[Federal Register Volume 84, Number 64 (Wednesday, April 3, 2019)]
[Rules and Regulations]
[Pages 12908-12929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06319]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I


Comparability Determination for Australia: Margin Requirements 
for Uncleared Swaps for Swap Dealers and Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notification of determination.

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SUMMARY: The following is the analysis and determination of the 
Commodity Futures Trading Commission (``Commission'') regarding a 
request by the Australian Prudential Regulation Authority (``APRA'') 
that the Commission determine that laws and regulations applicable in 
Australia provide a sufficient basis for an affirmative finding of 
comparability with respect to margin requirements for uncleared swaps 
applicable to certain swap dealers (``SDs'') and major swap 
participants (``MSPs'') registered with the Commission. As discussed in 
detail herein, the Commission has found the margin requirements for 
uncleared swaps under the laws and regulations of Australia comparable 
to those under the Commodity Exchange Act (``CEA'') and Commission 
regulations.

DATES: This determination was made and issued by the Commission on 
March 27, 2019.

FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, [email protected]; Frank Fisanich, Deputy Director, 202-418-5949, 
[email protected]; or Lauren Bennett, Special Counsel, 202-418-5290, 
[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. Introduction

    Pursuant to section 4s(e) of the CEA,\1\ the Commission is required 
to promulgate margin requirements for uncleared swaps applicable to 
each SD and MSP for which there is no U.S. Prudential Regulator 
(collectively, ``Covered Swap Entities'' or ``CSEs'').\2\ The 
Commission published final margin requirements for such CSEs in January 
2016 (``CFTC Margin Rule'').\3\
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    \1\ 7 U.S.C. 1 et seq.
    \2\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a 
U.S. Prudential Regulator must meet the margin requirements for 
uncleared swaps established by the applicable U.S. 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 of Governors 
of the Federal Reserve System; the Office of the Comptroller of the 
Currency; the Federal Deposit Insurance Corporation; the Farm Credit 
Administration; and the Federal Housing Finance Agency). The U.S. 
Prudential Regulators published final margin requirements in 
November 2015. See Margin and Capital Requirements for Covered Swap 
Entities, 80 FR 74840 (Nov. 30, 2015) (``U.S. Prudential Regulators' 
Margin Rule'').
    \3\ See 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. See Sec. Sec.  23.150 
through 23.159, 23.161. The Commission's regulations are found in 
chapter I of title 17 of the Code of Federal Regulations, 17 CFR 
parts 1 through 199.

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[[Page 12909]]

    Subsequently, on May 31, 2016, the Commission published in the 
Federal Register its final rule with respect to the cross-border 
application of the Commission's margin requirements for uncleared swaps 
applicable to CSEs (``CFTC Cross-Border Margin Rule'').\4\ The CFTC 
Cross-Border Margin Rule sets out the circumstances under which a CSE 
is allowed to satisfy the requirements under the CFTC Margin Rule by 
complying with comparable foreign margin requirements (``substituted 
compliance''); offers certain CSEs a limited exclusion from the 
Commission's margin requirements; and outlines a framework for 
assessing whether a foreign jurisdiction's margin requirements are 
comparable to the CFTC Margin Rule (``comparability determinations''). 
The Commission promulgated the CFTC Cross-Border Margin Rule after 
close consultation with the U.S. Prudential Regulators and in light of 
comments from and discussions with market participants and foreign 
regulators.\5\
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    \4\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Cross-Border Application of the Margin 
Requirements, 81 FR 34818 (May 31, 2016). The CFTC Cross-Border 
Margin Rule, which became effective August 1, 2016, is codified in 
part 23 of the Commission's regulations. See Sec.  23.160.
    \5\ In 2014, in conjunction with re-proposing its margin 
requirements, the Commission requested comment on three alternative 
approaches to the cross-border application of its margin 
requirements: (i) A transaction-level approach consistent with the 
Commission's guidance on the cross-border application of the CEA's 
swap provisions, see Interpretive Guidance and Policy Statement 
Regarding Compliance with Certain Swap Regulations, 78 FR 45292 
(July 26, 2013) (the ``Guidance''); (ii) an approach consistent with 
the U.S. Prudential Regulators' proposed cross-border framework for 
margin, see Margin and Capital Requirements for Covered Swap 
Entities, 79 FR 57348 (Sept. 24, 2014); and (iii) an entity-level 
approach that would apply margin rules on a firm-wide basis (without 
any exclusion for swaps with non-U.S. counterparties). See Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants, 79 FR 59898 (Oct. 3, 2014). Following a review of 
comments received in response to this request for comment, the 
Commission's Global Markets Advisory Committee (``GMAC'') hosted a 
public panel discussion on the cross-border application of margin 
requirements. See GMAC Meeting (May 14, 2015), transcript and 
webcast, available at: http://www.cftc.gov/PressRoom/Events/opaevent_gmac051415.
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    The Commission considered APRA's prudential standards and public 
consultation papers, in addition to supplemental materials provided by 
APRA, in making this determination. The Commission's analysis and 
comparability determination for Australia regarding the CFTC Margin 
Rule is detailed below.

II. CFTC Cross-Border Margin Rule

A. Regulatory Objective of Margin Requirements

    The regulatory objective of the CFTC Margin Rule is to further the 
congressional mandate to ensure the safety and soundness of CSEs in 
order to offset the greater risk to CSEs and the financial system 
arising from the use of swaps that are not cleared.\6\ The primary 
function of margin is to protect a CSE from counterparty default, 
allowing it to absorb losses and continue to meet its obligations using 
collateral provided by the defaulting counterparty. While the 
requirement to post margin protects the counterparty in the event of 
the CSE's default, it also functions as a risk management tool, 
limiting the amount of leverage a CSE can utilize by requiring that it 
have adequate eligible collateral to enter into an uncleared swap. In 
this way, margin serves as a first line of defense not only in 
protecting the CSE but in containing the amount of risk in the 
financial system as a whole, reducing the potential for contagion 
arising from uncleared swaps.\7\
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    \6\ See 7 U.S.C. 6s(e)(3)(A).
    \7\ See CFTC Margin Rule, 81 FR at 689.
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    However, the global nature of the swap market, coupled with the 
interconnectedness of market participants, also necessitate that the 
Commission recognize the supervisory interests of foreign regulatory 
authorities and consider the impact of its choices on market efficiency 
and competition, which the Commission believes are vital to a well-
functioning global swap market.\8\ Foreign jurisdictions are at various 
stages of implementing margin reforms. To the extent that other 
jurisdictions adopt requirements with different coverage or timelines, 
the Commission's margin requirements may lead to competitive burdens 
for U.S. entities and deter non-U.S. persons from transacting with U.S. 
CSEs and their affiliates overseas.
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    \8\ In determining the extent to which the Dodd-Frank swap 
provisions apply to activities overseas, the Commission strives to 
protect U.S. interests, as determined by Congress in Title VII, and 
minimize conflicts with the laws of other jurisdictions, consistent 
with principles of international comity. See Guidance, 78 FR at 
45300-01 (referencing the Restatement (Third) of Foreign Relations 
Law of the United States).
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B. Substituted Compliance

    To address these concerns, the CFTC Cross-Border Margin Rule 
provides that, subject to certain findings and conditions, a CSE is 
permitted to satisfy the requirements of the CFTC Margin Rule by 
instead complying with the margin requirements in the relevant foreign 
jurisdiction. This substituted compliance regime is intended to address 
the concerns discussed above without compromising the congressional 
mandate to protect the safety and soundness of CSEs and the stability 
of the U.S. financial system. Substituted compliance helps preserve the 
benefits of an integrated, global swap market by reducing the degree to 
which market participants will be subject to multiple sets of 
regulations. Further, substituted compliance builds on international 
efforts to develop a global margin framework.\9\
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    \9\ In October 2011, the Basel Committee on Banking Supervision 
(``BCBS'') and the International Organization of Securities 
Commissions (``IOSCO''), in consultation with the Committee on 
Payment and Settlement Systems and the Committee on Global Financial 
Systems, formed a Working Group on Margining Requirements to develop 
international standards for margin requirements for uncleared swaps. 
Representatives of 26 regulatory authorities participated, including 
the Commission. In September 2013, the Working Group on Margin 
Requirements published a final report articulating eight key 
principles for non-cleared derivatives margin rules. These 
principles represent the minimum standards approved by BCBS and 
IOSCO and their recommendations to the regulatory authorities in 
member jurisdictions. See BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (updated March 2015) (``BCBS/IOSCO 
Framework''), available at http://www.bis.org/bcbs/publ/d317.pdf.
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    The CFTC Cross-Border Margin Rule requires that applicants for a 
comparability determination provide copies of the relevant foreign 
jurisdiction's margin requirements \10\ and descriptions of their 
objectives,\11\ how they differ from the BCBS/IOSCO Framework,\12\ and 
how they address the elements of the Commission's margin 
requirements.\13\ The applicant must

[[Page 12910]]

identify the specific legal and regulatory provisions of the foreign 
jurisdiction's margin requirements that correspond to each element and, 
if necessary, whether the relevant foreign jurisdiction's margin 
requirements do not address a particular element.\14\
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    \10\ See Sec.  23.160(c)(2)(v).
    \11\ See Sec.  23.160(c)(2)(i).
    \12\ See Sec.  23.160(c)(2)(iii). See also Sec.  23.160(a)(3) 
(defining ``international standards'' as based on the BCBS-ISOCO 
Framework).
    \13\ See Sec.  23.160(c)(2)(ii) (identifying the elements as: 
(A) The products subject to the foreign jurisdiction's margin 
requirements; (B) the entities subject to the foreign jurisdiction's 
margin requirements; (C) the treatment of inter-affiliate 
transactions; (D) the methodologies for calculating the amounts of 
initial and variation margin; (E) the process and standards for 
approving models for calculating initial and variation margin 
models; (F) the timing and manner in which initial and variation 
margin must be collected and/or paid; (G) any threshold levels or 
amounts; (H) risk management controls for the calculation of initial 
and variation margin; (I) eligible collateral for initial and 
variation margin; (J) the requirements of custodial arrangements, 
including segregation of margin and rehypothecation; (K) margin 
documentation requirements; and (L) the cross-border application of 
the foreign jurisdiction's margin regime). Section 23.160(c)(2)(ii) 
largely tracks the elements of the BCBS/IOSCO Framework but breaks 
them down into their components as appropriate to ensure ease of 
application.
    \14\ See id.
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C. Standard of Review for Comparability Determinations

    The CFTC Cross-Border Margin Rule identifies certain key factors 
that the Commission will consider in making a comparability 
determination. Specifically, the Commission will consider the scope and 
objectives of the relevant foreign jurisdiction's margin requirements; 
\15\ whether the relevant foreign jurisdiction's margin requirements 
achieve comparable outcomes to the Commission's corresponding margin 
requirements; \16\ and the ability of the relevant regulatory authority 
or authorities to supervise and enforce compliance with the relevant 
foreign jurisdiction's margin requirements.\17\
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    \15\ See Sec.  23.160(c)(3)(i).
    \16\ See Sec.  23.160(c)(3)(ii). As discussed above, the 
Commission's CFTC Margin Rule is based on the BCBS/IOSCO Framework; 
therefore, the Commission expects that the relevant foreign margin 
requirements would conform to such Framework at a minimum in order 
to be deemed comparable to the Commission's corresponding margin 
requirements.
    \17\ See Sec.  23.160(c)(3)(iii). See also Sec.  
23.160(c)(3)(iv) (indicating the Commission would also consider any 
other relevant facts and circumstances).
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    This process reflects an outcomes-based approach to assessing the 
comparability of a foreign jurisdiction's margin requirements. Instead 
of demanding strict uniformity with the Commission's margin 
requirements, the Commission evaluates the objectives and outcomes of 
the foreign margin requirements in light of foreign regulator(s)' 
supervisory and enforcement authority. Recognizing that jurisdictions 
may adopt different approaches to achieving the same outcome, the 
Commission will focus on whether the foreign jurisdiction's margin 
requirements are comparable to the Commission's in purpose and effect, 
not whether they are comparable in every aspect or contain identical 
elements.
    In keeping with the Commission's commitment to international 
coordination on margin requirements for uncleared derivatives, the 
Commission believes that the standards it has established are fully 
consistent with the BCBS/IOSCO Framework.\18\ Accordingly, where 
relevant to the Commission's comparability analysis, the BCBS/IOSCO 
Framework is discussed to explain certain internationally agreed upon 
concepts. In addition, considerations of comity are particularly 
relevant to the substituted compliance determination under this type of 
international framework.\19\
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    \18\ The CFTC Margin Rule was modified substantially from its 
proposed form to further align the Commission's margin requirements 
with the BCBS/IOSCO Framework and, as a result, the potential for 
conflict with foreign margin requirements should be reduced. For 
example, the CFTC Margin Rule raised the material swaps exposure 
level from $3 billion to the BCBS/IOSCO standard of $8 billion, 
which reduces the number of entities that must collect and post 
initial margin. See CFTC Margin Rule, 81 FR at 644. In addition, the 
definition of uncleared swap was amended to not include swaps 
cleared by derivatives clearing organizations that are not 
registered with the Commission but pursuant to Commission orders are 
permitted to clear for U.S. persons. See id. at 638. The Commission 
notes, however, that the BCBS/IOSCO Framework leaves certain 
elements open to interpretation (e.g., the definition of 
``derivative'') and expressly invites regulators to build on certain 
principles as appropriate. See, e.g., Element 4 (eligible 
collateral) (national regulators should ``develop their own list of 
eligible collateral assets based on the key principle, taking into 
account the conditions of their own markets''); Element 5 (initial 
margin) (the degree to which margin should be protected would be 
affected by ``the local bankruptcy regime, and would vary across 
jurisdictions''); Element 6 (transactions with affiliates) 
(``Transactions between a firm and its affiliates should be subject 
to appropriate regulation in a manner consistent with each 
jurisdiction's legal and regulatory framework.'').
    \19\ It is noted that APRA has provided reciprocal recognition 
of the CFTC Margin Rule.
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    The CFTC Cross-Border Margin Rule provided a detailed discussion 
regarding the facts and circumstances under which substituted 
compliance for the requirements under the CFTC Margin Rule would be 
available and such discussion is not repeated here. CSEs seeking to 
rely on substituted compliance based on the comparability 
determinations contained herein are responsible for determining whether 
substituted compliance is available under the CFTC Cross-Border Margin 
Rule with respect to the CSE's particular status and circumstances.

D. Conditions to Comparability Determinations

    The CFTC Cross-Border Margin Rule provides that the Commission may 
impose terms and conditions it deems appropriate in issuing a 
comparability determination.\20\ Any specific terms and conditions with 
respect to margin requirements are discussed in the Commission's 
determinations detailed below.
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    \20\ See Sec.  23.160(c)(5).
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    As a general condition to all determinations, however, the 
Commission requires notification of any material changes to information 
submitted to the Commission by the applicant in support of a 
comparability finding, including, but not limited to, changes in the 
relevant foreign jurisdiction's supervisory or regulatory regime.\21\ 
The Commission also expects that the relevant foreign regulator will 
enter into, or will have entered into, an appropriate memorandum of 
understanding or similar arrangement with the Commission in connection 
with a comparability determination.\22\
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    \21\ See CFTC Cross-Border Margin Rule, 81 FR at 34839.
    \22\ Under Commission regulations 23.203 and 23.606, CSEs must 
maintain all records required by the CEA and the Commission's 
regulations in accordance with Commission regulation 1.31 and keep 
them open for inspection by representatives of the Commission, the 
U.S. Department of Justice, or any applicable U.S. Prudential 
Regulator. See Sec. Sec.  23.203 and 23.606. A CSE that is eligible 
to avail itself of substituted compliance pursuant to the 
Commission's Comparability Determination for Australia: Certain 
Entity-Level Requirements must comply with the Commission's 
requirements to: (i) Make records required by Sec.  23.201 open to 
inspection by any representative of the Commission, the United 
States Department of Justice, or any applicable U.S. Prudential 
Regulator in accordance with Sec.  23.203(b)(2); and (ii) produce 
information to Commission staff and the staff of an applicable U.S. 
Prudential Regulator in accordance with Sec.  23.606(a)(2).
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    Finally, the Commission considers an application to be a 
representation by the applicant that the laws and regulations submitted 
are finalized,\23\ that the description of such laws and regulations is 
accurate and complete, and that, unless otherwise noted, the scope of 
such laws and regulations encompasses the swaps activities \24\ of CSEs 
\25\ in the relevant jurisdictions.\26\
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    \23\ The Commission notes that finalized rules of the foreign 
jurisdiction must be in full force and effect before a CSE may rely 
on this comparability determination for purposes of substituted 
compliance.
    \24\ ``Swaps activities'' is defined in Commission regulation 
23.600(a)(7) to mean, with respect to a registrant, such 
registrant's activities related to swaps and any product used to 
hedge such swaps, including, but not limited to, futures, options, 
other swaps or security-based swaps, debt or equity securities, 
foreign currency, physical commodities, and other derivatives. The 
Commission's regulations under 17 CFR part 23 are limited in scope 
to the swaps activities of CSEs.
    \25\ No CSE that is not legally required to comply with a law or 
regulation determined to be comparable may voluntarily comply with 
such law or regulation in lieu of compliance with the CEA and the 
relevant Commission regulation. Each CSE that seeks to rely on a 
comparability determination is responsible for determining whether 
it is subject to the laws and regulations found comparable.
    \26\ The Commission has provided APRA with opportunities to 
review and comment on the Commission's description of APRA's laws 
and regulations on which this comparability determination is based. 
The Commission relies on the accuracy and completeness of such 
review and any corrections received in making its comparability 
determinations. A comparability determination based on an inaccurate 
description of foreign laws and regulations may not be valid.

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[[Page 12911]]

III. Margin Requirements for Swaps Activities in Australia

    As represented to the Commission by the applicant, margin 
requirements for swap activities in Australia are governed by APRA's 
Prudential Standard CPS 226: Margining and risk mitigation for non-
centrally cleared derivatives (including the Explanatory Statement and 
Regulation Impact Statement) (``CPS 226''), covering: (i) Authorized 
deposit-taking institutions (``ADIs,'' including foreign ADIs and 
authorized banking non-operating holding companies); (ii) general 
insurers (including foreign general insurers operating as foreign 
branches in Australia, authorized insurance non-operating holding 
companies and parent entities of Level 2 \27\ insurance groups); (iii) 
life companies (including friendly societies, eligible foreign life 
insurance companies, and registered life non-operating holding 
companies); and (iv) registrable superannuation entities (collectively, 
``APRA covered entities'').\28\
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    \27\ APRA has represented that a Level 2 group is APRA's 
broadest regulatory consolidation for capital adequacy purposes for 
banking and general insurance entities, and includes all 
subsidiaries of the head of the group, including those incorporated 
outside Australia, except for non-consolidated subsidiaries.
    \28\ See CPS 226, Paragraphs 2 and 3. An APRA covered entity 
that is a parent of a Level 2 group must ensure that certain 
affiliates comply with the requirements of APRA's margin rules as if 
those affiliates were themselves APRA covered entities. See CPS 226, 
Paragraph 4.
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IV. Comparability Analysis

    The following section describes the regulatory objective of the 
Commission's requirements with respect to margin for uncleared swaps 
imposed by the CEA and the CFTC Margin Rule and a description of such 
requirements. Immediately following a description of the requirement(s) 
of the CFTC Margin Rule for which a comparability determination was 
requested by the applicant, the Commission provides a description of 
the foreign jurisdiction's comparable laws, regulations, or rules. The 
Commission then provides a discussion of the comparability of, or 
differences between, the CFTC Margin Rule and the foreign 
jurisdiction's laws, regulations, or rules.

A. Objectives of Margin Requirements

1. Commission Statement of Regulatory Objectives
    The regulatory objective of the CFTC Margin Rule is to ensure the 
safety and soundness of CSEs in order to offset the greater risk to 
CSEs and the financial system arising from the use of swaps that are 
not cleared. The primary function of margin is to protect a CSE from 
counterparty default, allowing it to absorb losses and continue to meet 
its obligations using collateral provided by the defaulting 
counterparty. While the requirement to post margin protects the 
counterparty in the event of the CSE's default, it also functions as a 
risk management tool, limiting the amount of leverage a CSE can utilize 
by requiring that it have adequate eligible collateral to enter into an 
uncleared swap. In this way, margin serves as a first line of defense 
not only in protecting the CSE but in containing the amount of risk in 
the financial system as a whole, reducing the potential for contagion 
arising from uncleared swaps.\29\
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    \29\ See CFTC Cross-Border Margin Rule, 81 FR at 34819.
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2. APRA Statement of Regulatory Objectives
    The regulatory objectives of CPS 226 are to improve prudential 
safety, reduce systemic risk, and promote central clearing.\30\ 
Further, APRA's margin regime incorporates additional risk mitigation 
requirements in relation to non-centrally cleared derivatives that are 
intended to increase the transparency of bilateral positions between 
counterparties, promote legal certainty over the terms of non-centrally 
cleared derivative transactions, and facilitate the timely resolution 
of disputes.\31\ To ensure that these objectives are achieved, the laws 
and regulations of Australia prescribe that financial institutions 
shall establish an appropriate framework for margin requirements, in 
line with the BCBS/IOSCO Framework.
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    \30\ See CPS 226 Explanatory Statement, Page 4.
    \31\ See APRA Discussion Paper, Margining and risk mitigation 
for non-centrally cleared derivatives (``APRA Discussion Paper''), 
Page 8, available at https://www.apra.gov.au/margining-and-risk-mitigation-non-centrally-cleared-derivatives.
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B. Products Subject to Margin Requirements

    The Commission's CFTC Margin Rule applies only to uncleared swaps. 
Swaps are defined in section 1a(47) of the CEA \32\ and Commission 
regulations.\33\ ``Uncleared swap'' is defined for purposes of the CFTC 
Margin Rule in Sec.  23.151 as a swap that is not cleared by a 
registered derivatives clearing organization, or by a clearing 
organization that the Commission has exempted from registration by rule 
or order pursuant to section 5b(h) of the Act.\34\
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    \32\ 7 U.S.C. 1a(47).
    \33\ See, e.g., Sec.  1.3, Swap.
    \34\ Section 23.151.
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    In Australia, APRA's margin rules apply to ``non-centrally cleared 
derivatives,'' which are defined as derivatives \35\ that are not 
cleared by a central counterparty.\36\ APRA's margin rules do not apply 
to physically-settled foreign exchange forwards and swaps.\37\ While it 
is beyond the scope of this comparability determination to definitively 
map any differences between the definitions of ``swap'' and ``uncleared 
swap'' under the CEA and Commission regulations and APRA's definitions 
of ``derivative,'' and ``non-centrally cleared derivative,'' the 
Commission believes that such definitions largely cover the same 
products and instruments.
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    \35\ For the purposes of CPS 226, a ``derivative'' is defined as 
(i) a derivative within the meaning of Chapter 7 of the Corporations 
Act of 2001; or (ii) an arrangement that is a forward, swap, or 
option, or any combination of those things, in relation to one or 
more commodities. See CPS 226, Paragraph 9(g).
    \36\ See CPS 226, Paragraph 9(r). Non-centrally cleared 
derivatives do not include exchange traded derivatives, securities 
financing transactions, or indirectly cleared derivatives that are 
intermediated through a clearing member on behalf of a non-member 
client where the client is subject to the margin requirements of the 
central counterparty, or where the client provides margin consistent 
with the central counterparty's margin requirements. Id.
    \37\ See CPS 226, Paragraphs 12 and 18. Pursuant to a 
determination by the Secretary of the Treasury, foreign exchange 
swaps and foreign exchange forwards are exempt from the definition 
of the term ``swap'' under the CEA. See Determination of Foreign 
Exchange Swaps and Foreign Exchange Forwards Under the Commodity 
Exchange Act, 77 FR 69694 (Nov. 20, 2012). Accordingly, such 
transactions are not subject to the CFTC Margin Rule. See 81 FR at 
638. Notwithstanding that foreign exchange swaps and foreign 
exchange forwards are exempt from the definition of swap, CSEs 
remain subject to the Commission's requirements for swap transaction 
reporting and business conduct standards with respect to such 
transactions.
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    However, because the definitions are not identical, the Commission 
recognizes the possibility that a CSE may enter into a transaction that 
is an uncleared swap as defined in the CEA and Commission regulations, 
but that is not a non-centrally cleared derivative as defined under the 
laws of Australia. In such cases, the CFTC Margin Rule would apply to 
the transaction but APRA's margin rules would not apply and thus, 
substituted compliance would not be available. The CSE could not choose 
to comply with APRA's margin rules in place of the CFTC Margin Rule.

[[Page 12912]]

    Likewise, if a transaction is a non-centrally cleared derivative as 
defined under the laws of Australia but not an uncleared swap subject 
to the CFTC Margin Rule, a CSE could not choose to comply with the CFTC 
Margin Rule pursuant to this determination. CSEs are solely responsible 
for determining whether a particular transaction is both an uncleared 
swap and a non-centrally cleared derivative before relying on 
substituted compliance under the comparability determinations set forth 
below.

C. Entities Subject to Margin Requirements

    The CFTC Margin Rule and CFTC Cross-Border Margin Rule apply only 
to CSEs, i.e., SDs and MSPs registered with the Commission for which 
there is not a U.S. Prudential Regulator.\38\ Thus, only such CSEs may 
rely on the determinations herein for substituted compliance, while SDs 
and MSPs for which there is a U.S. Prudential Regulator must look to 
the determinations of the U.S. Prudential Regulators. The Commission 
has consulted with the U.S. Prudential Regulators in making these 
determinations.
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    \38\ See description of the U.S. Prudential Regulators in supra 
note 2.
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    CSEs are not required to collect and/or post margin with every 
uncleared swap counterparty. The initial margin obligations of CSEs 
under the CFTC Margin Rule apply only to uncleared swaps with 
counterparties that meet the definition of ``covered counterparty'' in 
Sec.  23.151.\39\ Such definition provides that a ``covered 
counterparty'' is a counterparty to a swap with a CSE that is either a 
financial end user \40\ that exceeds a certain threshold of swap 
activity (``material swaps exposure'') \41\ or another SD or MSP.\42\ 
On the other hand, the variation margin obligations of CSEs under the 
CFTC Margin Rule apply more broadly. Such obligations apply to CSEs 
transacting with SDs, MSPs, and all financial end users, not just those 
with material swaps exposure.\43\ Thus, importantly for comparison with 
the non-centrally cleared derivative margin requirements of Australia, 
under the CFTC Margin Rule CSEs must exchange variation margin with any 
counterparty that falls within the definition of ``financial end user'' 
without regard to the size of such counterparty's involvement in the 
swap market or the risk it may present to the CSE.
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    \39\ See Sec.  23.152.
    \40\ See definition of ``Financial end user'' in Sec.  23.150. 
In general, the definition covers entities involved in regulated 
financial activity, including banks, brokers, intermediaries, 
advisers, asset managers, collective investment vehicles, and 
insurers.
    \41\ See Sec.  23.150, which defines the initial margin 
threshold for financial end-users as ``material swaps exposure.'' 
Material swaps exposure for a financial end-user means that the 
entity and its margin affiliates have an average daily aggregate 
notional amount of uncleared swaps, uncleared security-based swaps, 
foreign exchange forwards, and foreign exchange swaps with all 
counterparties for June, July and August of the previous calendar 
year that exceeds $8 billion, where such amount is calculated only 
for business days. An entity shall count the average daily aggregate 
notional amount of an uncleared swap, an uncleared security-based 
swap, a foreign exchange forward, or a foreign exchange swap between 
the entity and a margin affiliate only one time. For purposes of 
this calculation, an entity shall not count a swap that is exempt 
pursuant to Sec.  23.150(b) or a security-based swap that qualifies 
for an exemption under section 3C(g)(10) of the Securities Exchange 
Act of 1934 (15 U.S.C. 78c-3(g)(4)) and implementing regulations or 
that satisfies the criteria in section 3C(g)(1) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78-c3(g)(4)) and implementing 
regulations.
    \42\ See definition of ``swap entity'' in Sec.  23.150.
    \43\ See Sec.  23.153.
---------------------------------------------------------------------------

    All APRA covered entities are subject to the margin requirements in 
CPS 226. Similar to the CFTC Margin Rule's exclusion of non-CSE 
counterparties that do not meet the definition of ``financial end 
user,'' APRA's margin rules state that APRA covered entities are only 
required to exchange margin with certain types of financial 
institutions \44\ (collectively, ``APRA covered counterparties''). Also 
similar to the CFTC Margin Rule's material swaps exposure threshold for 
application of initial margin requirements, APRA's margin rules require 
initial margin to be exchanged only when an APRA covered entity and its 
APRA covered counterparty each belong to a margining group \45\ whose 
aggregate month-end average notional amount of non-centrally cleared 
derivatives for a pre-defined three-month reference period exceeds a 
``qualifying level'' of AUD 12 billion, subject to a phase-in period 
(``APRA Initial Margin Threshold'').\46\ The implementation timetable 
for APRA's initial margin requirements is as follows: \47\
---------------------------------------------------------------------------

    \44\ A ``financial institution'' includes, but is not limited to 
any institution engaged substantively in one or more of the 
following activities: Banking; leasing; issuing credit cards; 
portfolio management; management of securitization schemes; equity 
and/or debt securities, futures and commodity trading and broking; 
custodial and safekeeping services; insurance and similar activities 
that are ancillary to the conduct of these activities. See CPS 226, 
Paragraph 9(i). Further, an APRA covered counterparty excludes: (i) 
Sovereigns, central banks, multilateral development banks, public 
sector entities and the Bank for International Settlements; (ii) a 
covered bond special purpose vehicle that enters into derivative 
transactions for the sole purpose of hedging; and (iii) a 
securitization special purpose vehicle in a traditional 
securitization that enters into derivative transactions for the sole 
purpose of hedging. See CPS 226, Paragraph 9(f).
    \45\ A ``margining group'' is comprised of one or more entities 
within the meaning of Australian Accounting Standard AASB 10 
Consolidated Financial Statements (``AASB 10''). AASB 10 establishes 
principles for the presentation and preparation of consolidated 
financial statements when an entity controls one or more other 
entities, and defines a group as a parent and its subsidiaries, 
where a subsidiary is an entity that is controlled by another 
entity. See CPS 226, Paragraph 9(n); Australian Accounting Standard 
AASB 10 Consolidated Financial Statements, Appendix A. An APRA 
covered entity may elect to apply equivalent foreign accounting 
standards that apply to the consolidated financial statements of the 
APRA covered entity or APRA covered counterparty, as relevant. See 
CPS 226, Paragraph 9(n).
    \46\ See CPS 226, Paragraph 17.
    \47\ See CPS 226, Paragraph 18.

------------------------------------------------------------------------
       Reference period          Qualifying level     Margining period
------------------------------------------------------------------------
March, April and May 2016.....  AUD 4.5 trillion.  1 March 2017 to 31
                                                    August 2017.
March, April and May 2017.....  AUD 3.375          1 September 2017 to
                                 trillion.          31 August 2018.
March, April and May 2018.....  AUD 2.25 trillion  1 September 2018 to
                                                    31 August 2019.
March, April and May 2019.....  AUD 1.125          1 September 2019 to
                                 trillion.          31 August 2020.
From March 2020, March, April   AUD 12 billion...  1 September of the
 and May of each subsequent                         year referred to in
 calendar year.                                     the first column of
                                                    this row to 31
                                                    August of the next
                                                    calendar year.
------------------------------------------------------------------------

    But, dissimilar to the CFTC Margin Rule's requirement that CSEs 
exchange variation margin with all swap entity and ``financial end 
user'' counterparties regardless of the level of activity in uncleared 
swaps, APRA's margin rules require variation margin to be exchanged 
only when an APRA covered entity and its APRA covered counterparty each 
belong to a margining group whose aggregate month-end average notional 
amount of non-

[[Page 12913]]

centrally cleared derivatives for a pre-defined three-month reference 
period exceeds a ``qualifying level'' of AUD 3 billion (``APRA 
Variation Margin Threshold'').\48\ The implementation timetable for 
APRA's variation margin requirements is as follows: \49\
---------------------------------------------------------------------------

    \48\ See CPS 226, Paragraph 11.
    \49\ See CPS 226, Paragraph 12.

------------------------------------------------------------------------
       Reference period          Qualifying level     Margining period
------------------------------------------------------------------------
March, April and May 2016.....  AUD 3 billion....  1 March 2017 to 31
                                                    August 2017.
March, April and May 2017.....  AUD 3 billion....  1 September 2017 to
                                                    31 August 2018.
March, April and May of each    AUD 3 billion....  1 September of the
 subsequent calendar year.                          year referred to in
                                                    the first column of
                                                    this row to 31
                                                    August of the next
                                                    calendar year.
------------------------------------------------------------------------

    Accordingly, (i) when either the APRA covered entity or its APRA 
covered counterparty belong to a margining group whose non-centrally 
cleared derivatives activities fall below the APRA Initial Margin 
Threshold, an APRA covered entity is not required to comply with the 
initial margin requirements of CPS 226; (ii) when either the APRA 
covered entity or its APRA covered counterparty belong to a margining 
group whose non-centrally cleared derivatives activities fall below the 
APRA Variation Margin Threshold, an APRA covered entity is not required 
to comply with the variation margin requirements of CPS 226; and (iii) 
when the APRA covered entity transacts with a non-APRA covered 
counterparty, the APRA covered entity is not required to comply with 
either the initial or variation margin requirements of CPS 226 
(transactions described in (ii) and (iii) are hereinafter referred to 
as ``Supervised Transactions'').
    Notwithstanding APRA's margin thresholds, entities that are subject 
to both the CFTC Margin Rule and CPS 226 would also be required to 
comply with APRA's risk management framework, which requires such 
entities to have systems in place for identifying, measuring, 
evaluating, monitoring, reporting, and controlling or mitigating 
material risks (``CPS 220'').\50\ Such risks include: (i) Credit risk, 
(ii) market and investment risk; (iii) liquidity risk; (iv) insurance 
risk; (v) operational risk; (vi) risk arising from strategic objectives 
and business plans; and (vii) any other risk that, singly or in 
combination with different risks, may have a material impact on the 
institution.\51\
---------------------------------------------------------------------------

    \50\ See APRA Prudential Standard CPS 220--Risk Management 
(``CPS 220''), available at https://www.apra.gov.au/sites/default/files/Prudential-Standard-CPS-220-Risk-Management-%28July-2017%29.pdf.
    \51\ See CPS 220, Paragraph 26.
---------------------------------------------------------------------------

    APRA represented that, given the highly concentrated nature of 
Australia's non-centrally cleared derivatives market, the exclusion of 
small market participants from APRA's margin requirements would have a 
minimal impact on the reduction of systemic risk.\52\ APRA further 
stated that the APRA Variation Margin Threshold was intended to limit 
the competitive disadvantage to small firms faced with the considerable 
costs associated with compliance of the full extent of the margin 
requirements in CPS 226, and to avoid the creation of a disincentive 
for the use of non-centrally cleared derivatives for hedging 
purposes.\53\
---------------------------------------------------------------------------

    \52\ See APRA Response to Submissions, Margining and risk 
mitigation for non-centrally cleared derivatives (``APRA Response to 
Submissions''), Page 22, available at https://www.apra.gov.au/margining-and-risk-mitigation-non-centrally-cleared-derivatives. 
Further, APRA estimated that although the APRA Variation Margin 
Threshold would exclude approximately half of all market 
participants from the requirement to exchange variation margin, over 
80% of all transactions in the market would nonetheless be subject 
to variation margin requirements. See APRA Regulation Impact 
Statement, Page 13.
    \53\ See APRA Discussion Paper, Page 19.
---------------------------------------------------------------------------

    Despite the definitional differences and differences in activity 
thresholds with respect to the scope of application of the CFTC Margin 
Rule and APRA's margin requirements, the Commission notes that in 
transactions between counterparties with the highest levels of activity 
in uncleared swaps (and thus presumably present the most risk), both 
the CFTC Margin Rule and APRA's margin requirements require both 
initial and variation margin. CSEs that exceed the APRA Initial Margin 
Threshold transacting with APRA covered counterparties that also exceed 
the APRA Initial Margin Threshold would be required to collect and post 
initial margin and variation margin in amounts and with frequencies 
that are comparable to the same requirements under the CFTC Margin Rule 
(as discussed elsewhere in this determination). Although the ``material 
swaps exposure'' threshold under the CFTC Margin Rule (denominated in 
USD) is currently lower than the APRA Initial Margin Threshold 
(denominated in AUD), the Commission recognizes that they are of 
approximately the same magnitude and further differences are largely 
attributable to fluctuating AUD/USD exchange rates. Given that the 
initial margin thresholds serve the same purpose and are of 
approximately the same magnitude, the Commission has concluded that the 
application of the APRA Initial Margin Threshold is comparable in 
purpose and effect to the CFTC ``material swaps exposure'' threshold. 
The Commission also notes that if a CSE/APRA covered entity enters into 
an uncleared swap with a CSE that is a U.S. person, then it will be 
required to exchange variation margin and post initial margin in 
accordance with the CFTC Margin Rule, because substituted compliance 
for variation margin and the collection of initial margin is not 
available.\54\ This requirement significantly limits the extent to 
which differences between the APRA Initial Margin Threshold and the 
CFTC ``material swaps exposure'' threshold could negatively impact 
systemic risk in the United States.\55\
---------------------------------------------------------------------------

    \54\ See Cross-Border Margin Rule, 81 FR at 34829.
    \55\ This requirement also mitigates anti-evasion concerns.
---------------------------------------------------------------------------

    With respect to Supervised Transactions that would be subject to 
the CFTC Margin Rule but not subject to certain requirements of CPS 
226, the Commission recognizes that APRA has determined that such 
transactions generally involve small counterparties that do not present 
risk that warrants the considerable costs associated with compliance 
with the full scope of APRA's margin rules. The Commission also 
recognizes that Supervised Transactions will remain subject to APRA's 
risk management requirements under CPS 220.
    The Commission also notes that application of the CFTC Margin Rule 
to CSEs otherwise eligible for substituted compliance that are seeking 
to enter Supervised Transactions in Australia that are subject to 
APRA's risk management requirements under CPS 220 would place those 
CSEs at a competitive disadvantage relative to other firms subject only 
to the risk management requirements under CPS 220.

[[Page 12914]]

    Accordingly, the Commission finds that the scope of entities 
subject to the non-centrally cleared derivatives requirements under the 
laws of Australia is comparable in purpose and outcome to the scope of 
entities subject to the CFTC Margin Rule for purposes of Sec.  23.160. 
A CSE that is an APRA covered entity and eligible for substituted 
compliance under Sec.  23.160 may therefore classify its counterparties 
in accordance with CPS 226 with respect to determining whether initial 
or variation margin must be exchanged. For Supervised Transactions, 
where certain margin requirements would apply under the CFTC Margin 
Rule, but not under CPS 226 (e.g., the requirement to exchange 
variation margin), a CSE that is an APRA covered entity and eligible 
for substituted compliance under Sec.  23.160 may comply with the 
relevant aspects of the CFTC Margin Rule by complying with the risk 
management requirements of CPS 220.

D. Treatment of Inter-Affiliate Derivative Transactions

    The BCBS/IOSCO Framework recognizes that the treatment of inter-
affiliate derivative transactions will vary between jurisdictions. 
Thus, the BCBS/IOSCO Framework does not set standards with respect to 
the treatment of inter-affiliate transactions. Rather, it recommends 
that regulators in each jurisdiction review their own legal frameworks 
and market conditions and put in place margin requirements applicable 
to inter-affiliate transactions as appropriate.\56\
---------------------------------------------------------------------------

    \56\ See BCBS/IOSCO Framework, Element 6: Treatment of 
transactions with affiliates.
---------------------------------------------------------------------------

1. Commission Requirements for Inter-Affiliate Transactions
    The Commission determined through its CFTC Margin Rule to provide 
rules for swaps between ``margin affiliates.'' The definition of 
``margin affiliates'' provides that a company is a margin affiliate of 
another company if: (i) Either company consolidates the other on a 
financial statement prepared in accordance with U.S. Generally Accepted 
Accounting Principles, the International Financial Reporting Standards, 
or other similar standards; (ii) both companies are consolidated with a 
third company on a financial statement prepared in accordance with such 
principles or standards; or (iii) for a company that is not subject to 
such principles or standards, if consolidation as described in (i) or 
(ii) above would have occurred if such principles or standards had 
applied.\57\
---------------------------------------------------------------------------

    \57\ See Sec.  23.151.
---------------------------------------------------------------------------

    With respect to swaps between margin affiliates, the CFTC Margin 
Rule, with one exception explained below, provides that a CSE is not 
required to collect initial margin \58\ from a margin affiliate 
provided that the CSE meets the following conditions: (i) The swaps are 
subject to a centralized risk management program that is reasonably 
designed to monitor and to manage the risks associated with the inter-
affiliate swaps; and (ii) the CSE exchanges variation margin with the 
margin affiliate.\59\
---------------------------------------------------------------------------

    \58\ ``Initial margin'' is margin exchanged to protect against a 
potential future exposure and is defined in Sec.  23.151 to mean 
``the collateral, as calculated in accordance with Sec.  23.154 that 
is collected or posted in connection with one or more uncleared 
swaps.''
    \59\ See Sec.  23.159(a).
---------------------------------------------------------------------------

    In an exception to the foregoing general rule, the CFTC Margin Rule 
does require CSEs to collect initial margin from non-U.S. affiliates 
that are financial end users that are not subject to comparable initial 
margin collection requirements on their own outward-facing swaps with 
financial end users.\60\ This provision is an anti-evasion measure that 
is designed to prevent the potential use of affiliates to avoid 
collecting initial margin from third parties. For example, suppose an 
unregistered non-U.S. affiliate of a CSE enters into a swap with a 
financial end user and does not collect initial margin equivalent to 
that which would have been required if such affiliate were subject to 
the CFTC Margin Rule. Suppose further that the affiliate then enters 
into a swap with the CSE. Effectively, the risk of the swap with the 
third party would have been passed to the CSE without any initial 
margin. The rule would require this affiliate to post initial margin 
with the CSE. The rule would further require that the CSE collect 
initial margin even if the affiliate routed the trade through one or 
more other affiliates.\61\
---------------------------------------------------------------------------

    \60\ See Sec.  23.159(c).
    \61\ See id.
---------------------------------------------------------------------------

    The Commission stated in the CFTC Margin Rule that its inter-
affiliate initial margin requirement is consistent with its goal of 
harmonizing its margin rules as much as possible with the BCBS/IOSCO 
Framework.\62\ Such Framework, for example, states that although the 
exchange of initial and variation margin by affiliated parties vary, 
such exchange ``is not customary'' and that initial margin in 
particular ``would likely create additional liquidity demands.'' \63\ 
Accordingly, the Framework states that ``[s]uch transactions may not 
necessarily be suited to harmonization.'' \64\ With an understanding 
that many authorities, such as those in Europe and Japan, were not 
expected to require initial margin for inter-affiliate swaps, the 
Commission recognized that requiring the posting and collection of 
initial margin for inter-affiliate swaps generally would be likely to 
put CSEs at a competitive disadvantage to firms in those other 
jurisdictions where such margin was not required.\65\
---------------------------------------------------------------------------

    \62\ See CFTC Margin Rule, 81 FR at 674.
    \63\ See BCBS/IOSCO Framework, Element 6: Treatment of 
transactions with affiliates.
    \64\ Id.
    \65\ See CFTC Margin Rule, 81 FR at 674.
---------------------------------------------------------------------------

    Unlike the general rule for initial margin, however, the CFTC 
Margin Rule does require CSEs to exchange variation margin with margin 
affiliates that are SDs, MSPs, or financial end users (as is also 
required under the U.S. Prudential Regulators' rules).\66\ The 
Commission believes that marking open positions to market each day and 
requiring the posting or collection of variation margin reduces the 
risks of inter-affiliate swaps.
---------------------------------------------------------------------------

    \66\ See Sec.  23.159(b), U.S. Prudential Regulators' Margin 
Rule, 80 FR at 74909.
---------------------------------------------------------------------------

2. Requirements for Inter-Affiliate Derivatives Under the Laws of 
Australia
    Pursuant to APRA's margin rules, an APRA covered entity is not 
required to exchange initial margin with an APRA covered counterparty 
that is also a member of the APRA covered entity's margining group.\67\ 
APRA's definition of ``margining group'' is similar to the Commission's 
definition of ``margin affiliates'' for purposes of the CFTC Margin 
Rule.\68\ Further, an APRA covered entity that is a foreign ADI, a 
foreign general insurer operating as a foreign branch in Australia, or 
an eligible foreign life insurance company is not required to exchange 
variation margin with an APRA covered counterparty that is a member of 
its margining group.\69\ An APRA covered entity is also not required to 
exchange variation margin with an APRA covered counterparty that is a 
member of its Level 2 group.\70\
---------------------------------------------------------------------------

    \67\ See CPS 226, Paragraph 57.
    \68\ See definition of ``margin affiliate'' in Sec.  23.150.
    \69\ See CPS 226, Paragraph 58.
    \70\ See CPS 226, Paragraph 59. A Level 2 group is APRA's 
broadest regulatory consolidation for capital adequacy purposes for 
banking and general insurance entities, and includes all 
subsidiaries of the head of the group, including those incorporated 
outside Australia, except for non-consolidated subsidiaries. APRA 
has represented that, with respect to banking groups, the following 
types of affiliates would be excluded from Level 2 consolidation: 
Insurance; funds management; certain securitization special purpose 
vehicles; and non-financial subsidiaries.
---------------------------------------------------------------------------

    In addition, APRA has the discretionary authority to impose initial 
and/or variation margin requirements between an APRA covered entity and

[[Page 12915]]

any of its affiliates where APRA deems appropriate to do so, in light 
of regulatory arbitrage and contagion risks.\71\ APRA stated that it 
would consider ``the impact on prudential safety, financial stability, 
procyclicality, competition, and other factors'' in exercising this 
discretionary authority.\72\
---------------------------------------------------------------------------

    \71\ See CPS 226, Paragraph 61; see also APRA Response to 
Submissions, Page 14.
    \72\ See APRA Response to Submissions, Page 14.
---------------------------------------------------------------------------

    APRA has observed that entities often perform risk management 
decisions on a consolidated group basis, and frequently use inter-
affiliate derivatives for hedging purposes.\73\ Further, APRA stated 
that the application of consolidated capital requirements to Level 2 
groups allows APRA to maintain oversight and confidence that the Level 
2 capital required adequately reflects the risk undertaken by entities 
within the same Level 2 group.\74\ Accordingly, APRA limited its inter-
affiliate variation margin requirements to those affiliates that are 
not part of the same Level 2 capital consolidation group. APRA stated 
that its application of inter-affiliate variation margin requirements 
is intended to minimize liquidity and operational burdens while also 
reducing the risk of contagion to an APRA-regulated institution.\75\
---------------------------------------------------------------------------

    \73\ See APRA Discussion Paper, Page 15.
    \74\ See id.
    \75\ See id.
---------------------------------------------------------------------------

3. Commission Determination
    Having compared the outcomes of APRA's margin requirements 
applicable to inter-affiliate non-centrally cleared derivatives to the 
outcomes of the Commission's corresponding margin requirements 
applicable to inter-affiliate uncleared swaps, and considered those 
outcomes in the broader context of APRA's prudential oversight of risk 
management and capital requirements, the Commission finds that the 
treatment of inter-affiliate transactions under the CFTC Margin Rule 
and the treatment of those transactions under APRA's margin 
requirements are comparable in outcome.
    The CFTC and APRA both generally exclude inter-affiliate 
transactions from their respective initial margin requirements.\76\ 
However, the scope of application of APRA's variation margin 
requirements for inter-affiliate transactions is narrower than that 
under the CFTC Margin Rule. Specifically, the CFTC Margin Rule requires 
the exchange of variation margin between all margin affiliates, while 
APRA only requires the exchange of variation margin between affiliates 
that are not part of the same Level 2 capital consolidation group.
---------------------------------------------------------------------------

    \76\ The CFTC Margin Rule only requires CSEs to collect initial 
margin from non-U.S. affiliates that are not subject to comparable 
initial margin collection requirements on their own outward facing 
swaps with third parties.
---------------------------------------------------------------------------

    An uncleared swap with an affiliate presents credit risk to a CSE. 
The Commission has determined that this credit risk must be managed by 
marking open positions to market each day and requiring the posting or 
collection of variation margin. If the affiliate were to default, the 
margin provided by the affiliate would allow a CSE to continue to meet 
its obligations. APRA, on the other hand, has determined that this 
credit risk can be adequately managed for Level 2 affiliates with 
specific capital requirements and the more general risk management 
standards that require APRA covered entities to establish and implement 
policies and procedures for risk mitigation standards for non-centrally 
cleared derivatives transactions with all of their counterparties.\77\ 
In 2013, the Commission found the risk management requirements for APRA 
covered entities comparable to the Commission's risk management 
requirements for SDs and MSPs under subpart J of part 23 of the 
Commission's regulations.\78\ In addition, uncollateralized credit risk 
from inter-affiliate swaps would be subject to capital requirements 
under the Commission's proposed capital rules.\79\
---------------------------------------------------------------------------

    \77\ See CPS 226, Paragraph 71. In this regard, APRA's position 
is similar to a 2016 statement of then-CFTC Commissioner Christopher 
Giancarlo regarding inter-affiliate swaps, ``[I]nter-affiliate swaps 
provide an important risk management role within corporate groups. 
They enable use of a single conduit on behalf of multiple affiliates 
to net affiliates' trades, which reduces the overall risk of the 
corporate group and the number of outward-facing swaps into which 
the affiliates might otherwise enter. This, in turn, reduces 
operational, market, counterparty credit and settlement risk. Rather 
than increasing risk, inter-affiliate swaps allow entities within a 
corporate group to transfer risk to the group entity best positioned 
to manage it.'' See CFTC Margin Rule, 81 FR at 707.
    \78\ See Notice of Comparability Determination for Certain 
Requirements under Australian Regulation, 78 FR 78864, 78870 (Dec. 
27, 2013). In that determination, the Commission noted that CPS 220, 
which was in draft form at the time, would impose additional 
compliance requirements on ADIs.
    \79\ See Capital Requirements for Swap Dealers and Major Swap 
Participants, 81 FR 91252, 91258 (Dec. 16, 2016). Further, many CSEs 
are part of bank holding companies that are subject to consolidated 
oversight by the U.S. Prudential Regulators.
---------------------------------------------------------------------------

    The Commission notes that if a CSE/APRA covered entity enters into 
an uncleared swap with a margin affiliate that is itself a CSE and a 
U.S. person, then it will be required to exchange variation margin in 
accordance with the CFTC Margin Rule, because the U.S. CSE is required 
to do so and substituted compliance for the inter-affiliate variation 
margin requirement is not available to U.S. CSEs.\80\ In addition, the 
Commission is aware of the historic volume and aggregate size of inter-
affiliate uncleared swaps of CSEs that may currently be eligible for 
substituted compliance pursuant to this determination. Given the 
inability to transfer risk to U.S. margin affiliates that are CSEs 
without variation margin, the historic level of relevant inter-
affiliate activity, and the capital and risk management requirements of 
both APRA and the Commission, the Commission has concluded that the 
outcome resulting from compliance with APRA's capital and risk 
management requirements is comparable in outcome to compliance with the 
CFTC Margin Rule with respect to uncleared swaps with Level 2 
affiliates. Accordingly, the Commission finds that the requirements 
under the laws of Australia with respect to inter-affiliate margin for 
non-centrally cleared derivatives are comparable in outcome to the 
requirements of the CFTC Margin Rule for purposes of Sec.  23.160. The 
Commission intends to monitor the volume and aggregate size of inter-
affiliate swaps of CSEs that may be eligible for substituted compliance 
pursuant to this determination and, to the extent it deems prudent, may 
consult with APRA regarding the capital and risk management treatment 
of the attendant risk of such swaps.
---------------------------------------------------------------------------

    \80\ See Cross-Border Margin Rule, 81 FR at 34829. The 
Commission notes that, subject to certain conditions, a CSE is 
generally not required to collect initial margin from a margin 
affiliate. See Sec.  23.159(a)(1). However, a CSE would be required 
to collect initial margin from a margin affiliate that is a 
financial end user where the margin affiliate is located in a 
jurisdiction that the Commission has not found to be eligible for 
substituted compliance with regard to the CFTC Margin Rule, and the 
margin affiliate does not collect initial margin on its swaps with 
unaffiliated third parties for which initial margin would be 
required if the swap were subject to the CFTC Margin Rule. See Sec.  
23.159(c)(2)(ii). With this Determination, the Commission has found 
Australia to be eligible for substituted compliance with regard to 
all aspects of the CFTC Margin Rule, and thus, a CSE would generally 
not be required to collect initial margin from a margin affiliate in 
Australia that is a financial end user. See Sec.  23.159(c)(2)(iii).
---------------------------------------------------------------------------

E. Methodologies for Calculating the Amounts of Initial and Variation 
Margin

    As an overview, the methodologies for calculating initial and 
variation margin as agreed under the BCBS/IOSCO Framework state that 
the margin collected from a counterparty should (i) be consistent 
across entities covered by the requirements and reflect the potential 
future exposure (initial margin) and current exposure (variation 
margin) associated with the particular portfolio of non-centrally 
cleared derivatives, and (ii) ensure that all

[[Page 12916]]

counterparty risk exposures are covered fully with a high degree of 
confidence.
    With respect to the calculation of initial margin, as a minimum the 
BCBS/IOSCO Framework generally provides that:
     Initial margin requirements will not apply to 
counterparties that have less than EUR 8 billion of gross notional in 
outstanding derivatives.
     Initial margin may be subject to a EUR 50 million 
threshold applicable to a consolidated group of affiliated 
counterparties.
     All margin transfers between parties may be subject to a 
de-minimis minimum transfer amount not to exceed EUR 500,000.
     The potential future exposure of a non-centrally cleared 
derivative should reflect an extreme but plausible estimate of an 
increase in the value of the instrument that is consistent with a one-
tailed 99% confidence interval over a 10-day horizon, based on 
historical data that incorporates a period of significant financial 
stress.
     The required amount of initial margin may be calculated by 
reference to either (i) a quantitative portfolio margin model or (ii) a 
standardized margin schedule.
     When initial margin is calculated by reference to an 
initial margin model, the period of financial stress used for 
calibration should be identified and applied separately for each broad 
asset class for which portfolio margining is allowed.
     Models may be either internally developed or sourced from 
the counterparties or third-party vendors but in all such cases, models 
must be approved by the appropriate supervisory authority.
     Quantitative initial margin models must be subject to an 
internal governance process that continuously assesses the value of the 
model's risk assessments, tests the model's assessments against 
realized data and experience, and validates the applicability of the 
model to the derivatives for which it is being used.
     An initial margin model may consider all of the 
derivatives that are approved for model use that are subject to a 
single legally enforceable netting agreement.
     Initial margin models may account for diversification, 
hedging, and risk offsets within well-defined asset classes such as 
currency/rates, equity, credit, or commodities, but not across such 
asset classes and provided these instruments are covered by the same 
legally enforceable netting agreement and are approved by the relevant 
supervisory authority.
     The total initial margin requirement for a portfolio 
consisting of multiple asset classes would be the sum of the initial 
margin amounts calculated for each asset class separately.
     Derivatives for which a firm faces zero counterparty risk 
require no initial margin to be collected and may be excluded from the 
initial margin calculation.
     Where a standardized initial margin schedule is 
appropriate, it should be computed by multiplying the gross notional 
size of a derivative by the standardized margin rates provided under 
the BCBS/IOSCO Framework \81\ and adjusting such amount by the ratio of 
the net current replacement cost to gross current replacement cost 
(NGR) pertaining to all derivatives in a legally enforceable netting 
set. The BCBS/IOSCO Framework provides the following standardized 
margin rates:
---------------------------------------------------------------------------

    \81\ The BCBS/IOSCO Framework provides standardized margin 
rates, as set out in the table accompanying the text.

------------------------------------------------------------------------
                                                          Initial margin
                                                          requirement (%
                       Asset class                          of notional
                                                             exposure)
------------------------------------------------------------------------
Credit: 0-2 year duration...............................               2
Credit: 2-5 year duration...............................               5
Credit: 5+ year duration................................              10
Commodity...............................................              15
Equity..................................................              15
Foreign exchange........................................               6
Interest rate: 0-2 year duration........................               1
Interest rate: 2-5 year duration........................               2
Interest rate: 5+ year duration.........................               4
Other...................................................              15
------------------------------------------------------------------------

     For a regulated entity that is already using a schedule-
based margin to satisfy requirements under its required capital regime, 
the appropriate supervisory authority may permit the use of the same 
schedule for initial margin purposes, provided that it is at least as 
conservative.
     The choice between model- and schedule-based initial 
margin calculations should be made consistently over time for all 
transactions within the same well defined asset class.
     Initial margin should be collected at the outset of a 
transaction, and collected thereafter on a routine and consistent basis 
upon changes in measured potential future exposure, such as when trades 
are added to or subtracted from the portfolio.
     In the event that a margin dispute arises, both parties 
should make all necessary and appropriate efforts, including timely 
initiation of dispute resolution protocols, to resolve the dispute and 
exchange the required amount of initial margin in a timely fashion.
    With respect to the calculation of variation margin, as a minimum 
the BCBS/IOSCO Framework generally provides that:
     The full amount necessary to fully collateralize the mark-
to-market exposure of the non-centrally cleared derivatives must be 
exchanged.
     Variation margin should be calculated and exchanged for 
derivatives subject to a single, legally enforceable netting agreement 
with sufficient frequency (e.g., daily).
     In the event that a margin dispute arises, both parties 
should make all necessary and appropriate efforts, including timely 
initiation of dispute resolution protocols, to resolve the

[[Page 12917]]

dispute and exchange the required amount of variation margin in a 
timely fashion.
1. Commission Requirement for Calculation of Initial Margin
    In keeping with the BCBS/IOSCO Framework described above, with 
respect to the calculation of initial margin, the Commission's CFTC 
Margin Rule generally provides that:
     Initial margin is intended to address potential future 
exposure, i.e., in the event of a counterparty default, initial margin 
protects the non-defaulting party from the loss that may result from a 
swap or portfolio of swaps, during the period of time needed to close 
out the swap(s).\82\
---------------------------------------------------------------------------

    \82\ See CFTC Margin Rule, 81 FR at 683.
---------------------------------------------------------------------------

     Potential future exposure is to be an estimate of the one-
tailed 99% confidence interval for an increase in the value of the 
uncleared swap or netting portfolio of uncleared swaps due to an 
instantaneous price shock that is equivalent to a movement in all 
material underlying risk factors, including prices, rates, and spreads, 
over a holding period equal to the shorter of 10 business days or the 
maturity of the swap or netting portfolio.\83\
---------------------------------------------------------------------------

    \83\ See Sec.  23.154(b)(2)(i).
---------------------------------------------------------------------------

     The required amount of initial margin may be calculated by 
reference to either (i) a risk-based margin model or (ii) a table-based 
method.\84\
---------------------------------------------------------------------------

    \84\ See Sec.  23.154(a)(1)(i) and (ii).
---------------------------------------------------------------------------

     All data used to calibrate the initial margin model shall 
incorporate a period of significant financial stress for each broad 
asset class that is appropriate to the uncleared swaps to which the 
initial margin model is applied.\85\
---------------------------------------------------------------------------

    \85\ See Sec.  23.154(b)(2)(ii).
---------------------------------------------------------------------------

     CSEs shall obtain the written approval of the Commission 
or a registered futures association to use a model to calculate the 
initial margin required.\86\
---------------------------------------------------------------------------

    \86\ See Sec.  23.154(b)(1)(i).
---------------------------------------------------------------------------

     An initial margin model may calculate initial margin for a 
netting portfolio of uncleared swaps covered by the same eligible 
master netting agreement.\87\
---------------------------------------------------------------------------

    \87\ See Sec.  23.154(b)(2)(v).
---------------------------------------------------------------------------

     An initial margin model may reflect offsetting exposures, 
diversification, and other hedging benefits for uncleared swaps that 
are governed by the same eligible master netting agreement by 
incorporating empirical correlations within the following broad risk 
categories, provided the CSE validates and demonstrates the 
reasonableness of its process for modeling and measuring hedging 
benefits: Commodity, credit, equity, and foreign exchange or interest 
rate.\88\
---------------------------------------------------------------------------

    \88\ See id.
---------------------------------------------------------------------------

     Empirical correlations under an eligible master netting 
agreement may be recognized by the model within each broad risk 
category, but not across broad risk categories.\89\
---------------------------------------------------------------------------

    \89\ See id.
---------------------------------------------------------------------------

     If the initial margin model does not explicitly reflect 
offsetting exposures, diversification, and hedging benefits between 
subsets of uncleared swaps within a broad risk category, the CSE shall 
calculate an amount of initial margin separately for each subset of 
uncleared swaps for which such relationships are explicitly recognized 
by the model and the sum of the initial margin amounts calculated for 
each subset of uncleared swaps within a broad risk category will be 
used to determine the aggregate initial margin due from the 
counterparty for the portfolio of uncleared swaps within the broad risk 
category.\90\
---------------------------------------------------------------------------

    \90\ See Sec.  23.154(b)(2)(vi).
---------------------------------------------------------------------------

     Where a risk-based model is not used, initial margin must 
be computed by multiplying the gross notional size of a derivative by 
the standardized margin rates provided under Sec.  23.154(c)(1) \91\ 
and adjusting such amount by the ratio of the net current replacement 
cost to gross current replacement cost (NGR) pertaining to all 
derivatives under the same eligible master netting agreement.\92\
---------------------------------------------------------------------------

    \91\ The standardized margin rates provided in Sec.  
23.154(c)(1) are, in all material respects, the same as those 
provided under the BCBS/IOSCO Framework. See supra note 81.
    \92\ See Sec.  23.154(c).
---------------------------------------------------------------------------

     A CSE shall not be deemed to have violated its obligation 
to collect or post initial margin if, inter alia, it makes timely 
initiation of dispute resolution mechanisms, including pursuant to 
Sec.  23.504(b)(4).\93\
---------------------------------------------------------------------------

    \93\ See Sec.  23.152(d)(2)(i).
---------------------------------------------------------------------------

2. Commission Requirements for Calculation of Variation Margin
    In keeping with the BCBS/IOSCO Framework described above, with 
respect to the calculation of variation margin, the Commission's CFTC 
Margin Rule generally provides that:
     Each business day, a CSE must calculate variation margin 
amounts for itself and for each counterparty that is an SD, MSP, or 
financial end user. Such variation margin amounts must be equal to the 
cumulative mark-to-market change in value to the CSE of each uncleared 
swap, adjusted for any variation margin previously collected or posted 
with respect to that uncleared swap.\94\
---------------------------------------------------------------------------

    \94\ See Sec.  23.155(a).
---------------------------------------------------------------------------

     Variation margin must be calculated using methods, 
procedures, rules, and inputs that to the maximum extent practicable 
rely on recently-executed transactions, valuations provided by 
independent third parties, or other objective criteria.\95\
---------------------------------------------------------------------------

    \95\ See id.
---------------------------------------------------------------------------

     CSEs may comply with variation margin requirements on an 
aggregate basis with respect to uncleared swaps that are governed by 
the same eligible master netting agreement.\96\
---------------------------------------------------------------------------

    \96\ See Sec.  23.153(d)(1).
---------------------------------------------------------------------------

     A CSE shall not be deemed to have violated its obligation 
to collect or post variation margin if, inter alia, it makes timely 
initiation of dispute resolution mechanisms, including pursuant to 
Sec.  23.504(b)(4).\97\
---------------------------------------------------------------------------

    \97\ See Sec.  23.153(e)(2)(i).
---------------------------------------------------------------------------

3. APRA Requirements for Calculation of Initial Margin
    In keeping with the BCBS/IOSCO Framework described above, with 
respect to the calculation of initial margin, APRA's margin rule 
generally provides that:
     APRA covered entities must post and collect initial margin 
with an APRA covered counterparty to cover the potential future 
exposure that could arise from future changes in the market value of a 
non-centrally cleared derivative over the close-out period in the event 
of a counterparty default.\98\
---------------------------------------------------------------------------

    \98\ See CPS 226, Paragraphs 17 and 9(k). The standardized 
margin rates provided in CPS 226 are, in all material respects, the 
same as those provided under the BCBS/IOSCO Framework. See supra 
note 81.
---------------------------------------------------------------------------

     The required amount of initial margin posted and collected 
must be calculated by either a model approach approved by APRA or the 
standardized schedule set out in APRA's margin rules.\99\
---------------------------------------------------------------------------

    \99\ See CPS 226, Paragraph 30.
---------------------------------------------------------------------------

     APRA may, upon the request of an APRA covered entity, 
approve the entity to calculate initial margin using a schedule already 
in use for regulatory capital purposes prior to the application of 
APRA's margin rules, provided that such a schedule is at least as 
conservative as outlined in APRA's margin rules.\100\
---------------------------------------------------------------------------

    \100\ See CPS 226, Attachment A, Paragraph 2.
---------------------------------------------------------------------------

     When using the standardized schedule for initial margin, 
APRA covered entities must calculate the sum of the net standardized 
initial margin

[[Page 12918]]

amount separately for each netting agreement.\101\
---------------------------------------------------------------------------

    \101\ See CPS 226, Attachment A, Paragraph 1. For each netting 
agreement, the net standardized initial margin amount = 0.4 x gross 
standardized initial margin amount + 0.6 x net-to-gross ratio of the 
net current credit exposure of all transactions included in a 
netting agreement to the gross current credit exposure of the same 
transactions. See CPS 226, Attachment A, Paragraph 3(a).
---------------------------------------------------------------------------

     APRA covered entities are not required to collect initial 
margin for non-centrally cleared derivatives for which there is no 
counterparty risk; accordingly, such derivatives may be excluded from 
the initial margin calculation under both a model approach and the 
standardized schedule.\102\
---------------------------------------------------------------------------

    \102\ See CPS 226, Paragraph 31.
---------------------------------------------------------------------------

     The calculation of initial margin for cross-currency swaps 
differs depending on whether a model approach or the standardized 
schedule is adopted:\103\
---------------------------------------------------------------------------

    \103\ See CPS 226, Paragraph 32.
---------------------------------------------------------------------------

    [ssquf] If a model approach is adopted, then the model does not 
need to incorporate the risk associated with the fixed physically-
settled FX transactions associated with the exchange of principal. All 
other risks of the cross-currency swap must be considered in the 
calculation.
    [ssquf] If the standardized schedule is adopted, then the initial 
margin only needs to be calculated with reference to the relevant row 
in the interest rates section of APRA's standardized schedule.
     The initial margin calculated by the model approach must 
be sufficiently conservative even during periods of low market 
volatility. Calculation of the initial margin amount must be consistent 
with at least a one-tailed 99% confidence interval over a 10-day time 
horizon, based on historical data that includes a period of significant 
financial stress and does not exceed an historical period of five 
years. The historical data must be equally weighted for calibration 
purposes.\104\
---------------------------------------------------------------------------

    \104\ See CPS 226, Paragraph 34.
---------------------------------------------------------------------------

     The period of financial stress used for calibration must 
be identified and applied separately for each asset class.\105\
---------------------------------------------------------------------------

    \105\ See CPS 226, Paragraph 35.
---------------------------------------------------------------------------

     Transactions that are not subject to the same legally 
enforceable netting agreement must not be considered in the same 
initial margin model calculation.\106\
---------------------------------------------------------------------------

    \106\ See CPS 226, Paragraph 36.
---------------------------------------------------------------------------

     A model may allow for diversification, hedging and risk 
offsets within an asset class provided these transactions are covered 
by the same legally enforceable netting agreement. Any such allowance 
requires approval by APRA as part of an initial margin model 
approval.\107\
---------------------------------------------------------------------------

    \107\ See CPS 226, Paragraph 37.
---------------------------------------------------------------------------

     Initial margin calculations by a model for derivatives in 
distinct asset classes must be performed without regard to derivatives 
in other asset classes. That is, initial margin amounts calculated for 
each asset class must not account for diversification benefits across 
asset class and must be summed to calculate the initial margin amount 
for a netting agreement.\108\
---------------------------------------------------------------------------

    \108\ See CPS 226, Paragraph 38.
---------------------------------------------------------------------------

4. APRA Requirements for Calculation of Variation Margin
    In keeping with the BCBS/IOSCO Framework described above, with 
respect to the calculation of variation margin, APRA's margin rule 
generally provides that:
     APRA covered entities must exchange variation margin with 
APRA covered counterparties to reflect the current mark-to-market 
exposure resulting from changes in the market value of a non-centrally 
cleared derivative.\109\
---------------------------------------------------------------------------

    \109\ See CPS 226, Paragraphs 9(ab), 11. The exchange of 
variation margin is executed pursuant to the implementation table 
referenced in section IV(C) supra.
---------------------------------------------------------------------------

     Transactions that are not subject to the same legally 
enforceable netting agreement must not be considered in the same 
variation margin calculation.\110\
---------------------------------------------------------------------------

    \110\ See CPS 226, Paragraph 16.
---------------------------------------------------------------------------

5. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission has determined that the amounts of initial and variation 
margin calculated under the methodologies required under APRA's margin 
rules would be similar to those calculated under the methodologies 
required under the CFTC Margin Rule. Specifically, under the CFTC 
Margin Rule and APRA's margin rules:
     The definitions of initial and variation margin are 
similar, including the description of potential future exposure agreed 
under the BCBS/IOSCO Framework;
     Margin models and/or a standardized margin schedule may be 
used to calculate initial margin;
     Criteria for historical data to be used in initial margin 
models are similar;
     Initial margin models must be approved by a regulator;
     Eligibility for netting is similar;
     Correlations may be recognized within broad risk 
categories, but not across such risk categories;
     The required method of calculating initial margin using 
standardized margin rates is essentially identical; and
     The prescribed standardized margin rates are essentially 
identical.
    Accordingly, the Commission finds that the methodologies for 
calculating the amounts of initial and variation margin for non-
centrally cleared derivatives under the laws of Australia are 
comparable in outcome to those of the CFTC Margin Rule for purposes of 
Sec.  23.160.

F. Process and Standards for Approving Margin Models

    Pursuant to the BCBS/IOSCO Framework, initial margin models may be 
either internally developed or sourced from counterparties or third-
party vendors but in all such cases, models must be approved by the 
appropriate supervisory authority.\111\
---------------------------------------------------------------------------

    \111\ See BCBS/IOSCO Framework Requirement 3.3.
---------------------------------------------------------------------------

1. Commission Requirement for Margin Model Approval
    In keeping with the BCBS/IOSCO Framework, the CFTC Margin Rule 
generally requires:
     CSEs shall obtain the written approval of the Commission 
or a registered futures association to use a model to calculate the 
initial margin required.\112\
---------------------------------------------------------------------------

    \112\ See Sec.  23.154(b)(1)(i).
---------------------------------------------------------------------------

     The Commission or a registered futures association will 
approve models that demonstrate satisfaction of all of the requirements 
for an initial margin model set forth above in Section IV(E)(1), in 
addition to the requirements for annual review; \113\ control, 
oversight, and validation mechanisms; \114\ documentation; \115\ and 
escalation procedures.\116\
---------------------------------------------------------------------------

    \113\ See Sec.  23.154(b)(4), discussed further infra.
    \114\ See Sec.  23.154(b)(5), discussed further infra.
    \115\ See Sec.  23.154(b)(6), discussed further infra.
    \116\ See Sec.  23.154(b)(7), discussed further infra.
---------------------------------------------------------------------------

     CSEs must notify the Commission and the registered futures 
association in writing 60 days prior to, extending the use of an 
initial margin model to an additional product type; making any change 
to the model that would result in a material change in the CSE's 
assessment of initial margin requirements; or making any material 
change to modeling assumptions.
     The Commission or the registered futures association may 
rescind its approval, or may impose additional conditions or 
requirements if the Commission or the registered futures association 
determines, in its discretion, that a model no longer complies with the 
requirements for an initial margin

[[Page 12919]]

model summarized in section IV(E)(1) supra.
2. APRA Requirements for Approval of Margin Models
    In keeping with the BCBS/IOSCO Framework, APRA's margin rules 
generally require:
     An APRA covered entity may apply to APRA for approval to 
use a model for the calculation of initial margin for some or all of 
its portfolio.\117\ APRA has further represented that it must approve 
all margin models prior to their implementation.
---------------------------------------------------------------------------

    \117\ See CPS 226, Paragraph 33.
---------------------------------------------------------------------------

     Once an APRA covered entity has obtained approval to use a 
model for the calculation of initial margin for an asset class, it must 
continue to employ that model for that asset class on an ongoing basis 
unless, or except to the extent that, the model approval is varied, 
revoked, or suspended by APRA.\118\
---------------------------------------------------------------------------

    \118\ See CPS 226, Paragraph 41.
---------------------------------------------------------------------------

     APRA may, at any time, vary, revoke, or suspend a model 
approval for the calculation of initial margin, or impose additional 
conditions on a model approval.\119\
---------------------------------------------------------------------------

    \119\ See CPS 226, Paragraph 42.
---------------------------------------------------------------------------

     Prior notification to APRA is required for any material 
changes to an initial margin model or risk measurement system. APRA's 
prior written approval is required for any material changes to an 
initial margin model which are not consistent with global industry 
standards for initial margin models.\120\
---------------------------------------------------------------------------

    \120\ See CPS 226, Paragraph 44.
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission has determined that the requirements for submission of 
margin models to APRA are comparable to the regulatory approval 
requirements of the CFTC Margin Rule. Specifically, APRA covered 
entities must submit their models to APRA for approval prior to their 
implementation and notify APRA of material changes to the model. APRA 
also retains the right to vary, suspend or revoke its approval at any 
time. Accordingly, the Commission finds that such requirements under 
the laws of Australia are comparable in outcome to those of the CFTC 
Margin Rule for purposes of Sec.  23.160.

G. Timing and Manner for Collection or Payment of Initial and Variation 
Margin

1. Commission Requirement for Timing and Manner for Collection or 
Payment of Initial and Variation Margin
    With respect to the timing and manner for collection or posting of 
initial margin, the CFTC Margin Rule generally provides that:
     Where a CSE is required to collect initial margin, it must 
be collected on or before the business day after execution of an 
uncleared swap, and thereafter the CSE must continue to hold initial 
margin in an amount equal to or greater than the required initial 
margin amount as re-calculated each business day until such uncleared 
swap is terminated or expires.
     Where a CSE is required to post initial margin, it must be 
posted on or before the business day after execution of an uncleared 
swap, and thereafter the CSE must continue to post initial margin in an 
amount equal to or greater than the required initial margin amount as 
re-calculated each business day until such uncleared swap is terminated 
or expires.
     Required initial margin amounts must be posted and 
collected by CSEs on a gross basis (i.e., amounts to be posted may not 
be set-off against amounts to be collected from the same counterparty).
    With respect to the timing and manner for collection or posting of 
variation margin, the CFTC Margin Rule generally provides that:
     Where a CSE is required to collect variation margin, it 
must be collected on or before the business day after execution of an 
uncleared swap, and thereafter the CSE must continue to collect the 
required variation margin amount, if any, each business day as re-
calculated each business day until such uncleared swap is terminated or 
expires.\121\
---------------------------------------------------------------------------

    \121\ See Sec.  23.153(a).
---------------------------------------------------------------------------

     Where a CSE is required to post variation margin, it must 
be posted on or before the business day after execution of an uncleared 
swap, and thereafter the CSE must continue to post the required 
variation margin amount, if any, each business day as re-calculated 
each business day until such uncleared swap is terminated or 
expires.\122\
---------------------------------------------------------------------------

    \122\ See Sec.  23.153(b).
---------------------------------------------------------------------------

    With respect to both initial and variation margin, a CSE shall not 
be deemed to have violated its obligation to collect or post margin if, 
inter alia, it makes timely initiation of dispute resolution 
mechanisms, including pursuant to Sec.  23.504(b)(4).\123\
---------------------------------------------------------------------------

    \123\ See Sec.  23.153(e)(2)(i).
---------------------------------------------------------------------------

2. APRA Requirements for Timing and Manner for Collection of Initial 
and Variation Margin
    With respect to the timing and manner for collection or posting of 
initial margin, APRA's margin rules generally provide that:
     Initial margin must be calculated and called both at the 
outset of a transaction and on a regular and consistent basis upon 
changes in the measured potential future exposure. Settlement of 
initial margin amounts must be conducted promptly.\124\
---------------------------------------------------------------------------

    \124\ See CPS 226, Paragraph 21. APRA represented that its 
initial margin requirements were intended to provide flexibility for 
less significant financial counterparties that may find the daily 
calculation and exchange of initial margin to be operationally 
difficult. Given that changes to a portfolio would trigger a 
requirement for the re-calculation and call of initial margin, APRA 
represented that, in practice, the inter-bank/dealer market would 
nonetheless calculate and exchange initial margin on a daily basis.
---------------------------------------------------------------------------

     Initial margin must be posted and collected on a gross 
basis.\125\
---------------------------------------------------------------------------

    \125\ See CPS 226, Paragraph 20.
---------------------------------------------------------------------------

    With respect to the timing and manner for collection or posting of 
variation margin, APRA's margin rules generally provide that variation 
margin must be calculated and called on a daily basis, and settlement 
of variation margin amounts must be conducted promptly.\126\ In the 
discussion paper that accompanied CPS 226, APRA stated that settlement 
of variation margin should occur on a T+1 basis; however, such a 
settlement timeframe may not be feasible in all circumstances due to, 
for example, time zone and cross-border considerations, and therefore 
has adopted a principles-based approach for the prompt settlement of 
variation margin.\127\
---------------------------------------------------------------------------

    \126\ See CPS 226, Paragraph 14.
    \127\ See APRA Discussion Paper, Page 19.
---------------------------------------------------------------------------

3. Commission Determination
    Having compared APRA's margin requirements applicable to the timing 
and manner of collection and payment of initial and variation margin to 
the Commission's corresponding margin requirements, the Commission 
finds that APRA's margin requirements are comparable in outcome for 
purposes of Sec.  23.160.
    Under the CFTC Margin Rule, where initial margin is required, a CSE 
must calculate the amount of initial margin each business day. Although 
APRA's margin rules only require that initial margin be calculated on a 
``regular and consistent basis,'' APRA represented

[[Page 12920]]

that larger Australian banks and dealers whose portfolios change on a 
daily basis will nonetheless calculate initial margin on a daily basis, 
given that APRA's rules require that initial margin must be re-
calculated upon changes in potential future exposure. Both 
jurisdictions require counterparties to calculate and call variation 
margin on a daily basis.
    With respect to the timing of the collection and posting of margin, 
the CFTC Margin Rule requires CSEs to collect or post any required 
margin amount (whether initial or variation) within one business day of 
calculation. APRA's margin rules specify only that margin be collected 
or posted ``promptly,'' which presumably could be longer than one 
business day. APRA stated that, absent extenuating circumstances, the 
settlement of variation margin should occur within one business day of 
calculation. With respect to the settlement of initial margin, APRA 
stated that its flexible approach is appropriate for ``less significant 
financial counterparties'' and would not significantly impact systemic 
risk.\128\ Specifically, the daily calculation and exchange of initial 
margin would have a limited impact on risk for inactive traders, as a 
counterparty's potential future exposure would be unlikely to change 
significantly and variation margin would nonetheless be exchanged 
daily. APRA has represented that the large internationally active banks 
that are operating in Australia would generally calculate and exchange 
margin on a daily basis, consistent with the CFTC Margin Rule, due to 
daily changes to their portfolios.
---------------------------------------------------------------------------

    \128\ As discussed above, the CFTC Margin Rule applies only to 
SDs and MSPs for which there is no U.S. Prudential Regulator. SDs 
and MSPs are registered by virtue of their substantial swaps 
activity. By comparison, APRA's margin rules apply to a broader 
range of entities, including depository institutions, insurance 
companies, and superannuation firms. Thus, APRA's margin rules have 
incorporated a greater flexibility with respect to the timing of 
margin collection and posting in order to address the range in the 
size and sophistication of the entities that are subject to its 
margin requirements.
---------------------------------------------------------------------------

    Given APRA's statements regarding the practical implementation of 
its margin rules, the Commission finds that the requirements of APRA's 
rules with respect to the timing and manner for collection or payment 
of initial and variation margin are comparable in outcome for purposes 
of Sec.  23.160.

H. Margin Threshold Levels or Amounts

    The BCBS/IOSCO Framework provides that initial margin could be 
subject to a threshold not to exceed EUR 50 million. The threshold is 
applied at the level of the consolidated group to which the threshold 
is being extended and is based on all non-centrally cleared derivatives 
between the two consolidated groups.
    Similarly, to alleviate operational burdens associated with the 
transfer of small amounts of margin, the BCBS/IOSCO Framework provides 
that all margin transfers between parties may be subject to a de-
minimis minimum transfer amount not to exceed EUR 500,000.
1. Commission Requirement for Margin Threshold Levels or Amounts
    In keeping with the BCBS/IOSCO Framework, with respect to margin 
threshold levels or amounts the CFTC Margin Rule generally provides 
that:
     CSEs may agree with their counterparties that initial 
margin may be subject to a threshold of no more than $50 million 
applicable to a consolidated group of affiliated counterparties.\129\
---------------------------------------------------------------------------

    \129\ See Sec.  23.154(a)(3) and definition of ``initial margin 
threshold'' in Sec.  23.151.
---------------------------------------------------------------------------

     CSEs are not required to collect or to post initial or 
variation margin with a counterparty until the combined amount of 
initial margin and variation margin to be collected or posted is 
greater than $500,000 (i.e., a minimum transfer amount).\130\
---------------------------------------------------------------------------

    \130\ See Sec.  23.152(b)(3).
---------------------------------------------------------------------------

2. APRA Requirements for Margin Threshold Levels or Amounts
    Also in keeping with the BCBS/IOSCO Framework, with respect to 
margin threshold levels or amounts, APRA's margin requirements 
generally provide that:
     The threshold applicable to the initial margin for each 
margining group must not be greater than AUD 75 million. The threshold 
is applied bilaterally at the aggregate level of the margining group 
and is based on all non-centrally cleared derivative transactions 
between the two margining groups.\131\
---------------------------------------------------------------------------

    \131\ See CPS 226, Paragraph 22.
---------------------------------------------------------------------------

     The combined variation margin and initial margin required 
to be posted or collected pursuant to APRA's margin rules must be 
subject to a de-minimis minimum transfer amount that must not exceed 
AUD 750,000 (i.e., a minimum transfer amount).\132\
---------------------------------------------------------------------------

    \132\ See CPS 226, Paragraph 28.
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission has determined that APRA's requirements for margin 
threshold levels or amounts, in the case of APRA covered entities, are 
comparable in outcome to those required by the CFTC Margin Rule for 
purposes of Sec.  23.160.
    The Commission notes that at current exchange rates, AUD 75 million 
is approximately $53 million, while AUD 750,000 is approximately 
$530,000. Although these amounts are greater than those permitted by 
the CFTC Margin Rule, the Commission recognizes that exchange rates 
will fluctuate over time and thus the Commission finds that such 
requirements under the laws of Australia are comparable in outcome to 
those of the CFTC Margin Rule for purposes of Sec.  23.160.

I. Risk Management Controls for the Calculation of Initial and 
Variation Margin

1. Commission Requirement for Risk Management Controls for the 
Calculation of Initial and Variation Margin
    With respect to risk management controls for the calculation of 
initial margin, the CFTC Margin Rule generally provides that:
     CSEs are required to have a risk management unit pursuant 
to Sec.  23.600(c)(4). Such risk management unit must include a risk 
control unit tasked with validation of a CSE's initial margin model 
prior to implementation and on an ongoing basis, including an 
evaluation of the conceptual soundness of the initial margin model, an 
ongoing monitoring process that includes verification of processes and 
benchmarking by comparing the CSE's initial margin model outputs 
(estimation of initial margin) with relevant alternative internal and 
external data sources or estimation techniques, and an outcomes 
analysis process that includes back testing the model.\133\
---------------------------------------------------------------------------

    \133\ See Sec.  23.154(b)(5).
---------------------------------------------------------------------------

     In accordance with Sec.  23.600(e)(2), CSEs must have an 
internal audit function independent of the business trading unit and 
the risk management unit that at least annually assesses the 
effectiveness of the controls supporting the initial margin model 
measurement systems, including the activities of the business trading 
units and risk control unit, compliance with policies and procedures, 
and calculation of the CSE's initial margin requirements under this 
part.\134\
---------------------------------------------------------------------------

    \134\ See Sec.  23.154(b)(5)(iv).
---------------------------------------------------------------------------

     At least annually, such internal audit function shall 
report its findings to the CSE's governing body, senior management, and 
chief compliance officer.\135\
---------------------------------------------------------------------------

    \135\ See Sec.  23.154(b)(5)(iv).

---------------------------------------------------------------------------

[[Page 12921]]

    With respect to risk management controls for the calculation of 
variation margin, the CFTC Margin Rule generally provides that:
     CSEs must maintain documentation setting forth the 
variation margin methodology with sufficient specificity to allow a 
counterparty, the Commission, a registered futures association, and any 
applicable U.S. Prudential Regulator to calculate a reasonable 
approximation of the margin requirement independently.
     CSEs must evaluate the reliability of its data sources at 
least annually, and make adjustments, as appropriate.
     CSEs, upon request of the Commission or a registered 
futures association, must provide further data or analysis concerning 
the variation margin methodology or a data source, including: The 
manner in which the methodology meets the requirements of the CFTC 
Margin Rule; a description of the mechanics of the methodology; the 
conceptual basis of the methodology; the empirical support for the 
methodology; and the empirical support for the assessment of the data 
sources.
2. APRA Requirements for Risk Management Controls for the Calculation 
of Initial and Variation Margin
    With respect to risk management controls for the calculation of 
initial margin, APRA's margin requirements generally provide that:
     Where APRA covered entities use a quantitative calculation 
model to calculate initial margin, the models must be subject to an 
independent internal governance process that: (i) Continuously monitors 
and assesses the value of the model's risk assessments; (ii) tests the 
model against realized data and experience; (iii) validates the 
applicability of the model to the derivatives for which it is used; 
(iv) regularly reviews the model in line with developments in global 
industry standards for initial margin models; and (v) accounts for the 
complexity of the products covered.\136\
---------------------------------------------------------------------------

    \136\ See CPS 226, Paragraph 39.
---------------------------------------------------------------------------

     APRA covered entities must ensure that an independent 
review of the initial margin model and risk measurements system is 
carried out initially and then regularly as part of the internal audit 
process. This review must be conducted by functionally independent, 
appropriately trained, and competent personnel, and must take place at 
least once every three years or when a material change is made to the 
model or the risk measurement system.\137\
---------------------------------------------------------------------------

    \137\ See CPS 226, Paragraph 40.
---------------------------------------------------------------------------

    With respect to risk management controls for the calculation of 
variation margin, APRA's margin requirements generally provide that:
     An APRA covered entity must agree with its APRA covered 
counterparties and clearly document the process for determining the 
value of each non-centrally cleared derivative transaction at any time 
from the execution of the transaction to the termination, maturity, or 
expiration thereof.\138\
---------------------------------------------------------------------------

    \138\ See CPS 226, Paragraph 86.
---------------------------------------------------------------------------

     Documentation must include an alternative process or 
approach by which counterparties will determine the value of the non-
centrally cleared derivative transaction in the event of the 
unavailability or other failure of any inputs required to value the 
transaction.\139\
---------------------------------------------------------------------------

    \139\ See CPS 226, Paragraph 88.
---------------------------------------------------------------------------

     An APRA covered entity must perform periodic reviews of 
the agreed upon valuation process to take into account changes in 
market conditions.\140\
---------------------------------------------------------------------------

    \140\ See CPS 226, Paragraph 89.
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing, the Commission has determined that APRA's 
requirements applicable to APRA covered entities pertaining to risk 
management controls for the calculation of initial and variation margin 
are comparable to the corresponding requirements under the CFTC Margin 
Rule. Specifically, the Commission finds that under both APRA's 
requirements and the CFTC Margin Rule, a CSE is required to establish a 
unit independent of the trading desk that is tasked with 
comprehensively managing the entity's use of an initial margin model, 
including establishing controls and testing procedures. Further, APRA's 
margin requirements and the CFTC Margin Rule both require ongoing 
reviews of firms' valuation methodologies. Although APRA's margin rules 
only require an internal review of the margin model and risk 
measurement system to be carried out once every three years, as 
compared to the CFTC Margin Rule's requirement for an annual review, 
APRA's margin rules also require a review to be conducted when a 
material change is made to the model or risk management system. In 
addition, margin model risk is further mitigated by APRA's requirement 
that models must be subject to an internal governance process that, 
among other things, continuously monitors and tests the models against 
realized experience and developments in industry standards. 
Accordingly, the Commission finds that, for purposes of Sec.  23.160, 
APRA's requirements pertaining to risk management controls are 
comparable in outcome to the controls required by the CFTC Margin Rule.

J. Eligible Collateral for Initial and Variation Margin

    As explained in the BCBS/IOSCO Framework, to ensure that 
counterparties can liquidate assets held as initial and variation 
margin in a reasonable amount of time to generate proceeds that could 
sufficiently protect collecting entities from losses on non-centrally 
cleared derivatives in the event of a counterparty default, assets 
collected as collateral for initial and variation margin purposes 
should be highly liquid and should, after accounting for an appropriate 
haircut, be able to hold their value in a time of financial stress. 
Such a set of eligible collateral should take into account that assets 
which are liquid in normal market conditions may rapidly become 
illiquid in times of financial stress. In addition to having good 
liquidity, eligible collateral should not be exposed to excessive 
credit, market and FX risk (including through differences between the 
currency of the collateral asset and the currency of settlement). To 
the extent that the value of the collateral is exposed to these risks, 
appropriately risk-sensitive haircuts should be applied. More 
importantly, the value of the collateral should not exhibit a 
significant correlation with the creditworthiness of the counterparty 
or the value of the underlying non-centrally cleared derivatives 
portfolio in such a way that would undermine the effectiveness of the 
protection offered by the margin collected. Accordingly, securities 
issued by the counterparty or its related entities should not be 
accepted as collateral. Accepted collateral should also be reasonably 
diversified.
1. Commission Requirement for Eligible Collateral for Initial and 
Variation Margin
    With respect to eligible collateral that may be collected or posted 
to satisfy an initial margin obligation, the CFTC Margin Rule generally 
provides that CSEs may collect or post: \141\
---------------------------------------------------------------------------

    \141\ See Sec.  23.156(a)(1).
---------------------------------------------------------------------------

     Cash denominated in a major currency, being United States 
Dollar (USD); Canadian Dollar (CAD); Euro (EUR); United Kingdom Pound 
(GBP); Japanese Yen (JPY); Swiss Franc (CHF); New Zealand Dollar (NZD); 
Australian Dollar (AUD); Swedish Kronor (SEK); Danish Kroner (DKK); 
Norwegian Krone

[[Page 12922]]

(NOK); any other currency designated by the Commission; or any currency 
of settlement for a particular uncleared swap.
     A security that is issued by, or unconditionally 
guaranteed as to the timely payment of principal and interest by, the 
U.S. Department of Treasury.
     A security that is issued by, or unconditionally 
guaranteed as to the timely payment of principal and interest by, a 
U.S. government agency (other than the U.S. Department of Treasury) 
whose obligations are fully guaranteed by the full faith and credit of 
the U.S. government.
     A security that is issued by, or fully guaranteed as to 
the payment of principal and interest by, the European Central Bank or 
a sovereign entity that is assigned no higher than a 20 percent risk 
weight under the capital rules applicable to SDs subject to regulation 
by a U.S. Prudential Regulator.
     A publicly-traded debt security issued by, or an asset-
backed security fully guaranteed as to the timely payment of principal 
and interest by, a U.S. Government-sponsored enterprise that is 
operating with capital support or another form of direct financial 
assistance received from the U.S. government that enables the 
repayments of the U.S. Government-sponsored enterprise's eligible 
securities.
     A security that is issued by, or fully guaranteed as to 
the payment of principal and interest by, the Bank for International 
Settlements, the International Monetary Fund, or a multilateral 
development bank as defined in Sec.  23.151.
     Other publicly-traded debt that has been deemed acceptable 
as initial margin by a U.S. Prudential Regulator as defined in Sec.  
23.151.
     A publicly-traded common equity security that is included 
in the Standard & Poor's Composite 1500 Index (or any other similar 
index of liquid and readily marketable equity securities as determined 
by the Commission), or an index that a CSE's supervisor in a foreign 
jurisdiction recognizes for purposes of including publicly traded 
common equity as initial margin under applicable regulatory policy, if 
held in that foreign jurisdiction.
     Securities in the form of redeemable securities in a 
pooled investment fund representing the security-holder's proportional 
interest in the fund's net assets and that are issued and redeemed only 
on the basis of the market value of the fund's net assets prepared each 
business day after the security-holder makes its investment commitment 
or redemption request to the fund, if the fund's investments are 
limited to securities that are issued by, or unconditionally guaranteed 
as to the timely payment of principal and interest by, the U.S. 
Department of the Treasury, and immediately-available cash funds 
denominated in U.S. dollars; or securities denominated in a common 
currency and issued by, or fully guaranteed as to the payment of 
principal and interest by, the European Central Bank or a sovereign 
entity that is assigned no higher than a 20% risk weight under the 
capital rules applicable to SDs subject to regulation by a U.S. 
Prudential Regulator, and immediately-available cash funds denominated 
in the same currency; and assets of the fund may not be transferred 
through securities lending, securities borrowing, repurchase 
agreements, reverse repurchase agreements, or other means that involve 
the fund having rights to acquire the same or similar assets from the 
transferee.
     Gold.
     A CSE may not collect or post as initial margin any asset 
that is a security issued by: The CSE or a margin affiliate of the CSE 
(in the case of posting) or the counterparty or any margin affiliate of 
the counterparty (in the case of collection); a bank holding company, a 
savings and loan holding company, a U.S. intermediate holding company 
established or designated for purposes of compliance with 12 CFR 
252.153, a foreign bank, a depository institution, a market 
intermediary, a company that would be any of the foregoing if it were 
organized under the laws of the United States or any State, or a margin 
affiliate of any of the foregoing institutions; or a nonbank financial 
institution supervised by the Board of Governors of the Federal Reserve 
System under Title I of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (12 U.S.C. 5323).\142\
---------------------------------------------------------------------------

    \142\ See Sec.  23.156(a)(2).
---------------------------------------------------------------------------

     The value of any eligible collateral collected or posted 
to satisfy initial margin requirements must be reduced by the following 
haircuts: An 8% discount for initial margin collateral denominated in a 
currency that is not the currency of settlement for the uncleared swap, 
except for eligible types of collateral denominated in a single 
termination currency designated as payable to the non-posting 
counterparty as part of an eligible master netting agreement; and the 
discounts set forth in the following table: \143\
---------------------------------------------------------------------------

    \143\ See Sec.  23.156(a)(3).

                      Standardized Haircut Schedule
------------------------------------------------------------------------
        Cash in same currency as swap obligation                0.0
------------------------------------------------------------------------
Cash in same currency as swap obligation................             0.0
Eligible government and related debt (e.g., central                  0.5
 bank, multilateral development bank, GSE securities
 identified in 17 CFR 23.156(a)(1)(v)): Residual
 maturity less than one-year............................
Eligible government and related debt (e.g., central                  2.0
 bank, multilateral development bank, GSE securities
 identified in 17 CFR 23.156(a)(1)(v)): Residual
 maturity between one and five years....................
Eligible government and related debt (e.g., central                  4.0
 bank, multilateral development bank, GSE securities
 identified in 17 CFR 23.156(a)(1)(v)): Residual
 maturity greater than five years.......................
Eligible corporate debt (including eligible GSE debt                 1.0
 securities not identified in 17 CFR 23.156(a)(1)(v)):
 Residual maturity less than one-year...................
Eligible corporate debt (including eligible GSE debt                 4.0
 securities not identified in 17 CFR 23.156(a)(1)(v)):
 Residual maturity between one and five years...........
Eligible corporate debt (including eligible GSE debt                 8.0
 securities not identified in 17 CFR 23.156(a)(1)(v)):
 Residual maturity greater than five years..............
Equities included in S&P 500 or related index...........            15.0
Equities included in S&P 1500 Composite or related index            25.0
 but not S&P 500 or related index.......................
Gold....................................................            15.0
------------------------------------------------------------------------

    With respect to eligible collateral that may be collected or posted 
to satisfy a variation margin obligation, the CFTC Margin Rule 
generally provides that CSEs may collect or post: \144\
---------------------------------------------------------------------------

    \144\ See Sec.  23.156(b)(1).

---------------------------------------------------------------------------

[[Page 12923]]

     With respect to uncleared swaps with an SD or MSP, only 
immediately available cash funds that are denominated in: U.S. dollars, 
another major currency (as defined in Sec.  23.151), or the currency of 
settlement of the uncleared swap.
     With respect to any other uncleared swaps for which a CSE 
is required to collect or post variation margin, any asset that is 
eligible to be posted or collected as initial margin, as described 
above.
     The value of any eligible collateral collected or posted 
to satisfy variation margin requirements must be reduced by the same 
haircuts applicable to initial margin described above.\145\
---------------------------------------------------------------------------

    \145\ See Sec.  23.156(b)(2).
---------------------------------------------------------------------------

    Finally, CSEs must monitor the value and eligibility of collateral 
collected and posted: \146\
---------------------------------------------------------------------------

    \146\ See Sec.  23.156(c).
---------------------------------------------------------------------------

     CSEs must monitor the market value and eligibility of all 
collateral collected and posted, and, to the extent that the market 
value of such collateral has declined, the CSE must promptly collect or 
post such additional eligible collateral as is necessary to maintain 
compliance with the margin requirements of Sec. Sec.  23.150 through 
23.161.
     To the extent that collateral is no longer eligible, CSEs 
must promptly collect or post sufficient eligible replacement 
collateral to comply with the margin requirements of Sec. Sec.  23.150 
through 23.161.
2. APRA Requirements for Eligible Collateral for Initial and Variation 
Margin
    With respect to eligible collateral that may be collected or posted 
to satisfy an initial or variation margin obligation, APRA's margin 
requirements generally provide that APRA covered entities may collect 
or post: \147\
---------------------------------------------------------------------------

    \147\ See CPS 226, Paragraph 45.
---------------------------------------------------------------------------

     Cash.\148\
---------------------------------------------------------------------------

    \148\ See CPS 226, Paragraph 45(a).
---------------------------------------------------------------------------

     Debt securities issued by Commonwealth, State and 
Territory governments in Australia, central, state, and regional 
governments in other countries, the Reserve Bank of Australia, central 
banks in other countries, and the international banking agencies and 
multilateral development banks (each with an External Credit Assessment 
Institution (``ECAI'') rating of 3 or better).\149\
---------------------------------------------------------------------------

    \149\ See CPS 226, Paragraph 45(b).
---------------------------------------------------------------------------

     Debt securities issued by ADIs, overseas banks, Australian 
and international local governments and corporates (each with an ECAI 
rating of 3 or better).\150\
---------------------------------------------------------------------------

    \150\ See CPS 226, Paragraph 45(c).
---------------------------------------------------------------------------

     Unrated debt securities that are issued by an ADI or 
overseas bank as senior debt and are listed on a recognized exchange. 
All externally rated issues of the same seniority by the same issuer 
must have a long-term or short-term ECAI rating of 3 or better, and the 
entity holding the unrated security must have no information suggesting 
that the unrated security justifies an ECAI rating of less than 3.\151\
---------------------------------------------------------------------------

    \151\ See CPS 226, Paragraph 45(d).
---------------------------------------------------------------------------

     Covered bonds with an ECAI rating of 3 or better.\152\
---------------------------------------------------------------------------

    \152\ See CPS 226, Paragraph 45(e).
---------------------------------------------------------------------------

     Senior securitization exposures with an ECAI rating of 
1.\153\
---------------------------------------------------------------------------

    \153\ See CPS 226, Paragraph 45(f).
---------------------------------------------------------------------------

     Equities included in a major stock index.\154\
---------------------------------------------------------------------------

    \154\ See CPS 226, Paragraph 45(g).
---------------------------------------------------------------------------

     Gold bullion.\155\
---------------------------------------------------------------------------

    \155\ See CPS 226, Paragraph 45(h).
---------------------------------------------------------------------------

     Resecuritization exposures (irrespective of credit 
ratings) are not eligible collateral.\156\
---------------------------------------------------------------------------

    \156\ See CPS 226, Paragraph 46.
---------------------------------------------------------------------------

     Securities issued by a counterparty to the transaction (or 
by any person or entity related or associated with the counterparty) is 
considered to have a material positive correlation with the credit 
quality of the counterparty and thus are not eligible collateral.\157\
---------------------------------------------------------------------------

    \157\ See CPS 226, Paragraph 47.
---------------------------------------------------------------------------

     An APRA covered entity must have appropriate controls in 
place to ensure that the collateral collected does not exhibit 
significant wrong-way risk or significant concentration risk. The 
controls must consider concentrations in terms of an individual issuer, 
issuer type, and asset type.\158\
---------------------------------------------------------------------------

    \158\ See CPS 226, Paragraph 48.
---------------------------------------------------------------------------

    Risk-sensitive haircuts appropriately reflecting the credit, 
market, and FX risk must be applied to the collateral.\159\ The 
haircuts must be calculated using either a model approach approved by 
APRA or the following standardized schedule: \160\
---------------------------------------------------------------------------

    \159\ See CPS 226, Paragraph 50.
    \160\ See CPS 226, Paragraph 50 and Attachment B. The risk-
sensitive haircut for an APRA covered entity may also be calculated 
using a schedule already in use for regulatory capital purposes 
prior to the application of CPS 226, provided that such a schedule 
is at least as conservative as the CPS 226 schedule. The use of such 
an alternative schedule for the risk-sensitive haircut must be 
approved by APRA. Id.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Cash....................................................              0%
------------------------------------------------------------------------
                 Debt securities under paragraph 45(b):
------------------------------------------------------------------------
residual maturity <=1 year..............................            0.5%
residual maturity >1 year, <=5 years....................              2%
residual maturity >5 years..............................              4%
------------------------------------------------------------------------
       Debt securities under paragraphs 45(c), 45(d), 45(e),45(f):
------------------------------------------------------------------------
residual maturity <=1 year..............................              1%
residual maturity >1 year, <=5 years....................              4%
residual maturity >5 years..............................              8%
Equities included in a major stock index................             15%
Gold....................................................             15%
------------------------------------------------------------------------

    With respect to initial margin, an additional FX haircut of eight 
per cent of market value applies to all cash and non-cash collateral in 
which the currency of the collateral asset differs from the termination 
currency.\161\ Similarly, for purposes of variation margin, an 
additional FX haircut of 8% of market value applies to all non-cash 
collateral in which the currency of the collateral asset differs from 
the agreed upon currency of an individual derivative contract, the 
relevant master netting agreement, or the relevant credit support 
annex.\162\
---------------------------------------------------------------------------

    \161\ See CPS 226, Attachment B, Paragraph 4.
    \162\ See CPS 226, Attachment B, Paragraph 3.
---------------------------------------------------------------------------

3. Commission Determination
    Based on the foregoing and the representations of the applicant, 
the Commission observes that APRA's

[[Page 12924]]

requirements pertaining to assets eligible for posting or collecting by 
APRA covered entities as collateral for non-centrally cleared 
derivatives are comparable to the requirements of the CFTC Margin Rule.
    The Commission notes that there are some areas in which APRA's 
requirements for eligible collateral are less strict than those in the 
CFTC Margin Rule. For example, APRA allows for a broader range of forms 
of eligible collateral, including debt securities issued by banks and 
senior securitizations. This difference is mitigated, however, by 
APRA's requirement that such debt securities either: (i) have certain 
minimum credit ratings; or (ii) if unrated, are senior debt listed on a 
recognized exchange and issued by entities whose comparable securities 
have certain minimum credit ratings. Further, APRA's margin rules apply 
a 15% haircut for all equities included on a major stock index, whereas 
the CFTC Margin Rule permits a 15% haircut for equities included in the 
S&P 500 or related index, and a 25% haircut for equities included in 
the S&P 1500 or related index. In addition, unlike the CFTC Margin 
Rule, APRA's margin rules do not delineate specific currencies which 
may be used as collateral.
    With respect to variation margin, the CFTC Margin Rule states that 
CSEs are only permitted to exchange immediately available cash funds 
that are denominated in U.S. dollars, another major currency (as 
defined in Sec.  23.151), or the currency of settlement of the 
uncleared swap when transacting with other swap entities. CSEs may post 
and collect any form of eligible collateral as variation margin when 
transacting with financial end users. By comparison, APRA's 
requirements would permit any form of eligible collateral (as described 
above) for transactions with all counterparties.
    While not identical, the Commission finds that the forms of 
eligible collateral for initial and variation margin under the laws of 
Australia provide comparable protections to the forms of eligible 
collateral mandated by the CFTC Margin Rule. Specifically, although 
APRA's margin regime allows for a broader range of eligible collateral 
with corresponding haircuts, such collateral must satisfy credit rating 
restrictions that seek to ensure that it is liquid and able to hold its 
value in a time of financial stress. APRA covered entities must also 
continuously monitor the concentration risk of collateral. The 
Commission recognizes that the list of eligible collateral under APRA's 
margin regime was compiled by APRA in accordance with the standard set 
forth in the BCBS/IOSCO Framework requiring that the assets held as 
collateral are highly liquid and, after accounting for appropriate 
haircuts, able to hold their value in a time of financial stress.\163\ 
Thus, the Commission finds APRA's margin regime with respect to the 
forms of eligible collateral for initial and variation margin for 
uncleared swaps is comparable in outcome to the CFTC Margin Rule for 
purposes of Sec.  23.160.
---------------------------------------------------------------------------

    \163\ See APRA Discussion Paper, Page 24.
---------------------------------------------------------------------------

K. Requirements for Custodial Arrangements, Segregation, and 
Rehypothecation

    As explained in the BCBS/IOSCO Framework, the exchange of initial 
margin on a net basis may be insufficient to protect two market 
participants with large gross derivatives exposures to each other in 
the case of one firm's failure. Thus, the gross initial margin between 
such firms should be exchanged.\164\
---------------------------------------------------------------------------

    \164\ See BCBS/IOSCO Framework, Key principle 5.
---------------------------------------------------------------------------

    Further, initial margin collected should be held in such a way as 
to ensure that (i) the margin collected is immediately available to the 
collecting party in the event of the counterparty's default, and (ii) 
the collected margin must be subject to arrangements that protect the 
posting party to the extent possible under applicable law in the event 
that the collecting party enters bankruptcy.\165\ The BCBS-IOSCO 
Framework acknowledges that ``there are many different ways to protect 
provided margin,'' and that in some cases, ``access to assets held by 
third-party custodians has been limited or practically difficult.'' 
\166\
---------------------------------------------------------------------------

    \165\ See id.
    \166\ See BCBS/IOSCO Framework, Commentary 5(i).
---------------------------------------------------------------------------

1. Commission Requirement for Custodial Arrangements, Segregation, and 
Rehypothecation
    In keeping with the principles set forth in the BCBS/IOSCO 
Framework, with respect to custodial arrangements, segregation, and 
rehypothecation, the CFTC Margin Rule generally requires that:
     All assets posted by or collected by CSEs as initial 
margin must be held by one or more custodians that are not the CSE, the 
counterparty, or margin affiliates of the CSE or the counterparty.\167\
---------------------------------------------------------------------------

    \167\ See Sec.  23.157(a) and (b).
---------------------------------------------------------------------------

     CSEs must enter into an agreement with each custodian 
holding initial margin collateral that:
    [ssquf] Prohibits the custodian from rehypothecating, repledging, 
reusing, or otherwise transferring (through securities lending, 
securities borrowing, repurchase agreement, reverse repurchase 
agreement or other means) the collateral held by the custodian;
    [ssquf] May permit the custodian to hold cash collateral in a 
general deposit account with the custodian if the funds in the account 
are used to purchase an asset that qualifies as eligible collateral 
(other than equities, investment vehicle securities, or gold), such 
asset is held in compliance with this section, and such purchase takes 
place within a time period reasonably necessary to consummate such 
purchase after the cash collateral is posted as initial margin; and
    [ssquf] Is a legal, valid, binding, and enforceable agreement under 
the laws of all relevant jurisdictions including in the event of 
bankruptcy, insolvency, or a similar proceeding.\168\
---------------------------------------------------------------------------

    \168\ See Sec.  23.157(c)(1) and (2).
---------------------------------------------------------------------------

     A posting party may substitute any form of eligible 
collateral for posted collateral held as initial margin.\169\
---------------------------------------------------------------------------

    \169\ See Sec.  23.157(c)(3).
---------------------------------------------------------------------------

     A posting party may direct reinvestment of posted 
collateral held as initial margin in any form of eligible 
collateral.\170\
---------------------------------------------------------------------------

    \170\ See id.
---------------------------------------------------------------------------

     Collateral that is collected or posted as variation margin 
is not required to be held by a third-party custodian and is not 
subject to restrictions on rehypothecation, repledging, or reuse.\171\
---------------------------------------------------------------------------

    \171\ See CFTC Margin Rule, 81 FR at 672.
---------------------------------------------------------------------------

2. APRA Requirements for Custodial Arrangements, Segregation, and 
Rehypothecation
    With respect to custodial arrangements, segregation, and 
rehypothecation, APRA's margin rules generally require that:
     Initial margin must be held so as to ensure that: (i) The 
margin collected is promptly available to the collecting party in the 
event of the posting party's default; \172\ and (ii) the collected 
margin must be subject to arrangements that protect the posting party 
to the extent possible under applicable law in the event that the 
collecting party enters insolvency or bankruptcy.\173\
---------------------------------------------------------------------------

    \172\ APRA considers the requirement that initial margin be 
promptly available to the collecting party in the event of the 
posting party's default consistent in policy intent with a 
requirement that initial margin be immediately available; i.e., that 
initial margin must be available as soon as legally and 
operationally possible.
    \173\ See CPS 226, Paragraph 25. APRA further represented that 
although it implemented a principles-based approach, in practice it 
believes that most of the major Australian banks intend to use 
third-party custodians to meet with requirements of CPS 226.

---------------------------------------------------------------------------

[[Page 12925]]

     Initial margin must not be re-hypothecated, re-pledged or 
re-used, but cash initial margin may be held in a demand deposit 
account with a third-party custodian in the name of the posting 
counterparty. The third-party custodian must not be affiliated with 
either counterparty. APRA has represented that cash held in a custody 
account may be reinvested in other forms of eligible collateral. 
Contractual arrangements providing for the posting and collection of 
initial margin must provide for initial margin to be held in a manner 
that satisfies this requirement.\174\
---------------------------------------------------------------------------

    \174\ See CPS 226, Paragraph 26.
---------------------------------------------------------------------------

     Initial margin collected must be segregated from the 
collector's proprietary assets. The initial margin collector must also 
segregate initial margin provided in respect of one or more 
counterparties from the assets of other parties if requested by the 
relevant counterparty or counterparties.\175\
---------------------------------------------------------------------------

    \175\ See CPS 226, Paragraph 27.
---------------------------------------------------------------------------

     Eligible collateral that was originally posted or 
collected may be substituted provided that: (i) both parties agree to 
the substitution; (ii) the substitution is made on the terms applicable 
to their agreement; and (iii) the substituted eligible collateral meets 
all of the requirements of APRA's margin rules and the value of the 
substituted eligible collateral, after the application of risk-
sensitive haircuts, is sufficient to meet the margin requirement.\176\
---------------------------------------------------------------------------

    \176\ See CPS 226, Paragraph 49.
---------------------------------------------------------------------------

     Collateral exchanged for variation margin is not subject 
to custodial safekeeping requirements.
3. Commission Determination
    The Commission notes that APRA's margin requirements with respect 
to custodial arrangements are less stringent than those of the CFTC 
Margin Rule in one respect. Under the CFTC Margin Rule, all assets 
posted by or collected by CSEs as initial margin must be held by one or 
more custodians that are not the CSE, the counterparty, or margin 
affiliates of the CSE or the counterparty.\177\ APRA's margin rules 
permit, but do not require, cash initial margin to be held with a 
third-party custodian. If a third-party custodian is used, it may not 
be affiliated with either counterparty. Importantly, however, APRA's 
margin rules do not prohibit an APRA covered entity itself (or an 
affiliated entity for other than cash initial margin) from acting as 
custodian to hold initial margin collected from counterparties, so long 
as the margin is segregated from the collector's proprietary assets. 
Further, where a third-party custodian is not used, APRA's margin rules 
require collateral to be segregated from other counterparties' 
collateral only at the request of the posting counterparty.
---------------------------------------------------------------------------

    \177\ See Sec.  23.157(a) and (b).
---------------------------------------------------------------------------

    As discussed above, the BCBS-IOSCO Framework contemplates multiple 
methodologies for protecting initial margin. APRA has stated that its 
margin safekeeping requirements were intended to allow flexible 
approaches that would mitigate compliance costs without compromising 
the protections available to counterparties.\178\ If a third-party 
custodian is not used, APRA further represented that mere segregation 
of assets, in the absence of a trust arrangement, would not be 
sufficient to meet the requirements of CPS 226. APRA stated that 
Australian insolvency law protects the posting party's right to recover 
initial margin upon insolvency of the collecting party so long as it is 
held by the collecting party on trust for the posting party.\179\ 
Accordingly, the Commission finds that APRA's margin requirements with 
respect to custodial arrangements are comparable in outcome to the CFTC 
Margin Rule for purposes of Sec.  23.160.
---------------------------------------------------------------------------

    \178\ See APRA Discussion Paper, Page 22. APRA further 
represented that many large banks will nonetheless use third-party 
custodians.
    \179\ APRA stated that in the event of a bankruptcy, trust 
assets are not considered property of the collecting party, and 
would be dealt with under the terms of the trust arrangement. See 
Stansfield DIY Wealth Pty Ltd (in liq) [2014] NSWSC 1484.
---------------------------------------------------------------------------

L. Requirements for Margin Documentation

1. Commission Requirement for Margin Documentation
    With respect to requirements for documentation of margin 
arrangements, the CFTC Margin Rule generally provides that:
     CSEs must execute documentation with each counterparty 
that provides the CSE with the contractual right and obligation to 
exchange initial margin and variation margin in such amounts, in such 
form, and under such circumstances as are required by the CFTC Margin 
Rule.\180\
---------------------------------------------------------------------------

    \180\ See Sec.  23.158(a).
---------------------------------------------------------------------------

     The margin documentation must specify the methods, 
procedures, rules, inputs, and data sources to be used for determining 
the value of uncleared swaps for purposes of calculating variation 
margin; describe the methods, procedures, rules, inputs, and data 
sources to be used to calculate initial margin for uncleared swaps 
entered into between the CSE and the counterparty; and specify the 
procedures by which any disputes concerning the valuation of uncleared 
swaps, or the valuation of assets collected or posted as initial margin 
or variation margin may be resolved.\181\
---------------------------------------------------------------------------

    \181\ See Sec.  23.158(b).
---------------------------------------------------------------------------

2. APRA Requirements for Margin Documentation
    With respect to requirements for documentation of margin 
arrangements, APRA's margin rules generally provide that:
     An APRA covered entity must establish and implement 
policies and procedures to execute written trading relationship 
documentation with an APRA covered counterparty prior to or 
contemporaneously with executing a non-centrally cleared derivative 
transaction.\182\
---------------------------------------------------------------------------

    \182\ See CPS 226, Paragraph 74.
---------------------------------------------------------------------------

     The trading relationship documentation must: (i) Promote 
legal certainty for non-centrally cleared derivative transactions; (ii) 
include all material rights and obligations of the counterparties 
concerning the non-centrally cleared derivative trading relationship, 
including margin arrangements in accordance with applicable law, that 
have been agreed between them; and (iii) be executed in writing or 
through equivalent non-rewritable, non-erasable electronic means.\183\
---------------------------------------------------------------------------

    \183\ See CPS 226, Paragraph 75.
---------------------------------------------------------------------------

     An APRA covered entity must agree with its counterparties 
and clearly document the process for determining the value of each non-
centrally cleared derivative transaction for the purpose of exchanging 
margin.\184\
---------------------------------------------------------------------------

    \184\ See CPS 226, Paragraph 86.
---------------------------------------------------------------------------

     All agreements on valuation process must be documented in 
the trading relationship documentation or trade confirmation.\185\
---------------------------------------------------------------------------

    \185\ See CPS 226, Paragraph 87.
---------------------------------------------------------------------------

     An APRA covered entity must have rigorous and robust 
dispute resolution procedures in place with its counterparties prior to 
or contemporaneously with executing a non-centrally cleared derivative 
transaction.\186\
---------------------------------------------------------------------------

    \186\ See CPS 226, Paragraph 90.
---------------------------------------------------------------------------

     An APRA covered entity must have policies and procedures 
to maintain trading relationship documentation for a reasonable period 
of time after the maturity of any outstanding transactions with an APRA 
covered counterparty.\187\
---------------------------------------------------------------------------

    \187\ See CPS 226, Paragraph 76.

---------------------------------------------------------------------------

[[Page 12926]]

3. Commission Determination
    Based on the foregoing, the Commission has determined that APRA's 
margin requirements applicable to margin documentation are 
substantially the same as the margin documentation requirements under 
the CFTC Margin Rule. Specifically, the Commission finds that under 
both APRA's requirements and the CFTC Margin Rule, a CSE/APRA covered 
entity is required to enter into documentation with each counterparty 
that sets forth the rights and obligations of the counterparties, 
including margin arrangements in accordance with applicable law, as 
well as the methodologies used for determining valuations. Accordingly, 
the Commission finds that APRA's requirements pertaining to margin 
documentation are comparable in outcome to those required by the CFTC 
Margin Rule for purposes of Sec.  23.160.

M. Cross-Border Application of the Margin Regime

1. Cross-Border Application of the CFTC Margin Rule
    The general cross-border application of the CFTC Margin Rule, as 
set forth in the CFTC Cross-Border Margin Rule, is discussed in detail 
in section II supra. However, Sec.  23.160(d) and (e) of the CFTC 
Cross-Border Margin Rule also provide certain alternative requirements 
for uncleared swaps subject to the laws of a jurisdiction that does not 
reliably recognize close-out netting under a master netting agreement 
governing a swap trading relationship, or that has inherent limitations 
on the ability of a CSE to post initial margin in compliance with the 
custodial arrangement requirements \188\ of the CFTC Margin Rule.\189\
---------------------------------------------------------------------------

    \188\ See Sec.  23.157 and section IV(K) supra.
    \189\ See Sec.  23.160(d) and (e). With respect to non-netting 
jurisdictions, the CFTC margin rule generally provides that if a CSE 
cannot conclude after sufficient legal review with a well-founded 
basis that the netting agreement described in Sec.  23.152(c) meets 
the definition of ``eligible master netting agreement'' set forth in 
Sec.  23.151, the CSE must treat the uncleared swaps covered by the 
agreement on a gross basis for the purposes of calculating and 
complying with the requirements of Sec. Sec.  23.152(a) and 
23.153(a) to collect margin, but the CSE may net those uncleared 
swaps in accordance with Sec. Sec.  23.152(c) and 23.153(d) for the 
purposes of calculating and complying with the requirements of this 
part to post margin. A CSE that relies on this provision must have 
policies and procedures ensuring that it is in compliance with the 
requirements of this paragraph, and maintain books and records 
properly documenting that all of the requirements of the provision 
are satisfied.
    With respect to jurisdictions where compliance with custodial 
arrangements is unavailable, Sec. Sec.  23.152(b), 23.157(b), and 
23.160(d) do not apply to an uncleared swap entered into by a 
Foreign Consolidated Subsidiary or a foreign branch of a U.S. CSE if 
(i) inherent limitations in the legal or operational infrastructure 
in the applicable foreign jurisdiction make it impracticable for the 
CSE and its counterparty to post any form of eligible initial margin 
collateral recognized pursuant to Sec.  23.156 in compliance with 
the custodial arrangement requirements of Sec.  23.157; (ii) the CSE 
is subject to foreign regulatory restrictions that require the CSE 
to transact in uncleared swaps with the counterparty through an 
establishment within the foreign jurisdiction and do not accommodate 
the posting of collateral for the uncleared swap in compliance with 
the custodial arrangements of Sec.  23.157 in the United States or a 
jurisdiction for which the Commission has issued a comparability 
determination under Sec.  23.160(c) with respect to Sec.  23.157; 
(iii) the counterparty to the uncleared swap is a non-U.S. person 
that is not a CSE, and the counterparty's obligations under the 
uncleared swap are not guaranteed by a U.S. person; (iv) the CSE 
collects initial margin for the uncleared swap in accordance with 
Sec.  23.152(a) in the form of cash pursuant to Sec.  
23.156(a)(1)(i), and posts and collects variation margin in 
accordance with Sec.  23.153(a) in the form of cash pursuant to 
Sec.  23.156(a)(1)(i); (v) for each broad risk category, as set out 
in Sec.  23.154(b)(2)(v), the total outstanding notional value of 
all uncleared swaps in that broad risk category, as to which the CSE 
is relying on Sec.  23.160(e), may not exceed 5% of the CSE's total 
outstanding notional value for all uncleared swaps in the same broad 
risk category; (vi) the CSE has policies and procedures ensuring 
that it is in compliance with the requirements of Sec.  23.160(e); 
and (vii) the CSE maintains books and records properly documenting 
that all of the requirements of Sec.  23.160(e) are satisfied.
---------------------------------------------------------------------------

    Section 23.160(d) generally provides that where a jurisdiction does 
not reliably recognize close-out netting, the CSE must treat the 
uncleared swaps covered by a master netting agreement on a gross basis 
with respect to collecting initial and variation margin, but may treat 
such swaps on a net basis with respect to posting initial and variation 
margin.\190\
---------------------------------------------------------------------------

    \190\ See id.
---------------------------------------------------------------------------

    Section 23.160(e) generally provides that where certain CSEs are 
required to transact with certain counterparties in uncleared swaps 
through an establishment in a jurisdiction where, due to inherent 
limitations in legal or operational infrastructure, it is impracticable 
to require posted initial margin to be held by an independent custodian 
pursuant to Sec.  23.157, the CSE is required to collect initial margin 
in cash (as described in Sec.  23.156(a)(1)(i)) and post and collect 
variation margin in cash, but is not required to post initial margin. 
In addition, the CSE is not required to hold the initial margin 
collected with an unaffiliated custodian.\191\ Finally, the CSE may 
only enter into such affected transactions up to 5% of its total 
uncleared swap notional outstanding for each broad category of swaps 
described in Sec.  23.154(b)(2)(v).
---------------------------------------------------------------------------

    \191\ See Sec. Sec.  23.160(e) and 23.157(b).
---------------------------------------------------------------------------

2. Cross-Border Application of APRA's Margin Regime

    With respect to cross-border transactions, APRA's margin 
requirements state that APRA may approve substituted compliance in 
relation to the margin requirements of a foreign jurisdiction where 
those requirements are comparable in outcome with the BCBS/IOSCO 
framework and APRA's margin rules.\192\ Where APRA grants substituted 
compliance, an APRA covered entity will be deemed in compliance with 
APRA's margin rules for transactions in which it complies with the 
relevant foreign margin requirements in their entirety.\193\ APRA may 
limit the scope or impose conditions on its substituted compliance 
determinations.\194\ An APRA covered entity may only avail itself of 
substituted compliance with respect to a foreign jurisdiction when a 
transaction is subject to the margin requirements of that 
jurisdiction.\195\
---------------------------------------------------------------------------

    \192\ See CPS 226, Paragraph 62.
    \193\ See CPS 226, Paragraph 63.
    \194\ Id.
    \195\ See CPS 226, Paragraph 64. An APRA covered entity may only 
substitute compliance in APRA's margin rules with those of a foreign 
jurisdiction where: (i) the APRA covered entity is transacting with 
an APRA covered counterparty that is subject to the margin 
requirements of a the relevant foreign jurisdiction; and/or (ii) the 
APRA covered entity is directly subject to the margin requirements 
of the relevant foreign jurisdiction. Id.
---------------------------------------------------------------------------

    Where an APRA covered entity is a foreign ADI, a foreign general 
insurer operating as a foreign branch in Australia, or an eligible 
foreign life insurance company and is directly subject to margin 
requirements that are substantially similar to the BCBS/IOSCO Framework 
by its home jurisdiction, it may comply with its home jurisdiction's 
requirements in their entirety in lieu of complying with APRA's margin 
rules, subject to certain conditions.\196\ Specifically, the APRA 
covered entity must complete an internal assessment that positively 
demonstrates: (i) How it is directly subject to the requirements of the 
foreign jurisdiction; (ii) how the requirements of the foreign 
jurisdiction are substantially similar to the BCBS/IOSCO Framework; and 
(iii) how it complies with those requirements.\197\
---------------------------------------------------------------------------

    \196\ See CPS 226, Paragraph 65.
    \197\ See CPS 226, Paragraph 65. The APRA covered entity's 
internal assessment, and any additional information, must be made 
available to APRA upon request. Id.
---------------------------------------------------------------------------

    Similarly, where a member of an APRA covered entity's Level 2 group 
that is incorporated outside of Australia is directly subject to margin 
requirements of a foreign jurisdiction that are substantially similar 
to the

[[Page 12927]]

BCBS/IOSCO Framework, the APRA covered entity may apply for approval by 
APRA to comply, with respect to that member, with the foreign 
jurisdiction's requirements in lieu of complying with the relevant 
requirements of APRA's margin rules.\198\
---------------------------------------------------------------------------

    \198\ See CPS 226, Paragraph 66.
---------------------------------------------------------------------------

    Further, an APRA covered entity is not required to exchange 
variation margin or post or collect initial margin if there is any 
doubt as to the enforceability of: (i) The netting agreement upon 
insolvency or bankruptcy of the counterparty; \199\ or (ii) the 
collateral agreement upon default of the counterparty.\200\ APRA 
covered entities must monitor such exposures and set appropriate 
internal limits and controls to manage its exposure to such 
counterparties.\201\ APRA has represented that it will review such 
thresholds, limits and controls though its supervisory processes and 
monitor both entity and industry levels of exposures to these 
jurisdictions.
---------------------------------------------------------------------------

    \199\ See CPS 226, Paragraph 68.
    \200\ See CPS 226, Paragraph 69.
    \201\ See CPS 226, Paragraphs 68 and 69.
---------------------------------------------------------------------------

    Finally, where a counterparty to a transaction is incorporated, and 
operating, in a legal jurisdiction that does not permit it or its 
counterparty to satisfy the safekeeping requirements of Paragraph 25 of 
APRA's margin rules,\202\ an APRA covered entity is not required to 
post or collect initial margin.\203\ APRA represented that although 
there is no limit to such exposures, it intends to monitor the use of 
this exemption as part of its supervisory program.
---------------------------------------------------------------------------

    \202\ See CPS 226, Paragraph 25, which states that initial 
margin must be held so as to ensure that: (a) the margin collected 
is promptly available to the collecting party in the event of the 
posting party's default; and (b) the collected margin must be 
subject to arrangements that protect the posting party to the extent 
possible under applicable law in the event that the collecting party 
enters insolvency or bankruptcy.
    \203\ See CPS 226, Paragraph 67. APRA has represented that this 
exemption is intended to address legal impediments that currently 
exist in New Zealand because the four largest banks regulated by 
APRA have New Zealand subsidiaries that are subject to APRA's rules. 
According to APRA, entities subject to New Zealand law are not able 
to give, and enforce rights with respect to, margin provided by way 
of security interest. APRA continues to engage in ongoing dialogue 
with New Zealand regarding this use of this exemption.
---------------------------------------------------------------------------

3. Commission Determination
    Although there are some differences in the cross-border application 
of APRA's margin rules as compared to the CFTC Cross-Border Margin 
Rule, the Commission finds that the cross-border application of APRA's 
margin regime is comparable in outcome to that of the CFTC Margin Rule 
as supplemented by the CFTC Cross-Border Margin Rule for purposes of 
Sec.  23.160.
    APRA implemented a final amendment to CPS 226 on September 1, 2017, 
which permits substituted compliance with respect to the margin 
requirements of fourteen foreign bodies, including the CFTC and the 
U.S. Prudential Regulators.\204\ Accordingly, where a counterparty to a 
transaction is subject to the uncleared margin requirements of APRA and 
the CFTC, it may comply with the CFTC Margin Rule.
---------------------------------------------------------------------------

    \204\ Where an APRA covered entity and its APRA covered 
counterparty are both members of the same margining group, APRA did 
not grant substituted compliance with respect the following 
jurisdictions: (i) Office of the Superintendent of Financial 
Institutions, Canada; (ii) European Commission; (iii) Hong Kong 
Monetary Authority; (iv) Financial Services Agency, Japan; (v) 
Ministry of Agriculture, Forestry and Fisheries, Japan; (vi) 
Monetary Authority of Singapore; and (vii) Swiss Financial Market 
Supervisory Authority.
---------------------------------------------------------------------------

    The Commission notes some differences in the cross-border treatment 
of netting and collateral agreements by APRA and the CFTC. 
Specifically, the CFTC Cross-Border Margin Rule provides that a CSE 
transacting in a jurisdiction that does not reliably recognize close-
out netting and/or collateral arrangements must collect initial and 
variation margin on a gross basis, but may post on a net basis.\205\ 
APRA's margin regime differs in this respect in that it does not 
require APRA covered entities to collect or post initial or variation 
margin at all where the enforceability of netting agreements and/or 
collateral arrangements are questionable. APRA stated that it 
implemented these exceptions in consideration of: (i) The potential 
liquidity burdens associated with exchanging margin on a gross basis; 
(ii) the additional counterparty credit risk associated with posting 
collateral to a jurisdiction where insolvency laws do not provide 
certainty that posted collateral will be returned in the event of the 
counterparty's insolvency; (iii) the higher regulatory capital 
requirements that would apply to banking institutions for their non-
netting or uncollateralized exposures; and (iv) the commercial 
limitations to requiring margin on a collect-only basis, or on a 
collect-gross and post-net basis. However, pursuant to APRA's margin 
rules, APRA covered entities are required to monitor the resulting 
uncollateralized exposures and set appropriate internal limits and 
controls to manage such exposures to counterparties in these 
jurisdictions.\206\ APRA represented that although it did not prescribe 
a quantitative limit for such exposures, it intends to review APRA 
covered entities' internal thresholds, limits, and controls through its 
supervisory process and monitor both entity and industry levels of 
exposures to these non-netting jurisdictions. The Commission notes that 
every CSE is required to have a risk management program pursuant to 
Sec.  23.600, and thus the Commission also has the authority to inquire 
as to the adequacy of risk management covering uncleared swaps in non-
netting jurisdictions. In light of the limited scope of the difference 
and APRA's heightened supervisory focus, the Commission finds for 
purposes of Sec.  23.160 that APRA's margin rules are comparable in 
outcome to the Commission's margin rules with respect to the treatment 
of cross-border transactions with counterparties in non-netting 
jurisdictions.
---------------------------------------------------------------------------

    \205\ See Sec.  23.160(d).
    \206\ See CPS 226, Paragraphs 68 and 69.
---------------------------------------------------------------------------

    Further, the CFTC Cross-Border Margin Rule states that when a CSE 
transacts in a jurisdiction where it cannot adhere to the CFTC Margin 
Rule's custodial safekeeping requirements, the CSE must collect initial 
margin in cash, and post and collect variation margin in cash, but is 
not required to post initial margin.\207\ APRA's margin regime, 
however, does not require APRA covered entities to post or collect 
initial margin where either it or its counterparty cannot satisfy the 
safekeeping requirements of Paragraph 25 of APRA's margin rules.\208\ 
APRA explained that this provision was intended to address APRA covered 
entities operating in New Zealand, where the country's legal framework 
prevents the giving or enforcing of rights with respect to margin 
provided by way of security interest. APRA further stated that it 
intends to monitor the use of this exemption and is engaged in ongoing 
dialogue with New Zealand authorities. Given this explanation, the 
Commission believes that the use of this exemption will be limited in 
scope and continuously monitored by APRA. Accordingly, although the 
Commission acknowledges that APRA's initial margin requirements in such 
scenarios are less stringent than those of the CFTC, the Commission 
finds that they

[[Page 12928]]

are nonetheless comparable in outcome for purposes of Sec.  23.160.
---------------------------------------------------------------------------

    \207\ See Sec.  23.160(e).
    \208\ See CPS 226, Paragraph 25, which states that initial 
margin must be held so as to ensure that: (a) The margin collected 
is promptly available to the collecting party in the event of the 
posting party's default; and (b) the collected margin must be 
subject to arrangements that protect the posting party to the extent 
possible under applicable law in the event that the collecting party 
enters insolvency or bankruptcy.
---------------------------------------------------------------------------

    Having considered the similarities and differences described above, 
the Commission finds that the cross-border aspects of APRA's margin 
regime comparable in outcome to that of the Commission for purposes of 
Sec.  23.160.

N. Supervision and Enforcement

    The Commission has a long history of regulatory cooperation with 
APRA, including cooperation in the regulation of registrants of the 
Commission that are also APRA covered entities.\209\ As part of APRA's 
ongoing prudential regulation and supervision of APRA covered entities, 
it will take all measures necessary to ensure that APRA's margin rules 
are implemented. Thus, the Commission finds that APRA has the necessary 
powers to supervise, investigate, and discipline entities for 
compliance with its margin requirements and recognizes APRA's ongoing 
efforts to detect and deter violations of, and ensure compliance with, 
the margin requirements applicable in Australia.
---------------------------------------------------------------------------

    \209\ To facilitate this cooperation, the Commission has 
concluded memoranda of understanding with APRA with respect to the 
exchange of supervisory information. See the Commission's website at 
http://www.cftc.gov/International/MemorandaofUnderstanding/index.htm.
---------------------------------------------------------------------------

V. Conclusion

    As detailed above, the Commission has noted several differences 
between the CFTC Margin Rule and APRA's margin rules. However, having 
considered the scope and objectives of the margin requirements for non-
centrally cleared derivatives under the laws of Australia \210\ the 
margin requirements in the broader context of APRA's prudential 
oversight of risk management and capital requirements, whether such 
margin requirements achieve comparable outcomes to the Commission's 
corresponding margin requirements,\211\ the ability of APRA to 
supervise and enforce compliance with the margin requirements for non-
centrally cleared derivatives under the laws of Australia,\212\ and the 
reciprocal nature of comity in international regulation, the Commission 
has determined that APRA's margin rules are comparable in outcome, for 
purposes of Sec.  23.160, to the CFTC Margin Rule.
---------------------------------------------------------------------------

    \210\ See Sec.  23.160(c)(3)(i).
    \211\ See Sec.  23.160(c)(3)(ii). As discussed herein, the 
Commission's CFTC Margin Rule is based on the BCBS/IOSCO Framework; 
therefore, the Commission expects that the relevant foreign margin 
requirements would conform to such Framework at minimum in order to 
be deemed comparable to the Commission's corresponding margin 
requirements.
    \212\ See Sec.  23.160(c)(3)(iii). See also Sec.  
23.160(c)(3)(iv) (indicating the Commission would also consider any 
other relevant facts and circumstances).

    Issued in Washington, DC, on March 27, 2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

Appendices to Comparability Determination for Australia: Margin 
Requirements for Uncleared Swaps for Swap Dealers and Major Swap 
Participants--Commission Voting Summary, Chairman's Statement, and 
Commissioners' Statements

Appendix 1--Commission Voting Summary

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

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    Today I am pleased to announce that the Commission has issued a 
decision concluding that the Australian margin rules are comparable 
to the CFTC rules. As a result, Australian firms may rely on 
compliance with Australian margin rules to satisfy CFTC 
requirements.
    In making this substituted compliance determination, Commission 
staff has conducted a principles-based, holistic analysis that 
focuses on regulatory outcomes rather than on a strict rule-by-rule 
comparison. This means that market participants can rely on one set 
of rules--in their totality--without fear that another jurisdiction 
will seek to selectively impose an additional layer of regulatory 
obligations.
    This comparability determination is another example of how the 
Commission is committed to showing deference to foreign 
jurisdictions that have comparable regulatory and supervisory 
regimes. Such an approach is essential to ensuring strong and stable 
derivatives markets that support economic growth both within the 
United States and around the globe.

Appendix 3--Statement of Commissioner Brian D. Quintenz

    I support the issuance of the Margin Comparability Determination 
for Australia (Determination). As I have noted previously, in order 
to avoid market fragmentation and an unworkable, complex patchwork 
of cross-border regulations, the Commission must apply a holistic, 
outcomes-based approach to substituted compliance. The Commission 
should assess comparability by determining if the totality of a 
legal regime's regulations, guidance, and supervisory approach 
achieve comparable outcomes to the CFTC's regime, instead of 
engaging in a rule-by-rule analysis for identical requirements.
    I support today's Determination which applies such a holistic 
approach and respects the sovereignty of another jurisdiction to 
implement important G-20 reforms, such as margin, as it deems 
appropriate. Moreover, the Australian Prudential Regulation 
Authority (APRA) has already found CFTC margin regulations to be 
comparable to its own, so I am pleased that the determination 
adopted by the Commission today appropriately reciprocates that 
finding.
    The outcomes-based approach of today's Determination 
appropriately accounts for modest regulatory differences between the 
CFTC and Australian margin regimes. For example, although CFTC rules 
require initial margin to be segregated at a third party custodian, 
the Australian framework allows initial margin to be segregated at a 
third party custodian or held in some other bankruptcy-remote 
manner, such as the use of a trust account. The end result of both 
custodial arrangements is the same, however, because in the event of 
bankruptcy, the posting party's assets are protected. The 
Determination today recognizes that other regimes can achieve the 
same overarching policy goals as the CFTC's regulations, although 
they do so by different means.
    Like the recently amended Comparability Determination for Japan 
regarding margin for uncleared swaps, the Determination before us 
today also limits the flow of risk back to the United States. This 
is because under the Commission's Cross-Border Margin Rule, when a 
U.S. swap dealer enters into an uncleared swap with an Australian 
swap dealer or end-user, it is required to collect initial margin 
and variation margin must be exchanged. In the case of uncleared 
swaps between affiliated U.S. and non-U.S. swap dealers, variation 
margin is always required. In light of these safeguards, I do not 
believe that the Determination today will result in systemic risk 
being ``backdoored'' into the United States.
    Since the Commission first began issuing comparability 
determinations in 2013, we have made substantial progress toward 
formalizing cooperative arrangements with our international 
counterparts through supervisory Memorandums of Understanding 
(``MOUs''). MOUs facilitate information sharing and cooperation 
between regulators with a shared interest in supervising cross-
border firms. Importantly, we have an active MOU with APRA and I 
know we will continue to coordinate closely to ensure appropriate 
oversight over our respective regulated entities.\1\ Through 
deference and engagement, the Commission can work alongside other 
regulators to ensure a well-regulated, liquid, global swaps market.
---------------------------------------------------------------------------

    \1\ Memorandum of Understanding, Cooperation and the Exchange of 
Information Related to the Supervision of Covered Firms (April 13, 
2015), https://www.cftc.gov/idc/groups/public/@internationalaffairs/documents/file/cftc-apra-supervisorymou041320.pdf.
---------------------------------------------------------------------------

Appendix 4--Statement of Commissioner Dan M. Berkovitz

    I support today's Comparability Determination for Australia: 
Margin Requirements for Uncleared Swaps for Swap Dealers and Major 
Swap Participants (``Australia Determination'').
    The Commission's regulations governing margin requirements for 
uncleared swaps (``CFTC Margin Rules'') help mitigate risks

[[Page 12929]]

posed by uncleared swaps to swap dealers, major swap participants, 
and the overall U.S. financial system.\1\ In this regard, the CFTC 
Margin Rules--and other rules around the world requiring margin for 
uncleared swaps--are a fundamental component of the regulatory 
reforms adopted in the wake of the 2008 financial crisis.
---------------------------------------------------------------------------

    \1\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016).
---------------------------------------------------------------------------

    In 2016, the CFTC adopted its cross-border margin rule to permit 
swap dealers and major swap participants located in non-U.S. 
jurisdictions to comply with the CFTC's Margin Rules by meeting the 
similar rules of their home jurisdiction if the Commission has 
deemed those rules comparable.\2\ This framework for ``substituted 
compliance'' supports the global nature of the swaps market and 
conforms to the directive in the Dodd-Frank Act for the Commission 
to consult and coordinate with international regulators to establish 
consistent international standards for the regulation of swaps 
entities and activities.\3\ The substituted compliance framework 
helps reduce duplicative and overlapping regulatory requirements 
where effective comparable regulation exists, facilitates the 
ability of U.S. market participants to compete in foreign 
jurisdictions, and is consistent with the principle of international 
comity.
---------------------------------------------------------------------------

    \2\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants-Cross-Border Application of the Margin 
Requirements, 81 FR 34818 (May 31, 2016).
    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376, at section 752 (2010).
---------------------------------------------------------------------------

    The CFTC's cross-border margin rule establishes an outcomes-
based approach that considers a number of factors and does not 
require strict conformity with the CFTC Margin Rules. As I have said 
before, a comparability determination should not be based solely on 
the home country's written laws and regulations, but also consider 
the country's broader system of regulation, including oversight and 
enforcement. In addition, the nature of the other country's relevant 
markets may be taken into account. Finally, in considering these 
issues, the Commission should keep in mind the principle of comity: 
The reciprocal recognition of the legislative, executive, and 
judicial acts of another jurisdiction.\4\
---------------------------------------------------------------------------

    \4\ See Restatement (Third) of The Foreign Relations Law in the 
United States, section 101 (1987) (Am. Law Inst. 2019); https://www.law.cornell.edu/wex/comity.
---------------------------------------------------------------------------

    The Australia Determination finds the margin requirements for 
uncleared swaps under Australian laws, regulations, standards, and 
other materials comparable in outcome to the CFTC's Margin Rules. 
The CFTC staff engaged with staff of the Australian Prudential 
Regulation Authority (``APRA''), and evaluated prudential standards 
and other materials provided by APRA to develop an understanding of 
APRA's regulatory objectives, the products and entities subject to 
margin requirements, the treatment of inter-affiliate swaps, and 
other aspects of APRA's margin rules. The in-depth analysis outlined 
in today's Australia Determination reflects a holistic understanding 
by the Commission of APRA's margin rules and its prudential 
oversight practices. The analysis also observes that the CFTC Margin 
Rules and APRA's margin requirements for uncleared swaps are not 
identical. In a number of instances, APRA's specific requirements 
are not as comprehensive as the CFTC's Margin Rules. However, the 
determination explains how mitigating factors--such as certain of 
APRA's risk management requirements and differences in the size of 
the two countries' swap markets and of the market participants in 
them--support a determination that the two systems of regulation 
have similar outcomes.
    For example, unlike the CFTC Margin Rule, APRA only requires 
that variation margin be exchanged between counterparties whose 
average notional amount of uncleared swaps exceeds a certain 
threshold. However, as noted in the determination, Australia's non-
centrally cleared swaps market is highly concentrated in large 
entities that exceed that threshold, and the large majority of 
transactions would therefore be subject to variation margin. 
Furthermore, as noted in the determination, if an Australian entity 
that would otherwise be subject to the CFTC Margin Rules, but for 
substituted compliance, enters into swaps with any U.S. entity 
covered by the CFTC Margin Rules, then both entities are required to 
exchange margin under our rules. This reduces the potential for 
risks from swap activities overseas finding their way to the United 
States.
    As with other jurisdictions where the legal and regulatory 
structure does not mirror our own, and the substituted compliance 
determinations are based on the overall outcome of the regulatory 
system, subsequent monitoring may be appropriate to confirm that our 
initial understanding of the regulatory structure and the expected 
outcomes is accurate. Accordingly, I encourage the CFTC staff to 
periodically assess the implementation of this determination to 
confirm our expectations are accurate.
    I thank the CFTC staff for their thorough work on this 
determination and appreciate their responsiveness to our comments 
and suggestions. I would also like to thank my fellow Commissioners 
for their collaboration in helping us reach this positive outcome.

[FR Doc. 2019-06319 Filed 4-2-19; 8:45 am]
BILLING CODE 6351-01-P