due diligence on its 
counterparties, with what is reasonable in a particular situation to 
depend on the relevant facts and circumstances.\53\
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    \53\ The Commission notes that under the External Business 
Conduct Rules, a SD or MSP generally meets its due diligence 
obligations if it reasonably relies on counterparty representations, 
absent indications to the contrary. As in the case of the External 
Business Rules, the Commission believes that allowing for reasonable 
reliance on counterparty representations encourages objectivity and 
avoids subjective evaluations, which in turn facilitates a more 
consistent and foreseeable determination of whether a person is 
within the Commission's interpretation of the term ``U.S. person.''
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    Under the Proposed Rule, a ``non-U.S. person'' is any person that 
is not a ``U.S. person'' (as defined in the Proposed Rule).\54\ 
References in this preamble to a ``U.S. counterparty'' are to a swap 
counterparty that is a ``U.S. person'' under the Proposed Rule, and 
references to a ``non-U.S. counterparty'' are to a swap counterparty 
that is a ``non-U.S. person'' under the Proposed Rule.\55\
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    \54\ See Sec.  23.160(a)(5) of the Proposed Rule.
    \55\ Under the Proposed Rule, a ``U.S. CSE'' is a CSE that is a 
U.S. person. The term ``U.S. CSE'' includes a foreign branch of a 
U.S. CSE. A ``non-U.S. CSE'' is any CSE that is not a U.S. person.
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    Request for Comment. The Commission requests comment on all aspects 
of the proposed definition of ``U.S. person,'' including the following:
    1. Does the proposed definition of ``U.S. person'' appropriately 
identify all individuals or entities that should be designated as U.S. 
persons? Is the proposed definition too narrow or broad? Why?
    2. Should the definition of ``U.S. person'' include the U.S. 
majority-ownership prong for funds and other collective investment 
vehicles, as set forth in the Guidance? Please explain.
    3. Should the definition of ``U.S. person'' include certain legal 
entities owned by one or more persons described in prongs (1), (2), 
(3), (4), or (5) (Proposed Rule Sec.  23.160(a)(10)(i), (ii), (iii), 
(iv) or (v)) of the proposed U.S. person definition who bear(s) 
unlimited responsibility for the obligations and liabilities of the 
legal entity? Please explain.
    4. Should the definition of ``U.S. person'' be identical to the 
definition of ``U.S. person'' that the SEC adopted in its August 2014 
rulemaking? For example:
    a. Should the definition of ``U.S. person'' exclude certain 
designated (and any similar) international organizations, their 
agencies and pension plans, with headquarters in the United States?
    b. Should the Commission define the term ``principal place of 
business'' as the location from which the officers, partners, or 
managers of a legal person primarily direct, control, and coordinate 
the activities of the legal person, and specify that in the case of an 
externally managed investment vehicle, this location is the office from 
which the manager of the vehicle primarily directs, controls, and 
coordinates the investment activities of the vehicle?
    c. Should the Commission delete prong (6) (Proposed Rule Sec.  
23.160(a)(10)(vi)) of the proposed definition of ``U.S. person'' which 
includes certain legal entities owned by one or more U.S. person(s) and 
for which such person(s) bear unlimited responsibility for the 
obligations and liabilities of the legal entity and instead treat such 
arrangements as recourse guarantees?
    d. Should any other changes be made to the proposed definition of 
``U.S. person'' to conform it to the definition adopted by the SEC?
2. Guarantees
    Under the Proposed Rule, uncleared swaps of non-U.S. CSEs, where 
the non-U.S. CSE's obligations under the uncleared swap are guaranteed 
by a U.S. person, would be treated the same as uncleared swaps of a 
U.S. CSE. The Commission believes that this treatment is appropriate 
because the swap of a non-U.S. CSE whose obligations under the swap are 
guaranteed by a U.S. person is identical, in relevant respects, to a 
swap entered directly by a U.S. person. That is, by virtue of the 
guarantee, the U.S. guarantor is responsible for the swap it guarantees 
in a manner similar to a direct counterparty to the swap. The U.S. 
person guarantor effectively acts jointly with the non-U.S. person 
whose swap it guarantees to engage in swaps transactions. The 
counterparty, pursuant to the recourse guarantee, looks to both the 
direct non-U.S. counterparty and its U.S. guarantor in entering into 
the swap.
    The Proposed Rule would define the term ``guarantee'' as an 
arrangement pursuant to which one party to a swap transaction with a 
non-U.S. counterparty has rights of recourse against a U.S. person 
guarantor (whether such guarantor is affiliated with the non-U.S. 
counterparty or is an unaffiliated third party) with respect to the 
non-U.S. counterparty's obligations under the relevant swap 
transaction. Under the Commission's proposal, a party to a swap 
transaction has rights of recourse against the U.S. person guarantor if 
the party has a conditional or unconditional legally enforceable right, 
in whole or in part, to receive payments from, or otherwise collect 
from, the U.S. person in connection with the non-U.S. person's 
obligations under the swap.\56\ Accordingly, the term ``guarantee'' 
would apply whenever a party to the swap has a legally enforceable 
right of recourse against the U.S. guarantor of a non-U.S. 
counterparty's obligations under the relevant swap, regardless of 
whether such right of recourse is conditioned upon the non-U.S. 
counterparty's insolvency or failure to meet its obligations under the 
relevant swap, and regardless of whether the counterparty seeking to 
enforce the guarantee is required to make a demand for payment or 
performance from the non-U.S. counterparty before proceeding against 
the U.S. guarantor.
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    \56\ See Sec.  23.160(a)(2) of the Proposed Rule.
---------------------------------------------------------------------------

    Under the Proposed Rule, the terms of the guarantee need not 
necessarily be included within the swap documentation or even otherwise 
reduced to writing (so long as legally enforceable rights are created 
under the laws of the relevant jurisdiction), provided that a swap 
counterparty has a conditional or unconditional legally enforceable 
right, in whole or in part, to receive payments from, or otherwise 
collect from, the U.S. person in connection with the non-U.S. person's 
obligations under the swap.\57\
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    \57\ Further, the definition of ``guarantee'' is intended to 
encompass any swap of a non-U.S. person where the counterparty to 
the swap has rights of recourse, regardless of the form of the 
arrangement, against at least one U.S. person (either individually 
or jointly or severally with others) for the non-U.S. person's 
obligations under the swap.
---------------------------------------------------------------------------

    Further, the Commission's proposed definition of guarantee would 
not be affected by whether the U.S. guarantor is an affiliate of the 
non-U.S. CSE because, in each case, the swap counterparty has a 
conditional or unconditional legally enforceable right, in whole or in 
part, to receive payments from, or otherwise collect from, the U.S. 
person in connection with the non-U.S. person's obligations under the 
swap.
    The Commission notes that the definition of ``guarantee'' in the 
Proposed Rule is narrower in scope than the one used in the 
Guidance.\58\ In proposing this definition, the Commission is cognizant 
that many other types of financial arrangements or support, other than 
a guarantee as defined in the Proposed Rule, may be provided by a U.S. 
person to a non-U.S. CSE (e.g., keepwells and liquidity puts,

[[Page 41385]]

certain types of indemnity agreements, master trust agreements, 
liability or loss transfer or sharing agreements). The Commission 
understands that these other financial arrangements or support transfer 
risk directly back to the U.S. financial system, with possible 
significant adverse effects, in a manner similar to a guarantee with a 
direct recourse to a U.S. person. The Commission, however, believes 
that application of a narrower definition of guarantee for purposes of 
identifying those uncleared swaps that should be treated like uncleared 
swaps of a U.S. CSEs would reduce the potential for conflict with the 
non-U.S. CSE's home regulator. Moreover, the Commission believes that a 
non-U.S. CSE that has been provided with financial arrangements or 
support from a U.S. person that do not fall within the term 
``guarantee'' as defined in the Proposed Rule in many cases is likely 
to meet the definition of a ``Foreign Consolidated Subsidiary'' and 
therefore, as discussed in the next section, would be subject to the 
Commission's margin requirements, with substituted compliance (but not 
the Exclusion) available. Therefore, the Commission believes that a 
narrow definition of guarantee would achieve a more workable framework 
for non-U.S. CSEs, without undermining protection of U.S. persons and 
U.S. financial system.
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    \58\ In the Guidance, the Commission interpreted the term 
``guarantee'' generally to include not only traditional guarantees 
of payment or performance of the related swaps, but also other 
formal arrangements that, in view of all the facts and 
circumstances, support the non-U.S. person's ability to pay or 
perform its swap obligations with respect to its swaps.
---------------------------------------------------------------------------

    The Commission is aware that some non-U.S. CSEs removed guarantees 
in order to fall outside the scope of certain Dodd-Frank requirements. 
The proposed coverage of foreign subsidiaries of a U.S. person as a 
``Foreign Consolidated Subsidiary,'' which is discussed in the next 
section, and whose swaps would not be eligible for the Exclusion under 
any circumstances (as discussed in section II.C.3. below), would 
address the concern that even without a guarantee, as defined under the 
Guidance or in the Proposed Rule, foreign subsidiaries of a U.S. person 
with a substantial nexus to the U.S. financial system are adequately 
covered by the margin requirements.
    Request for Comment. The Commission seeks comment on all aspects of 
the proposed definition of ``guarantee,'' including the following:
    1. Should the broader use of the term ``guarantee'' in the Guidance 
be used instead of the proposed definition, and if so, why? Would an 
alternative definition be more effective in light of the purpose of the 
margin requirements, and if so, why?
    2. Is the Commission's assumption that a non-U.S. CSE is likely to 
meet the definition of a ``Foreign Consolidated Subsidiary'' when it 
has been provided with financial arrangements or support from a U.S. 
person that do not fall within the term ``guarantee'' (as defined in 
the Proposed Rule) correct? If not, why not?
    3. Is it appropriate to distinguish, for purposes of the Proposed 
Rule, between those arrangements under which a party to the swap has a 
legally enforceable right of recourse against the U.S. guarantor and 
those arrangements where there is not direct recourse against a U.S. 
guarantor?
3. Foreign Consolidated Subsidiaries
    The Proposed Rule uses the term ``Foreign Consolidated Subsidiary'' 
in order to identify swaps of those non-U.S. CSEs whose obligations 
under the relevant uncleared swap are not guaranteed by a U.S. person 
but that raise substantial supervisory concern in the United States, as 
a result of the possible negative impact on their U.S. parent entities 
and the U.S. financial system. Consolidated financial statements report 
the financial position, results of operations and statement of cash 
flows of a parent entity together with subsidiaries in which the parent 
entity has a controlling financial interest (which are required to be 
consolidated under U.S. generally accepted accounting principles 
(``GAAP'')). In the Commission's view, the fact that an entity is 
included in the consolidated financial statements of another is an 
indication of potential risk to the other entity that offers a clear 
and objective standard for the application of margin requirements.
    Specifically, the Proposed Rule defines the term ``Foreign 
Consolidated Subsidiary'' as a non-U.S. CSE in which an ultimate parent 
entity \59\ that is a U.S. person has a controlling interest, in 
accordance with U.S. GAAP, such that the U.S. ultimate parent entity 
includes the non-U.S. CSE's operating results, financial position and 
statement of cash flows in the U.S. ultimate parent entity's 
consolidated financial statements, in accordance with U.S. GAAP.
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    \59\ Under the Proposed Rule, the term ``ultimate parent 
entity'' means the parent entity in a consolidated group in which 
none of the other entities in the consolidated group has a 
controlling interest, in accordance with U.S. GAAP.
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    In the case of Foreign Consolidated Subsidiaries whose obligations 
under the relevant swap are not guaranteed by a U.S. person, 
substituted compliance would be broadly available under the Proposed 
Rule to the same extent as other non-U.S. CSEs whose obligations under 
the relevant swap are not guaranteed by a U.S. person, even though the 
financial position, operating results, and statement of cash flows of 
the Foreign Consolidated Subsidiary have a direct impact on the 
financial position, risk profile and market value of the consolidated 
group (which includes a U.S. parent entity); however, the Exclusion 
would not be available for swaps with a Foreign Consolidated Subsidiary 
because their swap activities have a direct impact on the financial 
position, risk profile, and market value of a U.S. parent entity that 
consolidates the Foreign Consolidated Subsidiary's financial statements 
and a potential spill-over effect on the U.S. financial system.\60\
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    \60\ The Exclusion under the Proposed Rule is discussed in 
section II.C.3. below.
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    The Commission believes that not extending the Exclusion to Foreign 
Consolidated Subsidiaries under the Proposed Rule would be appropriate 
because the U.S. parent entity that consolidates the Foreign 
Consolidated Subsidiary's financial statements may have an incentive to 
provide support to a Foreign Consolidated Subsidiary, or the Foreign 
Consolidated Subsidiary may pose financial risk to the U.S. parent 
entity. In addition, market participants (including counterparties) may 
have the expectation that the parent entity will provide support to the 
Foreign Consolidated Subsidiary although, whether the U.S. parent 
entity actually steps in to fulfill the obligations of the Foreign 
Consolidated Subsidiary would depend on a business judgment rather than 
a legal obligation.\61\ Notably, although consolidation has a direct 
impact on the U.S. parent entity, the U.S. parent entity stands in a 
different legal position than a U.S. guarantor because, in the absence 
of a direct recourse guarantee, the U.S. parent entity has no legal 
obligation to pay or perform under the relevant swap if the Foreign 
Consolidated Subsidiary defaults on its swap obligations. Therefore, 
the Commission believes that, in the absence of a direct recourse

[[Page 41386]]

guarantee from a U.S. person, uncleared swaps with a Foreign 
Consolidated Subsidiary should not be treated the same as swaps with a 
U.S. CSE or a non-U.S. CSE whose obligations under the relevant swap 
are guaranteed by a U.S. person.
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    \61\ For example, when General Electric announced on April 10, 
2015 that it would guarantee repayment of approximately $210 billion 
of debt from GE Capital, the prices of some GE Capital bonds 
reportedly went up as much as 1.5% even though previously the parent 
company had provided other support but not an unconditional 
guarantee. According to an article in the Wall Street Journal, 
Russell Solomon, an analyst at Moody's Investors Service, stated: 
``We've always assumed that GE would support GE Capital almost no 
matter what . . . But now this says they'll support it no matter 
what.'' Similarly, the article reports that Standard & Poor's Rating 
Services stated that General Electric's decision to back GE Capital 
debt ``strengthens our view of GE's support, by buttressing the 
parent's proven willingness and ability to support its subsidiary 
with a contractual obligation to do so.'' See Mike Cherney and Katy 
Burne, WSJ, Apr. 10, 2015, available at http://www.wsj.com/articles/ges-move-alters-the-bond-market-1428707800.
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    The Commission considered proposing a ``control'' test similar to 
that proposed by the Prudential Regulators. The ``control test'' in the 
Prudential Regulators' proposal is based solely on an entity's 
ownership level and control of the election of the board,\62\ which may 
or may not clearly identify, depending on the facts and circumstances, 
those non-U.S. CSEs that are likely to raise greater supervisory 
concerns than other non-U.S. CSEs (in each case whose obligations under 
the relevant swap are not guaranteed by a U.S. person). Therefore, the 
Commission is using a ``consolidation test'' rather than a ``control 
test'' in the proposed definition of a ``Foreign Consolidated 
Subsidiary'' in order to provide a clear, bright-line test for 
identifying those non-U.S. CSEs whose uncleared swaps are likely to 
raise greater supervisory concerns.
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    \62\ Under the Prudential Regulators' proposal, the term 
``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.
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    Request for Comment. The Commission seeks comment on all aspects of 
the Proposed Rule's definition of ``Foreign Consolidated Subsidiary,'' 
including:
    1. Does the proposed definition of a ``Foreign Consolidated 
Subsidiary'' appropriately capture those non-U.S. CSEs that should not 
be eligible for the Exclusion? If not, please explain and provide an 
alternative(s).
    2. The consolidation test in the definition of a ``Foreign 
Consolidated Subsidiary'' is intended to provide a clear, bright-line 
test for identifying those non-U.S. CSEs whose uncleared swaps are 
likely to raise greater supervisory concerns relative to other non-
guaranteed non-U.S. CSEs. Should the proposed consolidation test be 
used in lieu of the control test proposed by the Prudential Regulators? 
Why or why not? Should the Commission use both a consolidation test and 
a control test? If so, please explain. Would any other tests or 
criteria be more appropriate? If so, please explain what tests or 
criteria should be used and why they are more appropriate.
    3. Under the definition of Foreign Consolidated Subsidiary, the 
Commission is using U.S. GAAP as the standard for purposes of 
determining whether an entity consolidates another entity. In reviewing 
registration data of CSEs, the Commission believes that this definition 
balances the goals of the statute and the burdens placed on the 
industry; however, should the Commission also consider including in the 
definition of Foreign Consolidated Subsidiary, non-U.S. CSEs whose U.S. 
ultimate parent entity uses a different standard than U.S. GAAP in 
determining whether a parent entity must consolidate an entity for 
financial reporting purposes? If so, please explain why.
    4. Should the Commission also include in the definition of 
``Foreign Consolidated Subsidiary'' those non-U.S. CSEs whose U.S. 
ultimate parent entity is not required to prepare consolidated 
financial statements under any accounting standard or for any other 
reason (e.g., the U.S. ultimate parent entity is not a public company 
under federal securities laws and is not required to prepare 
consolidated financial statements by private investors or debtholders 
as a condition to investing or financing), but which would consolidate 
the non-U.S. CSE if it were required to prepare consolidated financial 
statements in accordance with U.S. GAAP? If so, please explain why?
    5. Under the definition of Foreign Consolidated Subsidiary, the 
Commission is only including non-U.S. CSEs whose financial statements 
are consolidated by an ultimate parent entity that is a U.S. person. 
Should the Commission also include immediate and intermediate parent 
entities of the non-U.S. CSE in the definition? If so, please explain 
why?

C. Applicability of Margin Requirements to Cross-Border Uncleared Swaps

    The following section describes the application of the Commission's 
margin rules to cross-border swaps between CSEs and various types of 
counterparties, as well as when the Exclusion from the Commission's 
margin requirements would be applicable. Table A to this release (see 
below) illustrates how the Proposed Rule would apply to specific 
transactions between various types of counterparties, and should be 
read in conjunction with the rest of the preamble and the text of the 
Proposed Rule.
1. Uncleared Swaps of U.S. CSEs or Non-U.S. CSEs Whose Obligations 
Under the Relevant Swap Are Guaranteed by a U.S. Person
    Under the Proposed Rule, the Commission's margin rules \63\ would 
apply to all uncleared swaps of U.S. CSEs,\64\ with no exclusions. By 
their nature, U.S. CSEs have a significant impact on the U.S. swaps 
market, and the Commission therefore has a strong interest in ensuring 
their viability. However, substituted compliance would be available 
with respect to initial margin posted to (but not collected from) any 
non-U.S. counterparty (including a non-U.S. CSE) whose obligations 
under the uncleared swap are not guaranteed by a U.S. person. The 
Commission proposes to provide substituted compliance in this situation 
(assuming that the non-U.S. counterparty is subject to comparable 
margin requirements in a foreign jurisdiction) because the swap 
counterparty is a non-U.S. person and where its swap obligations are 
not guaranteed by a U.S. person, the foreign regulator may have equal 
or greater interest in the collection of margin by the non-U.S. 
counterparty. However, substituted compliance would not apply to the 
collection of margin by the U.S. CSE from the non-U.S. counterparty, as 
the Commission has a significant regulatory interest in the collection 
of margin by the U.S. CSE, which protects the U.S. CSE and the U.S. 
financial system from counterparty credit risk.
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    \63\ The Commission's Proposed Margin Rules are set forth in 
proposed Sec. Sec.  23.150 through 23.159 of part 23 of the 
Commission's regulations, proposed as 17 CFR 23.150 through 23.159.
    \64\ Foreign branches of a U.S. CSE are treated as part of the 
related principal entity and hence an uncleared swap executed by or 
through a foreign branch would be treated as an uncleared swap of a 
U.S. CSE.
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    The same treatment that applies to U.S. CSEs would also apply to a 
non-U.S. CSE whose obligations under the relevant swap are guaranteed 
by a U.S. person. The Commission believes that this result is 
appropriate because the economics of the transaction are no different 
from a trade entered directly by the U.S. guarantor, as discussed in 
section II.B.2. above. In addition, the Commission believes that 
treating uncleared swaps of these entities differently from those of 
U.S. CSEs would lead to unwarranted competitive distortions. That is, 
the non-U.S. CSE that enters into a swap with a direct recourse 
guarantee from a U.S. person would be positioned to benefit from more 
competitive pricing when dealing with non-U.S. counterparties (as 
compared to U.S. CSEs) to the extent

[[Page 41387]]

that either substituted compliance or the Exclusion would be available.
    The Commission believes that requiring U.S. CSEs and non-U.S. CSEs 
whose obligations under the relevant swap are guaranteed by a U.S. 
person to comply with its margin requirements, with only limited 
substituted compliance for margin posted to (but not collected from) 
any non-U.S. counterparty (including a non-U.S. CSE) whose obligations 
under the uncleared swap are not guaranteed by a U.S. person, would 
help ensure their safety and soundness and support the stability of the 
U.S. financial markets, reducing the likelihood of another financial 
crisis affecting the U.S. economy.
    Request for Comment. The Commission requests comments on all 
aspects of the proposed treatment of uncleared swaps of U.S. CSEs and/
or non-U.S. CSEs whose obligations under the relevant swap are 
guaranteed by a U.S. person, including:
    1. Is the Proposed Rule's treatment of U.S. CSEs and non-U.S. CSEs 
whose obligations under the swap are guaranteed by a U.S. person 
appropriate? If not, please explain. If a different treatment should 
apply to U.S. CSEs or non-U.S. CSEs whose obligations under the swap 
are guaranteed by a U.S. person, please describe the alternative 
treatment that should apply and explain why.
    2. What are the competitive implications of the proposed treatment 
of uncleared swaps of non-U.S. CSEs whose obligations under the swap 
are guaranteed by a U.S. person?
    3. Does the proposed treatment of non-U.S. CSEs whose obligations 
under the swap are guaranteed by a U.S. person appropriately take into 
account the supervisory interest of a non-U.S. CSE's home jurisdiction?
2. Uncleared Swaps of Non-U.S. CSEs (Including Foreign Consolidated 
Subsidiaries) Whose Obligations Under the Relevant Swap Are Not 
Guaranteed by a U.S. Person
    Under the Proposed Rule, non-U.S. CSEs (including Foreign 
Consolidated Subsidiaries) whose obligations under the relevant 
uncleared swap are not guaranteed by a U.S. person may avail themselves 
of substituted compliance to a greater extent than if their obligations 
under the swap were guaranteed by a U.S. person. The Commission 
believes that this approach is appropriate since a non-U.S. CSE whose 
swap obligations are not guaranteed by a U.S. person (including a 
Foreign Consolidated Subsidiary), on balance, may implicate equal or 
greater supervisory concerns on the part of a foreign regulator 
relative to the supervisory interest of the Commission (in comparison 
to U.S. CSEs or non-U.S. CSEs whose obligations under the relevant swap 
are guaranteed by a U.S. person, because the Commission has a 
significant regulatory interest in uncleared swaps of these CSEs). 
Under the Proposed Rule, where the obligations of a non-U.S. CSE 
(including a Foreign Consolidated Subsidiary) under the relevant swap 
are not guaranteed by a U.S. person, substituted compliance would be 
available with respect to its uncleared swaps with any counterparty, 
except where the counterparty is a U.S. CSE or a non-U.S. CSE whose 
obligations under the relevant swap are guaranteed by a U.S. 
person.\65\
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    \65\ With respect to uncleared swaps with a U.S. CSE or a non-
U.S. CSE whose obligations under the relevant swap are guaranteed by 
a U.S. person, substituted compliance would only be available for 
initial margin collected by the non-U.S. CSE whose obligations under 
the relevant swap are not guaranteed by a U.S. person, as discussed 
in section II.C.1.
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    Further, uncleared swaps entered into by Foreign Consolidated 
Subsidiaries would not be eligible for the Exclusion under the Proposed 
Rule. As described above, the financial position, operating results, 
and statement of cash flows of a Foreign Consolidated Subsidiary are 
incorporated into the financial statements of the U.S. ultimate parent 
entity and therefore, likely have a direct impact on the consolidated 
entity's financial position, risk profile, and market value. Under 
these circumstances, and given the importance of margin in mitigating 
counterparty credit risk, the Commission has greater supervisory 
concerns with respect to the uncleared swaps of a Foreign Consolidated 
Subsidiary than other non-U.S. CSEs. Therefore, the Commission believes 
that extending the Exclusion to a Foreign Consolidated Subsidiary would 
not further the goal of ensuring the safety and soundness of a CSE and 
the stability of U.S. financial markets. The Commission is also 
concerned that extending the Exclusion to Foreign Consolidated 
Subsidiaries would encourage a U.S. entity to use their non-U.S. 
subsidiaries to conduct their swap activities with non-U.S. 
counterparties, possibly bifurcating the U.S. entity's U.S. and non-
U.S.-facing businesses, and potentially resulting in separate pools of 
liquidity.
    Request for Comment. The Commission requests comments on all 
aspects of the proposed treatment of uncleared swaps of non-U.S. CSEs 
(including Foreign Consolidated Subsidiaries) whose obligations under 
the relevant swap are not guaranteed by a U.S. person, including:
    1. The Proposed Rule makes substituted compliance more broadly 
available to a Foreign Consolidated Subsidiary whose obligations under 
the relevant swap are not guaranteed by a U.S. person than a non-U.S. 
CSE (including a Foreign Consolidated Subsidiary) whose obligations 
under the relevant swap are guaranteed by a U.S. person. Should Foreign 
Consolidated Subsidiaries be treated the same as non-U.S. CSEs that are 
guaranteed by a U.S. person and if not, what treatment is appropriate?
    2. What are the competitive implications of the proposed treatment 
of Foreign Consolidated Subsidiaries (relative to other non-U.S. CSEs)? 
Does the proposed treatment appropriately take into account the 
supervisory interest of a non-U.S. CSE's home jurisdiction?
3. Exclusion for Uncleared Swaps of Non-U.S. CSEs Where Neither 
Counterparty's Obligations Under the Relevant Swap Are Guaranteed by a 
U.S. Person and Neither Counterparty Is a Foreign Consolidated 
Subsidiary Nor a U.S. Branch of a Non-U.S. CSE
    Under the Proposed Rule, an uncleared swap entered into by a non-
U.S. CSE with a non-U.S. person counterparty (including a non-U.S. CSE) 
would be excluded from the Commission's margin rules, provided that 
neither counterparty's obligations under the relevant swap are 
guaranteed by a U.S. person and neither counterparty is a Foreign 
Consolidated Subsidiary nor a U.S. branch of a non-U.S. CSE.\66\
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    \66\ See Sec.  23.160(b)(2)(ii) of the Proposed Rule.
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    As discussed above, the Commission believes that, given the 
importance of margin to the safety and soundness of a CSE, as a general 
matter, margin requirements should apply to the uncleared swaps of a 
CSE, without regard to the domicile of the counterparty or where the 
trade is executed. At the same time, the Commission believes that it is 
appropriate to make a limited exception to this principle of firm-wide 
application of margin requirements in the cross-border context, 
consistent with section 4s(e) of the CEA \67\ and comity principles, so 
as to exclude a narrow class of uncleared swaps involving a

[[Page 41388]]

non-U.S. CSE and a non-U.S. counterparty.
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    \67\ Section 4s(e)(3)(A) of the CEA, 7 U.S.C. 6s(e)(3)(A). The 
section calls for, among other things, that margin requirements ``be 
appropriate for the risks associated with the non-cleared swaps held 
as a swap dealer or major market participant.''
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    The Commission notes that a non-U.S. CSE that can avail itself of 
the Exclusion would still be subject to the Commission's margin rules 
with respect to all uncleared swaps not meeting the criteria for the 
Exclusion, albeit with the possibility of substituted compliance. The 
non-US CSE would also be subject to the Commission's capital 
requirements, which, as proposed, would impose a capital charge for 
uncollateralized exposures.\68\ Additionally, any excluded swaps would 
most likely be covered by the margin requirements of another 
jurisdiction that adheres to the BCBS-IOSCO framework.\69\
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    \68\ See Capital Requirements of Swap Dealers and Major Swap 
Participants, Notice of proposed rulemaking, 76 FR 27802 (May 12, 
2011).
    \69\ The non-U.S. CSE that qualifies for the exclusion would be 
eligible for substituted compliance, with respect to all margin 
requirements, if its counterparty to the uncleared swap is a U.S. 
person that is not a CSE. If the uncleared swap is with a U.S. CSE, 
substituted compliance would only be available with respect to 
initial margin posed by the U.S. CSE counterparty.
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    The Commission also recognizes that the supervisory interest of 
foreign regulators in the uncleared swaps of non-U.S. CSEs (and their 
non-U.S. counterparties) that are eligible for the Exclusion may equal 
or exceed the supervisory interest of the United States in such 
uncleared swaps. Both counterparties are domiciled outside the United 
States and likely would be subject to the supervision of a foreign 
regulator. As discussed above, the Commission believes that a workable 
cross-border framework must take into account the interests of other 
jurisdictions and balance those interests with the supervisory 
interests of the United States in order to calibrate the application of 
margin rules to non-U.S. CSEs' swaps with non-U.S. counterparties. Such 
an approach would help mitigate the potential for conflicts with other 
jurisdictions and ultimately promote global harmonization. For all of 
the foregoing reasons, the Commission believes that it would be 
appropriate to not apply the Commission's margin rules to uncleared 
swaps meeting the criteria for the Exclusion.
    The Commission acknowledges that similar mitigating factors and 
comity considerations may apply to Foreign Consolidated Subsidiaries, 
but as discussed above, a Foreign Consolidated Subsidiary's financial 
position, operating results, and statement of cash flows are directly 
reflected in its U.S. Ultimate Parent entity's financial statements, 
which implicates greater supervisory concerns. Therefore, the 
Commission believes that it has a greater regulatory interest in 
Foreign Consolidated Subsidiaries than other non-U.S. CSEs (that are 
not guaranteed by a U.S. person), and that the uncleared swaps of 
Foreign Consolidated subsidiaries should not be excluded from the 
margin requirements.
    Further, the Commission believes that the uncleared swaps of a U.S. 
branch of a non-U.S. CSE should not be excluded from the margin 
requirements for the reasons discussed in the next section.
    Request for Comment. The Commission is requesting comments on all 
aspects of the proposed Exclusion, including:
    1. In light of the mitigating factors cited above and the 
Commission's supervisory interest in the safety and soundness of all 
CSEs and the critical role that margin plays in helping ensure the 
safety and soundness of CSEs, is the proposed Exclusion appropriate, 
and if not, please explain why not? Is the scope of the Exclusion 
appropriate, or should it be broader or narrower, and if so, why?
    2. Under the Proposed Rule, uncleared swaps with a Foreign 
Consolidated Subsidiary would not be eligible for the Exclusion from 
the Commission's margin requirements. Should Foreign Consolidated 
Subsidiaries be eligible for the Exclusion and if so, why?
4. U.S. Branches of Non-U.S. CSEs
    The Proposed Rule treats uncleared swaps executed through or by a 
U.S. branch of a non-U.S. CSE the same as those swaps of a non-U.S. 
CSE, except that the Exclusion from the margin rules would not be 
available to a U.S. branch of a non-U.S. CSE.
    Generally speaking, because the risks posed by uncleared swaps are 
borne by a CSE as a whole, it should not matter if the transaction is 
entered by or through a U.S. branch or office within the United States. 
Nevertheless, the Commission believes that extending the Exclusion (to 
the extent than the Exclusion might otherwise apply to the non-U.S. 
CSE, as discussed above) would not be appropriate in the case of 
uncleared swaps executed by or through a U.S. branch of a non-U.S. CSE.
    The Commission notes that non-U.S. CSEs can conduct their swap 
dealing business within the United States utilizing a number of 
different legal structures, including a U.S. subsidiary or a U.S. 
branch or office. Excluding uncleared swaps conducted by or through 
U.S. branches of non-U.S. CSEs would give these non-U.S. CSEs an unfair 
advantage when dealing with non-U.S. clients relative to U.S. CSEs 
(including those CSEs that are subsidiaries of foreign entities). That 
is, a U.S. branch of a non-U.S. CSE that is permitted to operate 
outside of the Commission's margin requirements would be able to offer 
a more competitive price to non-U.S. clients than a U.S. CSE. The 
Commission believes that when a non-U.S. CSE is conducting its swap 
activities within the United States through a branch or office located 
in the United States, it should be subject to U.S. margin laws. 
However, the Commission also believes that, consistent with comity 
principles, substituted compliance should be available for uncleared 
swaps executed by or through a U.S. branch of a non-U.S. CSE whose 
obligations under the relevant swap are not guaranteed by a U.S. person 
with any counterparty (except where the counterparty is a U.S. CSE or a 
non-U.S. CSE whose obligations under the relevant swap are guaranteed 
by a U.S. person).\70\
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    \70\ With respect to uncleared swaps with a U.S. CSE or a non-
U.S. CSE whose obligations under the relevant swap are guaranteed by 
a U.S. person, substituted compliance would only be available for 
initial margin collected by the U.S. branch of a non-U.S. CSE whose 
obligations under the relevant swap are not guaranteed by a U.S. 
person. See section II.C.1.
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    Request for Comment. The Commission seeks comment on the Proposed 
Rule's treatment of uncleared swaps conducted by or through a ``U.S. 
branch of a non-U.S. CSE.'' In particular, the Commission requests 
comment on the following questions:
    1. How should the Commission determine whether a swap is executed 
through or by a U.S. branch of a non-U.S. CSE for purposes of applying 
the Commission's margin rules on a cross-border basis? Should the 
Commission base the determination of whether the swap activity is 
conducted at a U.S. branch of a non-U.S. CSE for purposes of applying 
the Commission's margin rules on a cross-border basis on the same 
analysis as is used in the Volcker rule? \71\
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    \71\ Under the Volcker rule, personnel that arrange, negotiate, 
or execute a purchase or sale conducted under the exemption for 
trading activity of a foreign banking entity must be located outside 
of the United States. See Prohibitions and Restrictions on 
Proprietary Trading and Certain Interests in, and Relationships 
With, Hedge Funds and Private Equity Funds; Final Rule, 79 FR 5808 
(Jan. 31, 2014). Thus, for example, personnel in the United States 
cannot solicit or sell to or arrange for trades conducted under this 
exemption. Personnel in the United States also cannot serve as 
decision makers in transactions conducted under this exemption. 
Personnel that engage in back-office functions, such as clearing and 
settlement of trades, would not be considered to arrange, negotiate, 
or execute a purchase or sale for purposes of this provision. Id. at 
5927, n.1526.
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    2. The Commission seeks comment on the proposed treatment of U.S. 
branches

[[Page 41389]]

of non-U.S. CSEs, including whether these branches should be eligible 
for the Exclusion in light of the policy objectives outlined above. If 
the Exclusion should be available, please explain why. The Commission 
also seeks comment regarding whether the scope of substituted 
compliance for U.S. branches of non-U.S. CSEs under the Proposed Rule 
is appropriate. If not, please explain why.

D. Substituted Compliance

    As noted above, consistent with CEA section 2(i) and comity 
principles, the Commission would allow CSEs to comply with comparable 
margin requirements in a foreign jurisdiction under certain 
circumstances. In this release, we are proposing to establish a 
standard of review that will apply to Commission determinations 
regarding whether some or all of the relevant foreign jurisdiction's 
margin requirements are comparable to the Commission's corresponding 
margin requirements, as well as procedures for requests for 
comparability determinations, including eligibility requirements and 
submission requirements.
    Specifically, the Commission would permit a U.S. CSE or a non-U.S. 
CSE, as applicable, to avail itself of substituted compliance (to the 
extent applicable under the Proposed Rule) by complying with the margin 
requirements of the relevant foreign jurisdiction in lieu of compliance 
with the Commission's margin requirements, provided that the Commission 
finds that such jurisdiction's margin requirements are comparable to 
the Commission's margin requirements. Failure to comply with the 
applicable foreign margin requirements could result in a violation of 
the Commission's margin requirements. Further, all CSEs, regardless of 
whether they rely on a comparability determination, would remain 
subject to the Commission's examination and enforcement authority.\72\
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    \72\ Under Commission regulations 23.203 and 23.606, all records 
required by the CEA and the Commission's regulations to be 
maintained by a registered swap dealer or MSP shall be maintained in 
accordance with Commission regulation 1.31 and shall be open for 
inspection by representatives of the Commission, the United States 
Department of Justice, or any applicable prudential regulator. The 
Commission believes that, before a non-U.S. CSE should be permitted 
to rely on substituted compliance, it should assure the Commission 
that it can provide the Commission with prompt access to books and 
records and submit to onsite inspection and examination. The 
Commission further expects that access to books and records and the 
ability to inspect and examine a non-U.S. CSE will be a condition to 
any comparability determination.
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    The Commission is proposing a comparability standard that is 
outcome-based with a focus on whether the margin requirements in the 
foreign jurisdiction achieve the same regulatory objectives as the 
CEA's margin requirements. Under this outcome-based approach, the 
Commission would not look to whether a foreign jurisdiction has 
implemented specific rules and regulations that are identical to rules 
and regulations adopted by the Commission. Rather, the Commission would 
evaluate whether a foreign jurisdiction has rules and regulations that 
achieve comparable outcomes. If it does, the Commission believes that a 
comparability determination may be appropriate, even if there may be 
differences in the specific elements of a particular regulatory 
provision.\73\
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    \73\ As noted below, because the Commission would make 
comparability determinations on an element-by-element basis, it is 
possible that a foreign jurisdiction's margin requirements would be 
comparable with respect to some, but not all, elements of the margin 
requirements.
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    In evaluating whether a foreign jurisdiction's margin requirements 
are comparable to the Commission's margin requirements, the Commission 
would consider whether the foreign jurisdiction's margin rules are 
consistent with international standards.\74\ That is, the Commission 
would determine, considering all relevant facts and circumstances, 
whether a foreign jurisdiction has adopted margin rules that adequately 
address the BCBS-IOSCO framework. The Commission believes that 
considering this factor is appropriate because BCBS and IOSCO 
established this framework to ensure globally harmonized margin rules 
for uncleared derivative transactions. Individual regulatory 
authorities across major jurisdictions (including the EU, Japan, and 
the United States) have started to develop their own margin rules 
consistent with the final BCBS-IOSCO framework for non-centrally 
cleared, bilateral derivatives.\75\ If the foreign jurisdiction's 
margin rules are not consistent with international standards, then the 
Commission may not find the rules comparable. In providing information 
to the Commission for a determination, applicants should include, among 
other things, information describing any difference between the foreign 
jurisdiction's margin requirements and international standards.\76\
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    \74\ Under the Proposed Rule, the term ``international 
standards'' means the margin policy framework for non-cleared, 
bilateral derivatives issued by the Basel Committee on Banking 
Supervision and the International Organization of Securities 
Commissions in September 2013, as subsequently updated, revised, or 
otherwise amended, or any other international standards, principles 
or guidance relating to margin requirements for non-cleared, 
bilateral derivatives that the Commission may in the future 
recognize, to the extent that they are consistent with United States 
law (including the margin requirements in the Commodity Exchange 
Act). See Sec.  23.160(a)(3) of the Proposed Rule. For further 
information regarding the margin policy framework for non-cleared, 
bilateral derivatives issued by the Basel Committee on Banking 
Supervision and the International Organization of Securities in 
September 2013, see note 12, supra.
    \75\ See note 13, supra.
    \76\ See Sec.  23.160(c)(2)(iii) of the Proposed Rule.
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    Under the proposal, once the Commission has determined that a 
foreign jurisdiction's margin requirements adhere to the BCBS-IOSCO 
framework, the Commission would evaluate the various elements of the 
foreign jurisdiction's margin requirements.\77\ Because the Commission 
is not proposing to make a binary determination of comparability (i.e., 
all or nothing), but instead would make comparability determinations on 
an element-by-element basis, it is possible that a foreign margin 
system would be comparable with respect to some, but not all, elements 
of the margin requirements. For instance, a foreign jurisdiction may 
impose variation margin requirements on a non-U.S. CSE's uncleared 
swaps with financial end-users that achieve outcomes comparable to the 
Commission's margin requirements, but the same foreign jurisdiction may 
not achieve comparable regulatory outcomes with respect to segregation 
and rehypothecation requirements. By assessing each of the relevant 
elements separately, the Commission would have the flexibility to 
determine, with respect to one element of the requirements, that the 
outcomes are comparable, but not another. The elements that the 
Commission would be analyzing, among others, would include, but not be 
limited to: (i) The transactions subject to the foreign jurisdiction's 
margin requirements; (ii) the entities subject to the foreign 
jurisdiction's margin requirements; (iii) the methodologies for 
calculating the amounts of initial and variation margin; (iv) the 
process and standards for approving models for calculating initial and 
variation margin models; (v) the timing and manner in which initial and 
variation margin must be collected and/or paid; (vi) any threshold 
levels or amounts; (vii) risk management controls for the calculation 
of initial and variation margin; (viii) eligible collateral for initial 
and variation margin; (ix) the requirements of custodial arrangements, 
including

[[Page 41390]]

rehypothecation and the segregation of margin; (x) documentation 
requirements relating to margin; and (xi) the cross-border application 
of the foreign jurisdiction's margin regime.
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    \77\ See Sec.  23.160(c)(2) of the Proposed Rule.
---------------------------------------------------------------------------

    Moreover, the Commission would expect that the applicant, at a 
minimum, describe how the foreign jurisdiction's margin requirements 
addresses each of the above-referenced elements, and identify the 
specific legal and regulatory provisions that correspond to each 
element (and, if necessary, whether the foreign jurisdiction's margin 
requirements do not address a particular element), and describe the 
objectives of the foreign jurisdiction's margin requirements. Further, 
the applicant would be required to furnish copies of the foreign 
jurisdiction's margin requirements (including an English translation of 
any foreign language document) and any other information or 
documentation that the Commission deems appropriate.
    In addition, in paragraph (c)(3) of the Proposed Rule,\78\ the 
Commission sets out its standard of review that would take into 
consideration all other relevant factors, including but not limited to, 
the scope and objectives of the foreign jurisdiction's margin 
requirement(s) for uncleared swaps; how the foreign jurisdiction's 
margin requirements compare to international standards; whether the 
foreign jurisdiction's margin requirements achieve comparable outcomes 
to the Commission's corresponding margin requirements; the ability of 
the relevant regulatory authority or authorities to supervise and 
enforce compliance with the foreign jurisdiction's margin requirements; 
and any other facts and circumstances the Commission deems 
relevant.\79\
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    \78\ See Sec.  23.160(c)(3) of the Proposed Rule.
    \79\ The submission should include a description of the ability 
of the relevant foreign regulatory authority or authorities to 
supervise and enforce compliance with the foreign jurisdiction's 
margin requirements, including the powers of the foreign regulatory 
authority or authorities to supervise, investigate, and discipline 
entities for compliance with the margin requirements and the ongoing 
efforts of the regulatory authority or authorities to detect, deter, 
and ensure compliance with the margin requirements. See Sec.  
23.160(c)(2)(iv) of the Proposed Rule.
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    The Proposed Rule provides that any CSE that is eligible for 
substituted compliance may apply, either individually or collectively. 
In addition, the Proposed Rule provides that a foreign regulatory 
authority that has direct supervisory authority over one or more 
covered swap entities and that is responsible for administering the 
relevant foreign jurisdiction's margin requirements may submit a 
request for a comparability determination with respect to some or all 
of the Commission's margin requirements. Persons requesting a 
comparability determination may want to coordinate their application 
with other market participants and their home regulators to simplify 
and streamline the process. Once a comparability determination is made 
for a jurisdiction, it will apply for all entities or transactions in 
that jurisdiction to the extent provided in the Proposed Rule and the 
determination, subject to any conditions specified by the Commission.
    The Commission expects that the comparability determination process 
would require close consultation, cooperation, and coordination with 
other appropriate U.S. regulators and relevant foreign regulators. 
Further, the Commission expects that, in connection with a 
comparability determination, the foreign regulator(s) would enter into, 
or would have entered into, an appropriate memorandum of understanding 
(``MOU'') or similar arrangement with the Commission.
    In issuing a Comparability Determination, the Commission may impose 
any terms and conditions it deems appropriate.\80\ Further, the 
Proposed Rule would provide that the Commission may, on its own 
initiative, further condition, modify, suspend, terminate, or otherwise 
restrict a comparability determination in the Commission's discretion. 
This could result, for example, from a situation where, after the 
Commission issues a comparability determination, the basis of that 
determination ceases to be true. In this regard, the Commission would 
require an applicant to notify the Commission of any material changes 
to information submitted in support of a comparability determination 
(including, but not limited to, changes in the relevant foreign 
jurisdiction's supervisory or regulatory regime) as the Commission's 
comparability determination may no longer be valid.\81\
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    \80\ The violation of such terms and conditions may constitute a 
violation of the Commission's margin requirements and/or result in 
the modification or revocation of the comparability determination.
    \81\ The Commission expects to impose this obligation as one of 
the conditions to the issuance of a comparability determination.
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    Request for Comment. The Commission is seeking comments on all 
aspects of the proposed standard of review that will apply to 
Commission determinations regarding whether some or all of the relevant 
foreign jurisdiction's margin requirements are comparable to the 
Commission's corresponding margin requirements, as well as proposed 
procedures for requests for comparability determinations, including 
eligibility requirements and submission requirements. Among other 
things, commenters may wish to submit comments on the following 
questions:
    1. Please provide comments on the appropriate standard of review 
for comparability determinations and the degree of comparability and 
comprehensiveness that should be applied to comparability 
determinations.
    2. Are the proposed procedures, including eligibility requirements 
and submission requirements, for comparability determinations 
appropriate?
    3. Many foreign jurisdictions are in the process of implementing 
margin reform. Should the Commission develop an interim process that 
takes into account a different implementation timeline? Please provide 
details and address competitive implications for U.S. CSEs and non-U.S. 
CSEs that are required to comply with the Commission's margin 
regulations.
    4. In the Guidance, the Commission discussed ``a de minimis'' 
exemption with respect to transaction-level requirements for foreign 
branches of U.S. swap dealers located in ``emerging markets'' that, in 
the aggregate, constitute less than 5 percent of the firm's notional 
swaps.\82\ The Proposed Rule does not contain an exemption for CSEs 
operating in ``emerging markets.'' Should the Commission develop an 
exemption for emerging markets? If so, what should be the eligibility 
criteria or conditions? For example, should the Commission provide an 
exemption where a non-U.S. CSE is operating in a jurisdiction that does 
not permit the related collateral to be held outside that jurisdiction 
and/or that lacks legal or operational infrastructure relating to 
proper segregation of initial margin? Should the Commission require the 
CSE to collect initial and variation margin from its counterparty in 
eligible emerging market jurisdictions, but only require the CSE to 
post variation margin? Should the Commission limit the type of eligible 
collateral that could be used in eligible emerging market 
jurisdictions? Which jurisdictions, if any, should qualify as 
``emerging markets'' for purposes of the exemption? What should be the 
process for determining that the qualifying criteria are met? Please 
provide quantitative data, to the extent practical.
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    \82\ See the Guidance, 78 FR 45351.
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    5. As some emerging market jurisdictions' laws may not support 
legally enforceable netting

[[Page 41391]]

arrangements, which would then, under the Proposed Margin Rules and 
under certain circumstances, require that a CSE and its counterparty 
post and collect gross margin, should the Commission, if it does not 
provide for an emerging markets exception, permit the CSE and its 
counterparty to collect/post variation margin on a net basis? If so, 
what conditions, if any, should the Commission place on this 
requirement to ensure that CSEs and the U.S. financial system are 
adequately protected?
    6. Is the scope of substituted compliance under the Proposed Rule 
appropriate? Should additional or fewer transactions be eligible for 
substituted compliance, and if so, how should the Proposed Rule be 
modified?

E. General Request for Comments

    In addition to the specific requests for comments included above, 
the Commission seeks comment on all aspects of the Proposed Rule. 
Commenters are encouraged to address, among other things, the scope and 
application of the Proposed Rule, costs and benefits of the Proposed 
Rule, alternatives to the Proposed Rule, practical implications for 
CSEs and other market participants and the market generally related to 
the Proposed Rule, whether the Proposed Rule sufficiently supports the 
statutory goals of ensuring the safety and soundness of the CSE and 
protecting the financial system against the risks associated with 
uncleared swaps, and whether the Proposed Rule sufficiently takes into 
account principles of international comity. In particular, the 
Commission requests comment on the following:
    1. Does the Proposed Rule's approach to the cross-border 
application of margin requirements satisfy the Commission's statutory 
requirements, including the requirement to help ensure the safety and 
soundness of CSEs, and the requirement that the Commission, the 
Prudential Regulators, and the SEC, to the maximum extent practicable, 
establish and maintain comparable minimum initial and variation margin 
requirements?
    2. Would it be more appropriate to apply the margin requirements at 
the entity-level, without any exclusion? If yes, please explain.
    3. Would it be more appropriate to apply the margin requirements at 
a transaction-level? If yes, please explain.
    4. Is the scope of the Proposed Rule appropriate, or should it be 
changed, and if so, how?
    5. Would an alternative approach to the Proposed Rule better 
achieve the Commission's statutory requirements or otherwise be 
preferable or more appropriate? If yes, please explain.
    6. Does the Commission's Proposed Rule strike the right balance 
between the Commission's supervisory interest in offsetting the risk to 
CSEs and the financial system arising from the use of uncleared swaps 
and international comity principles? If not, please explain.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities.\83\ The 
Commission previously has established certain definitions of ``small 
entities'' to be used in evaluating the impact of its regulations on 
small entities in accordance with the RFA.\84\ The proposed regulation 
establishes a mechanism for CSEs \85\ to satisfy margin requirements by 
complying with comparable margin requirements in the relevant foreign 
jurisdiction as described in paragraph (c) of the Proposed Rule,\86\ 
but only to the extent that the Commission makes a determination that 
complying with the laws of such foreign jurisdiction is comparable to 
complying with the corresponding margin requirement(s) for which the 
determination is sought.
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    \83\ 5 U.S.C. 601 et seq.
    \84\ 47 FR 18618 (Apr. 30, 1982).
    \85\ Section 23.151 of the Proposed Margin Rules defines CSEs as 
a SD or MSP for which there is no prudential regulator.
    \86\ See Sec.  23.160(c) of the Proposed Rule.
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    The Commission previously has determined that SDs and MSPs are not 
small entities for purposes of the RFA.\87\ Thus, the Commission is of 
the view that there will not be any small entities directly impacted by 
this rule.
---------------------------------------------------------------------------

    \87\ See 77 FR 30596, 30701 (May 23, 2012).
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    The Commission notes that under the Proposed Margin Rules, SDs and 
MSPs would only be required to collect and post margin on uncleared 
swaps when the counterparties to the uncleared swaps are either other 
SDs and MSPs or financial end users. As noted above, SDs and MSPs are 
not small entities for RFA purposes. Furthermore, any financial end 
users that may be indirectly \88\ impacted by the Proposed Rule would 
be similar to eligible contract participants (``ECPs''), and, as such, 
they would not be small entities.\89\ Further, to the extent that there 
are any foreign financial entities that would not be considered ECPs, 
the Commission expects that there would not be a substantial number of 
these entities significantly impacted by the Proposed Rule. As noted 
above, most foreign financial entities would likely be ECPs to the 
extent they would trade in uncleared swaps. The Commission expects that 
only a small number of foreign financial entities that are not ECPs, if 
any, would trade in uncleared swaps.
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    \88\ The RFA focuses on direct impact to small entities and not 
on indirect impacts on these businesses, which may be tenuous and 
difficult to discern. See Mid-Tex Elec. Coop., Inc. v. FERC, 773 
F.2d 327, 340 (D.C. Cir. 1985); Am. Trucking Assns. v. EPA, 175 F.3d 
1027, 1043 (D.C. Cir. 1985).
    \89\ As noted in paragraph (1)(xii) of the definition of 
``financial end user'' in Sec.  23.151 of the Proposed Margin Rules, 
a financial end-user includes a person that would be a financial 
entity described in paragraphs (1)(i)-(xi) of that definition, if it 
were organized under the laws of the United States or any State 
thereof. The Commission believes that this prong of the definition 
of financial end-user would capture the same type of U.S. financial 
end-users that are ECPs, but for them being foreign financial 
entities. Therefore, for purposes of the Commission's RFA analysis, 
these foreign financial end-users will be considered ECPs and 
therefore, like ECPs in the U.S., not small entities.
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    Accordingly, the Commission finds that there will not be a 
substantial number of small entities impacted by the Proposed Rule. 
Therefore, the Chairman, on behalf of the Commission, hereby certifies 
pursuant to 5 U.S.C. 605(b) that the proposed regulations will not have 
a significant economic impact on a substantial number of small 
entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. This proposed rulemaking would 
result in the collection of information requirements within the meaning 
of the PRA, as discussed below. The proposed rulemaking contains 
collections of information for which the Commission has not previously 
received control numbers from the Office of Management and Budget 
(``OMB''). If adopted, responses to this collection of information 
would be required to obtain or retain benefits. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number. The Commission has submitted to OMB an information collection 
request to obtain an OMB control number for the collections contained 
in this proposal.
    Section 731 of the Dodd-Frank Act, amended the CEA,\90\ to add, as 
section

[[Page 41392]]

4s(e) thereof, provisions concerning the setting of initial and 
variation margin requirements for SDs and MSPs. Each SD and MSP for 
which there is a Prudential Regulator, as defined in section 1a(39) of 
the CEA, must meet margin requirements established by the applicable 
Prudential Regulator, and each CSE must comply with the Commission's 
regulations governing margin. With regard to the cross-border 
application of the swap provisions enacted by Title VII of the Dodd-
Frank Act, section 2(i) of the CEA provides the Commission with express 
authority over activities outside the United States relating to swaps 
when certain conditions are met. Section 2(i) of the CEA provides that 
the provisions of the CEA relating to swaps enacted by Title VII of the 
Dodd-Frank Act (including Commission rules and regulations promulgated 
thereunder) shall not apply to activities outside the United States 
unless those activities (1) have a direct and significant connection 
with activities in, or effect on, commerce of the United States or (2) 
contravene such rules or regulations as the Commission may prescribe or 
promulgate as are necessary or appropriate to prevent the evasion of 
any provision of Title VII.\91\ Because margin requirements are 
critical to ensuring the safety and soundness of a CSE and supporting 
the stability of the U.S. financial markets, the Commission believes 
that its margin rules should apply on a cross-border basis in a manner 
that effectively addresses risks to the registered CSE and the U.S. 
financial system.
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    \90\ 7 U.S.C. 1 et seq.
    \91\ 7 U.S.C. 2(i).
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    As noted above, the Proposed Rule would establish margin 
requirements for uncleared swaps of CSEs on a firm-wide, entity-level 
basis (with substituted compliance available in certain circumstances), 
except as to a narrow class of uncleared swaps between a non-U.S. CSE 
and a non-U.S. counterparty that fall within the Exclusion. The 
Proposed Rule would establish a procedural framework in which the 
Commission would consider permitting compliance with comparable margin 
requirements in a foreign jurisdiction to substitute for compliance 
with the Commission's margin requirements in certain circumstances. The 
Commission would consider whether the requirements of such foreign 
jurisdiction with respect to margin of uncleared swaps are comparable 
to the Commission's margin requirements.
    Specifically, the Proposed Rule would provide that a CSE who is 
eligible for substituted compliance may submit a request, individually 
or collectively, for a comparability determination.\92\ Persons 
requesting a comparability determination may coordinate their 
application with other market participants and their home regulators to 
simplify and streamline the process. Once a comparability determination 
is made for a jurisdiction, it would apply for all entities or 
transactions in that jurisdiction to the extent provided in the 
determination, as approved by the Commission. In providing information 
to the Commission for a comparability determination, applicants must 
include, at a minimum, information describing any differences between 
the relevant foreign jurisdiction's margin requirements and 
international standards,\93\ and the specific provisions of the foreign 
jurisdiction that govern: (i) The transactions subject to the foreign 
jurisdiction's margin requirements; (ii) the entities subject to the 
foreign jurisdiction's margin requirements; (iii) the methodologies for 
calculating the amounts of initial and variation margin; (iv) the 
process and standards for approving models for calculating initial and 
variation margin models; (v) the timing and manner in which initial and 
variation margin must be collected and/or paid; (vi) any threshold 
levels or amounts; (vii) risk management controls for the calculation 
of initial and variation margin; (viii) eligible collateral for initial 
and variation margin; (ix) the requirements of custodial arrangements, 
including rehypothecation and the segregation of margin; (x) 
documentation requirements relating to margin; and (xi) the cross-
border application of the foreign jurisdiction's margin regime.\94\
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    \92\ A CSE may apply for a comparability determination only if 
the uncleared swap activities of the CSE are directly supervised by 
the authorities administering the foreign regulatory framework for 
uncleared swaps. Also, a foreign regulatory agency may make a 
request for a comparability determination only if that agency has 
direct supervisory authority to administer the foreign regulatory 
framework for uncleared swaps in the requested foreign jurisdiction.
    \93\ See note 74, supra, for a discussion of the definition of 
``international standards'' under the Proposed Rule. See also Sec.  
23.160(a)(3) of the Proposed Rule.
    \94\ See Sec.  23.160(c)(2) of the Proposed Rule for submission 
requirements.
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    In addition, the Commission would expect the applicant, at a 
minimum, to describe how the foreign jurisdiction's margin requirements 
addresses each of the above-referenced elements, and identify the 
specific legal and regulatory provisions that correspond to each 
element (and, if necessary, whether the relevant foreign jurisdiction's 
margin requirements do not address a particular element). Further, the 
applicant must describe the objectives of the foreign jurisdiction's 
margin requirements, the ability of the relevant regulatory authority 
or authorities to supervise and enforce compliance with the foreign 
jurisdiction's margin requirements, including the powers of the foreign 
regulatory authority or authorities to supervise, investigate, and 
discipline entities for compliance with the margin requirements and the 
ongoing efforts of the regulatory authority or authorities to detect, 
deter, and ensure compliance with the margin requirements. Finally, the 
applicant must furnish copies of the foreign jurisdiction's margin 
requirements (including an English translation of any foreign language 
document) and any other information and documentation that the 
Commission deems appropriate.\95\
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    \95\ See Sec.  23.160(c)(2)(v) and (vi) of the Proposed Rule.
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    In issuing a Comparability Determination, the Commission may impose 
any terms and conditions it deems appropriate.\96\ In addition, the 
Proposed Rule would provide that the Commission may, on its own 
initiative, further condition, modify, suspend, terminate, or otherwise 
restrict a comparability determination in the Commission's discretion. 
This could result, for example, from a situation where, after the 
Commission issues a comparability determination, the basis of that 
determination ceases to be true. In this regard, the Commission would 
require an applicant to notify the Commission of any material changes 
to information submitted in support of a comparability determination 
(including, but not limited to, changes in the foreign jurisdiction's 
supervisory or regulatory regime) as the Commission's comparability 
determination may no longer be valid.\97\
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    \96\ The violation of such terms and conditions may constitute a 
violation of the Commission's margin requirements and/or result in 
the modification or revocation of the comparability determination.
    \97\ The Commission expects to impose this obligation as one of 
the conditions to the issuance of a comparability determination.
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    The collection of information that is proposed by this rulemaking 
is necessary to implement sections 4s(e) of the CEA, which mandates 
that the Commission adopt rules establishing minimum initial and 
variation margin requirements for CSEs on all swaps that are not 
cleared by a registered derivatives clearing organization, and section 
2(i) of the CEA, which provides that the provisions of the CEA relating 
to swaps that were enacted by Title VII of the Dodd-Frank Act 
(including any rule prescribed or regulation promulgated thereunder) 
apply to

[[Page 41393]]

activities outside the United States that have a direct and significant 
connection with activities in, or effect on, commerce of the United 
States.\98\ The information collection would be necessary for the 
Commission to consider whether the requirements of the foreign rules 
are comparable to the applicable requirements of the Commission's 
rules.
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    \98\ Section 2(i) of the CEA provides that the provisions of the 
CEA relating to swaps that were enacted by Title VII of the Dodd-
Frank Act (including any rule prescribed or regulation promulgated 
thereunder), shall not apply to activities outside the United States 
unless those activities (1) have a direct and significant connection 
with activities in, or effect on, commerce of the United States or 
(2) contravene such rules or regulations as the Commission may 
prescribe or promulgate as are necessary or appropriate to prevent 
the evasion of any provision of Title VII of the CEA.
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    As noted above, any CSE who is eligible for substituted compliance 
may make a request for a comparability determination. Currently, there 
are approximately 102 CSEs provisionally registered with the 
Commission. The Commission further estimates that of the approximately 
102 CSEs, approximately 61 CSEs would be subject to the Commission's 
margin rules as they are not subject to a Prudential Regulator. 
However, the Commission notes that any foreign regulatory agency that 
has direct supervisory authority over one or more CSEs and that is 
responsible to administer the relevant foreign jurisdiction's margin 
requirements may apply for a comparability determination. Further, once 
a comparability determination is made for a jurisdiction, it would 
apply for all entities or transactions in that jurisdiction to the 
extent provided in the determination, as approved by the Commission. 
The Commission estimates that it will receive requests for a 
comparability determination from 17 jurisdictions, consisting of the 16 
jurisdictions within the G20, plus Switzerland,\99\ and that each 
request would impose an average of 10 burden hours.
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    \99\ Because the Commission's proposed margin requirements are 
based on the BCBS-IOSCO framework and one of the factors that the 
Commission will consider in making its determination is the 
comparability to these international standards, the Commission 
estimates that in all likelihood, it will receive applications from 
all 16 jurisdictions within the G20, plus Switzerland.
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    Based upon the above, the estimated hour burden for collection is 
calculated as follows:
    Number of respondents: 17.
    Frequency of collection: Once.
    Estimated annual responses per registrant: 1.
    Estimated aggregate number of annual responses: 17.
    Estimated annual hour burden per registrant: 10 hours.
    Estimated aggregate annual hour burden: 170 hours (17 registrants x 
10 hours per registrant).
    Information Collection Comments. The Commission invites the public 
and other Federal agencies to comment on any aspect of the reporting 
burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the 
Commission solicits comments in order to: (1) Evaluate whether the 
proposed collection of information is necessary for the proper 
performance of the functions of the Commission, including whether the 
information will have practical utility; (2) evaluate the accuracy of 
the Commission's estimate of the burden of the proposed collection of 
information; (3) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(4) minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by email at 
[email protected]. Please provide the Commission with a copy 
of submitted comments so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the ADDRESSES section of 
this notice of proposed rulemaking for comment submission instructions 
to the Commission. A copy of the supporting statements for the 
collections of information discussed above may be obtained by visiting 
RegInfo.gov. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this document in the Federal Register. Therefore, a comment is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

C. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders.\100\ Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors.
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    \100\ 7 U.S.C. 19(a).
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    In promulgating the Proposed Margin Rules,\101\ the Commission 
considered the costs and benefits associated with its choices regarding 
the scope and extent to which it would apply its proposed margin 
requirements to uncleared swaps of a CSE, including those related to 
the setting of the material swap exposure for financial entities, and 
related substantive requirements, such as the determination of eligible 
collateral and acceptable custodial arrangements. In addition, in light 
of the fact that section 4s(e), by its terms, applies to uncleared 
swaps of all CSEs, regardless of the domicile of the CSE (or its 
counterparties), the costs and benefits discussed in the Proposed 
Margin Rules' Federal Register release relate both to the domestic and 
cross-border application of the margin rule.\102\ The cost and benefit 
considerations (``CBC'') set out in this proposal are intended to 
augment the CBC set forth in the Proposed Margin Rules' Federal 
Register release and address cost and benefit considerations related to 
the Commission's choices regarding the extent to which it would 
recognize compliance with comparable foreign requirements as an 
alternative means of compliance with the Commission's margin rules 
(``substituted compliance'') and the extent to which it would exclude 
uncleared swaps from the Commission's margin rules. Further, in 
considering the relevant costs and benefits of the Proposed Margin 
Rules, the Commission used as its baseline the swaps market as it 
existed at the time of the Proposed Margin Rules' Federal Register 
release; because this Proposed Rule addresses the cross-border 
application of the Proposed Margin Rules, the Commission is using as 
its baseline the swaps market as it would operate once the Proposed 
Margin Rules were fully implemented.
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    \101\ The Commission's Proposed Margin Rules are set forth in 
proposed Sec. Sec.  23.150 through 23.159 of part 23 of the 
Commission's regulations, proposed as 17 CFR 23.150 through 23.159. 
See Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 79 FR 59898 (Oct. 3, 2014).
    \102\ See Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 79 FR 59920-59926 (Oct. 3, 
2014).
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    As discussed in section I.B. above, in developing the proposed 
cross-border framework in the Proposed Rule, the

[[Page 41394]]

Commission is mindful of the global and highly interconnected nature of 
the swaps market--and that risk exposures overseas can quickly manifest 
in the United States and pose substantial threat to the U.S. financial 
system. At the same time, the Commission also recognizes that 
competitive distortions and market inefficiencies can result--and the 
benefits of the BCBS-IOSCO framework lost--if due consideration is not 
given to comity principles. The Commission has also carefully 
considered the impact of its choices in determining whether (and, if 
so, under what circumstances) substituted compliance would be available 
or whether (and, if so, under what circumstances) swaps would be deemed 
excluded, including the effect of its choices on efficiency, 
competition, market integrity and transparency.
    The Commission is aware of the potentially significant trade-offs 
inherent in its policy decisions. For instance, the Commission's choice 
not to exclude from its margin requirements certain foreign-facing 
swaps involving U.S. CSEs and non-U.S. CSEs whose obligations under the 
relevant swap are guaranteed by a U.S. person may make it more costly 
for such firms to conduct their swaps business, particularly in foreign 
jurisdictions, and put them at a competitive disadvantage relative to 
non-U.S. CSEs whose obligations under the relevant swap are not 
guaranteed by a U.S. person. It could also make foreign counterparties 
less willing to deal with U.S. CSEs and non-U.S. CSEs whose obligations 
under the relevant swap are guaranteed by a U.S. person. On the other 
hand, full application of the margin requirements to these CSEs may 
enhance the safety and soundness of these CSEs and consequently, the 
U.S. financial system. In addition, the extent, if any, to which either 
of the aforementioned disadvantages would arise depends on whether 
competitors of such CSEs must comply with comparable margin 
requirements. In developing the proposed cross-border framework in the 
Proposed Rule, the Commission has attempted to appropriately consider 
competing concerns in seeking to effectively address the risk posed to 
the safety and soundness of CSEs, while creating a workable framework 
that mitigates the potential for undue market distortions and that 
promotes global harmonization.
    The Commission's consideration of the costs and benefits associated 
with the proposed framework is complicated by the fact that other 
jurisdictions may adopt requirements with different scope or on 
different timelines. Currently, no foreign jurisdiction has finalized 
rules for margin of uncleared swaps. However, the EU \103\ and Japan 
\104\ have proposed such rules, each of which are based on the BCBS-
IOSCO framework.\105\ The extent to which, if at all, foreign 
jurisdictions will follow the BCBS-IOSCO framework and the differences 
between the requirements implemented overseas and the Commission's 
margin requirements will affect the costs and benefits related to the 
Proposed Rule. Thus, for example, if a margin rule in a particular 
foreign jurisdiction is less rigorous than the Commission's margin 
rule, those CSEs (U.S. and non-U.S. CSEs) that are subject to the 
Commission's margin rule may be competitively disadvantaged relative to 
those dealers that are eligible for Exclusion from the Commission's 
margin rule for certain swaps or are outside the Commission's 
jurisdiction.\106\
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    \103\ See European Banking Authority, European Securities and 
Markets Authority, and European Insurance and Occupational Pensions 
Authority, Consultation Paper on 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 (for the European Market Infrastructure Regulation) (April 14, 
2014), available at https://www.eba.europa.eu/documents/10180/655149/JC+CP+2014+03+%28CP+on+risk+mitigation+for+OTC+derivatives%29.pdf, and Second Consultation Paper on 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 (for the European Market Infrastructure Regulation) (Jun. 10, 
2015), available at https://www.eba.europa.eu/documents/10180/1106136/JC-CP-2015-002+JC+CP+on+Risk+Management+Techniques+for+OTC+derivatives+.pdf.
    \104\ See Financial Services Agency of Japan, draft amendments 
to the ``Cabinet Office Ordinance on Financial Instruments 
Business'' and ``Comprehensive Guidelines for Supervision'' with 
regard to margin requirements for non-centrally cleared derivatives 
(July 3, 2014). Available in Japanese at http://www.fsa.go.jp/news/26/syouken/20140703-3.html.
    \105\ See Margin Requirements for Non-centrally Cleared 
Derivatives, Sept. 2013, available at http://www.bis.org/publ/bcbs261.pdf. The Commission is not incorporating the details of the 
EU and Japanese proposals in this CBC, because they have not been 
adopted and would be subject to change upon adoption.
    \106\ As discussed in section I.B. above, in the interest of 
promoting global harmonization, the Commission has consulted and 
coordinated with the Prudential Regulators and foreign regulatory 
authorities. In addition, the Commission staff has participated in 
numerous bilateral and multilateral discussions with foreign 
regulatory authorities discussing national efforts to implement 
margin reform and the possibility of conflicts and overlaps between 
U.S. and foreign regulatory regimes. Although at this time foreign 
jurisdictions do not yet have their margin regimes in place, the 
Commission has participated in ongoing, collaborative discussions 
with regulatory authorities in the EU and Japan regarding their 
cross-border approaches to the margin rules, including the 
anticipated scope of application of margin requirements in their 
jurisdiction to cross-border swaps, their plans for recognizing 
foreign margin regimes, and their anticipated timelines. The 
Commission expects that these discussions will continue as it 
finalizes and then implements its margin rules, and as other 
jurisdictions develop their own margin rules and approaches to 
cross-border applications.
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    In sum, given that foreign jurisdictions do not yet have in place 
their margin rules, it is not possible to fully evaluate the costs and 
benefits associated with the Proposed Rule, and in particular, the 
implications for the safety and soundness of CSEs and competition. 
However, to the extent that a foreign regime's margin requirements are 
comparable, any differences between the Commission's margin 
requirements and foreign margin requirements would be insignificant 
and, therefore, mitigate the potential for undue risk to the CSE and 
competitive distortions. However, if a foreign regime's margin 
requirements are not deemed comparable, this may put a CSE at a 
competitive disadvantage when competing with non-U.S. firms that are 
not registered with the Commission because these non-CFTC registered 
dealers would have a cost advantage that could affect their pricing 
terms to clients.
    In the sections that follow, the Commission considers: (i) Costs 
and benefits associated with the proposed definition of U.S. person; 
(ii) the proposed framework for substituted compliance; (iii) the 
proposed exclusion from the margin rule; (iv) the submission of 
requests for a comparability determination; and (v) alternatives 
considered and the cost and benefit of such alternatives. Wherever 
reasonably feasible, the Commission has endeavored to quantify the 
costs and benefits of this proposed rulemaking. In a number of 
instances, the Commission currently lacks the data and information 
required to precisely estimate costs and benefits. Where it was not 
feasible to quantify (e.g., because of the lack of accurate data or 
appropriate metrics), the Commission has endeavored to consider the 
costs and benefits of these rules in qualitative terms.
2. Proposed Rule
    The Proposed Rule sets forth a definition of ``U.S. person,'' 
describing the circumstances under which substituted compliance or the 
exclusion would be available, and would establish a process for the 
submission of requests for a comparability determination. In addition 
to issues related to financial integrity of markets, competition and 
market distortions noted above, the U.S. person definition and 
comparability determination process entail monetary costs for CSEs and 
market participants because a market participant may have

[[Page 41395]]

to expend resources to determine whether it (or its counterparty) is a 
U.S. person. A CSE seeking to rely on substituted compliance could 
incur costs in connection with the submission of a request for a 
comparability determination, although this would not be the case in 
circumstances where the relevant jurisdiction has itself attained a 
comparability finding from the Commission. In this section, we describe 
the most significant considerations that we have taken into account in 
formulating the Proposed Rule.
a. U.S. Person
    Under the Proposed Rule, the term ``U.S. person'' would be defined 
so as to identify activities having a substantial nexus to the U.S. 
market because they are undertaken by individuals or entities organized 
or domiciled in the United States or because of other connections to 
the U.S. market. The definition is intended to identify those 
individuals and entities whose swap activities have a substantial nexus 
to U.S. markets even when they transact in swaps with a non-U.S. CSE. 
As noted in section II.B.1. above, this proposed definition generally 
follows the traditional, territorial approach to defining a U.S. 
person. The chief benefit of this territorial approach is that it is 
objective and clear--and the Commission believes that the industry has 
largely followed a similar definition of ``U.S. person'' included in 
the Guidance.
    The Commission considered including the U.S. majority-ownership 
prong that was included in the Guidance (50% U.S. person ownership of a 
fund or other collective investment vehicle), but has determined not to 
propose it.\107\ The Commission understands that unlike other corporate 
structures, certain types of funds, specifically fund-of-funds and 
master-feeder structures, would require an adviser or administrator to 
look through to other fund entities in the fund structure, in 
ascertaining whether a beneficial owner of the fund is a U.S. person. 
The Commission further understands that this may be difficult to 
determine in some cases. In addition, the Commission believes that 
other elements of the U.S. person definition would in many 
circumstances cover these funds as a ``U.S. person.''
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    \107\ The Commission's definition of the term ``U.S. person'' as 
used in the Guidance included a prong (iv) which covered ``any 
commodity pool, pooled account, or collective investment vehicle 
(whether or not it is organized or incorporated in the United 
States) of which a majority ownership is held, directly or 
indirectly, by a U.S. person(s).''
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    Even if a non-U.S. fund with U.S. majority-ownership is treated as 
a non-U.S. person, such fund would be excluded from the Commission's 
margin rules only in limited circumstances (namely, when the fund 
trades with a non-U.S. CSE that is not a consolidated subsidiary of a 
U.S. entity or a U.S. branch of a non-U.S. CSE). Additionally, any 
excluded swaps would most likely be covered by another jurisdiction 
that adheres to the BCBS-IOSCO standards. The Commission anticipates 
that non-U.S. CSEs will generally be required, in their home 
jurisdiction, to collect margin from these non-U.S. funds.\108\ 
Therefore, non-U.S. CSEs would generally be protected in the event of a 
default by a non-U.S. fund even if the uncleared swap with the non-U.S. 
fund falls within the Exclusion.\109\ Accordingly, the Commission 
believes that treatment of non-U.S. funds with U.S. majority-ownership 
as non-U.S. persons will not have a substantial impact on the safety 
and soundness of CSEs or the stability of the U.S. financial system; at 
the same time, the Commission believes that excluding the majority-
ownership prong would alleviate any burden associated with determining 
whether a fund qualifies as a U.S. person under this criterion.
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    \108\ At this time, we do not have information as to what 
portion of the funds that would have been covered by the U.S. 
majority-ownership prong are hedge funds.
    \109\ Further, as noted earlier, a non-U.S. CSE that can avail 
itself of the Exclusion would still be subject to the Commission's 
margin rules with respect to all uncleared swaps not meeting the 
criteria for the Exclusion, albeit with the possibility of 
substituted compliance. The Commission further believes that the 
possibility of a cascading event affecting U.S. counterparties and 
the U.S. market more broadly as a result of a default by the non-
U.S. CSE would also be mitigated because the non-U.S. CSE would be 
subject to U.S. margin requirements (with the possibility of 
substituted compliance to the extent applicable) when entering into 
a swap with U.S. counterparties.
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    As noted in section II.B.1. above, prong (6) (Proposed Rule Sec.  
23.160(a)(10)(vi)) of the proposed ``U.S. person'' definition would 
capture certain legal entities owned by one or more U.S. person(s) and 
for which such person(s) bear unlimited responsibility for the 
obligations and liabilities of the legal entity. In the case of the 
Guidance, the ``U.S. person'' definition would generally characterize a 
legal entity as a U.S. person if the entity were ``directly or 
indirectly majority-owned'' by one or more persons falling within the 
term ``U.S. person'' and such U.S. person(s) bears unlimited 
responsibility for the obligations and liabilities of the legal entity. 
Because this prong of the proposed definition of ``U.S. person'' is 
broader in scope, the Commission believes that this may result in more 
legal entities meeting the U.S. person definition. In addition, to the 
extent that this prong of the proposed definition of ``U.S. person'' 
expands the number of market participants that would be deemed to be a 
``U.S. person,'' the Commission believes that the benefits that would 
have been provided to otherwise non-U.S. CSEs from being able to avail 
themselves of substituted compliance and the Exclusion would not be 
realized.
    The proposed ``U.S. person'' definition does not include the 
prefatory phrase ``includes, but is not limited to'' that was included 
in the Guidance. The Commission believes that this prefatory phrase 
should not be included in the Proposed Rule in order to provide legal 
certainty regarding the application of U.S. margin requirements to 
cross-border swaps.
    Finally, the Commission believes that the definition of ``U.S. 
person'' provides a clear and objective basis upon which to identify a 
U.S. person, and that identifying whether a counterparty is a ``U.S. 
person'' should be relatively straightforward because, as noted above, 
the Commission believes that a swap counterparty generally should be 
permitted to reasonably rely on its counterparty's written 
representation in determining whether the counterparty is within the 
definition of the term ``U.S. person.''
b. Availability of Substituted Compliance and Exclusion
i. Uncleared Swaps of U.S. CSEs or of Non-U.S. CSEs Whose Obligations 
Under the Relevant Swap Are Guaranteed by a U.S. Person
    As set out in Table A to this release, under the Proposed Rule, the 
Commission's margin rules would generally apply to all uncleared swaps 
of U.S. CSEs. For U.S. CSEs, substituted compliance would only be 
available with respect to the requirement to post initial margin and 
only if the counterparty is a non-U.S. person (including a non-U.S. 
CSE) whose obligations under the uncleared swap are not guaranteed by a 
U.S. person. Uncleared swaps with U.S. CSEs would never qualify for the 
Exclusion. Under the Proposed Rule, non-U.S. CSEs whose obligations 
under the relevant swap are guaranteed by a U.S. person would receive 
the same treatment as U.S. CSEs.\110\ The Commission believes

[[Page 41396]]

that this result is appropriate because a swap of an entity guaranteed 
by that U.S. person will have economic and financial implications that 
are likely to be very similar to the economic and financial 
implications of a swap entered into directly by the U.S. guarantor, as 
discussed in section II.B.2. above.
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    \110\ As discussed in section II.B.2, under the Proposed Rule 
the Commission is defining a guarantee narrower than in the 
Guidance, and in doing so, the Commission has broadened the 
availability of substituted compliance and the Exclusion to certain 
non-U.S. CSEs that would not have the ability to avail themselves of 
these if the broader definition of guarantee used in the Guidance 
were used in the Proposed Rule instead of the narrower definition. 
However, the Commission believes that as a result of its decision to 
define certain non-U.S. CSEs as Foreign Consolidated Subsidiaries, 
some of these same non-U.S. CSEs that would have been able to avail 
themselves of substituted compliance and the Exclusion, as a result 
of the narrow definition of a guarantee, would not be eligible for 
the Exclusion (but would benefit from the full application of 
substituted compliance instead of a limited application). The costs 
and benefits related to substituted compliance and the Exclusion are 
set out in this section and below.
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    The Commission understands that the Proposed Rule may place U.S. 
CSEs and non-U.S. CSEs whose obligations under the relevant swap are 
guaranteed by a U.S. person at a disadvantage when competing with 
either non-U.S. CSEs that are able to rely on the Exclusion or with 
non-CFTC registered dealers for foreign clients, though whether such a 
disadvantage exists would depend on whether these competitors are 
subject to comparable margin rules in other jurisdictions. For example, 
the ability of a non-U.S. CSE that is not guaranteed by a U.S. person 
(and that is not a Foreign Consolidated Subsidiary or a U.S. branch of 
a non-U.S. CSE) to rely on the Exclusion could allow it to gain a cost 
advantage over a U.S. CSE or a non-U.S. CSE that is guaranteed by a 
U.S. person and thus offer better pricing terms to foreign clients, 
unless it is subject to another jurisdiction's margin rules that are 
comparable. U.S. CSEs and non-U.S. CSEs whose obligations under the 
relevant swap are guaranteed by a U.S. person may also be at a 
disadvantage when competing for clients with non-U.S. CSEs that are 
able to rely on substituted compliance more broadly if the clients 
believe complying with the foreign jurisdiction's margin requirements 
would be less burdensome or costly than when transacting with a U.S. 
CSE under the Proposed Rule, as the amount posted by the non-U.S. 
counterparty would need to comply with U.S. margin requirements. 
However, the Commission believes that the requirement that the relevant 
foreign jurisdiction's margin requirements have comparable outcomes 
should operate to narrow any competitive disadvantage, thereby 
diminishing opportunities for regulatory arbitrage.\111\
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    \111\ The Commission notes that of the approximately 61 CSEs 
that would be subject to the Commission's margin rules, 21 are non-
U.S. CSEs. Of those 21 non-U.S. CSEs, 20 are domiciled in 
jurisdictions that participated in the development of the BCBS-IOSCO 
framework. Although harmonization among these jurisdictions may 
mitigate some competitive disadvantages, the associated costs and 
benefits cannot be reasonably determined as no jurisdictions have 
finalized their margin rules.
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    In addition, because the Proposed Rule provides for limited 
substituted compliance for U.S. CSEs and non-U.S. CSEs whose 
obligations under the relevant swap are guaranteed by a U.S. person 
(relative to other CSEs), those CSEs may be subject to conflicting or 
duplicative regulations, and consequently, would incur costs associated 
with developing multiple sets of policies and procedures and 
operational infrastructures. The Commission recognizes that such costs 
would vary for firms depending on the nature and scope of the 
individual firm's business, and costs relative to other competitors 
would depend on whether the competitors are subject to other 
jurisdictions' margin rules. The Commission requests data from 
commenters to assist the Commission in considering the quantitative 
effect of the limited substituted compliance for U.S. CSEs and non-U.S. 
CSEs whose obligations under the relevant swap are guaranteed by a U.S. 
person.
    On the other hand, the Commission believes that requiring U.S. CSEs 
and non-U.S. CSEs whose obligations under the relevant swap are 
guaranteed by a U.S. person to comply with its margin requirements 
would foster the stability of the U.S. financial markets. By their 
nature, U.S. CSEs and non-U.S. CSEs whose swap obligations are 
guaranteed by a U.S. person have a significant impact on the U.S. 
financial markets, and the Commission therefore has a strong interest 
in ensuring their viability. As discussed in section II.C.1. above, the 
Commission believes that requiring U.S. CSEs and non-U.S. CSEs whose 
swap obligations are guaranteed by a U.S. person to comply with the 
Commission's margin requirements, with only limited substituted 
compliance, is important to maintaining well-functioning U.S. financial 
markets and ensuring the sound risk management practices of key market 
participants in the U.S. swaps market.
ii. Uncleared Swaps of Non-U.S. CSEs Whose Obligations Under the 
Relevant Swap Are Not Guaranteed by a U.S. Person
    As set out in Table A to this release, under the Proposed Rule, 
non-U.S. CSEs whose obligations under the relevant uncleared swap are 
not guaranteed by a U.S. person, including Foreign Consolidated 
Subsidiaries, are eligible for substituted compliance to a greater 
extent relative to U.S. CSEs or non-U.S. CSEs whose obligations under 
the relevant uncleared swap are guaranteed by a U.S. person. A subset 
of these non-U.S. CSEs may qualify for the Exclusion, as described in 
section II.C.3. above. As noted in section II.C.2., the Commission 
believes that the proposed approach is appropriate since a non-U.S. CSE 
whose swap obligations are not guaranteed by a U.S. person (including a 
Foreign Consolidated Subsidiary), may implicate equal or greater 
supervisory concerns on the part of a foreign regulator relative to the 
Commission's supervisory interests (in comparison to U.S. CSEs or non-
U.S. CSEs whose obligations under the relevant swap are guaranteed by a 
U.S. person, because the Commission has a significant regulatory 
interest in uncleared swaps of these CSEs).
    Substituted compliance would benefit such non-U.S. CSEs by allowing 
them to avoid conflicting or duplicative regulations and choose the 
most appropriate set of rules when transacting with each other. 
Furthermore, eligible non-U.S. CSEs could further benefit from 
developing one enterprise-wide set of compliance and operational 
infrastructures.\112\ And

[[Page 41397]]

because substituted compliance is contingent on the Commission's 
determination that the relevant jurisdiction's margin rules are 
comparable, the potential for undue risk to the CSE and competitive 
distortions between those registrants that are eligible for substituted 
compliance and those that are not would be mitigated. However, if the 
foreign jurisdiction's margin requirements are not deemed comparable, 
these CSEs will be at a disadvantage to non-CFTC registered dealers 
when competing for client business.
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    \112\ The Commission notes that the costs of developing the 
margin infrastructure needed to comply with Commission margin 
requirements in the context of cross-border transactions, as well as 
the costs of complying with the Commission's margin requirements 
more generally in the context of cross-border transactions, could 
vary significantly for different CSEs based on factors specific to 
each firm (e.g., organizational structure, status as a U.S. CSE or 
non-U.S. CSE (including whether the firm is a Foreign Consolidated 
Subsidiary or a U.S. branch of a non-U.S. CSE), jurisdictions in 
which uncleared swaps activities are conducted, applicable margin 
requirements in the U.S. and other jurisdictions, the location and 
status of counterparties, existence of an appropriate MOU or similar 
arrangement with the relevant jurisdictions, existence of 
Comparability Determinations in the relevant jurisdictions and any 
conditions in such determinations, and firm policies and procedures 
for the posting and collection of margin). The Commission further 
notes that currently no foreign jurisdiction has finalized rules for 
margin of uncleared swaps. However, the EU and Japan have proposed 
such rules, each of which are based on the BCBS-IOSCO framework. 
Accordingly, the Commission lacks the data and information required 
to reasonably estimate costs related to developing the appropriate 
margin infrastructure or the costs of complying with the 
Commission's margin requirements generally in the context of cross-
border transactions.
---------------------------------------------------------------------------

iii. Exclusion for Uncleared Swaps of Non-U.S. CSEs Where Neither 
Counterparty's Obligations Under the Relevant Swap Are Guaranteed by a 
U.S. Person and Neither Counterparty Is a Foreign Consolidated 
Subsidiary Nor a U.S. Branch of a Non-U.S. CSE
    As discussed in section II.C.3., under the Proposed Rule, the 
Commission would exclude from its margin rules uncleared swaps entered 
into by a non-U.S. CSE with a non-U.S. person counterparty (including a 
non-U.S. CSE), provided that neither counterparty's obligations under 
the relevant swap are guaranteed by a U.S. person and neither 
counterparty is a Foreign Consolidated Subsidiary nor a U.S. branch of 
a non-U.S. CSE. As discussed in section II.C.3. above, the Commission 
believes that it would be appropriate to tailor the application of 
margin requirements in the cross-border context, consistent with 
section 4s(e) of the CEA \113\ and comity principles, so as to exclude 
this narrow class of uncleared swaps involving a non-U.S. CSE and a 
non-U.S. counterparty.
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    \113\ Section 4s(e)(3)(A) of the CEA, 7 U.S.C. 6s(e)(3)(A). The 
section provides, among other things, that margin requirements ``be 
appropriate for the risks associated with the non-cleared swaps held 
as a swap dealer or major market participant.''
---------------------------------------------------------------------------

    The Commission believes that such non-U.S. CSEs may benefit from 
the Exclusion because it allows them to avoid conflicting or 
duplicative regulations where a transaction would be subject to more 
than one uncleared swap margin regime. On the other hand, to the extent 
a non-U.S. CSE would be able to rely on the margin requirements of a 
foreign jurisdiction, as opposed to the Commission's margin 
requirements, and such other margin requirements are not comparable, 
the Exclusion could result in a less rigorous margin regime for such 
CSE. This, in turn, could create competitive disparities between non-
U.S. CSEs relying on the Exclusion and other CSEs that are not eligible 
for the Exclusion. That is, the Exclusion could allow these non-U.S. 
CSEs to offer better pricing to their non-U.S. clients, which would 
give them a competitive advantage relative to those CSEs that are not 
eligible for the Exclusion (e.g., U.S. CSEs, non-U.S. CSEs whose 
obligations under the relevant swap are not guaranteed by a U.S. 
person, or Foreign Consolidated Subsidiaries). However, whether these 
competitive effects occur will also depend on whether the relevant 
foreign jurisdiction has comparable margin rules. In addition, non-U.S. 
CSEs that are eligible for the Exclusion could be in a better position 
to compete with non-CFTC registered dealers in the relevant foreign 
jurisdiction for foreign clients.
    As noted above, at this time, given that foreign jurisdictions do 
not yet have in place their margin regimes, it is not possible to fully 
evaluate the Proposed Rule's eventual implications for the safety and 
soundness of CSEs and competition. Assuming, however, for the sake of 
analysis that the relevant foreign jurisdiction does not have 
comparable margin requirements, the Commission preliminarily believes 
that the Exclusion would not result in a significant diminution in the 
safety and soundness of the non-U.S. CSE, as discussed in section 
II.C.3. above. This is based on several considerations. First, the 
potential adverse effect on a non-U.S. CSE would be substantially 
mitigated by the Commission's capital requirements.\114\ Additionally, 
any excluded swaps would most likely be covered by another jurisdiction 
that adheres to the BCBS-IOSCO standards because the Commission 
believes that most swaps are currently undertaken in jurisdictions that 
already have agreed to adhere to the BCBS-IOSCO margin standards.
---------------------------------------------------------------------------

    \114\ See section II.A.1.
---------------------------------------------------------------------------

    Further, a non-U.S. CSE that can avail itself of the Exclusion 
would still be subject to the Commission's margin rules with respect to 
all uncleared swaps not meeting the criteria for the Exclusion, albeit 
with the possibility of substituted compliance. The Commission further 
believes that the possibility of a cascading event affecting U.S. 
counterparties and the U.S. financial markets more broadly as a result 
of a default by the non-U.S. CSE would also be mitigated because the 
non-U.S. CSE would be subject to U.S. margin requirements (with the 
possibility of substituted compliance to the extent applicable) when 
entering into a swap with U.S. counterparties.
iv. Foreign Consolidated Subsidiaries
    Under the Proposed Rule, substituted compliance is more broadly 
available to a Foreign Consolidated Subsidiary whose obligations under 
the relevant swap are not guaranteed by a U.S. person than a U.S. CSE 
or a non-U.S. CSE whose obligations under the relevant swap are 
guaranteed by a U.S. person. Further, a Foreign Consolidated Subsidiary 
would be able to avail itself of substituted compliance to the same 
extent as other non-U.S. CSEs, but would not be eligible for the 
Exclusion. A Foreign Consolidated Subsidiary's financial position, 
operating results, and statement of cash flows are directly reflected 
in its ultimate U.S. parent entity's financial statements. Given the 
nature of a Foreign Consolidated Subsidiary's direct relationship to a 
U.S. person, the Commission believes that the uncleared swaps of 
Foreign Consolidated Subsidiaries should not be excluded from the 
margin requirements, as discussed in section II.C.3. above.
    The unavailability of the Exclusion could disadvantage Foreign 
Consolidated Subsidiaries relative to other non-U.S. CSEs that would be 
eligible for the Exclusion (i.e., non-U.S. CSEs where neither 
counterparty's obligations under the relevant swap are guaranteed by a 
U.S. person and neither counterparty is a Foreign Consolidated 
Subsidiary nor a U.S. branch of a non-U.S. CSE) or non-CFTC registered 
dealers within a foreign jurisdiction. Non-U.S. CSEs that rely on the 
Exclusion or non-CFTC registered dealers could realize a cost advantage 
over Foreign Consolidated Subsidiaries and thus have the potential to 
offer better pricing terms to foreign clients. The competitive 
disparity between non-U.S. CSEs that rely on the Exclusion and Foreign 
Consolidated Subsidiaries, however, may be somewhat mitigated to the 
extent that the relevant foreign jurisdiction implements the BCBS-IOSCO 
framework.
v. U.S. Branch of a Non-U.S. CSE
    Under the Proposed Rule, the Exclusion from the margin rules would 
not be available to a U.S. branch of a non-U.S. CSE. The Commission 
believes that when a non-U.S. CSE conducts its swap activities within 
the United States through a branch or office located in the United 
States, it should be subject to U.S. margin requirements, but with the 
possibility of substituted compliance, consistent with comity 
principles. The Commission believes that the Proposed Rule's Exclusion 
should not be available in this case, because U.S. branches of non-U.S. 
CSEs are operating within the

[[Page 41398]]

U.S. market and competing with U.S. CSEs for business, including from 
non-U.S. counterparties.
    If a U.S. branch of a non-U.S. CSE were permitted to use the 
Exclusion it could be able to offer more competitive terms to non-U.S. 
clients than U.S. CSEs, and thereby gain an unwarranted advantage when 
dealing with non-U.S. clients relative to other CSEs operating within 
the United States (i.e., U.S. CSEs). On the other hand, for the same 
reason, the Proposed Rule could put non-U.S. CSEs that conduct swaps 
business through their U.S. branches at a disadvantage relative to 
either non-U.S. CSEs that are eligible for the Exclusion or non-CFTC 
registered dealers that conduct swaps business overseas. However, to 
the extent that the U.S. branch of a non-U.S. CSE is able to rely on 
substituted compliance, the competitive disparities relative to those 
non-U.S. CSEs that are eligible for the Exclusion should be reduced to 
the extent that the relevant foreign jurisdiction implements BCBS-IOSCO 
framework standards.\115\
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    \115\ Non-U.S. CSEs are also likely to conduct swaps business 
with U.S. clients from locations outside the United States; 
nevertheless, U.S. branches are likely to have greater U.S. client-
orientation relative to such foreign operations.
---------------------------------------------------------------------------

    The unavailability of the Exclusion could also result in the U.S. 
branch of a non-U.S. CSE being subject to conflicting or duplicative 
margin requirements. However, the Commission believes that overall any 
resulting costs may not be significant to the extent that the U.S. 
branch is able to avail itself of substituted compliance in that 
jurisdiction.
c. Alternatives
    The Commission believes that the Proposed Rule effectively 
addresses the risk posed to the safety and soundness of CSEs, while 
creating a workable framework that reduces the potential for undue 
market disruptions and promotes global harmonization by taking into 
account the interests of other jurisdictions and balancing those 
interests with the supervisory interests of the United States.
    The Commission has determined not to propose the Guidance Approach 
because it believes that if the Guidance Approach were adopted, too 
many swaps would be excluded from the margin rules to ensure the safety 
and soundness of CSEs and the U.S. financial system. In particular, 
under the Guidance Approach, uncleared swaps between a non-U.S. CSE and 
a non-U.S. person whose uncleared swap obligations are not guaranteed 
by a U.S. person would be excluded from the Commission's margin rules 
without regard to whether the non-U.S CSE is guaranteed or its 
financial statements are consolidated with a U.S. parent entity under 
U.S. generally accepted accounting principles.
    The Commission has also determined not to propose the Entity-Level 
Approach. On the one hand, the Entity-Level Approach (where the margin 
requirements would apply to all uncleared swaps of a CSE, with no 
possibility of any exclusion) is arguably appropriate because margin 
requirements are critical in ensuring the safety and soundness of a CSE 
and in supporting the stability of the U.S. financial markets. As a 
result of CSEs engaging in a level of uncleared swap activity that is 
significant enough to warrant U.S. registration, their uncleared swaps 
have a direct and significant nexus to the U.S. financial system, 
irrespective of whether their counterparty is a U.S. or non-U.S. 
entity. However, the Commission believes that the Entity-Level Approach 
does not adequately consider the relative supervisory interests of U.S. 
and foreign regulators.
d. Comparability Determinations
    As noted in section II.D. above, any CSE who is eligible for 
substituted compliance may make a request for a comparability 
determination. Currently, there are approximately 102 CSEs 
provisionally registered with the Commission. The Commission further 
estimates that of the 102 CSEs that are registered, approximately 61 
CSEs would be subject to the Commission's margin rules, as they are not 
supervised by a Prudential Regulator. However, the Commission notes 
that any foreign regulatory agency that has direct supervisory 
authority to administer the foreign regulatory framework for margin of 
uncleared swaps in the requested foreign jurisdiction may apply for a 
comparability determination. Further, once a comparability 
determination is made for a jurisdiction, it would apply for all 
entities or transactions in that jurisdiction to the extent provided in 
the determination, as approved by the Commission.
    The Commission assumes that a CSE or foreign regulatory agency will 
apply for a comparability determination only if the anticipated 
benefits warrant the costs attendant to submission of a request for a 
comparability determination. Although there is uncertainty regarding 
the number of requests that would be made under the Proposed Rule, the 
Commission estimates that it would receive applications for 
comparability determinations from 17 jurisdictions representing 61 
separate registrants, and that each request would impose an average of 
10 burden hours per registrant.\116\
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    \116\ See note 99, supra.
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    Based upon the above, the Commission estimates that the preparation 
and filing of submission requests for comparability determinations 
should take no more than 170 hours annually in the aggregate (17 
registrants x 10 hours). The Commission further estimates that the 
total aggregate cost of preparing such submission requests would be 
$64,600, based on an estimated cost of $380 per hour for an in-house 
attorney.\117\
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    \117\ Although different registrants may choose to staff 
preparation of the comparability determination request with 
different personnel, Commission staff estimates that, on average, an 
initial request could be prepared and submitted with 10 hours of an 
in-house attorney's time. To estimate the hourly cost of an in-house 
attorney's attorney time, Commission staff reviewed data in SIFMA's 
Report on Management and Professional Earnings in the Securities 
Industry 2013, modified by Commission staff to account for an 1800-
hour work-year and multiplied by a factor of 5.35 to account for 
firm size, employee benefits and overhead. Commission staff believes 
that use of a 5.35 multiplier here is appropriate because some 
persons may retain outside advisors to assist in making the 
determinations under the rules.
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3. Section 15(a) Factors
    As discussed above, the Proposed Rule is intended to apply the 
Proposed Margin Rules on a cross-border basis in a manner that 
effectively addresses risks to U.S. persons and the U.S. financial 
system, while mitigating the potential for conflicts and duplications 
that could lead to market distortions and undue competitive 
disparities. The discussion that follows supplements the related cost 
and benefit considerations addressed in the preceding section and 
addresses the overall effect of the Proposed Rule in terms of the 
factors set forth in section 15(a) of the CEA.
a. Protection of Market Participants and the Public
    CEA section 15(a)(2)(A) requires the Commission to evaluate the 
costs and benefits of a proposed regulation in light of considerations 
of protection of market participants and the public. CEA section 
4s(e)(2)(A) requires the Commission to develop rules designed to ensure 
the safety and soundness of CSEs and the U.S. financial system. In 
developing the Proposed Rule, the Commission's primary focus was on the 
relationship or trade-offs between the benefits associated with 
applying the Commission's margin requirement and the costs associated 
with extending substituted compliance or the

[[Page 41399]]

Exclusion. On the one hand, full application of the Commission's margin 
requirements would help to ensure the safety and soundness of CSEs and 
the U.S. financial system by reducing counterparty credit risk and the 
threat of contagion; on the other hand, extending substituted 
compliance or the Exclusion to CSEs would reduce the potential for 
conflicting or duplicative requirements, which would, in turn, reduce 
market distortions and promote global harmonization. Substituted 
compliance in particular should not reduce the safety and soundness 
benefit of the Proposed Rule because substituted compliance will not be 
available unless the Commission determines that foreign margin 
regulations are comparable to the Commission's margin regulations. 
Granting the Exclusion to certain CSEs should not significantly 
undermine these purposes, because other requirements and circumstances 
discussed above should mitigate the risk those CSEs pose to the U.S. 
financial system.
b. Efficiency, Competitiveness, and Financial Integrity
    CEA section 15(a)(2)(B) requires the Commission to evaluate the 
costs and benefits of a proposed regulation in light of efficiency, 
competitiveness and financial integrity considerations.
i. Efficiency
    The availability of substituted compliance to CSEs following 
comparable margin requirements in a foreign jurisdiction may 
incentivize global implementation of the BCBS-IOSCO framework. Greater 
harmonization across markets lessens the potential for conflicting or 
duplicative requirements, which, in turn, would promote greater 
operational efficiencies as a CSE would be able to avoid creating 
individualized compliance and operational infrastructures to account 
for the unique requirements of each jurisdiction in which it conducts 
swaps business. Also, to the extent that margin regimes across 
jurisdictions are comparable, substituted compliance should help to 
mitigate regulatory arbitrage.
ii. Competitiveness
    Under the Proposed Rule, the availability of substituted compliance 
would turn primarily on the nature of the non-U.S. CSE's relationship 
to a U.S. person and the national status of the non-U.S. CSE's 
counterparty. For example, in the case of a non-U.S. CSE whose swap 
obligations are not guaranteed by a U.S. person, substituted compliance 
would be available for any swap with a counterparty that is not a U.S. 
CSE or a non-U.S. CSE whose swap obligations are guaranteed by a U.S. 
person. Further, under the Proposed Rule, an uncleared swap entered 
into by a non-U.S. CSE with a non-U.S. person counterparty (including a 
non-U.S. CSE) would be excluded from the Commission's margin rules, 
provided that neither counterparty's obligations under the relevant 
swap are guaranteed by a U.S. person and neither counterparty is a 
Foreign Consolidated Subsidiary nor a U.S. branch of a non-U.S. CSE.
    The availability of substituted compliance and/or the Exclusion 
could create competitive disparities between those CSEs that are 
eligible for substituted compliance and/or the Exclusion relative to 
those that are not eligible. In addition, as the Exclusion is not 
provided to all CSEs, those that are not permitted to use the Exclusion 
may be at a competitive disadvantage when competing in foreign 
jurisdictions that do not have comparable margin rules to that of the 
Commission relative to non-CFTC registered dealers for foreign 
clients.\118\ Because the Proposed Rule offers to U.S. CSEs (and non-
U.S. CSEs with respect to swaps whose obligations are guaranteed by a 
U.S. person) only a minimal degree of substituted compliance and no 
Exclusion, these CSEs may be particularly impacted. As discussed in 
section II.C.1., however, the Commission believes that the Proposed 
Margin Rules should apply to the maximum degree to such CSEs in order 
to ensure the safety and soundness of U.S. CSEs (and U.S. guarantor) 
and the U.S. financial system. Furthermore, to the extent that that a 
relevant foreign jurisdiction's margin rules are comparable to that of 
the Commission's margin rules, such competitive disparities could be 
reduced.
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    \118\ The Commission notes, however, that of the approximately 
61 CSEs that would be subject to the Commission's margin rules, 21 
are non-U.S. CSEs. Of those 21 non-U.S. CSEs, 20 are domiciled in 
jurisdictions that participated in the development of the BCBS-IOSCO 
framework, which may mitigate possible regulatory arbitrage between 
these dealers.
---------------------------------------------------------------------------

iii. Financial Integrity of Markets
    The safety and soundness of CSEs are critical to the financial 
integrity of markets. Further, as discussed in section II.A. above, 
margin serves as a first line of defense to protect a CSE as a whole in 
the event of a default by a counterparty. Together with capital, margin 
represents a key element in a CSE's overall risk management program, 
which ultimately mitigates the possibility of a systemic event.
    At the same time, the Commission recognizes that a CSE's uncleared 
swaps with a particular counterparty may implicate the supervisory 
interests of foreign regulators, and it is important to calibrate the 
cross-border application of the margin requirements to mitigate, to the 
extent possible, consistent with the Commission's regulatory interests, 
the potential for conflict or duplication with other jurisdictions. 
Therefore, the Proposed Rule also allows for substituted compliance and 
an Exclusion in certain circumstances.
    The Commission believes that the Proposed Rule strikes the right 
balance between the two competing considerations to ensure that 
substituted compliance and the Exclusion are not extended in a way that 
could pose substantial risk to the integrity of the U.S. financial 
system. Substituted compliance is predicated on the Commission's 
determination that the relevant foreign jurisdiction has comparable 
margin rules; if the Commission does not find a foreign jurisdiction's 
rules comparable, the CSE would then need to comply with the 
Commission's rules. Even in instances where the Exclusion would be 
available, the Commission has taken into account that the risk to the 
integrity of the financial markets would be mitigated by the 
Commission's expectation that: (1) The Proposed Margin Rules would 
cover many of the swaps of the non-U.S. CSEs (eligible for the 
Exclusion) with other counterparties, namely, all U.S. counterparties; 
(2) the Exclusion would be limited to a narrow set of swaps by non-U.S. 
CSEs; (3) the capital requirements would apply on an entity-level basis 
to all CSEs; and (4) the excluded swaps will most likely be covered by 
another foreign regulator's margin rules that are based on the BCBS-
IOSCO framework.
c. Price Discovery
    CEA section 15(a)(2)(C) requires the Commission to evaluate the 
costs and benefits of a proposed regulation in light of price discovery 
considerations. The Commission generally believes that substituted 
compliance, by reducing the potential for conflicting or duplicative 
regulations, could reduce impediments to transact uncleared swaps on a 
cross-border basis. This, in turn, may enhance liquidity as more market 
participants would be willing to enter into uncleared swaps, thereby 
possibly improving price discovery--and ultimately reducing market 
fragmentation. Alternatively, if substituted compliance or the 
Exclusion were not made available, it would

[[Page 41400]]

incentivize CSEs to consider setting up their swap operations outside 
the Commission's jurisdiction, and as a result, increase the potential 
for market fragmentation.
d. Sound Risk Management Practices
    CEA section 15(a)(2)(D) requires the Commission to evaluate the 
costs and benefits of a proposed regulation in light of sound risk 
management practices. Margin is a critical element of a firm's sound 
risk management program that, among other things, can prevent the 
accumulation of counterparty credit risk. As international regulators 
and the Commission harmonize their margin regulations for uncleared 
swaps, market participants may be able to manage their risk more 
effectively on an enterprise-wide basis. On the other hand, to the 
extent that a CSE relies on the Exclusion for eligible swaps and the 
relevant foreign jurisdiction does not have comparable margin 
requirements, the Proposed Rule could lead to weaker risk management 
practices.
e. Other Public Interest Considerations
    CEA section 15(a)(2)(E) requires the Commission to evaluate the 
costs and benefits of a proposed regulation in light of other public 
interest considerations. The Commission has not identified any 
additional public interest considerations related to the costs and 
benefits of the Proposed Rule.
4. General Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits relating to the cross-border application of the Proposed Rule, 
including the nature and extent of the costs and benefits discussed 
above and any other costs and benefits that could result from adoption 
of the Proposed Rule. Commenters are encouraged to discuss the costs 
and benefits to U.S. CSEs and non-U.S. CSEs covered by the Proposed 
Rule, as well as any costs and benefits to other market participants, 
the swap markets, or the general public, and to the extent such costs 
and benefits can be quantified, monetary and other estimates thereof. 
The Commission requests that commenters provide any data or other 
information that would be useful in estimating the quantifiable costs 
and benefits of this rulemaking. Among other things, commenters may 
wish to submit comments on the following questions:
    1. Are the Commission's assumptions about the costs and benefits of 
the Proposed Rule accurate? If not, please explain and provide any data 
or other information that you have quantifying or qualifying the costs 
and benefits of the Proposed Rule.
    2. Did the Commission consider all of the appropriate costs and 
benefits related to the Proposed Rule? If not, what additional costs 
and benefits should the Commission consider? Please explain why these 
additional costs and benefits should be considered and provide any data 
or other information that you have quantifying or qualifying the costs 
and benefits of these additional costs of the Proposed Rule.
    3. Please provide any data or other information relating to costs 
associated with the definition of ``U.S. person'' in the Proposed Rule, 
and in particular, as the proposed definition relates to the definition 
of ``U.S. person'' that was included in the Guidance.
    4. Will allowing substituted compliance or the Exclusion for swaps 
between certain categories of non-U.S. persons lead to fragmentation 
(e.g., creating separate or multiple swap markets) of the liquidity in 
swaps markets for uncleared swaps to the detriment of price discovery? 
Is swap market fragmentation detrimental to various market participants 
when there is post-trade price transparency of swaps? Commenters are 
encouraged to quantify when practicable. Does the Proposed Rule have 
any significant effects on price discovery? Indeed, to what extent are 
the impacts on price discovery the result of other requirements, such 
as the margin for uncleared swaps or the trade execution mandate, and 
not the Proposed Rule per se?

List of Subjects in 17 CFR Part 23

    Swaps, Swap dealers, Major swap participants, Capital and margin 
requirements.

    For the reasons discussed in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as set forth 
below:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
1. The authority citation for part 23 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t, 
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
    Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b), 
Pub. L. 111-203, 124 Stat. 1641 (2010).

0
2. Add subpart E to part 23 to read as follows:
Subpart E--Capital and Margin Requirements for Swap Dealers and Major 
Swap Participants
Sec.
23.100-23.149 [Reserved]
23.150-23.159 [Reserved]
23.160 Cross-border application.
23.161-23.199 [Reserved]

Subpart E--Capital and Margin Requirements for Swap Dealers and 
Major Swap Participants


Sec. Sec.  23.100-23.149  [Reserved]


Sec. Sec.  23.150-23.159  [Reserved]


Sec.  23.160  Cross-border application.

    (a) Definitions. For purposes of this section only:
    (1) Foreign Consolidated Subsidiary means a non-U.S. CSE in which 
an ultimate parent entity that is a U.S. person has a controlling 
financial interest, in accordance with U.S. GAAP, such that the U.S. 
ultimate parent entity includes the non-U.S. CSE's operating results, 
financial position and statement of cash flows in the U.S. ultimate 
parent entity's consolidated financial statements, in accordance with 
U.S. GAAP.
    (2) Guarantee means an arrangement pursuant to which one party to a 
swap transaction with a non-U.S. person counterparty has rights of 
recourse against a U.S. person, with respect to the non-U.S. person 
counterparty's obligations under the swap transaction. For these 
purposes, a party to a swap transaction has rights of recourse against 
a U.S. person if the party has a conditional or unconditional legally 
enforceable right to receive or otherwise collect, in whole or in part, 
payments from the U.S. person in connection with the non-U.S. person 
counterparty's obligations under the swap.
    (3) International standards means the margin policy framework for 
non-cleared, bilateral derivatives issued by the Basel Committee on 
Banking Supervision and the International Organization of Securities in 
September 2013, as subsequently updated, revised, or otherwise amended, 
or any other international standards, principles or guidance relating 
to margin requirements for non-cleared, bilateral derivatives that the 
Commission may in the future recognize, to the extent that they are 
consistent with United States law (including the margin requirements in 
the Commodity Exchange Act).
    (4) Non-U.S. CSE means a covered swap entity that is not a U.S. 
person. The term ``non-U.S. CSE'' includes a ``Foreign Consolidated 
Subsidiary'' or a U.S. branch of a non-U.S. CSE.
    (5) Non-U.S. person means any person that is not a U.S. person.
    (6) Ultimate parent entity means the parent entity in a 
consolidated group in which none of the other entities in the

[[Page 41401]]

consolidated group has a controlling interest, in accordance with U.S. 
GAAP.
    (7) United States means the United States of America, its 
territories and possessions, any State of the United States, and the 
District of Columbia.
    (8) U.S. CSE means a covered swap entity that is a U.S. person.
    (9) U.S. GAAP means U.S. generally accepted accounting principles.
    (10) U.S. person means:
    (i) A natural person who is a resident of the United States;
    (ii) An estate of a decedent who was a resident of the United 
States at the time of death;
    (iii) A corporation, partnership, limited liability company, 
business or other trust, association, joint-stock company, fund or any 
form of entity similar to any of the foregoing (other than an entity 
described in paragraph (a)(10)(iv) or (v) of this section) (a ``legal 
entity''), in each case that is organized or incorporated under the 
laws of the United States or having its principal place of business in 
the United States, including any branch of such legal entity;
    (iv) A pension plan for the employees, officers or principals of a 
legal entity described in paragraph (a)(10)(iii) of this section, 
unless the pension plan is primarily for foreign employees of such 
entity;
    (v) A trust governed by the laws of a state or other jurisdiction 
in the United States, if a court within the United States is able to 
exercise primary supervision over the administration of the trust;
    (vi) A legal entity (other than a limited liability company, 
limited liability partnership or similar entity where all of the owners 
of the entity have limited liability) that is owned by one or more 
persons described in paragraphs (a)(10)(i) through (v) of this section 
and for which such person(s) bears unlimited responsibility for the 
obligations and liabilities of the legal entity, including any branch 
of the legal entity; or
    (vii) An individual account or joint account (discretionary or not) 
where the beneficial owner (or one of the beneficial owners in the case 
of a joint account) is a person described in paragraphs (a)(10)(i) 
through (vi) of this section.
    (b) Applicability of margin requirements--(1) Uncleared swaps of 
U.S. CSEs or Non-U.S. CSEs whose obligations under the relevant swap 
are guaranteed by a U.S. person--(i) Applicability of U.S. margin 
requirements; availability of substituted compliance for requirement to 
post initial margin. With respect to each uncleared swap entered into 
by a U.S. CSE or a non-U.S. CSE whose obligations under the swap are 
guaranteed by a U.S. person, the U.S. CSE or non-U.S. CSE whose 
obligations under the swap are guaranteed by a U.S. person shall comply 
with the requirements of Sec. Sec.  23.150 through 23.159, provided 
that the U.S. CSE or non-U.S. CSE whose obligations under the swap are 
guaranteed by a U.S. person may satisfy its requirement to post initial 
margin to certain counterparties to the extent provided in paragraph 
(b)(1)(ii) of this section.
    (ii) Compliance with foreign initial margin collection requirement. 
A covered swap entity that is covered by paragraph (b)(1)(i) of this 
section may satisfy its requirement to post initial margin under this 
part by posting initial margin in the form and amount, and at such 
times, that its counterparty is required to collect initial margin 
pursuant to a foreign jurisdiction's margin requirements, but only to 
the extent that:
    (A) The counterparty is neither a U.S. person nor a non-U.S. person 
whose obligations under the relevant swap are guaranteed by a U.S. 
person;
    (B) The counterparty is subject to such foreign jurisdiction's 
margin requirements; and
    (C) The Commission has issued a comparability determination under 
paragraph (c) of this section (``Comparability Determination'') with 
respect to such foreign jurisdiction's requirements regarding the 
posting of initial margin by the covered swap entity (that is covered 
in paragraph (b)(1) of this section).
    (2) Uncleared swaps of Non-U.S. CSEs whose obligations under the 
relevant swap are not guaranteed by a U.S. person--(i) Applicability of 
U.S. margin requirements except where an exclusion applies; 
Availability of substituted compliance. With respect to each uncleared 
swap entered into by a non-U.S. CSE whose obligations under the 
relevant swap are not guaranteed by a U.S. person, the non-U.S. CSE 
shall comply with the requirements of Sec. Sec.  23.150 through 23.159 
except to the extent that an exclusion is available under paragraph 
(b)(2)(ii) of this section, provided that a non-U.S. CSE whose 
obligations under the relevant swap are not guaranteed by a U.S. person 
may satisfy its margin requirements under this part to the extent 
provided in paragraphs (b)(2)(iii) and (iv) of this section.
    (ii) Exclusion. A non-U.S. CSE shall not be required to comply with 
the requirements of Sec. Sec.  23.150 through 23.159 with respect to 
each uncleared swap it enters into to the extent:
    (A) The non-U.S. CSE's obligations under the relevant swap are not 
guaranteed by a U.S. person;
    (B) The non-U.S. CSE is not a U.S. branch of a non-U.S. CSE; and
    (C) The non-U.S. CSE is not a Foreign Consolidated Subsidiary with 
a non-U.S. person counterparty (excluding a Foreign Consolidated 
Subsidiary or the U.S. branch of a non-U.S. CSE), whose obligations 
under the relevant swap are not guaranteed by a U.S. person.
    (iii) Availability of substituted compliance where the counterparty 
is not a U.S. CSE or a non-U.S. CSE whose obligations under the 
relevant swap are guaranteed by a U.S. person. Except to the extent 
that an exclusion is available under paragraph (b)(2)(ii) of this 
section, with respect to each uncleared swap entered into by a non-U.S. 
CSE whose obligations under the relevant swap are not guaranteed by a 
U.S. person with a counterparty (except where the counterparty is 
either a U.S. CSE or a non-U.S. CSE whose obligations under the 
relevant swap are guaranteed by a U.S. person), the non-U.S. CSE whose 
obligations under the relevant swap are not guaranteed by a U.S. person 
may satisfy margin requirements under this part by complying with the 
margin requirements of a foreign jurisdiction to which such non-U.S. 
CSE (whose obligations under the relevant swap are not guaranteed by a 
U.S. person) is subject, but only to the extent that the Commission has 
issued a Comparability Determination under paragraph (c) of this 
section for such foreign jurisdiction.
    (iv) Availability of substituted compliance where the counterparty 
is a U.S. CSE or a non-U.S. CSE whose obligations under the relevant 
swap are guaranteed by a U.S. person. With respect to each uncleared 
swap entered into by a non-U.S. CSE whose obligations under the 
relevant swap are not guaranteed by a U.S. person with a counterparty 
that is a U.S. CSE or a non-U.S. CSE whose obligations under the 
relevant swap are guaranteed by a U.S. person, the non-U.S. CSE (whose 
obligations under the relevant swap are not guaranteed by a U.S. 
person) may satisfy its requirement to collect initial margin under 
this part by collecting initial margin in the form and amount, and at 
such times and under such arrangements, that the non-U.S. CSE (whose 
obligations under the relevant swap are not guaranteed by a U.S. 
Person) is required to collect initial margin pursuant to a foreign 
jurisdiction's margin requirements, provided that:

[[Page 41402]]

    (A) The non-U.S. CSE (whose obligations under the relevant swap are 
not guaranteed by a U.S. person) is subject to the foreign 
jurisdiction's regulatory requirements; and
    (B) The Commission has issued a Comparability Determination with 
respect to such foreign jurisdiction's margin requirements.
    (c) Comparability determinations--(1) Eligibility requirements. The 
following persons may, either individually or collectively, request a 
Comparability Determination with respect to some or all of the 
Commission's margin requirements:
    (i) A covered swap entity that is eligible for substituted 
compliance under this section; or
    (ii) A foreign regulatory authority that has direct supervisory 
authority over one or more covered swap entities and that is 
responsible for administering the relevant foreign jurisdiction's 
margin requirements.
    (2) Submission requirements. Persons requesting a Comparability 
Determination should provide the Commission (either by hard copy or 
electronically):
    (i) A description of the objectives of the relevant foreign 
jurisdiction's margin requirements;
    (ii) A description of how the relevant foreign jurisdiction's 
margin requirements address, at minimum, each of the following elements 
of the Commission's margin requirements. Such description should 
identify the specific legal and regulatory provisions that correspond 
to each element and, if necessary, whether the relevant foreign 
jurisdiction's margin requirements do not address a particular element:
    (A) The transactions subject to the foreign jurisdiction's margin 
requirements;
    (B) The entities subject to the foreign jurisdiction's margin 
requirements;
    (C) The methodologies for calculating the amounts of initial and 
variation margin;
    (D) The process and standards for approving models for calculating 
initial and variation margin models;
    (E) The timing and manner in which initial and variation margin 
must be collected and/or paid;
    (F) Any threshold levels or amounts;
    (G) Risk management controls for the calculation of initial and 
variation margin;
    (H) Eligible collateral for initial and variation margin;
    (I) The requirements of custodial arrangements, including 
rehypothecation and the segregation of margin;
    (J) Documentation requirements relating to margin; and
    (K) The cross-border application of the foreign jurisdiction's 
margin regime.
    (iii) A description of the differences between the relevant foreign 
jurisdiction's margin requirements and the International Standards;
    (iv) A description of the ability of the relevant foreign 
regulatory authority or authorities to supervise and enforce compliance 
with the relevant foreign jurisdiction's margin requirements. Such 
description should discuss the powers of the foreign regulatory 
authority or authorities to supervise, investigate, and discipline 
entities for compliance with the margin requirements and the ongoing 
efforts of the regulatory authority or authorities to detect, deter, 
and ensure compliance with the margin requirements; and
    (v) Copies of the foreign jurisdiction's margin requirements 
(including an English translation of any foreign language document);
    (vi) Any other information and documentation that the Commission 
deems appropriate.
    (3) Standard of review. The Commission will issue a Comparability 
Determination to the extent that it determines that some or all of the 
relevant foreign jurisdiction's margin requirements are comparable to 
the Commission's corresponding margin requirements. In determining 
whether the requirements are comparable, the Commission will consider 
all relevant factors, including:
    (i) The scope and objectives of the relevant foreign jurisdiction's 
margin requirements;
    (ii) How the relevant foreign jurisdiction's margin requirements 
compare to the International Standards;
    (iii) Whether the relevant foreign jurisdiction's margin 
requirements achieve comparable outcomes to the Commission's 
corresponding margin requirements;
    (iv) The ability of the relevant regulatory authority or 
authorities to supervise and enforce compliance with the relevant 
foreign jurisdiction's margin requirements; and
    (v) Any other facts and circumstances the Commission deems 
relevant.
    (4) Reliance. Any covered swap entity that, in accordance with a 
Comparability Determination, complies with a foreign jurisdiction's 
margin requirements would be deemed to be in compliance with the 
Commission's corresponding margin requirements. Accordingly, the 
failure of such a covered swap entity to comply with the foreign 
jurisdiction's margin requirements may constitute a violation of the 
Commission's margin requirements. All covered swap entities, regardless 
of whether they rely on a Comparability Determination, remain subject 
to the Commission's examination and enforcement authority.
    (5) Conditions. In issuing a Comparability Determination, the 
Commission may impose any terms and conditions it deems appropriate. 
The violation of such terms and conditions may constitute a violation 
of the Commission's margin requirements and/or result in the 
modification or revocation of the Comparability Determination.
    (6) Modifications. The Commission reserves the right to further 
condition, modify, suspend, terminate or otherwise restrict a 
Comparability Determination in the Commission's discretion.
    (7) Delegation of authority. The Commission hereby delegates to the 
Director of the Division of Swap Dealer and Intermediary Oversight, or 
such other employee or employees as the Director may designate from 
time to time, the authority to request information and/or documentation 
in connection with the Commission's issuance of a Comparability 
Determination.


Sec. Sec.  23.161--23.199  [Reserved]

    Note: The following table will not appear in the Code of Federal 
Regulations.


                              Table A--Application of the Proposed Rule \1\ \2\ \3\
----------------------------------------------------------------------------------------------------------------
                 CSE                                  Counterparty                       Proposed approach
----------------------------------------------------------------------------------------------------------------
U.S. CSE or Non-U.S. CSE (including     U.S. person (including U.S. CSE).  U.S. (All).
 U.S. branch of a non-U.S. CSE and a    Non-U.S. person (including non-
 Foreign Consolidated Subsidiary        U.S. CSE, FCS, and U.S. branch of a non-
 (``FCS'')) whose obligations under     U.S. CSE) whose obligations under the
 the relevant swap are guaranteed by    relevant swap are guaranteed by a U.S.
 a U.S. person.                         person.

[[Page 41403]]

 
                                        Non-U.S. person (including non-    U.S. (Initial Margin
                                        U.S. CSE, FCS and U.S. branch of a non-     collected by CSE in column
                                        U.S. CSE) whose obligations under the       1).
                                        relevant swap are not guaranteed by a      Substituted Compliance
                                        U.S. person.                                (Initial Margin posted by
                                                                                    CSE in column 1).
                                                                                   U.S. (Variation Margin).
FCS whose obligations under the         U.S. CSE.                          U.S. (Initial Margin posted
 relevant swap are not guaranteed by    Non-U.S. CSE (including U.S.        by CSE in column 1).
 a U.S. person or U.S. branch of a      branch of a non-U.S. CSE and FCS) whose    Substituted Compliance
 non-U.S. CSE whose obligations under   obligations under the relevant swap are     (Initial Margin collected by
 the relevant swap are not guaranteed   guaranteed by a U.S. person.                CSE in column 1).
 by a U.S. person.                                                                 U.S. (Variation Margin).
                                        U.S. person (except as noted       Substituted Compliance (All).
                                        above for a CSE).
                                        Non-U.S. person whose obligations
                                        under the swap are guaranteed by a U.S.
                                        person (except a non-U.S. CSE, U.S.
                                        branch of a non-U.S. CSE, and FCS whose
                                        obligations are guaranteed, as noted
                                        above).
                                        Non-U.S. person (including non-
                                        U.S. CSE, U.S. branch of a non-U.S. CSE,
                                        and a FCS) whose obligations under the
                                        relevant swap are not guaranteed by a
                                        U.S. person.
Non-U.S. CSE (that is not a FCS or a    U.S. CSE.                          U.S. (Initial Margin posted
 U.S. branch of a non-U.S. CSE) whose   Non-U.S. CSE (including U.S.        by CSE in column 1).
 obligations under the relevant swap    branch of a non-U.S. CSE and FCS) whose    Substituted Compliance
 are not guaranteed by a U.S. person.   obligations under the swap are guaranteed   (Initial Margin collected by
                                        by a U.S. person.                           CSE in column 1).
                                                                                   U.S. (Variation Margin).
                                        U.S. person (except as noted       Substituted Compliance (All).
                                        above for a CSE).
                                        Non-U.S. person whose obligations
                                        under the swap are guaranteed by a U.S.
                                        person (except a non-U.S. CSE whose
                                        obligations are guaranteed, as noted
                                        above).
                                        U.S. branch of a Non-U.S. CSE or
                                        FCS, in each case whose obligations under
                                        the relevant swap are not guaranteed by a
                                        U.S. person.
                                        Non-U.S. person (including a non-  Excluded.
                                        U.S. CSE, but not a FCS or a U.S. branch
                                        of a non-U.S. CSE) whose obligations
                                        under the relevant swap are not
                                        guaranteed by a U.S. person.
----------------------------------------------------------------------------------------------------------------
\1\ This table should be read in conjunction with the rest of the preamble and the text of the Proposed Rule.
\2\ The term ``U.S. person'' is defined in Sec.   23.160(a)(10) of the Proposed Rule. A ``non-U.S. person'' is
  any person that is not a ``U.S. person.'' The term swap means an uncleared swap and is defined in Sec.
  23.151 of the Proposed Margin Rules. See Margin Requirements for Uncleared Swaps for Swap Dealers and Major
  Swap Participants, 79 FR 59898 (Oct. 3, 2014).
\3\ As used in this table, the term ``Foreign Consolidated Subsidiary'' or ``FCS'' refers to a non-U.S. CSE in
  which an ultimate parent entity that is a U.S. person has a controlling financial interest, in accordance with
  U.S. GAAP, such that the U.S. ultimate parent entity includes the non-U.S. CSE's operating results, financial
  position and statement of cash flows in the U.S. ultimate parent entity's consolidated financial statements,
  in accordance with U.S. GAAP. The term ``ultimate parent entity'' means the parent entity in a consolidated
  group in which none of the other entities in the consolidated group has a controlling interest, in accordance
  with U.S. GAAP.


    Issued in Washington, DC, on July 2, 2015, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Cross-Border Application of the Margin 
Requirements--Commission Voting Summary, Chairman's Statement, and 
Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Wetjen, Bowen, 
and Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Statement of Chairman Timothy G. Massad

    Today the Commission voted unanimously to issue a proposal on 
the cross-border application of our previously proposed rules on 
margin for uncleared swaps. I thank my fellow Commissioners for 
their work and input on this proposal, and I also want to thank our 
staff for their hard work.
    The proposed rule on margin for uncleared swaps, which we issued 
last fall, is one of the most important rules for the regulation of 
the over-the-counter swaps market.
    That is because there will always be a large part of the swaps 
market that is not cleared through central counterparties. Although 
we are mandating clearing for certain swaps, we should not mandate 
clearing for all swaps. Some products are not appropriate for such

[[Page 41404]]

a mandate because of their risk or liquidity characteristics.
    Margin can be an effective tool for addressing counterparty 
credit risk arising from uncleared swaps. Our rule will make sure 
that registered swap dealers post and collect margin in their 
transactions with other registered swap dealers and financial 
institutions that are above certain thresholds. That helps lower the 
risk to the financial system and the overall economy. I also note 
that the requirements do not apply to commercial end users.
    We saw what happened in 2008 when there was a build-up of 
excessive risk in bilateral swaps. That risk intensified and 
accelerated the financial crisis like gasoline poured on a fire. And 
that crisis cost our economy eight million jobs and untold suffering 
for American families.
    Moreover, we saw how that risk could be created offshore, 
outside our borders, but still jeopardize our financial stability 
and our economy.
    The excessive swap risk taken on by AIG was initiated from its 
overseas operation. In order to prevent the failure of AIG, our 
government had to commit over $180 billion.
    We got all that money back, but that is a painful example of why 
the cross-border application of the margin rule is important.
    The proposal we are issuing today addresses the possibility that 
risk created offshore can flow back into the U.S. And so it applies 
to activities of non-U.S. swap dealers that are registered with us. 
At the same time, our proposal recognizes the importance of 
harmonizing rules with other jurisdictions.
    If a transaction by an offshore swap dealer is guaranteed by a 
U.S. person, such as the parent of the dealer, the risk of that 
transaction can flow back into the U.S. But the same can occur even 
if the transaction is not guaranteed by the U.S. parent. Our 
proposal addresses that. By doing so, I believe our proposal is a 
good way to address the risk that can arise from uncleared swaps in 
that situation.
    The proposal draws a line as to when we should take this 
offshore risk into account that is both reasonable and clear. The 
line we are proposing is this: If the financial results and position 
of the non-U.S. swap dealer are consolidated in the financial 
statements of the U.S. parent, then we should take that into 
account, whether or not there is an explicit guarantee.
    This is how the proposal works: U.S. swap dealers would be 
required to comply with the rule in all their transactions, but in 
their transactions with certain non-U.S. counterparties, they would 
be entitled to substituted compliance with respect to margin they 
post, but not the margin they collect. Non-U.S. swap dealers whose 
swap obligations are guaranteed by a U.S. person would be treated 
the same way. Substituted compliance would be available in the case 
of the laws of those jurisdictions which we have deemed comparable.
    For non-U.S. swap dealers registered with us, whose obligations 
are not guaranteed by a U.S. person, they must still comply, but 
they would be entitled to substituted compliance to a greater 
extent. Generally, they could avail themselves of full substituted 
compliance unless the counterparty was a U.S. swap dealer or a swap 
dealer guaranteed by a U.S. person. And, transactions between a non-
U.S. swap dealer (but not conducted through its U.S. branch) and a 
non-U.S. counterparty would be excluded from the margin rules, if 
neither party's obligations under the relevant swap are guaranteed 
by a U.S. person nor consolidated in the financial statements of its 
U.S. parent.
    Limiting the exclusion from our rule to only those transactions 
where neither party is guaranteed or consolidated with a U.S. person 
helps address the concern that there is risk to the U.S. even if 
there is no explicit guarantee.
    Lastly, when foreign banks conduct their swaps business within 
the U.S. through their branches located in the U.S., in direct 
competition with U.S. swap dealers, the exclusion would not apply. 
However, U.S. branches would be eligible for substituted compliance, 
which would reduce the potential for conflicts with foreign 
jurisdictions.
    The broad scope of substituted compliance recognizes that we 
must work together with other jurisdictions to regulate this market, 
and we should design our rules to avoid conflict and duplication as 
much as possible. And the proposal may reduce competitive 
disparities that would otherwise result from different sets of rules 
applying to swap dealers engaged in essentially the same activity.
    The proposal we are making today is very similar to the approach 
proposed last fall by the prudential regulators. That is 
appropriate, because the law requires us and the prudential 
regulators to harmonize our margin rules as much as possible. It 
also makes sense when you look at the composition of the registered 
swap dealers. There are approximately 100 swap dealers registered 
with us. Approximately 40 of those will be subject to the margin 
rules of the prudential regulators, while approximately 60 will be 
subject to our rules. About two thirds of those 60 swap dealers that 
will be subject to our margin rule have affiliates who will be 
subject to the margin rules of the prudential regulators. For 
example, of the approximately 60 swap dealers subject to our margin 
rules, over half are subsidiaries of just five major U.S. bank 
holding companies. Each of those large bank holding companies has 
other subsidiaries that are, subject to the margin rules of the 
prudential regulators. Therefore, if our margin rules are 
substantially different from the margin rules of the prudential 
regulators, then we have created incentives for firms to move 
activity from one entity to another solely to take advantage of 
potential differences in the rules. That is an outcome we should try 
very hard to avoid.
    We also wish to coordinate our rules with the margin rules of 
other jurisdictions. That is why our proposal today provides for 
substituted compliance. In addition, at my direction, our staff is 
actively engaged with their counterparts in other jurisdictions to 
try to harmonize the rules as much as possible. Although much work 
remains to be done, and the Commission must take final action, I am 
hopeful that our final rules will be similar on many critical issues 
to those currently being developed in other major jurisdictions.
    I would also like to say a word about our Cross-Border Guidance, 
which discussed how the Commission would generally apply Dodd-Frank 
requirements to cross-border swap activities. In doing so, the 
Commission recognized that the market is complex and dynamic and 
that a flexible approach is necessary. As stated in the Guidance, 
``the Commission will continue to follow developments as foreign 
regulatory regimes and the global swaps market continue to evolve. 
In this regard, the Commission will periodically review this 
Guidance in light of future developments.'' That is essentially what 
we are doing here. With each area of our rules, the implications of 
cross-border transactions for our policy objectives may vary. Margin 
for uncleared swaps is intended to protect the safety and soundness 
of swap dealers and ultimately, to ensure the stability of the U.S. 
financial system. Therefore, it is appropriate to take into account 
whether that risk flows back into the United States by virtue of a 
guarantee by a U.S. person, or financial consolidation with a U.S. 
person. But the approach we are proposing today for margin may not 
be appropriate with respect to other areas of regulation--such as 
swaps reporting or trading.
    In conclusion, I believe the approach we are proposing today 
combines the best elements of the various approaches proposed last 
fall. It strikes the right balance between the Commission's 
supervisory interest in ensuring the safety and soundness of 
registered swap dealers and the need to recognize principles of 
international comity and reduce the potential for conflict with 
foreign regulatory requirements.

Appendix 3--Statement of Commissioner Mark P. Wetjen

    Today's release lays out a proposed framework for the 
application of the Commission's margin rules to un-cleared swaps 
(the ``Margin Rule'') in cross-border transactions. Interestingly, 
the release states that there was no consensus among those who filed 
comments in response to the Commission's Advance Notice of Proposed 
Rulemaking (``ANPR'') last fall, which laid out three alternative, 
cross-border approaches: The Guidance Approach, the Prudential 
Regulators' Approach, and the Entity Approach. To the extent, 
therefore, that the release was designed to identify a consensus 
view concerning which of these three approaches was best, it failed.
    The comment letters, however, provided a great deal of useful 
discussion that has aided the Commission's thinking about the extra-
territorial application of its rules. Ultimately, the agency was 
guided by those comments to propose today an approach that is 
essentially an entity approach, but because of more availability of 
substituted compliance, appears most similar to the Prudential 
Regulators' Approach in terms of its practical implementation.
    I am comfortable supporting today's release, but for the reasons 
discussed below,

[[Page 41405]]

continue to harbor some doubts as to whether we have selected the 
approach that best balances the Commission's interests in protecting 
the financial system and U.S. taxpayers, meeting its statutory 
mandate to preserve an appropriate competitive landscape for 
participants in the global swaps market, and adopting policies whose 
costs to those affected do not exceed their benefits.\1\
---------------------------------------------------------------------------

    \1\ See 7 U.S.C. 19(a).
---------------------------------------------------------------------------

The Commission's Responsibilities Regarding the Margin Rule

    To begin, it is important to understand the scope of the 
Commission's responsibilities with respect to implementing and 
enforcing the Margin Rule. As was made plain by the proposal seeking 
comment on the Margin Rule released last fall, the rulemaking is one 
of the most important component parts of the risk-focused 
requirements under Title VII of Dodd-Frank. The statute divides up 
responsibilities for implementing and enforcing the Margin Rule 
among this Commission, the U.S. prudential regulators, and the 
Securities and Exchange Commission. Those responsibilities are 
weighty, requiring, among others, the review and approval of margin 
methodologies submitted by the covered swap entities under each 
authority's jurisdiction.
    As of today, five U.S. bank holding companies regulated by the 
Board of Governors of the Federal Reserve System (the ``Board'') 
have 17 U.S. registered swap dealers that would fall exclusively 
within the CFTC's jurisdiction for margin purposes. These same five 
U.S. bank holding companies have 15 non-U.S. registered swap dealers 
that would fall exclusively within the CFTC's jurisdiction for 
margin purposes (the ``U.S. Foreign-Affiliate Dealers''). That is a 
total of 32 registered swap dealers that the commission would have 
to oversee, supervise, and enforce compliance with respect to the 
Margin Rule.
    There are another three non-U.S. parent entities regulated by 
the Board, which altogether have four entities registered with the 
Commission as swap dealers, due to the level of swap-dealing 
activity they engage in with U.S. counterparties (``Non-U.S. 
Dealers''). There are only three non-U.S. registered swap dealers 
that do not have a parent entity regulated by the Board and that 
would fall exclusively within the CFTC's jurisdiction for margin 
purposes (the ``Truly Foreign Dealers''), or just a fraction of the 
number of firms that are either based in the U.S. or controlled by a 
U.S. regulated parent. This brings to 39 the total number of swap 
dealers whose un-cleared swap activities would be subjected to the 
Commission's Margin Rule.
    The Commission's regulatory interests in each of these 
categories of registered swap dealers is different, notwithstanding 
the fact the Commission has responsibility over all of them. In most 
respects, the Commission (and other U.S. policymakers and swap-
market stakeholders) should be primarily concerned about the U.S. 
Foreign-Affiliate Dealers when thinking through and developing a 
cross-border framework to determine when these entities should 
follow U.S. law. This statement is based on the fact that concerns 
about risk importation into the U.S. are much lower, relatively 
speaking, when it comes to the activities of the Non-U.S. Dealers 
and Truly Foreign Dealers (none of the Non-U.S. Dealers or Truly 
Foreign Dealers would appear to meet the control test under the 
prudential regulators' September 2014 margin rule proposal). 
Instead, these latter categories of swap dealers raise different 
issues related to the Commission's mandates to enhance market 
integrity and promote fair competition.\2\
---------------------------------------------------------------------------

    \2\ See section 3(b) of the Commodity Exchange Act (``CEA''), 7 
U.S.C. 5(b).
---------------------------------------------------------------------------

    Appropriately, when Non-U.S. Dealers and Truly Foreign Dealers 
face other non-U.S. counterparties, they are excluded from having to 
comply with the Margin Rule under the proposal, so long as neither 
the registered swap dealer's nor its counterparty's obligations 
benefit from a guarantee by a U.S. person. Under the Guidance 
Approach, these Non-U.S. Dealers and Truly Foreign Dealers would be 
excluded from the Margin Rule as well, so long as neither the swap 
dealer's nor its counterparty's obligations benefit from a guarantee 
by a U.S. person.
    I review the scope and weight of these responsibilities here 
because the context to deciding how much supervisory 
responsibilities to assert over the cross-border swap activities of 
entities located outside of the U.S. is important, both in 
understanding the practical implications of claiming those 
responsibilities as well as the potential effect on international 
comity. The review of the different categories of swap-dealer 
registrants also makes it clear to me that to pursue the Entity 
Approach without allowing substituted compliance, as some commenters 
suggested, is neither necessary for the Commission to meet its 
statutory responsibilities nor advisable, not to mention 
impractical.
    When the Commission voted on the ANPR, I noted the potential 
benefits of the proposal set forth by the Prudential Regulators' 
Approach, which would effectively apply the margin rule as an 
entity-level rule with certain exclusions for foreign swap 
activities. At that time, however, I expressed my view that applying 
the margin rule as a transaction-level requirement under the 
Guidance Approach was the better option. In part, that view was 
shaped by the practical reality that it would be difficult for the 
Commission to meet its challenge to supervise U.S. swap dealers' 
compliance with the margin rule, let alone the activities of the 
U.S. Foreign-Affiliate Dealers and Truly Foreign Dealers.

Policy Advantages of Today's Proposal

    As it relates to the Truly Foreign Dealers, compliance 
obligations under today's proposal would be effectively the same as 
under the cross-border guidance, so presumably no new burdens or 
competitive considerations would be created here for those firms (as 
discussed above). Additionally, as it relates to the U.S. Foreign-
Affiliate Dealers (some of which have affiliates not supervised by 
the commission and engaged in swap activities), today's proposal 
could dis-incentivize firms from moving swap activity transacted by 
an affiliated entity regulated by a U.S. prudential regulator, into 
the U.S. Foreign-Affiliate Dealer. Such a market response is 
conceivable given the fact there could be different compliance 
obligations under the proposal as compared to the Guidance Approach 
depending on whether the U.S. Foreign-Affiliate Dealer is a Foreign 
Consolidated Subsidiary, and whether the dealer's un-cleared swap is 
supported by a guarantee. Presumably, there is swap activity of some 
of these U.S. Foreign-Affiliate Dealers that would be required to 
comply with the Margin Rule under today's proposal, that would not 
have been subjected to the Margin Rule under the Guidance Approach.
    U.S. domestic regulators should not knowingly create an 
opportunity for affiliates within a U.S. bank holding company to 
move swap activity from one affiliate to another for no other reason 
than to avoid application of U.S. law (even if there are legitimate 
policy reasons that U.S. law would not apply). Indeed, this is why 
the Dodd-Frank Act requires the relevant agencies implementing the 
Margin Rule to coordinate their efforts as closely as possible. 
Knowingly allowing such a result also would be inconsistent with the 
Commission's statutory duty to promote fair competition.\3\
---------------------------------------------------------------------------

    \3\ See section 3(b) of the CEA, 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    Similarly, the Commission should be careful to avoid adopting a 
significantly different cross-border approach from the U.S. 
prudential regulators if it would incentivize affiliates of U.S. 
Foreign-Affiliate Dealers to move their swap activity to the U.S. 
Foreign-Affiliate Dealer in order to exploit the relative dearth of 
resources available to the Commission for supervising and enforcing 
compliance. The CFTC currently is under-staffed. Meeting the 
challenge to monitor compliance with the complex and technical 
requirements of the Margin Rule as it applies to the swap activity 
conducted by U.S. Foreign-Affiliate Dealers today would be 
difficult. A cross-border approach that is substantively similar to 
the Prudential Regulators' Approach may facilitate the Commission in 
meeting its supervisory challenge.
    Relatedly, I am also cognizant of market efforts to develop a 
standard initial-margin methodology for un-cleared swaps, which I 
believe would be supported by the hybrid approach set forth in 
today's proposal. I am in favor of these efforts because the use of 
a standard initial margin methodology has the potential to reduce 
dispute burdens by using a common approach for reconciliation, 
promote the efficient use of limited market resources, and enhance 
fairness and transparency in the global OTC derivatives markets. As 
such, the Commission should, if possible, avoid adopting a cross-
border approach that would discourage the development of a standard 
initial-margin methodology, or would otherwise encourage the 
development of different margin methodologies across affiliated 
entities and/or the broader marketplace. This outcome

[[Page 41406]]

would complicate the jobs of all supervisory authorities involved, 
perhaps especially the U.S. prudential regulators.

Policy Advantages of the Guidance Approach

    Generally speaking, the Commission in adopting its cross-border 
guidance intended to strike a reasonable balance in assuring that 
the swaps markets were brought under the new regulatory regime as 
directed by Congress and consistent with section 2(i) of the CEA.\4\ 
We should not depart from those important policy judgments without a 
compelling reason to do so.
---------------------------------------------------------------------------

    \4\ See section 2(i) of the CEA, 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    One advantage of the Guidance Approach, therefore, is that it 
would harmonize the Commission's own cross-border policies as they 
related to both cleared and un-cleared swap activity. Because many 
firms under the Commission's jurisdiction have incurred significant 
costs by building systems and practices designed to follow the 
Commission's cross-border guidance, overall costs to registered swap 
dealers might be lower if the Guidance Approach were adopted, which 
obviously is relevant to the Commission's mandate to consider the 
benefits and costs of its policies. But of course, with harmony of 
the Commission's cross-border policies comes disharmony with the 
U.S. prudential regulators.
    Another advantage to the Guidance Approach is that it provides a 
more elegant way for U.S. Foreign-Affiliate Dealers, Non-U.S. 
Dealers and Truly Foreign Dealers to comply with their regulatory 
obligations when the Commission has made a substituted-compliance 
determination regarding another jurisdiction's margin requirements. 
Under the Guidance Approach, an affected swap dealer's obligations 
to post margin and collect margin would follow the same law or 
regulation of another jurisdiction if the Commission had made such a 
substituted-compliance determination; which is to say, margin 
payments going in both directions would follow the same set of 
rules. This outcome has the added benefit of being consistent with 
the Basel Committee on Banking Supervision's (``BCBS'') and the 
Board of the International Organization of Securities Commissions' 
(``IOSCO'') final margin policy framework for margin requirements 
for non-centrally cleared derivatives (the ``BCBS-IOSCO 
Framework''), which states that when a transaction is subject to two 
sets of rules, the regulators should endeavor to harmonize their 
rules to the extent possible.\5\
---------------------------------------------------------------------------

    \5\ See BCBS and IOSCO, Margin requirements for non-centrally 
cleared derivatives (Sept. 2013) at 22, available at http://www.bis.org/publ/bcbs261.pdf. The BCBS-IOSCO Framework also provides 
that regulators should recognize the equivalence and comparability 
of their respective rules and apply only one set of rules to the 
transaction.
---------------------------------------------------------------------------

    Given the relatively broad agreement among key jurisdictions 
about how the global framework for margin requirements ought to be 
structured, such a result should be an acceptable way to address any 
remaining concerns about risk from overseas activity transferring 
back to the U.S. Again, those concerns primarily would arise from 
the un-cleared swap activities of the U.S. Foreign-Affiliate 
Dealers. The proposal, on the other hand, would require a non-U.S. 
covered swap entity guaranteed by a U.S. person to follow U.S. 
initial margin rules, but only permit substituted compliance for the 
posting of initial margin when such non-U.S. covered swap entity 
trades with a non-U.S. counterparty.
    In this scenario, it would be possible for two separate laws to 
apply to the same transaction. Under this framework, I question 
whether market participants engaging in un-cleared swaps would have 
the necessary legal certainty as to which margin requirements they 
would face. While this framework is proposed ostensibly to help 
ensure the safety and soundness of covered swap entities and to 
support the stability of the U.S. financial markets, these goals 
arguably will be accomplished only if the framework is workable. The 
Guidance Approach would arguably provide greater certainty as to the 
law applicable to a particular transaction, and render the 
Commission's policy more consistent with the BCBS-IOSCO 
Framework.\6\
---------------------------------------------------------------------------

    \6\ See id.
---------------------------------------------------------------------------

    To that end, I look forward to hearing additional comments on 
whether a swap between a non-U.S. covered swap entity and a non-U.S. 
counterparty should receive substituted compliance for the entire 
swap, rather than subject the swap to both U.S. and foreign margin 
requirements. Ideally, such comments would give the Commission a 
better understanding of the feasibility of designing systems to 
assist the covered swap entity comply with two separate margin 
requirements for the same transaction.
    To the degree that the Commission should be concerned about 
deferring to other regulators to supervise the posting and 
collecting of margin for un-cleared swaps--as it would in the wake 
of a substituted-compliance determination--context again is 
important to remember here. As mentioned, there is relatively broad 
agreement among key jurisdictions about how the global framework for 
margin requirements should be structured, as a result of the 
issuance of the BCBS-IOSCO Framework. It's equally important to 
remember that the Commission's capital rule is treated as an entity-
level rule under the Commission's cross-border guidance.\7\ As I 
stated when the Commission released its proposal for the Margin 
Rule, credit risks not addressed through the Margin Rule could be 
addressed, at least in part, through indirect capital requirements 
at the holding company level, and direct capital requirements at the 
registrant level for those swap dealers relying on substituted 
compliance (or otherwise).
---------------------------------------------------------------------------

    \7\ See Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 
2013).
---------------------------------------------------------------------------

    Yet another advantage to the Guidance Approach is that it might 
better avoid further diminishments to liquidity that the marketplace 
has experienced recently, as well as better avoid regulatory market 
fragmentation that materialized after the Commission's new swap-
execution framework went into effect. Several commenters expressed 
strong concerns that the Entity Approach could further fragment the 
swaps markets and impair liquidity, promote regulatory arbitrage, 
and place the foreign affiliates of U.S. entities at a competitive 
disadvantage beyond the circumstances they face in the cleared swap 
environment under the Commission cross-border guidance. I have 
recognized and spoken about market fragmentation for years, and so 
do not take lightly such concerns being raised again in this 
context.

Clarifications of the Commission's Definition of ``Guarantee'' and 
``U.S. Person''

    The proposal includes two important clarifications for market 
participants that I would like to acknowledge. First, I am 
supportive of the proposed removal of the U.S. majority-ownership 
prong from the U.S. person definition. For certain types of funds, 
it is extremely difficult for advisors or administrators to 
accurately determine whether, and how many of, the beneficial owners 
of fund entities within the fund structure are U.S. persons. Given 
this complexity and the other elements of the U.S. person definition 
that would capture those funds that have a substantial nexus to the 
U.S. markets, I believe this exclusion is necessary and appropriate. 
I also support the release's proposed definition of ``guarantee''. 
This clearer definition will help market participants better 
identify those transactions that raise or implicate greater 
supervisory interest by the Commission.

Conclusion

    The questions asked in this proposal are intended to solicit 
comment in hopes of further clarifying the most appropriate way for 
the Commission to meet its regulatory objectives as well as finding 
more consensus on the important issues raised in the release. As 
discussed above, I am open to the approach taken in this proposal 
and recognize its merits. I look forward to seeing whether comments 
filed in response to today's release can further build the case for 
the Commission adopting the proposal, rather than the Guidance 
Approach.

Appendix 4--Concurring Statement of Commissioner Sharon Y. Bowen

    I'm pleased to support this new proposed rule on cross-border 
application of uncleared margin requirements for swap dealers and 
major swap participants. Margin requirements for uncleared swaps, 
needless to say, are a core piece of the new regulatory regime we 
are establishing as required by the Dodd-Frank Wall Street Reform 
and Consumer Protection Act.
    It is imperative that we get all aspects of our margin 
requirements right, and that includes getting the cross-border 
element of the requirements right. The swaps market is a global 
one--the market has organically evolved to rely on the ability of 
U.S. entities to trade with European entities as a matter of course. 
It is incumbent on us that our rules not severely restrict this flow 
of commerce, just as it is incumbent on us that our rules provide 
rigorous regulations on this market for the protection of investors, 
consumers, and the broader financial system.

[[Page 41407]]

    To that end, I look forward to receiving comments on this 
proposal from a wide swath of stakeholders, from market participants 
to financial reform advocates. I hope we will receive comments on 
whether this rule is workable, whether it is sufficiently robust, 
and what changes would make the rule more effective on both of those 
metrics.

Appendix 5--Statement of Commissioner J. Christopher Giancarlo

    The Commission's proposal for the cross-border application of 
margin requirements for uncleared swaps is a highly complicated 
labyrinth. I look forward to the jolt to U.S. economic growth that 
will occur in the 3rd quarter of 2015 as a result of the thousands 
of billable hours that will be expended by lawyers and other 
professionals, who will have to read, interpret and respond to this 
tangled regulatory construct.
    I have many concerns and questions regarding the proposal, 
including:
    1. The shift from the transaction-level approach set forth in 
the July 2013 Cross-Border Interpretive Guidance and Policy 
Statement \1\ (``Guidance'') to a hybrid approach and what this 
means for the status of the Guidance moving forward;
---------------------------------------------------------------------------

    \1\ Interpretive Guidance and Policy Statement Regarding 
Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26, 
2013).
---------------------------------------------------------------------------

    2. the revised definitions of ``U.S. person'' (defined for the 
first time in an actual Commission rule) and ``guarantee'' and how 
these new terms will be interpreted and applied by market 
participants across their entire global operations;
    3. the scope of when substituted compliance is allowed; and
    4. the practical implications of permitting substituted 
compliance, but disallowing the exclusion from CFTC margin 
requirements (``Exclusion'') for non-U.S. covered swap entities 
(``CSEs'') who qualify as Foreign Consolidated Subsidiaries.
    My concerns extend to the standards set forth for determining 
comparability. An appropriate framework for the cross-border 
application of margin requirements for uncleared swaps is essential 
if we are to preserve the global nature of the swaps market. 
Congress recognized this when it instructed the CFTC, the SEC and 
the prudential regulators to ``coordinate with foreign regulatory 
authorities on the establishment of consistent international 
standards with respect to the regulation . . . of swaps.'' \2\ 
Towards that end, representatives of more than 20 regulatory 
authorities, including the CFTC, participated in consultations with 
the Basel Committee on Banking Supervision (``BCBS'') and the Board 
of the International Organization of Securities Commissions 
(``IOSCO''), which resulted in the issuance of a final BCBS-IOSCO 
framework in September 2013 that establishes minimum margin 
standards for uncleared swaps (``BCBS-IOSCO framework'').\3\
---------------------------------------------------------------------------

    \2\ 15 U.S.C. 8325(a) (added by section 752 of the Dodd-Frank 
Act).
    \3\ See Margin Requirements for Non-centrally Cleared 
Derivatives (Sep. 2013), available at http://www.bis.org/publ/bcbs261.pdf, revised Mar. 2015, available at http://www.bis.org/bcbs/publ/d317.pdf.
---------------------------------------------------------------------------

    Element seven of the BCBS-IOSCO framework discusses the cross-
border application of margin requirements and stresses the 
importance of developing consistent requirements across 
jurisdictions to ensure that implementation at a national 
jurisdictional level is appropriately interactive:

that is, that each national jurisdiction's rule is territorially 
complementary such that (i) regulatory arbitrage opportunities are 
limited, (ii) a level playing field is maintained, (iii) there is no 
application of duplicative or conflicting margin requirements to the 
same transaction or activity, and (iv) there is substantial 
certainty as to which national jurisdiction's rules apply. When a 
transaction is subject to two sets of rules (duplicative 
requirements), the home and the host regulators should endeavor to 
(1) harmonize the rules to the extent possible or (2) apply only one 
set of rules, by recognizing the equivalence and comparability of 
their respective rules.\4\
---------------------------------------------------------------------------

    \4\ Id. at 23.
---------------------------------------------------------------------------

    Regulatory authorities in major financial centers continue to 
collaborate in the development of their rules and I commend CFTC 
staff for their continued dialogue with fellow domestic and foreign 
regulators. Nevertheless, there are bound to be differences across 
jurisdictions in the final rule sets that are ultimately adopted. 
Comparability determinations allowing for substituted compliance 
with the margin requirements of foreign jurisdictions will be 
essential to achieving a workable cross-border framework. I am 
concerned that the standards for making comparability determinations 
outlined in the Commission's proposal may be too restrictive.
    The Commission states that it will employ an outcome-based 
comparability standard focusing on whether the margin requirements 
in a foreign jurisdiction achieve the same regulatory objectives as 
the CFTC's margin requirements and will not require specific rules 
identical to the Commission's rules. The Commission states further, 
however, that it will make its outcome-based determinations on an 
element-by-element basis that will include, but not be limited to, 
analyzing: (i) The transactions subject to the foreign 
jurisdiction's margin requirements; (ii) the entities subject to the 
foreign jurisdiction's margin requirements; (iii) the methodologies 
for calculating the amounts of initial and variation margin; (iv) 
the process and standards for approving models for calculating 
initial and variation margin models; (v) the timing and manner in 
which initial and variation margin must be collected and/or paid; 
(vi) any threshold levels or amount; (vii) risk management controls 
for the calculation of initial and variation margin; (viii) eligible 
collateral for initial and variation margin; (ix) the requirements 
of custodial arrangements, including rehypothecation and segregation 
of margin; (x) documentation requirements relating to margin; and 
(xi) the cross-border application of the foreign jurisdiction's 
margin regime.
    As proposed, the Commission will not be assessing whether the 
foreign authority's margin regime as a whole meets the broad 
regulatory objectives of requiring margin for uncleared swaps.\5\ 
Rather, in looking at each element (and any other factor not 
included in the foregoing list) the Commission may determine that a 
foreign regime is comparable as to some elements, but not others, in 
which case substituted compliance might be allowed, for example, 
with respect to the methodologies for calculating initial and 
variation margin, but not for the eligible collateral.
---------------------------------------------------------------------------

    \5\ The regulatory objectives of requiring margin for uncleared 
swaps, as stated in the Dodd-Frank Act, are to help insure the 
safety and soundness of the swap dealer or major swap participant, 
the financial integrity of the markets and the stability of the U.S. 
financial system. Section 4s(e)(3)(A), (C), 7 U.S.C. 6s(e)(3)(A), 
(C).
---------------------------------------------------------------------------

    Depending on how it is put into practice, this element-by-
element approach may be difficult to distinguish from the rule-by-
rule analysis the Commission claims to eschew. We have seen this 
before when the Commission made its comparability determinations for 
certain foreign countries regarding certain transaction-level 
requirements for swap dealers and major swap participants.\6\ There, 
the Commission made its determinations on a ``requirement-by-
requirement'' basis, rather than on the basis of the foreign regime 
as a whole.\7\ Former Commissioner Scott O'Malia observed in that 
instance that this was a ``rule-by-rule'' analysis, which was 
contrary to the recommendations of the OTC Derivatives Regulators 
Group and afforded only limited substituted compliance relief.\8\ 
Will our ``element-by-element'' analysis be any different than the 
``requirement-by-requirement'' method the Commission employed then?
---------------------------------------------------------------------------

    \6\ See, e.g., Comparability Determination for the European 
Union: Certain Transaction-Level Requirements, 78 FR 78878 (Dec. 27, 
2013).
    \7\ Id. at 78881.
    \8\ Id. at 78889.
---------------------------------------------------------------------------

    I fear that the proposed element-by-element approach will be 
outcome-based in name only. In a perfect world all G-20 countries 
will adopt comparable margin requirements, but we cannot let the 
perfect be the enemy of the good. For substituted compliance to 
work, we must focus on broad objectives, not specific requirements.
    I am also troubled by the provision of the proposed rule that 
would not permit swaps executed ``through or by'' a U.S. branch of a 
non-U.S. CSE to qualify for the Exclusion for non-U.S. CSEs who 
qualify as Foreign Consolidated Subsidiaries. Under the proposal, 
uncleared swaps entered into by a non-U.S. CSE with a non-U.S. 
person counterparty (purely foreign-to-foreign swaps), where neither 
counterparty is a Foreign Consolidated Subsidiary or guaranteed by a 
U.S. person, would be excluded from the Commission's margin rules. 
The Exclusion is not available, however, if the swap is executed 
``through or by'' the U.S. branch of a non-U.S. CSE.\9\ The

[[Page 41408]]

request for comment following this discussion asks how the 
Commission should determine whether a swap is executed ``through or 
by'' a U.S. branch and suggests using the same analysis used in the 
Commission's Volcker Rule, which required that personnel that 
``arrange, negotiate, or execute'' a purchase or sale conducted 
under the exemption for trading activity of a foreign banking entity 
must be located outside the U.S.\10\
---------------------------------------------------------------------------

    \9\ I note that the ``through or by'' language appears in the 
preamble to the rule, not the rule text.
    \10\ See Prohibitions and Restrictions on Proprietary Trading 
and Certain Interests in, and Relationships With, Hedge Funds and 
Private Equity Funds, 79 FR 5808, 5927 & n.1526 (Jan. 31, 2014).
---------------------------------------------------------------------------

    Prior to its appearance in the Commission's final Volcker Rule 
this concept appeared in a hastily issued, November 2013 Staff 
Advisory 13-69 (sometimes referred to in the industry as the 
``elevator rule'') that imposed swaps transaction rules on trades 
between non-U.S. persons whenever anyone on U.S. soil ``arranged, 
negotiated, or executed'' the trade.\11\ The effective date of this 
Staff Advisory has been delayed four times.\12\ As I have stated 
before, the elevator rule is causing many overseas trading firms to 
consider cutting off all activity with U.S.-based trade support 
personnel to avoid subjecting themselves to the CFTC's flawed swaps 
trading rules. The Staff Advisory, if it goes into effect, will 
jeopardize the role of bank sales personnel in U.S. financial 
centers like Boston, Charlotte, Chicago, New Jersey and New York. It 
will likely have a ripple effect on technology staff supporting U.S. 
electronic trading systems, along with the thousands of jobs tied to 
the vendors who provide food services, office support, custodial 
services and transportation for the U.S. financial series industry. 
With this proposal, rather than recognizing the myriad of 
problematic issues arising from the Staff Advisory, the Commission 
is proposing to expand its scope from trading rules to margin rules.
---------------------------------------------------------------------------

    \11\ CFTC Staff Advisory No. 13-69 (Nov. 14, 2013), available at 
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.
    \12\ CFTC Letter No. 14-140, Extension of No-Action Relief: 
Transaction-Level Requirements for Non-U.S. Swap Dealers (Nov. 14, 
2014), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-140.pdf.
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    Despite my many questions and concerns, I support issuing the 
proposed rule only so that the public may provide thorough analysis 
and thoughtful comment. My vote to issue the proposal for public 
comment should not signal, however, my agreement with it. I look 
forward to reviewing public comment.

[FR Doc. 2015-16718 Filed 7-13-15; 8:45 am]
BILLING CODE 6351-01-P