[Federal Register Volume 83, Number 100 (Wednesday, May 23, 2018)]
[Proposed Rules]
[Pages 23842-23847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10995]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE71


Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is seeking comment on

[[Page 23843]]

proposed amendments to the margin requirements for uncleared swaps for 
swap dealers (``SD'') and major swap participants (``MSP'') for which 
there is no prudential regulator (``CFTC Margin Rule''). The Commission 
is proposing these amendments in light of the rules recently adopted by 
the Board of Governors of the Federal Reserve System (``Board''), the 
Federal Deposit Insurance Corporation (``FDIC''), and the Office of the 
Comptroller of the Currency (``OCC'') (collectively, the ``QFC Rules'') 
that impose restrictions on certain uncleared swaps and uncleared 
security-based swaps and other financial contracts. Specifically, the 
Commission proposes to amend the definition of ``eligible master 
netting agreement'' in the CFTC Margin Rule to ensure that master 
netting agreements of firms subject to the CFTC Margin Rule are not 
excluded from the definition of ``eligible master netting agreement'' 
based solely on such agreements' compliance with the QFC Rules. The 
Commission also proposes that any legacy uncleared swap (i.e., an 
uncleared swap entered into before the applicable compliance date of 
the CFTC Margin Rule) that is not now subject to the margin 
requirements of the CFTC Margin Rule would not become so subject if it 
is amended solely to comply with the QFC Rules. These proposed 
amendments are consistent with proposed amendments that the Board, 
FDIC, OCC, the Farm Credit Administration (``FCA''), and the Federal 
Housing Finance Agency (``FHFA'' and, together with the Board, FDIC, 
OCC, and FCA, the ``Prudential Regulators''), jointly published in the 
Federal Register on February 21, 2018.

DATES: Comments must be received on or before July 23, 2018.

ADDRESSES: You may submit comments, identified by RIN 3038-AE71, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Center, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above. Please submit your comments using only one of these 
methods. Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I.
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    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 https://comments.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 FOIA.

FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, (202) 418-
5213, [email protected]; Frank Fisanich, Chief Counsel, (202) 418-5949, 
[email protected]; Katherine Driscoll, Associate Chief Counsel, (202) 
418-5544, [email protected]; or Jacob Chachkin, Special Counsel, (202) 
418-5496, [email protected], Division of Swap Dealer and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Dodd-Frank Act and the CFTC Margin Rule

    On July 21, 2010, President Obama signed the Wall Street Reform and 
Consumer Protection Act (``Dodd-Frank Act'').\2\ Title VII of the Dodd-
Frank Act amended the Commodity Exchange Act (``CEA'') \3\ to establish 
a comprehensive regulatory framework designed to reduce risk, to 
increase transparency, and to promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and regulation of SDs and MSPs; (2) imposing clearing and 
trade execution requirements on standardized derivative products; (3) 
creating recordkeeping and real-time reporting regimes; and (4) 
enhancing the Commission's rulemaking and enforcement authorities with 
respect to all registered entities and intermediaries subject to the 
Commission's oversight.
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    \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ 7 U.S.C. 1 et seq.
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    Section 731 of the Dodd-Frank Act added a new section 4s to the CEA 
setting forth various requirements for SDs and MSPs. In particular, 
section 4s(e) of the CEA directs the Commission to adopt rules 
establishing minimum initial and variation margin requirements on all 
swaps \4\ that are (i) entered into by an SD or MSP for which there is 
no Prudential Regulator \5\ (collectively, ``covered swap entities'' or 
``CSEs'') and (ii) not cleared by a registered derivatives clearing 
organization (``uncleared swaps'').\6\ To offset the greater risk to 
the SD or MSP \7\ and the financial system arising from the use of 
uncleared swaps, these 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 an SD or MSP.\8\
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    \4\ For the definition of swap, see section 1a(47) of the CEA 
and Commission regulation 1.3. 7 U.S.C. 1a(47) and 17 CFR 1.3. It 
includes, among other things, an interest rate swap, commodity swap, 
credit default swap, and currency swap.
    \5\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a 
Prudential Regulator must meet the margin requirements for uncleared 
swaps established by the applicable Prudential Regulator. 7 U.S.C. 
6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining the term 
``Prudential Regulator'' to include the Board; the OCC; the FDIC; 
the FCA; and the FHFA). The definition further specifies the 
entities for which these agencies act as Prudential Regulators. The 
Prudential Regulators published final margin requirements in 
November 2015. See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential Margin Rule'').
    \6\ See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission regulation 
23.151, the Commission further defined this statutory language to 
mean all swaps that are not cleared by a registered derivatives 
clearing organization or a derivatives clearing organization that 
the Commission has exempted from registration as provided under the 
CEA. 17 CFR 23.151.
    \7\ For the definitions of SD and MSP, see section 1a of the CEA 
and Commission regulation 1.3. 7 U.S.C. 1a and 17 CFR 1.3.
    \8\ 7 U.S.C. 6s(e)(3)(A).
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    To this end, the Commission promulgated the CFTC Margin Rule in 
January 2016,\9\ establishing requirements for a CSE to collect and

[[Page 23844]]

post initial \10\ and variation margin \11\ for uncleared swaps, which 
requirements vary based on the type of counterparty to such swaps.\12\ 
These requirements generally apply only to uncleared swaps entered into 
on or after the compliance date applicable to a particular CSE and its 
counterparty (``covered swap'').\13\ An uncleared swap entered into 
prior to a CSE's applicable compliance date for a particular 
counterparty (``legacy swap'') is generally not subject to the margin 
requirements in the CFTC Margin Rule.\14\
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    \9\ Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The CFTC Margin 
Rule, which became effective April 1, 2016, is codified in part 23 
of the Commission's regulations. 17 CFR 23.150-23.159, 23.161.
    \10\ Initial margin, as defined in Commission regulation 23.151 
(17 CFR 23.151), is the collateral (calculated as provided by Sec.  
23.154 of the Commission's regulations) that is collected or posted 
in connection with one or more uncleared swaps. Initial margin is 
intended to secure potential future exposure following default of a 
counterparty (i.e., adverse changes in the value of an uncleared 
swap that may arise during the period of time when it is being 
closed out), while variation margin is provided from one 
counterparty to the other in consideration of changes that have 
occurred in the mark-to-market value of the uncleared swap. See CFTC 
Margin Rule, 81 FR at 664 and 683.
    \11\ Variation margin, as defined in Commission regulation 
23.151 (17 CFR 23.151), is the collateral provided by a party to its 
counterparty to meet the performance of its obligation under one or 
more uncleared swaps between the parties as a result of a change in 
the value of such obligations since the trade was executed or the 
last time such collateral was provided.
    \12\ See Commission regulations 23.152 and 23.153, 17 CFR 23.152 
and 23.153. For example, the CFTC Margin Rule does not require a CSE 
to collect margin from, or post margin to, a counterparty that is 
neither a swap entity nor a financial end user (each as defined in 
17 CFR 23.151). Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e), 
each counterparty to an uncleared swap must be an eligible contract 
participant (``ECP''), as defined in section 1a(18) of the CEA, 7 
U.S.C. 1a(18).
    \13\ Pursuant to Commission regulation 23.161, compliance dates 
for the CFTC Margin Rule are staggered such that SDs must come into 
compliance in a series of phases over four years. The first phase 
affected SDs and their counterparties, each with the largest 
aggregate outstanding notional amounts of uncleared swaps and 
certain other financial products. These SDs began complying with 
both the initial and variation margin requirements of the CFTC 
Margin Rule on September 1, 2016. The second phase began March 1, 
2017, and required SDs to comply with the variation margin 
requirements of Commission regulation 23.153 with all relevant 
counterparties not covered in the first phase. See 17 CFR 23.161.
    \14\ See CFTC Margin Rule, 81 FR at 651 and Commission 
regulation 23.161. 17 CFR 23.161.
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    To the extent that more than one uncleared swap is executed between 
a CSE and its covered counterparty, the CFTC Margin Rule permits the 
netting of required margin amounts of each swap under certain 
circumstances.\15\ In particular, the CFTC Margin Rule, subject to 
certain limitations, permits a CSE to calculate initial margin and 
variation margin, respectively, on an aggregate net basis across 
uncleared swaps that are executed under the same eligible master 
netting agreement (``EMNA'').\16\ Moreover, the CFTC Margin Rule 
permits swap counterparties to identify one or more separate netting 
portfolios (i.e., a specified group of uncleared swaps the margin 
obligations of which will be netted only against each other) under the 
same EMNA, including having separate netting portfolios for covered 
swaps and legacy swaps.\17\ A netting portfolio that contains only 
legacy swaps is not subject to the initial and variation margin 
requirements set out in the CFTC Margin Rule.\18\ However, if a netting 
portfolio contains any covered swaps, the entire netting portfolio 
(including all legacy swaps) is subject to such requirements.\19\
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    \15\ See CFTC Margin Rule, 81 FR at 651 and Commission 
regulations 23.152(c) and 23.153(d). 17 CFR 23.152(c) and 23.153(d).
    \16\ Id. The term EMNA is defined in Commission regulation 
23.151. 17 CFR 23.151. Generally, an EMNA creates a single legal 
obligation for all individual transactions covered by the agreement 
upon an event of default following certain specified permitted 
stays. For example, an International Swaps and Derivatives 
Association (``ISDA'') form Master Agreement may be an EMNA, if it 
meets the specified requirements in the EMNA definition.
    \17\ See CFTC Margin Rule, 81 FR at 651 and Commission 
regulations 23.152(c)(2)(ii) and 23.153(d)(2)(ii). 17 CFR 
23.152(c)(2)(ii) and 23.153(d)(2)(ii).
    \18\ Id.
    \19\ Id.
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    A legacy swap may lose its legacy treatment under the CFTC Margin 
Rule, causing it to become a covered swap and causing any netting 
portfolio in which it is included to be subject to the requirements of 
the CFTC Margin Rule. For reasons discussed in the CFTC Margin Rule, 
the Commission elected not to extend the meaning of legacy swaps to 
include (1) legacy swaps that are amended in a material or nonmaterial 
manner; (2) novations of legacy swaps; and (3) new swaps that result 
from portfolio compression of legacy swaps.\20\ Therefore, and as 
relevant here, a legacy swap that is amended after the applicable 
compliance date may become a covered swap subject to the initial and 
variation margin requirements in the CFTC Margin Rule, and netting 
portfolios that were intended to contain only legacy swaps and, thus, 
not be subject to the CFTC Margin Rule may become so subject.
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    \20\ See CFTC Margin Rule, 81 FR at 675. The Commission notes 
that certain limited relief has been given from this standard. See 
CFTC Staff Letter No. 17-52 (Oct. 27. 2017), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/17-52.pdf.
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B. The QFC Rules

    In late 2017, as part of the broader regulatory reform effort 
following the financial crisis to promote U.S. financial stability and 
increase the resolvability and resiliency of U.S. global systemically 
important banking institutions (``U.S. GSIBs'') \21\ and the U.S. 
operations of foreign global systemically important banking 
institutions (together with U.S. GSIBS, ``GSIBs''), the Board, FDIC, 
and OCC adopted the QFC Rules. The QFC Rules establish restrictions on 
and requirements for uncleared qualified financial contracts \22\ 
(collectively, ``Covered QFCs'') of GSIBs, the subsidiaries of U.S. 
GSIBs, and certain other very large OCC-supervised national banks and 
Federal savings associations (collectively, ``Covered QFC 
Entities'').\23\ They are designed to help ensure that a failed 
company's passage through a resolution proceeding--such as bankruptcy 
or the special resolution process created by the Dodd-Frank Act--would 
be more orderly, thereby helping to mitigate destabilizing effects on 
the rest of the financial system.\24\ To help achieve this goal, the 
QFC Rules respond in two ways.\25\
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    \21\ See 12 CFR 217.402 (defining global systemically important 
banking institution).
    \22\ Qualified financial contract (``QFC'') is defined in 
section 210(c)(8)(D) of the Dodd-Frank Act to mean any securities 
contract, commodity contract, forward contract, repurchase 
agreement, swap agreement, and any similar agreement that the FDIC 
determines by regulation, resolution, or order to be a qualified 
financial contract. 12 U.S.C. 5390(c)(8)(D).
    \23\ See, e.g., 12 CFR 252.82(c) (defining Covered QFC). See 
also 82 FR 42882 (Sep. 12, 2017) (for the Board's QFC Rule). See 
also 82 FR 50228 (Oct. 30, 2017) (for FDIC's QFC Rule). See also 82 
FR 56630 (Nov. 29, 2017) (for the OCC's QFC Rule). The effective 
date of the Board's QFC Rule is November 13, 2017, and the effective 
date for the OCC's QFC Rule and the substance of the FDIC's QFC Rule 
is January 1, 2018. The QFC Rules include a phased-in conformance 
period for a Covered QFC Entity, beginning on January 1, 2019 and 
ending on January 1, 2020, that varies depending upon the 
counterparty type of the Covered QFC Entity. See, e.g., 12 CFR 
252.82(f).
    \24\ See, e.g., Board's QFC Rule at 42883. In particular, the 
QFC Rules seek to facilitate the orderly resolution of a failed GSIB 
by limiting the ability of the firm's Covered QFC counterparties to 
terminate such contracts immediately upon entry of the GSIB or one 
of its affiliates into resolution. Given the large volume of QFCs to 
which covered entities are a party, the exercise of default rights 
en masse as a result of the failure or significant distress of a 
covered entity could lead to failure and a disorderly resolution if 
the failed firm were forced to sell off assets, which could spread 
contagion by increasing volatility and lowering the value of similar 
assets held by other firms, or to withdraw liquidity that it had 
provided to other firms.
    \25\ Id.
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    First, the QFC Rules generally require the Covered QFCs of Covered 
QFC Entities to contain contractual provisions explicitly providing 
that any default rights or restrictions on the transfer of the Covered 
QFC are limited to the same extent as they would be

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pursuant to the Federal Deposit Insurance Act (``FDI Act'') \26\ and 
Title II of the Dodd-Frank Act, thereby reducing the risk that those 
regimes would be challenged by a court in a foreign jurisdiction.\27\
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    \26\ 12 U.S.C. 1811 et seq.
    \27\ See, e.g., Board's QFC Rule at 42883 and 42890 and 12 CFR 
252.83(b).
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    Second, the QFC Rules generally prohibit Covered QFCs from allowing 
counterparties to Covered QFC Entities to exercise default rights 
related, directly or indirectly, to the entry into resolution of an 
affiliate of the Covered QFC Entity (``cross-default rights'').\28\ 
This is to ensure that counterparties of solvent affiliates of a failed 
entity cannot terminate their contracts with the solvent affiliate 
based solely on that failure.\29\
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    \28\ See, e.g., Board's QFC Rule at 42883 and 12 CFR 252.84(b). 
Covered QFC Entities are similarly generally prohibited from 
entering into Covered QFCs that would restrict the transfer of a 
credit enhancement supporting the Covered QFC from the Covered QFC 
Entity's affiliate to a transferee upon the entry into resolution of 
the affiliate. See, e.g., Board's QFC Rule at 42890 and 12 CFR 
252.84(b)(2).
    \29\ Id.
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    Covered QFC Entities are required to enter into amendments to 
certain pre-existing Covered QFCs to explicitly provide for these 
requirements and to ensure that Covered QFCs entered into after the 
applicable compliance date for the rule explicitly provide for the 
same.\30\
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    \30\ See, e.g., 12 CFR 252.82(a) and (c). The QFC Rules require 
a Covered QFC Entity to conform Covered QFCs (i) entered into, 
executed, or to which it otherwise becomes a party on or after 
January 1, 2019 or (ii) entered into, executed, or to which it 
otherwise became a party before January 1, 2019, if the Covered QFC 
Entity or any affiliate that is a Covered QFC Entity also enters, 
executes, or otherwise becomes a party to a new Covered QFC with the 
counterparty to the pre-existing Covered QFC or a consolidated 
affiliate of the counterparty on or after January 1, 2019.
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II. Proposed Changes to the CFTC Margin Rule (``Proposal'')

A. Proposed Amendment to the Definition of EMNA in Commission 
Regulation 23.151

    As noted above, the current definition of EMNA in Commission 
regulation 23.151 allows for certain specified permissible stays of 
default rights of the CSE. Specifically, consistent with the QFC Rules, 
the current definition provides that such rights may be stayed pursuant 
to a special resolution regime such as Title II of the Dodd-Frank Act, 
the FDI Act, and substantially similar foreign resolution regimes.\31\ 
However, the current EMNA definition does not explicitly recognize 
certain restrictions on the exercise of a CSE's cross-default rights 
required under the QFC Rules.\32\ Therefore, a pre-existing EMNA that 
is amended in order to become compliant with the QFC Rules or a new 
master netting agreement that conforms to the QFC Rules will not meet 
the current definition of EMNA. A CSE that is a counterparty under such 
a master netting agreement--one that does not meet the definition of 
EMNA--would be required to measure its exposures from covered swaps on 
a gross basis, rather than aggregate net basis, for purposes of the 
CFTC Margin Rule.\33\
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    \31\ 17 CFR 23.151.
    \32\ Id.
    \33\ See CFTC Margin Rule, 81 FR at 651 and Commission 
regulations 23.152(c) and 23.153(d). 17 CFR 23.152(c) and 23.153(d).
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    The Commission wants to protect market participants from being 
disadvantaged due to their master netting agreements not meeting the 
requirements of an EMNA solely as a result of such agreements' 
compliance with the QFC Rules. Accordingly, the Commission proposes to 
add a new paragraph (2)(ii) to the definition of ``eligible master 
netting agreement'' in Commission regulation 23.151 and make other 
minor related changes to that definition such that a master netting 
agreement may be an EMNA even though the agreement limits the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set-off collateral promptly 
upon an event of default of the counterparty to the extent necessary 
for the counterparty to comply with the requirements of part 47, 
subpart I of part 252, or part 382 of title 12, as applicable. These 
enumerated provisions contain the relevant requirements that have been 
added by the QFC Rules.

B. Proposed Amendment to Commission Regulation 23.161, Compliance Dates

    Covered QFC Entities must conform to the requirements of the QFC 
Rules for Covered QFCs entered into on or after January 1, 2019 and, in 
some instances, Covered QFCs entered into before that date.\34\ To do 
so, a Covered QFC Entity may need to amend the contractual provisions 
of its pre-existing Covered QFCs.\35\ Legacy swaps that are so amended 
by a Covered QFC Entity and its counterparty would become covered swaps 
under the current CFTC Margin Rule.\36\ Therefore, in order not to 
disadvantage market participants who are parties to legacy swaps that 
are required to be amended to comply with the QFC Rules, the Commission 
proposes to amend the CFTC Margin Rule such that a legacy swap will not 
be a covered swap under the CFTC Margin Rule if it is amended solely to 
conform to the QFC Rules. That is, the Commission proposes to add a new 
paragraph (d) to the end of Commission regulation 23.161, as shown in 
the proposed rule text in this document.
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    \34\ See supra, n.30.
    \35\ Id.
    \36\ See supra, n.20. Note, therefore, that such amendment would 
affect all parties to the legacy swap, not only the Covered QFC 
Entity subject to the QFC Rules.
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    This proposed addition is intended to provide certainty to a CSE 
and its counterparties about the treatment of legacy swaps and any 
applicable netting arrangements in light of the QFC Rules. However, if, 
in addition to amendments required to comply with the QFC Rules, the 
parties enter into any other amendments, the amended legacy swap will 
be a covered swap in accordance with the application of the existing 
CFTC Margin Rule.

C. Consistent With the Proposed Amendments to the Prudential Margin 
Rule

    The amendments to the CFTC Margin Rule described above are 
consistent with proposed amendments to the Prudential Margin Rule that 
the Prudential Regulators jointly published in the Federal Register on 
February 21, 2018.\37\ Proposing amendments to the CFTC Margin Rule 
that are consistent with those proposed by the Prudential Regulators 
furthers the Commission's efforts to harmonize its margin regime with 
the Prudential Regulators' margin regime and is responsive to 
suggestions received as part of the Commission's Project KISS 
initiative.\38\
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    \37\ Margin and Capital Requirements for Covered Swap Entities; 
Proposed Rule, 83 FR 7413 (Feb. 21, 2018).
    \38\ See Project KISS Initiatives, available at https://comments.cftc.gov/KISS/KissInitiative.aspx. The Commission received 
requests to coordinate revisions to the CFTC Margin Rule with the 
Prudential Regulators. See comments from Credit Suisse (``CS''), the 
Financial Services Roundtable (``FSR''), ISDA, the Managed Funds 
Association (``MFA''), and SIFMA Global Foreign Exchange Division 
(``GFMA''). GFMA requested that the Commission coordinate with the 
Prudential Regulators on proposing or making any changes to the CFTC 
Margin Rule to ensure harmonization and consistency across the 
respective rule sets. In addition, CS, FSR, ISDA, and MFA, as well 
as GFMA requested that the Commission make certain specific changes 
to the CFTC Margin Rule in coordination with the Prudential 
Regulators relating to, for example, initial margin calculations and 
requirements, margin settlement timeframes, netting product sets, 
inter-affiliate margin exemptions, and cross-border margin issues. 
Project KISS suggestions are available at https://comments.cftc.gov/KISS/KissInitiative.aspx.

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[[Page 23846]]

III. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \39\ 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. The Commission may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid Office of Management 
and Budget control number. This Proposal contains no requirements 
subject to the PRA.
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    \39\ 44 U.S.C. 3501 et seq.
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B. 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.\40\ This 
Proposal only affects certain SDs and MSPs that are subject to the QFC 
Rules and their covered counterparties, all of which are required to be 
ECPs.\41\ The Commission has previously determined that SDs, MSPs, and 
ECPs are not small entities for purposes of the RFA.\42\ Therefore, the 
Commission believes that this Proposal will not have a significant 
economic impact on a substantial number of small entities, as defined 
in the RFA.
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    \40\ 5 U.S.C. 601 et seq.
    \41\ See supra, n.12.
    \42\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and 
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001) 
(ECPs).
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    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that this Proposal will not have 
a significant economic impact on a substantial number of small 
entities. The Commission invites comment on the impact of this Proposal 
on small entities.

C. Cost-Benefit Considerations

    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. Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following 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) considerations.
    This Proposal prevents certain CSEs and their counterparties from 
being disadvantaged because their master netting agreements do not 
satisfy the definition of an EMNA, solely because such agreements' 
comply with the QFC Rules or because such agreements would have to be 
amended to achieve compliance. It revises the definition of EMNA such 
that a master netting agreement that meets the requirements of the QFC 
Rules may be an EMNA and provides that an amendment to a legacy swap 
solely to conform to the QFC Rules will not cause that swap to be a 
covered swap under the CFTC Margin Rule.
    The baseline against which the benefits and costs associated with 
this Proposal is compared is the uncleared swaps markets as they exist 
today, with the QFC Rules in effect.\43\ With this as the baseline for 
this Proposal, the following are the benefits and costs of this 
Proposal.
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    \43\ Although, as described above, the QFC Rules will be 
gradually phased in, for purposes of the cost benefit 
considerations, we assume that the affected CSEs are in compliance 
with the QFC Rules.
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1. Benefits
    As described above, this Proposal will allow parties whose master 
netting agreements satisfy the proposed revised definition of EMNA to 
continue to calculate initial margin and variation margin, 
respectively, on an aggregate net basis across uncleared swaps that are 
executed under that EMNA. Otherwise, a CSE that is a counterparty under 
a master netting agreement that complies with the QFC Rules and, thus, 
does not satisfy the current definition of EMNA, would be required to 
measure its exposures from covered swaps on a gross basis for purposes 
of the CFTC Margin Rule. In addition, this Proposal allows legacy swaps 
to maintain their legacy status, notwithstanding that they are amended 
to comply with the QFC Rules. Otherwise, such swaps would become 
covered swaps subject to initial and variation margin requirements 
under the CFTC Margin Rule. This Proposal provides certainty to CSEs 
and their counterparties about the treatment of legacy swaps and any 
applicable netting arrangements in light of the QFC Rules.
2. Costs
    Because this Proposal (i) will solely expand the definition of EMNA 
to potentially include those master netting agreements that meet the 
requirements of the QFC Rules and allow the amendment of legacy swaps 
solely to conform to the QFC Rules without causing such swaps to become 
covered swaps and (ii) does not require market participants to take any 
action to benefit from these changes, the Commission believes that this 
Proposal will not impose any additional costs on market participants.
3. Section 15(a) Considerations
    In light of the foregoing, the CFTC has evaluated the costs and 
benefits of this Proposal pursuant to the five considerations 
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
    As noted above, this Proposal will protect market participants by 
allowing them to comply with the QFC Rules without being disadvantaged 
under the CFTC Margin Rule. This Proposal will allow market 
participants to hedge more, because without this Proposal, posting 
gross margin would be more costly to transact and thus likely reduce 
the amount of hedging for market participants.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    This Proposal will make the uncleared swap markets more efficient 
by not requiring the payment of gross margin under EMNAs that are 
amended pursuant to the QFC Rules. Absent this Proposal, market 
participants that are required to amend their EMNAs to comply with the 
QFC Rules and, thereafter, required to measure their exposure on a 
gross basis and to post margin on their legacy swaps, would be placed 
at a competitive disadvantage as compared to those market participants 
that are not so required to amend their EMNAs. Therefore, this Proposal 
may increase the competitiveness of the uncleared swaps markets.
(c) Price Discovery
    This Proposal prevents the payment of gross margin, which would 
result in additional costs to swaps transactions. This Proposal could 
potentially reduce the cost to transact these swaps, and thus might 
lead to more trading, which could potentially improve liquidity and 
benefit price discovery.
(d) Sound Risk Management
    This Proposal prevents the payment of gross margin, which does not 
reflect true economic counterparty credit risk for swap portfolios 
transacted with counterparties. Therefore, this Proposal supports sound 
risk management.

[[Page 23847]]

(e) Other Public Interest Considerations
    The Commission has not identified an impact on other public 
interest considerations as a result of this Proposal.
4. Request for Comments on Cost-Benefit Considerations
    The Commission invites public comment on its cost-benefit 
considerations, including the section 15(a) factors described above. 
Commenters are also invited to submit any data or other information 
that they may have quantifying or qualifying the costs and benefits of 
the proposed amendments with their comment letters. In particular, the 
Commission seeks specific comment on the following:
    (a) Has the Commission accurately identified the benefits of this 
Proposal? Are there other benefits to the Commission, market 
participants, and/or the public that may result from the adoption of 
this Proposal that the Commission should consider? Please provide 
specific examples and explanations of any such benefits.
    (b) Has the Commission accurately identified the costs of this 
Proposal? Are there additional costs to the Commission, market 
participants, and/or the public that may result from the adoption of 
this Proposal that the Commission should consider? Please provide 
specific examples and explanations of any such costs.
    (c) Does this Proposal impact the section 15(a) factors in any way 
that is not described above? Please provide specific examples and 
explanations of any such impact.

D. Antitrust Laws

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 4c(b) 
of the CEA), or in requiring or approving any bylaw, rule, or 
regulation of a contract market or registered futures association 
established pursuant to section 17 of the CEA.\44\
---------------------------------------------------------------------------

    \44\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether this Proposal implicates any other specific 
public interest to be protected by the antitrust laws.
    The Commission has considered this Proposal to determine whether it 
is anticompetitive and has preliminarily identified no anticompetitive 
effects. The Commission requests comment on whether this Proposal is 
anticompetitive and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that this 
Proposal is not anticompetitive and has no anticompetitive effects, the 
Commission has not identified any less anticompetitive means of 
achieving the purposes of the CEA. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the CEA that would otherwise be served by adopting this 
Proposal.

List of Subjects in 17 CFR Part 23

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

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 23 as follows:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

0
1. The authority citation for part 23 continues 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. In Sec.  23.151, revise paragraph (2) of the definition of Eligible 
master netting agreement to read as follows:


Sec.  23.151   Definitions applicable to margin requirements.

* * * * *
    Eligible master netting agreement * * *
    (2) The agreement provides the covered swap entity the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set-off collateral promptly 
upon an event of default, including upon an event of receivership, 
conservatorship, insolvency, liquidation, or similar proceeding, of the 
counterparty, provided that, in any such case:
    (i) Any exercise of rights under the agreement will not be stayed 
or avoided under applicable law in the relevant jurisdictions, other 
than:
    (A) In receivership, conservatorship, or resolution under the 
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 
5381 et seq.), the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit 
Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign 
jurisdictions that are substantially similar to the U.S. laws 
referenced in this paragraph (2)(i)(A) in order to facilitate the 
orderly resolution of the defaulting counterparty; or
    (B) Where the agreement is subject by its terms to, or 
incorporates, any of the laws referenced in paragraph (2)(i)(A) of this 
definition; and
    (ii) The agreement may limit the right to accelerate, terminate, 
and close-out on a net basis all transactions under the agreement and 
to liquidate or set-off collateral promptly upon an event of default of 
the counterparty to the extent necessary for the counterparty to comply 
with the requirements of 12 CFR part 47; 12 CFR part 252, subpart I; or 
12 CFR part 382, as applicable;
* * * * *
0
3. In Sec.  23.161, add paragraph (d) to read as follows:


Sec.  23.161  Compliance dates.

* * * * *
    (d) For purposes of determining whether an uncleared swap was 
entered into prior to the applicable compliance date under this 
section, a covered swap entity may disregard amendments to the 
uncleared swap that were entered into solely to comply with the 
requirements of 12 CFR part 47; 12 CFR part 252, subpart I; or 12 CFR 
part 382, as applicable.

    Issued in Washington, DC, on May 18, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

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

Appendix to Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz 
and Behnam voted in the affirmative. No Commissioner voted in the 
negative.

[FR Doc. 2018-10995 Filed 5-22-18; 8:45 am]
BILLING CODE 6351-01-P