[Federal Register Volume 84, Number 204 (Tuesday, October 22, 2019)]
[Proposed Rules]
[Pages 56392-56397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22955]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE77


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is seeking comment on proposed amendments to the margin 
requirements for uncleared swaps for swap dealers (``SD'') and major 
swap participants (``MSP'') for which there is no prudential regulator. 
The proposed amendments would add the European Stability Mechanism 
(``ESM'') to the list of entities that are expressly excluded from the 
definition of financial end user and correct an erroneous cross-
reference in the Commission's regulations.

DATES: Comments must be received on or before December 23, 2019.

ADDRESSES: You may submit comments, identified by RIN 3038-AE77, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures

[[Page 56393]]

Trading Commission, Three Lafayette Center, 1155 21st Street NW, 
Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. 
Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the FOIA.

FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, 202-418-
6056, [email protected]; Thomas J. Smith, Deputy Director, 202-418-
5495, [email protected]; Warren Gorlick, Associate Director, 202-418-
5195, [email protected]; Carmen Moncada-Terry, Special Counsel, 202-
418-5795, [email protected]; or Rafael Martinez, Senior Financial 
Risk Analyst, 202-418-5462, [email protected], Division of Swap Dealer 
and Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    In January 2016, the Commission adopted Sec. Sec.  23.150 through 
23.161 (collectively, ``CFTC Margin Rule'') to implement section 4s(e) 
of the Commodity Exchange Act (``CEA''),\2\ which requires SDs and MSPs 
for which there is not a prudential regulator (``CSEs'') to meet 
minimum initial and variation margin requirements adopted by the 
Commission by rule or regulation.\3\
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    \2\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (``Final 
Margin Rule''); 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 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a 
``Prudential Regulator'' must meet the margin requirements for 
uncleared swaps established by the applicable ``Prudential 
Regulator.'' 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39) 
(defining the term ``Prudential Regulator'' to include the Board 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, and specifying the entities for which these agencies 
act as Prudential Regulators). The Prudential Regulators published 
final margin requirements in November 2015. See Margin and Capital 
Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015).
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    Consistent with the administration of swap regulation, the 
Commission's Division of Swap Dealer and Intermediary Oversight 
(``DSIO''), on an ongoing basis, reviews rules subject to its 
oversight, no-action letters and other grants of relief. In conducting 
that exercise, DSIO identified a no-action letter, further discussed 
below, whose codification would provide greater certainty to the 
marketplace concerning the scope and application of the CFTC Margin 
Rule and allow for its effective implementation. DSIO also identified a 
typographical error in Commission Sec.  23.157 that without correction 
would cause confusion in the application of the CFTC Margin Rule.

A. No-Action Letter

    In July 2017, the ESM submitted a letter to the Commission 
requesting that SDs be relieved from the CFTC Margin Rule when entering 
into swap transactions with the ESM. The ESM represented that it was 
similar to the multilateral development banks that are listed in 
Commission Sec.  23.151 (including the International Bank for 
Reconstruction and Development, the Asian Development Bank, and the 
European Investment Bank), which are excluded from the definition of 
financial end user and whose swaps are exempt from the CFTC Margin 
Rule. DSIO granted no-action relief, stating that it would not 
recommend enforcement action if an SD subject to the CFTC Margin Rule 
did not comply with that rule solely in respect of uncleared swaps 
between the SD and the ESM.\4\
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    \4\ See CFTC Letter No. 17-34, Commission Sec. Sec.  23.150 
through 23.159, and 23.161; No-Action Position with Respect to 
Uncleared Swaps with the European Stability Mechanism (July 24, 
2017) (``CFTC Letter No. 17-34''), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/17-34.pdf.
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II. Proposed Regulations

A. Amendment of Commission Sec.  23.151--Definition of Financial End 
User

    The CFTC Margin Rule applies to swap transactions between CSEs and 
counterparties that are SDs, MSPs or financial end users. Commission 
Sec.  23.151 defines the term ``financial end user'' \5\ and expressly 
carves out from the definition sovereign entities, multilateral 
development banks, the Bank for International Settlements, entities 
exempt from the definition of financial entity pursuant to section 
2(h)(7)(C)(iii) of the Act and implementing regulations, affiliates 
that qualify for the exemption from clearing pursuant to section 
2(h)(7)(D) of the Act, and eligible treasury affiliates that the 
Commission exempts from the requirements of Commission Sec. Sec.  
23.150 through 23.161 by rule.\6\ The Commission proposes to revise the 
definition of financial end user to further exclude the ESM.
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    \5\ See 17 CFR 23.151.
    \6\ See id.
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    The proposed amendment would codify CFTC Letter No. 17-34, which 
provides relief from the CFTC Margin Rule with respect to uncleared 
swaps between SDs and the ESM. In granting relief, DSIO stated that the 
ESM, like multilateral development banks excluded from the financial 
end user definition, had a lower risk profile, posing less counterparty 
risk to an SD and less systemic risk to the financial system. While not 
explicitly finding that the ESM was a multilateral development bank, 
DSIO recognized that its function and credit profile justified the 
relief.\7\
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    \7\ The Commission notes that the Basel Committee on Banking 
Supervision ascribes to the ESM a 0% risk weight. The ESM has been 
included in the list of entities receiving a 0% risk weight in the 
document entitled ``Basel II: International Convergence of Capital 
Measurement and Capital Standards: A Revised Framework--
Comprehensive Version, June 2006.'' See BIS, Risk Weight for the 
European Stability Mechanism (ESM) and European Financial Stability 
Facility (EFSF), https://www.bis.org/publ/bcbs_nl17.htm.
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    The Commission proposes to amend the definition of financial end 
user in Commission Sec.  23.151 by adding the ESM to the list of 
entities that are expressly excluded from the definition. As described 
in CFTC Letter No. 17-34, the ESM is an intergovernmental financial 
institution that provides financial assistance for national or regional 
development to Euro area member states that are in or are threatened by 
severe financial distress,

[[Page 56394]]

similar to entities listed as multilateral development banks in 
Commission Sec.  23.151, which are excluded from the definition of 
financial end user. To accomplish its policy goals, the ESM utilizes 
several financial assistance instruments, including loans in various 
forms which can be used for multiple purposes and are offered only 
subject to bespoke specified conditions, including economic reforms. 
The ESM regularly enters the international capital markets to fund 
these loans. It enters into uncleared swaps with SDs to hedge the 
interest rate and currency risks it faces as a result of entering into 
and funding these loans and to hedge risks associated with its invested 
contributed capital.
    The Commission notes that, contemporaneously with the issuance of 
this proposal, DSIO staff is issuing a revised no-action letter to 
phase out the relief provided under CFTC Letter No. 17-34, which would 
instead be provided under Commission Sec.  23.151. To allow adequate 
time for submission and review of comments, and finalization of the 
proposed amendment to Sec.  23.151, the revised no-action letter will 
provide relief until the earlier of: (i) April 14, 2020 at 11:59 p.m. 
(Eastern Time); or (ii) the effective date of final Commission action 
on this rule proposal.
    Based on the foregoing, the Commission proposes to exclude the ESM 
from the definition of a financial end user, which provides clarity and 
certainty to CSEs that uncleared swaps entered into with the ESM are 
not subject to the CFTC Margin Rule. The Commission believes that this 
approach is appropriate as activities conducted by the ESM, like 
activities conducted by multilateral development banks that are 
excluded from the financial end user definition, generally have a 
different purpose in the financial system. These types of entities are 
established by governments and their financial activities are designed 
to further governmental purposes. As such, the ESM, like multilateral 
development banks, has a lower risk profile and poses less counterparty 
risk to an SD and less systemic risk to the financial system.
    The Commission also believes that this proposed rule will encourage 
international comity and continued cooperation between the Commission 
and EU authorities. In this regard, the Commission notes that the 
European Stability Mechanism is exempt from the European Market 
Infrastructure Regulation or EMIR's margin rules for OTC derivatives 
contracts not cleared by a central counterparty.\8\ The proposed rule 
acknowledges the unique interests of the EU authorities in the ESM by 
excluding the ESM from the CFTC's margin requirements for uncleared 
swaps. The principles of international comity counsel mutual respect 
for the important interests of foreign sovereigns.\9\
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    \8\ See Regulation (EU) No 648/2012 of the European Parliament 
and the Council of the European Union of July 4, 2012.
    \9\ See Restatement (Third) of Foreign Relations Law of the 
United States sec. 403 (Am. Law Inst. 2018) (the Restatement). The 
Restatement provides that even where a country has a basis for 
jurisdiction, it should not prescribe law with respect to a person 
or activity in another country when the exercise of such 
jurisdiction is unreasonable. See Restatement section 403(1). 
Notably, the Restatement recognizes that, in the exercise of 
international comity, reciprocity is an appropriate consideration in 
determining whether to exercise jurisdiction extraterritorially.
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    Accordingly, paragraph (2)(iii) of the definition of financial end 
user in Commission Sec.  23.151 would be amended by replacing ``The 
Bank for International Settlements'' with ``The Bank for International 
Settlements and the European Stability Mechanism.''
    Request for comment: The Commission requests comment regarding the 
proposed amendment to Commission Sec.  23.151. The Commission 
specifically requests comment on the following question:
     Are there any other risk factors or issues pertaining to 
the ESM's business model that the Commission should consider in 
finalizing this rulemaking?

B. Amendment of Commission Sec.  23.157--Correction of Cross-Reference

    Commission Sec.  23.157 requires initial margin collected from or 
posted by a CSE to be held by one or more independent custodians. The 
CSE must enter into a custodial agreement with each custodian that 
holds the initial margin collateral. In particular, paragraph (c)(1) of 
Commission Sec.  23.157 provides that the custodial agreement must 
prohibit the custodian from rehypothecating, repledging, reusing, or 
otherwise transferring the collateral except that cash collateral may 
be held in a general deposit account with the custodian if the funds in 
the account are used to purchase an asset described in Commission Sec.  
23.156(a)(1)(iv) through (xii).
    Commission staff has determined that the cross-reference to ``Sec.  
23.156(a)(1)(iv) through (xii)'' in paragraph (c)(1) is erroneous. 
First, the existing cross-reference incorrectly refers to non-existing 
paragraphs. Second, the existing cross-reference excludes treasury 
securities and U.S. Government agency securities, which are included in 
the list of eligible collateral set forth in Commission Sec.  
23.156(a)(1), and which the Commission intended to include as eligible 
assets into which cash collateral can be converted.\10\ The correct 
cross-reference should be Sec.  23.156(a)(1)(ii) through (x). The 
Commission is proposing an amendment to Commission Sec.  23.157(c)(1) 
to remove the erroneous cross-reference to ``Sec.  23.156(a)(1)(iv) 
through (xii)'' and replace it with the corrected cross-reference 
``Sec.  23.156(a)(1)(ii) through (x).''
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    \10\ In the Final Margin Rule, the Commission explained that its 
intent was to exclude ``immediately available cash funds,'' which is 
one form of eligible collateral in Commission Sec.  23.156(a)(1), 
because allowing such eligible collateral to be held in the form of 
a deposit liability of the custodian bank would be incompatible with 
Commission Sec.  23.157(c)'s prohibition against rehypothecation of 
collateral. See Final Margin Rule, 81 FR at 671. However, the 
Commission expressly stated that the custodian could use the cash 
funds to purchase other forms of eligible collateral. See id.
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    Request for comment: The Commission requests comment regarding the 
proposed amendment to Commission Sec.  23.157.

III. Administrative Compliance

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies 
to consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis respecting the impact.\11\ 
Whenever an agency publishes a general notice of proposed rulemaking 
for any rule, pursuant to the notice-and-comment provisions of the 
Administrative Procedure Act,\12\ a regulatory flexibility analysis or 
certification typically is required.\13\ The Commission previously has 
established certain definitions of ``small entities'' to be used in 
evaluating the impact of its regulations on small entities in 
accordance with the RFA.\14\ The proposed amendments only affect 
certain SDs and MSPs and their counterparties, which must be eligible 
contract participants (``ECPs'').\15\ The Commission has previously 
established

[[Page 56395]]

that SDs, MSPs and ECPs are not small entities for purposes of the 
RFA.\16\
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    \11\ 5 U.S.C. 601 et seq.
    \12\ 5 U.S.C. 553. The Administrative Procedure Act is found at 
5 U.S.C. 500 et seq.
    \13\ See 5 U.S.C. 601(2), 603, 604, and 605.
    \14\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR 2613 (Jan. 19, 2012); 47 FR 18618 (Apr. 30, 
1982).
    \15\ Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e), each 
counterparty to an uncleared swap must be an ECP, as defined in 
section 1a(18) of the CEA, 7 U.S.C. 1a(18).
    \16\ See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' 77 FR 
30596, 30701 (May 23, 2012).
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    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the proposed alternatives 
will not have a significant economic impact on a substantial number of 
small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \17\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. The Commission may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid Office of Management 
and Budget control number. The proposed rules contain no requirements 
subject to the PRA.
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    \17\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA. Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the section 15(a) considerations.
    In addition, the Commission notes that the consideration of costs 
and benefits below is based on the understanding that the markets 
function internationally, with many transactions involving U.S. firms 
taking place across international boundaries; with some Commission 
registrants being organized outside of the United States; with leading 
industry members typically conducting operations both within and 
outside the United States; and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
below discussion of costs and benefits refers to the effects of the 
proposed rules on all activities subject to the proposal, whether by 
virtue of the activity's physical location in the United States or by 
virtue of the activities' connection with or effect on U.S. commerce 
under CEA section 2(i).\18\
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    \18\ See 7 U.S.C. 2(i).
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1. Baseline and Rule Summary
    The baseline for the Commission's consideration of the costs and 
benefits of this proposed rulemaking is the CFTC Margin Rule. The 
Commission recognizes that to the extent market participants have 
relied on CFTC Letter No. 17-34, the actual costs and benefits of the 
proposed amendment to Commission Sec.  23.151, as realized in the 
market, may not be as significant. The proposed amendment would revise 
the definition of financial end user in Commission Sec.  23.151 to 
exclude the ESM from the definition. The amendment would codify CFTC 
Letter No. 17-34 and confirm that swaps with the ESM as a counterparty 
are not subject to the CFTC Margin Rule. As a result, CSEs facing the 
ESM as counterparties would not be required to exchange margin with the 
ESM, resulting in the collection of lesser amounts of margin to 
mitigate the risk of uncleared swaps. Nevertheless, the Commission 
believes that the proposed amendment is reasonable because the ESM's 
activity in the swaps market, as of the date of this proposal, is so 
limited that any potential unmargined exposure is unlikely to result in 
substantial systemic risk.\19\ In addition, the Commission notes that 
the ESM is an intergovernmental financial institution established by 
the EU, and its stated purpose of supporting member states in financial 
distress serves to manage and reduce risk to the EU financial system.
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    \19\ Recent review of data from the swap data repositories 
indicates that the ESM engages in limited swap trading activity.
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    The Commission is also proposing to amend Commission Sec.  
23.157(c)(1) to remove the erroneous cross-reference to ``Sec.  
23.156(a)(1)(iv) through (xii)'' and to replace it with the corrected 
cross-reference ``Sec.  23.156(a)(1)(ii) through (x).'' The Commission 
believes that custodial banks will benefit from being able to convert 
cash posted as initial margin into treasury and U.S. Government agency 
securities as was originally intended by the Commission.
2. Section 15(a) Considerations
a. Protection of Market Participants and Public
    The proposed amendment to Commission Sec.  23.151 would formalize 
CFTC Letter No. 17-34 and would confirm that swaps with the ESM as a 
counterparty are not subject to the CFTC Margin Rule. As discussed 
above, given the limited activity of the ESM in the swaps markets, the 
Commission believes that the unmargined exposure resulting from swaps 
between CSEs and the ESM is unlikely to result in significant risk to 
the financial system. Inasmuch as margin is posted to protect 
counterparties against credit risk, the creditworthiness of the ESM is 
critical to this analysis. The ESM has maintained high capital levels 
and has ultimate backing from the European Union.\20\ Consequently, at 
this time, the Commission is comfortable that the ESM does not pose 
substantial counterparty credit risk. Thus, the Commission 
preliminarily believes that there would be no material impact on market 
participants and the general public relative to the status quo 
baseline.
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    \20\ CFTC Letter No. 17-34 states that ``[w]ith respect to its 
credit risk, as part of its emergency procedure, the ESM's member 
states have irrevocably agreed to contribute a total of 
approximately [euro]624 billion in additional capital should the ESM 
face financial distress. Further, the ESM is subject to limits on 
its lending and borrowing, and the ESM's property, funding, and 
assets in its member states are immune from search, requisition, 
confiscation, expropriation, or any other form of seizure, taking, 
or foreclosure. In addition, to the extent necessary to carry out 
its activities, all property, funding, and assets of the ESM are 
free from restrictions, regulations, controls, and moratoria of any 
nature. The combined application of these rules and limits is 
effective in keeping the ESM's total liabilities well below its 
available capital.''
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b. Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission preliminarily believes that the efficiency, 
competitiveness, and financial integrity of markets would not be 
significantly impacted by removing the requirement to post and collect 
margin in swap transactions with the ESM. One of the main functions of 
the ESM is to provide emergency assistance to members states of the 
European Union.\21\ Given the nature of its operations, the ESM would 
be motivated to choose sensible, creditworthy counterparties thereby 
containing the credit risk exposure that the ESM may incur in swaps 
transactions.
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    \21\ See CFTC Letter No. 17-34.

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[[Page 56396]]

c. Price Discovery
    The proposed amendment to Commission Sec.  23.151, which codifies 
CFTC Letter No. 17-34, would relieve the ESM and its counterparties 
from the CFTC Margin Rule, as the ESM would no longer be classified as 
a financial end user. The codification of the no-action relief as a 
rule would formalize a no-action position held by DSIO, promoting 
transparency concerning the applicability of the CFTC Margin Rule. 
Because there would not be a legal requirement that margin be posted in 
swap transactions with the ESM, such transactions would likely be for 
prices that deviate from similar swap transactions with financial end 
users but be in line with swaps with non-financial entities. As a 
result, swaps entered into with the ESM could increase, which could 
enhance, or at least not harm, the price discovery process.
d. Sound Risk Management
    The ESM is an intergovernmental financial institution established 
by the EU and its financial activities are designed to advance EU 
objectives. The ESM's purpose is to manage the potential for systemic 
risk by providing support to member states that are in distress. The 
exposures posed by the ESM are therefore relatively unique. Relief from 
the CFTC Margin Rule may result in CSEs being more inclined to enter 
into swaps with the ESM, benefiting from the overall diversification of 
their swap portfolios, which is consistent with sound risk management.
e. Other Public Interest Considerations
    As discussed above, the Commission believes that the proposed 
amendment to Commission Sec.  23.151 is also warranted based on the 
interests of comity and the Commission's continuing cross-border 
coordination with EU authorities, such as the 2016 EC-CFTC Agreement, 
which has fostered cooperation and mutual respect between the CFTC and 
EU authorities.
3. Request for Comment
    The Commission invites comment on its preliminary consideration of 
the costs and benefits associated with the proposed changes to 
Commission Sec. Sec.  23.151 and 23.157, especially with respect to the 
five factors the Commission is required to consider under CEA section 
15(a). In addressing these areas and any other aspect of the 
Commission's preliminary cost-benefit considerations, the Commission 
encourages commenters to submit any data or other information they may 
have quantifying and/or qualifying the costs and benefits of the 
proposal. The Commission also specifically requests comment on the 
following questions:
     Has the Commission accurately identified the benefits of 
this proposal? Are there other benefits to the Commission, market 
participants, and/or the public that may result from the adoption of 
this proposal that the Commission should consider? Please provide 
specific examples and explanations of any such benefits.
     Has the Commission accurately identified the costs of this 
proposal? Are there additional costs to the Commission, market 
participants, and/or the public that may result from the adoption of 
this proposal that the Commission should consider? Please provide 
specific examples and explanations of any such costs.
     Does this proposal impact the section 15(a) factors in any 
way that is not described above? Please provide specific examples and 
explanations of any such impact.
     Whether, and the extent to which, any specific foreign 
requirement(s) may affect the costs and benefits of the proposal. If 
so, please identify the relevant foreign requirement(s) and any 
monetary or other quantitative estimates of the potential magnitude of 
those costs and benefits.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
objectives of the CEA, in issuing any order or adopting any Commission 
rule or regulation. The Commission does not anticipate that the 
proposed changes discussed herein will result in anti-competitive 
behavior. The Commission requests comment regarding whether the 
proposed changes could be deemed anti-competitive.

List of Subjects in 17 CFR Part 23

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

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

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t, 
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

    Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b), 
Pub. L. 111-203, 124 Stat. 1641 (2010).

0
2. In Sec.  23.151, revise paragraph (2)(iii) of the definition of 
``Financial end user'' to read as follows:


Sec.  23.151  Definitions applicable to margin requirements.

* * * * *
    Financial end user * * *
    (2) * * *
    (iii) The Bank for International Settlements and the European 
Stability Mechanism;
* * * * *
0
3. In Sec.  23.157, revise paragraph (c)(1) to read as follows:


Sec.  23.157  Custodial arrangements.

* * * * *
    (c) * * *
    (1) 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 except 
that cash collateral may be held in a general deposit account with the 
custodian if the funds in the account are used to purchase an asset 
described in Sec.  23.156(a)(1)(ii) through (x), 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
* * * * *

    Issued in Washington, DC, on October 16, 2019, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.


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

Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Commission Voting Summary and 
Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Tarbert and Commissioners Behnam, 
Stump, and Berkovitz voted in the affirmative. Commissioner Quintenz 
voted in the negative.

[[Page 56397]]

Appendix 2--Dissenting Statement of Commissioner Brian D. Quintenz to 
the Proposed Exclusion for the European Stability Mechanism From the 
Commission's Margin Requirements for Uncleared Swaps

    In March 2018, I articulated my approach to our current 
regulatory relationship with our European counterparts in light of 
their refusal to stand by or re-affirm their 2016 commitments in the 
CFTC's and European Commission's common approach to the regulation 
of cross-border central counterparties (CCPs) (CFTC-EC CCP 
Agreement).\1\ Specifically, the absence of the agreement's re-
affirmation directly implied the agreement's abrogation by the 
European Market Infrastructure Regulation 2.2 (EMIR 2.2).\2\ I 
therefore vowed that I would either object to or vote against any 
relief provided to or requested by European Union authorities until 
the agreement's clarity was restored. While the possibility still 
exists for a successful outcome to EMIR 2.2 that fully respects the 
CFTC's ultimate authority over U.S. CCPs, still no assurance has 
been given to remove that doubt.
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    \1\ Keynote Address of Commissioner Brian Quintenz before FIA 
Annual Meeting, Boca Raton, Florida (March 14, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz9; and Joint 
Statement from CFTC Chairman Timothy Massad and European 
Commissioner Jonathan Hill, CFTC and the European Commission: Common 
approach for transatlantic CCPs (Feb. 10, 2016), https://www.cftc.gov/PressRoom/PressReleases/pr7342-16.
    \2\ The proposed implementation of EMIR 2.2 by ESMA is available 
at, https://www.esma.europa.eu/press-news/esma-news/esma-consults-tiering-comparable-compliance-and-fees-under-emir-22.
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    I therefore dissent from today's proposed rule to exempt the 
European Stability Mechanism from the Commission's margin 
requirements for uncleared swaps.
    The ESM plays an important role within Europe--an 
intergovernmental organization of the EU's Eurozone member states 
that provides financial assistance to those countries. The rule the 
CFTC is proposing to issue today would codify CFTC staff no-action 
relief permitting the ESM, unlike other financial entities, to enter 
into uncleared swaps with Commission-registered swap dealers without 
complying with the CFTC's margin regulations.\3\ In proposing this 
rule, the CFTC has directed precious staff resources to provide 
legal certainty to an EU agency so that it may access CFTC-
supervised swap dealers with significantly greater flexibility than 
numerous U.S. firms. Yet, we are taking this step while, and as I 
stated at last month's Global Markets Advisory Committee meeting, 
the proposed implementation of EMIR 2.2 has actually increased the 
likelihood of the CCP Agreement's nullification.\4\ It is entirely 
unclear if any of the five U.S. CCPs currently authorized to access 
the EU \5\ will ultimately be treated as domestic EU firms and 
forced to follow EU rules.
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    \3\ CFTC Letter 17-34 (July 24, 2017), https://www.cftc.gov/LawRegulation/CFTCStaffLetters/index.htm.
    \4\ Opening Statement of Commissioner Brian Quintenz before the 
CFTC Global Markets Advisory Committee Meeting (Sept. 24, 2019), 
https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement092419. See also a similar Opening Statement by 
Commissioner Quintenz before the June 12, 2019 meeting of the CFTC's 
Market Risk Advisory Committee, https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement061219.
    \5\ CME, ICE Clear Credit, ICE Clear US, Minneapolis Grain 
Exchange, and Nodal Clear.
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    Subjecting a U.S. CCP to the same level of EU regulation as an 
EU CCP would unilaterally render null and void an agreement 
originally based on regulatory deference and mutual respect between 
two authorities. Even subjecting them to a re-application process 
under new or different criteria could nullify the 2016 agreement. 
And yet that re-application process is precisely the current 
expectation.
    The CFTC-EC CCP Agreement promoted cross-border markets and 
regulatory efficiency because the CFTC and the European Commission 
agreed on where and how to defer to each other's regulatory regimes. 
A rule like the one proposed today, or the relief provided by CFTC 
staff to Eurex Clearing last December (to which I similarly 
objected) \6\ provides special accommodations to an EU institution 
by relying on the CFTC's trust in our EU counterparts. Such trust 
continues to be misplaced until the EU can provide assurance that 
the CFTC-EC CCP Agreement will be upheld.
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    \6\ Statement of Commissioner Brian Quintenz on Staff No-Action 
Relief for Eurex Clearing AG (December 20, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement122018.
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Appendix 3--Supporting Statement of Commissioner Dan M. Berkovitz on 
the Proposed Rule Excluding the European Stability Mechanism From 
Definition of Financial End User

    I support the proposed regulation that would add the European 
Stability Mechanism (``ESM'') to the list of governmental entities 
excluded from the definition of financial end user in the 
Commission's margin regulations. The Commission has recognized for 
many years that entities established by governments like the ESM 
should be exempted from some of our regulatory requirements for 
financial entities. These entities serve a governmental purpose that 
is not to speculate or profit from derivatives and therefor are less 
likely to engage in activities that would bring risk to the United 
States. The ESM, an intergovernmental entity designed to assist EU 
member states in financial distress, would likely reduce systemic 
risk in the European Union. If the 2008 financial crisis is any 
guide, reducing financial distress in one region of the world is 
likely to benefit the rest of the world, including the United 
States.
    In addition, comity is an important consideration when 
regulating entities established by a foreign government for a 
governmental purpose. The proposal will facilitate international 
comity and should encourage further cooperation. Showing reciprocal, 
mutual respect for the important interests of other sovereigns is an 
important step to harmonizing regulation and facilitating global 
markets where appropriate.

[FR Doc. 2019-22955 Filed 10-21-19; 8:45 am]
BILLING CODE 6351-01-P