[Federal Register Volume 81, Number 148 (Tuesday, August 2, 2016)]
[Rules and Regulations]
[Pages 50605-50613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18193]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 81, No. 148 / Tuesday, August 2, 2016 / Rules
and Regulations
[[Page 50605]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 45
[Docket No. OCC-2015-0023]
RIN 1557-AD00
FEDERAL RESERVE SYSTEM
12 CFR Part 237
[Docket No. R-1415]
RIN 7100-AD74
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 349
RIN 3064-AE21
FARM CREDIT ADMINISTRATION
12 CFR Part 624
RIN 3052-AC69
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1221
RIN 2590-AA45
Margin and Capital Requirements for Covered Swap Entities
AGENCY: Office of the Comptroller of the Currency, Treasury (``OCC'');
Board of Governors of the Federal Reserve System (``Board''); Federal
Deposit Insurance Corporation (``FDIC''); Farm Credit Administration
(``FCA''); and the Federal Housing Finance Agency (``FHFA'').
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (each an ``Agency'' and,
collectively, the ``Agencies'') are adopting exemptions from the
initial and variation margin requirements published by the Agencies in
November 2015 pursuant to sections 731 and 764 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the ``Dodd-Frank Act'' or
the ``Act''). Pursuant to Title III of the Terrorism Risk Insurance
Program Reauthorization Act of 2015 (``TRIPRA''), this final rule
exempts certain non-cleared swaps and non-cleared security-based swaps
with certain financial and non-financial end users that qualify for an
exception or exemption from clearing.
DATES: This final rule is effective October 1, 2016.
FOR FURTHER INFORMATION CONTACT:
OCC: Ang Middleton, Risk Specialist, Financial Markets Group, (202)
649-7138, or Carl Kaminski, Special Counsel, Legislative and Regulatory
Activities Division, (202) 649-5490, for persons who are deaf or hard
of hearing, TTY (202) 649-5597, Office of the Comptroller of the
Currency, 400 7th Street SW., Washington, DC 20219.
Board: Sean D. Campbell, Associate Director, (202) 452-3760, Anna
M. Harrington, Senior Supervisory Financial Analyst, (202) 452-6406, or
Lesley Chao, Senior Supervisory Financial Analyst, (202) 974-7063,
Division of Banking Supervision and Regulation; Victoria M. Szybillo,
Counsel, (202) 475-6325, or Adam Cohen, Counsel, (202) 912-4658, Legal
Division, Board of Governors of the Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551.
FDIC: Karl R. Reitz, Corporate Expert, Capital Markets,
[email protected]; Michael E. Spencer, Chief, Capital Markets Strategy
Section, [email protected], Division of Risk Management Supervision,
(202) 898-6888; Thomas F. Hearn, Counsel, [email protected], (202) 898-
6967, or Catherine Topping, Counsel, [email protected], (202) 898-3975,
Legal Division, Federal Deposit Insurance Corporation, 550 17th Street
NW., Washington, DC 20429.
FCA: J.C. Floyd, Associate Director, Finance & Capital Markets
Team, Timothy T. Nerdahl, Senior Policy Analyst--Capital Markets,
Jeremy R. Edelstein, Senior Policy Analyst, Office of Regulatory
Policy, (703) 883-4414, TTY (703) 883-4056, or Richard A. Katz, Senior
Counsel, Office of General Counsel, (703) 883-4020, TTY (703) 883-4056,
Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-
5090.
FHFA: George Sacco, Senior Financial Analyst, Division of Housing
Mission and Goals, (202) 649-3276, [email protected], or Peggy K.
Balsawer, Associate General Counsel, Office of General Counsel, (202)
649-3060, [email protected], Federal Housing Finance Agency,
Constitution Center, 400 7th St. SW., Washington, DC 20219. The
telephone number for the Telecommunications Device for the Hearing
Impaired is (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
The Dodd-Frank Act was enacted on July 21, 2010.\1\ Title VII of
the Dodd-Frank Act established a comprehensive new regulatory framework
for derivatives, which the Act generally characterizes as ``swaps'' and
``security-based swaps.'' \2\ As part of this new regulatory framework,
sections 731 and 764 of the Dodd-Frank Act added, respectively, a new
section 4s to the Commodity Exchange Act of 1936 (the ``Commodity
Exchange Act''), and a new section 15F to the Securities Exchange Act
of 1934 (the ``Securities Exchange Act''), which require registration
with the U.S. Commodity Futures Trading Commission (the ``CFTC'') of
swap dealers and major swap participants and with the U.S. Securities
and Exchange Commission (the ``SEC'') of security-based swap dealers
and major security-based swap participants.\3\ These
[[Page 50606]]
registrants are collectively referred to in this preamble as ``swap
entities.''
---------------------------------------------------------------------------
\1\ Public Law 111-203, 124 Stat. 1376 (2010).
\2\ ``Swaps'' are defined in section 721 of the Dodd-Frank Act
to include interest rate swaps, commodity-based swaps, equity swaps
and credit default swaps. ``Security-based swaps'' are defined in
section 761 of the Dodd-Frank Act to include a swap based on a
single security or loan or on a narrow-based security index. See 7
U.S.C. 1a(47); 15 U.S.C. 78c(a)(68).
\3\ See 7 U.S.C. 6s; 15 U.S.C. 78o-10. Section 731 of the Dodd-
Frank Act requires swap dealers and major swap participants to
register with the CFTC, which is vested with primary responsibility
for the oversight of the swaps market under Title VII of the Dodd-
Frank Act. Section 764 of the Dodd-Frank Act requires security-based
swap dealers and major security-based swap participants to register
with the SEC, which is vested with primary responsibility for the
oversight of the security-based swaps market under Title VII of the
Dodd-Frank Act. Section 712(d)(1) of the Dodd-Frank Act requires the
CFTC and SEC to issue joint rules further defining the terms swap,
security-based swap, swap dealer, major swap participant, security-
based swap dealer, and major security-based swap participant. The
CFTC and SEC issued final joint rulemakings with respect to these
definitions in May 2012 and August 2012, respectively. See 77 FR
30596 (May 23, 2012); 77 FR 39626 (July 5, 2012) (correction of
footnote in the Supplementary Information accompanying the rule);
and 77 FR 48207 (August 13, 2012). 17 CFR part 1; 17 CFR parts 230,
240 and 241.
---------------------------------------------------------------------------
Sections 731 and 764 of the Dodd-Frank Act require the Agencies to
adopt joint rules that apply to all swap entities for which any one of
the Agencies is the prudential regulator,\4\ imposing capital
requirements and initial and variation margin requirements on all swaps
and security-based swaps not cleared by a registered derivatives
clearing organization or clearing agency.\5\ After a rulemaking process
that began in 2011, the Agencies published a joint final rule to
implement these Dodd-Frank Act requirements on November 30, 2015 (the
``joint final rule'').\6\
---------------------------------------------------------------------------
\4\ Section 1a(39) of the Commodity Exchange Act defines the
term ``prudential regulator'' for purposes of the capital and margin
requirements applicable to swap dealers, major swap participants,
security-based swap dealers and major security-based swap
participants. 7 U.S.C. 1a(39).
\5\ See 7 U.S.C. 6s(e)(2)(A); 15 U.S.C. 78o-10(e)(2)(A).
\6\ 80 FR 74840 (November 30, 2015).
---------------------------------------------------------------------------
The capital and margin requirements under sections 731 and 764 of
the Dodd-Frank Act apply to non-cleared swaps and non-cleared security-
based swaps and complement other provisions of the Dodd-Frank Act that
require the CFTC and SEC to make determinations as to whether certain
swaps or security-based swaps, or a group, category, or class of such
transactions, should be required to be cleared.\7\ If the CFTC or SEC
has made such a determination, it is generally unlawful for any person
to engage in such a swap or security-based swap unless the transaction
is submitted to a derivatives clearing organization or clearing agency,
as applicable, for clearing.
---------------------------------------------------------------------------
\7\ 7 U.S.C. 2(h); 15 U.S.C. 78c-3. The Commodity Exchange Act
and the Securities Exchange Act set out standards that the CFTC and
the SEC, respectively, are required to apply when making
determinations about clearing, which generally address whether a
swap or security-based swap is sufficiently standardized to be
cleared. 7 U.S.C. 2(h)(2)(D); 15 U.S.C. 78c-3(b)(4).
---------------------------------------------------------------------------
The clearing requirements, however, do not apply to an entity that
is not a financial entity, is using a swap or security-based swap to
hedge or mitigate commercial risk, and notifies the CFTC or the SEC, in
a manner set forth by the appropriate Commission, how it generally
meets its financial obligations.\8\ Thus, a particular swap or
security-based swap might not be cleared either because it is not
subject to the mandatory clearing requirement or because one of the
parties to the swap is eligible for, and elects to use, an exception or
exemption from the mandatory clearing requirement. Such a swap or
security-based swap is ``non-cleared'' for purposes of the capital and
margin requirements established under sections 731 and 764 of the Dodd-
Frank Act.
---------------------------------------------------------------------------
\8\ See 7 U.S.C. 2(h)(7); 15 U.S.C. 78c-3(g). Further, the CFTC
has authority to exempt swaps from the clearing requirement. 7
U.S.C. 6(c)(1). Pursuant to this authority, the CFTC has provided an
exemption from clearing to certain cooperatives that are financial
entities. See 17 CFR 50.51. The SEC has similar exemptive authority
under section 36(c) of the Securities Exchange Act. 15 U.S.C.
78mm(c).
---------------------------------------------------------------------------
Sections 731 and 764 direct the Agencies to impose initial and
variation margin requirements on all non-cleared swaps and non-cleared
security-based swaps. The joint final rule takes into account the risk
posed by a covered swap entity's counterparties in establishing the
minimum amount of initial and variation margin that the covered swap
entity must exchange with its counterparties.\9\ In implementing this
risk-based approach, the joint final rule distinguishes among four
separate types of swap counterparties: (1) Counterparties that are
themselves swap entities; (2) counterparties that are financial end
users with a material swaps exposure; (3) counterparties that are
financial end users without a material swaps exposure, and (4) other
counterparties, including non-financial end users, sovereigns, and
multilateral development banks.\10\ The joint final rule makes a
covered swap entity's collection of margin from these ``other
counterparties,'' including commercial end users, subject to the
judgment of the covered swap entity. In particular, a covered swap
entity is not required to collect initial and variation margin from
these ``other counterparties'' as a matter of course; a covered swap
entity should collect initial or variation margin at such times and in
such forms and amounts (if any) as the covered swap entity determines
appropriate in its overall credit risk management of the covered swap
entity's exposure to the customer.\11\
---------------------------------------------------------------------------
\9\ Each Agency has codified its rule within its respective
title of the Code of Federal Regulations. Specifically, the Agencies
codified the rules as follows: 12 CFR part 45 (OCC); 12 CFR part 237
(the Board); 12 CFR part 349 (FDIC); 12 CFR part 624 (FCA); and 12
CFR part 1221 (FHFA).
\10\ See Sec. _.2 of the joint final rule for the various
definitions that identify these four types of swaps counterparties.
The terms ``non-financial end user'' and ``commercial end user'' are
used interchangeably throughout this preamble. Although the term
``commercial end user'' is not defined in the Dodd-Frank Act, it is
used in this preamble to mean a company that is eligible for the
exception to the mandatory clearing requirement for swaps under
section 2(h)(7)(A) of the Commodity Exchange Act and section
3C(g)(1) of the Securities Exchange Act, respectively. This
exception is generally available to a person that (1) is not a
financial entity, (2) is using the swap to hedge or mitigate
commercial risk, and (3) has notified the CFTC or SEC how it
generally meets its financial obligations with respect to non-
cleared swaps or security-based swaps, respectively. See 7 U.S.C.
2(h)(7)(A) and 15 U.S.C. 78c-3(g)(1); see also 80 FR 74848 note 70.
\11\ See Sec. Sec. _.3(d) and _.4(c) of the joint final rule.
---------------------------------------------------------------------------
On January 12, 2015, President Obama signed TRIPRA into law.\12\
Title III of TRIPRA, the ``Business Risk Mitigation and Price
Stabilization Act of 2015,'' amends the statutory provisions added by
the Dodd-Frank Act relating to margin requirements for non-cleared
swaps and non-cleared security-based swaps. Specifically, section 302
of TRIPRA amends sections 731 and 764 of the Dodd-Frank Act to provide
that the initial and variation margin requirements do not apply to
certain transactions of specified counterparties that would qualify for
an exception or exemption from clearing, as explained more fully below.
Qualifying non-cleared swaps and non-cleared security-based swaps of
entities covered by section 302 of TRIPRA are not subject to the
Agencies' joint final rule.
---------------------------------------------------------------------------
\12\ Public Law 114-1, 129 Stat. 3 (2015).
---------------------------------------------------------------------------
Section 303 of TRIPRA requires the Agencies to implement the
provisions of section 302 by promulgating an interim final rule
pursuant to which public comment is sought before a final rule is
issued. On November 30, 2015, the Agencies published and sought comment
on an interim final rule, which added Sec. _.1(d) to the joint final
rule.\13\ The Agencies are adopting as a final rule without change the
interim final rule that went into effect on April 1, 2016.
---------------------------------------------------------------------------
\13\ 80 FR 74916 (November 30, 2015) (the ``interim final
rule'').
---------------------------------------------------------------------------
II. Summary of Public Comments on Matters Raised in the Interim Final
Rule
Three banking organizations, two individuals, two trade
associations, and one nonprofit finance cooperative submitted comments
in response to the interim final rule.\14\ Four of the commenters
expressed strong support for the approach taken in the interim final
rule.
---------------------------------------------------------------------------
\14\ The Agencies carefully considered all comments received on
the interim final rule. In addition, representatives of the FDIC and
FCA had a telephone call with one commenter after the comment period
closed. Comments received on the interim final rule, as well as a
summary of the call with this commenter, are available on the
applicable Agencies' respective public Web sites.
---------------------------------------------------------------------------
Comments were received from two public sector entities organized
under foreign laws whose obligations are guaranteed by foreign
governments (``foreign public sector entities''). These
[[Page 50607]]
commenters argued that, even though they are not included among the
type of entities expressly covered by section 302 of TRIPRA, foreign
public sector entities should still not be subject to the joint final
rule because the CFTC has determined that these types of entities are
not subject to the mandate to clear swaps that are otherwise required
to be cleared.
The Agencies are not providing the relief requested by these
commenters since the purpose of this final rule is to incorporate the
terms of section 302 of TRIPRA, and the treatment of foreign public
sector entities is not specified by section 302. Even though the CFTC
has interpreted the Commodity Exchange Act to exclude certain foreign
public sector entities from the clearing mandate that the Dodd-Frank
Act added to the Commodity Exchange Act, such entities are not
addressed in section 302 of TRIPRA.\15\
---------------------------------------------------------------------------
\15\ Alternatively, each of these two foreign public sector
entities sought clarification that it meets the definition of
``sovereign entity'' or ``multilateral development bank'' under the
joint final rule. The joint final rule expressly excludes from the
definition of ``financial end user'' an entity that meets the
definition of ``sovereign entity'' or ``multilateral development
bank.'' Whether an entity meets the definition of ``sovereign
entity'' or ``multilateral development bank'' depends on facts and
circumstances that may vary from entity to entity and is outside the
scope of this rulemaking. The Agencies note that they considered
similar comments received on the joint final rule and determined not
to exclude entities guaranteed by a foreign sovereign from the
definition of financial end user. See 80 FR 74,840, 74,856 (The
Agencies explained: ``[a]n entity guaranteed by a sovereign entity
is not explicitly excluded from the definition of financial end user
in the final rule, unless that entity qualifies as a central
government agency, department, or central bank. The existence of a
government guarantee does not in and of itself exclude the entity
from the definition of financial end user.'')
---------------------------------------------------------------------------
One commenter asked for clarification that swap transaction
documentation that contains ``flip clauses'' or ``rating agency
condition'' (``RAC'') provisions cannot qualify for an exemption from
the Agencies' joint final rule or this final rule.\16\ Specifically,
the commenter stated that Title III of TRIPRA does not exempt a swap
with a flip clause or RAC provision from the margin requirements of the
joint final rule. The commenter further requested that an entity
covered by section 302 of TRIPRA be required to file with the CFTC a
signed affidavit stating that all swaps that are exempt from the joint
final rule's margin requirements because of section 302 of TRIPRA do
not have a flip clause or any other clause that can be reasonably
classified as a walk-away provision or RAC provision. Finally, the
commenter recommended that the prudential regulators should obligate a
covered swap entity to post initial margin and variation margin to its
guarantor or hedging affiliate against a swap that contains a ``flip
clause'' or any other clause that can be reasonably classified as a
walk-away provision. The Agencies are declining to make the requested
changes, since the purpose of the final rule is to incorporate the
terms of section 302 of TRIPRA, and the treatment of flip clauses or
RAC provisions is not specified by section 302.
---------------------------------------------------------------------------
\16\ The commenter has previously referred to a description of a
``flip clause'' as a contractual provision in a swap to which a
special purpose vehicle (``SPV'') is a party and under which the
payments owed by the SPV to a swap provider are at least pari passu
with interest of the senior most class of debt issued by the
structured finance vehicle. In the description that the commenter
referred to, a ``flip clause'' was described as a provision that
provides that should the swap provider be the defaulting party to a
swap, such default causes the swap provider to ``flip'' to a more
junior position in the priority of payments.
---------------------------------------------------------------------------
The Agencies received one request for clarification with respect to
paragraph (1)(xi) of the definition of ``financial end user'' set forth
in the joint final rule. Specifically, the commenter asked the Agencies
to clarify and consider the use of certain terms and phrases (i.e.,
``investing or trading,'' ``other assets,'' and ``primarily'') in this
prong of the financial end user definition. While Sec. _.1(d), as
adopted in this final rule, works in conjunction with the joint final
rule, the Agencies find this comment does not relate to Sec. _.1(d)
and thus is outside of the scope of the interim final rule, which
implements section 302 of TRIPRA.
The Agencies also received four comments in support of the
treatment of certain cooperative entities under the interim final rule.
One comment was received from an individual expressing his support for
the approach taken in the interim final rule.
III. Description of the Final Rule
The interim final rule adopted Sec. _.1(d) to implement section
302 of TRIPRA. The final rule makes no changes to Sec. _.1(d).
TRIPRA provides that the initial and variation margin requirements
in sections 731 and 764 of the Dodd-Frank Act do not apply to
qualifying non-cleared swaps and non-cleared security-based swaps of
certain categories of counterparties. In particular, section 302(a) of
TRIPRA amends section 731 of the Dodd-Frank Act so that initial and
variation margin requirements will not apply to a swap in which a
counterparty (to a covered swap entity) is:
(1) A non-financial entity (including a small financial institution
and a captive finance company) that qualifies for the clearing
exception under section 2(h)(7)(A) of the Commodity Exchange Act;
(2) A cooperative entity that qualifies for an exemption from the
clearing requirements issued under section 4(c)(1) of the Commodity
Exchange Act; or
(3) A treasury affiliate that satisfies the criteria for an
exception from clearing in section 2(h)(7)(D) of the Commodity Exchange
Act.
Similarly, section 302(b) of TRIPRA amends section 764 of the Dodd-
Frank Act so that initial and variation margin requirements will not
apply to a security-based swap in which a counterparty (to a covered
swap entity) is:
(1) A non-financial entity (including a small financial
institution) that qualifies for the clearing exception under section
3C(g)(1) of the Securities Exchange Act; or
(2) A treasury affiliate that satisfies the criteria for an
exception from clearing in section 3C(g)(4) of the Securities Exchange
Act.
Below is a discussion of each type of entity covered by section 302
of TRIPRA as well as a discussion of how related reporting requirements
can be satisfied.
A. Non-Financial Entities
TRIPRA provides that the initial and variation margin requirements
of the joint final rule shall not apply to a non-cleared swap in which
a counterparty qualifies for an exception under section 2(h)(7)(A) of
the Commodity Exchange Act or a non-cleared security-based swap in
which a counterparty qualifies for an exception under section 3C(g)(1)
of the Securities Exchange Act.\17\ Section 2(h)(7)(A) and section
3C(g)(1) except from clearing swaps or security-based swaps where one
of the counterparties: (1) Is not a financial entity; (2) is using the
swap to hedge or mitigate commercial risk; and (3) notifies the CFTC or
SEC how it generally meets its financial obligations associated with
entering into non-cleared swaps or non-cleared security-based swaps. A
number of different types of counterparties may qualify for an
exception from clearing under section 2(h)(7)(A) and section 3C(g)(1),
including non-financial end users and small banks, savings
associations, Farm Credit System institutions, and credit unions. In
addition, captive finance companies qualify for an exception from
clearing swaps under section 2(h)(7)(A).\18\
---------------------------------------------------------------------------
\17\ See 7 U.S.C. 2(h)(7)(A); 15 U.S.C. 78c-3(g)(1).
\18\ There is no corresponding exclusion from clearing security-
based swaps under section 3C(g)(1) of the Securities Exchange Act
for captive finance companies. Similarly, with respect to financial
cooperatives, TRIPRA exempts such entities from exchanging initial
and variation margin under the joint final rule on all swaps that
are subject to the exemption from clearing provided by the CFTC. See
7 U.S.C. 6(c)(1). There is no corresponding exclusion under the
Securities Exchange Act.
---------------------------------------------------------------------------
[[Page 50608]]
Non-financial end users. A counterparty that is not a financial
entity \19\ and that is using swaps to hedge or mitigate commercial
risk generally would qualify for an exception from clearing under
section 2(h)(7)(A) or section 3C(g)(1) and thus from the requirements
of the joint final rule for non-cleared swaps and non-cleared security-
based swaps pursuant to Sec. _.1(d).
---------------------------------------------------------------------------
\19\ See 7 U.S.C. 2(h)(7)(A); 15 U.S.C. 78c-3(g)(1); 17 CFR
50.50. A ``financial entity'' is defined to mean (i) a swap dealer;
(ii) a security-based swap dealer; (iii) a major swap participant;
(iv) a major security-based swap participant; (v) a commodity pool;
(vi) a private fund as defined in section 202(a) of the Investment
Advisers Act of 1940; (vii) an employee benefit plan as defined in
sections 3(3) and 3(32) of the Employment Retirement Income Security
Act of 1974; and (viii) a person predominantly engaged in activities
that are in the business of banking, or in activities that are
financial in nature, as defined in section 4(k) of the Bank Holding
Company Act of 1956. See 7 U.S.C. 2(h)(7)(C)(i); 15 U.S.C. 78c-
3(g)(3).
---------------------------------------------------------------------------
Small banks, savings associations, Farm Credit System institutions,
and credit unions. Section 2(h)(7)(C)(ii) provides that the CFTC shall
consider whether to exempt small banks, savings associations, Farm
Credit System institutions, and credit unions with total assets of $10
billion or less from the definition of financial entity. Pursuant to
this authority, the CFTC has exempted small banks, savings
associations, Farm Credit System institutions, and credit unions with
total assets of $10 billion or less from the definition of ``financial
entity,'' thereby permitting these institutions to avail themselves of
the clearing exception when they are using swaps to hedge or mitigate
risk.\20\ As a result, non-cleared swaps used by these small financial
institutions to hedge or mitigate commercial risk would also qualify
for an exemption from the initial and variation margin requirements of
the joint final rule pursuant to Sec. _.1(d).
---------------------------------------------------------------------------
\20\ See 7 U.S.C. 2(h)(7)(C)(ii); 17 CFR 50.50; 77 FR 42560
(July 19, 2012); as recodified by 77 FR 74284 (December 13, 2012).
---------------------------------------------------------------------------
Similarly, section 3C(g) provides that the SEC shall consider
whether to exempt small banks, savings associations, Farm Credit System
institutions, and credit unions with total assets of $10 billion or
less from the definition of ``financial entity.'' \21\ If the SEC were
to implement an exemption for such entities from clearing, non-cleared
security-based swaps with those entities would be eligible for the
exemption in the joint final rule pursuant to Sec. _.1(d) as required
under TRIPRA, provided they met the other requirements for the clearing
exemption.\22\
---------------------------------------------------------------------------
\21\ See 15 U.S.C. 78c-3(g)(3)(B).
\22\ On December 21, 2010, the SEC proposed to exempt security-
based swaps used by small depository institutions, small Farm Credit
System institutions, and small credit unions with total assets of
$10 billion or less from clearing. See 75 FR 79992 (December 21,
2010).
---------------------------------------------------------------------------
Captive finance companies. Section 2(h)(7)(C) also provides that
the definition of ``financial entity'' does not include an entity whose
primary business is providing financing and uses derivatives for the
purposes of hedging underlying commercial risks relating to interest
rate and foreign exchange exposures, 90 percent or more of which arise
from financing that facilitates the purchase or lease of products, 90
percent or more of which are manufactured by the parent company or
another subsidiary of the parent company (``captive finance
company'').\23\ These entities can qualify for a clearing exception
when they are using swaps to hedge or mitigate commercial risk and thus
non-cleared swaps of these entities would be eligible for the exemption
in the joint final rule pursuant to Sec. __.1(d).
---------------------------------------------------------------------------
\23\ See 7 U.S.C. 2(h)(7)(C)(iii).
---------------------------------------------------------------------------
B. Treasury Affiliates
Section 302 of TRIPRA provides that the initial and variation
margin requirements shall not apply to a non-cleared swap or non-
cleared security-based swap in which a counterparty satisfies the
criteria in section 2(h)(7)(D) of the Commodity Exchange Act or section
3C(g)(4) of the Securities Exchange Act. At the time the interim final
rule was published, these sections provided that, where a person
qualifies for an exception from the clearing requirements, an affiliate
of that person (including an affiliate predominantly engaged in
providing financing for the purchase of the merchandise or manufactured
goods of the person) would have qualified for the exception as well,
but only if the affiliate is acting on behalf of the person and as an
agent and uses the swap to hedge or mitigate the commercial risk of the
person or other affiliate of the person that is not a financial entity
(``treasury affiliate acting as agent'').\24\ Under the interim final
rule, non-cleared swaps and non-cleared security-based swaps of a
treasury affiliate acting as agent that met the requirements for a
clearing exception would also be eligible for an exemption pursuant to
Sec. _.1(d) from the joint final rule.
---------------------------------------------------------------------------
\24\ See 7 U.S.C. 2(h)(7)(D); 15 U.S.C. 78c-3(g)(4). This
exception does not apply to a person that is a swap dealer,
security-based swap dealer, major swap participant, major security-
based swap participant, an issuer that would be an investment
company as defined in section 3 of the Investment Company Act of
1940 (15 U.S.C. 80a-3) but for section 3(c)(1) or 3(c)(7) of that
Act, a commodity pool, or a bank holding company with over $50
billion in consolidated assets.
---------------------------------------------------------------------------
The Consolidated Appropriations Act, 2016 (``Appropriations Act of
2016''), which was enacted on December 18, 2015, amended section
2(h)(7)(D) of the Commodity Exchange Act and section 3C(g)(4) of the
Securities Exchange Act.\25\ Specifically, section 705 of the
Appropriations Act of 2016 removed the requirement that treasury
affiliates must act on behalf of a person and as an agent in order to
avail themselves of the clearing exception. The Appropriations Act of
2016 also included certain conditions on the application of the
treasury affiliate exception \26\ and imposed certain limitations on
the types of entities that can qualify for the exception.\27\
---------------------------------------------------------------------------
\25\ Pub. L. 114-113, 129 Stat. 2242 (2015).
\26\ Under section 705 of the Appropriations Act of 2016, a
treasury affiliate may qualify for an exception from the clearing
requirements only if the affiliate (i) enters into the swap to hedge
or mitigate the commercial risk of the person or other affiliate of
the person that is not a financial entity, and the commercial risk
that the affiliate is hedging or mitigating has been transferred to
the affiliate; (ii) is directly and wholly-owned by another
affiliate qualified for the exception under section 2(h)(7)(D)(i) of
the Commodity Exchange Act or an entity that is not a financial
entity; (iii) is not indirectly majority-owned by a financial
entity; (iv) is not ultimately owned by a parent company that is a
financial entity; and (v) does not provide any services, financial
or otherwise, to any affiliate that is a nonbank financial company
supervised by the Board of Governors (as defined under section 102
of the Financial Stability Act of 2010). With respect to the
treasury affiliate exception, the affiliate may not enter into any
swap other than for the purpose of hedging or mitigating commercial
risk; and neither the affiliate nor any person affiliated with the
affiliate that is not a financial entity may enter into a swap with
or on behalf of any affiliate that is a financial entity or
otherwise assume, net, combine, or consolidate the risk of swaps
entered into by any such financial entity, except one that is an
affiliate that qualifies for the exception. Further, any swap
entered into by an affiliate that qualifies for the exception shall
be subject to a centralized risk management program of the
affiliate, which is reasonably designed both to monitor and manage
the risks associated with the swap and to identify each of the
affiliates on whose behalf a swap was entered into. See Pub. L. 114-
113, 129 Stat. 2242 (2015).
\27\ For example, the treasury affiliate exception will not
apply if the affiliate is a swap dealer, a security-based swap
dealer, a major swap participant, a major security-based swap
participant, a commodity pool, a bank holding company, a private
fund (as defined in section 202(a) of the Investment Advisers Act of
1940), an employee benefit plan or government plan (as defined in
paragraphs (3) and (32) of section 3 of the Employee Retirement
Income Security Act of 1974), an insured depository institution, a
Farm Credit System institution, a credit union, a nonbank financial
company supervised by the Board, or an entity engaged in the
insurance business and subject to capital regulation by an insurance
regulator. The Appropriations Act of 2016 further prohibited the
treasury affiliate exception from applying to affiliates which are
themselves affiliated with swap entities unless the CFTC or the SEC,
as applicable, determines that doing so is in the public interest.
See Pub. L. 114-113, 129 Stat. 2242 (2015).
---------------------------------------------------------------------------
[[Page 50609]]
Since the exemption in Sec. __.1(d) of the final rule incorporates
the treasury affiliate exception by reference to section 2(h)(7)(D) of
the Commodity Exchange Act and section 3C(g)(4) of the Securities
Exchange Act, the exemption will by operation of law apply to
qualifying non-cleared swaps and non-cleared security-based swaps of
treasury affiliates, acting as either principal or agent. For this
reason, no changes to the regulatory text were necessary to reflect
these changes to the underlying statutes.\28\
---------------------------------------------------------------------------
\28\ Accordingly, the Agencies find it unnecessary to provide
further notice or seek further public comment regarding the effect
of the Appropriations Act of 2016 on this final rule.
---------------------------------------------------------------------------
C. Certain Cooperative Entities
Section 302 of TRIPRA provides that the initial and variation
margin requirements shall not apply to a non-cleared swap in which a
counterparty qualifies for an exemption issued under section 4(c)(1) of
the Commodity Exchange Act from the clearing requirements of section
2(h)(1)(A) of the Commodity Exchange Act for cooperative entities as
defined in such exemption.\29\ The CFTC, pursuant to its authority
under section 4(c)(1) of the Commodity Exchange Act, adopted a
regulation that allows cooperatives that are financial entities to
elect an exemption from mandatory clearing of swaps that: (1) They
enter into in connection with originating loans for their members; or
(2) hedge or mitigate commercial risk related to loans or swaps with
their members, or arising from certain swaps with members.\30\ The
swaps of these cooperatives that would qualify for an exemption from
clearing also would qualify pursuant to Sec. __.1(d) for an exemption
from the margin requirements of the joint final rule.
---------------------------------------------------------------------------
\29\ See 7 U.S.C. 6(c)(1). The CFTC, pursuant to its authority
under section 4(c)(1) of the Commodity Exchange Act, adopted 17 CFR
50.51, which allows cooperative financial entities that meet certain
qualifications to elect not to clear certain swaps that are
otherwise required to be cleared pursuant to section 2(h)(1)(A) of
the Commodity Exchange Act.
\30\ See 7 U.S.C. 6(c)(1); 17 CFR 50.51.
---------------------------------------------------------------------------
D. Compliance With Eligibility Requirements
Section 302 of TRIPRA identifies the types of non-cleared swaps or
non-cleared security-based swaps with counterparties that are excluded
from the margin requirements of the joint final rule by referring to
specific sections of the Commodity Exchange Act and the Securities
Exchange Act. These provisions, in turn, set forth clearing exceptions
and exemptions for these counterparties. To qualify for such exceptions
and exemptions, the counterparty must, in addition to falling within
the class or type of entity exempted or excepted by the respective
statutory provisions, also be entering into the swap or security-based
swap to hedge or mitigate commercial risk, and must report to the
applicable Commission (in a manner set forth by the applicable
Commission) how it generally meets its financial obligations associated
with entering into non-cleared swaps or non-cleared security-based
swaps.\31\
---------------------------------------------------------------------------
\31\ 7 U.S.C. 2(h)(7)(A); 17 CFR 50.50(b); 15 U.S.C. 3C(g)(4).
Other provisions of the Commodity Exchange Act and the Securities
Exchange Act separately impose additional governance requirements on
an entity that elects a clearing exemption and that is an issuer of
securities registered under section 12 of, or that is required to
file reports under section 15(d) of, the Securities Exchange Act of
1934. 7 U.S.C. 2(j); 15 U.S.C. 3C(i).
---------------------------------------------------------------------------
Swaps and Security-Based Swaps Required to be Cleared
For swaps that the CFTC has determined are required to be cleared,
the CFTC has adopted regulations that establish requirements by which
an eligible entity may elect its option not to clear that type of swap
and comply with the related substantive hedging and reporting
requirements.\32\ For such a swap, compliance with the CFTC regulatory
requirements for a swap subject to clearing will provide the covered
swap entity with sufficient information about the eligible entity and
the swap to establish the swap is also exempt from the margin
requirements of the joint final rule.\33\ The Agencies believe that
whenever a covered swap entity transacts in a swap with an eligible
entity that uses the clearing exemption for that swap in compliance
with these CFTC requirements, the covered swap entity needs no
additional information from the eligible entity to proceed with that
swap pursuant to the final rule's exemption from the margin
requirements of the joint final rule.
---------------------------------------------------------------------------
\32\ 17 CFR 50.50(b), 50.51(c), 50.51. In addition to providing
reporting requirements, these CFTC rules further define the entities
that are eligible for exceptions and exemptions from the clearing
requirements and define when a swap is used to hedge or mitigate
commercial risk.
\33\ Whenever a qualifying non-clearing entity has elected its
option to not clear a swap that the CFTC has determined should be
cleared, the entity's eligibility as well as its compliance with the
associated hedging and reporting requirements must be demonstrated
either: (1) In an annual filing by the entity reporting to an
appropriate Swap Data Repository (SDR) or, if no registered SDR is
available to receive the information, to the CFTC, which will be
applicable to all such swaps entered into by the entity for 365 days
following the date of such filing; or (2) on a swap-by-swap basis
through a report filed by the eligible entity or the covered swap
entity with the applicable SDR or, if no registered SDR is available
to receive the information, the CFTC. The rule requires that the
reporting counterparty have a reasonable basis to believe that the
electing counterparty is an eligible entity that meets the
associated hedging and reporting requirements. See 17 CFR
50.50(b)(2)-(3) and 50.51(c).
---------------------------------------------------------------------------
With respect to security-based swaps, the SEC has not yet made
determinations requiring any security-based swap to be cleared, and has
not yet adopted final rules related to how eligibility and compliance
with the associated substantive requirements can be documented.\34\ For
a security-based swap subject to clearing, compliance with the SEC
regulatory requirements, once finalized, will provide the covered swap
entity with sufficient information about the eligible entity and the
security-based swap to establish that the security-based swap is also
exempt from the margin requirements of the joint final rule. Until such
time as determinations are finalized by the SEC, the Agencies expect
that covered swap entities will take appropriate steps to establish a
reasonable belief that the entity is of a type eligible for the
exemption and is using the security-based swap to hedge or mitigate
commercial risk, as described below for other non-cleared swaps and
non-cleared security-based swaps.
---------------------------------------------------------------------------
\34\ In December 2010, the SEC proposed reporting requirements
for a counterparty exercising an exception from clearing, which
would require the entity to report to a security-based SDR that it
is an eligible entity and: that the swap is being used to hedge or
mitigate commercial risk; how it generally meets its financial
obligations associated with entering into non-cleared security-based
swaps, and, if a registered issuer of securities, whether a
committee of the board has reviewed and approved the decision to
enter into security-based swaps subject to the clearing exception.
75 FR 79992 (December 21, 2010).
---------------------------------------------------------------------------
Swaps and Security-Based Swaps Not Required To Be Cleared
There are also cases where a covered swap entity may enter into a
non-cleared swap or non-cleared security-based swap with an eligible
entity that the CFTC or SEC, respectively, does not require to be
cleared. For swaps that are not subject to a CFTC or SEC clearing
requirement, the Agencies expect that covered swap entities will take
appropriate steps to establish a reasonable belief that the
counterparty is an entity eligible for the exemption and is using the
swap to hedge or
[[Page 50610]]
mitigate commercial risk.\35\ The final rule does not prescribe any
specific procedure or standard in this regard, and instead leaves
covered swap entities the flexibility to collect information
specifically on these points, take cognizance of information they
already have about their counterparties and their non-cleared swap and
non-cleared security-based swap transactions, or a combination of both.
The Agencies believe it would be reasonable for a covered swap entity
to rely in good faith on reasonable representations of its counterparty
in making these assessments.\36\
---------------------------------------------------------------------------
\35\ As noted above, this category of non-cleared swaps includes
all non-cleared security-based swaps during the interim until the
SEC adopts final regulations requiring clearing of security-based
swaps and associated exemptions from clearing.
\36\ See the Agencies' joint final rule at 80 FR 74858 (November
30, 2015), discussing covered swap entities' reliance in good faith
on reasonable representations of a counterparty as to whether the
counterparty is a financial end user with a material swaps exposure;
see also 17 CFR 50.50(b)(2)-(3) and 50.51(c).
---------------------------------------------------------------------------
In addition to the entity type requirements and the hedging
requirements specified in the statutory clearing exceptions and
exemptions referenced under section 302 of TRIPRA, there are
requirements for reporting to the relevant Commission, in the manner
set forth by the Commission, when the clearing exceptions and
exemptions are elected. The Agencies expect covered swap entities
subject to the joint final rule to comply with any reporting
requirements that the relevant Commission may impose on covered swap
entities in order to permit the use of the margin exemptions pursuant
to section 302 of TRIPRA.
IV. Effective Date
The Riegle Community Development and Regulatory Improvement Act of
1994 (the ``RCDRIA'') requires that the OCC, the Board, and the FDIC,
in determining the effective date and administrative compliance
requirements of new regulations that impose additional reporting,
disclosure, or other requirements on insured depository institutions,
consider, consistent with principles of safety and soundness and the
public interest, any administrative burdens that such regulations would
place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations.\37\ In addition, new regulations by the
OCC, the Board, or the FDIC that impose additional reporting,
disclosures, or other new requirements on insured depository
institutions generally must take effect on the first day of a calendar
quarter that begins on or after the date on which the regulations are
published in final form.\38\ Accordingly, this final rule, which adopts
the interim final rule without change, will be effective on October 1,
2016 as required under the RCDRIA.
---------------------------------------------------------------------------
\37\ 12 U.S.C. 4802(a).
\38\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------
V. Administrative Law Matters
A. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, sec.
722, 113 Stat. 1338, 1471 (Nov. 12, 1999), requires the OCC, Board and
FDIC to use plain language in all proposed and final rules published
after January 1, 2000. The OCC, Board and FDIC sought to present the
final rule in a simple and straightforward manner and did not receive
any comments on the use of plain language.
B. Paperwork Reduction Act Analysis
Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (``PRA'') of 1995 (44 U.S.C. 3501-3521). In accordance
with the requirements of the PRA, the Agencies may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. The OMB control number for
the OCC is 1557-0335, the FDIC is 3064-0204, and the Board is 7100-
0364. The information collection requirements contained in this final
rulemaking have been submitted to OMB for review and approval by the
OCC and FDIC under section 3507(d) of the PRA and Sec. 1320.11 of
OMB's implementing regulations (5 CFR part 1320). The Board reviewed
the final rule under the authority delegated to the Board by OMB. The
Agencies received no comments on the PRA.
The final rule contains requirements subject to the PRA. The
reporting requirements are found in Sec. _.1(d). The final rule
implements statutory language that requires certain swaps of certain
counterparties to qualify for a statutory exemption or exception from
clearing in order to not be subject to the initial and variation margin
requirements of the joint final rule.
Proposed Information Collection
Title of Information Collection: Reporting and Recordkeeping
Requirements Associated with Margin and Capital Requirements for
Covered Swap Entities.
Frequency of Response: Annual, daily, and event-generated.
Affected Public: The affected public of the OCC, FDIC, and Board is
assigned generally in accordance with the entities covered by the scope
and authority section of their respective final rule. Businesses or
other for-profit.
Respondents:
OCC: Any national bank or a subsidiary thereof, Federal savings
association or a subsidiary thereof, or Federal branch or agency of a
foreign bank that is registered as a swap dealer, major swap
participant, security-based swap dealer, or major security-based swap
participant.
FDIC: Any FDIC-insured state-chartered bank that is not a member of
the Federal Reserve System or FDIC-insured state-chartered savings
association that is registered as a swap dealer, major swap
participant, security-based swap dealer, or major security-based swap
participant.
Board: Any state member bank (as defined in 12 CFR 208.2(g)), bank
holding company (as defined in 12 U.S.C. 1841), savings and loan
holding company (as defined in 12 U.S.C. 1467a), foreign banking
organization (as defined in 12 CFR 211.21(o)), foreign bank that does
not operate an insured branch, state branch or state agency of a
foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12)), or Edge or
agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)) that
is registered as a swap dealer, major swap participant, security-based
swap dealer, or major security-based swap participant.
Abstract: This final rule implements Title III of the Terrorism
Risk Insurance Program Reauthorization Act of 2015 (``TRIPRA''), which
exempts from the Agencies' swap margin rules non-cleared swaps and non-
cleared security-based swaps in which a counterparty qualifies for an
exemption or exception from clearing under the Dodd-Frank Act. This
final rule is a companion rule to the joint final rule adopted by the
Agencies to implement section 731 and 764 of the Dodd-Frank Act.
Reporting Requirements
The final rule implements statutory language that requires certain
swaps and security-based swaps of certain counterparties to qualify for
a statutory exemption or exception from clearing in order to not be
subject to the initial and variation margin requirements of the joint
final rule. The reporting requirements are found in Sec. __.1(d)
pursuant to cross-references to other
[[Page 50611]]
statutory provisions that set forth the conditions for an exemption
from clearing. For example, TRIPRA provides that the initial and
variation margin requirements of the joint final rule shall not apply
to a non-cleared swap or non-cleared security-based swap in which a
counterparty qualifies for an exception under section 2(h)(7)(A) of the
Commodity Exchange Act or section 3C(g)(1) of the Securities Exchange
Act, which includes certain reporting requirements established by the
CFTC or the SEC.\39\ Certain other counterparties that are exempt from
clearing pursuant to other provisions are also required to meet these
reporting requirements to notify the CFTC or the SEC.\40\ Thus, in
certain cases, the statutory exemption from clearing requires a
notification to the CFTC or SEC. These counterparties may be required
to meet the same notification requirements that are required for an
exception or exemption from clearing in order to qualify for an
exception or exemption pursuant to Sec. __.1(d) from the initial and
variation margin requirements established by the Agencies under
sections 731 and 764 of the Dodd-Frank Act. Since this final rule
serves to implement exemptions and exceptions by reference to existing
statutory provisions, Sec. __.1(d) imposes new reporting requirements
that are required under the relevant statutory provisions.
---------------------------------------------------------------------------
\39\ See, e.g., 17 CFR 50.50(b).
\40\ For example, certain exempt cooperatives must meet these
reporting requirements to qualify for an exemption from clearing.
See 17 CFR 50.51(c). Similarly, exempt treasury affiliates also must
be an affiliate of a person that qualifies for an exception from
clearing that notifies the CFTC or SEC how it generally meets its
financial obligations associated with entering into non-cleared
swaps or non-cleared security-based swaps. See 7 U.S.C. 2(h)(7)(D);
15 U.S.C. 78c-3(g)(4).
---------------------------------------------------------------------------
Estimated Burden per Response: Sec. _.1(d)--1 hour.
Annual Frequency: 1,000.
OCC
Number of respondents: 20.
Total estimated annual burden: 20,000 hours.
FDIC \41\
Number of respondents: 1.
Total estimated annual burden: 1,000 hours.
---------------------------------------------------------------------------
\41\ The FDIC had initially estimated that three of its
institutions might register as a swap dealer, major swap
participant, security-based swap dealer or major security-based swap
participant but no state non-member bank nor any state savings
association has so registered, so FDIC is reducing its estimate to
one as a placeholder for its information collection.
---------------------------------------------------------------------------
Board
Number of respondents: 50.
Proposed revisions only estimated annual burden: 50,000 hours.
Total estimated annual burden: 86,964 hours.
FCA: The FCA has determined that the final rule does not involve a
collection of information pursuant to the Paperwork Reduction Act for
Farm Credit System institutions because Farm Credit System institutions
are Federally chartered instrumentalities of the United States and
instrumentalities of the United States are specifically excepted from
the definition of ``collection of information'' contained in 44 U.S.C.
3502(3).
FHFA: With respect to any regulated entity as defined in section
1303(20) of the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (12 U.S.C. 4502(20)), the final rule
does not contain any collection of information that requires the
approval of the OMB under the PRA.
C. Regulatory Flexibility Act Analysis
Board: An initial regulatory flexibility analysis, in accordance
with the Regulatory Flexibility Act (5 U.S.C. 601 et seq.)
(``RFA''),\42\ was included in the interim final rule. In the initial
regulatory flexibility analysis, the Board requested comments on all
aspects of the initial regulatory flexibility analysis, and, in
particular, comments on its conclusion that the interim final rule
would not have a significant economic impact on a substantial number of
small entities. The Board also requested comments on any significant
alternatives to the interim final rule that would minimize the impact
of the rule on small entities. The Board has since considered the
potential impact of this final rule on small entities in accordance
with section 604 of the RFA and has prepared the following final
regulatory flexibility analysis. Based on the Board's analysis, and for
the reasons stated below, the Board believes that the final rule will
not have a significant economic impact on a substantial number of small
entities.
---------------------------------------------------------------------------
\42\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
1. Statement of the need for, and objectives of, the final rule. As
explained in detail above, this final rule implements section 302 of
TRIPRA, which provides that initial and variation margin requirements
will not apply to specified non-cleared swaps or non-cleared security-
based swaps of certain counterparties (to a covered swap entity). The
reasons and justification for the final rule are described above in the
SUPPLEMENTARY INFORMATION.
2. Summary of the significant issues raised by public comment on
the Board's initial analysis, the Board's assessment of such issues,
and a statement of any changes made as a result of such comments. The
Board did not receive comments specifically on the initial regulatory
flexibility analysis contained in the interim final rule, but the
Agencies did receive comments on other aspects of the rule. A full
discussion of all comments received by the Agencies with respect to
this rule is contained in the SUPPLEMENTARY INFORMATION, above.
3. Small entities affected by the final rule. This final rule may
have an effect on the following types of small entities: (i) Covered
swap entities that are subject to the joint final rule's capital and
margin requirements; and (ii) certain counterparties (e.g., non-
financial end users and certain other small financial counterparties)
that engage in swaps or security-based swaps with covered swap
entities.\43\
---------------------------------------------------------------------------
\43\ The Board notes that the RFA does not require the Board to
consider the impact of the final rule, including its indirect
economic effects, on small entities that are not subject to the
requirements of the final rule. See e.g., In Mid-Tex Electric
Cooperative v. FERC, 773 F.2d 327 (D.C. Cir. 1985); United
Distribution Cos. v. FERC, 88 F.3d 1105, 1170 (D.C. Cir. 1996);
Cement Kiln Recycling Coalition v. EPA, 255 F.3d 855 (D.C. Cir.
2001).
---------------------------------------------------------------------------
Under Small Business Administration (the ``SBA'') regulations, the
finance and insurance sector includes commercial banking, savings
institutions, credit unions, other depository credit intermediation and
credit card issuing entities (``financial institutions''), which
generally are considered ``small'' if they have assets of $550 million
or less.\44\ Covered swap entities would be considered financial
institutions for purposes of the RFA in accordance with SBA
regulations. The Board does not expect that any covered swap entity is
likely to be a small financial institution, because a small financial
institution is unlikely to engage in the level of swap activity that
would require it to register as a swap dealer or major swap
participant.\45\ None of the currently
[[Page 50612]]
registered covered swap entities are small entities. The final rule
would have an indirect effect on certain counterparties to non-cleared
swaps and non-cleared security-based swaps. Many of these
counterparties would be considered ``small'' under the SBA's
regulations.\46\ However, the effect of TRIPRA and the final rule will
be to exempt many of the non-cleared swaps and non-cleared security-
based swaps of these counterparties from the margin requirements of the
Agencies' joint final rule.
---------------------------------------------------------------------------
\44\ See 13 CFR 121.201 (effective December 2, 2014); see also
13 CFR 121.103(a)(6) (noting factors that the SBA considers in
determining whether an entity qualifies as a small business,
including receipts, employees, and other measures of its domestic
and foreign affiliates).
\45\ The CFTC has published a list of provisionally registered
swap dealers (as of February 9, 2016) and provisionally registered
major swap participants (as of March 1, 2013) that does not include
any small financial institutions. See http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer and http://www.cftc.gov/LawRegulation/DoddFrankAct/registermajorswappart. The
SEC has not provided a similar list since it only recently adopted
rules to provide for the registration of security-based swap dealers
and major security-based swap participants. See 80 FR 48963 (August
14, 2015); 17 CFR parts 240 and 249.
\46\ See 13 CFR 121.201. In addition to small financial
institutions with assets of $550 million or less, swap
counterparties could also include other small entities defined in
regulations issued by the SBA, including firms within the
``Securities, Commodity Contracts, and Other Financial Investments
and Related Activities'' sector with assets of $38.5 million or less
and ``Funds, Trusts and Other Financial Vehicles'' with assets of
$32.5 million or less.
---------------------------------------------------------------------------
4. Projected reporting, recordkeeping and other compliance
requirements of the final rule. As described above, this final rule
implements statutory language that requires certain swaps of certain
counterparties to qualify for a statutory exemption or exception from
the applicable clearing requirements in order to not be subject to the
initial and variation margin requirements of the joint final rule. The
reporting requirements are found in Sec. _.1(d) of this final rule
pursuant to cross-references to other statutory provisions that set
forth the conditions for an exemption or exception from clearing. In
certain cases, the statutory exemption from clearing and related
regulations may require a counterparty to report information, such as
how it meets its swaps obligations, to the CFTC or SEC. These
counterparties may be required to meet the same notification
requirements that are required for an exception or exemption from the
relevant CFTC and SEC regulations. Other than this potential overlap of
reporting obligations of this final rule and the relevant CFTC and SEC
regulations, the Board is not aware of any other Federal rules that
duplicate, overlap, or conflict with this final rule. In light of the
exemptions provided for the non-cleared swaps and non-cleared security-
based swaps of many small entities, the Board does not believe that the
final rule would have a significant economic impact on a substantial
number of small entity counterparties.
5. Significant alternatives to the final rule. Since the final rule
was required by TRIPRA, the Board does not believe that there are any
significant alternatives to the rule which would accomplish the stated
objectives of the applicable statute.
In light of the foregoing, the Board does not believe that this
final rule would have a significant economic impact on a substantial
number of small entities.
FDIC: The RFA requires an agency, in connection with a notice of
final rulemaking, to prepare a Final Regulatory Flexibility Act
analysis describing the impact of the rule on small entities (defined
by the SBA for purposes of the RFA to include banking entities with
total assets of $550 million or less) or to certify that the final rule
will not have a significant economic impact on a substantial number of
small entities.
Using SBA's size standards, as of June 30, 2015, the FDIC
supervised 3,357 small entities. The FDIC does not expect any small
entity that it supervises is likely to be a covered swap entity because
such entities are unlikely to engage in the level of swap activity that
would require them to register as a swap entity. Because TRIPRA
excludes non-cleared swaps entered into for hedging purposes by a
financial institution with total assets of $10 billion or less from the
requirement of the final rule, the FDIC expects that when a covered
swap entity transactions non-cleared swaps with a small entity
supervised by the FDIC, and such swaps are used to hedge the small
entity's commercial risk, those swaps will not be subject to the final
rule. The FDIC does not expect any small entity that it supervises will
engage in non-cleared swaps for purposes other than hedging. Therefore,
the FDIC does not believe that the interim final rule results in a
significant economic impact on a substantial number of small entities
under its supervisory jurisdiction.
The FDIC certifies that the interim final rule does not have a
significant economic impact on a substantial number of small FDIC-
supervised institutions.
OCC: The Regulatory Flexibility Act (RFA) \47\ generally requires
an agency that is issuing a proposed rule to prepare and make available
for public comment an initial regulatory flexibility analysis that
describes the impact of the proposed rule on small entities. The RFA
does not apply to a rulemaking where a general notice of proposed
rulemaking is not required.\48\ For the reasons described above in the
Supplementary Information, the OCC has previously determined that it
was unnecessary to publish a notice of proposed rulemaking for this
final rule. Accordingly, the RFA's requirements relating to an initial
and final regulatory flexibility analysis do not apply.
---------------------------------------------------------------------------
\47\ See 5 U.S.C. 601 et seq.
\48\ See 5 U.S.C. 603 and 604.
---------------------------------------------------------------------------
FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act,
the FCA hereby certifies that the final rule will not have a
significant economic impact on a substantial number of small entities.
Each of the banks in the Farm Credit System, considered together with
its affiliated associations, has assets and annual income in excess of
the amounts that would qualify them as small entities. Nor does the
Federal Agricultural Mortgage Corporation meet the definition of a
``small entity.'' Therefore, Farm Credit System institutions are not
``small entities'' as defined in the Regulatory Flexibility Act.
FHFA: FHFA certifies that the final rule will not have a
significant economic impact on a substantial number of small entities,
since none of FHFA's regulated entities comes within the meaning of a
``small entity'' as defined in the Regulatory Flexibility Act (see 5
U.S.C. 601(6)), and the final rule will not substantially affect any
business that its regulated entities might conduct with any such small
entity.
List of Subjects
12 CFR Part 45
Administrative practice and procedure, Capital, Margin
requirements, National Banks, Federal Savings Associations, Reporting
and recordkeeping requirements, Risk.
12 CFR Part 237
Administrative practice and procedure, Banks and banking, Capital,
Foreign banking, Holding companies, Margin requirements, Reporting and
recordkeeping requirements, Risk.
12 CFR Part 349
Administrative practice and procedure, Banks, Holding companies,
Capital, Margin requirements, Reporting and recordkeeping requirements,
Savings associations Risk.
12 CFR Part 624
Accounting, Agriculture, Banks, Banking, Capital, Cooperatives,
Credit, Margin requirements, Reporting and recordkeeping requirements,
Risk, Rural areas, Swaps.
12 CFR Part 1221
Government-sponsored enterprises, Mortgages, Securities.
[[Page 50613]]
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter I
PART 45--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
0
Accordingly, the interim final rule amending 12 CFR part 45, which was
published at 80 FR 74916 on November 30, 2015, is adopted as a final
rule without change.
Board of Governors of the Federal Reserve System
12 CFR Chapter II
PART 237--SWAPS MARGIN AND SWAPS PUSH-OUT
Subpart A--Margin and Capital Requirements for Covered Swap
Entities
0
Accordingly, the interim final rule amending 12 CFR part 237, subpart A
which was published at 80 FR 74916 on November 30, 2015, is adopted as
a final rule without change.
Federal Deposit Insurance Corporation
12 CFR Chapter III
PART 349--DERIVATIVES
0
Accordingly, the interim final rule amending 12 CFR part 349 which was
published at 80 FR 74916 on November 30, 2015, is adopted as a final
rule without change.
Farm Credit Administration
12 CFR Chapter VI
0
Accordingly, the interim final rule amending 12 CFR part 624 which was
published at 80 FR 74916 on November 30, 2015, is adopted as a final
rule without change.
Federal Housing Finance Agency
Chapter XII--Federal Housing Finance Agency
Subchapter B--Entity Regulations
PART 1221--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP
ENTITIES
0
Accordingly, the interim final rule amending 12 CFR part 1221 which was
published at 80 FR 74916 on November 30, 2015, is adopted as a final
rule without change.
Dated: June 21, 2016.
Thomas J. Curry,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, July 26, 2016.
Robert deV. Frierson,
Secretary of the Board.
Dated at Washington, DC, this 21 of June 2016.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: June 22, 2016.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
Dated: June 27, 2016.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2016-18193 Filed 8-1-16; 8:45 am]
BILLING CODE 4810-33-P; 8070-01-P; 6705-01-P; 6714-01-P; 6210-01-P;
4810-33-P