[Federal Register Volume 84, Number 206 (Thursday, October 24, 2019)]
[Proposed Rules]
[Pages 56950-56956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22954]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE89


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 a proposed amendment to the margin 
requirements for uncleared swaps for swap dealers (``SD'') and major 
swap participants (``MSP'') for which there is no prudential regulator 
(the ``CFTC Margin Rule''). As adopted in 2016, the CFTC Margin Rule, 
which mandates the collection and posting of variation margin and 
initial margin (``IM''), takes effect under a phased compliance 
schedule extending from September 1, 2016 to September 1, 2020. The 
proposed amendment would extend the compliance schedule to September 1, 
2021, for entities with smaller average daily aggregate notional 
amounts of swaps and certain other financial products. By extending the 
compliance schedule, the proposed amendment would mitigate the 
potential market disruption that could result from such a large number 
of entities coming into the scope of the IM requirements on September 
1, 2020.

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

ADDRESSES: You may submit comments, identified by RIN 3038-AE89, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Center, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. 
Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR Chapter I.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the FOIA.

FOR FURTHER INFORMATION CONTACT: 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.

[[Page 56951]]


SUPPLEMENTARY INFORMATION:

I. Background

    Section 4s(e) of the Commodity Exchange Act (``CEA'') \2\ requires 
the Commission to adopt rules establishing minimum initial and 
variation margin requirements for all swaps \3\ that are (i) entered 
into by an SD or MSP for which there is no Prudential Regulator \4\ 
(collectively, ``covered swap entities'' or ``CSEs'') and (ii) not 
cleared by a registered derivatives clearing organization (``uncleared 
swaps'').\5\ To offset the greater risk to the SD or MSP \6\ and the 
financial system arising from the use of uncleared swaps, these 
requirements must (i) help ensure the safety and soundness of the SD or 
MSP and (ii) be appropriate for the risk associated with the uncleared 
swaps held by the SD or MSP.\7\
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    \2\ 7 U.S.C. 1 et seq.
    \3\ For the definition of swap, see section 1a(47) of the CEA 
and Commission Sec.  1.3. 7 U.S.C. 1a(47) and 17 CFR 1.3. It 
includes, among other things, an interest rate swap, commodity swap, 
credit default swap, and currency swap.
    \4\ 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 mean 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 
definition further specifies the entities for which these agencies 
act as Prudential Regulators. The Prudential Regulators published 
final margin requirements in November 2015. See Margin and Capital 
Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) 
(``Prudential Regulators' Margin Rule'').
    \5\ See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission Sec.  23.151, 
the Commission further defined this statutory language to mean all 
swaps that are not cleared by a registered derivatives clearing 
organization or a derivatives clearing organization that the 
Commission has exempted from registration as provided under the CEA. 
17 CFR 23.151.
    \6\ For the definitions of SD and MSP, see section 1a of the CEA 
and Commission Sec.  1.3. 7 U.S.C. 1a and 17 CFR 1.3.
    \7\ 7 U.S.C. 6s(e)(3)(A).
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    The Basel Committee on Banking Supervision (``BCBS'') and the Board 
of the International Organization of Securities Commissions (``IOSCO'') 
established an international framework for margin requirements for 
uncleared derivatives in September 2013 (the ``BCBS/IOSCO 
framework'').\8\ After the establishment of the BCBS/IOSCO framework, 
on January 6, 2016, the CFTC, consistent with Section 4s(e), 
promulgated rules requiring CSEs to collect and post initial and 
variation margin for uncleared swaps,\9\ adopting the implementation 
schedule set forth in the BCBS/IOSCO framework, including the revised 
implementation schedule adopted on March 18, 2015.\10\
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    \8\ See BCBS and IOSCO ``Margin requirements for non-centrally 
cleared derivatives,'' (September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
    \9\ 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. 17 CFR 23.150-23.159, 
23.161. In May 2016, the Commission amended the CFTC Margin Rule to 
add Commission Sec.  23.160, providing rules on its cross border 
application. 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). 17 CFR 23.160.
    \10\ See BCBS and IOSCO ``Margin requirements for non-centrally 
cleared derivatives,'' (March 2015), available at https://www.bis.org/bcbs/publ/d317.pdf.
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II. Proposed Changes to the CFTC Margin Rule (``Proposal'')

    Covered swap entities are required to post and collect IM with 
counterparties that are SDs, MSPs, or financial end users with material 
swap exposure (``MSE'') \11\ (``covered counterparties'') in accordance 
with a compliance schedule set forth in Commission Sec.  23.161.\12\ 
The compliance schedule comprises five compliance dates, from September 
1, 2016 to September 1, 2020, staggered such that CSEs and covered 
counterparties, starting with the largest average daily aggregate 
notional amounts (``AANA'') of uncleared swaps and certain other 
financial products, and then successively lesser AANA, come into 
compliance with the IM requirements in a series of five phases.
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    \11\ Commission Sec.  23.151 provides that MSE for an entity 
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 or August of 
the previous calendar year that exceeds $8 billion, where such 
amount is calculated only for business days. 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 paragraph (1) or (2) of 
this definition would have occurred if such principles or standards 
had applied. 17 CFR 23.151.
    \12\ See 17 CFR 23.161.
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    The fourth compliance date, September 1, 2019, brought within the 
scope of compliance CSEs and covered counterparties each exceeding $750 
billion in AANA. On the fifth and last compliance date (``phase 5''), 
September 1, 2020, remaining CSEs and covered counterparties, including 
financial end user counterparties with an MSE exceeding $8 billion in 
AANA, will come into compliance. As a result of the large reduction in 
the compliance threshold from $750 billion to $8 billion at the end of 
the compliance schedule, a significant number of financial end user 
counterparties, including relatively small counterparties, will be 
required to comply with the IM requirements and implement related 
operational processes. According to the CFTC's Office of the Chief 
Economist (``OCE''), compared with the first through the fourth phase 
of compliance, which brought approximately 40 entities into scope, 
phase 5 would bring approximately 700 entities, along with 7,000 
relationships, which represent the number of IM agreements that would 
have to be in place in phase 5 to carry out swap transactions.\13\
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    \13\ See Initial Margin Phase 5 by Richard Haynes, Madison Lau, 
and Bruce Tuckman, Oct. 24, 2018 available at https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf (``OCE Initial Margin 
Phase 5 Study'').
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    Market participants have expressed concerns regarding the onset of 
phase 5 given the operational complexity associated with IM calculation 
and third-party segregation of IM collateral.\14\ As a large number of 
counterparties prepare to meet applicable IM deadlines, newly in-scope 
entities may encounter operational difficulties because a significant 
number of these entities will be engaging the same limited number of 
entities that provide IM required services, involving, among other 
things, the preparation of IM-related documentation, the approval and 
implementation of risk-based models for IM calculation, and custodial 
arrangements. The potential for compliance delays may lead to 
disruption in the markets, including the possibility that some 
counterparties could, for a time, be prohibited from entering into 
uncleared swaps and therefore be unable to use swaps to hedge their 
financial risk. In recognition of these difficulties, BCBS/IOSCO 
revised its framework to extend the schedule for compliance with the IM 
requirements and provide an additional phase-in period for smaller 
counterparties.\15\
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    \14\ See, e.g., Letter from the Securities Industry and 
Financial Markets Association (``SIFMA''), the American Bankers 
Association (``ABA''), the Global Foreign Exchange Division of the 
Global Financial Markets Association (``GFXD''), and the Institute 
of International Bankers (``IIB'') (April 5, 2019); Letter from the 
Managed Funds Association (June 20, 2019).
    \15\ See BCBS and IOSCO ``Margin requirements for non-centrally 
cleared derivatives,'' (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf (``July 2019 BCBS/IOSCO Margin 
Framework'').

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[[Page 56952]]

    The CFTC believes it is appropriate to amend the CFTC Margin Rule 
consistent with the BCBS/IOSCO framework's revision.\16\ The 
Commission's Proposal, which is in line with the revised framework, 
would extend the compliance schedule for the IM requirements, 
alleviating the potential market disruption. The Proposal represents 
the Commission's effort to undertake coordinated action with 
international counterparts to achieve regulatory harmonization with 
respect to uncleared swaps margin.
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    \16\ See July 2019 BCBS/IOSCO Margin Framework.
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    In proposing the change in the phase 5 compliance date, the 
Commission also considered the relatively small amount of swap activity 
of the financial end users that would be subject to the one year 
extension. The OCE estimated in 2018 that the average AANA per entity 
in phase 5 is $54 billion compared to an average $12.71 trillion AANA 
for each entity in phases 1, 2, and 3 and $1 trillion in phase 4. OCE 
also estimated that total AANA for entities that would be subject to 
the one year extension is approximately three percent of the total AANA 
across all the phases.\17\ Given the relatively small amount of swap 
activity of the financial end users in the extended compliance date 
group, the Commission believes the proposed compliance date extension 
will have a muted impact on the systemic risk mitigating effects of the 
IM requirements during the extension period.
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    \17\ See OCE Initial Margin Phase 5 Study at 4-5.
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    Accordingly, the Commission proposes to amend Commission Sec.  
23.161(a), which sets forth the schedule for compliance with the CFTC 
Margin Rule, to add a sixth phase of compliance for certain smaller 
entities that are currently subject to phase 5. The proposed amendment 
would require compliance by September 1, 2020, for CSEs and covered 
counterparties with an AANA ranging from $50 billion up to $750 
billion. The compliance date for all other remaining CSEs and covered 
counterparties, including financial end user counterparties exceeding 
an MSE of $8 billion in AANA, would be extended to September 1, 2021.
    In addition, the Commission is proposing non-substantive, 
conforming technical changes \18\ to Commission Sec.  23.161(a) to 
replace, where applicable, ``between an entity or a margin affiliate 
only one time'' with ``between the entity and a margin affiliate only 
one time.'' The proposed change will conform the CFTC Margin Rule to 
the rule text of the Prudential Regulators' Margin Rule, promoting 
further harmonization between both regulators.
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    \18\ For consistency, the proposed changes include revisions to 
text in Commission Sec.  23.161(a) relating to compliance dates that 
have already passed.
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    The Commission is also proposing to replace in Commission Sec.  
23.161(a), where applicable, ``shall not count a swap or a security-
based swap that is exempt pursuant to Sec.  23.150(b)'' with ``shall 
not count a swap that is exempt pursuant to Sec.  23.150(b).'' This 
proposed change will remove the term ``security-based swap'' from 
certain parts of Commission Sec.  23.161(a). This change is necessary 
because, due to a transcription error, the current rule text 
incorrectly indicates that Commission Sec.  23.150(b) exempts security-
based swaps from the CFTC Margin Rule. Section 23.150(b) applies only 
to swaps. Notwithstanding this technical change that eliminates the 
reference to Commission Sec.  23.150(b) with respect to security-based 
swaps, Commission Sec.  23.161(a) will continue to exclude any 
security-based swap, for purposes of the calculation of the various 
thresholds set forth in Commission Sec.  23.161(a), that is exempt 
pursuant to section 15F(e) of the Securities Exchange Act, of 1934, as 
is the case, prior to this Proposal, under the current rule text.
    Request for comment. The Commission requests comment regarding the 
proposed amendments to Commission Sec.  23.161. The Commission 
specifically requests comment on the following question:
     Is the proposed rule text relating to the one-year 
extension of the final implementation timeline clear in its intent and 
direction to market participants? Is any further Commission guidance 
necessary to avoid any potential confusion or market disruption? Please 
explain.

III. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \19\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. The Commission may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid Office of Management 
and Budget control number. This Proposal contains no requirements 
subject to the PRA.
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    \19\ 44 U.S.C. 3501 et seq.
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B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities.\20\ This 
Proposal only affects SDs and MSPs that are subject to the CFTC Margin 
Rule and their covered counterparties, all of which are required to be 
eligible contract participants (``ECPs'').\21\ The Commission has 
previously determined that SDs, MSPs, and ECPs are not small entities 
for purposes of the RFA.\22\ Therefore, the Commission believes that 
this Proposal will not have a significant economic impact on a 
substantial number of small entities, as defined in the RFA.
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    \20\ 5 U.S.C. 601 et seq.
    \21\ Each counterparty to an uncleared swap must be an ECP, as 
the term is defined in section 1a(18) of the CEA, 7 U.S.C. 1a(18) 
and Commission Sec.  1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
    \22\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and 
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001) 
(ECPs).
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    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that this Proposal will not have 
a significant economic impact on a substantial number of small 
entities. The Commission invites comment on the impact of this Proposal 
on small entities.

C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA. Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the section 15(a) considerations. 
Further, the Commission reflected upon the extraterritorial reach of 
this Proposal and notes where this reach may be especially relevant.
    This Proposal extends the compliance schedule for the CFTC Margin 
Rule and introduces an additional compliance date for smaller 
counterparties.\23\ The proposed compliance schedule would require CSEs 
and covered counterparties, with an AANA ranging

[[Page 56953]]

from $50 billion up to $750 billion, to exchange IM in phase 5. All 
remaining CSEs and covered counterparties, including financial end user 
counterparties exceeding an MSE of $8 billion in AANA, would come into 
scope in the proposed additional sixth phase, beginning September 1, 
2021.
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    \23\ The Commission is also proposing conforming technical 
changes to Commission Sec.  23.161(a). Given the non-substantive 
nature of these changes, there are no costs or benefits to be 
considered.
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    As discussed above, the Commission believes that as a result of the 
large number of counterparties that would be required to comply with 
the IM requirements for the first time at the end of the current 
compliance schedule, market disruption may arise. The markets may be 
strained given counterparties' demand for resources and services to 
meet the September 2020 deadline and operationalize the exchange of IM, 
involving, among other things, counterparty onboarding, approval and 
implementation of risk-based models for the calculation of IM, and 
documentation associated with the exchange of IM.
    The baseline against which the benefits and costs associated with 
this Proposal are compared is the uncleared swaps markets as they exist 
today, including the impact of the current compliance schedule and the 
implementation of phase 5 on September 1, 2020. With this as the 
baseline for this Proposal, the following are the benefits and costs of 
this Proposal.
1. Benefits
    As described above, this Proposal will extend the compliance 
schedule for the IM requirements for certain smaller entities to 
September 1, 2021. The Proposal is intended to alleviate the potential 
congestion and market disruption resulting from the large number of 
counterparties that would come into scope under the current compliance 
schedule and the strain on the uncleared swaps markets resulting from 
the increased demand for limited resources and services to set up 
operations to comply with the IM requirements, including counterparty 
onboarding, adoption and implementation of risk-based models to 
calculate IM, and documentation associated with the exchange of IM.
    The Proposal would prioritize applicable IM compliance deadlines in 
order to focus on certain financial end users, SDs, and MSPs that 
engage in greater swap trading activity and that may significantly 
contribute to systemic risk in the financial markets, while providing a 
12-month delay for smaller counterparties, whose swap trading may not 
pose the same level of risk, to prepare for their eventual compliance 
with the IM requirements. The Proposal therefore would promote the 
smooth and orderly transition into IM compliance.
    The Proposal would amend the CFTC Margin Rule consistent with the 
revised BCBS/IOSCO margin framework. The Proposal therefore promotes 
harmonization with international margin regulatory requirements, 
reducing the potential for regulatory arbitrage.
2. Costs
    The Proposal would extend the time frame for compliance with the IM 
requirements for the smallest, in terms of notional amount, CSEs and 
covered counterparties, including SDs and MSPs and financial end users 
that exceed an MSE of $8 billion, by an additional 12 months. Swaps 
entered into during this period with the smallest CSEs have the 
potential to be treated as legacy swaps and thus would not be subject 
to the IM requirements. The contagion risk associated with these 
potentially uncollateralized legacy swaps is a lesser concern because 
these legacy swap portfolios would be entered into with counterparties 
that engage in lower levels of notional trading.
    The Proposal would also delay the implementation of IM by smaller 
CSEs. There may not be as much IM posted to protect the financial 
system as would otherwise be the case. As such, the probability and 
severity of financial contagion may increase.
3. Section 15(a) Considerations
    In light of the foregoing, the CFTC has evaluated the costs and 
benefits of this Proposal pursuant to the five considerations 
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
    This Proposal would protect market participants and the public 
against the potential disruption that may be caused by the large number 
of counterparties that would come into scope of the IM requirements at 
the end of the current compliance schedule.
    Under the proposed compliance schedule, fewer counterparties would 
come into scope in phase 5 and many smaller counterparties would be 
able to defer compliance until the sixth and last compliance date on 
September 1, 2021. As such, the demand for resources and services to 
achieve operational readiness would be reduced, mitigating the 
potential strain on the uncleared swaps markets.
    Also, the Proposal would appropriately prioritize IM compliance 
requirements for those counterparties and CSEs that have greater swap 
trading activity and potentially pose greater systemic risk, while 
giving more time to smaller counterparties to come into compliance with 
the IM requirements.
    Inasmuch as this Proposal delays the implementation of IM for the 
smallest CSEs, there may not be as much IM posted to protect the 
financial system as would otherwise be the case. Consequently, the 
probability and severity of financial contagion may be increased, 
especially among the smallest CSEs.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Proposal would make the uncleared swaps markets more 
streamlined by facilitating counterparties' transition into compliance 
with the IM requirements. Counterparties would have additional time to 
document their swap relationships and set up adequate processes to 
operationalize the exchange of IM. As such, the Proposal would promote 
fairer competition among counterparties in the uncleared swaps markets, 
as it would remove the potential incentive of CSEs to prioritize 
arrangements with larger counterparties to the detriment of smaller 
counterparties and would help maintain the current state of market 
efficiency.
    By preventing the market disruption that would result from the 
large number of counterparties that would come into scope at the end of 
the current compliance schedule, the Proposal promotes the financial 
integrity of the markets, reducing the probability of congestion 
resulting from the heightened demand for limited financial 
infrastructure resources. On the other hand, there would be less IM 
posted overall, making uncleared swaps markets more susceptible to 
financial contagion where the default of one counterparty could lead to 
subsequent defaults of other counterparties potentially harming market 
integrity.
(c) Price Discovery
    This Proposal would not harm price discovery and might help 
preserve it. Without the Proposal, counterparties, in particular 
smaller counterparties, may be discouraged from entering or may even be 
foreclosed from entering the uncleared swaps markets because they may 
not be able to secure resources and services in a timely manner to 
operationalize the exchange of IM. These counterparties may thus be 
shut out from the uncleared swaps markets, potentially reducing 
liquidity and harming price discovery.

[[Page 56954]]

(d) Sound Risk Management
    The Proposal would stave off the potential market disruption that 
could result from the large number of counterparties that would come 
into the scope of the IM requirements at the end of the current 
compliance schedule. The extended compliance schedule would alleviate 
the potential congestion in establishing the financial infrastructure 
to post IM between in scope entities and would give counterparties time 
to prepare for the exchange of IM and to establish operational 
processes tailored to their uncleared swaps and associated risks. The 
additional compliance time may also improve risk management practices 
because there might be some parties who may prefer to enter into 
cleared swaps rather than install otherwise required financial 
infrastructure in a short time frame, choosing to enter into swaps that 
are more standardized but that do not match their risk management needs 
as well.
(e) Other Public Interest Considerations
    The Proposal would amend the CFTC Margin Rule consistent with the 
revised BCBS/IOSCO margin framework in order to promote harmonization 
with international margin regulatory requirements and reduce the 
potential for regulatory arbitrage.
4. Request for Comments on Cost-Benefit Considerations
    The Commission invites public comment on its cost-benefit 
considerations, including the section 15(a) factors described above. 
Commenters are also invited to submit any data or other information 
that they may have quantifying or qualifying the costs and benefits of 
the proposed amendments with their comment letters. In particular, the 
Commission seeks specific comment on the following:
    (a) Has the Commission accurately identified all the benefits of 
this Proposal? Are there other benefits to the Commission, market 
participants, and/or the public that may result from the adoption of 
this Proposal that the Commission should consider? Please provide 
specific examples and explanations of any such benefits.
    (b) Has the Commission accurately identified all 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. For example, is 
there a potential for increased counterparty credit risk in trades or 
contagion involving firms that will get the benefit of the margin 
deadline extension that we have proposed, i.e., with respect to trades 
entered into by those entities during the period between September 2020 
and September 2021? Is it possible to identify reliably the amount of 
any such increase in potential risk? Should the margin amounts that 
these firms are required to post by contract, rather than by our 
regulations, be considered as a risk mitigant during that period?
    (c) Does this Proposal impact the section 15(a) factors in any way 
that is not described above? Please provide specific examples and 
explanations of any such impact.

D. Antitrust Laws

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the CEA, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 4c(b) 
of the CEA), or in requiring or approving any bylaw, rule, or 
regulation of a contract market or registered futures association 
established pursuant to section 17 of the CEA.\24\
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    \24\ 7 U.S.C. 19(b).
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    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. Further, the 
Commission preliminarily believes that allowing parties more time to 
come into compliance with the CFTC Margin Rule by splitting the last 
compliance phase into two phases will preserve competition by 
encouraging more participation in the uncleared swaps markets. The 
Commission requests comment on whether this Proposal implicates any 
other specific public interest to be protected by the antitrust laws.
    The Commission has considered this Proposal to determine whether it 
is anticompetitive and has preliminarily identified no anticompetitive 
effects. The Commission requests comment on whether this Proposal is 
anticompetitive and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that this 
Proposal is not anticompetitive and has no anticompetitive effects, the 
Commission has not identified any less anticompetitive means of 
achieving the purposes of the CEA. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the CEA that would otherwise be served by adopting this 
Proposal.

List of Subjects in 17 CFR Part 23

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

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

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

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

0
2. Amend Sec.  23.161 by revising paragraphs (a)(1)(iii), (a)(3)(iii), 
(a)(4)(iii), (a)(5)(iii), and (a)(6) and adding paragraph (a)(7) to 
read as follows:


Sec.  23.161   Compliance dates.

    (a) * * *
    (1) * * *
    (iii) In calculating the amounts in paragraphs (a)(1)(i) and (ii) 
of this section, an entity shall count the average daily 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 and shall not count a swap that is 
exempt pursuant to Sec.  23.150(b) or a security-based swap that is 
exempt pursuant to section 15F(e) of the Securities Exchange Act of 
1934 (15 U.S.C. 78o-10(e)).
* * * * *
    (3) * * *
    (iii) In calculating the amounts in paragraphs (a)(3)(i) and (ii) 
of this section, an entity shall count the average daily 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 and shall not count a swap that is 
exempt pursuant to Sec.  23.150(b) or a security-based swap that is 
exempt pursuant to section 15F(e) of the Securities Exchange Act of 
1934 (15 U.S.C. 78o-10(e)).
    (4) * * *
    (iii) In calculating the amounts in paragraphs (a)(4)(i) and (ii) 
of this section, an entity shall count the

[[Page 56955]]

average daily 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 and shall 
not count a swap that is exempt pursuant to Sec.  23.150(b) or a 
security-based swap that is exempt pursuant to section 15F(e) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78o-10(e)).
    (5) * * *
    (iii) In calculating the amounts in paragraphs (a)(5)(i) and (ii) 
of this section, an entity shall count the average daily 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 and shall not count a swap that is 
exempt pursuant to Sec.  23.150(b) or a security-based swap that is 
exempt pursuant to section 15F(e) of the Securities Exchange Act of 
1934 (15 U.S.C. 78o-10(e)).
    (6) September 1, 2020 for the requirements in Sec.  23.152 for 
initial margin for any uncleared swaps where both--
    (i) The covered swap entity combined with all its margin 
affiliates; and
    (ii) Its counterparty combined with all its margin affiliates have 
an average daily aggregate notional amount of uncleared swaps, 
uncleared security-based swaps, foreign exchange forwards, and foreign 
exchange swaps in March, April, and May 2020 that exceeds $50 billion, 
where such amounts are calculated only for business days; and where
    (iii) In calculating the amounts in paragraphs (a)(6)(i) and (ii) 
of this section, an entity shall count the average daily 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 and shall not count a swap that is 
exempt pursuant to Sec.  23.150(b) or a security-based swap that is 
exempt pursuant to section 15F(e) of the Securities Exchange Act of 
1934 (15 U.S.C. 78o.10(e)).
    (7) September 1, 2021 for the requirements in Sec.  23.152 for 
initial margin for any other covered swap entity with respect to 
uncleared swaps entered into with any other counterparty.
* * * * *

    Issued in Washington, DC, on October 16, 2019, by the 
Commission.
Robert Sidman,
Deputy 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 Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Supporting Statement of Commissioner Brian Quintenz

    I am pleased to support the Commission's proposal to extend the 
compliance schedule for uncleared margin to September 1, 2021 for 
entities with smaller average daily aggregate notional amounts of 
activity. As our own Office of the Chief Economist noted, phase five 
would have brought approximately 700 entities into our margin 
regime, implicating around 7,000 relationships that would have to be 
negotiated to manage initial margin arrangements.\1\ Recognizing the 
operational challenges associated with phase 5 implementation, BCBS 
and IOSCO revised the uncleared margin framework to include an 
additional implementation phase. I am pleased that the agency, 
consistent with this revised international framework, is providing 
these smaller counterparties with additional time to come into 
compliance. I also support the recent proposal by the US banking 
regulators to similarly extend the compliance period for smaller 
firms.
---------------------------------------------------------------------------

    \1\ See Initial Margin Phase 5 by Richard Haynes, Madison Lau, 
and Bruce Tuckman, Oct. 24, 2018 available at https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf.
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    However, much more needs to be done. First, it is critical that 
the CFTC, US banking regulators, the SEC, and our international 
counterparts adopt a coordinated approach with respect to uncleared 
margin. The derivatives market is a global market and any 
differences in our respective approaches will result in increased 
burdens and operational complexities for firms. This point was 
emphasized most recently at the Global Markets Advisory Committee 
(GMAC) meeting. Participants highlighted the numerous ways in which 
derivatives regulators across the globe have implemented conflicting 
timing, scope, calculation, and other requirements for uncleared 
margin implementation. I believe we must work with our regulatory 
counterparts to eliminate these cross-border discrepancies. This 
rulemaking represents a first step of many more in that 
international harmonization effort and I will continue to support 
the work of Commissioner Stump through the GMAC to further align and 
rationalize uncleared margin frameworks globally.

Appendix 3--Concurring Statement of Commissioner Dan M. Berkovitz

    I concur with issuing for public comment the proposed rulemaking 
(``Proposal'') to extend the swaps margining compliance deadline for 
certain financial entities that have smaller swap portfolios.
    In general, I am not in favor of extending compliance deadlines 
when there has been a substantial lead-in period for compliance. The 
compliance date being extended in the Proposal was set more than 
four years earlier. However, in this instance, there are several 
factors that lead me to conclude that the Proposal will benefit 
hundreds of entities with smaller swap portfolios while having only 
a small impact on the systemic risk mitigation benefits of the 
initial margin requirements.
    Variation and initial margin requirements for uncleared swaps 
reduce contagion and liquidity concerns by ensuring that collateral 
is available to cover swap losses if a party defaults.\1\ Two types 
of margin are required. Variation margin covers current net exposure 
from day-to-day price movements for a portfolio of swaps. The 
Proposal does not change variation margin requirements. Initial 
margin covers estimated potential future exposures between the time 
a default occurs and when the swaps can be closed out or hedged.
---------------------------------------------------------------------------

    \1\ Basel Committee on Banking Supervision and the Board of the 
International Organization of Securities Commissions ``Margin 
requirements for non-centrally cleared derivatives,'' (September 
2013), available at https://www.bis.org/publ/bcbs261.pdf.
---------------------------------------------------------------------------

    A CFTC Office of the Chief Economist (``OCE'') analysis 
indicated that approximately 40 large financial enterprises are 
already required to exchange initial margin for uncleared swaps 
under regulations adopted by the CFTC and other regulators.\2\ Under 
the current rule, the so called ``phase 5'' entities, entities with 
average daily aggregate notional amounts (``AANA'') of between $8 
billion and $750 billion on a consolidated basis, are required to 
have various margining and custodial agreements in place by 
September 1, 2020. The Proposal does not change that deadline for 
financial end users that have an AANA greater than $50 billion. 
Accordingly, entities with moderately large swap portfolios would 
remain subject to the original compliance date. Only financial end 
users with relatively modest AANA levels would get an extension of 
the compliance deadline.
---------------------------------------------------------------------------

    \2\ See Initial Margin Phase 5 by Richard Haynes, Madison Lau, 
and Bruce Tuckman, Oct. 24, 2018 available at https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf.
---------------------------------------------------------------------------

    The existing implementation schedule is consistent with the 
original Basel Committee on Banking Supervision (``BCBS'') and the 
Board of the International Organization of Securities Commissions 
(``IOSCO'') international framework for margin requirements. In July 
2019, BCBS and IOSCO revised the framework to effectively recommend 
an extension of the phase 5

[[Page 56956]]

deadline in recognition of likely compliance delays given the large 
number of entities that would need to execute margining agreements 
to comply with the new initial margin requirements.\3\
---------------------------------------------------------------------------

    \3\ See BCBS and IOSCO ``Margin requirements for non-centrally 
cleared derivatives,'' (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf (``July 2019 BCBS/IOSCO Margin 
Framework'').
---------------------------------------------------------------------------

    The Proposal follows the revisions recommended by BCBS and 
IOSCO. Other United States and foreign regulators have indicated 
they also intend to adopt extensions. Consistency with other 
regulators, particularly with requirements like swap margining, 
helps reduce the likelihood of regulatory arbitrage.
    I am concurring with the Proposal because the impact on systemic 
risk mitigation resulting from the partial one year delay is muted 
while the potential impacts on the hundreds of financial end users 
with smaller swap portfolios might be significant if they are not 
able to have margining documentation in place by the original 
deadline. This is a data driven conclusion. While about 40 entities 
have had to comply through phase 4, the OCE analysis estimates that 
around 700 entities with 7,000 swap arrangements would be included 
in phase 5. Providing more time to hundreds of smaller users of 
swaps should help maintain the hedging capabilities of these market 
participants while they negotiate and establish the necessary 
margining arrangements.
    The OCE analysis also provides critical data on the muted impact 
of the proposed change on systemic risk mitigation. The estimated 
average AANA for phase 5 entities is $54 billion compared to an 
average $12.71 trillion AANA for entities in phases 1, 2 and 3, and 
$1 trillion for entities in phase 4. The total estimated AANA for 
entities that would be subject to the one year extension is 
approximately three percent of the total AANA of entities subject to 
the margin rules. In my view, this data is critical to supporting a 
one year extension as it indicates that the likely affect in 
providing the extension on systemic risk mitigation will be quite 
limited.
    For these reasons, I concur in the issuance of the Proposal.

[FR Doc. 2019-22954 Filed 10-23-19; 8:45 am]
 BILLING CODE 6351-01-P