[Federal Register Volume 85, Number 91 (Monday, May 11, 2020)]
[Rules and Regulations]
[Pages 27674-27680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08601]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AE77


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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

DATES: This final rule is effective June 10, 2020.

[[Page 27675]]


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

SUPPLEMENTARY INFORMATION:

I. Background

    In January 2016, the Commission adopted regulation Sec. Sec.  
23.150 through 23.161 (collectively, ``CFTC Margin Rule'') to implement 
section 4s(e) of the Commodity Exchange Act (``CEA''),\1\ which 
requires SDs and MSPs for which there is not a prudential regulator 
(``CSEs'') to meet minimum initial and variation margin requirements 
adopted by the Commission by rule or regulation.\2\
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    \1\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (``Final 
Margin Rule''); Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants--Cross-Border Application of the 
Margin Requirements, 81 FR 34818 (May 31, 2016).
    \2\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a 
``Prudential Regulator'' must meet the margin requirements for 
uncleared swaps established by the applicable ``Prudential 
Regulator.'' 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39) 
(defining the term ``Prudential Regulator'' to include the Board of 
Governors of the Federal Reserve System; the Office of the 
Comptroller of the Currency; the Federal Deposit Insurance 
Corporation; the Farm Credit Administration; and the Federal Housing 
Finance Agency, and specifying the entities for which these agencies 
act as Prudential Regulators). The Prudential Regulators published 
final margin requirements in November 2015. See Margin and Capital 
Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015).
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    Since adopting the CFTC Margin Rule, the Commission's Division of 
Swap Dealer and Intermediary Oversight (``DSIO'') has issued staff 
guidance, including no-action letters, addressing the application of 
the rule. In July 2017, DSIO issued CFTC Letter No. 17-34 in response 
to a request for relief submitted by the ESM.\3\ The ESM sought relief 
with respect to uncleared swaps transactions it entered into with SDs, 
representing that it was similar to multilateral development banks, as 
the term is defined in Commission regulation Sec.  23.151, which are 
excluded from the definition of financial end user and whose swaps are 
exempt from the CFTC Margin Rule.
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    \3\ CFTC Letter No. 17-34, Commission regulation Sec. Sec.  
23.150 through 23.159, 23.161; No-Action Position with Respect to 
Uncleared Swaps with the European Stability Mechanism (July 24, 
2017) (``CFTC Letter No. 17-34''), available at http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-34.pdf.
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    In October 2019, the Commission proposed to codify CFTC Letter No. 
17-34 and amend Commission regulation Sec.  23.151 to exclude the ESM 
from the definition of financial end user and thus exempt from the CFTC 
Margin Rule uncleared swaps entered into by the ESM.\4\ The Commission 
also proposed to correct a typographical error in Commission regulation 
Sec.  23.157.\5\
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    \4\ Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 84 FR 56392 (Oct. 22, 2019) (the 
``Proposal''), at 56393-4.
    \5\ Id. at 56394.
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II. Final Rules

    The Commission is adopting the amendments to Commission regulation 
Sec. Sec.  23.151 and 23.157 as proposed. The Commission received three 
comments in the file for the Proposal,\6\ only one of which directly 
addressed the Proposal.\7\ The Futures Industry Association (``FIA'') 
indicated, among other things, that its commodities members generally 
support the Proposal.\8\
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    \6\ Comments for the Proposal are available on the Commission 
website at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3038. Comment letter no. 62275 dated Dec. 23, 
2019 from the Asset Management Group of the Securities Industry and 
Financial Markets Association, available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62275&SearchText=, discussed other margin issues 
outside the scope of the Proposal. In addition, an anonymous 
commenter submitted a comment addressing issues unrelated to margin. 
Comment no. 62220 dated Oct. 22, 2019, available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62220&SearchText=.
    \7\ Comment letter no. 62272 dated Dec. 23, 2019 from FIA, 
available at https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62272&SearchText= (the ``FIA letter''), 
discussed other margin issues outside the scope of the Proposal.
    \8\ FIA letter at 2.
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A. Commission Regulation Sec.  23.151--Definition of Financial end user

    The CFTC Margin Rule applies to swap transactions between CSEs and 
counterparties that are SDs, MSPs or financial end users. Commission 
regulation Sec.  23.151 defines the term ``financial end user,'' \9\ 
excluding from the definition sovereign entities, multilateral 
development banks, the Bank for International Settlements, entities 
exempt from the definition of financial entity pursuant to section 
2(h)(7)(C)(iii) of the Act and implementing regulations, affiliates 
that qualify for the exemption from clearing pursuant to section 
2(h)(7)(D) of the Act, and eligible treasury affiliates that the 
Commission exempts from the requirements of Commission regulation 
Sec. Sec.  23.150 through 23.161 by rule.\10\
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    \9\ 17 CFR 23.151.
    \10\ See id.
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    The Commission is adopting the proposed amendment to Commission 
regulation Sec.  23.151. As amended, Commission regulation Sec.  23.151 
excludes the ESM from the definition of financial end user, effectively 
exempting uncleared swaps transactions entered into by the ESM from the 
CFTC Margin Rule. With respect to the proposed amendment, FIA stated 
that its commodity members generally support the Commission's efforts 
to amend its rules to relieve burdens on market participants.
    The amendment to Commission regulation Sec.  23.151 codifies the 
relief provided by CFTC Letter No. 17-34, which extends no-action 
relief from the CFTC Margin Rule with respect to uncleared swaps 
between SDs and the ESM. The no-action relief was granted based on the 
ESM's representations concerning the nature of its operations. The no-
action letter stated that the ESM is an intergovernmental financial 
institution that provides financial assistance for national or regional 
development to Euro area member states that are in or are threatened by 
severe financial distress, similar to multilateral development banks, 
which are excluded from the definition of financial end user in 
Commission regulation Sec.  23.151. To accomplish its policy goals, the 
ESM utilizes several financial assistance instruments, including loans 
in various forms which can be used for multiple purposes and are 
offered only subject to bespoke specified conditions, including 
economic reforms. The ESM enters into uncleared swaps with SDs to hedge 
the interest rate and currency risks it faces as a result of entering 
into and funding loans and to hedge risks associated with its invested 
capital. The ESM does not, and will not, enter into uncleared swaps for 
speculative purposes.
    In granting no-action relief, DSIO noted that the ESM, like 
multilateral development banks excluded from the financial end user 
definition, has a lower risk profile, posing less counterparty risk to 
an SD and less systemic risk to the financial system. While not 
explicitly finding that the ESM was a multilateral development bank, 
DSIO recognized that its functions and credit profile justified 
relief.\11\
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    \11\ The Basel Committee on Banking Supervision ascribes to the 
ESM a 0% risk weight. The ESM has been included in the list of 
entities that receive a 0% risk weight in the document entitled 
``Basel II: International Convergence of Capital Measurement and 
Capital Standards: A Revised Framework--Comprehensive Version, June 
2006.'' See BIS, Risk Weight for the European Stability Mechanism 
(ESM) and European Financial Stability Facility (EFSF), https://www.bis.org/publ/bcbs_nl17.htm.

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[[Page 27676]]

    Based on the aforementioned considerations, the Commission amends 
paragraph (2)(iii) of the definition of Financial end user in 
Commission regulation Sec.  23.151 by adding the ESM to the list of 
entities that are excluded from the definition of financial end user. 
As a result of the ESM's exclusion from the definition of financial end 
user, uncleared swaps entered into between the ESM and CSEs are exempt 
from the CFTC Margin Rule. The Commission believes that the amendment, 
as adopted, provides clarity and certainty to CSEs that are 
counterparties to the ESM that uncleared swaps entered into with the 
ESM are not subject to the CFTC Margin Rule. The Commission is adopting 
the amendment because activities conducted by the ESM, like activities 
conducted by multilateral development banks that are excluded from the 
financial end user definition, generally have a different purpose in 
the financial system. These types of entities are established by 
governments and their financial activities are designed to further 
governmental purposes, posing less counterparty risk to CSEs and less 
systemic risk to the financial system.
    Furthermore, the Commission believes that the amendment encourages 
international comity and continued cooperation between the Commission 
and the European Union (``EU'') authorities. In this regard, the 
Commission notes that the ESM is exempt from the European Market 
Infrastructure Regulation or EMIR's margin rules for OTC derivatives 
contracts not cleared by a central counterparty.\12\ By taking this 
action, the Commission acknowledges the unique interests of the EU 
authorities in the ESM and recognizes that the principles of 
international comity counsel mutual respect for the important interests 
of foreign sovereigns.\13\
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    \12\ See Regulation (EU) No 648/2012 of the European Parliament 
and the Council of the European Union of July 4, 2012.
    \13\ See Restatement (Third) of Foreign Relations Law of the 
United States sec. 403 (Am. Law Inst. 2018) (the Restatement). The 
Restatement provides that even where a country has a basis for 
jurisdiction, it should not prescribe law with respect to a person 
or activity in another country when the exercise of such 
jurisdiction is unreasonable. See Restatement section 403(1). 
Notably, the Restatement recognizes that, in the exercise of 
international comity, reciprocity is an appropriate consideration in 
determining whether to exercise jurisdiction extraterritorially.
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B. Amendment of Commission Regulation Sec.  23.157--Correction of 
Cross-Reference

    The Commission is adopting a corrective amendment to Commission 
regulation Sec.  23.157. In its comment letter, FIA indicated that its 
commodities members generally support the Commission's efforts to amend 
its rules when necessary to correct errors.\14\
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    \14\ FIA letter at 2.
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    Commission regulation Sec.  23.157 requires initial margin 
collected from or posted by a CSE to be held by one or more independent 
custodians. The CSE must enter into a custodial agreement with each 
custodian that holds the initial margin collateral. In particular, 
paragraph (c)(1) of Commission regulation Sec.  23.157 provides that 
the custodial agreement must prohibit the custodian from 
rehypothecating, repledging, reusing, or otherwise transferring the 
collateral except that cash collateral may be held in a general deposit 
account with the custodian if the funds in the account are used to 
purchase an asset described in Commission regulation Sec.  
23.156(a)(1)(iv) through (xii).
    In administering the Commission's regulations, DSIO staff noticed 
that the cross-reference to ``Sec.  23.156(a)(1)(iv) through (xii)'' in 
paragraph (c)(1) of Commission regulation Sec.  23.157 was erroneous. 
First, the existing cross-reference incorrectly refers to non-existing 
paragraphs. Second, the existing cross-reference excludes treasury 
securities and U.S. Government agency securities, which are included in 
the list of eligible collateral set forth in Commission regulation 
Sec.  23.156(a)(1), and which the Commission intended to include as 
eligible assets into which cash collateral can be converted.\15\ To 
administer the CFTC Margin Rule and prevent confusion in its 
application, the Commission is hereby amending Commission regulation 
Sec.  23.157(c)(1) to remove the erroneous cross-reference to ``Sec.  
23.156(a)(1)(iv) through (xii)'' and replace it with the corrected 
cross-reference ``Sec.  23.156(a)(1)(ii) through (x).''
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    \15\ In the Final Margin Rule, the Commission explained that its 
intent was to exclude ``immediately available cash funds,'' which is 
one form of eligible collateral in Commission regulation Sec.  
23.156(a)(1), because allowing such eligible collateral to be held 
in the form of a deposit liability of the custodian bank would be 
incompatible with Commission regulation Sec.  23.157(c)'s 
prohibition against rehypothecation of collateral. See Final Margin 
Rule, 81 FR at 671. However, the Commission expressly stated that 
the custodian could use cash funds to purchase other forms of 
eligible collateral. See id.
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III. Administrative Compliance

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies, 
in promulgating regulations, to consider whether the rules they propose 
will have a significant economic impact on a substantial number of 
small entities and, if so, provide a regulatory flexibility analysis 
respecting the impact.\16\ 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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    \16\ 5 U.S.C. 601 et seq.
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    As discussed in the Proposal, the Final Rules only affect 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'').\17\ The Commission has previously determined 
that SDs, MSPs, and ECPs are not small entities for purposes of the 
RFA.\18\ Therefore, the Commission believes that the Final Rules will 
not have a significant economic impact on a substantial number of small 
entities, as defined in the RFA.
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    \17\ 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 Sec.  1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
    \18\ 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 the Final Rules will not 
have a significant economic impact on a substantial number of small 
entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \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. The Final Rules, as adopted, contain no 
requirements subject to the PRA.
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    \19\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before

[[Page 27677]]

promulgating a regulation under the CEA. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
the following five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission considers the costs and 
benefits resulting from its discretionary determinations with respect 
to the section 15(a) considerations.
    In addition, the Commission notes that the consideration of costs 
and benefits below is based on the understanding that the markets 
function internationally, with many transactions involving U.S. firms 
taking place across international boundaries; with some Commission 
registrants being organized outside of the United States; with leading 
industry members typically conducting operations both within and 
outside the United States; and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
below discussion of costs and benefits refers to the effects of the 
Final Rules on all activities subject to the Proposal, whether by 
virtue of the activity's physical location in the United States or by 
virtue of the activities' connection with or effect on U.S. commerce 
under CEA section 2(i).\20\
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    \20\ See 7 U.S.C. 2(i).
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1. Baseline and Rule Summary
    The baseline for the Commission's consideration of the costs and 
benefits of these Final Rules is the CFTC Margin Rule. The Commission 
recognizes that to the extent market participants have relied on CFTC 
Letter No. 17-34, the actual costs and benefits of the amendment to 
Commission regulation Sec.  23.151, as realized in the market, may not 
be as significant. The amendment, as adopted, revises the definition of 
financial end user in Commission regulation Sec.  23.151 to exclude the 
ESM from the definition. The amendment codifies CFTC Letter No. 17-34 
and confirms that uncleared swaps with the ESM as a counterparty are 
not subject to the CFTC Margin Rule. As a result, CSEs facing the ESM 
will not be required to exchange margin with the ESM, resulting in the 
collection of lesser amounts of margin to mitigate the risk of 
uncleared swaps, which could increase the possibility of a systemic 
event. Nevertheless, after analyzing the swap data repository (``SDR'') 
data, the Commission believes that by classifying the ESM as a non-
financial end-user and excluding it from the margin requirements, it is 
unlikely that the Final Rule will result in substantial systemic 
risk.\21\
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    \21\ Recent review of data from the SDRs indicates that the ESM 
engages in limited swap trading activity.
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    The Commission notes that the ESM has a lower risk profile, 
maintaining high capital levels with ultimate financial backing from 
the EU, and thus poses less counterparty risk to CSEs and less systemic 
risk to the financial system. In addition, in the Commission's view, 
relief from the margin requirements will enable the ESM to fulfill its 
mission of providing support to member states of the EU in financial 
distress, in particular, in times of tight liquidity, contributing to 
the stability of the EU financial system and the reduction of risk.
    The Commission is also adopting an amendment to Commission 
regulation Sec.  23.157(c)(1) to remove the erroneous cross-reference 
to ``Sec.  23.156(a)(1)(iv) through (xii)'' and to replace it with the 
corrected cross-reference ``Sec.  23.156(a)(1)(ii) through (x).'' The 
Commission believes that custodial banks will benefit from being able 
to convert cash posted as initial margin into treasury and U.S. 
Government agency securities as was originally intended by the 
Commission.
    The Commission sought comment on all aspects of the cost and 
benefit considerations in the Proposal but received no substantive 
comments.
2. Section 15(a) Considerations
a. Protection of Market Participants and Public
    The amendment to Commission regulation Sec.  23.151, as adopted, 
codifies CFTC Letter No. 17-34 and confirms that uncleared swaps with 
the ESM as a counterparty are not subject to the CFTC Margin Rule. As 
discussed in the Proposal, given the limited activity of the ESM in the 
swaps markets, the Commission believes that the unmargined exposure 
resulting from uncleared swaps between CSEs and the ESM is unlikely to 
result in significant risk to the financial system. Inasmuch as margin 
is posted to protect counterparties against credit risk, the 
creditworthiness of the ESM is critical to this analysis. The ESM has 
maintained high capital levels and has ultimate backing from the 
EU.\22\ Consequently, the Commission is of the view that the ESM does 
not pose substantial counterparty credit risk. Thus, the Commission 
believes that there will be no material impact on market participants 
and the general public relative to the status quo baseline.
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    \22\ CFTC Letter No. 17-34 states that ``[w]ith respect to its 
credit risk, as part of its emergency procedure, the ESM's member 
states have irrevocably agreed to contribute a total of 
approximately [euro]624 billion in additional capital should the ESM 
face financial distress. Further, the ESM is subject to limits on 
its lending and borrowing, and the ESM's property, funding, and 
assets in its member states are immune from search, requisition, 
confiscation, expropriation, or any other form of seizure, taking, 
or foreclosure. In addition, to the extent necessary to carry out 
its activities, all property, funding, and assets of the ESM are 
free from restrictions, regulations, controls, and moratoria of any 
nature. The combined application of these rules and limits is 
effective in keeping the ESM's total liabilities well below its 
available capital.''
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b. Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission believes that the efficiency, competitiveness, and 
financial integrity of markets will not be significantly impacted by 
amending Commission regulation Sec.  23.151 to exclude the ESM from the 
definition of financial end user and therefore removing the requirement 
to post and collect margin in uncleared swap transactions with the ESM.
    One of the main functions of the ESM is to provide emergency 
assistance to members states of the EU in financial distress.\23\ The 
Commission believes that relief from the margin requirements will allow 
the ESM to meet its mission, in particular, in times of tight 
liquidity, contributing to the stability of the EU financial system and 
the reduction of risk. Moreover, given the nature of its operations, 
the ESM is motivated to choose sensible, creditworthy counterparties 
and to limit its credit risk exposure.
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    \23\ See CFTC Letter No. 17-34.
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c. Price Discovery
    The amendment to Commission regulation Sec.  23.151 codifies CFTC 
Letter No. 17-34, relieving the ESM and its counterparties from the 
CFTC Margin Rule. The codification of the no-action relief as a rule 
formalizes a no-action position held by DSIO and promotes transparency 
concerning the applicability of the CFTC Margin Rule. Because there 
will not be a legal requirement that margin be posted in uncleared swap 
transactions with the ESM, such transactions will likely be for prices 
that deviate from similar uncleared swap transactions with financial 
end users but be in line with swaps with non-financial entities. As a

[[Page 27678]]

result, uncleared swaps entered into with the ESM could increase, which 
could enhance, or at least not harm, the price discovery process.
d. Sound Risk Management
    The ESM is an intergovernmental financial institution established 
by the EU and its financial activities are designed to advance EU 
objectives. The ESM's purpose is to manage the potential for systemic 
risk by providing support to member states that are in distress. The 
exposures posed by the ESM are therefore relatively unique. 
Accordingly, the amendment to Commission regulation Sec.  23.151 to 
exclude the ESM from the definition of financial end user and thereby 
remove it from the purview of the CFTC Margin Rule may result in CSEs 
being more inclined to enter into uncleared swaps with the ESM, 
benefiting from the overall diversification of their swap portfolios, 
which is consistent with sound risk management. Also, while relief from 
the margin requirements will result in the ESM collecting lesser 
amounts of margin to mitigate the risk of uncleared swaps, increasing 
the possibility of systemic risk, the Commission believes that the 
ESM's uncleared swaps activity, as reflected in the SDR data, is 
unlikely to result in substantial systemic risk.\24\
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    \24\ See supra, n. 21.
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e. Other Public Interest Considerations
    As discussed in the Proposal, the Commission believes that the 
amendment to Commission regulation Sec.  23.151 is also warranted based 
on the interests of comity and the Commission's continuing cross-border 
coordination with EU authorities, such as the 2016 EC-CFTC Agreement, 
which has fostered cooperation and mutual respect between the CFTC and 
EU authorities.

D. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
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.\25\
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    \25\ 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 fair competition. 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 the Final Rules to determine whether 
they are 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 Rules are not 
anticompetitive and have 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 set forth below:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

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


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


Sec.  23.151   Definitions applicable to margin requirements.

* * * * *

Financial end user * * *

    (2) * * *
    (iii) The Bank for International Settlements and the European 
Stability Mechanism;
* * * * *

0
3. In Sec.  23.157, revise paragraph (c)(1) to read as follows:


Sec.  23.157  Custodial arrangements.

* * * * *
    (c) * * *
    (1) Prohibits the custodian from rehypothecating, repledging, 
reusing, or otherwise transferring (through securities lending, 
securities borrowing, repurchase agreement, reverse repurchase 
agreement or other means) the collateral held by the custodian except 
that cash collateral may be held in a general deposit account with the 
custodian if the funds in the account are used to purchase an asset 
described in Sec.  23.156(a)(1)(ii) through (x), such asset is held in 
compliance with this section, and such purchase takes place within a 
time period reasonably necessary to consummate such purchase after the 
cash collateral is posted as initial margin; and
* * * * *

    Issued in Washington, DC, on April 17, 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, Chairman's 
Statement, 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 Chairman Heath P. Tarbert

    I am pleased to support today's final rule codifying relief from 
the Margin Rule for the European Stability Mechanism (``ESM'').\1\ 
The Margin Rule requires the posting of initial and variation margin 
for uncleared swaps entered into by certain swap dealers, major swap 
participants, and ``financial end user[s].'' \2\ Today's final rule 
will amend the definition of ``financial end user'' in Regulation 
23.151 to exclude the ESM from the requirements of the Margin Rule.
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    \1\ The Margin Rule is codified at Commission Regulations 23.150 
through 23.161, 17 CFR 23.150-23.161 (2019).
    \2\ Regulation 23.151 applies to swap dealers, major swap 
participants, and financial end users that are not subject to 
regulation by a ``Prudential Regulator,'' which term our laws use as 
shorthand to mean what is essentially a banking regulator.
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    As I explained when this amendment was proposed last October,\3\ 
the ESM provides financing and bond purchases to support Eurozone 
member states, serving similar functions as a multilateral 
development bank. Given that multilateral development banks and 
related entities \4\ are excluded from

[[Page 27679]]

the Margin Rule, it makes good sense to codify the same relief for 
the ESM.\5\ This is especially true given the ESM's role in the 
market. As its name suggests, the ESM is an agent of stability and 
does not raise concerns about risk in the derivatives markets. 
Codifying the ESM's relief from the Margin Rule is particularly 
important as Europe responds to the financial fallout of the global 
coronavirus pandemic.
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    \3\ See Statement of Chairman Heath P. Tarbert Before the Open 
Commission Meeting on October 16, 2019 (Oct. 16, 2019), available at 
https://www.cftc.gov/PressRoom/SpeechesTestimony/heathstatement101619.
    \4\ The Margin Rule excludes from the definition of ``financial 
end user'' sovereign entities, multilateral development banks, and 
the Bank for International Settlements, among other entities. See 
Regulation 23.151.
    \5\ The ESM has had no-action relief from the Margin Rule since 
July 24, 2017. See CFTC Letter 17-34 (July 24, 2017); see also CFTC 
Letter 19-22 (Oct. 16, 2019).
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    Erasmus observed long ago that ``humility is wisdom.'' Keeping 
that perspective is especially important when it comes to financial 
regulatory areas where nations have implemented a common set of core 
principles internationally. Those internationally-shared frameworks 
serve as a baseline, and national regulators have necessarily 
tailored their specific rules to the unique attributes of their own 
domestic markets. But we should be humble, and indeed wise enough, 
to resist the temptation to insist that a foreign counterpart adopt 
domestic regulations on a rule-by-rule basis. Cross-border 
derivatives regulation that utilizes comity and deference can enable 
the effective implementation of the post-crisis G20 derivatives 
regulatory reforms.
    As I have stated before, were financial regulators to insist 
that their counterparts overseas import each other's specific rules 
wholesale, it would lead to an absurd result ad infinitum.\6\ Just 
as the G20, Financial Stability Board, and various standard-setting 
bodies were established to prevent a global race to the bottom, 
their work is also meant to prevent nations from forcing the 
complete strictures of their domestic regimes onto others. For 
example, the Principles for Financial Markets Infrastructure 
(``PFMI'') represent international standards for, among other 
things, central counterparties and trade repositories. All of the 
G20 nations have adopted the PFMI, providing an opportunity for 
meaningful dialogue with both the European Commission and the 
European Securities and Markets Authority regarding the status of 
American and European central counterparties.
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    \6\ See Statement of Chairman Heath P. Tarbert in Support of the 
Cross-Border Swaps Proposal (Dec. 18, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement121819 
(``If we impose our regulations on non-U.S. persons whenever they 
have a remote nexus to the United States, then we should be willing 
for all other jurisdictions to do the same. The end result would be 
absurdity, with everyone trying to regulate everyone else. And the 
duplicative and overlapping regulations would inevitably lead to 
fragmentation in the global swaps market--itself a potential source 
of systemic risk.'').
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    Those discussions are ongoing and have been productive. In 
particular, we are working toward a potential cooperative framework 
for the supervision of central counterparties engaged in 
international markets. With an eye to this progress, I believe 
today's final amendments to the Margin Rule are appropriate. I am 
encouraged by the tone of the dialogue and the commitment of our EU 
counterparts to reach a mutually beneficial arrangement that will 
stand the test of time. I believe such an arrangement for the 
supervision of third country central counterparties would entail a 
great degree of regulatory deference and international comity 
alongside extensive information sharing and regular communications 
between supervisory authorities. I look forward to continuing to 
engage with our European colleagues to advance our shared interests 
in a robust and resilient transatlantic derivatives market. In that 
context, I am pleased to support today's final rule to exclude the 
ESM from the Margin Rule.\7\
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    \7\ Today the Commission is also voting on a proposal to codify 
the ESM's relief from the Clearing Requirement under Part 50 of the 
CFTC's rules.
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Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    In March 2018, I articulated my approach to our current 
regulatory relationship with our European counterparts in light of 
their refusal to stand by or re-affirm their 2016 commitments in the 
CFTC's and European Commission's common approach to the regulation 
of cross-border central counterparties (CCPs) (CFTC-EC CCP 
Agreement).\1\ Specifically, I believe that the absence of the 
agreement's re-affirmation in the European Market Infrastructure 
Regulation 2.2 (EMIR 2.2) directly implied the agreement's 
abrogation.\2\ I therefore vowed that I would either object to or 
vote against any relief provided to, or requested by, European Union 
authorities until the agreement's clarity was restored. Since that 
time, I have consistently voted against, or objected to, any 
regulation or relief that provides special accommodations to 
European entities, including the proposed exemption from margin 
requirements for the European Stability Mechanism (ESM) that the 
Commission seeks to finalize today.\3\
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    \1\ Keynote Address of Commissioner Brian Quintenz before FIA 
Annual Meeting, Boca Raton, Florida (March 14, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opaquintenz9; and Joint 
Statement from CFTC Chairman Timothy Massad and European 
Commissioner Jonathan Hill, CFTC and the European Commission: Common 
approach for transatlantic CCPs (Feb. 10, 2016), https://www.cftc.gov/PressRoom/PressReleases/pr7342-16.
    \2\ The proposed implementation of EMIR 2.2 by ESMA is available 
at, https://www.esma.europa.eu/press-news/esma-news/esma-consults-tiering-comparable-compliance-and-fees-under-emir-22.
    \3\ Dissenting Statement by Commissioner Brian Quintenz before 
the Open Commission Meeting: FBOT Registration (Nov. 5, 2019), 
https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement110519; Dissenting Statement by Commissioner 
Quintenz to the Proposed Exclusion for the European Stability 
Mechanism from the Commission's Margin Requirements for Uncleared 
Swaps (Oct. 16, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintentzstatement101619; Statement of 
Commissioner Brian Quintenz on Staff No-Action Relief for Eurex 
Clearing AG (December 20, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatement122018.
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    However, the unprecedented devastating economic and social 
impacts of COVID-19 across the globe warrant a reprieve from that 
position. In the United States, financial regulators have acted 
swiftly, decisively, and boldly to mitigate economic disruptions and 
support market liquidity, including providing regulatory relief 
where necessary. I am very proud of the CFTC's decisive response to 
the COVID-19 pandemic, which promoted the full functioning of 
derivatives markets despite the extraordinary challenges facing 
exchanges, clearinghouses, and market intermediaries as a result of 
social distancing.\4\ I know the Commission, under the strong 
leadership of Chairman Heath P. Tarbert, is committed to providing 
any additional relief necessary to ensure that U.S. markets remain 
accessible.
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    \4\ Statement of CFTC Commissioner Brian Quintenz on Current 
Market Dynamics and Commission Actions Related to COVID-19 (March 
18, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/quintenzstatment031820.
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    Our European counterparts are engaged in the same epic struggle 
as we are to lessen the extraordinary economic and social harms of 
this pandemic. Although I remain committed to ensuring the terms of 
the CFTC-EC CCP Agreement are ultimately upheld, I also recognize 
that issue is one facet of a much broader, deeper bond we share with 
the European Union--a relationship that has been grounded in 
goodwill, trust, and partnership. Many of the European institutions 
affected by the rules and no-action relief before the Commission 
today are likely to be central to the European Union's COVID-19 
economic recovery efforts. As a result, I believe it is appropriate 
to support the items before the Commission today, which, by 
providing relief from CFTC clearing and margin requirements, may 
bolster the ability of EU institutions to provide critical financial 
assistance to their economies, businesses, and citizens.
    For example, the European Commission, ESM, and European 
Investment Bank (EIB) are working in concert to take unprecedented 
actions at the European level to complement national measures to 
mitigate the impacts of COVID-19.\5\ The ESM has many economic tools 
at its disposal, including making loans to Eurozone member states, 
purchasing the bonds of Eurozone members, providing precautionary 
credit lines that can be drawn upon if needed, and directly 
recapitalizing financial institutions.\6\
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    \5\ The time for solidarity in Europe is now--a concerted 
European financial response to the corona-crisis, https://www.esm.europa.eu/blog/time-solidarity-europe-concerted-european-financial-response-corona-crisis (April 2, 2020).
    \6\ European Stability Mechanism, Lending Toolkit, https://www.esm.europa.eu/assistance/lending-toolkit.
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    Similarly, the EIB, the lending arm of the European Union, and 
the European Investment Fund (EIF), which specializes in finance for 
small and medium sized businesses, are also working together to 
respond to COVID-19. Together, the EIB and the EIF have proposed a 
plan to provide immediate financing to combat the health and 
economic effects of the pandemic.\7\ Each

[[Page 27680]]

of these EU institutions may seek to enter into swaps subject to the 
CFTC's clearing or uncleared margin requirements in order to hedge 
the risks associated with these lending and investment activities. 
Accordingly, I support today's measures that provide relief from 
those requirements, thereby freeing up additional capital that can 
be immediately deployed in the European economy.
---------------------------------------------------------------------------

    \7\ Coronavirus outbreak: EIB Group's response to the pandemic, 
https://www.eib.org/en/about/initiatives/covid-19-response/index.htm 
(April 9, 2020).
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    When the present hardship caused by COVID-19 abates, I look 
forward to re-engaging with our European counterparts on the 
critical issue of the oversight of U.S. CCPs. I believe the 
possibility still exists for a successful implementation of EMIR 2.2 
that fully respects the CFTC's ultimate authority over U.S. CCPs, 
and I am committed to doing everything in my power to achieve this 
outcome.

Amendments To Swap Clearing Requirement Exemptions Under Part 50

    I am pleased to support this proposal, which codifies existing 
relief, from the Commission's requirement that certain commonly 
traded interest rate swaps and credit default swaps be cleared 
following their execution.\8\ The new exemptions could be elected by 
several classes of counterparties that may enter into these swaps, 
namely: Sovereign nations; central banks; ``international financial 
institutions'' of which sovereign nations are members; bank holding 
companies, and savings and loan holding companies, whose assets 
total no more than $10 billion; and community development financial 
institutions recognized by the U.S. Treasury Department. Today's 
proposal notes that many of these entities have actually relied on 
existing relief, electing not to clear swaps that are generally 
subject to the clearing requirement.
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    \8\ The swap clearing requirement is codified in part 50 of the 
Commission's regulations (17 CFR part 50).
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    I strongly support the policy of international ``comity'' 
described in the proposal, recognizing that sovereign nations and 
their instrumentalities should generally not be subject to the 
Commission's regulations. I trust that by proposing this relief, the 
United States, the Federal Reserve, and other U.S. government 
instrumentalities will receive the same treatment in foreign 
jurisdictions. As noted above, this policy is timely in light of the 
current projects the ESM, the EIB, and the EIF are currently 
undertaking in response to the pandemic. I am pleased that the 
Commission can provide flexibility to these entities at this time 
when entering into swaps with U.S. swap dealers. To this end, I also 
support the decision of the Division of Clearing and Risk to extend 
the current, time-limited no-action relief provided to the ESM \9\ 
pending the finalization of the amendments to part 50. I note that 
the EIB, EIF, other international financial institutions, central 
banks, and sovereign entities currently have relief that is not 
time-limited.\10\
---------------------------------------------------------------------------

    \9\ CFTC Letter 19-23 (Oct. 16, 2019).
    \10\ End-User Exception to the Clearing Requirement for Swaps, 
77 FR 42,560, 42,561-62 (Jul. 19, 2012).
---------------------------------------------------------------------------

    As for the bank holding companies, savings and loan holding 
companies, and community development financial institutions that 
would be provided relief pursuant to this proposal, I am hopeful 
that the Commission will ultimately finalize this relief, which it 
first proposed for these entities in 2018.\11\ However, I note that 
these entities currently have relief pursuant to no-action letters 
issued in 2016 that have no expiration dates.\12\
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    \11\ Amendments to Clearing Exemption for Swaps Entered Into by 
Certain Bank Holding Companies, Savings and Loan Holding Companies, 
and Community Development Financial Institutions, 83 FR 44,001 (Aug. 
29, 2018).
    \12\ CFTC Letters 16-01 and -02 (both Jan. 8, 2016).
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Final Rule Excluding the European Stability Mechanism From CFTC 
Margin Requirements for Uncleared Swaps

    I support today's final rule that would exempt a swap between 
the European Stability Mechanism and a swap dealer from the 
Commission's margin requirements applicable to uncleared swaps. This 
rule is premised on the same policy of international comity 
referenced in today's proposed exemption from the swap clearing 
requirement. I would like to highlight that the EIB, EIF, and the 
other international financial institutions referenced by the 
proposed exemption from the swap clearing requirement, as well as 
sovereign entities and central banks, are already exempted from the 
Commission's margin requirements for uncleared swaps pursuant to 
Commission regulations.\13\ Finally, I am pleased that the Division 
of Swap Dealer and Intermediary Oversight is today extending 
previously granted, time-limited no-action relief to the ESM,\14\ 
pending the effective date of today's final rule.
---------------------------------------------------------------------------

    \13\ CFTC regulation 23.151.
    \14\ CFTC Letter 19-22 (Oct. 16, 2019).
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Appendix 4--Statement of Commissioner Dan M. Berkovitz

    I support today's final rule that excludes the European 
Stability Mechanism (``ESM'') from the definition of financial end 
user in the Commission's margin rules. The final rule codifies no-
action relief that has been in effect since 2017 that exempts the 
ESM from initial and variation margin requirements for uncleared 
swaps with swap dealer or major swap participant counterparties. The 
final rule recognizes the ESM's status as an intergovernmental 
institution that assists Euro-area members in financial distress and 
its similarity to multilateral development banks that are excluded 
from the definition of financial end user. The ESM does not engage 
in speculative swaps trading and its swaps activities are in 
furtherance of its financial assistance programs. The final rule 
provides certainty to both the ESM and its swap dealer 
counterparties in uncleared swaps, facilitates the ESM's work in 
mitigating systemic risk, and poses minimal risk to the U.S. 
financial system.
    The final rule also recognizes the importance of international 
comity in regulating entities established by sovereign governments 
for governmental purposes. I encourage continued cooperation between 
the Commission and European authorities in maintaining mutual 
respect for our corresponding regulatory interests and expertise.
    I thank the staff of the Division of Swap Dealer and 
Intermediary Oversight for their work on this final rule and their 
responsiveness to suggestions from my office.

[FR Doc. 2020-08601 Filed 5-8-20; 8:45 am]
 BILLING CODE 6351-01-P