[Federal Register Volume 85, Number 127 (Wednesday, July 1, 2020)]
[Rules and Regulations]
[Pages 39754-39780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14097]



[[Page 39753]]

Vol. 85

Wednesday,

No. 127

July 1, 2020

Part III





Department of the Treasury





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Comptroller of the Currency





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12 CFR Part 45





Federal Reserve System





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12 CFR Part 237





Federal Deposit Insurance Corporation





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12 CFR Part 349





Farm Credit Administration





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12 CFR 624





Federal Housing Finance Agency





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12 CFR Part 1221





Margin and Capital Requirements for Covered Swap Entities; Direct-
Interim-Final Rule-Final Rule

  Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules 
and Regulations  

[[Page 39754]]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 45

[Docket No. OCC-2019-0023]
RIN 1557-AE69

 FEDERAL RESERVE SYSTEM

12 CFR Part 237

[Docket No. R-1682]
RIN 7100-AF62

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 349

RIN 3064-AF08

FARM CREDIT ADMINISTRATION

12 CFR Part 624

RIN 3052-AD38

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1221

RIN 2590-AB03


Margin and Capital Requirements for Covered Swap Entities

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (Board); Federal 
Deposit Insurance Corporation (FDIC); Farm Credit Administration (FCA); 
and the Federal Housing Finance Agency (FHFA).

ACTION: Final rule.

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SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (each, an agency, and 
collectively, the agencies) are adopting a final rule that amends the 
agencies' regulations requiring swap dealers and security-based swap 
dealers under the agencies' respective jurisdictions to exchange margin 
with their counterparties for swaps that are not centrally cleared 
(Swap Margin Rule). The Swap Margin Rule as adopted in 2015 takes 
effect under a phased compliance schedule spanning from 2016 through 
2020, and the entities covered by the rule continue to hold swaps in 
their portfolios that were entered into before the effective dates of 
the rule. Such swaps are grandfathered from the Swap Margin Rule's 
requirements until they expire according to their terms. The final rule 
permits swaps entered into prior to an applicable compliance date 
(legacy swaps) to retain their legacy status in the event that they are 
amended to replace an interbank offered rate (IBOR) or other 
discontinued rate, modifies initial margin requirements for non-cleared 
swaps between affiliates, introduces an additional compliance date for 
initial margin requirements, clarifies the point in time at which 
trading documentation must be in place, permits legacy swaps to retain 
their legacy status in the event that they are amended due to technical 
amendments, notional reductions, or portfolio compression exercises, 
and makes technical changes to relocate the provision addressing 
amendments to legacy swaps that are made to comply with the Qualified 
Financial Contract Rules, as defined in the Supplementary Information 
section. In addition, the final rule addresses comments received in 
response to the agencies' publication of the interim final rule that 
would preserve the status of legacy swaps meeting certain criteria if 
the United Kingdom withdraws from the European Union (hereafter 
``Brexit) without a negotiated settlement agreement.

DATES: The final rule is effective August 31, 2020.

FOR FURTHER INFORMATION CONTACT: 
    OCC: Chris McBride, Director for Market Risk, Treasury and Market 
Risk Policy, (202) 649-6402, or Allison Hester-Haddad, Counsel, Chief 
Counsel's Office, (202) 649-5490, for persons who are deaf or hearing 
impaired, TTY (202) 649-5597, Office of the Comptroller of the 
Currency, 400 7th Street SW, Washington, DC 20219.
    Board: Constance Horsley, Deputy Associate Director, (202) 452-
5239, Lesley Chao, Lead Financial Institution Policy Analyst, (202) 
974-7063, or John Feid, Principal Economist, (202) 452-2385, Division 
of Supervision and Regulation; Patricia Yeh, Senior Counsel, (202) 452-
3089, or Justyna Bolter, Senior Attorney, (202) 452-2686, Legal 
Division; for users of Telecommunication Devices for the Deaf (TDD) 
only, contact 202-263-4869; Board of Governors of the Federal Reserve 
System, 20th and C Streets NW, Washington, DC 20551.
    FDIC: Irina Leonova, Senior Policy Analyst, [email protected], 
Capital Markets Branch, Division of Risk Management Supervision, (202) 
898-3843; Thomas F. Hearn, Counsel, [email protected], Legal Division, 
Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, 
DC 20429.
    FCA: Jeremy R. Edelstein, Associate Director, Timothy T. Nerdahl, 
Senior Policy Analyst, Clayton D. Milburn, Senior Financial Analyst, 
Finance and Capital Markets Team, Office of Regulatory Policy, (703) 
883-4414, TTY (703) 883-4056, or Richard A. Katz, Senior Counsel, 
Office of General Counsel, (703) 883-4020, TTY (703) 883-4056, Farm 
Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
    FHFA: Christopher Vincent, Senior Financial Analyst, Office of 
Financial Analysis, Modeling & Simulations, (202) 649-3685, 
[email protected], or James P. Jordan, Associate General 
Counsel, Office of General Counsel, (202) 649-3075, 
[email protected], Federal Housing Finance Agency, Constitution 
Center, 400 7th St. SW, Washington, DC 20219. The telephone number for 
the Telecommunications Device for the Hearing Impaired is (800) 877-
8339.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The agencies are adopting the recently proposed amendments to the 
agencies' regulations that require swap dealers and security-based swap 
dealers under the agencies' respective jurisdictions to exchange margin 
with their counterparties for swaps that are not centrally cleared 
(Swap Margin Rule or Rule), with certain adjustments (final rule). As 
discussed in detail below, the final rule (1) permits swaps entered 
into prior to an applicable compliance date (legacy swaps) to retain 
their legacy status in the event that they are amended to replace an 
interbank offered rate (IBOR) or other discontinued rate, (2) modifies 
initial margin requirements for non-cleared swaps between covered swap 
entities and their affiliates, (3) introduces an additional compliance 
date for initial margin requirements, (4) clarifies the point in time 
at which trading documentation must be in place, (5) permits legacy 
swaps to retain their legacy status in the event that they are amended 
due to technical amendments, notional reductions, or portfolio 
compression exercises, (6) makes technical changes to relocate the 
provision within the rule addressing amendments to legacy swaps that 
are made to comply with the qualified financial contract rules (QFC 
Rules),\1\ and (7) addresses comments received in response to the 
agencies' publication of

[[Page 39755]]

the interim final rule dealing with Brexit-related issues.
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    \1\ 83 FR 50805 (October 10, 2018). The QFC Rules are codified 
as follows: 12 CFR part 47 (OCC's QFC Rule); 12 CFR part 252, 
subpart I (Board's QFC Rule); 12 CFR part 382 (FDIC's QFC Rule).
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A. Background on the Swap Margin Rule

    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) required the agencies to jointly adopt rules that 
establish capital and margin requirements for swap entities that are 
prudentially regulated by one of the agencies (covered swap 
entities).\2\ These capital and margin requirements apply to swaps that 
are not cleared by a registered derivatives clearing organization or a 
registered clearing agency (non-cleared swaps).\3\ For the remainder of 
this preamble, the term ``non-cleared swaps'' refers to non-cleared 
swaps and non-cleared security-based swaps unless the context requires 
otherwise.
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    \2\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010). See 7 U.S.C. 6s; 15 
U.S.C. 78o-10. Sections 731 and 764 of the Dodd-Frank Act added a 
new section 4s to the Commodity Exchange Act of 1936, as amended, 
and a new section, section 15F, to the Securities Exchange Act of 
1934, as amended, respectively, which require registration with the 
Commodity Futures Trading Commission (CFTC) of swap dealers and 
major swap participants and the U.S. Securities and Exchange 
Commission (SEC) of security-based swap dealers and major security-
based swap participants (each a swap entity and, collectively, swap 
entities). Section 1a(39) of the Commodity Exchange Act of 1936, as 
amended, defines the term ``prudential regulator'' for purposes of 
the margin requirements applicable to swap dealers, major swap 
participants, security-based swap dealers and major security-based 
swap participants. See 7 U.S.C. 1a(39).
    \3\ A ``swap'' is defined in section 721 of the Dodd-Frank Act 
to include, among other things, an interest rate swap, commodity 
swap, equity swap, and credit default swap, and a security-based 
swap is defined in section 761 of the Dodd-Frank Act to include a 
swap based on a single security or loan or on a narrow-based 
security index. See 7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68).
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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 on non-
cleared derivatives in September 2013 (BCBS/IOSCO Framework).\4\ 
Following the establishment of the BCBS/IOSCO Framework, on November 
30, 2015, the agencies published the Swap Margin Rule, which includes 
many of the principles and other aspects of the BCBS/IOSCO 
Framework.\5\ In particular, the Swap Margin Rule adopted the 
implementation schedule set forth in the BCBS/IOSCO Framework, 
including the revised implementation schedule adopted on March 18, 
2015.\6\
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    \4\ See BCBS and IOSCO ``Margin requirements for non-centrally 
cleared derivatives,'' (September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
    \5\ 80 FR 74840 (November 30, 2015).
    \6\ See BCBS and IOSCO ``Margin requirements for non-centrally 
cleared derivatives,'' (March 2015), available at https://www.bis.org/bcbs/publ/d317.pdf.
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    The Swap Margin Rule established an effective date of April 1, 
2016, with a phased-in compliance schedule for the initial and 
variation margin requirements.\7\ On or after March 1, 2017, all 
covered swap entities were required to comply with the variation margin 
requirements for transactions with other swap entities and financial 
end user counterparties. The Swap Margin Rule presently requires all 
covered swap entities to comply with the initial margin requirements 
for non-cleared swaps with all financial end users with a material 
swaps exposure and with all swap entities by September 1, 2020.
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    \7\ The applicable compliance date for a covered swap entity is 
based on the average daily aggregate notional amount of non-cleared 
swaps, foreign exchange forwards and foreign exchange swaps of the 
covered swap entity and its counterparty (accounting for their 
respective affiliates) for each business day in March, April, and 
May of that year. The applicable compliance dates for initial margin 
requirements that are currently in place, and the corresponding 
average daily aggregate notional amount thresholds, are: September 
1, 2016, $3 trillion; September 1, 2017, $2.25 trillion; September 
1, 2018, $1.5 trillion; September 1, 2019, $0.75 trillion; and 
September 1, 2020, all swap entities and counterparties. See Sec.  
__.1(e) of the Swap Margin Rule. In this final rule, the agencies 
are also adding one additional year to this schedule for certain 
counterparties.
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B. Overview of the Notice of Proposed Rulemaking and General Summary of 
Comments

    On November 7, 2019, the agencies sought comment on a proposal to 
revise certain parts of the Swap Margin Rule to facilitate the 
implementation of prudent risk management strategies at covered swap 
entities (proposed rule or proposal).\8\ The proposed amendments 
permitted legacy swaps to retain their legacy status in the event that 
they are amended to replace an interbank offered rate (IBOR) or other 
discontinued rate, introduced an additional compliance date for initial 
margin requirements, clarified the point in time at which trading 
documentation must be in place, and permitted legacy swaps to retain 
their legacy status in the event that they are amended due to technical 
amendments, notional reductions, or portfolio compression exercises. 
The proposal would also have made technical changes to relocate the 
provision within the rule addressing amendments to legacy swaps that 
are made to comply with the QFC Rules.
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    \8\ 84 FR 59970 (Nov. 7, 2019).
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    The proposal would also have no longer required covered swap 
entities to collect initial margin for non-cleared swaps with 
affiliates. However, inter-affiliate transactions would have continued 
to be subject to variation margin requirements. Inter-affiliate 
transactions of covered swap entities regulated by the FDIC, the OCC, 
and the Board also would continue to be subject to other applicable 
rules and regulations.
    The agencies received approximately 20 comments on the proposal, 
from U.S. financial institutions, public interest groups, trade 
associations, academic institutions, and other interested parties. 
Agency staff also met with some commenters at those commenters' request 
to discuss their comments on the proposal.\9\
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    \9\ Summaries of these meetings may be found at the internet 
sites where the agencies' have posted public comments on the NPR. 
See, e.g., https://www.federalreserve.gov/apps/foia/proposedregs.aspx.
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    Most commenters supported the proposal's relief to amend certain 
legacy swaps for certain reasons and the proposal's addition of a 
compliance phase for smaller entities, as a meaningful way to assist 
market participants in managing and prioritizing their resources, 
mitigating potential trading disruptions related to the transition of 
IBORs to other interest rates, complying with documentation 
requirements, and engaging in certain trade life-cycle events.
    With respect to removing the initial margin requirement for inter-
affiliate transactions, some commenters supported the proposal while 
others expressed the view that the proposal would increase risks to 
covered swap entities individually and financial stability more 
broadly. For example, a few commenters shared their view that 
collateralization (in the form of initial margin collected from a 
covered swap entity's affiliate) is a highly effective tool for 
reducing closeout risk.\10\ These commenters were concerned that the 
proposed rule would eliminate an estimated $40 billion in collateral 
held by covered swap entities, which, in their view, is necessary for 
closeout risk-absorption. Some of the commenters also expressed the 
view that banking organizations are using inter-affiliate swaps for the 
primary purpose of concentrating the risks of the organizations' world-
wide derivatives activities onto the books of the covered

[[Page 39756]]

swap entities subject to the Swap Margin Rule, i.e., U.S. insured 
depository institutions.
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    \10\ Closeout risk is the risk associated with the period 
following a confirmed default wherein the defaulting counterparty is 
unable to perform on the swap contract and the cost of legally 
closing out the existing swap and establishing a replacement swap 
with a new counterparty is unknown.
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    By contrast, commenters supporting the removal of the initial 
margin requirement for inter-affiliate transactions asserted that the 
proposal would align the Swap Margin Rule with the margin requirements 
of some other domestic and foreign jurisdictions and facilitate more 
balanced and effective risk management practices across the spectrum of 
risks faced within banking organizations that engage in non-cleared 
swaps.
    As discussed below in this Supplementary Information section, the 
final rule adopts, with certain adjustments in response to the comments 
received, the proposal that (1) permits swaps entered into prior to an 
applicable compliance date (legacy swaps) to retain their legacy status 
in the event that they are amended to replace an IBOR or other 
discontinued rate, (2) modifies the initial margin requirement for non-
cleared swaps between covered swap entities and their affiliates, (3) 
introduces an additional compliance date for initial margin 
requirements, (4) clarifies the point in time at which trading 
documentation must be in place, (5) permits legacy swaps to retain 
their legacy status in the event that they are amended due to technical 
amendments, notional reductions, or portfolio compression exercises, 
(6) makes technical changes to relocate the provision within the rule 
addressing amendments to legacy swaps that are made to comply with the 
qualified financial contract rules (QFC Rules),) \11\ and (7) addresses 
comments received in response to the agencies' publication of the 
interim final rule dealing with Brexit-related issues.
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    \11\ 83 FR 50805 (October 10, 2018). The QFC Rules are codified 
as follows: 12 CFR part 47 (OCC's QFC Rule); 12 CFR part 252, 
subpart I (Board's QFC Rule); 12 CFR part 382 (FDIC's QFC Rule).
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II. Interbank Offered Rates

A. Summary of Proposed Rule

    Due to the potential discontinuation of LIBOR at the end of 2021, 
covered swap entities face uncertainty about the way their swap 
contracts that include an interest rate based on LIBOR and other IBORs 
will operate after a permanent discontinuation. An interest rate is a 
critical term for calculating payments under a swap contract, be it an 
interest rate swap or another type of swap that includes a reference 
interest rate as one of the mechanisms for determining payments or 
premiums. In many instances, covered swap entities may decide to amend 
existing swap contracts to replace an IBOR before the IBOR becomes 
discontinued. Such amendments may also trigger follow-on amendments 
that the counterparties determine are necessary to maintain the 
economics of the contract.\12\ Absent revisions to the Swap Margin 
Rule, an amendment to a legacy swap could affect the legacy status of 
such a swap and make it subject to the margin requirements of the rule. 
In order to enable covered swap entities and their counterparties to 
minimize disturbance to the financial markets, the agencies proposed to 
provide relief to permit covered swap entities to amend the interest 
rates in a legacy swap contract, based on certain conditions of 
eligibility, and to adopt necessary follow-on amendments, without the 
swap losing its legacy status.
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    \12\ Follow-on amendments may include, for example, spread 
adjustments resulting from the move from a term rate to an overnight 
rate, from an unsecured rate to a secured rate, or from a change in 
tenor.
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B. Method of Amendment

1. Proposal
    In recognition of the ongoing efforts to transition away from 
certain IBORs due to their potential discontinuation, the agencies 
proposed to amend the Swap Margin Rule to remove impediments that would 
limit the ability of covered swap entities to replace certain interest 
rates in their legacy non-cleared swaps. Proposed Sec.  __.1(h) 
recognized that these replacements could be carried out using a variety 
of legal mechanisms by permitting amendments accomplished by the 
parties' adherence to a protocol, contractual amendment of an agreement 
or confirmation, or execution of a new contract in replacement of and 
immediately upon termination of an existing contract (i.e., tear-up), 
subject to certain limitations found in Sec.  __.1(h)(3).
2. Final Rule
    Commenters were supportive of the flexibility that the agencies 
provided regarding the method of amendment, particularly the 
flexibility to make amendments to an individual non-cleared swap or on 
a netting set level. Several commenters requested a technical change to 
the language in proposed Sec.  __.1(h) to clarify that the method of 
adherence to a protocol is itself a contractual amendment. To make this 
clarification, the agencies are replacing the language ``contractual 
amendment of an agreement or confirmation'' with ``other amendment of a 
contract or confirmation'' to make clear that both an adherence to a 
protocol as well as other amendments are permissible methods of 
amendment to a legacy swap, and also to maintain consistency in using 
the term ``contract'' rather than ``agreement'' in Sec.  __.1(h). The 
agencies are also making non-substantive parallel changes to the rule 
text to clarify that the execution of a new contract or confirmation in 
replacement of and immediately upon termination of an existing contract 
or confirmation is a permitted method of amendment.
    A few commenters also requested that the agencies expand Sec.  
__.1(h) to include new, non-legacy swaps entered into solely for 
managing the transition away from IBORs, or new, non-legacy swaps 
designed to transition an existing swap away from an IBOR even if the 
swap may not be amended or terminated. These commenters suggested this 
expansion would facilitate use of basis swaps to offset IBOR exposure 
from legacy swaps against new exposure to a risk-free rate (RFR). One 
commenter argued this would be roughly economically equivalent to 
directly amending one or more existing swaps to eliminate the IBOR 
exposure and replacing it with an RFR.
    The agencies are not expanding the regulation beyond the methods 
that were proposed in Sec.  __.1(h).) The alternative suggested by the 
commenters would be ineffective in resolving the problem the agencies 
seek to address. As long as covered swap entities hold existing swaps 
contractually obligating them to exchange payments based on IBORs, they 
bear the risk that those IBORs will be discontinued. If a covered swap 
entity hedges that IBOR exposure to another benchmark by executing a 
new basis swap, one leg of that swap will necessarily be linked to the 
IBOR. While the agencies believe there may be certain circumstances in 
which sound risk management by a covered swap entity would include new 
trading activity between IBOR and non-IBOR market exposures (with 
contract dates ending by December 2021), these activities go beyond the 
scope of relief the agencies are providing with this rule.

C. Purpose of Amendments

1. Proposal
    The proposed rule described the type of interest rate that can be 
replaced and the accompanying changes that would be permitted. Proposed 
Sec. Sec.  __.1(h)(3)(i)(A) and (B) would permit amendments that are 
made solely to accommodate the replacement of an IBOR or of any other 
non-IBOR interest rate that a covered swap entity

[[Page 39757]]

reasonably expects to be discontinued or reasonably determines has lost 
its relevance as a reliable benchmark due to a significant impairment 
with an alternate interest rate.
2. Final Rule
    The agencies did not receive any comments on this part of the 
proposed rule and are adopting it as proposed.

D. Permitted Interest Rates

1. Proposal
    The proposed rule provided that an IBOR could be replaced, 
including but not limited to LIBOR, TIBOR, BBSW, SIBOR, CDOR, EURIBOR, 
and HIBOR. Although the current uncertainty surrounding interest rates 
is tied to IBORs, the agencies also proposed a second, more subjective 
standard that would be applicable to other categories of interest 
rates, should the need arise in the future. This forward-looking 
standard was designed to encourage covered swap entities to resolve 
critical uncertainties before an interest rate is discontinued, or 
loses its market relevance, in order to minimize disturbance to the 
markets.
    The proposed rule (Sec.  __.1(h)(3)(i)(C)) also contemplated that 
an interest rate may need to be replaced more than one time. For 
example, an IBOR may first be replaced with fallback provisions at a 
time when a permanent alternative interest rate is not yet available or 
not yet agreed upon by the swap participants, or amendment 
documentation has not yet been developed. Subsequently, fallback 
provisions may be replaced with permanent alternative interest rates. 
If the original interest rate that is being replaced is an IBOR or any 
other non-IBOR interest rate that otherwise met the requirements of the 
proposed rule and that a covered swap entity reasonably expects to be 
discontinued or reasonably determines has lost its relevance as a 
reliable benchmark due to a significant impairment, the non-cleared 
swap may be amended more than once to accommodate ongoing developments 
toward a permanent replacement interest rate. The proposed rule did not 
limit the number of amendments that could take place, as long as the 
interest rate that was originally present in the non-cleared swap met 
the criteria in either proposed Sec.  __.1(h)(3)(i)(A) or Sec.  
__.1(h)(3)(i)(B). The proposed rule would not permit subsequent 
amendments that change interest rates or other terms of the non-cleared 
swap for any purpose other than for those purposes explicitly set out 
in Sec.  __.1(h), without triggering application of the margin 
requirements.
    To benefit from the treatment of this new legacy swap provision, a 
covered swap entity must make the amendments to the non-cleared swap 
solely to accommodate the replacement of an interest rate described in 
the proposed rule. The proposed rule was flexible as to the incoming 
replacement interest rate by leaving it up to the counterparties to 
select a mutually agreeable replacement interest rate. The proposed 
rule provided examples of the Secured Overnight Funding Rate (SOFR), 
the AMERIBOR and the Overnight Bank Funding Rate as some potential 
alternatives suggested by some market participants. The agencies 
expected that any replacement interest rate, including any successor 
replacement interest rate, would be agreed upon by the parties after 
assessing its complexity, safety and soundness, and taking into 
consideration associated risk management practices.\13\
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    \13\ The replacement rate is also expected to be consistent with 
international standards, such as the IOSCO Principles for Financial 
Benchmarks. See https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf.
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2. Final Rule
    The agencies received several comments expressing concern that the 
proposed rule could be read as applying to interest rate swaps only and 
requesting similar relief for all other asset categories of swaps, 
including foreign exchange, equity, commodity, and credit default 
swaps. The agencies are clarifying that amendments to the rule permit 
amendments to interest rates but do not restrict the categories of 
swaps where those interest rates appear and thus do not restrict the 
categories of swaps in which those amendments could be made. Interest 
rates could be used in a variety of different categories of swaps, such 
as an underlying interest rate index in an interest rate swap or as a 
discounting interest rate for collateral or payment calculations in a 
commodity, foreign exchange, equity, or credit swap. In other words, 
the relief provided applies to all categories of non-cleared swaps that 
include or refer to an IBOR or any other interest rate described in 
paragraphs (h)(3)(i)(A)-(C) of the final rule.
    One commenter requested that the agencies extend the relief in the 
Proposal to cover amendments made solely to accommodate the replacement 
of any reference instrument (e.g., iTraxx) reasonably expected to be 
discontinued or reasonably determined to have lost its relevance as a 
reliable benchmark due to a significant impairment. The agencies note 
that there is no current expectation or indication that any major non-
interest rate reference instrument is expected to be discontinued. 
Moreover, the expected discontinuation of IBORs place these interest 
rates in a special position that does not extend to periodic revisions 
of underlying reference instruments in commodity, foreign exchange, 
credit, equity, or other swaps. The agencies are not modifying the 
final rule to allow the replacement of a non-interest rate reference 
instrument while retaining the legacy status of the swap. If any 
expectation of discontinuation arises in the future, the agencies may 
reconsider their position.
    One commenter requested clarification that any new intermediate or 
permanent interest rate does not necessarily have to be viewed by the 
market as a ``successor'' to the IBOR or other discontinued rate, but 
that the counterparties to the swap contract simply have to agree on 
the appropriate replacement interest rate. The agencies confirm this 
understanding.
    Commenters expressed concern that changes to the discounting 
methods to adopt RFRs used by some central counterparties (CCPs) would 
require conforming changes to over-the-counter swaptions that may be 
presented to these CCPs for clearing. The agencies have modified the 
proposed rule to allow legacy swaps to be amended to reflect these 
changes to the discount interest rate and remain legacy swaps.
    The agencies did not receive any other comments on this part of the 
proposed rule and are adopting it largely as proposed.

E. Follow-On Amendments

1. Proposal
    In the proposed rule, the agencies acknowledged that replacing an 
interest rate could require other contractual changes to maintain the 
economics of the non-cleared swap and to preserve the relative economic 
values to the parties after incorporating changes to the interest rate. 
The proposed rule would permit changes that incorporate spreads and 
other adjustments that accompany and implement the replacement interest 
rate amendment. The proposed rule would also permit other, more 
administrative and technical changes necessary to operationalize the 
determination of payments or other exchanges of economic value using 
the replacement interest rate, including changes to determination 
dates, calculation agents, and payment dates. These types of

[[Page 39758]]

administrative changes may be necessary to adjust computations and 
operational provisions to reflect the differences between an IBOR and 
the replacement interest rate or rates. The agencies envisioned that a 
number of contractual changes could be necessary to maintain the 
economics of the non-cleared swap, and for this reason, the proposed 
rule would permit these changes. However, the agencies did not believe 
that the relief being provided for interest rate replacement purposes 
should be expansively applied to encompass all changes to a legacy 
swap. Accordingly, the proposed rule text clarified that the proposed 
safe harbor for legacy swaps would be unavailable if the amendments 
extend the maturity or increase the total effective notional amount of 
the non-cleared swap, irrespective of the reason for those changes.
2. Final Rule
    The agencies received several comments requesting reconsideration 
of the restriction on extending the maturity or increasing the total 
effective notional amount of the non-cleared swap. Day count 
conventions or other factors such as final settlement or final payment 
occurring on the 30th of the month versus the 15th of the month may 
result in an extension of the remaining maturity of a swap. Since the 
counterparty to a non-cleared swap may not know the size of the final 
payment until the end of the interest period, the swap may incorporate 
a payment delay, with the final maturity shifting as a result. 
Commenters also explained that the replacement of an IBOR may increase 
the total effective notional amount of the non-cleared swap under a few 
scenarios. For example, a fixed-for-floating IBOR swap may use a 30/360 
day count fraction market convention, but the market standard for a 
replacement reference benchmark rate swap may use an actual/360 day 
count fraction market convention. Under this scenario, the notional 
amount would need to be adjusted to ensure that the payment amounts on 
the fixed leg of the replacement reference benchmark rate swap are the 
same compared to the IBOR swap.
    In response to these comments, the agencies understand that certain 
differences in market conventions may not yet be well established or 
expected. The agencies are preserving the proposal's restriction on 
extensions of maturity and increases of total effective notional 
amount, but adding language allowing extensions and increases as 
necessary to accommodate the differences between market conventions for 
an outgoing interest rate and its replacement. Market conventions could 
include changes in day count conventions, settlement date, or final 
payment date.
    Several commenters also explained that counterparties may employ 
portfolio compression to effectuate amendments to legacy swaps for the 
purpose of eliminating IBORs, and that differences between market 
conventions for an outgoing interest rate and its replacement in this 
context could also affect the remaining maturity and total effective 
notional amount of portfolios of IBOR swaps. The agencies are adding 
new paragraph (h)(3)(iii) to accommodate portfolio compression 
exercises that are driven by the sole purpose of replacing an interest 
rate described in paragraph (h)(3)(i). In such a case, portfolio 
compression would not be subject to the limitations in paragraph 
(h)(4), but may not extend the maturity or increase the total effective 
notional amount of the non-cleared swap or non-cleared security-based 
swap beyond what is necessary to accommodate the differences between 
market conventions for an outgoing interest rate and its replacement.
    Commenters also expressed a concern that changes associated with 
the liquidity of specific maturities of swaps with a replacement 
interest rate may result in an increase in the remaining maturity of 
the non-cleared swap. For example, a swap with a four-year remaining 
maturity may not be as liquid as a swap with a five-year remaining 
maturity. Given that this rationale for an extension of maturity can 
significantly increase the remaining maturity of a legacy swap, the 
agencies believe that it could lead to inappropriate extensions or 
evasion of the requirements of the rule. Accordingly, the agencies are 
not permitting an extension of the remaining maturity for liquidity or 
similar reasons.

F. End Date

    The proposed rule did not specify an end date by which IBOR-related 
amendments must be completed, but requested comment on that issue. 
Several commenters agreed with the agencies' approach to not specify an 
end date, explaining that amendments related to fallbacks or other 
transitions to replacement interest rates may not be completed in one 
step or within a given time frame. Accordingly, the agencies are not 
adopting any specific end date by which IBOR-related amendments must be 
completed.

G. Exemptions for Commercial and Cooperative End Users

    One commenter requested that the agencies clarify how the Swap 
Margin Rule treats post-compliance date non-cleared swaps that 
qualified for the commercial/cooperative end user exemption from the 
rule under Sec.  __.1(d)(1), if such swaps are amended to accommodate 
changes to referenced benchmark interest rates. The commenter expressed 
concern that post-compliance date non-cleared swaps originally exempted 
under Sec.  __.1(d)(1) will need to be amended by commercial end users 
or cooperatives to remove an IBOR benchmark interest rate. 
Specifically, the commenter noted that the amended swaps might become 
subject to temporary mismatches between the rate referenced by such 
swaps and the commercial arrangements being hedged, thereby raising 
questions about their exempt status.
    The commenter's request is based on two no-action letters that the 
CFTC issued pertaining to non-cleared swaps in which the counterparty 
qualified for an exemption or exception from mandatory clearing and/or 
non-cleared margin requirements under the Commodity Exchange Act (CEA) 
or CFTC regulations.\14\
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    \14\ See CFTC Letter No. 19-28 (December 17, 2019), in section 
V.A., providing regulatory relief from the mandatory clearing 
requirement, and CFTC Letter 19-26 (December 17, 2019), in section 
E.1., which granted relief from the CFTC's margin requirements for 
non-cleared swaps. In both situations, the counterparties previously 
relied on the end-user exemptions end-user exemptions in the CEA and 
applicable CFTC regulations.
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    The scope of the agencies' exemption for commercial and cooperative 
end users in Sec.  __.1(d)(1) is, by its terms, tied to the scope of 
the commercial end user exemptions in the CEA and their implementing 
regulations. No-action letters are not included under the agencies' 
regulations. However, for the same reasons the agencies are amending 
Sec.  __.1(h) to preserve the legacy status of swaps during the IBOR 
transition, the agencies will treat commercial and cooperative end user 
swaps originally exempted under Sec.  __.1(d)(1) as remaining within 
the scope of Sec.  __.1(d)(1) if those swaps are effectuated under the 
terms of the two applicable CFTC no-action letters.\15\
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    \15\ Id. The agencies' determination is specific to these two 
CFTC no-action letters, and more specifically to section V.A. of 
CFTC Letter No. 19-28 and section E.1. of CFTC Letter No. 19-26. The 
agencies are not applying CFTC no-action letters to modify the terms 
of the Swap Margin Rule in any other regard.

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[[Page 39759]]

III. Non-Cleared Swaps Between Covered Swap Entities and an Affiliate

    The agencies proposed to amend the treatment of affiliate 
transactions in the Swap Margin Rule by creating an exemption from the 
initial margin requirements for non-cleared swaps between affiliates. 
The agencies also proposed, however, to retain the requirement that 
affiliates exchange variation margin. Twenty-two interested persons 
submitted public comments to the agencies on the proposal, including 
individuals, banking and securities trade groups, public interest 
advocacy groups, and one custodian bank.
    After consideration of these public comments, as discussed below, 
the agencies are adopting the rule as proposed with a modification (1) 
requiring a covered swap entity to calculate and monitor the amount of 
inter-affiliate initial margin that would otherwise be required to be 
collected by such covered swap entity under the Swap Margin Rule; and 
(2) requiring a covered swap entity to collect initial margin from its 
affiliates on all new non-cleared swaps if the aggregate initial margin 
calculation amount exceeds 15 percent of the covered swap entity's Tier 
1 capital (``15% Tier 1 Threshold''). This requirement will apply to 
inter-affiliate swaps executed on any business day the 15% Tier 1 
Threshold is exceeded and remain in place as long as the 15%Tier 1 
threshold has been exceeded. A covered swap entity will not be required 
to collect initial margin from its affiliates if the aggregate inter-
affiliate initial margin calculation amount is 15 percent or less of 
the covered swap entity's Tier 1 capital. For purposes of the 
calculation described above and as further discussed below, a covered 
swap entity will treat non-cleared swaps between a subsidiary of the 
covered swap entity and an affiliate as if the non-cleared swaps were 
its own. Additionally, the agencies are also clarifying one aspect of 
the initial margin requirement for affiliates. The final rule clarifies 
that non-cleared swaps between affiliates remain subject to Sec.  
__.3(d), which describes the initial margin requirements that apply to 
non-cleared swaps between a covered swap entity and counterparties that 
are not subject to the Swap Margin Rule's requirement to calculate and 
exchange initial margin on a daily basis. That section provides that a 
covered swap entity shall collect initial margin at such times and in 
such forms and such amounts (if any), that the covered swap entity 
determines appropriately addresses the credit risk posed by the 
counterparty and the risks of such non-cleared swap.

A. Main Proposal

    The agencies proposed to amend Sec.  __.11 of the Swap Margin Rule, 
which currently establishes a special set of six regulatory 
requirements for swap transactions between a covered swap entity and an 
affiliate. Five of these provisions concern the requirement for a 
covered swap entity to collect initial margin for covered swap 
transactions with an affiliate. Each of these five provisions focuses 
on a particular aspect of the Swap Margin Rule's initial margin 
requirements as they generally apply to non-affiliated counterparties, 
and provides corresponding exemptions from or reductions to that 
particular aspect of the Swap Margin Rule's requirements whenever the 
counterparty is an affiliate of the covered swap entity.\16\ The 
agencies proposed to replace this set of five exemptive provisions with 
a single exemption from the initial margin exchange requirement 
contained in Sec.  __.3 of the Swap Margin Rule. The agencies proposed 
to retain the sixth regulatory requirement in Sec.  __.11, which is the 
requirement for covered swap entities to collect and post variation 
margin for affiliate swap transactions pursuant to Sec.  __.4 of the 
Swap Margin Rule.\17\
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    \16\ Swap Margin Rule Sec. Sec.  __.11(b)(1) (posting initial 
margin); (b)(2) (initial margin threshold amount); (d) (custody of 
margin); (e) (margin model holding period); and (f) (standardized 
margin amounts).
    \17\ Swap Margin Rule Sec.  __.11(c). This subsection creates no 
variations from the generally-applicable requirements of Sec.  __.4. 
Accordingly, the agencies proposed to remove it, and Sec.  __.4 
directly applies to covered swap entities engaging in swap 
transactions with affiliates on the same terms as it applies with 
any other counterparty.
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B. Comments and Considerations for the Final Rule

    Twelve commenters representing the views of covered swap entities 
and their counterparties expressed support for the proposed rule. 
Commenters in this group generally expressed the view that inter-
affiliate swaps are an important risk management tool, the use of which 
would be facilitated by the proposed rule. Several of these commenters 
further expressed the view that the risks of inter-affiliate swaps are 
better addressed by other means, such as capital, credit risk limits, 
and variation margin. Many also noted the inter-affiliate provisions of 
the current Swap Margin Rule are inconsistent with those of the CFTC 
and most G20 regulators. One commenter estimates that $39.4 billion of 
inter-affiliate initial margin collateral was held at year-end 2018 by 
the group of covered swap entities that first became subject to the 
Swap Margin Rule in 2016.
    Eight commenters, including public interest advocacy groups and 
individuals, expressed opposition to the agencies' proposal, and 
provided several different grounds for their objections. These views 
are grounded on similar core concerns, which the agencies have 
evaluated as follows.
    One concern centers on some commenters' view that initial margin 
serves a special loss-absorbing function in the inter-affiliate 
context, and the agencies' proposal would increase risks to covered 
swap entities individually and financial stability more broadly by 
removing this protection. One commenter discussed the specific function 
of initial margin and contrasted it with variation margin.
    Initial margin is a risk management tool designed to mitigate a 
covered swap entity's exposure to market risk associated with a 
counterparty's default by requiring a counterparty to obtain and 
provide financial collateral equal to the potential future exposure 
(PFE) the covered swap entity would face if the counterparty defaults. 
Under the Swap Margin Rule, a covered swap entity accordingly collects 
high-quality collateral from its counterparty equal to this PFE, placed 
in third-party custody to provide a source of payment to offset this 
risk. This PFE is the measurement of the exposure due to the defaulting 
counterparty's inability to continue performing on the swap contracts 
during the period after the counterparty's default but before the 
covered swap entity closes out its positions with the defaulting 
counterparty and establishes similar trades with a new counterparty.
    In practice, it can take a varying number of days after default for 
the covered swap entity to establish new trades with new counterparties 
as necessary to replace or re-hedge the defaulted swaps.\18\ The 
process of

[[Page 39760]]

obtaining new swaps contracts with new counterparties creates 
additional costs that can vary depending on prevailing market 
conditions at the time default occurs and in the subsequent days needed 
to obtain the new contracts. This potential range of costs represents 
the covered swap entity's PFE.
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    \18\ If the net value to the covered swap entity of the 
portfolio with the counterparty (the current exposure amount) was 
positive at the time of the default, the covered swap entity already 
holds variation margin--collected from the counterparty on a daily 
basis as required by the Swap Margin Rule--to cover that amount. The 
Swap Margin Rule's variation margin provisions require covered swap 
entities to recalculate the monetary value of the portfolio of swaps 
with each counterparty every business day. If the monetary value of 
the portfolio to the covered swap entity has increased, the covered 
swap entity is required to collect additional variation margin 
collateral from the counterparty. If the monetary value has 
decreased, the covered swap entity is required to return an 
equivalent amount of variation margin collateral to the 
counterparty. Sec. Sec.  __.2 ``variation margin'' and ``variation 
margin amount,'' __.4. It is generally industry practice to use cash 
as variation margin collateral; however, if non-cash financial 
collateral is used, the covered swap entity must re-value it each 
day and adjust the daily variation margin collection or return 
amounts to reflect those changes as well. Sec.  __.6(e). If the 
event triggering the counterparty's default under a swap is the 
counterparty's failure to provide additional collateral in response 
to a margin call, then the dealer's current credit exposure will be 
undercollateralized by the amount of the day's changes in current 
exposure and/or collateral value.
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    As the commenter noted, because these costs will vary depending on 
whatever market conditions actually exist at the unknown future time 
when the counterparty defaults, the Swap Margin Rule requires covered 
swap entities to calculate PFE based on the premise that its market 
costs will be on the high end of the expected range, statistically 
speaking. Because of this uncertainty, the amount of initial margin 
collateral a covered swap entity will collect under the Swap Margin 
Rule is significantly higher than the daily amount of variation margin 
exchanged, which is based on current and known changes in the market 
conditions that change the value of the portfolio of swaps.
    Commenters expressing concern about PFE risk asserted that 
collateralization (in the form of initial margin collected from the 
covered swap entity's affiliate) is an effective tool for reducing the 
close-out and re-hedging risk described above. These commenters 
objected that the proposed rule would eliminate an estimated $40 
billion in collateral held by covered swap entities that, in the 
commenters' views, is necessary for mitigating PFE risk. However, it is 
incumbent on supervisors to evaluate multiple approaches to controlling 
the overall risk of inter-affiliate swaps exposures, and to consider 
which of the available approaches to deploy depending on how those 
risks occur (and evolve) in the industry. Inter-affiliate counterparty 
credit risk, in the form of PFE, is one of several risks that 
affiliated banking organizations need to manage. The nature of these 
risks, their potential severity, and the mechanisms to manage them in 
tandem vary such that no single approach to address all risks in 
isolation is appropriate. Supervisors have a variety of tools at their 
disposal to ensure protection of a banking organization's financial 
integrity, in light of the banking organization's particular scope of 
activities (both financial and geographic).\19\ Initial margin can be 
effective in addressing the PFE risks of inter-affiliate transactions 
within a banking organization, but viewing it as a comprehensive 
solution is a simplistic approach.
---------------------------------------------------------------------------

    \19\ For example, internationally-active banking organizations 
face the financial risks of each location in which they operate, and 
one important tool is the coordination by international supervisors 
to ensure equivalent supervisory requirements are implemented across 
jurisdictions, normalizing market conditions in each location. For 
any banking organization with important sources of revenue spread 
across more than one entity, the strength of the banking 
organization could be materially affected in the absence of 
successful strategic management of all the business components. 
Supervisors play an important role in assessing whether the 
organization's management maintains an effective process for 
identifying, measuring, and managing all key risks in this regard. 
Organization-wide capital, leverage, and liquidity considerations 
are important supervisory considerations. Other measures include 
amount limits, concentration limits, collateral amount and quality, 
qualitative transaction restrictions, or market equivalency 
standards. Even matters such as addressing market concerns about 
ring-fencing available assets can have a significant benefit in 
reducing a U.S. bank's foreign exposures.
---------------------------------------------------------------------------

    Some of these commenters also expressed the view that banking 
organizations are using inter-affiliate swaps for the primary purpose 
of concentrating the risks of the organizations' world-wide derivatives 
activities onto the books of the covered swap entities covered by the 
prudential regulators' Swap Margin Rule, i.e., U.S. insured depository 
institutions (IDIs). These views are not consistent with the agencies' 
supervisory experience since the rule took effect. As described in 
greater detail below, the agencies observe that internationally active 
banking organizations that have a cross-border organizational structure 
relying on separate legal entities must use inter-affiliate swaps to 
manage the risks of the overall banking organization's outward-facing 
derivatives exposures. Other internationally active banks, operating 
cross-border through branching structures, do not have the need to use 
inter-affiliate swaps for risk management.
    As the agencies discussed in the proposal, actual supervisory 
experience in the years since the agencies imposed the Swap Margin 
Rule's current requirements has raised two inter-related concerns at 
the institution-specific level and the systemic level about the utility 
of initial margin to address exposures arising from inter-affiliate 
swap transactions. These concerns surround impediments to a banking 
organization's best management practices for cross-border swap risks, 
and whether these risks are more appropriately addressed through other 
regulatory and supervisory mechanisms as discussed below, and 
limitations on the effectiveness of inter-affiliate margin to address 
systemic cross-border market risks, also discussed below.
1. Effects of the Inter-Affiliate Initial Margin Requirement on Banking 
Organizations
    Some covered swap entities covered by the Swap Margin Rule are 
internationally active banking organizations and their swaps activities 
are carried out in a cross-border marketplace. Some commenters perceive 
that U.S. banking organizations use inter-affiliate swaps primarily to 
transfer the risks of all their foreign derivatives activities into the 
U.S. insured depository institution. However, the agencies observe a 
redistribution of risk based instead on the international scope of the 
banking organization's business.
    In the market for non-cleared derivatives, inter-dealer trading 
activity for certain types of derivatives is heavily concentrated in 
one geographic location, while the marketplace for other types of 
derivatives takes place in a different geographic location. An 
internationally active U.S. banking organization participates as a 
covered swap entity in a number of these marketplaces by establishing a 
place of business in each, such as a locally incorporated business 
entity, or a foreign branch of the main U.S. bank. The banking 
organization also has swap customers at home and abroad and services 
them by establishing a place of business in the same geographic 
locations as the customers.
    If a customer in one market (e.g., the U.K.) needs a non-cleared 
swap that is traded in the local market (e.g., a sterling interest rate 
swap), the U.K. operation of the banking organization handles the 
entire transaction locally. On the other hand, if a U.S. customer needs 
the same sterling interest rate swap, the U.S.-based establishment of 
the banking organization enters into the swap with the customer 
(collecting margin and exchanging periodic payments on the swap) while 
the banking organization uses its U.K establishment to execute on the 
market-facing sterling interest rate swap (also exchanging margin with 
its counterparty in that market). Best safety and soundness practices 
in risk management dictate that the banking organization's personnel 
with the expertise in a class of derivatives be located in the relevant

[[Page 39761]]

market location, where they can obtain the most advantageous swap 
terms, such as best pricing or a wider range of maturities. On the 
customer side, market expectations are that the banking organization 
will locate personnel in the same location as the customer.
    As a result, international banking organizations using inter-
affiliate swaps as a risk management tool under this business model are 
hedging market risk arising from the nature of their world-wide 
customer needs (e.g., dollar swaps, euro swaps) and managing it in the 
corresponding market location. A foreign customer's need for a U.S. 
dollar swap product would engage the involvement of the U.S. banking 
organization's U.S. bank affiliate, due not to the depository 
institution status of the U.S. bank or some bias in favor of the 
banking organization's home market, but rather to its place as the 
banking organization's locus of market activity in the dollar market. 
As in the example above, if a U.S. customer of the U.S. bank sought a 
sterling swap product, the opposite occurs. Moreover, if a non-U.S. 
customer in one location needs a type of swap traded in another non-
U.S. location, the risk can be transferred between them without any 
direct U.S. intermediation.\20\
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    \20\ When a non-bank affiliate enters into a non-cleared swap 
with its counterparty, and then enters into an inter-affiliate swap 
with a U.S. institution to manage the market risk component, 
commenters also expressed the view that the affiliate thereby 
``transfers the risk'' of the non-cleared swap into the U.S. 
institution. The agencies have considered this viewpoint and note 
that the affiliate continues to face the counterparty, actively 
managing the counterparty credit risk and exchanging margin in 
accordance with the same margin standards as the U.S. has imposed 
pursuant to the BCBS-IOSCO framework. To the extent these 
counterparties are also financial intermediaries, they are 
themselves subject to the same margin standards, buttressing their 
financial resiliency. Because the prudential regulators' margin 
rules apply to covered swap entities that are foreign banks, in many 
instances those margin rules are, in fact, identical.
---------------------------------------------------------------------------

    For internationally-active banking organizations, U.S. supervisors 
consider this arrangement a better risk management practice than using 
the U.S. location to manage the market-facing risk of the swap through 
local trading (in a less liquid market for that that type of exposure), 
or U.S. personnel endeavoring to make trades with foreign dealers in 
the relevant market (through cross-border communication and 
contracts).\21\ As discussed below, this is occurring in the context of 
supervisory oversight of the banking organization aimed at ensuring the 
affiliates are in good financial standing, utilizing an appropriate 
system of market and credit risk limits, and the affiliates themselves 
obtain robust initial margin from their counterparties, to protect the 
affiliates from PFE risk if their counterparties should default.\22\
---------------------------------------------------------------------------

    \21\ Commenters in the group objecting to the agencies' initial 
margin proposal did not object to maintaining the Rule's variation 
margin requirement. As one commenter noted, variation margin 
performs a different function than initial margin. Where initial 
margin is calibrated to PFE, variation margin reflects the ongoing 
shift in market value of a swap contract between the covered swap 
entity and the counterparty on a daily basis. Because a non-cleared 
swap creates bilateral payment obligations between the two parties, 
the current market value of the cash flows due to be paid to one 
party will usually be higher than the current market value of the 
cash flows due to be paid to other party, depending on how the 
market value for the underlying reference asset or rate rises or 
falls. In this regard, the agencies note that variation margin 
requires ongoing daily payments from the party that is ``out of the 
money'' over to the party that is ``in the money.'' Internationally 
active banking organizations routinely exchange variation margin on 
inter-affiliate swaps, but not exclusively as a counterparty default 
risk mitigation tool. For strategic purposes, banking organizations 
internally measure and evaluate the relative profitability of their 
differing lines of business and locations (typically by comparing 
profits for the location as a ratio of the level of regulatory 
capital and funding costs associated with the location). The 
exchange of variation margin is a natural way for the two different 
locations (trading desks) to assign the profitability of the swap to 
the right desk for these internal measurements, and related 
purposes.
    \22\ One commenter expressed the view that these considerations 
would potentially address the commenter's concerns about PFE risk 
transfer from affiliates, but also posited that the agencies were 
unconcerned about the potential absence of these factors in issuing 
the proposal. The agencies note that the presence of these important 
risk management measures is a supervisory expectation for banking 
organizations engaged in the practice. The agencies also note the 
commenter presumes the Swap Margin Rule's methodology for 
determining the initial margin collection amount--which represents 
the agencies' implementation of Section 3.1 of the BCBS-IOSCO 
Framework's requirement for portfolio replacement costs designed to 
address unexpected third-party counterparty defaults based on a 
probability statistical model using a 10-day holding period and 
presuming a period of severe market stress--is properly calibrated 
for the close-out risk of interaffiliate transactions that are 
already subject to several additional prudential risk-reducing 
requirements and reduced information gaps. Moreover, the agencies 
note that Element 6 of the BCBS-IOSCO Framework itself excludes 
interaffiliate swaps from the scope of the Framework and did not 
contemplate that Section 3.1 of the BCBS-IOSCO Framework would be 
applied to them.
---------------------------------------------------------------------------

    Also, as the agencies discussed in the proposal, some 
internationally active U.S. banking organizations utilize the same 
arrangement without creating inter-affiliate PFE, because they set up 
their foreign establishments as a foreign branch of the U.S. bank. From 
an entity and accounting standpoint, the U.S. bank can transact with 
the customer and hedge its cross-border swap risk through foreign swap 
contracts, all within the same entity (and without the need to create 
an internal swap).
    The risk presented to the U.S. bank by the foreign-market swaps 
themselves is identical under both structural alternatives, whether the 
banking organization uses a foreign branch or a foreign affiliate. That 
risk is managed through several tools, including the banking 
organization's board-approved system of risk limits governing its 
participation in the foreign swap market; the banking organization's 
underwriting and ongoing monitoring of the credit risk of the 
counterparties it faces through swap transactions in the foreign swap 
market; and the collection of variation margin and initial margin 
requirements from those foreign market counterparties, under margin 
regulations developed on a coordinated basis by U.S. and foreign 
regulators through an established, formal process.
    The addition of an affiliated entity instead of a branch may have 
the effect of creating other regulatory and risk issues to be 
considered, but these are separate from the risks of the foreign swap 
itself and are addressed under separate supervisory and regulatory 
frameworks.
    The participation of U.S. banking organizations in the derivatives 
markets abroad is substantial, making attempts to ``compartmentalize'' 
the exposures of significant market affiliates on the basis of legal 
separation and collateral exclusively challenging.\23\ Sound risk 
management for banking organizations necessitates ongoing assessments 
of financial performance across the organization and corrective 
incremental responses to undesirable changes in key risk metrics.
---------------------------------------------------------------------------

    \23\ See, e.g., https://www.bis.org/ifc/publ/ifcb31n.pdf (U.S.-
based banking organizations engage in derivatives activities across 
G-10 countries actively, with non-U.S. market participation 
exceeding U.S. market participation in the aggregate); see also, 
Guidance for Sec.  165(d) Resolution Plan Submissions by Domestic 
Covered Companies, 84 FR 1438 (February 4, 2019).
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    The agencies' structural concerns described above have arisen with 
the benefit of hindsight in the time since the Rule was finalized. In 
2014 and 2015, the future structure of the cross-border non-cleared 
swaps market was potentially subject to significant change in response 
to key factors such as growth in the cleared derivatives market 
(reducing non-cleared activity), industry acclamation to significant 
expected cost increases attributable to the robust world-wide margin 
regimes about to take effect, and new regulatory resolution planning 
requirements, causing internal restructuring within banking 
organizations in response to these factors. These unknowns, and the 
costs of the inter-affiliate initial margin requirement, could have 
reasonably been expected to curtail existing use of

[[Page 39762]]

inter-affiliate non-cleared swaps.\24\ For example, some 
internationally-active covered swap entities conducted their cross-
border business through foreign branches, and others might have 
restructured to eliminate the need for inter-affiliate swaps. The 
agencies' past expectations of reductions in inter-affiliate swap 
activity have not been borne out through the completion of the Swap 
Margin Rule's implementation phase. In addition, among the prudential 
regulators, the banking agencies continue to assess the proper 
calibration of regulatory capital requirements including enhanced 
recognition of collateralization (or the lack of it) for closeout 
risk.\25\
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    \24\ See 80 FR at 74,893 (``It is likely the behavior of swap 
market participants, including affiliate counterparties, will 
respond to incentives created by these swap margin requirements. 
Such changes could have a dramatic effect on the pattern of 
affiliate swap transactions which would itself have a significant 
impact on the amounts of initial margin that are ultimately 
collected on inter-affiliate transactions.'')
    \25\ In this regard, it is worth noting that the analysis in 
this Supplementary Information Section evaluates comments on the 
proposal from the perspective of the Swap Margin Rule. The 
evaluation of risk for inter-affiliate trades and the best way to 
address such risks from a regulatory perspective could change 
depending on, among other things, the statutory authority on which a 
regulatory requirement is premised.
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2. System-Wide Effectiveness of Inter-Affiliate Initial Margin 
Requirements
    Commenters objecting to the agencies' proposal also expressed the 
view that the agencies are engaging in a ``race to the bottom'' to the 
extent the agencies discussed how inter-affiliate initial margin 
requirements have not been universally applied by other domestic and 
foreign regulators. As stated in the proposal, the agencies raise this 
concern in the context of observing that limited application of the 
initial margin requirements to one slice of the market is a blunt tool 
for enhancing financial stability among interconnected financial market 
participants. With the benefit of hindsight, the agencies observe that 
other regulators developing their implementing rules in 2015 and beyond 
have not implemented the same comprehensive inter-affiliate margin 
collection requirements that the agencies did in 2015.\26\ As a result, 
certain anticipated systemic protections that would have accrued from 
comprehensive inter-affiliate initial margin practices world-wide will 
not be realized.
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    \26\ In the EU, intragroup transactions are fully exempt (not 
only initial margin, but also variation margin), unless the relevant 
affiliates are subject to specific and identified legal impediments 
to funds transfers between them, such as currency exchange 
restrictions, identified defects in one of the affiliate's formal 
resolution plans, or other specific legal restriction that 
significantly affects the transfer of funds between the affiliates. 
See Commodity Futures Trading Commission Comparability Determination 
for the European Union, 82 FR 48394, 48399-48400 (October 18, 2017) 
(comparing CFTC non-cleared swap margin rules to comparable EU 
rules, discussing EU reliance on appropriate centralized risk 
evaluation, measurement, and control procedures between cross-border 
affiliates, and margin rule comparability determinations outside the 
EU); see also Commission Implementing Decision (EU) 2017/1857 
(October 13, 2017) (EU comparability determination for US 
transactions subject to the CFTC non-cleared margin rules), 
available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017D1857&from=ES; European Supervisory Authorities, 
EMIR RTS on various amendments to the bilateral margin requirements 
in view of the international framework (December 5, 2019) (notice of 
proposed amendments to EMIR non-cleared derivatives margin rule to 
grant an additional extension of the exemption from comparability 
determination requirements), available at https://eba.europa.eu/sites/default/documents/files/document_library//ESAs%202019%2020%20-%20Final%20Report%20-%20Bilateral%20margin%20amendments.pdf. In 
Japan, prudential regulators address inter-affiliate non-cleared 
derivatives with existing capital standards and risk-management 
principles in the first instance, with margin as a voluntary 
alternative. See Commodity Futures Trading Commission Amendment to 
Comparability Determination for the Japan, 84 FR 12074, 12079 (April 
1, 2019). All other major jurisdictions also exempt inter-affiliate 
non-cleared derivatives from margin requirements, including Canada 
(https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/e22.aspx, both initial and variation margin); Australia (https://www.apra.gov.au/sites/default/files/prudential_standard_cps_226_margining_and_risk_mitigation_for_non-centrally_cleared_derivatives.pdf, initial margin); Hong Kong 
(https://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/supervisory-policy-manual/CR-G-14.pdf, both initial and 
variation margin); and Singapore (https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Securities-Futures-and-Fund-Management/Regulations-Guidance-and-Licensing/Guidelines/Guidelines-on-Margin-Requirements-for-NonCentrally-Cleared-OTC-Derivatives-Contracts-revised-on-5-October-2018.pdf, both initial and variation margin).
---------------------------------------------------------------------------

    Commenters opposing the agencies' proposal also expressed the view 
that the agencies were eliminating an estimated $40 billion of initial 
margin collateral that will serve a ``loss absorbing capacity'' to 
protect against potential affiliate default on their swaps exposures. 
Initial margin, however, is not loss-absorbing in the same sense as 
equity capital; initial margin collateral is funded with borrowings 
from the banking organization's creditors.\27\ The practice in banking 
organizations of providing collateral to their bank affiliates as 
security for the banking organization's financial obligations is a 
routine and expected aspect of the business. But it is accompanied by 
market expectations on behalf of each banking organization's creditors 
if the aggregate extent to which it is employed in the banking 
organization materially exceeds established expectations. During 
periods of market distress, those creditors' claims are potentially 
subordinated to the bank's claim on the banking organization's assets, 
placing additional stress on the banking organization's access to 
funding if the subordination effects are materially beyond the norm.
---------------------------------------------------------------------------

    \27\ Two commenters suggested the affiliate's use of leverage to 
acquire initial margin collateral was a choice, and the affiliate 
could instead raise additional equity or retain earnings to fund it. 
This is not consistent with the agencies' supervisory and policy-
making experience for internationally-active banks, where public 
policy and competitiveness concerns serve to establish and maintain 
capital requirements that must address not only adequacy, but regime 
equivalency.
---------------------------------------------------------------------------

C. Description of the Final Rule

    After considering commenters' range of views about the proposed 
rule, the agencies have determined to finalize it consistent with the 
proposal, with two revisions.
    First, the agencies are including a limit on the aggregate amount 
that a covered swap entity may recognize pursuant to the inter-
affiliate initial margin exemption provided under the final rule. This 
limit, as further described below, is set at 15 percent of the covered 
swap entity's tier 1 capital. The agencies are incorporating the 15% 
Tier 1 Threshold into Sec.  __.11 as an augmentation to reflect safety 
and soundness and financial system risk concerns of the Board, the 
FDIC, and the OCC surrounding the status of covered swap entities that 
are U.S. insured depository institutions.\28\ The agencies, in their 
supervisory experience, have observed that covered swap entities have 
collected inter-affiliate initial margin under the current rule at 
levels that do not exceed this limit. Nevertheless, the agencies' 
determinations underlying the decision to issue this final rule are 
informed significantly by the agencies' supervisory experience 
overseeing inter-affiliate swap activities at covered swap entities 
during the first four years the Swap Margin Rule has been in effect. 
Accordingly, the agencies believe it is appropriate to apply the 15% 
Tier 1 Threshold as an augmentation, as the agencies continue to 
supervise covered swap entities further into the maturation of the 
international derivatives market reforms that have been under 
development since 2010. This augmentation will address additional 
supervisory concerns that may arise at a covered swap entity whose tier 
1 capital base is contracting in an unusually rapid pattern, a 
situation that evidences the institution is experiencing

[[Page 39763]]

heightened levels of stress, or whose inter-affiliate derivative 
exposures increase in an unusually rapid pattern. Thus, the agencies 
have set it at a level that exceeds the typical initial margin 
collection amounts at the affected covered swap entities, to 
accommodate expected levels and taking into consideration a range of 
those levels that varies somewhat across those covered swap entities.
---------------------------------------------------------------------------

    \28\ 7 U.S.C. 6s(e)(3); 15 U.S.C. 78o-10(e)(3).
---------------------------------------------------------------------------

    This provision requires a covered swap entity to calculate the 
initial margin collection amount \29\ each business day for each 
counterparty that is a swap entity or a financial end-user with a 
material swaps exposure that is an affiliate, and aggregate these 
amounts to determine whether the aggregate amount exceeds the 15% Tier 
1 Threshold.\30\ When a covered swap entity calculates the 15 percent 
threshold, it must include all non-cleared swaps between the covered 
swap entity and its affiliates (which includes subsidiaries of the 
covered swap entity) plus all non-cleared swaps between an covered swap 
entity subsidiary and other affiliates (but not double counting non-
cleared swaps with the parent covered swap entity). So long as the 
aggregate remains below the 15% Tier 1 Threshold, the covered swap 
entity is exempt from the requirement to collect initial margin from 
its affiliates. If, however, the aggregate exceeds the 15% Tier 1 
Threshold on any business day, the final rule requires the covered swap 
entity to collect initial margin on any additional non-cleared swap 
executed with an affiliated swap entity or financial end user.\31\ Once 
the 15 percent threshold is exceeded, the covered swap entity is 
required to collect initial margin on all new transactions with its 
affiliates (which includes the covered swap entity subsidiaries). Also, 
if a covered swap entity subsidiary enters into a non-cleared swap with 
an affiliate other than the covered swap entity,\32\ the covered swap 
entity must collect initial margin from the affiliate, and the 
subsidiary does not need to also collect initial margin for the 
affiliate for that non-cleared swap. This provision is designed to 
provide protection for the covered swap entity. Initial margin 
collection takes place pursuant to the generally-applicable initial 
margin requirement specified in Sec.  __.3(a) of the current rule, 
commencing the day after execution of the non-cleared swap and with 
updates each business day as specified in Sec.  __.3(c).\33\ The 
covered swap entity is obligated to continue initial margin collection 
on these new swaps until they terminate under their own terms. If, 
however, the covered swap entity's aggregate initial margin collection 
amount calculation falls below the 15% Tier 1 Threshold, the covered 
swap entity is no longer obligated to maintain initial margin on these 
non-cleared swaps. Consistent with Sec.  __.11(d) of the current rule, 
the covered swap entity is permitted to maintain custody of non-cash 
initial margin collateral collected pursuant to these requirements with 
the covered swap entity itself or with an affiliate, but is otherwise 
subject to the segregation requirements of Sec.  __.7 of the current 
rule.\34\
---------------------------------------------------------------------------

    \29\ Section __.2 of the current rule defines the ``initial 
margin collection amount'' as the amount of initial margin the 
covered swap entity calculates for a counterparty using the covered 
swap entity's approved initial margin model under Sec.  __.8 (or if 
the covered swap entity does not have an initial margin model, the 
standardized approach under Appendix A).
    \30\ The final rule specifies that tier 1 capital for this 
purpose is comprised of common equity tier 1 capital and additional 
tier 1 capital, as defined in the agencies' respective regulations 
at 12 CFR 3.20(b)-(c) (OCC); 12 CFR 217.20(b)-(c) (Board); 12 CFR 
324.20(b)-(c) (FDIC); 12 CFR 628.20(b)-(c) for Farm Credit System 
banks and associations and 12 CFR 652.61(b) for the Federal 
Agricultural Mortgage Corporation (FCA); and 12 CFR 1240(b)-(c) 
(FHFA). Covered swap entities are required to use the tier 1 capital 
amounts reported in their most recent Call Report.
    \31\ The final rule does not require the covered swap entity to 
begin collecting initial margin on its portfolio of interaffiliate 
swaps that were executed before the business day on which the 15% 
Tier 1 Threshold is exceeded.
    \32\ The rule provides that if any subsidiary of the covered 
swap entity executes a non-cleared swap with any other affiliated 
swap entity or financial end user, the covered swap entity must 
treat that swap as its own for purposes of complying with these 
requirements. Additionally, the agencies have added an expanded 
definition of a ``subsidiary'' to Sec.  __.11(d) for these purposes, 
consistent with the structure of the expanded ``affiliate'' 
definition. The agencies have also incorporated language in Sec.  
__.11(a)(5)(ii) for multi-tier CSE structures that permit the lower 
tier CSEs to count their inter-affiliate non-cleared swaps as part 
of the top-tier IDI's 15% Tier 1 Threshold if the top-tier IDI 
collects initial margin for additional inter-affiliate swaps entered 
into by the lower tier CSEs after the limit is reached. This is 
intended to greatly simply the limit calculations for multi-tiered 
CSEs, while still ensuring the requirements of Sec.  __.11(a) are 
fully satisfied at the IDI level.
    \33\ Covered swap entities may avail themselves of the option, 
pursuant to Sec.  __.5(a)(3)(ii) of the current rule, to place these 
swaps in a separate netting set for purposes of calculating the 
initial margin collection amount on a portfolio basis under an 
eligible master netting agreement.
    \34\ The agencies have also made corresponding technical 
revisions to the language of Sec.  __.11 to provide an exemption 
from the requirements to post initial margin under Sec.  __.3(b), 
consistent with the current rule. This exemption is not subject to 
the 15% Tier 1 Threshold.
---------------------------------------------------------------------------

    As part of this addition, the agencies are making associated 
changes to Sec.  __.9 of the Swap Margin Rule. Section __.9 addresses 
cross-border application of the Swap Margin Rule to certain foreign 
financial firms that are organized under non-U.S. law and operate 
abroad, and that fall within the scope of the Rule because they are 
also registered with the CFTC or SEC as swap dealers or security-based 
swap dealers. These firms include foreign-chartered banks, and foreign-
chartered subsidiaries of Edge corporations and agreement 
corporations.\35\ Under the current rule, these foreign firms are 
currently not subject to comprehensive initial margin collection 
requirements for affiliate swap transactions under the laws of their 
home counties.\36\ However, if they engage in a swap transaction with a 
U.S. affiliate, Sec.  __.9 currently requires them to collect initial 
margin from the U.S. affiliate.
---------------------------------------------------------------------------

    \35\ Specifically, see Sec. Sec.  __.9(a) and __.9(d)(3)(i)-
(ii). These entities are often governed by non-U.S. regulatory 
capital requirements and they do not file Call Reports; U.S. 
branches and agencies of foreign banks are not subject to stand-
alone capital requirements.
    \36\ See footnote 27, supra.
---------------------------------------------------------------------------

    The amendment to Sec.  __.11 that the agencies issue today would 
apply to these foreign firms, absent a change to Sec.  __.9. As 
discussed above, the 15 percent threshold in Sec.  __.11 is an 
augmentation reflecting safety and soundness and financial system risk 
concerns of covered swap entities that are U.S. insured depository 
institutions. Imposing the 15 percent threshold requirement on these 
foreign firms is not relevant to these concerns and could even have the 
incongruous result of requiring a U.S. covered swap entity to post 
initial margin collateral to an affiliated foreign firm. Accordingly, 
the agencies are adding a new subsection Sec.  __.9(h), which provides 
that these foreign firms are exempt from the requirement to collect 
initial margin from their affiliates under Sec.  __.3(a), and the 
foreign firms are not subject to the 15 percent threshold under Sec.  
__.11(a) unless they are subsidiaries of a covered swap entity subject 
to the requirements of Sec.  __.11. In that case, the firm is treated 
the same as any other subsidiary, as described above, and the parent 
covered swap entity is required to treat inter-affiliate exposures 
between the subsidiary and an affiliate as if it is its own.\37\
---------------------------------------------------------------------------

    \37\ For applicable transactions with U.S. affiliates, these 
foreign firms will be covered by Sec.  __.11(b), exempting them from 
posting initial margin to affiliates pursuant to Sec.  __.3(b). 
These foreign firms will be subject to Sec.  __.4, requiring them to 
exchange variation margin, which is standard practice for these 
firms, and Sec.  __.11(c), requiring swap dealers to collect initial 
margin at such times and in such forms and such amounts (if any) 
that the covered swap entity determines appropriately address the 
credit risk posed by the counterparty and the risks of the swap, 
consistent with Sec.  __.3(d).
---------------------------------------------------------------------------

    Second, the agencies are also including an additional revision that 
is

[[Page 39764]]

consistent with the Rule's current treatment of counterparties that are 
not subject to the Rule's quantitative requirement to exchange and 
segregate initial margin on a daily basis.
    Section __.3 of the Rule contains the core initial margin 
requirement, directing covered swap entities to collect and post 
initial margin as calculated under Sec.  __.8. Accordingly, in drafting 
the proposed rule text for the initial margin exemption in proposed 
Sec.  __.11(a), the agencies exempted swaps between affiliates from 
Sec.  __.3 in its entirety. In the final rule, the agencies have 
revised the text of the exemption in Sec.  __.11, in order to preserve 
the applicability of Sec.  __.3(d).
    Section __.3(d) addresses counterparties who are not financial end 
users with a material swaps exposure or swap entities. These 
counterparties are not subject to daily initial margin exchange 
pursuant to Sec.  __.3(a)-(c). For these other counterparties, Sec.  
__.3(d) requires covered swap entities to collect initial margin at 
such times and in such forms and such amounts (if any) that the covered 
swap entity determines appropriately address the credit risk posed by 
the counterparty and the risks of the swap. When the agencies adopted 
the Rule in 2015, this provision was included to reflect prudent risk 
management practices in the industry before the Rule's issuance, 
whereby an institution would include initial margin on a case-by-case 
basis for any type of swap counterparty, as part of their internal risk 
management practices, if the institution judged it to be 
appropriate.\38\
---------------------------------------------------------------------------

    \38\ 80 FR 74840, 74844 (November 30, 2015).
---------------------------------------------------------------------------

    The agencies, in assessing the risk of PFE to a covered swap entity 
in transacting swaps with an affiliate, have determined that an across-
the-board requirement in the Swap Margin Rule to collect initial margin 
from affiliates is not the best approach. That being said, the agencies 
do not assess inter-affiliate swaps to be risk-free, and there can 
still be circumstances in which the agencies would expect a covered 
swap entity to incorporate initial margin as well as variation margin 
into its risk management for exposures to a particular affiliate or 
particular swaps. Accordingly, the agencies have revised the text of 
Sec.  __.11 to treat inter-affiliate swaps the same way as swaps with 
other counterparties pursuant to Sec.  __.3(d).
    Commenters that addressed the agencies' proposed definition of an 
``affiliate'' for purposes of Sec.  __.11 supported it. The agencies 
are adopting it without change.

D. Federal Reserve Board Statement on Sections 23A and 23B of the 
Federal Reserve Act

    Although this final rule will exempt non-cleared swaps between a 
bank and its affiliates from the initial margin requirements of the 
swap margin rule under the conditions described above, swaps between a 
bank and its affiliates are of course also subject to sections 23A and 
23B of the Federal Reserve Act and the Board's Regulation W.
    The Board's position is that, under section 23A, bank-affiliate 
derivatives generally can be valued at the bank's current exposure to 
the affiliate. Accordingly, the Board believes that a bank must collect 
23A-compliant variation margin from its affiliates to cover its current 
exposure on bank-affiliate derivatives, but generally is not required 
to collect initial margin to cover the bank's potential future exposure 
on the transactions.
    Under section 23B, a bank's swaps with its affiliates must be on 
terms and conditions that are substantially the same, or at least as 
favorable to the bank, as those prevailing at the time for comparable 
transactions with third parties. In part because of the swap margin 
rule and in part due to natural evolution in the financial markets, 
comparable swap transactions between a bank and a third party today 
involve the bank collecting initial margin from, and posting initial 
margin to, the counterparty.
    In many cases the Board finds it reasonable to conclude that a 
bank-affiliate swap with no initial margin requirement is at least as 
favorable to the bank as a comparable bank-nonaffiliate swap with two-
way initial margin requirements. This occurs where the two-way initial 
margining described above requires each of the two counterparties to 
give the other counterparty a contractual term of roughly equivalent 
value. In the Board's view, situations where the bank and affiliate 
each agree not to require an equivalent exchange of initial margin from 
the other will generally create a set of contractual terms that is 
roughly equally favorable to the bank as a two-way initial margin 
regime.
    Some cases of specific bank-affiliate swap arrangements without 
initial margin requirements could raise issues under section 23B, 
however, as can every affiliate transaction depending on the facts and 
circumstances of the arrangement. In the Board's view, relevant facts 
for the section 23B analysis include the relative creditworthiness of 
the bank vs. the affiliate, whether the bank-affiliate swap portfolio 
is more likely to create potential future exposure of the bank to the 
affiliate or vice versa, and whether or not the affiliate requires 
initial margin from the bank under the swap arrangement.

E. Other Comments

    Four commenters expressed the view that the agencies are without 
the statutory authority to adopt the proposed rule. One among these 
commenters provided an analysis of the language Congress used in 
requiring the prudential regulators to issue the margin requirements. 
In this commenter's view, the meaning of the words Congress chose are 
so prescriptive that they compel the agencies to impose initial margin 
and variation margin requirements on all swap transactions within the 
scope of the legislation.
    The agencies note that, in requiring the prudential regulators to 
issue margin and capital requirements, the statutory language also 
mandates that the requirements shall help ensure the safety and 
soundness of covered swap entities and be appropriate for the risk 
associated with the swaps held by the covered swap entity.\39\ The 
agencies have previously considered the same line of analysis pursued 
by the commenters, in connection with adopting the Swap Margin Rule in 
2015.\40\ The agencies have concluded that the statutes direct the 
agencies to employ a risk-based approach to imposing margin 
requirements, and the agencies have done so by imposing rules that vary 
depending on the type of counterparty in light of the risks 
presented.\41\
---------------------------------------------------------------------------

    \39\ 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-10(e)(3)(A).
    \40\ 80 FR at 74866; see also 79 FR 57348, 57354-55 (September 
24, 2014).
    \41\ The agencies also note that the Swap Margin Rule imposes 
margin requirements on a covered swap entity's non-cleared swaps 
with affiliates, specifically the variation margin collection 
requirement of Sec.  __4(a)-(b), and the above-described requirement 
of Sec.  __.3(d).
---------------------------------------------------------------------------

    Commenters that opposed the agencies' proposal also expressed the 
view that the agencies' discussion and analysis in the Supplementary 
Information section of the proposal was deficient. The commenters were 
of the view that the agencies discussed the same factors in 2015 and 
2019, but in the first instance the agencies determined initial margin 
was required to address the risk of inter-affiliate swap exposures, 
whereas in the second instance the agencies drew the opposite 
conclusion.\42\ In this regard, the

[[Page 39765]]

agencies note that the analysis in 2015 did not propound the imposition 
of an across-the-board inter-affiliate initial margin requirement, and 
the agencies carefully evaluated the extent to which numerous aspects 
of the Rule's initial margin requirements should be reduced 
commensurate with the risks the agencies anticipated.\43\ In issuing 
these revisions, the agencies have performed the same probing analysis 
of the relevant factors, based on industry practices as they have 
settled after the Rule's compliance period.
---------------------------------------------------------------------------

    \42\ Some commenters also expressed the view that the agencies 
are obligated to perform an analysis of the PFEs between covered 
swap entities and their affiliates, using the Swap Margin Rule's 
framework for quantifying initial margin collection amounts, in 
order to quantify how much PFEs would increase as a result of the 
proposed change. As the agencies discussed above, however, the 
Rule's methodology for evaluating the PFE of an unaffiliated 
counterparty is not an appropriate measurement of inter-affiliate 
risk. Among other things, it does not take relevant additional risk 
management factors into account, and it was originally formulated 
with the expectation it would not be applied to inter-affiliate 
swaps.
    \43\ 80 FR 74887-889.
---------------------------------------------------------------------------

IV. Additional Compliance Date for Initial Margin Requirements

A. Proposal

    The agencies proposed to give covered swap entities an additional 
year to implement initial margin requirements for certain smaller 
counterparties. The implementation of both initial and variation margin 
requirements started on September 1, 2016. With respect to initial 
margin requirements, the requirements in the Swap Margin Rule were 
implemented in five phases from September 1, 2016, through September 1, 
2020, depending on the size of the covered swap entity's portfolio of 
non-cleared swaps and the counterparty's portfolio of non-cleared 
swaps. Variation margin requirements for all covered swap entities and 
counterparties were completely phased in by March 1, 2017. This 
schedule was consistent with BCBS/IOSCO Framework when the Swap Margin 
Rule was adopted in 2015.
    The phase-in schedule for initial margin is based on the average 
daily aggregate notional amount (AANA) of non-cleared swaps for March, 
April, and May, held in each party's market-wide portfolio, measured 
separately from the standpoint of the covered swap entity and the 
standpoint of the counterparty.\44\ With the recent occurrence of the 
fourth phase of initial margin compliance obligations on September 1, 
2019--for covered swap entities and counterparties with an AANA of $750 
billion to $1.5 trillion--the group currently scheduled for the fifth 
phase of compliance in the upcoming year includes all remaining 
entities within the scope of the initial margin requirements, spanning 
AANAs from $8 billion up to $750 billion.\45\
---------------------------------------------------------------------------

    \44\ See supra note 7.
    \45\ The Swap Margin Rule does not require initial margin to be 
exchanged with any counterparty whose AANA is less than $8 billion 
as of the previous June, July, and August. See Sec.  __.3 and the 
definition of ``material swaps exposure'' in Sec.  __.1.
---------------------------------------------------------------------------

    The industry raised significant concerns about the operational and 
other difficulties associated with beginning to exchange initial margin 
with the large number of relatively small counterparties encompassed in 
the Swap Margin Rule's fifth phase.\46\ Following the revisions adopted 
in July 2019 to the BCBS/IOSCO Framework to permit an additional phase 
for smaller counterparties, the agencies proposed to amend the Swap 
Margin Rule to add an additional phase for smaller counterparties.\47\ 
Specifically, the agencies proposed to amend the compliance schedule to 
add a sixth phase of compliance for certain smaller entities that are 
currently subject to the ``phase five'' compliance deadline. The 
proposed amendments would have required compliance by September 1, 
2020, for counterparties with an AANA ranging from $50 billion up to 
$750 billion, while the compliance date for all other counterparties 
(with an AANA ranging from a ``material swaps exposure'' of $8 billion 
up to $50 billion) would have been extended to September 1, 2021.
---------------------------------------------------------------------------

    \46\ The industry's implementation work to execute new trading 
documentation to meet variation margin compliance obligations by 
2017 largely excluded any required documentation for initial margin, 
due to the greater operational complexity associated with ``T+1'' 
portfolio reconciliation of internally-modeled initial margin 
amounts and third-party segregation of initial margin collateral.
    \47\ See BCBS and IOSCO ``Margin requirements for non-centrally 
cleared derivatives,'' (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf.
---------------------------------------------------------------------------

B. Final Rule

    Commenters supported the proposed amendments to the compliance 
schedule, specifically, the additional phase six for all other 
counterparties (i.e., with an AANA of $8 billion up to $50 billion) 
with a compliance date of September 1, 2021. Commenters noted that the 
proposal did not clarify the convention that should be used for 
calculating the AANA for purposes of the proposed phase six and 
therefore, by default, the calculation would be based on the 
methodology for calculating ``material swaps exposure,'' which is 
determined based on an entity's and its affiliates AANA for June, July, 
and August of the previous calendar year (in this case, 2020). Several 
commenters recommended that the agencies clarify that, for purposes of 
the new phase six, the calculation is based on the AANA for March, 
April, and May of the same year, which is consistent with the BCBS/
IOSCO Framework. One commenter recommended that the calculation of 
``material swaps exposure'' be based on the AANA for March, April, and 
May, beginning in 2021 and thereafter, and asserted this approach would 
maintain consistency with the BCBS/IOSCO Framework and other foreign 
jurisdictions.
    The final rule adopts the additional phase six as proposed. The 
agencies acknowledge that a change to the AANA calculation for phase 
six would result in greater consistency with the BCBS/IOSCO Framework, 
but are not adopting the recommended change to the month calculation 
convention because basing AANA on June, July, and August of the 
previous calendar year will provide end users subject to phase six with 
more time to prepare for compliance with initial margin requirements 
following meeting the material swaps exposure threshold. Moreover, the 
definition of material swaps exposure is not being amended as part of 
this final rule. The material swaps exposure definition was not raised 
as an issue in the proposal, as an amendment to that definition would 
affect more than just the phase-in periods in Sec.  __.1(e). The 
agencies confirm that the material swaps exposure is to be calculated 
based on the previous year.\48\ For example, for the period January 1, 
2022 through December 31, 2022, an entity would determine whether it 
had a material swaps exposure with reference to June, July, and August 
of 2021.
---------------------------------------------------------------------------

    \48\ See 80 FR 74857 (November 30, 2015).
---------------------------------------------------------------------------

V. Documentation Requirements

A. Proposal

    The agencies proposed to amend the documentation requirements under 
Sec.  __.10 of the Swap Margin Rule. Pursuant to Sec.  __.10 of the 
Rule, a covered swap entity must execute trading documentation with 
each counterparty that falls within the scope of the Rule's definition 
of a ``swap entity'' or a ``financial end user'' regarding credit 
support arrangements unless the swap entity or financial end user is 
explicitly exempt from the Rule pursuant to Sec.  __.1(d).\49\ The 
documentation must provide the covered swap entity the contractual 
rights and obligations to collect and post initial and variation margin 
in such amounts, in such form, and under such circumstances as are 
required by the Rule. The documentation must also

[[Page 39766]]

specify the methods, procedures, rules, and inputs for determining the 
value of each non-cleared swap for purposes of calculating variation 
margin and the procedures by which any disputes concerning the 
valuation of non-cleared swaps or the valuation of assets collected or 
posted as initial margin or variation margin may be resolved. Finally, 
the documentation must also describe the methods, procedures, rules, 
and inputs used to calculate initial margin for non-cleared swaps 
entered into between the covered swap entity and the counterparty.\50\ 
The proposed rule clarified that under Sec.  __.10 of the Rule, a 
covered swap entity is not required to execute initial margin trading 
documentation with a counterparty prior to the time that it is required 
to collect or post initial margin pursuant to Sec.  __.3.\51\
---------------------------------------------------------------------------

    \49\ 80 FR 74886-74887 (November 30, 2015).
    \50\ Id.
    \51\ Under Sec.  __.3, a covered swap entity must collect or 
post initial margin when it calculates an initial margin amount 
that, after subtracting the initial margin threshold amount (not 
including any portion of the initial margin threshold amount already 
applied by the covered swap entity or its affiliates to other non-
cleared swaps or non-cleared security-based swaps with the 
counterparty or its affiliates), exceeds zero.
---------------------------------------------------------------------------

B. Final Rule

    Commenters supported the proposed amendment to Sec.  __.10 of the 
Rule. The agencies are adopting the amendment to Sec.  __.10 of the 
Rule as proposed.
    In addition, the preamble to the proposal discussed the operation 
of the custody agreement requirements in Sec.  __.7 of the Swap Margin 
Rule. Under Sec.  __.7, custody agreements are required to be in place 
only after initial margin is required to be collected or posted 
pursuant to Sec.  __.3, or when initial margin is posted by a covered 
swap entity beyond an amount required by the Rule. The agencies 
explained that they expect that covered swap entities will closely 
monitor their exposures and take appropriate steps to ensure that 
trading documentation is in place at such time as initial margin is 
required to be exchanged pursuant to Sec.  __.3. The agencies noted 
that this view is consistent with statements of the BCBS and IOSCO with 
respect to internationally agreed standards for margin requirements for 
non-centrally cleared derivatives.\52\ Commenters supported this 
clarification, and the agencies reaffirm their statement regarding the 
execution of custody agreements required pursuant to Sec.  __.7 of the 
Rule.
---------------------------------------------------------------------------

    \52\ BCBS/IOSCO statement on the final implementation phases of 
the Margin requirements for non-centrally cleared derivatives, March 
5, 2019, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD624.pdf, stating that ``the framework does not specify 
documentation, custodial or operational requirements if the 
bilateral initial margin amount does not exceed the framework's 
[euro]50 million initial margin threshold. It is expected, however, 
that covered entities will act diligently when their exposures 
approach the threshold to ensure that the relevant arrangements 
needed are in place if the threshold is exceeded.''
---------------------------------------------------------------------------

VI. Portfolio Compression Exercises and Other Amendments

A. Summary of Proposed Rule

    The Swap Margin Rule applies to non-cleared swaps entered into on 
or after the applicable compliance date. The agencies are concerned 
about amendments to a swap that was entered into before the applicable 
compliance date if the amendments would have the effect of allowing 
covered swap entities and their counterparties to evade or otherwise 
artificially delay implementation of margin requirements. In 
particular, the agencies are concerned that market participants might 
amend legacy swaps, rather than entering into new swaps and exchanging 
margin pursuant to the Rule once the legacy swaps expire according to 
their original terms. The proposed rule permitted certain amendments, 
particularly non-material amendments to non-economic terms, as well as 
amendments that are made to reduce operational or counterparty risk, 
such as notional reductions and portfolio compressions, to be executed 
while still allowing those amended legacy swaps to remain exempt from 
the Swap Margin Rule.
    The proposed rule clarified the agencies' implementation of the 
legacy swaps provisions of the Swap Margin Rule since its adoption in 
2015. The proposed rule was intended to permit amendments to legacy 
swaps arising from certain routine industry practices over the life-
cycle of a non-cleared swap that are carried out for logistical 
reasons, risk-management purposes, or IBOR replacement. The proposed 
rule covered amendments that do not raise concerns that the covered 
swap entity is seeking to evade or otherwise delay the application of 
margin requirements for non-cleared swaps.

B. Technical Changes

1. Proposal
    The proposed rule recognized the legacy status of a non-cleared 
swap that has been amended to reflect technical changes, such as 
addresses, the identities of parties for delivery of formal notices, 
and other administrative or operational provisions of the non-cleared 
swap that do not alter the non-cleared swap's underlying asset or 
indicator, such as a security, currency, interest rate, commodity, or 
price index, the remaining maturity, or the total effective notional 
amount. For example, an interest rate swap documentation amendment that 
changes the counterparty's contact person or a weather swap 
documentation amendment that changes the margin payment instructions 
would not impact those swaps' legacy status. However, an interest rate 
swap amendment to the fixed leg interest rate or a weather swap 
amendment to the measurement of the precipitation level would impact 
those swaps' legacy status as it is intended to change the economic 
valuation of the swap. The technical changes permitted by the proposed 
rule are necessary to reflect changes in a counterparty's 
circumstances, but are not associated with a desire by either party to 
increase or decrease its exposure to market risk factors.
2. Final Rule
    Commenters were supportive of the proposal. Commenters agreed with 
the agencies that amendments made for logistical or risk management 
purposes arising from routine industry practices over the life-cycle of 
the swap, should not cause legacy swaps to lose their legacy status. 
One commenter requested that the agencies permit any technical 
amendment that does not affect the economic obligations of the parties 
or the valuation of the legacy swap. Two commenters requested 
clarification that the language in the proposed rule aligns with the 
CFTC's Division of Swap Dealer and Intermediary Oversight's June 6, 
2019 No Action Position wherein the CFTC took a no action position on 
legacy swaps that are amended, ``provided that no term is amended that 
would affect the economic obligations of the parties or the valuation'' 
of the swap or that are partially terminated or partially novated 
subject to certain conditions.\53\ The agencies are clarifying that the 
language in the proposed rule is intended to align with the CFTC's No 
Action Position. With respect to the language in Sec.  __.1(h)(5)(i), a 
commenter requested a technical change from usage of the word 
``indicator,'' because it is not a common term in the industry, to the 
word ``reference.'' The agencies are amending the rule to reflect this 
technical change.
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    \53\ CFTC Letter No. 19-13 (June 06, 2019) at 8.
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    The agencies did not receive any other comments on this part of the 
proposed rule and are adopting it, subject to the technical change 
discussed, as proposed.

[[Page 39767]]

C. Reduction in Notional Amount

1. Proposal
    The proposed rule recognized the legacy status of a non-cleared 
swap that has been amended solely to reduce the notional amount of the 
non-cleared swap, without altering other terms of the original non-
cleared swap. For these purposes, a reduction in notional amount may be 
achieved through a partial termination of the original non-cleared 
swap, with the remaining non-terminated non-cleared swap being able to 
retain its legacy status. A reduction in notional amount could also be 
achieved by novating a portion of the original non-cleared swap's 
notional amount to a third party. The original non-cleared swap, with a 
lower notional amount, would retain legacy status, but the novated 
portion would not retain legacy status.
2. Final Rule
    The agencies did not receive comments on this amendment and are 
adopting it as proposed.

C. Portfolio Compression Exercises

1. Proposal
    The proposed rule recognized the legacy status of non-cleared swaps 
that have been modified as part of certain portfolio compression 
exercises used as a risk management tool or for IBOR replacement. In 
compression, offsetting trades between two or more parties are amended 
or torn up and replaced, which reduces the size of gross derivatives 
exposures and generally reduces the number or frequency of payments 
between parties, thus maintaining or reducing the overall risk profile 
of the portfolio.
    In a simple bilateral form of compression between two 
counterparties, the dealer agrees with another dealer to compress 
trades so that offsetting positions are cancelled and only the net 
amount remains, without any change to the overall market exposures. The 
resulting net position is documented by amending one of the original 
swaps. This ``amended swap'' method is the predominant method used in 
compressions of non-cleared interest rate swaps. Compression can also 
be done on a multilateral basis among more than two counterparties, and 
is often even more efficient, as trades across multiple dealers 
involved in a compression exercise can be offset, reducing the risk in 
each relationship across the various counterparties involved in the 
compression. The resulting net position is documented by creating a 
replacement swap reflecting the net position. This ``replacement swap'' 
method is predominantly used in compression exercises for non-cleared 
credit default swaps, but it can also be used for interest rate swap 
compression. Compression often results in the cancellation of 
offsetting positions, but it could also result in new trades being 
booked into an existing non-cleared portfolio to reflect the netted-
down risk of the original portfolio.
2. Final Rule
    Commenters were generally supportive of this amendment to maintain 
legacy status of non-cleared swap after portfolio compression 
exercises. Commenters noted that portfolio compression generally 
reduces gross derivative exposures and reduces the frequency of 
payment, reducing the portfolio's risk profile.
    The agencies are modifying the language in Sec.  __.1(h)(4) to make 
clear that when parties engage in portfolio compression, the resulting 
replacement swap from the compression exercise is accorded legacy 
treatment so long as it meets the limitations in Sec.  __.1(h)(4). As 
described above, in order to separate compression for the purposes of 
replacing an interest rate listed in Sec.  __.1(h)(3)(i) and 
compression for other risk reducing or risk neutral purposes, the rule 
now has a section for the former (under Sec.  __.1(h)(3)) and the 
latter (under Sec.  __.1(h)(4)). The rule also makes clear that the 
resulting non-cleared swap or non-cleared security-based swap from the 
portfolio compression exercises may not (1) exceed the sum of the total 
effective notional amounts of all of the swaps that were submitted to 
the compression exercise that had the same or longer remaining maturity 
as the resulting swap; or (2) exceed the longest remaining maturity of 
all the swaps submitted to the compression exercise. This is consistent 
with the proposal.
    As in other areas of the final rule, supervisors may review these 
changes to confirm that covered swap entities are not purposefully 
avoiding the requirements of the rule.

VII. Technical Changes

    The proposed rule would have deleted Sec.  __.1(e)(7), which 
includes an amendment relating to the QFC Rules. The text of Sec.  
__.1(e)(7), with slight modifications, would have been moved to Sec.  
__.1(h)(1), so that it would reside in the section of the Swap Margin 
Rule dedicated to legacy swap amendments. The methods of amendment 
listed in Sec.  __.1(h) would have applied not only to IBOR 
replacements, but also to any other contractual modifications permitted 
under Sec.  __.1(h), including amendments relating to the QFC Rules.
    The agencies did not receive any comments on this part of the 
proposed rule and are adopting it as proposed.

VIII. Comments Regarding Broader Changes to the Swap Margin Rule

    Several commenters that supported the proposed rule also requested 
broader changes to the rule. Some commenters requested a carve-out for 
seeded funds and an alternative approach to US GAAP accounting analysis 
for purposes of determining the application of the rule. These 
commenters asserted that the limited and passive nature of the 
relationship between seeded funds and their sponsors does not warrant 
the requirement to aggregate a seeded fund's swap exposures with those 
of its parent or other commonly consolidated entities for the purpose 
of calculation material swap exposure. One commenter requested the 
agencies make an announcement to deprioritize compliance with any 
enforcement of the swap margin rule with respect to seeded funds. 
Another commenter stated that non-public and mutual insurance companies 
that are not required to perform GAAP accounting analysis do not 
routinely do so because the cost to perform such analysis for limited 
purposes is significant. They suggested engagement with the regulators 
to determine if an alternative approach may be available.
    Other commenters representing nonprofit organizations, asset 
managers, mutual funds, other institutional asset managers, and 
custodian banks recommended the types of eligible collateral be 
expanded to include certain types of money market mutual funds and 
exchange traded funds. Commenters also requested exclusion of seeded 
funds from the definition of a consolidated group through limited rule 
making. Other commenters raised concerns with the current $50 million 
initial margin threshold and requested that an additional 6-month grace 
period be provided after a financial end user crosses the initial 
margin threshold. In addition, commenters requested a less frequent 
calculation of the initial margin threshold amount because of the 
burden associated with the testing and monitoring in-scope 
counterparties. Commenters also requested that the agencies work with 
regulated entities to develop an approach for the allocation of the 
initial margin amounts and the minimum transfer amount across multiple 
asset managers for a given client.

[[Page 39768]]

    Commenters also requested that the agencies exclude physically 
settled foreign exchange swaps from the material swaps exposure 
calculation and consider making comparability and substitute compliance 
determination for foreign jurisdictions.
    The agencies are not adopting these broader proposed changes in 
this final rule because they fall outside the scope of the changes the 
agencies sought comment on in the proposed rule. The agencies will 
continue to evaluate the requirements of this rule to ensure they meet 
the agencies' objectives.

IX. Brexit IFR

    The agencies issued an interim final rule, which became effective 
on March 19, 2019, to provide certainty for covered swap entities as 
they prepare for the event commonly described as ``Brexit.'' \54\ In 
particular, the interim final rule provided a covered swap entity with 
the ability to continue to service its cross-border clients in the 
event that the U.K. withdraws from the E.U. without a Withdrawal 
Agreement. A Withdrawal Agreement between the UK and EU was ratified in 
January 2020.\55\ The Withdrawal Agreement addresses certain EU-related 
matters that will immediately be affected by the withdrawal itself and 
a transition period. The transition period will run until December 31, 
2020 and could be extended by one or two years.
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    \54\ 84 FR 9940 (March 19, 2019).
    \55\ See European Council Press Release ``Brexit: Council adopts 
decision to conclude the withdraw agreement'' (January 30, 2020), 
available at https://www.consilium.europa.eu/en/press/press-releases/2020/01/30/brexit-council-adopts-decision-to-conclude-the-withdrawal-agreement/.
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    The agencies received one comment letter on the interim final rule. 
The commenter requested that the agencies amend the interim final rule 
to exclude swaps with a flip clause. The comment raised an issue that 
was not within the scope of the interim final rule. Accordingly, the 
agencies are not making any revisions to the rule and are retaining it 
as a final rule as initially adopted.

X. Administrative Law Matters

Paperwork Reduction Act Analysis

    Certain provisions of the final rulemaking contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with 
the requirements of the PRA, the agencies may not conduct or sponsor, 
and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number.
    The agencies reviewed the final rulemaking and determined that it 
reduces certain recordkeeping requirements that have been previously 
cleared under various OMB control numbers. In order to be consistent 
across the agencies, the agencies are also applying a conforming 
methodology for calculating the burden estimates. The agencies are 
proposing to extend for three years, with revision, these information 
collections. The OCC and FDIC have submitted to OMB for review under 
section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of 
the OMB's implementing regulations (5 CFR 1320). The Board has reviewed 
the information collection under its delegated authority. The OMB 
control numbers are 1557-0251 (OCC), 3064-0204 (FDIC), and 7100-0364 
(Board). The FCA has determined the final rulemaking has no PRA 
implications because Farm Credit System institutions are Federally 
chartered instrumentalities of the United States and instrumentalities 
of the United States are specifically excepted from the definition of 
``collection of information'' contained in 44 U.S.C. 3502(3). The FHFA 
has determined that the final rulemaking does not contain any 
collection of information for which the agency must obtain clearance 
under the PRA.

Current Actions

    The final rulemaking removes the record keeping requirement in 
Sec.  __.11(b) that a covered swap entity shall calculate the amount of 
initial margin that would be required to be posted to an affiliate that 
is a financial end user with material swaps exposure pursuant to Sec.  
__.3(b) and provide documentation of such amount to each affiliate on a 
daily basis.

Final Revision, With Extension, of the Following Information 
Collections

    Title of information collection: Reporting and Recordkeeping 
Requirements Associated with Swaps Margin and Swaps Push-Out.
    Frequency: Annual and event generated.
    Affected public: Businesses or other for-profit.
    Estimated average hours per response:
Reporting
    Section __.1(d)--1 hour (on average of 1,000 times per year).
    Sections __.8(c) and __.8(d)--240 hours.
    Section __.8(f)(3)--50 hours.
    Section __.9(e)--10 hours (on average of 3 times per year).
    Sections 237.22(a)(1) and 237.22(e) (Board only)--7 hours.
Recordkeeping
    Sections __.2 (definition of ``eligible master netting agreement,'' 
item 4), 237.8(g), and 237.10--5 hours.
    Section __.5(c)(2)(i)--4 hours.
    Section __.7(c)--100 hours.
    Sections __.8(e) and 237.8(f)--40 hours.
    Section __.8(h)--20 hours.
Disclosure
    Section __.1(h)--1 hour.
OCC
    Respondents: Any national bank or a subsidiary thereof, Federal 
savings association or a subsidiary thereof, or Federal branch or 
agency of a foreign bank that is registered as a swap dealer, major 
swap participant, security-based swap dealer, or major security-based 
swap participant.
    Estimated number of respondents: 10.
    Proposed revisions only estimated annual burden: -2,500 hours.
    Total estimated annual burden: 14,900 hours.
Board
    Respondents: Any state member bank (as defined in 12 CFR 208.2(g)), 
bank holding company (as defined in 12 U.S.C. 1841), savings and loan 
holding company (as defined in 12 U.S.C. 1467a), foreign banking 
organization (as defined in 12 CFR 211.21(o)), foreign bank that does 
not operate an insured branch, state branch or state agency of a 
foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12)), or Edge or 
agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)) that 
is registered as a swap dealer, major swap participant, security-based 
swap dealer, or major security-based swap participant.
    Estimated number of respondents: 41.
    Proposed revisions only estimated annual burden: -10,209 hours.
    Total estimated annual burden: 61,104 hours.
FDIC
    FDIC: Any FDIC-insured state-chartered bank that is not a member of 
the Federal Reserve System or FDIC-insured state-chartered savings 
association that is registered as a swap dealer, major swap 
participant, security-based swap dealer, or major security-based swap 
participant.
    Estimated number of respondents: 1.
    Proposed revisions only estimated annual burden: -249 hours.

[[Page 39769]]

    Total estimated annual burden: 1,490 hours.

Regulatory Flexibility Act Analysis

    OCC: In general, the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
et seq.) requires that in connection with a final rulemaking, an agency 
publish a final regulatory flexibility analysis that describes the 
impact of the rule on small entities. Under section 605(b) of the RFA, 
this analysis is not required if an agency certifies that the rule will 
not have a significant economic impact on a substantial number of small 
entities and publishes its certification and a brief explanatory 
statement in the Federal Register along with its rule.
    As part of our analysis, we consider whether, pursuant to the RFA, 
the final rule would have a significant economic impact on a 
substantial number of small entities. The OCC currently supervises 
approximately 745 small entities.\56\ Among these 745 small entities, 
42 could be affected by the final rule if one or more of these small 
entities are a party to a financial contract with a covered swap 
entity. Because we believe banks will incur de minimis costs, if any, 
to comply with the final rule, we conclude that the final rule would 
not have a significant economic impact on a substantial number of small 
entities.\57\
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    \56\ We base our estimate of the number of small entities on the 
Small Business Administration's (SBA's) size thresholds for 
commercial banks and savings institutions, and trust companies, 
which are $600 million and $41.5 million, respectively. Consistent 
with the General Principles of Affiliation, 13 CFR 121.103(a), we 
count the assets of affiliated financial institutions when 
determining if we should classify an OCC-supervised institution as a 
small entity. We use December 31, 2019, to determine size because a 
``financial institution's assets are determined by averaging the 
assets reported on its four quarterly financial statements for the 
preceding year.'' See footnote 8 of the SBA's Table of Size 
Standards.
    \57\ As one way of determining whether any of the small entities 
is a covered swap entity, the OCC reviewed the CFTC's listing of 
registered swap dealers at http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer. The SEC has not yet imposed a 
registration requirement on entities that meet the definition of 
security-based swap dealer or major security-based swap participant.
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    Board: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
generally requires that an agency prepare and make available for public 
comment a final regulatory flexibility analysis in connection with a 
final rulemaking or certify that the final rule will not have a 
significant economic impact on a substantial number of small 
entities.\58\
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    \58\ See 5 U.S.C. 603(a).
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    As described above, the final rule amends the Swap Margin Rule as 
follows:
    First, the final rule provides relief by allowing legacy swaps to 
be amended to replace interbank offered rates (IBORs) and other 
interest rates that are reasonably expected to be discontinued or are 
reasonably determined to have lost their relevance as a reliable 
benchmark due to a significant impairment, without such swaps losing 
their legacy status.
    Second, the final rule adds an additional initial margin compliance 
period for swaps with certain smaller counterparties, and clarifies the 
existing trading documentation requirements in Sec.  __.10 of the Rule.
    Third, the final rule permits amendments driven by certain routine 
life-cycle activities that covered swap entities may conduct for legacy 
swaps, such as reduction of notional amounts and portfolio compression 
exercises, without triggering margin requirements.
    Fourth, the final rule would make final a previously issued interim 
final rule that preserve the status of legacy swaps meeting certain 
criteria after the United Kingdom withdraws from the European Union 
without a negotiated settlement agreement.
    Lastly, the final rule amends the treatment of affiliate 
transactions by amending the regulatory requirement that a covered swap 
entity collect initial margin for non-cleared swaps from its 
affiliates. The final rule retains the requirement that affiliates 
exchange variation margin. It also makes clear that affiliates should 
continue to use sound judgment to impose initial margin on non-cleared 
swaps when appropriate.
    This final rule applies to financial institutions that are covered 
swap entities that are subject to the requirements of the Swap Margin 
Rule. Under SBA regulations, the finance and insurance sectors include 
commercial banking, savings institutions, credit unions, other 
depository credit intermediation and credit card issuing entities 
(financial institutions). With respect to financial institutions that 
are covered swap entities under the Swap Margin Rule, a financial 
institution generally is considered small if it has assets of $600 
million or less.\59\ Covered swap entities would be considered 
financial institutions for purposes of the RFA in accordance with SBA 
regulations. The Board does not expect that any covered swap entity is 
likely to be a small financial institution, because a small financial 
institution is unlikely to engage in the level of swap activity that 
would require it to register as a swap dealer or a major swap 
participant with the CFTC or a security-based swap dealer or security-
based major swap participant with the U.S. Securities and Exchange 
Commission (SEC).\60\ None of the current Board-regulated covered swap 
entities are small entities for purposes of the RFA.
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    \59\ See 13 CFR 121.201 (effective December 2, 2014, as amended 
by 84 FR 34261, effective August 19, 2019); see also 13 CFR 
121.103(a)(6) (noting factors that the SBA considers in determining 
whether an entity qualifies as a small business, including receipts, 
employees, and other measures of its domestic and foreign 
affiliates).
    \60\ The CFTC has published a list of provisionally registered 
swap dealers as of February 27, 2020, that does not include any 
small financial institutions. See http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer. The SEC has not yet imposed a 
registration requirement on entities that meet the definition of 
security-based swap dealer or major security-based swap participant.
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    The Board does not believe that this final rule will result in any 
new reporting, recordkeeping or other compliance requirements resulting 
in increased burden to any small entities, nor, therefore, that there 
are any significant alternatives to the final rule that would reduce 
the impact on small entities. In light of the foregoing, the Board 
certifies pursuant to section 605(b) of the RFA that the final rule 
will not have a significant economic impact on a substantial number of 
small entities.
    FDIC: The RFA generally requires that, in connection with a final 
rulemaking, an agency prepare and make available for public comment a 
final regulatory flexibility analysis describing the impact of the 
final rule on small entities. However, a regulatory flexibility 
analysis is not required if the agency certifies that the final rule 
will not have a significant economic impact on a substantial number of 
small entities. The SBA has defined ``small entities'' to include 
banking organizations with total assets of less than or equal to $600 
million that are independently owned and operated or owned by a holding 
company with less than or equal to $600 million in total assets.\61\ 
Generally, the FDIC considers a significant effect to be a quantified 
effect in excess of 5 percent of total annual salaries and benefits per 
institution, or 2.5 percent of total non-interest expenses. The FDIC 
believes that effects in excess of these thresholds typically represent 
significant effects for FDIC-

[[Page 39770]]

supervised institutions. For the reasons described below, the FDIC 
certifies pursuant to section 605(b) of the RFA that the final rule 
will not have a significant economic impact on a substantial number of 
small entities.
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    \61\ The SBA defines a small banking organization as having $600 
million or less in assets, where an organization's ``assets are 
determined by averaging the assets reported on its four quarterly 
financial statements for the preceding year.'' See 13 CFR 121.201 
(as amended by 84 FR 34261, effective August 19, 2019). In its 
determination, the ``SBA counts the receipts, employees, or other 
measure of size of the concern whose size is at issue and all of its 
domestic and foreign affiliates.'' See 13 CFR 121.103. Following 
these regulations, the FDIC uses a covered entity's affiliated and 
acquired assets, averaged over the preceding four quarters, to 
determine whether the covered entity is ``small'' for the purposes 
of RFA.
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    According to data from recent Consolidated Reports of Income and 
Condition (Call Report),\62\ the FDIC supervised 3,344 institutions. Of 
those, 2,581581 are considered ``small,'' according to the terms of the 
RFA. As discussed previously, the final rule directly applies to 
covered swap entities (which includes persons registered with the CFTC 
as swap dealers or major swap participants pursuant to the Commodity 
Exchange Act of 1936 and persons registered with the SEC as security-
based swap dealers and major security-based swap participants under the 
Securities Exchange Act of 1934) that are subject to the requirements 
of the Swap Margin Rule. The FDIC has identified 108 swap dealers and 
major swap participants that, as of February 27, 2020, have registered 
as swap entities.\63\ One of these institutions is supervised by the 
FDIC, however that institution holds in excess of $460 billion in 
assets and does not meet the definition of ``small'' for the purpose of 
RFA.
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    \62\ FDIC Call Report, December 31, 2019.
    \63\ While the SEC had adopted a regulation that would require 
registration of security-based swap dealers and major security-based 
swap participants, as of June 28, 2019, there was no date 
established as the compliance date and no SEC-published list of any 
such entities that so registered (see 84 FR 4906 at 4925). 
Accordingly, no security-based swap dealers and no major security-
based swap participants have been identified as swap entities by the 
FDIC. In identifying the 105 institutions referred to in the text, 
the FDIC used the list of swap dealers set forth, on March 22, 2020 
(providing data as of February 27, 2020) at https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html. Major swap 
participants, among others, are required to apply for registration 
through a filing with the National Futures Association. Accordingly, 
the FDIC reviewed the National Futures Association https://www.nfa.futures.org/members/sd/index.html to determine whether there 
were registered major swap participants. As of March 22, 2020, there 
were no major swap participants listed on this link.
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    As an amendment to the Swap Margin Rule, the final rule also 
affects counterparties to swaps entered into by covered swap entities. 
However, the Terrorism Risk Insurance Program Reauthorization Act of 
2015 excludes non-cleared swaps entered into for hedging purposes by a 
financial institution with total assets of $10 billion or less from the 
requirements of the Swap Margin Rule. Given this exclusion, a non-
cleared swap between a covered swap entity and a small FDIC-supervised 
entity that is used to hedge a commercial risk of the small entity will 
not be subject to the Swap Margin Rule. The FDIC believes that it is 
unlikely that any small entity it supervises will engage in non-cleared 
swaps for purposes other than hedging.
    Given that no FDIC-supervised small entities are covered swap 
entities and that it is unlikely that FDIC-supervised small entities 
enter into non-cleared swaps for purposes other than hedging, this 
final rule is not expected to have a significant economic impact on a 
substantial number of small entities supervised by the FDIC. For these 
reasons, the FDIC certifies that the final rule will not have a 
significant economic impact on a substantial number of small entities, 
within the meaning of those terms as used in the RFA. Accordingly, a 
regulatory flexibility analysis is not required.
    FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.), FCA hereby certifies that the final rule will 
not have a significant economic impact on a substantial number of small 
entities. Each of the banks in the Farm Credit System, considered 
together with its affiliated associations, has assets and annual income 
in excess of the amounts that would qualify them as small entities; nor 
does the Federal Agricultural Mortgage Corporation meet the definition 
of ``small entity.'' Therefore, Farm Credit System institutions are not 
``small entities'' as defined in the Regulatory Flexibility Act.
    FHFA: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) 
requires that a regulation that has a significant economic impact on a 
substantial number of small entities, small businesses, or small 
organizations must include a final regulatory flexibility analysis 
describing the regulation's impact on small entities. FHFA need not 
undertake such an analysis if the agency has certified the regulation 
will not have a significant economic impact on a substantial number of 
small entities. 5 U.S.C. 605(b). FHFA has considered the impact of the 
final rule under the Regulatory Flexibility Act, and certifies that the 
final rule does not have a significant economic impact on a substantial 
number of small entities because the final rule is applicable only to 
FHFA's regulated entities, which are not small entities for purposes of 
the Regulatory Flexibility Act.

Unfunded Mandates Reform Act of 1995

    The OCC has analyzed the final rule under the factors in the 
Unfunded Mandates Reform Act of 1995 (UMRA).\64\ Under this analysis, 
the OCC considered whether the final rule includes a Federal mandate 
that may result in the expenditure by State, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year (adjusted annually for inflation). The 
UMRA does not apply to regulations that incorporate requirements 
specifically set forth in law.
---------------------------------------------------------------------------

    \64\ 2 U.S.C. 1531 et seq.
---------------------------------------------------------------------------

    The OCC analyzed the amendments proposed in this final rulemaking 
and has determined that they would not result in expenditures by State, 
local, and Tribal governments, in the aggregate, or by the private 
sector, of $157 million in any one year. Accordingly, the OCC has not 
prepared a written statement under sections 202 and 205.

Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act (RCDRIA),\65\ in determining the effective 
date and administrative compliance requirements for new regulations 
that impose additional reporting, disclosure, or other requirements on 
insured depository institutions (IDIs), each Federal banking agency 
must consider, consistent with principles of safety and soundness and 
the public interest, any administrative burdens that such regulations 
would place on depository institutions, including small depository 
institutions, and customers of depository institutions, as well as the 
benefits of such regulations. In addition, section 302(b) of RCDRIA 
requires new regulations and amendments to regulations that impose 
additional reporting, disclosures, or other new requirements on IDIs 
generally to take effect on the first day of a calendar quarter that 
begins on or after the date on which the regulations are published in 
final form.\66\
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    \65\ 12 U.S.C. 4802(a).
    \66\ 12 U.S.C. 4802.
---------------------------------------------------------------------------

    Each Federal banking agency has determined that the final rule 
would not impose additional reporting, disclosure, or other 
requirements on IDIs; therefore, the requirements of the RCDRIA do not 
apply.
A. Plain Language
    Section 722 of the Gramm-Leach-Bliley Act \67\ requires the Federal 
banking agencies to use plain language in all proposed and final rules 
published after January 1, 2000. The agencies have sought to present 
the final rule in a simple and straightforward

[[Page 39771]]

manner and did not receive comment on the use of plain language.
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    \67\ 12 U.S.C. 4809.
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B. The Congressional Review Act
    For purposes of Congressional Review Act, the OMB makes a 
determination as to whether a final rule constitutes a ``major'' 
rule.\68\ If a rule is deemed a ``major rule'' by the OMB, the 
Congressional Review Act generally provides that the rule may not take 
effect until at least 60 days following its publication.\69\
---------------------------------------------------------------------------

    \68\ 5 U.S.C. 801 et seq.
    \69\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------

    The Congressional Review Act defines a ``major rule'' as any rule 
that the Administrator of the Office of Information and Regulatory 
Affairs of the OMB finds has resulted in or is likely to result in--(A) 
an annual effect on the economy of $100,000,000 or more; (B) a major 
increase in costs or prices for consumers, individual industries, 
Federal, State, or local government agencies or geographic regions, or 
(C) significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic and 
export markets.\70\ As required by the Congressional Review Act, the 
agencies will submit the final rule and other appropriate reports to 
Congress and the Government Accountability Office for review.
---------------------------------------------------------------------------

    \70\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 45

    Administrative practice and procedure, Capital, Margin 
requirements, National Banks, Federal Savings Associations, Reporting 
and recordkeeping requirements, Risk.

12 CFR Part 237

    Administrative practice and procedure, Banks, Banking, Foreign 
Banking, Holding companies, Reporting and recordkeeping requirements, 
Swaps.

 12 CFR Part 349

    Administrative practice and procedure, Banks, Banking, Holding 
companies, Capital, Margin requirements, Reporting and recordkeeping 
requirements, Savings associations, Risk, Swaps.

12 CFR Part 624

    Accounting, Agriculture, Banks, Banking, Capital, Cooperatives, 
Credit, Margin requirements, Reporting and recordkeeping requirements, 
Risk, Rural areas, Swaps.

12 CFR Part 1221

    Government-sponsored enterprises, Mortgages, Securities.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the common preamble and under the 
authority of 12 U.S.C. 93a and 5412(b)(2)(B), the Office of the 
Comptroller of the Currency amends part 45 of Title 12, Code of Federal 
Regulations, as follows:

PART 45--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES

0
1. The authority citation for part 45 continues to read as follows:

    Authority:  7 U.S.C. 6s(e), 12 U.S.C. 1 et seq., 12 U.S.C. 93a, 
161, 481, 1818, 3907, 3909, 5412(b)(2)(B), and 15 U.S.C. 78o-10(e).


0
2. Section 45.1 is amended by revising paragraphs (e)(6) and (7) and 
(h) introductory text and adding paragraphs (h)(1) and (3) through (5) 
to read as follows:


Sec.  45.1   Authority, purpose, scope, exemptions and compliance 
dates.

* * * * *
    (e) * * *
    (6) September 1, 2020, with respect to requirements in Sec.  45.3 
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) Its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, foreign 
exchange forwards and foreign exchange swaps for March, April, and May 
2020 that exceeds $50 billion, where such amounts are calculated only 
for business days; and
    (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii) 
of this section, an entity shall count the average daily aggregate 
notional amount of a non-cleared swap, a non-cleared security-based 
swap, a foreign exchange forward or a foreign exchange swap between the 
entity and an affiliate only one time, and shall not count a swap or 
security-based swap that is exempt pursuant to paragraph (d) of this 
section.
    (7) September 1, 2021, with respect to requirements in Sec.  45.3 
for initial margin for any other covered swap entity with respect to 
non-cleared swaps and non-cleared security-based swaps entered into 
with any other counterparty.
* * * * *
    (h) Legacy swaps. Covered swaps entities are required to comply 
with the requirements of this part for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant 
compliance dates for variation margin and for initial margin 
established in paragraph (e) of this section. Any non-cleared swap or 
non-cleared security-based swap entered into before such relevant date 
shall remain outside the scope of this part if amendments are made to 
the non-cleared swap or non-cleared security-based swap by method of 
adherence to a protocol, other amendment of a contract or confirmation, 
or execution of a new contract or confirmation in replacement of and 
immediately upon termination of an existing contract or confirmation, 
as follows:
    (1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12 
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
    (3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
    (A) An interbank offered rate (IBOR) including, but not limited to, 
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered 
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank 
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro 
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered 
Rate (HIBOR);
    (B) Any other interest rate that a covered swap entity reasonably 
expects to be replaced or discontinued or reasonably determines has 
lost its relevance as a reliable benchmark due to a significant 
impairment; or
    (C) Any other interest rate that succeeds a rate referenced in 
paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under 
this paragraph (h)(3)(i)(C) could be one of multiple amendments made 
under this paragraph (h)(3)(i)(C). For example, an amendment could 
replace an IBOR with a temporary interest rate and later replace the 
temporary interest rate with a permanent interest rate.

[[Page 39772]]

    (ii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also incorporate 
spreads or other adjustments to the replacement interest rate and make 
other necessary technical changes to operationalize the determination 
of payments or other exchanges of economic value using the replacement 
interest rate, including changes to determination dates, calculation 
agents, and payment dates. The changes may not extend the maturity or 
increase the total effective notional amount of the non-cleared swap or 
non-cleared security-based swap beyond what is necessary to accommodate 
the differences between market conventions for an outgoing interest 
rate and its replacement.
    (iii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also be 
effectuated through portfolio compression between or among covered swap 
entities and their counterparties. Portfolio compression under this 
paragraph is not subject to the limitations in paragraph (h)(4) of this 
section but any non-cleared swaps or non-cleared security-based swaps 
resulting from the portfolio compression may not have a longer maturity 
or increase the total effective notional amount more than what is 
necessary to accommodate the differences between market conventions for 
an outgoing interest rate and its replacement.
    (4) Amendments solely to reduce risk or remain risk-neutral through 
portfolio compression between or among covered swap entities and their 
counterparties, as long as any non-cleared swaps or non-cleared 
security-based swaps resulting from the portfolio compression do not:
    (i) Exceed the sum of the total effective notional amounts of all 
of the swaps that were submitted to the compression exercise that had 
the same or longer remaining maturity as the resulting swap; or
    (ii) Exceed the longest remaining maturity of all the swaps 
submitted to the compression exercise.
    (5) The non-cleared swap or non-cleared security-based swap was 
amended solely for one of the following reasons:
    (i) To reflect technical changes, such as addresses, identities of 
parties for delivery of formal notices, and other administrative or 
operational provisions as long as they do not alter the non-cleared 
swap's or non-cleared security-based swap's underlying asset or 
reference, the remaining maturity, or the total effective notional 
amount; or
    (ii) To reduce the notional amount, so long as:
    (A) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
terminated; or
    (B) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
novated to a third party, who complies with applicable margin rules for 
the novated portion upon the transfer.

0
3. Section 45.9 is amended by adding paragraph (h) to read as follows:


Sec.  45.9   Cross-border application of margin requirements.

* * * * *
    (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and 
(ii) of this section is not subject to the requirements of Sec.  
45.3(a) or Sec.  45.11(a) for any non-cleared swap or non-cleared 
security-based swap executed with an affiliate of the covered swap 
entity; and
    (2) For purposes of paragraph (h)(1) of this section, ``affiliate'' 
has the same meaning provided in Sec.  45.11(d).

0
4. Section 45.10 is amended by revising paragraph (a) to read as 
follows:


Sec.  45.10   Documentation of margin matters.

* * * * *
    (a) Provides the covered swap entity and its counterparty with the 
contractual right to collect and post initial margin and variation 
margin in such amounts, in such form, and under such circumstances as 
are required by this subpart, and at such time as initial margin or 
variation margin is required to be collected or posted under Sec.  45.3 
or Sec.  45.4, as applicable; and
* * * * *

0
5. Section 45.11 is revised to read as follows:


Sec.  45.11   Special rules for affiliates.

    (a)(1) A covered swap entity shall calculate on each business day 
an initial margin collection amount for each counterparty that is a 
swap entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity.
    (2) If the aggregate of all initial margin collection amounts 
calculated under paragraph (a)(1) of this section does not exceed 15 
percent of the covered swap entity's tier 1 capital, the requirements 
for a covered swap entity to collect initial margin under Sec.  45.3(a) 
do not apply with respect to any non-cleared swap or non-cleared 
security-based swap with a counterparty that is an affiliate.
    (3) On each business day that the aggregate of all initial margin 
collection amounts calculated under paragraph (a)(1) of this section 
exceeds 15 percent of the covered swap entity's tier 1 capital:
    (i) The covered swap entity shall collect initial margin under 
Sec.  45.3(a) for each additional non-cleared swap and non-cleared 
security-based swap executed that business day with a counterparty that 
is a swap entity or financial end user with a material swaps exposure 
and an affiliate of the covered swap entity, commencing on the day 
after execution and continuing on a daily basis as required under Sec.  
45.3(c), until the earlier of:
    (A) The termination date of such non-cleared swap or non-cleared 
security-based swap, or
    (B) The business day on which the aggregate of all initial margin 
collection amounts calculated under Sec.  45.11(a)(1) falls below 15 
percent of the covered swap entity's tier 1 capital;
    (ii) Notwithstanding Sec.  45.7(b), to the extent the covered swap 
entity collects initial margin pursuant to paragraph (a)(3)(i) of this 
section in the form of collateral other than cash collateral, the 
custodian for such collateral may be the covered swap entity or an 
affiliate of the covered swap entity;
    (4) For purposes of this paragraph (a), ``tier 1 capital'' means 
the sum of common equity tier 1 capital as defined in 12 CFR 3.20(b) 
and additional tier 1 capital as defined in 12 CFR 3.20(c), as reported 
in the institution's most recent Consolidated Reports of Income and 
Condition (Call Report); and
    (5) If any subsidiary of the covered swap entity (including a 
subsidiary described in Sec.  45.9(h)) executes any non-cleared swap or 
non-cleared security-based swap with any counterparty that is a swap 
entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity:
    (i) The covered swap entity shall treat such non-cleared swap or 
security-based swap as its own for purposes of this paragraph (a); and
    (ii) If the subsidiary is itself a covered swap entity, the 
compliance by its parent covered swap entity with this paragraph (a)(5) 
shall be deemed to establish the subsidiary's compliance with the 
requirements of this paragraph (a) and to exempt the subsidiary from 
the requirements for a covered swap entity to collect initial margin 
under Sec.  45.3(a) from an affiliate.
    (b) The requirement for a covered swap entity to post initial 
margin under Sec.  45.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty 
that is an affiliate.

[[Page 39773]]

    (c) Section 45.3(d) shall apply to a counterparty that is an 
affiliate in the same manner as it applies to any counterparty that is 
neither a financial end user without a material swap exposure nor a 
swap entity.
    (d) For purposes of this section:
    (1) An affiliate means:
    (i) An affiliate as defined in Sec.  45.2; or
    (ii) Any company that controls, is controlled by, or is under 
common control with the covered swap entity through the direct or 
indirect exercise of controlling influence over the management or 
policies of the controlled company.
    (2) A subsidiary means:
    (i) A subsidiary as defined in Sec.  45.2; or
    (ii) Any company that is controlled by the covered swap entity 
through the direct or indirect exercise of controlling influence over 
the management or policies of the controlled company.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

12 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the common preamble, the Board of 
Governors of the Federal Reserve System amends 12 CFR part 237 as 
follows:

PART 237--SWAPS MARGIN AND SWAPS PUSH-OUT (REGULATION KK)

0
6. The authority citation for part 237 continues to read as follows:

    Authority:  7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 15 U.S.C. 8305, 
12 U.S.C. 221 et seq., 12 U.S.C. 343-350, 12 U.S.C. 1818, 12 U.S.C. 
1841 et seq., 12 U.S.C. 3101 et seq., and 12 U.S.C. 1461 et seq.

0
7. Revise the heading of part 237 to read as shown above.

Subpart A--Margin and Capital Requirements for Covered Swap 
Entities (Regulation KK)

0
8. Section 237.1 is amended by revising paragraphs (e)(6) and (7) and 
(h) introductory text and adding paragraphs (h)(1) and (3) through (5) 
to read as follows:


Sec.  237.1   Authority, purpose, scope, exemptions and compliance 
dates.

* * * * *
    (e) * * *
    (6) September 1, 2020, with respect to requirements in Sec.  237.3 
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) Its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, foreign 
exchange forwards and foreign exchange swaps for March, April, and May 
2020 that exceeds $50 billion, where such amounts are calculated only 
for business days; and
    (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii) 
of this section, an entity shall count the average daily aggregate 
notional amount of a non-cleared swap, a non-cleared security-based 
swap, a foreign exchange forward or a foreign exchange swap between the 
entity and an affiliate only one time, and shall not count a swap or 
security-based swap that is exempt pursuant to paragraph (d) of this 
section.
    (7) September 1, 2021, with respect to requirements in Sec.  237.3 
for initial margin for any other covered swap entity with respect to 
non-cleared swaps and non-cleared security-based swaps entered into 
with any other counterparty.
* * * * *
    (h) Legacy swaps. Covered swaps entities are required to comply 
with the requirements of this subpart for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant 
compliance dates for variation margin and for initial margin 
established in paragraph (e) of this section. Any non-cleared swap or 
non-cleared security-based swap entered into before such relevant date 
shall remain outside the scope of this subpart if amendments are made 
to the non-cleared swap or non-cleared security-based swap by method of 
adherence to a protocol, other amendment of a contract or confirmation, 
or execution of a new contract or confirmation in replacement of and 
immediately upon termination of an existing contract or confirmation, 
as follows:
    (1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12 
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
    (3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
    (A) An interbank offered rate (IBOR) including, but not limited to, 
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered 
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank 
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro 
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered 
Rate (HIBOR);
    (B) Any other interest rate that a covered swap entity reasonably 
expects to be replaced or discontinued or reasonably determines has 
lost its relevance as a reliable benchmark due to a significant 
impairment; or
    (C) Any other interest rate that succeeds a rate referenced in 
paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under 
this paragraph (h)(3)(i)(C) could be one of multiple amendments made 
under this paragraph (h)(3)(i)(C). For example, an amendment could 
replace an IBOR with a temporary interest rate and later replace the 
temporary interest rate with a permanent interest rate.
    (ii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also incorporate 
spreads or other adjustments to the replacement interest rate and make 
other necessary technical changes to operationalize the determination 
of payments or other exchanges of economic value using the replacement 
interest rate, including changes to determination dates, calculation 
agents, and payment dates. The changes may not extend the maturity or 
increase the total effective notional amount of the non-cleared swap or 
non-cleared security-based swap beyond what is necessary to accommodate 
the differences between market conventions for an outgoing interest 
rate and its replacement.
    (iii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also be 
effectuated through portfolio compression between or among covered swap 
entities and their counterparties. Portfolio compression under this 
paragraph is not subject to the limitations in paragraph (h)(4) of this 
section, but any non-cleared swaps or non-cleared security-based swaps 
resulting from the portfolio compression may not have a longer maturity 
or increase the total effective notional amount more than what is 
necessary to accommodate the differences between market conventions for 
an outgoing interest rate and its replacement.
    (4) Amendments solely to reduce risk or remain risk-neutral through 
portfolio compression between or among covered swap entities and their 
counterparties, as long as any non-cleared swaps or non-cleared 
security-based swaps resulting from the portfolio compression do not:
    (i) Exceed the sum of the total effective notional amounts of all 
of the

[[Page 39774]]

swaps that were submitted to the compression exercise that had the same 
or longer remaining maturity as the resulting swap; or
    (ii) Exceed the longest remaining maturity of all the swaps 
submitted to the compression exercise.
    (5) The non-cleared swap or non-cleared security-based swap was 
amended solely for one of the following reasons:
    (i) To reflect technical changes, such as addresses, identities of 
parties for delivery of formal notices, and other administrative or 
operational provisions as long as they do not alter the non-cleared 
swap's or non-cleared security-based swap's underlying asset or 
reference, the remaining maturity, or the total effective notional 
amount; or
    (ii) To reduce the notional amount, so long as:
    (A) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
terminated; or
    (B) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
novated to a third party, who complies with applicable margin rules for 
the novated portion upon the transfer.

0
9. Section 237.9 is amended by adding paragraph (h) to read as follows:


Sec.  237.9   Cross-border application of margin requirements.

* * * * *
    (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and 
(ii) of this section is not subject to the requirements of Sec.  
237.3(a) or Sec.  237.11(a) for any non-cleared swap or non-cleared 
security-based swap executed with an affiliate of the covered swap 
entity; and
    (2) For purposes of paragraph (h)(1) of this section, ``affiliate'' 
has the same meaning provided in 12 CFR 237.11(d).

0
10. Section 237.10 is amended by revising paragraph (a) to read as 
follows:


Sec.  237.10   Documentation of margin matters.

* * * * *
    (a) Provides the covered swap entity and its counterparty with the 
contractual right to collect and post initial margin and variation 
margin in such amounts, in such form, and under such circumstances as 
are required by this subpart, and at such time as initial margin or 
variation margin is required to be collected or posted under Sec.  
237.3 or Sec.  237.4, as applicable; and
* * * * *

0
11. Section 237.11 is revised to read as follows:


Sec.  237.11   Special rules for affiliates.

    (a)(1) A covered swap entity shall calculate on each business day 
an initial margin collection amount for each counterparty that is a 
swap entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity.
    (2) If the aggregate of all initial margin collection amounts 
calculated under paragraph (a)(1) of this section does not exceed 15 
percent of the covered swap entity's tier 1 capital, the requirements 
for a covered swap entity to collect initial margin under Sec.  
237.3(a) do not apply with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is an affiliate.
    (3) On each business day that the aggregate of all initial margin 
collection amounts calculated under paragraph (a)(1) of this section 
exceeds 15 percent of the covered swap entity's tier 1 capital:
    (i) The covered swap entity shall collect initial margin under 
Sec.  237.3(a) for each additional non-cleared swap and non-cleared 
security-based swap executed that business day with a counterparty that 
is a swap entity or financial end user with a material swaps exposure 
and an affiliate of the covered swap entity, commencing on the day 
after execution and continuing on a daily basis as required under Sec.  
237.3(c), until the earlier of:
    (A) The termination date of such non-cleared swap or non-cleared 
security-based swap, or
    (B) The business day on which the aggregate of all initial margin 
collection amounts calculated under paragraph (a)(1) of this section 
falls below 15 percent of the covered swap entity's tier 1 capital;
    (ii) Notwithstanding Sec.  237.7(b), to the extent the covered swap 
entity collects initial margin pursuant to paragraph (a)(3)(i) of this 
section in the form of collateral other than cash collateral, the 
custodian for such collateral may be the covered swap entity or an 
affiliate of the covered swap entity; and
    (4) For purposes of this paragraph (a), ``tier 1 capital'' means 
the sum of common equity tier 1 capital as defined in 12 CFR 217.20(b) 
and additional tier 1 capital as defined in 12 CFR 217.20(c), as 
reported in the institution's most recent Consolidated Reports of 
Income and Condition (Call Report).
    (5) If any subsidiary of the covered swap entity (including a 
subsidiary described in Sec.  237.9(h)) executes any non-cleared swap 
or non-cleared security-based swap with any counterparty that is a swap 
entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity:
    (i) The covered swap entity shall treat such non-cleared swap or 
security-based swap as its own for purposes of this paragraph (a); and
    (ii) If the subsidiary is itself a covered swap entity, the 
compliance by its parent affiliated covered swap entity with this 
paragraph (a)(5) shall be deemed to establish the subsidiary's 
compliance with the requirements of this paragraph (a) and to exempt 
the subsidiary from the requirements for a covered swap entity to 
collect initial margin under Sec.  237.3(a) from an affiliate.
    (b) The requirement for a covered swap entity to post initial 
margin under Sec.  237.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty 
that is an affiliate.
    (c) Section 237.3(d) shall apply to a counterparty that is an 
affiliate in the same manner as it applies to any counterparty that is 
neither a financial end user without a material swap exposure nor a 
swap entity.
    (d) For purposes of this section,
    (1) An affiliate means:
    (i) An affiliate as defined in Sec.  237.2; or
    (ii) Any company that controls, is controlled by, or is under 
common control with the covered swap entity through the direct or 
indirect exercise of controlling influence over the management or 
policies of the controlled company.
    (2) A subsidiary means:
    (i) A subsidiary as defined in Sec.  237.2; or
    (ii) Any company that is controlled by the covered swap entity 
through the direct or indirect exercise of controlling influence over 
the management or policies of the controlled company.

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

    For the reasons set forth in the Supplementary Information section, 
the Federal Deposit Insurance Corporation amends 12 CFR chapter III as 
follows:

PART 349--DERIVATIVES

Subpart A--Margin and Capital Requirements for Covered Swap Entries

0
12. The authority citation for subpart A of part 349 continues to read 
as follows:

    Authority:  7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), and 12 U.S.C. 
1818 and 12 U.S.C.

[[Page 39775]]

1819(a)(Tenth), 12 U.S.C. 1813(q), 1818, 1819, and 3108.


0
13. Section 349.1 is amended by revising paragraphs (e)(6) and (7) and 
(h) introductory text, and adding paragraphs (h)(1) and (3) through (5) 
to read as follows:


Sec.  349.1   Authority, purpose, scope, exemptions and compliance 
dates.

* * * * *
    (e) * * *
    (6) September 1, 2020, with respect to requirements in Sec.  349.3 
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) Its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, foreign 
exchange forwards and foreign exchange swaps for March, April, and May 
2020 that exceeds $50 billion, where such amounts are calculated only 
for business days; and
    (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii) 
of this section, an entity shall count the average daily aggregate 
notional amount of a non-cleared swap, a non-cleared security-based 
swap, a foreign exchange forward or a foreign exchange swap between the 
entity and an affiliate only one time, and shall not count a swap or 
security-based swap that is exempt pursuant to paragraph (d) of this 
section.
    (7) September 1, 2021, with respect to requirements in Sec.  349.3 
for initial margin for any other covered swap entity with respect to 
non-cleared swaps and non-cleared security-based swaps entered into 
with any other counterparty.
* * * * *
    (h) Legacy swaps. Covered swaps entities are required to comply 
with the requirements of this subpart for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant 
compliance dates for variation margin and for initial margin 
established in paragraph (e) of this section. Any non-cleared swap or 
non-cleared security-based swap entered into before such relevant date 
shall remain outside the scope of this subpart if amendments are made 
to the non-cleared swap or non-cleared security-based swap by method of 
adherence to a protocol, other amendment of a contract or confirmation, 
or execution of a new contract or confirmation in replacement of and 
immediately upon termination of an existing contract or confirmation, 
as follows:
    (1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12 
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
    (3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
    (A) An interbank offered rate (IBOR) including, but not limited to, 
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered 
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank 
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro 
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered 
Rate (HIBOR);
    (B) Any other interest rate that a covered swap entity reasonably 
expects to be replaced or discontinued or reasonably determines has 
lost its relevance as a reliable benchmark due to a significant 
impairment; or
    (C) Any other interest rate that succeeds a rate referenced in 
paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under 
this paragraph (h)(3)(i)(C) could be one of multiple amendments made 
under this paragraph (h)(3)(i)(C). For example, an amendment could 
replace an IBOR with a temporary interest rate and later replace the 
temporary interest rate with a permanent interest rate.
    (ii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also incorporate 
spreads or other adjustments to the replacement interest rate and make 
other necessary technical changes to operationalize the determination 
of payments or other exchanges of economic value using the replacement 
interest rate, including changes to determination dates, calculation 
agents, and payment dates. The changes may not have a longer maturity 
or increase the total effective notional amount of the non-cleared swap 
or non-cleared security-based swap beyond what is necessary to 
accommodate the differences between market conventions for an outgoing 
interest rate and its replacement.
    (iii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also be 
effectuated through portfolio compression between or among covered swap 
entities and their counterparties. Portfolio compression under this 
paragraph is not subject to the limitations in paragraph (h)(4) of this 
section, but any non-cleared swap[s] or non-cleared security-based 
swaps resulting from the portfolio compression may not extend the 
maturity or increase the total effective notional amount more than what 
is necessary to accommodate the differences between market conventions 
for an outgoing interest rate and its replacement.
    (4) Amendments solely to reduce risk or remain risk-neutral through 
portfolio compression between or among covered swap entities and their 
counterparties, as long as any non-cleared swaps or non-cleared 
security-based swaps resulting from the portfolio compression do not:
    (i) Exceed the sum of the total effective notional amounts of all 
of the swaps that were submitted to the compression exercise that had 
the same or longer remaining maturity as the resulting swap; or
    (ii) Exceed the longest remaining maturity of all the swaps 
submitted to the compression exercise.
    (5) The non-cleared swap or non-cleared security-based swap was 
amended solely for one of the following reasons:
    (i) To reflect technical changes, such as addresses, identities of 
parties for delivery of formal notices, and other administrative or 
operational provisions as long as they do not alter the non-cleared 
swap's or non-cleared security-based swap's underlying asset or 
reference, the remaining maturity, or the total effective notional 
amount; or
    (ii) To reduce the notional amount, so long as:
    (A) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
terminated; or
    (B) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
novated to a third party, who complies with applicable margin rules for 
the novated portion upon the transfer.

0
14. Section 349.9 is amended by adding paragraph (h) to read as 
follows:


Sec.  349.9   Cross-border application of margin requirements.

* * * * *
    (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and 
(ii) is not subject to the requirements of Sec.  349.3(a) or Sec.  
349.11 for any non-cleared swap or non-cleared security-based swap 
executed with an affiliate of the covered swap entity; and
    (2) For purposes of paragraph (h)(1) of this section, ``affiliate'' 
has the same meaning provided in Sec.  349.11(d).

0
15. Section 349.10 is amended by revising paragraph (a) to read as 
follows:

[[Page 39776]]

Sec.  349.10   Documentation of margin matters.

* * * * *
    (a) Provides the covered swap entity and its counterparty with the 
contractual right to collect and post initial margin and variation 
margin in such amounts, in such form, and under such circumstances as 
are required by this subpart, and at such time as initial margin or 
variation margin is required to be collected or posted under Sec.  
349.3 or Sec.  349.4, as applicable; and
* * * * *

0
16. Section 349.11 is revised to read as follows:


Sec.  349.11   Special rules for affiliates.

    (a)(1) A covered swap entity shall calculate on each business day 
an initial margin collection amount for each counterparty that is a 
swap entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity.
    (2) If the aggregate of all initial margin collection amounts 
calculated under paragraph (a)(1) of this section does not exceed 15 
percent of the covered swap entity's tier 1 capital, the requirements 
for a covered swap entity to collect initial margin under Sec.  
349.3(a) do not apply with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is an affiliate.
    (3) On each business day that the aggregate of all initial margin 
collection amounts calculated under paragraph (a)(1) of this section 
exceeds 15 percent of the covered swap entity's tier 1 capital:
    (i) The covered swap entity shall collect initial margin under 
Sec.  349.3(a) for each additional non-cleared swap and non-cleared 
security-based swap executed that business day with a counterparty that 
is a swap entity or financial end user with a material swaps exposure 
and an affiliate of the covered swap entity, commencing on the day 
after execution and continuing on a daily basis as required under Sec.  
45.3(c), until the earlier of:
    (A) The termination date of such non-cleared swap or non-cleared 
security-based swap, or
    (B) The business day on which the aggregate of all initial margin 
collection amounts calculated under paragraph (a)(1) of this section 
falls below 15 percent of the covered swap entity's tier 1 capital;
    (ii) Notwithstanding Sec.  349.7(b), to the extent the covered swap 
entity collects initial margin pursuant to paragraph (a)(3)(i) of this 
section in the form of collateral other than cash collateral, the 
custodian for such collateral may be the covered swap entity or an 
affiliate of the covered swap entity;
    (4) For purposes of this paragraph (a), ``tier 1 capital'' means 
the sum of common equity tier 1 capital as defined in 12 CFR 324.20(b) 
and additional tier 1 capital as defined in 12 CFR 324.20(c), as 
reported in the institution's most recent Consolidated Reports of 
Income and Condition (Call Report); and
    (5) If any subsidiary of the covered swap entity (including a 
subsidiary described in Sec.  349.9(h)) executes any non-cleared swap 
or non-cleared security-based swap with any counterparty that is a swap 
entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity:
    (i) The covered swap entity shall treat such non-cleared swap or 
security-based swap as its own for purposes of this paragraph (a); and
    (ii) If the subsidiary is itself a covered swap entity, the 
compliance by its parent covered swap entity with this paragraph (a)(5) 
shall be deemed to establish the subsidiary's compliance with the 
requirements of this paragraph (a) and to exempt the subsidiary from 
the requirements for a covered swap entity to collect initial margin 
under Sec.  349.3(a) from an affiliate.
    (b) The requirement for a covered swap entity to post initial 
margin under Sec.  349.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty 
that is an affiliate.
    (c) Section 349.3(d) shall apply to a counterparty that is an 
affiliate in the same manner as it applies to any counterparty that is 
neither a financial end user without a material swap exposure nor a 
swap entity.
    (d) For purposes of this section:
    (1) An affiliate means:
    (i) An affiliate as defined in Sec.  349.2; or
    (ii) Any company that controls, is controlled by, or is under 
common control with the covered swap entity through the direct or 
indirect exercise of controlling influence over the management or 
policies of the controlled company.
    (2) A subsidiary means:
    (i) A subsidiary as defined in Sec.  349.2; or
    (ii) Any company that is controlled by the covered swap entity 
through the direct or indirect exercise of controlling influence over 
the management or policies of the controlled company.

FARM CREDIT ADMINISTRATION

12 CFR Chapter VI

Authority and Issuance

    For the reasons set forth in the preamble, the Farm Credit 
Administration amends chapter VI of title 12, Code of Federal 
Regulations, as follows:

PART 624--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES

0
17. The authority citation for part 624 continues to read as follows:

    Authority:  7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 2154, 
12 U.S.C. 2243, 12 U.S.C. 2252, 12 U.S.C. 2279bb-1.


0
18. Section 624.1 is amended by revising paragraphs (e)(6) and (7) and 
(h) introductory text and adding paragraphs (h)(1) and (3) through (5) 
to read as follows:


Sec.  624.1   Authority, purpose, scope, exemptions and compliance 
dates.

* * * * *
    (e) * * *
    (6) September 1, 2020, with respect to requirements in Sec.  624.3 
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) Its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, foreign 
exchange forwards and foreign exchange swaps for March, April, and May 
2020 that exceeds $50 billion, where such amounts are calculated only 
for business days; and
    (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii) 
of this section, an entity shall count the average daily aggregate 
notional amount of a non-cleared swap, a non-cleared security-based 
swap, a foreign exchange forward or a foreign exchange swap between the 
entity and an affiliate only one time, and shall not count a swap or 
security-based swap that is exempt pursuant to paragraph (d) of this 
section.
    (7) September 1, 2021, with respect to requirements in Sec.  624.3 
for initial margin for any other covered swap entity with respect to 
non-cleared swaps and non-cleared security-based swaps entered into 
with any other counterparty.
* * * * *
    (h) Legacy swaps. Covered swaps entities are required to comply 
with the requirements of this subpart for non-cleared swaps and non-
cleared security-

[[Page 39777]]

based swaps entered into on or after the relevant compliance dates for 
variation margin and for initial margin established in paragraph (e) of 
this section. Any non-cleared swap or non-cleared security-based swap 
entered into before such relevant date shall remain outside the scope 
of this subpart if amendments are made to the non-cleared swap or non-
cleared security-based swap by method of adherence to a protocol, other 
amendment of a contract or confirmation, or execution of a new contract 
or confirmation in replacement of and immediately upon termination of 
an existing contract or confirmation, as follows:
    (1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12 
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
    (3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
    (A) An interbank offered rate (IBOR) including, but not limited to, 
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered 
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank 
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro 
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered 
Rate (HIBOR);
    (B) Any other interest rate that a covered swap entity reasonably 
expects to be replaced or discontinued or reasonably determines has 
lost its relevance as a reliable benchmark due to a significant 
impairment; or
    (C) Any other interest rate that succeeds a rate referenced in 
paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under 
this paragraph (h)(3)(i)(C) could be one of multiple amendments made 
under this paragraph (h)(3)(i)(C). For example, an amendment could 
replace an IBOR with a temporary interest rate and later replace the 
temporary interest rate with a permanent interest rate.
    (ii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also incorporate 
spreads or other adjustments to the replacement interest rate and make 
other necessary technical changes to operationalize the determination 
of payments or other exchanges of economic value using the replacement 
interest rate, including changes to determination dates, calculation 
agents, and payment dates. The changes may not extend the maturity or 
increase the total effective notional amount of the non-cleared swap or 
non-cleared security-based swap beyond what is necessary to accommodate 
the differences between market conventions for an outgoing interest 
rate and its replacement.
    (iii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also be 
effectuated through portfolio compression between or among covered swap 
entities and their counterparties. Portfolio compression under this 
paragraph is not subject to the limitations in paragraph (h)(4) of this 
section, but any non-cleared swap[s] or non-cleared security-based 
swaps resulting from the portfolio compression may not extend the 
maturity or increase the total effective notional amount more than what 
is necessary to accommodate the differences between market conventions 
for an outgoing interest rate and its replacement.
    (4) Amendments solely to reduce risk or remain risk-neutral through 
portfolio compression between or among covered swap entities and their 
counterparties, as long as any non-cleared swaps or non-cleared 
security-based swaps resulting from the portfolio compression do not:
    (i) Exceed the sum of the total effective notional amounts of all 
of the swaps that were submitted to the compression exercise that had 
the same or longer remaining maturity as the resulting swap; or
    (ii) Exceed the longest remaining maturity of all the swaps 
submitted to the compression exercise.
    (5) The non-cleared swap or non-cleared security-based swap was 
amended solely for one of the following reasons:
    (i) To reflect technical changes, such as addresses, identities of 
parties for delivery of formal notices, and other administrative or 
operational provisions as long as they do not alter the non-cleared 
swap's or non-cleared security-based swap's underlying asset or 
reference, the remaining maturity, or the total effective notional 
amount; or
    (ii) To reduce the notional amount, so long as:
    (A) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
terminated; or
    (B) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
novated to a third party, who complies with applicable margin rules for 
the novated portion upon the transfer.

0
19. Section 624.9 is amended by adding paragraph (h) to read as 
follows:


Sec.  624.9   Cross-Border application of margin requirements.

* * * * *
    (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and 
(ii) of this section is not subject to the requirements of Sec.  
624.3(a) or Sec.  624.11(a) for any non-cleared swap or non-cleared 
security-based swap executed with an affiliate of the covered swap 
entity; and
    (2) For purposes of paragraph (h)(1) of this section, ``affiliate'' 
has the same meaning provided in Sec.  624.11(d).

0
20. Section 624.10 is amended by revising paragraph (a) to read as 
follows:


Sec.  624.10   Documentation of margin matters.

* * * * *
    (a) Provides the covered swap entity and its counterparty with the 
contractual right to collect and post initial margin and variation 
margin in such amounts, in such form, and under such circumstances as 
are required by this subpart, and at such time as initial margin or 
variation margin is required to be collected or posted under Sec.  
624.3 or Sec.  624.4, as applicable; and
* * * * *

0
21. Section 624.11 is revised to read as follows:


Sec.  624.11   Special rules for affiliates.

    (a)(1) A covered swap entity shall calculate on each business day 
an initial margin collection amount for each counterparty that is a 
swap entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity.
    (2) If the aggregate of all initial margin collection amounts 
calculated under paragraph (a)(1) of this section does not exceed 15 
percent of the covered swap entity's tier 1 capital, the requirements 
for a covered swap entity to collect initial margin under Sec.  
624.3(a) do not apply with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is an affiliate.
    (3) On each business day that the aggregate of all initial margin 
collection amounts calculated under paragraph (a)(1) of this section 
exceeds 15 percent of the covered swap entity's tier 1 capital:
    (i) The covered swap entity shall collect initial margin under 
Sec.  624.3(a) for each additional non-cleared swap and non-cleared 
security-based swap executed that business day with a counterparty that 
is a swap entity or financial end user with a material swaps exposure 
and an affiliate of the covered

[[Page 39778]]

swap entity, commencing on the day after execution and continuing on a 
daily basis as required under Sec.  624.3(c), until the earlier of;
    (A) The termination date of such non-cleared swap or non-cleared 
security-based swap, or
    (B) The business day on which the aggregate of all initial margin 
collection amounts calculated under paragraph (a)(1) of this section 
falls below 15 percent of the covered swap entity's tier 1 capital;
    (ii) Notwithstanding Sec.  624.7(b), to the extent the covered swap 
entity collects initial margin pursuant to paragraph (a)(3)(i) of this 
section in the form of collateral other than cash collateral, the 
custodian for such collateral may be the covered swap entity or an 
affiliate of the covered swap entity; and
    (4) For purposes of this paragraph (a), ``tier 1 capital'' means:
    (i) For Farm Credit System banks and associations, the sum of 
common equity tier 1 capital as defined in 12 CFR 628.20(b) and 
additional tier 1 capital as defined in 12 CFR 628.20(c), and as 
reported in the institution's most recent Uniform Reports of Financial 
Condition and Performance (Call Report); or
    (ii) For the Federal Agricultural Mortgage Corporation, as defined 
and required in in 12 CFR 652.61, and as reported in the institution's 
most recent Call Report.
    (5) If any subsidiary of the covered swap entity (including a 
subsidiary described in Sec.  624.9(h)) executes any non-cleared swap 
or non-cleared security-based swap with any counterparty that is a swap 
entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity:
    (i) The covered swap entity shall treat such non-cleared swap or 
security-based swap as its own for purposes of this paragraph (a); and
    (ii) If the subsidiary is itself a covered swap entity, the 
compliance by its parent covered swap entity with this paragraph (a)(5) 
shall be deemed to establish the subsidiary's compliance with the 
requirements of Sec.  624.11(a) and to exempt the subsidiary from the 
requirements for a covered swap entity to collect initial margin under 
Sec.  624.3(a) from an affiliate.
    (b) The requirement for a covered swap entity to post initial 
margin under Sec.  624.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty 
that is an affiliate.
    (c) Section 624.3(d) shall apply to a counterparty that is an 
affiliate in the same manner as it applies to any counterparty that is 
neither a financial end user without a material swap exposure nor a 
swap entity.
    (d) For purposes of this section:
    (1) An affiliate means:
    (i) An affiliate as defined in Sec.  624.2; or
    (ii) Any company that controls, is controlled by, or is under 
common control with the covered swap entity through the direct or 
indirect exercise of controlling influence over the management or 
policies of the controlled company.
    (2) A subsidiary means:
    (i) A subsidiary as defined in Sec.  624.2; or
    (ii) Any company that is controlled by the covered swap entity 
through the direct or indirect exercise of controlling influence over 
the management or policies of the controlled company.

FEDERAL HOUSING FINANCE AGENCY

12 CFR Chapter XII

Authority and Issuance

    For the reasons set forth in the preamble, the Federal Housing 
Finance Agency amends chapter XII of title 12, Code of Federal 
Regulations, as follows:

PART 1221--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP 
ENTITIES

0
22. The authority citation for part 1221 continues to read as follows:

    Authority:  7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 4513, 
and 12 U.S.C. 4526(a).


0
23. Section 1221.1 is amended by revising paragraphs (e)(6) and (7) and 
(h) introductory text and adding paragraphs (h)(1) and (3) through (5) 
to read as follows:


Sec.  1221.1   Authority, purpose, scope, exemptions and compliance 
dates.

* * * * *
    (e) * * *
    (6) September 1, 2020, with respect to the requirements in Sec.  
1221.3 for initial margin for any non-cleared swaps and non-cleared 
security-based swaps, where both:
    (i) The covered swap entity combined with all its affiliates; and
    (ii) Its counterparty combined with all its affiliates, have an 
average daily aggregate notional amount of non-cleared swaps, foreign 
exchange forwards and foreign exchange swaps for March, April, and May 
2020 that exceeds $50 billion, where such amounts are calculated only 
for business days; and
    (iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii) 
of this section, an entity shall count the average daily aggregate 
notional amount of a non-cleared swap, a non-cleared security-based 
swap, a foreign exchange forward or a foreign exchange swap between the 
entity and an affiliate only one time, and shall not count a swap or 
security-based swap that is exempt pursuant to paragraph (d) of this 
section.
    (7) September 1, 2021, with respect to requirements in Sec.  1221.3 
for initial margin for any other covered swap entity with respect to 
non-cleared swaps and non-cleared security-based swaps entered into 
with any other counterparty.
* * * * *
    (h) Legacy swaps. Covered swaps entities are required to comply 
with the requirements of this part for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant 
compliance dates for variation margin and for initial margin 
established in paragraph (e) of this section. Any non-cleared swap or 
non-cleared security-based swap entered into before such relevant date 
shall remain outside the scope of this part if amendments are made to 
the non-cleared swap or non-cleared security-based swap by method of 
adherence to a protocol, other amendment of a contract or confirmation, 
or execution of a new contract or confirmation in replacement of and 
immediately upon termination of an existing contract or confirmation, 
as follows:
    (1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of 12 CFR part 47, 12 
CFR part 252 subpart I, or 12 CFR part 382, as applicable;
* * * * *
    (3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
    (A) An interbank offered rate (IBOR) including, but not limited to, 
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered 
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank 
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), the Euro 
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered 
Rate (HIBOR);
    (B) Any other interest rate that a covered swap entity reasonably 
expects to be replaced or discontinued or reasonably determines has 
lost its relevance as a reliable benchmark due to a significant 
impairment; or
    (C) Any other interest rate that succeeds a rate referenced in 
paragraph

[[Page 39779]]

(h)(3)(i)(A) or (B) of this section. An amendment made under this 
paragraph (h)(3)(i)(C) could be one of multiple amendments made under 
this paragraph (h)(3)(i)(C). For example, an amendment could replace an 
IBOR with a temporary interest rate and later replace the temporary 
interest rate with a permanent interest rate.
    (ii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also incorporate 
spreads or other adjustments to the replacement interest rate and make 
other necessary technical changes to operationalize the determination 
of payments or other exchanges of economic value using the replacement 
interest rate, including changes to determination dates, calculation 
agents, and payment dates. The changes may not have a longer maturity 
or increase the total effective notional amount of the non-cleared swap 
or non-cleared security-based swap beyond what is necessary to 
accommodate the differences between market conventions for an outgoing 
interest rate and its replacement.
    (iii) Amendments to accommodate replacement of an interest rate 
described in paragraph (h)(3)(i) of this section may also be 
effectuated through portfolio compression between or among covered swap 
entities and their counterparties. Portfolio compression under this 
paragraph (h)(3)(iii) is not subject to the limitations in paragraph 
(h)(4) of this section, but any non-cleared swap[s] or non-cleared 
security-based swaps resulting from the portfolio compression may not 
have a longer maturity or increase the total effective notional amount 
more than what is necessary to accommodate the differences between 
market conventions for an outgoing interest rate and its replacement.
    (4) Amendments solely to reduce risk or remain risk-neutral through 
portfolio compression between or among covered swap entities and their 
counterparties, as long as any non-cleared swaps or non-cleared 
security-based swaps resulting from the portfolio compression do not:
    (i) Exceed the sum of the total effective notional amounts of all 
of the swaps that were submitted to the compression exercise that had 
the same or longer remaining maturity as the resulting swap; or
    (ii) Exceed the longest remaining maturity of all the swaps 
submitted to the compression exercise.
    (5) The non-cleared swap or non-cleared security-based swap was 
amended solely for one of the following reasons:
    (i) To reflect technical changes, such as addresses, identities of 
parties for delivery of formal notices, and other administrative or 
operational provisions as long as they do not alter the non-cleared 
swap's or non-cleared security-based swap's underlying asset or 
reference, the remaining maturity, or the total effective notional 
amount; or
    (ii) To reduce the notional amount, so long as:
    (A) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
terminated; or
    (B) All payment obligations attached to the total effective 
notional amount being eliminated as a result of the amendment are fully 
novated to a third party, who complies with applicable margin rules for 
the novated portion upon the transfer.

0
24. Section 1221.9 is amended by adding paragraph (h) to read as 
follows:


Sec.  1221.9   Cross-Border application of margin requirements.

* * * * *
    (h)(1) A covered swap entity described in paragraphs (d)(3)(i) and 
(ii) of this section is not subject to the requirements of Sec.  
1221.3(a) or Sec.  1221.11(a) for any non-cleared swap or non-cleared 
security-based swap executed with an affiliate of the covered swap 
entity; and
    (2) For purposes of paragraph (h)(1) of this section, ``affiliate'' 
has the same meaning provided in Sec.  1221.11(d).

0
25. In Sec.  1221.10 revise paragraph (a) to read as follows:


Sec.  1221.10   Documentation of margin matters.

* * * * *
    (a) Provides the covered swap entity and its counterparty with the 
contractual right to collect and post initial margin and variation 
margin in such amounts, in such form, and under such circumstances as 
are required by this part, and at such time as initial margin or 
variation margin is required to be collected or posted under Sec.  
1221.3 or Sec.  1221.4, as applicable; and
* * * * *

0
26. Section 1221.11 is revised to read as follows:


Sec.  1221.11   Special rules for affiliates.

    (a)(1) A covered swap entity shall calculate on each business day 
an initial margin collection amount for each counterparty that is a 
swap entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity.
    (2) If the aggregate of all initial margin collection amounts 
calculated under paragraph (a)(1) of this section does not exceed 15 
percent of the covered swap entity's tier 1 capital, the requirements 
for a covered swap entity to collect initial margin under Sec.  
1221.3(a) do not apply with respect to any non-cleared swap or non-
cleared security-based swap with a counterparty that is an affiliate.
    (3) On each business day that the aggregate of all initial margin 
collection amounts calculated under paragraph (a)(1) of this section 
exceeds 15 percent of the covered swap entity's tier 1 capital:
    (i) The covered swap entity shall collect initial margin under 
Sec.  1221.3(a) for each additional non-cleared swap and non-cleared 
security-based swap executed that business day with a counterparty that 
is a swap entity or financial end user with a material swaps exposure 
and an affiliate of the covered swap entity, commencing on the day 
after execution and continuing on a daily basis as required under Sec.  
1221.3(c), until the earlier of;
    (A) The termination date of such non-cleared swap or non-cleared 
security-based swap, or
    (B) The business day on which the aggregate of all initial margin 
collection amounts calculated under paragraph (a)(1) of this section 
falls below 15 percent of the covered swap entity's tier 1 capital;
    (ii) Notwithstanding Sec.  1221.7(b), to the extent the covered 
swap entity collects initial margin pursuant to paragraph (a)(3)(i) of 
this section in the form of collateral other than cash collateral, the 
custodian for such collateral may be the covered swap entity or an 
affiliate of the covered swap entity; and
    (4) For purposes of paragraph (a) of this section, ``tier 1 
capital'' means:
    (i) The sum of common equity tier 1 capital as defined in 12 CFR 
1240.20(b) and additional tier 1 capital as defined in 12 CFR 
1240.20(c).
    (5) If any subsidiary of the covered swap entity (including a 
subsidiary described in Sec.  1221.9(h)) executes any non-cleared swap 
or non-cleared security-based swap with any counterparty that is a swap 
entity or financial end user with a material swaps exposure and an 
affiliate of the covered swap entity;
    (i) The covered swap entity shall treat such non-cleared swap or 
security-based swap as its own for purposes of this paragraph (a); and
    (ii) If the subsidiary is itself a covered swap entity, the 
compliance by its parent covered swap entity with this paragraph (a)(5) 
shall be deemed to establish the subsidiary's compliance

[[Page 39780]]

with the requirements of this paragraph (a) and to exempt the 
subsidiary from the requirements for a covered swap entity to collect 
initial margin under Sec.  1221.3(a) from an affiliate.
    (b) The requirement for a covered swap entity to post initial 
margin under Sec.  1221.3(b) does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty 
that is an affiliate.
    (c) Section 1221.3(d) shall apply to a counterparty that is an 
affiliate in the same manner as it applies to any counterparty that is 
neither a financial end user without a material swap exposure nor a 
swap entity.
    (d) For purposes of this section:
    (1) An affiliate means:
    (i) An affiliate as defined in Sec.  1221.2; or
    (ii) Any company that controls, is controlled by, or is under 
common control with the covered swap entity through the direct or 
indirect exercise of controlling influence over the management or 
policies of the controlled company.
    (2) A subsidiary means:
    (i) A subsidiary as defined in Sec.  1221.2; or
    (ii) Any company that is controlled by the covered swap entity 
through the direct or indirect exercise of controlling influence over 
the management or policies of the controlled company.

Brian P. Brooks,
Acting Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System.
Ann E. Misback,
Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.
    Dated at Washington, DC, on or about June 25, 2020.
James P. Sheesley,
Acting Assistant Executive Secretary.
    Dated: June 24, 2020.
Dale Aultman
Secretary, Farm Credit Administration Board.
Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2020-14097 Filed 6-30-20; 8:45 am]
BILLING CODE 4810-33; 6210-01; 6705-01; 6714-01; 7535-01-P