[Federal Register Volume 85, Number 69 (Thursday, April 9, 2020)]
[Rules and Regulations]
[Pages 19878-19884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06625]


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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: Final rule

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting 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 ``CFTC Margin 
Rule''). Specifically, the Commission is adopting an amendment, along 
with certain conforming, technical changes, to extend the compliance 
schedule for the posting and collection of initial margin (``IM'') 
under the CFTC Margin Rule to September 1, 2021, for entities with 
smaller average daily aggregate notional amounts of swaps and certain 
other financial products (``Final Rule''). The compliance schedule 
currently extends from September 1, 2016 to September 1, 2020. The 
revised compliance schedule mitigates the potential of a market 
disruption, which could be triggered by the large number of entities 
that would come into the scope of the IM requirements at the end of the 
current compliance schedule on September 1, 2020.

DATES: This final rule is effective May 11, 2020.

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

    Section 4s(e) of the Commodity Exchange Act (``CEA'') \1\ requires 
the Commission to adopt rules establishing minimum initial and 
variation margin requirements for all swaps \2\ that are (i) entered 
into by an SD or MSP for which there is no Prudential Regulator \3\ 
(collectively, ``covered swap entities'' or ``CSEs'') and (ii) not 
cleared by a registered derivatives clearing organization (``uncleared 
swaps'').\4\ To offset the greater risk to the SD or MSP \5\ 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.\6\
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    \1\ 7 U.S.C. 1 et seq.
    \2\ For the definition of swap, see section 1a(47) of the CEA 
and Commission regulation 1.3. 7 U.S.C. 1a(47) and 17 CFR 1.3. The 
term ``swap'' includes, among other things, an interest rate swap, 
commodity swap, credit default swap, and currency swap.
    \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 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'').
    \4\ See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission regulation 
23.151, the Commission further defined this statutory language to 
mean all swaps that are not cleared by a registered derivatives 
clearing organization or a derivatives clearing organization that 
the Commission has exempted from registration as provided under the 
CEA. 17 CFR 23.151.
    \5\ For the definitions of SD and MSP, see section 1a of the CEA 
and Commission regulation 1.3. 7 U.S.C. 1a and 17 CFR 1.3.
    \6\ 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'').\7\ After the establishment of the BCBS/IOSCO framework, 
the CFTC, on January 6, 2016, consistent with Section 4s(e), 
promulgated rules requiring CSEs to collect and post initial and 
variation margin for uncleared swaps,\8\ adopting the implementation 
schedule set forth in the BCBS/IOSCO framework, including the revised 
implementation schedule adopted on March 18, 2015.\9\
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    \7\ See BCBS/IOSCO Margin requirements for non-centrally cleared 
derivatives (September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
    \8\ 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 regulation 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.
    \9\ See BCBS/IOSCO Margin requirements for non-centrally cleared 
derivatives (March 2015), available at https://www.bis.org/bcbs/publ/d317.pdf.
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    In July 2019, the BCBS and IOSCO further revised the framework to 
extend the implementation schedule for compliance with IM requirements 
to September 1, 2021.\10\ Shortly after, the

[[Page 19879]]

Commission proposed to amend and similarly extend the compliance 
schedule for the IM requirements under the CFTC Margin Rule 
(``Proposal'').\11\
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    \10\ See BCBS/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'').
    \11\ See Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 84 FR 56950 (Oct. 24, 2019).
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II. Final Rule

    The Commission is adopting the Final Rule to amend the CFTC Margin 
Rule to extend the schedule for compliance with the IM requirements by 
adding September 1, 2021 as an additional phase-in date, in order to 
help ensure continued access to the swaps markets for certain entities 
with relatively smaller levels of swaps trading activities as discussed 
below and in light of the recent revision to the implementation 
schedule set forth in the BCBS/IOSCO framework. The Commission received 
nine comment letters expressing support for the Proposal to extend the 
CFTC compliance schedule for the IM requirements, noting that the 
change aligns the CFTC Margin Rule with the BCBS/IOSCO framework and 
allows market participants to manage resources and mitigate trading 
disruptions that could arise at the conclusion of the current 
compliance schedule.\12\
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    \12\ The Commission received nine relevant comment letters from 
the Asset Management Group of the Securities Industry and Financial 
Markets Association, Blackrock, Inc., the Futures Industry 
Association, the eleven Federal Home Loan Banks, the Global Foreign 
Exchange Division of the Global Financial Markets Association, the 
International Swaps and Derivatives Association, Inc., the Institute 
of International Bankers jointly with the Securities Industry and 
Financial Markets Association, the Managed Funds Association, and 
State Street Corporation. Some of these comment letters, in addition 
to a letter from the American Council of Life Insurers, addressed 
issues outside the scope the Proposal. The Commission will monitor 
these issues as well as any additional issues that may be raised in 
the future concerning the implementation and operation of the CFTC 
Margin Rule, and act upon them as appropriate.
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    The CFTC Margin Rule requires covered swap entities to post and 
collect IM with counterparties that are SDs, MSPs, or financial end 
users with material swap exposure (``MSE'') \13\ (``covered 
counterparties'') in accordance with a compliance schedule set forth in 
Commission regulation 23.161.\14\ 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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    \13\ Commission regulation 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.
    \14\ 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. The fifth and last compliance date of September 1, 
2020, absent a rule change, will bring into the scope of compliance all 
remaining CSEs and covered counterparties, including financial end user 
counterparties with an MSE exceeding $8 billion in AANA. 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 phases of compliance, which brought approximately 40 entities 
into scope, phase 5 could bring approximately 700 entities, as well as 
7,000 relationships representing the number of IM agreements that would 
need to be in place to carry out swap transactions.\15\
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    \15\ See Richard Haynes, Madison Lau, & Bruce Tuckman, Initial 
Margin Phase 5 (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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    As stated in the Proposal, market participants have expressed 
concerns regarding the onset of phase 5 under the current schedule 
given the operational complexity associated with IM calculation and 
third-party segregation of IM collateral.\16\ As a large number of 
counterparties prepare to meet applicable IM deadlines, newly in-scope 
entities could encounter operational difficulties because a significant 
number of the entities may engage 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.\17\
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    \16\ 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).
    \17\ See July 2019 BCBS/IOSCO Margin Framework.
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    The CFTC believes it is appropriate to amend the CFTC Margin Rule 
consistent with the BCBS/IOSCO framework's revision. In particular, the 
Commission is adopting the Final Rule to extend the compliance schedule 
for the IM requirements in order to mitigate the potential for a market 
disruption that could be brought upon by phase 5 at the end of the 
current compliance schedule. The Commission's action reflects an effort 
to undertake coordinated action with international counterparts and the 
Prudential Regulators \18\ to achieve regulatory harmonization with 
respect to uncleared swaps margin.
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    \18\ The Prudential Regulators recently issued a notice of 
proposed rulemaking to, among other things, revise their rules 
consistent with the revised BCBS/IOSCO framework. See Margin and 
Capital Requirements for Covered Swap Entities, 84 FR 59970 (Nov. 7, 
2019).
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    In adopting the Final Rule, the Commission has considered the 
relatively small amount of swap activity of the financial end users 
that would be subject to the one year extension. The OCE has estimated 
that the average AANA per entity in phase 5, under the current 
schedule, would be $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. 
The OCE has also estimated that the total AANA for entities that would 
be subject to the one year extension, if adopted, would be 
approximately three percent of the total AANA across all the 
phases.\19\ Given the relatively small amount of swap activity of the 
financial end users in the extended compliance

[[Page 19880]]

date group, the Commission believes the Final Rule will have a 
relatively minor impact on the systemic risk mitigating effects of the 
IM requirements during the extension period.
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    \19\ See OCE Initial Margin Phase 5 Study at 4-5.
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    As proposed, the Final Rule amends Commission regulation 23.161(a) 
by adding a sixth phase of compliance for certain smaller entities that 
are currently subject to phase 5. The Final Rule requires 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, is extended to September 1, 2021.
    In addition, the Commission is adopting non-substantive, conforming 
technical changes to Commission regulation 23.161(a).\20\ The 
Commission is amending Commission regulation 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. This 
change conforms the CFTC Margin Rule to the rule text of the Prudential 
Regulators' Margin Rule, promoting harmonization between both 
regulators.
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    \20\ The adopted changes include revisions to text in Commission 
regulation 23.161(a) relating to compliance dates that have already 
passed.
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    The Commission is also amending Commission regulation 23.161(a) to 
replace, 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 change removes 
the term ``security-based swap'' from certain parts of Commission 
regulation 23.161(a). The change is necessary because, due to a 
transcription error, the current rule text incorrectly indicates that 
Commission regulation 23.150(b) exempts security-based swaps from the 
CFTC Margin Rule even though such provision only applies to swaps. 
Notwithstanding this technical change that eliminates the reference to 
Commission regulation 23.150(b) with respect to security-based swaps, 
Commission regulation 23.161(a) will continue to exclude any security-
based swap, for purposes of the calculation of the various thresholds 
set forth in Commission regulation 23.161(a), that is exempt pursuant 
to section 15F(e) of the Securities Exchange Act of 1934, as is the 
case under the current rule text.

III. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \21\ 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 Final Rule, as adopted, contains no 
requirements subject to the PRA.
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    \21\ 44 U.S.C. 3501 et seq.
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B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires agencies, in 
promulgating regulations, to consider whether the regulations they 
propose will have a significant economic impact on a substantial number 
of small entities and, if so, to provide a flexibility analysis 
regarding the economic impact on those entities.\22\ In the Proposal, 
the Commission certified that the Proposal would not have a significant 
economic impact on a substantial number of small entities. The 
Commission requested comments with respect to the RFA and received no 
comments.
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    \22\ 5 U.S.C. 601 et seq.
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    As discussed in the Proposal, the Final Rule 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'').\23\ The Commission has previously determined 
that SDs, MSPs, and ECPs are not small entities for purposes of the 
RFA.\24\ Therefore, the Commission believes that the Final Rule will 
not have a significant economic impact on a substantial number of small 
entities, as defined in the RFA.
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    \23\ 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 regulation 1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
    \24\ 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 Final Rule will not 
have a significant economic impact on a substantial number of 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 has considered the extraterritorial reach of 
the Final Rule and notes where this reach may be especially relevant.
    This Final Rule extends the compliance schedule for the CFTC Margin 
Rule and introduces an additional compliance date for smaller 
counterparties.\25\ The revised compliance schedule requires CSEs and 
covered counterparties, with an AANA ranging 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, will come into scope in the additional 
sixth phase beginning September 1, 2021.
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    \25\ The Commission is also adopting conforming technical 
changes to Commission regulation 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 in the Proposal, 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 
the Final Rule 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, the following are the benefits and costs of the Final 
Rule.
    The Commission sought comment on all aspects of the cost and 
benefit

[[Page 19881]]

considerations in the Proposal but received no substantive comments.
1. Benefits
    As described above, the Final Rule extends the compliance schedule 
for the IM requirements for certain smaller entities to September 1, 
2021. The Final Rule is intended to alleviate the potential congestion 
and possible 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 Final Rule prioritizes 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 Final Rule therefore promotes a smooth 
and orderly transition into IM compliance.
    The Final Rule amends the CFTC Margin Rule consistent with the 
revised BCBS/IOSCO margin framework and the Prudential Regulators' 
proposed rulemaking to amend the IM compliance schedule.\26\ The Final 
Rule promotes harmonization with international and domestic margin 
regulatory requirements and reduces the potential for regulatory 
arbitrage.
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    \26\ See supra, n. 18.
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2. Costs
    The Final Rule extends the time frame for compliance with the IM 
requirements for the smallest CSEs and covered counterparties in terms 
of notional amount, including SDs and MSPs and financial end users that 
exceed an MSE of $8 billion, by an additional 12 months. Uncleared 
swaps entered into during this period with the smallest covered 
counterparties may be treated as legacy swaps exempt from the IM 
requirements. In the Commission's view, the contagion risk associated 
with these potentially uncollateralized legacy swaps is a lesser 
concern because the legacy swap portfolios will be entered into with 
counterparties that engage in lower levels of notional trading.
    The Final Rule also delays 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 severity of any 
financial contagion that might occur may potentially increase.
3. Section 15(a) Considerations
    In light of the foregoing, the CFTC has evaluated the costs and 
benefits of the Final Rule pursuant to the five considerations 
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
    The Final Rule will 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 revised compliance schedule, fewer counterparties will 
come into scope in phase 5 and many smaller counterparties will 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 will be reduced, mitigating the potential 
strain on the uncleared swaps markets.
    Also, the Final Rule will appropriately prioritize IM compliance 
requirements for counterparties and CSEs that have greater swap trading 
activity, while giving more time to smaller counterparties to come into 
compliance with the IM requirements.
    Inasmuch as this Final Rule 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 
severity of any financial contagion that might occur may potentially 
increase, especially among the smallest CSEs.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Final Rule will make the uncleared swaps markets more 
streamlined by facilitating counterparties' transition into compliance 
with the IM requirements. Counterparties will have additional time to 
document their swap relationships and set up adequate processes to 
operationalize the exchange of IM. As such, the Final Rule will promote 
fairer competition among counterparties in the uncleared swaps markets, 
as it will remove the potential incentive of CSEs to prioritize 
arrangements with larger counterparties to the detriment of smaller 
counterparties and will help maintain the current state of market 
efficiency.
    By preventing the market disruption that could be brought upon by 
the large number of counterparties that would come into scope at the 
end of the current compliance schedule, the Final Rule 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 will 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
    The Final Rule will not harm price discovery and might help 
preserve it. In the absence of the Final Rule, counterparties, in 
particular smaller counterparties, could be discouraged from entering 
or even 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 thus 
could be shut out from the uncleared swaps markets, potentially 
reducing liquidity and harming price discovery.
(d) Sound Risk Management
    The Final Rule will 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 will alleviate 
the potential congestion in establishing the financial infrastructure 
to post IM between in scope entities and will 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.
    The Commission acknowledges that the Final Rule extends the time 
frame for compliance with the IM requirements for the smallest CSEs and 
covered counterparties by an additional 12 months. Uncleared swaps 
entered into during this period by these entities

[[Page 19882]]

may be treated as legacy swaps and will not be subject to the IM 
requirements. As a result, lesser amounts of margin will be collected 
to mitigate the risk of uncleared swaps, which may increase the 
possibility of systemic risk. Nevertheless, the risk associated with 
these potentially uncollateralized legacy swaps is a lesser concern 
because the legacy swap portfolios will be entered into with 
counterparties that engage in lower levels of notional trading.
(e) Other Public Interest Considerations
    The Final Rule amends the CFTC Margin Rule consistent with the 
revised BCBS/IOSCO margin framework and the Prudential Regulators' 
proposed rulemaking to amend the IM compliance schedule, promoting 
harmonization with international and domestic margin regulatory 
requirements and reducing the potential for regulatory arbitrage.

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.\27\
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    \27\ 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 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 requested 
comments on whether the Proposal implicated any other specific public 
interest to be protected by the antitrust laws and received no 
comments.
    The Commission has considered this Final Rule to determine whether 
it is anticompetitive and has identified no anticompetitive effects. 
The Commission requested comments on whether the Proposal was 
anticompetitive and, if it is, what the anticompetitive effects are, 
and received no comments.
    Because the Commission has determined that the Final Rule is not 
anticompetitive and has no anticompetitive effects, the Commission has 
not identified any less anticompetitive means of achieving the purposes 
of the CEA.

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 amends 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:
0
a. Revising paragraphs (a)(1)(iii), (a)(3)(iii), (a)(4)(iii), 
(a)(5)(iii), and (a)(6); and
0
b. Adding paragraph (a)(7).
    The addition and revisions 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 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.
* * * * *


[[Page 19883]]


    Issued in Washington, DC, on March 25, 2020, 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--Statement of Commissioner Rostin Behnam

    I vote to approve the Commodity Futures Trading Commission's 
(the ``Commission'' or ``CFTC'') decision today to extend the 
compliance schedule for the posting and collection of initial margin 
(``IM'') by swap dealers (``SDs'') and major swap participants 
(``MSPs'') for which there is no prudential regulator (collectively, 
``covered swap entities'') under the CFTC Margin Rule, 17 CFR 
23.160, which implements section 4s(e) of the Commodity Exchange Act 
(``CEA'').\1\ As a seminal part of the policy response following the 
2008 financial crisis, Section 731 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act \2\ added section 4s(e) requiring 
the adoption of rules establishing minimum initial and variation 
margin requirements for all uncleared swaps entered by covered swaps 
entities.
---------------------------------------------------------------------------

    \1\ 7 U.S.C. 1 et seq.
    \2\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203 section 731, 124 Stat. 1376, 1704-5 (2010).
---------------------------------------------------------------------------

    Among many universal commitments established by global leaders 
in the 2009 G20 Communique,\3\ margin requirements for uncleared 
swaps remain a critical component of financial reform, specifically 
within the global derivatives markets. As we learned during the 
financial crisis, margin provides confidence in times of market 
stress and volatility by ensuring that collateral is available to 
offset counterparty losses.
---------------------------------------------------------------------------

    \3\ G20, Leaders' Statement, The Pittsburgh Summit (Sept. 24-25, 
2009), available at http://www.g20.utoronto.ca/2009/2009communique0925.html.
---------------------------------------------------------------------------

    Right now, we are collectively enduring uncertainty as a result 
of Covid-19. As financial leaders are taking action and providing 
responses intended to address market stress, our progress is being 
tested as we operate within the new realities of communication and 
the work environment. We cannot hesitate in our efforts to preserve 
market interests and protect customers and market participants in a 
timely, decisive manner. It remains critically important that we 
ensure market continuity, transparency, and resiliency as we work 
towards normalcy.
    Today's amendments align implementation of the CFTC Margin Rule 
with the framework issued by the Basel Committee on Banking 
Supervision (``BCBS'') and the International Organization of 
Securities Commissions (``IOSCO'').\4\ The amendments represent a 
cohesive, data-driven effort by the staffs of the CFTC, the 
Prudential Regulators--who have proposed similar amendments to the 
margin implementation schedule for SDs and MSPs subject to their 
regulations \5\--and international counterparts through the BCBS/
IOSCO Working Group on Margining Requirements (``WGMR'') towards 
regulatory harmonization with respect to margin for uncleared swaps.
---------------------------------------------------------------------------

    \4\ See BCBS and IOSCO ``Margin requirements for non-centrally 
cleared derivatives,'' (July 2019), https://www.bis.org/bcbs/publ/d475.pdf.
    \5\ See Margin and Capital Requirements for covered swap 
entities, 84 FR 59970 (Nov. 7, 2019).
---------------------------------------------------------------------------

    Implementing the margin requirements for uncleared swaps is a 
challenge we have faced collectively.\6\ As global harmonization is 
a key hallmark of the 2009 G20 reforms, ensuring we remain vigilant 
to risks and responsive to real-world concerns articulated by market 
participants as we work together towards these feats of regulatory 
engineering will serve us all well into the future. I commend the 
work of the our CFTC staff in demonstrating its analytical expertise 
in both validating the need for the sixth phase of compliance for 
certain smaller entities, and analyzing the risks of requiring such 
entities to remain in phase 5.
---------------------------------------------------------------------------

    \6\ See Rostin Behnam, Our Collective Strength, Remarks of CFTC 
Commissioner Rostin Behnam at the 2018 ISDA Annual Japan Conference, 
Shangri-La Hotel, Tokyo (Oct. 26, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam11; Rostin Behnam, Sowing the 
Seeds of Success in 2020, Remarks of CFTC Commissioner Rostin Behnam 
at the ISDA 34th Annual General Meeting, Grand Hyatt Hong Kong, Hong 
Kong (Apr. 9, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam13.
---------------------------------------------------------------------------

    The extension of the compliance schedule for initial margin 
requirements for an additional year will accommodate roughly 700 
entities and 7,000 relationships. While that may seem monumental, 
the CFTC's Office of Chief Economist estimates that these 
relationships represent a relatively small amount of swap activity; 
approximately three percent of the total average daily aggregate 
notional amounts of uncleared swaps and certain other financial 
products across all the compliance phases.\7\
---------------------------------------------------------------------------

    \7\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 84 FR 56950, 56952 (proposed Oct. 24, 
2019); Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants at II.
---------------------------------------------------------------------------

    I believe it is important to highlight that today's amendments 
seek to address transition risks by mitigating potential market 
disruptions due largely to limitations of service providers and 
related operational burdens associated with those approximately 
7,000 relationships. It remains my expectation that the large number 
of covered entities who will now fall into the sixth phase of 
compliance will work diligently over the next year and a half and 
that with the additional time and a clear demand for services, 
market participants and the entities they engage will focus 
resources on compliance.
    To the extent commenters identified additional and potentially 
significant implementation challenges, I appreciate CFTC staff's 
ongoing commitment to monitoring these and other issues as they 
evolve. Our open engagement and willingness to address appropriate 
concerns is a hallmark of our agency, and I believe it is one our 
greatest strengths. We should continue to maintain our high 
standards as we move forward in any additional targeted, strategic 
modifications to the CFTC Margin Rules and others.

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

    I concur with issuing the final rule to extend by one year the 
initial swap margin compliance deadline for financial entities with 
smaller swap portfolios.
    As I noted in my statement when this rule was proposed, 
generally I am not sympathetic to requests to extend compliance 
deadlines when a long lead-in period has been provided. The 
compliance date for swap margin rule compliance was set more than 
four years ago. However, this deadline extension will benefit 
hundreds of entities with smaller swap portfolios while having only 
a limited impact on the systemic risk mitigation benefits of the 
initial margin requirements.
    Importantly, the final rule does not change variation margin 
requirements that are already effective. The extension in the final 
rule only applies to the initial margin requirement, which covers 
estimated potential future exposures.
    Furthermore, the final rule only extends the deadline for 
financial end users that have average daily aggregate notional 
amounts (``AANA'') less than $50 billion. A CFTC Office of the Chief 
Economist (``OCE'') analysis indicates that around 700 entities with 
7,000 swap arrangements that need to be modified would be included 
in this group. The final rule provides more time to these smaller 
users of swaps, which will help maintain the hedging capabilities of 
these market participants while they negotiate and establish the 
necessary margining agreements.
    The OCE analysis also provides data on the muted impact of the 
final rule on systemic risk mitigation. The total estimated AANA for 
entities that can use the 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 the likely effect on systemic risk mitigation will be 
quite limited.
    Also, other United States and foreign regulators are adopting 
similar extensions. The prudential banking regulators in the United 
States have adopted a margin rule deadline extension proposal that 
is substantively the same as the CFTC final rule. At this time there 
is no reason to believe the prudential regulators will not adopt 
their proposal.
    Finally, the current financial market turmoil resulting from the 
global coronavirus pandemic makes issuance of this relief to these 
smaller financial end users particularly timely.

[[Page 19884]]

    Accordingly, I concur in adopting the final rule.
[FR Doc. 2020-06625 Filed 4-8-20; 8:45 am]
 BILLING CODE 6351-01-P