[Federal Register Volume 85, Number 133 (Friday, July 10, 2020)]
[Rules and Regulations]
[Pages 41346-41355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12033]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AF02


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Interim final rule with request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting and invites comment on an interim final rule 
amending its margin requirements for uncleared swaps for swap dealers 
(``SDs'') and major swap participants (``MSPs'') for which there is no 
prudential regulator (``CFTC Margin Rule''). The Commission is revising 
the compliance schedule for the posting and collection of initial 
margin under the CFTC Margin Rule to defer the compliance date of 
September 1, 2020, to September 1, 2021 (``Interim Final Rule''). The 
Commission is issuing the Interim Final Rule to address the operational 
challenges faced by certain entities subject to the CFTC Margin Rule as 
a result of the coronavirus disease 2019 (``COVID-19'') pandemic, 
consistent with the recent revision of the Basel Committee on Banking 
Supervision and Board of the International Organization of Securities 
Commissions (together, ``BCBS/IOSCO'') implementation schedule for 
margin requirements for non-centrally-cleared derivatives.

DATES: 
    Effective Date: This rule is effective July 10, 2020.
    Comment Date: Comments must be received on or before September 8,

[[Page 41347]]

2020. Comments submitted by mail will be accepted as timely if they are 
postmarked on or before that date.

ADDRESSES: You may submit comments, identified by RIN 3038-AF02, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Center, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. 
Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act (``APA'') \2\ and other applicable laws, and may be 
accessible under the FOIA.\3\
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    \2\ 5 U.S.C. Subchapter II.
    \3\ 5 U.S.C. 552.

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

SUPPLEMENTARY INFORMATION:

I. Background

    Section 4s(e) of the Commodity Exchange Act (``CEA'') \4\ directs 
the Commission to adopt rules establishing minimum initial and 
variation margin requirements on all swaps \5\ that are (i) entered 
into by an SD \6\ or MSP \7\ for which there is no prudential regulator 
\8\ (collectively, ``covered swap entities'' or ``CSEs'') \9\ and (ii) 
not cleared by a registered derivatives clearing organization 
(``uncleared swaps'').\10\ To offset the greater risk to the SD or MSP 
and the financial system arising from the use of uncleared swaps, these 
requirements must (i) help ensure the safety and soundness of the SD or 
MSP and (ii) be appropriate for the risk associated with the uncleared 
swaps held as an SD or MSP.\11\
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    \4\ 7 U.S.C. 6s(e) (capital and margin requirements).
    \5\ CEA section 1a(47), 7 U.S.C. 1a(47) (swap definition); 
Commission regulation 1.3, 17 CFR 1.3 (further definition of a 
swap). A swap includes, among other things, an interest rate swap, 
commodity swap, credit default swap, and currency swap.
    \6\ CEA section 1a(49), 7 U.S.C. 1a(49) (swap dealer 
definition); Commission regulation 1.3 (further definition of swap 
dealer).
    \7\ CEA section 1a(32), 7 U.S.C. 1a(32) (major swap participant 
definition); Commission regulation 1.3 (further definition of major 
swap participant).
    \8\ CEA section 1a(39), 7 U.S.C. 1a(39) (defining the term 
``prudential regulator'' to include the Board of Governors of the 
Federal Reserve System; the Office of the Comptroller of the 
Currency; the Federal Deposit Insurance Corporation; the Farm Credit 
Administration; and the Federal Housing Finance Agency). The 
definition of prudential regulator further specifies the entities 
for which these agencies act as prudential regulators. The 
prudential regulators published final margin requirements in 
November 2015. See generally Margin and Capital Requirements for 
Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential 
Margin Rule''). The Prudential Margin Rule is similar to the CFTC 
Margin Rule, including with respect to the CFTC's phasing-in of 
margin requirements, as discussed below.
    \9\ CEA section 4s(e)(1)(B), 7 U.S.C. 6s(e)(1)(B). SDs and MSPs 
for which there is a prudential regulator must meet the margin 
requirements for uncleared swaps established by the applicable 
prudential regulator. CEA section 4s(e)(1)(A), 7 U.S.C. 6s(e)(1)(A).
    \10\ CEA section 4s(e)(2)(B)(ii), 7 U.S.C. 6s(e)(2)(B)(ii). In 
Commission regulation 23.151, the Commission further defined the 
term uncleared swap to mean a swap that is not cleared by a 
registered derivatives clearing organization or by a derivatives 
clearing organization that the Commission has exempted from 
registration as provided under the CEA. 17 CFR 23.151.
    \11\ CEA section 4s(e)(3)(A), 7 U.S.C. 6s(e)(3)(A).
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    BCBS/IOSCO established an international framework for margin 
requirements for uncleared derivatives in September 2013 (the ``BCBS/
IOSCO framework'').\12\ After the establishment of the BCBS/IOSCO 
framework, the CFTC, on January 6, 2016, consistent with Section 4s(e), 
promulgated rules requiring CSEs to collect and post initial margin 
(``IM'') \13\ and variation margin (``VM'') \14\ for uncleared 
swaps,\15\ adopting the implementation schedule set forth in the BCBS/
IOSCO framework, including the revised implementation schedule adopted 
on March 18, 2015.\16\
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    \12\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (Sept. 2013), https://www.bis.org/publ/bcbs261.pdf.
    \13\ Initial margin is the collateral (calculated as provided by 
Sec.  23.154 of the Commission's regulations) that is collected or 
posted in connection with one or more uncleared swaps pursuant to 
Sec.  23.152. Initial margin is intended to secure potential future 
exposure following default of a counterparty (i.e., adverse changes 
in the value of an uncleared swap that may arise during the period 
of time when it is being closed out). See CFTC Margin Rule, 81 FR at 
683.
    \14\ Variation margin, as defined in Commission regulation 
23.151, is the collateral provided by a party to its counterparty to 
meet the performance of its obligation under one or more uncleared 
swaps between the parties as a result of a change in the value of 
such obligations since the trade was executed or the last time such 
collateral was provided. 17 CFR 23.151.
    \15\ See generally Margin Requirements for Uncleared Swaps for 
Swap Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016). 
The CFTC Margin Rule, which became effective April 1, 2016, is 
codified in part 23 of the Commission's regulations. 17 CFR 23.150-
23.159, 23.161. In May 2016, the Commission amended the CFTC Margin 
Rule to add Commission regulation Sec.  23.160, 17 CFR 23.160, 
providing rules on its cross-border application. See generally 
Margin Requirements for Uncleared Swaps for Swap Dealers and Major 
Swap Participants--Cross-Border Application of the Margin 
Requirements, 81 FR 34818 (May 31, 2016).
    \16\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (March 2015), https://www.bis.org/bcbs/publ/d317.pdf.
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    In July 2019, BCBS/IOSCO further revised the framework to extend 
the implementation schedule to September 1, 2021.\17\ Consistent with 
this revision to the international framework, in April 2020, the 
Commission promulgated a final rule amending the compliance schedule 
for the IM requirements under the CFTC Margin Rule (``April 2020 Final 
Rule'').\18\
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    \17\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (July 2019), https://www.bis.org/bcbs/publ/d475.pdf.
    \18\ See generally Margin Requirements for Uncleared Swaps for 
Swap Dealers and Major Swap Participants, 85 FR 19878 (April 9, 
2020).
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    The World Health Organization declared the COVID-19 outbreak a 
global pandemic on March 11, 2020.\19\ On March 13, 2020, President 
Donald J. Trump declared a national emergency

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due to the COVID-19 pandemic.\20\ The disease has impacted individuals 
across the world.
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    \19\ WHO Director-General's opening remarks at the media 
briefing on COVID-19 (March 11, 2020), https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020.
    \20\ Proclamation on Declaring a National Emergency Concerning 
the Novel Coronavirus Disease (COVID-19) Outbreak (March 13, 2020), 
https://www.whitehouse.gov/presidential-actions/proclamation-declaring-national-emergency-concerning-novel-coronavirus-disease-covid-19-outbreak/.
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    The COVID-19 outbreak has severely disrupted domestic and 
international business, and adversely impacted the global economy. In 
March 2020, a group of global financial market trade associations wrote 
a letter to BCBS/IOSCO requesting a suspension of the nearing 
compliance dates, set to begin on September 1, 2020, and September 1, 
2021, in light of the pandemic.\21\ The Trade Association Letter stated 
that staff at financial firms have been displaced and repurposed given 
the increased market volatility.\22\ The letter further stated that 
working from home limits access to legal and operational documentation 
and also limits abilities to communicate with counterparties.\23\ With 
operational teams working at full capacity to ensure proper business 
continuity, the trade associations declared that the strained working 
conditions at firms had ``impaired'' such firms' ability to undertake 
preparations to exchange IM, such as custodian onboarding and custodian 
documentation, by the upcoming September 1, 2020 deadline.\24\
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    \21\ Margin Requirements for Non-Centrally Cleared Swaps 
Margin--Impact of COVID-19 on Initial Margin Phase-In (March 25, 
2020), https://www.isda.org/2020/03/25/joint-trade-association-letter-on-impact-of-covid-19-on-initial-margin-phase-in/ (``Trade 
Association Letter'').
    \22\ Trade Association Letter at 2.
    \23\ Id.
    \24\ Trade Association Letter at 3.
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    Under these circumstances, the Trade Association Letter emphasizes 
the industry concern about diverting resources from ongoing business 
continuity efforts to the substantial preparations needed for the 
exchange of regulatory IM ahead of the September 1, 2020 deadline.\25\
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    \25\ See id.
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    In response to these concerns, BCBS/IOSCO decided to further extend 
the implementation schedule for the margin requirements for non-
centrally cleared derivatives by one year.\26\ BCBS/IOSCO, in a joint 
statement, stated that the extension would provide additional 
operational capacity for firms to respond to the immediate impact of 
COVID-19 and at the same time facilitate firms' diligent efforts to 
comply with the requirements by the revised deadlines.\27\
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    \26\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (April 2020), https://www.bis.org/bcbs/publ/d499.htm (``2020 BCBS/IOSCO Margin Framework'') and Press 
Release, April 3, 2020, https://www.bis.org/press/p200403a.htm 
(``April 2020 BCBS/IOSCO Press Release'').
    \27\ Basel Committee and IOSCO announce deferral of final 
implementation phases of the margin requirements for non-centrally 
cleared derivatives (April 3, 2020), https://www.bis.org/press/p200403a.htm.
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    Recently, a Global Markets Advisory Committee (``GMAC'') 
subcommittee encouraged the adoption of the BCBS/IOSCO recommendation 
to extend the implementation schedule given the circumstances brought 
about by the COVID-19 pandemic. The subcommittee noted that the April 
2020 BCBS/IOSCO action ``serves as confirmation by the collective 
international standard[hyphen]setting bodies that it is critical for 
the industry to be able to divert and dedicate scarce resources to 
respond to the COVID-19 crisis and related market volatility and 
liquidity issues without jeopardizing compliance with upcoming 
regulatory obligations under uncleared swap margin rules.'' \28\
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    \28\ See Recommendations to Improve Scoping and Implementation 
of Initial Margin Requirements for Non-Cleared Swaps, Report to the 
CFTC's Global Markets Advisory Committee by the Subcommittee on 
Margin Requirements for Non-Cleared Swaps, at 3 (April 2020), 
https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download. The GMAC adopted the subcommittee's report and recommended 
to the Commission that it consider adopting the report's 
recommendations. The GMAC subcommittee was not tasked to respond to 
the COVID-19 pandemic. Rather, its establishment pre-dates the 
pandemic's impact and its directive was to address the ongoing 
challenges involving the implementation of the CFTC margin 
requirements during the last stages of the compliance schedule, 
which may be taken up at a later date by the Commission. See CFTC 
Commissioner Stump Announces New GMAC Subcommittee on Margin 
Requirements for Non-Cleared Swaps (Oct. 28, 2019), https://www.cftc.gov/PressRoom/PressReleases/8064-19.
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II. Interim Final Rule

    The Commission is issuing the Interim Final Rule to amend the CFTC 
Margin Rule by deferring for one year to September 1, 2021, compliance 
with the IM requirements for entities subject to the September 1, 2020 
deadline. The Commission is issuing this deferral in recognition of the 
extraordinary operational challenges and risk-management demands faced 
by the entities as a result of the COVID-19 pandemic, consistent with 
the recent revision of BCBS/IOSCO's implementation schedule.\29\
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    \29\ See generally 2020 BCBS/IOSCO Margin Framework. The 
Framework extends the BCBS/IOSCO implementation schedule to 
September 1, 2022, by deferring the compliance dates of September 1, 
2020, and September 1, 2021, to September 1, 2021, and September 1, 
2022, respectively. Given the immediate need to address the impact 
of the COVID-19 pandemic on entities nearing the September 1, 2020 
deadline, the Commission is issuing the Interim Final Rule discussed 
herein. As discussed below, the Commission intends to issue a notice 
of proposed rulemaking with respect to the September 1, 2021 
compliance date in the near term.
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    The CFTC Margin Rule requires covered swap entities to post and 
collect IM with counterparties that are SDs, MSPs, or financial end 
users with material swaps exposure (``MSE'') \30\ (``covered 
counterparties'') in accordance with a phased compliance schedule set 
forth in Commission regulation Sec.  23.161.\31\ The compliance 
schedule applies progressively to CSEs and their covered counterparties 
in staggered phases, starting with entities with the largest average 
daily aggregate notional amounts (``AANA'') of uncleared swaps and 
certain other financial products, and then successively with lesser 
AANA.
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    \30\ Commission regulation Sec.  23.151 provides that MSE for an 
entity means that the entity and its margin affiliates have an 
average daily aggregate notional amount of uncleared swaps, 
uncleared security-based swaps, foreign exchange forwards, and 
foreign exchange swaps with all counterparties for June, July, and 
August of the previous calendar year that exceeds $8 billion, where 
such amount is calculated only for business days. A company is a 
``margin affiliate'' of another company if: (i) Either company 
consolidates the other on a financial statement prepared in 
accordance with U.S. Generally Accepted Accounting Principles, the 
International Financial Reporting Standards, or other similar 
standards; (ii) both companies are consolidated with a third company 
on a financial statement prepared in accordance with such principles 
or standards; or (iii) for a company that is not subject to such 
principles or standards, if consolidation as described in (i) or 
(ii) would have occurred if such principles or standards had 
applied. 17 CFR 23.151.
    \31\ 17 CFR 23.161.
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    The compliance schedule originally spanned from September 1, 2016 
to September 1, 2020. The April 2020 Final Rule extended the schedule 
by one year by dividing the last compliance ``phase''--which would have 
brought into scope CSEs and covered counterparties with an AANA between 
$8 billion and $750 billion--into two compliance phases. Under the 
April 2020 Final Rule, CSEs and covered counterparties with an AANA 
between $50 billion and $750 billion must comply with the IM 
requirements beginning on September 1, 2020.\32\ In addition, again 
pursuant to the April 2020 Final Rule, other remaining CSEs and covered 
counterparties, including financial end users with MSE, must comply 
beginning on September 1, 2021.\33\
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    \32\ See 17 CFR 23.161(a)(6).
    \33\ 17 CFR 23.161(a)(7).
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    This Interim Final Rule amends Commission regulation Sec.  23.161, 
as revised by the April 2020 Final Rule,\34\ by deferring for one year 
the April 2020

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Final Rule's compliance date of September 1, 2020. The Interim Final 
Rule reflects the recent revisions to the BCBS/IOSCO framework 
extending the margin implementation schedule.\35\ More specifically, 
the Interim Final Rule defers compliance for entities that would come 
into scope beginning on September 1, 2020, requiring CSEs and covered 
counterparties with an AANA between $50 billion up to $750 billion 
during the three-month period of March-May of 2021 to come into 
compliance beginning on September 1, 2021.
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    \34\ 17 CFR 23.161.
    \35\ 2020 BCBS/IOSCO Margin Framework.
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    By extending the September 1, 2020 deadline for compliance with the 
IM requirements under the CFTC Margin Rule, the Commission, consistent 
with BCBS/IOSCO's revision of the margin implementation schedule, seeks 
to alleviate the challenges, operational and otherwise, that COVID-19 
poses to entities nearing the September 1, 2020 deadline. In the 
Commission's view, compliance with the existing requirements could 
exacerbate COVID-19's adverse impact on operations by causing entities 
to divert scarce resources from more pressing operational needs, which 
could hinder business continuity efforts and adequate management of 
volatility, liquidity, and other risks brought about by the 
pandemic.\36\
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    \36\ To be sure, the exchange of IM mitigates various risks, 
such as counterparty credit risk. However, given the relatively 
small share of the swaps market affected by this IFR, the Commission 
believes it is appropriate to defer covered entities' IM obligations 
to allow such entities to focus on immediate operational, 
volatility, and liquidity risks arising from the COVID-19 pandemic.
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    The COVID-19 pandemic has severely and adversely impacted 
preparations for the exchange of regulatory IM in advance of the 
current compliance deadlines, including procuring rule-compliant 
documentation, setting up custodial arrangements, and establishing 
internal processes for the calculation, collection, and posting of IM, 
among other things. In the midst of high market volatility, firms have 
experienced a reduction in operational capacity, carrying out remote 
operations, with employees performing critical functions from home or 
other temporary locations, which has limited access to legal and 
operational documentation and limited the ability to work with 
counterparties.
    Service providers, such as custodians, are facing similar 
operational challenges. As the next phase of compliance, beginning on 
September 1, 2020, approaches, custodian onboarding is being impeded, 
resulting in further delays in the establishment of custodian accounts. 
Other vendors providing IM-related services are being similarly 
affected.
    The Commission notes that the compliance delay provided by the 
Interim Final Rule applies to entities whose uncleared swap portfolios 
tend to be smaller than the portfolios of entities that came into scope 
in earlier phases of the compliance schedule. The CFTC's Office of the 
Chief Economist (``OCE'') has estimated that entities with such smaller 
uncleared swap portfolios represent only 8% of total AANA across all 
phases.\37\ This modest share of notional amount, spread across many 
small entities, likely means that the uncollateralized swaps entered 
into by these entities--taking into account that no exchange of IM is 
required by the CFTC Margin Rule until the IM threshold amount has been 
exceeded \38\--pose less risk to the financial markets than the risk 
posed by uncleared swaps entered into by entities that have already 
come into the scope of IM compliance.
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    \37\ Richard Haynes, Madison Lau, & Bruce Tuckman, Initial 
Margin Phase 5, at 4 (Oct. 24, 2018), https://www.cftc.gov/sites/default/files/About/Economic%20Analysis/Initial%20Margin%20Phase%205%20v5_ada.pdf (``OCE Initial Margin 
Phase 5 Study'').
    \38\ Under Commission regulation Sec.  23.154(a)(3), there is no 
requirement to post or collect IM until the initial margin threshold 
amount has been exceeded. See 17 CFR 23.154(a)(3). The term 
``initial margin threshold amount'' is defined in Commission 
regulation 23.151 as an aggregate credit exposure of $50 million 
from all uncleared swaps between a CSE and its margin affiliates on 
one hand, and a covered counterparty and its margin affiliates on 
the other. 17 CFR 23.151. For the definition of ``margin 
affiliate,'' see supra note 30.
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    This Interim Final Rule does not address the last phase of 
compliance beginning on September 1, 2021. As discussed below, the 
Commission is making a finding that notice and public procedure on this 
rule is impracticable because the need for relief is immediate. Because 
there is more time to address the last phase of compliance currently 
set to commence on September 1, 2021, the Commission will address that 
compliance date through a notice of proposed rulemaking and public 
comment process. The Commission intends to take action with respect to 
the final compliance phase in the near term. The Commission notes that 
without an extension of the final compliance phase, approximately 700 
entities would come into the scope of the IM requirements 
simultaneously on September 1, 2021.\39\
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    \39\ See OCE Initial Margin Phase 5 Study at 4.
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III. Request for Comment

    The Commission is issuing this Interim Final Rule to revise 
Commission regulation Sec.  23.161 to address concerns relating to the 
COVID-19 pandemic, as discussed above. Issuing an Interim Final Rule 
means that the amendment to delay the April 2020 Final Rule's 
compliance deadline of September 1, 2020, will take effect sooner than 
if the Commission followed the usual prior notice and comment 
rulemaking process. A discussion of the Commission's finding that there 
is good cause to omit the usual prior notice and comment procedures 
appears below in the section entitled ``Administrative Procedure Act.''
    The Commission welcomes public comments from interested persons 
regarding any aspect of the changes made by this Interim Final Rule. 
The Commission also seeks comment on the following specific questions. 
The Commission will take into consideration comments received and may 
modify the Interim Final Rule if warranted.
    (1) This Interim Final Rule delays by one year compliance with the 
IM requirements under the CFTC Margin Rule for entities subject to the 
September 1, 2020 deadline to alleviate the challenges, operational and 
otherwise, that COVID-19 poses to entities engaging in uncleared swaps 
nearing the existing compliance deadline as discussed above. Uncleared 
swaps that are entered into during the one year extension period will 
be legacy swaps not subject to the IM requirements (although they would 
be subject to VM requirements) and, as such, lesser amounts of margin 
would be collected for these swaps, potentially increasing counterparty 
risk and the risk of contagion.\40\ In light of these risks, should the 
Commission consider any alternative to extending the compliance 
schedule? Please describe the alternatives if any can be identified.
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    \40\ Pursuant to Commission regulation Sec.  23.161, the 
compliance dates for the IM and VM requirements under the CFTC 
Margin Rule are staggered across a phased schedule that extends from 
September 1, 2016, to September 1, 2021. The compliance period for 
the VM requirements ended on March 1, 2017 (though the CFTC and 
other regulators provided guidance permitting a six month grace 
period to implement the requirements following the implementation 
date), while the IM requirements continue to phase in through 
September 1, 2021. An uncleared swap entered into prior to an 
entity's IM compliance date is a ``legacy swap'' that is not subject 
to IM requirements. See CFTC Margin Rule, 81 FR at 651 and 
Commission regulation Sec.  23.161. 17 CFR 23.161.
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    (2) As an alternative to the Interim Final Rule deferring 
compliance for the entities coming into scope in September 2020, should 
the Commission consider

[[Page 41350]]

a longer deferral period for such firms? Please describe the potential 
benefits and any costs were the CFTC to provide a longer deferral 
period.
    Please refer to the ADDRESSES section above with respect to the 
submission of comments.

IV. Related Matters

A. Administrative Procedure Act

    The APA generally requires Federal agencies to publish a notice of 
proposed rulemaking and provide an opportunity for public comment 
before issuing a new rule.\41\ However, an agency may issue a new rule 
without publication in the Federal Register of a notice of proposed 
rulemaking with an opportunity for comment if the agency for good cause 
finds (and incorporates the finding and a brief statement of the 
reasons therefor in the rules issued) that notice and public procedure 
thereon are impracticable, unnecessary, or contrary to the public 
interest.\42\ The Commission for good cause finds that such notice and 
public procedure on the instant amendments to Commission regulation 
Sec.  23.161 are impracticable and contrary to the public interest due 
to the COVID-19 pandemic. The World Health Organization declared the 
COVID-19 outbreak a global pandemic on March 11, 2020.\43\ On March 13, 
2020, President Donald J. Trump declared a national emergency due to 
the COVID-19 pandemic.\44\
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    \41\ See 5 U.S.C. 553(b).
    \42\ 5 U.S.C. 553(b)(B).
    \43\ See supra note 19.
    \44\ See supra note 20.
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    The Commission for good cause finds that notice and public 
procedure on this rule are impracticable because the need for relief is 
immediate. With respect to the change to the compliance schedule for 
the CFTC Margin Rule, time is of the essence. Participants in the 
uncleared swaps markets have experienced diminished operational 
capacity due to stay-at-home orders, closures, and other community 
nonpharmaceutical interventions.\45\ Efforts to comply with the IM 
requirements may divert manpower and funding resources from already 
strained operations, hindering business continuity efforts and focus on 
management of risks posed by the pandemic.
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    \45\ See Nonpharmaceutical Interventions (NPIs) (describing 
strategies to slow the spread of COVID-19), https://www.cdc.gov/nonpharmaceutical-interventions/index.html (last visited April 28, 
2020).
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    The practical effect of these contagion mitigation strategies is to 
require many businesses to carry out remote operations with employees 
performing critical functions from their homes or other temporary 
locations. Preparations in anticipation of IM compliance by, among 
other things, procuring rule compliant documentation, setting up 
custodial arrangements, and establishing internal processes for the 
calculation, collection, and posting, are more difficult to accomplish 
when personnel are working remotely.
    Undertaking the regular rulemaking proceedings would therefore be 
impracticable to provide the immediate relief market participants need 
to focus on immediate COVID-19 response. Delays in the response could 
exacerbate the adverse impact of the pandemic on these entities' 
operations and detract from more urgent operational matters.
    The next compliance phase commences on September 1, 2020. Entities 
coming into scope need to prepare for months in advance to comply with 
the IM requirements. These preparations may be affected by the 
entities' reduced operational capacity. A compliance delay until 
September 1, 2021, will alleviate the operational burden. This 
militates against the delay needed to conduct the regular notice and 
comment rulemaking.
    The Commission for good cause also finds that notice and public 
procedure thereon are contrary to the public interest in the context of 
the COVID-19 national emergency. As explained above, participants in 
the uncleared swaps markets have an immediate need for operational 
flexibility due to the COVID-19 pandemic. The Commission has determined 
that issuing this Interim Final Rule, to be effective immediately upon 
publication in the Federal Register, is crucial to alleviate the burden 
associated with the exchange of regulatory IM for entities whose 
operations may be already strained given the effect of COVID-19 on 
their operations. Providing a notice and comment period pursuant to 
normal rulemaking process would delay relief and thus be contrary to 
the public interest.
    For the above reasons, the Commission's implementation of this rule 
as an Interim Final Rule, with provision for post-promulgation public 
comment, is in accordance with section 553(b) of the APA.\46\
---------------------------------------------------------------------------

    \46\ 5 U.S.C. 553(b)(B); 553(d)(3).
---------------------------------------------------------------------------

    Similarly, for the same reasons set forth above under the 
discussion of section 553(b)(B) of the APA, the Commission, for good 
cause, finds that no transitional period, after publication in the 
Federal Register, is necessary before the amendment to Sec.  23.161 
made by this Interim Final Rule becomes effective. Accordingly, this 
Interim Final Rule shall be effective immediately upon publication in 
the Federal Register.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act \47\ requires Federal agencies to 
consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
to provide a regulatory flexibility analysis regarding the economic 
impact on those entities. Because, as discussed above, the Commission 
is not required to publish a notice of proposed rulemaking for this 
rule, a regulatory flexibility analysis is not required.\48\
---------------------------------------------------------------------------

    \47\ 5 U.S.C. 601 et seq.
    \48\ See 5 U.S.C. 603(a).
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \49\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. The Commission may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid Office of Management 
and Budget (``OMB'') control number.
---------------------------------------------------------------------------

    \49\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Commission believes that this Interim Final Rule does not 
impose any new recordkeeping or information collection requirements, or 
other collections of information that require approval of OMB under the 
PRA.

D. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA. Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the section 15(a) considerations.
    This Interim Final Rule revises the compliance schedule for the 
CFTC Margin Rule by deferring compliance with the IM requirements from 
September 1, 2020, to September 1,

[[Page 41351]]

2021, for CSEs and covered counterparties with an AANA ranging from $50 
billion up to $750 billion.
    The baseline against which the benefits and costs associated with 
the Interim Final Rule are compared is the uncleared swaps markets as 
they exist today and the current compliance schedule. As discussed in 
both the CFTC Margin Rule and the April 2020 Final Rule, the existing 
compliance schedule represented an attempt to balance the costs and 
benefits of requiring margin for uncleared swaps for different 
entities. For example, the CFTC Margin Rule noted that ``[t]he 
compliance dates have been structured to ensure that the largest and 
most sophisticated CSEs and counterparties that present the greatest 
potential risk to the financial system comply with the requirements 
first. These swap market participants should be able to make the 
required operational and legal changes more rapidly and easily than 
smaller entities [that] engag[e] in swaps less frequently and pose less 
risk to the financial system.'' \50\ As discussed below, the COVID-19 
pandemic has raised the cost of compliance for the next cohort of 
entities, and hence altered the calculus in setting the CFTC Margin 
Rule's compliance schedule, which is based on balancing costs and 
benefits.
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    \50\ Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR at 676.
---------------------------------------------------------------------------

1. Benefits
    As described above, the Interim Final Rule defers compliance with 
the IM requirements for CSEs and their covered counterparties subject 
to IM compliance beginning on September 1, 2020. The Interim Final Rule 
creates a benefit as it is intended to mitigate the disruptive effect 
of COVID-19 and the attendant market volatility by permitting firms to 
allocate their resources to ensure proper business continuity and 
management of risks brought about by the pandemic.
    Starting in March, 2020, entities that trade uncleared swaps have 
experienced diminished operational capacity, due to stay-at-home 
orders, closures, and other community nonpharmaceutical 
interventions.\51\ These entities are currently conducting business 
operations remotely and employees are performing critical business 
functions from their homes or other temporary locations.
---------------------------------------------------------------------------

    \51\ See supra note 45.
---------------------------------------------------------------------------

    With reduced operational capacity, preparations to come into 
compliance with the IM requirements in the next phase of the compliance 
schedule represent a challenge to these entities. Compliance will 
require procuring documentation addressing the exchange of regulatory 
IM, setting up custodial arrangements, and establishing processes for 
the calculation, posting, and collection of IM, among other things. 
Absent the Interim Final Rule, which delays compliance with the IM 
requirements, some market participants may be unable to secure 
necessary documentation and establish processes for the exchange of IM 
by the September 1, 2020 deadline. As a result, these entities may be 
required to cease uncleared swap trading in September, with a resulting 
reduction in their ability to hedge their risk. The inability of some 
entities to trade uncleared swaps may reduce liquidity in this market, 
and thereby potentially harm other traders as well.
    Another potential benefit of the Interim Final Rule is that it 
would mitigate the effect on entities that would have otherwise been 
required to collect and post IM beginning on September 1, 2020, under 
the April 2020 Final Rule. Many of these entities would likely have 
reduced cash reserves due to the effects of COVID-19 on their business 
operations. For these firms, the compliance delay in the Interim Final 
Rule may mitigate the temporary cash constraint by eliminating or 
suspending the cost of IM collateralization, allowing for continued 
hedging and the management of risks posed by the pandemic. By extending 
the September 1, 2020 compliance deadline, the Interim Final Rule 
defers the timeline for compliance, thereby promoting diligent risk 
management and allowing entities who might be precluded from trading 
uncleared swaps to continue to hedge using uncleared swaps.
2. Costs
    The Interim Final Rule delays compliance with the IM requirements 
by one year for CSEs and covered counterparties that are subject to the 
September 1, 2020 compliance deadline. Uncleared swaps entered into 
between September 1, 2020, and the new deadline of September 1, 2021, 
may be treated as legacy swaps exempt from the IM requirements and, as 
such, lesser amounts of collateral would be collected to offset the 
risk of uncleared swaps, potentially increasing the risk of contagion 
and systemic risk to the United States.\52\
---------------------------------------------------------------------------

    \52\ See supra note 40 for the definition of ``legacy swaps.''
---------------------------------------------------------------------------

    In addition, many entities in advance of the nearing September 1, 
2020 deadline may have already engaged in preparations for the exchange 
of regulatory IM, procuring compliant documentation and setting up 
processes for the exchange of IM. Given the extension of the compliance 
deadline, these entities would likely need to re-negotiate the existing 
documentation and refresh processes put into place as the new 
compliance deadlines approach and would thus incur additional costs to 
come into compliance with the IM requirements.
    The Interim Final Rule provides relief to entities whose uncleared 
swap portfolios tend to be smaller than the portfolios of entities that 
came into scope in earlier phases. The decision to defer the compliance 
date of September 1, 2020, to September 1, 2021, affects slightly fewer 
than 200 entities, representing approximately 8% of AANA across all 
phases, as estimated by the OCE. This modest share of notional amount 
spread across many small entities likely means that the 
uncollateralized swaps entered into by these entities--taking into 
account that no exchange of IM is required by the CFTC Margin Rule 
until the initial margin threshold amount has been exceeded \53\--pose 
less risk to the financial markets than the risk posed by uncleared 
swaps entered into by entities that have already come into the scope of 
IM compliance.
3. Section 15(a) Considerations
    In light of the foregoing, the CFTC has evaluated the costs and 
benefits of this Interim Final Rule pursuant to the five considerations 
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
    As discussed above, as a result of the COVID-19 pandemic, entities 
trading uncleared swaps are facing a reduction in their operational 
capacities due to stay-at-home orders, closures, and other community 
nonpharmaceutical interventions \54\ to contain the spread of the virus 
and slow its progress. To alleviate the effect on entities nearing the 
September 1, 2020 deadline for compliance with the IM requirements, the 
Interim Final Rule delays compliance by one year for those entities, 
allowing them to continue to trade uncleared swaps and hedge their risk 
without incurring the full costs and operational demands of preparing 
for compliance while simultaneously responding to the COVID-19 
pandemic.
---------------------------------------------------------------------------

    \54\ See supra note 45.
---------------------------------------------------------------------------

    The Interim Final Rule also allows entities that would otherwise be 
focused on implementing regulatory margin

[[Page 41352]]

requirements, in order to continue to trade uncleared swaps, to instead 
focus on and respond to the challenges posed by COVID-19.
    Because the Interim Final Rule delays the implementation of 
mandatory IM for uncleared swaps, there may not be as much IM posted to 
protect the financial system as would be the case if the Interim Final 
Rule were not promulgated. This could potentially make market 
participants' positions more risky.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    Entities nearing the September 1, 2020 deadline for compliance with 
the IM requirements may face difficulties in preparing to exchange 
regulatory IM given the reduced operational capacity as a result of 
COVID-19. By extending the compliance deadline for these entities by 
one year, the Interim Final Rule may enhance efficiencies in several 
ways, as this extension allows these entities to shift their focus to 
emerging risks and to act diligently to comply with the IM requirements 
by the revised deadlines. As such, the Interim Final Rule promotes the 
financial integrity of the markets.
    The Commission acknowledges that delaying compliance with the IM 
requirements will result in the collection of less IM overall, 
potentially making the uncleared swaps markets more susceptible to 
financial contagion where the default of one counterparty could lead to 
subsequent defaults of other counterparties. This could potentially 
harm market integrity. However, because this extension covers a 
relatively smaller share of the swaps market, the Commission believes 
that such a contagion is less likely to occur during the limited 
extension period.
(c) Price Discovery
    Delaying the margin requirement for one year for some entities may 
have an effect on trading behavior, and consequently, may potentially 
have an effect on price discovery. Postponing the requirement may allow 
more firms to trade uncleared swaps (i.e., those who would have an AANA 
above $50 billion based on March-May 2020, yet could not comply with 
the IM requirements by September 2020). This, in turn, could make the 
uncleared swaps market more liquid, so that trading would be more 
likely to result in prices that reflect fundamentals.
(d) Sound Risk Management
    By deferring the September 1, 2020 deadline by one year, the 
Interim Final Rule will have the effect of relieving some of the burden 
on managerial resources, at a time when such resources are strained 
from the COVID-19 outbreak. As such, the Interim Final Rule allows 
covered entities to more readily undertake proper business continuity 
measures and address the market, liquidity, operational, and other 
risks brought about by the pandemic. In this sense, the Interim Final 
Rule promotes sound risk management.
    Uncleared swaps entered into during the one year compliance delay 
may be treated as legacy swaps exempt from the IM requirement. As such, 
less collateral would be collected to offset the risk of uncleared 
swaps, increasing the risk of contagion and systemic risk to the United 
States.
    As noted above, the Interim Final Rule addresses entities whose 
uncleared swap portfolios tend to be smaller than entities that came 
into scope in earlier phases, comprising approximately 200 entities 
that represent 8% of total AANA, as estimated by the OCE.\55\ This 
modest share of notional amount spread across those entities likely 
means that the uncollateralized swaps entered into by these entities 
during the one year delay pose relatively less risk to the financial 
markets than the swaps entered into by the entities with larger swap 
portfolios that are already subject to the IM requirements.
---------------------------------------------------------------------------

    \55\ See OCE Initial Margin Phase 5 Study at 4.
---------------------------------------------------------------------------

(e) Other Public Interest Considerations
    The Interim Final Rule amends the CFTC Margin Rule consistent with 
the revised BCBS/IOSCO margin framework, promoting harmonization with 
international and domestic margin regulatory requirements and reducing 
the potential for regulatory arbitrage.
    Request for Comments on Cost-Benefit Considerations. The Commission 
invites public comment on its cost-benefit considerations, including 
the section 15(a) factors described above. Commenters are also invited 
to submit any data or other information that they may have quantifying 
or qualifying the costs and benefits of the proposed amendment with 
their comment letters.

D. Antitrust Laws

    Section 15(b) of the CEA requires the Commission to ``take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of this Act, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of this Act.'' \56\
---------------------------------------------------------------------------

    \56\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the Interim Final Rule implicates any other 
specific public interest to be protected by the antitrust laws.
    The Commission has considered the Interim Final Rule to determine 
whether it is anticompetitive and has preliminarily identified no 
anticompetitive effects. The Commission requests comment on whether the 
Interim Final Rule is anticompetitive and, if it is, what the 
anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
Interim Final Rule is not anticompetitive and has no anticompetitive 
effects, the Commission has not identified any less anticompetitive 
means of achieving the purposes of the Act. The Commission requests 
comment on whether there are less anticompetitive means of achieving 
the relevant purposes of the Act that would otherwise be served by 
adopting the Interim Final Rule.

List of Subjects in 17 CFR Part 23

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

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

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

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

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


0
2. Amend Sec.  23.161 by revising paragraph (a)(6) to read as follows:


Sec.  23.161  Compliance dates.

    (a) * * *
    (6) September 1, 2021 for the requirements in Sec.  23.152 for 
initial margin for any uncleared swaps where both--
    (i) The covered swap entity combined with all its margin 
affiliates; and
    (ii) Its counterparty combined with all its margin affiliates have 
an average

[[Page 41353]]

daily aggregate notional amount of uncleared swaps, uncleared security-
based swaps, foreign exchange forwards, and foreign exchange swaps in 
March, April, and May 2021 that exceeds $50 billion, where such amounts 
are calculated only for business days; and where
    (iii) In calculating the amounts in paragraphs (a)(6)(i) and (ii) 
of this section, an entity shall count the average daily notional 
amount of an uncleared swap, an uncleared security-based swap, a 
foreign exchange forward, or a foreign exchange swap between the entity 
and a margin affiliate only one time and shall not count a swap that is 
exempt pursuant to Sec.  23.150(b) or a security-based swap that is 
exempt pursuant to section 15F(e) of the Securities Exchange Act of 
1934 (15 U.S.C. 78o.10(e)).
* * * * *

    Issued in Washington, DC, on June 1, 2020, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

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

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

Appendix 1--Commission Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz, 
Behnam, Stump, and Berkovitz voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Supporting Statement of Chairman Heath P. Tarbert

    If there were no uncertainty, there would be no derivatives 
markets. Indeed, the CFTC is in the business of regulating markets 
that enable market participants to hedge their risks. But there are 
some exogenous events that come but once a century--a so-called 
Black Swan--which even prudent risk management can neither foresee 
nor adequately prepare for. The United States and much of the world 
is now facing such an event in the form of the COVID-19 
(coronavirus) pandemic.
    Two months ago, the Commission voted to extend the compliance 
schedule for initial margin requirements for uncleared swaps for 
those entities with the smallest swaps portfolios.\1\ This extension 
split Phase 5 of the schedule in two, creating a new Phase 6 
composed of entities with swaps portfolios between $8 billion and 
$50 billion in average aggregate notional amount (``AANA'').
---------------------------------------------------------------------------

    \1\ Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 85 FR 19,878 (published in the Federal 
Register Apr. 9, 2020) (``March 2020 IM Rule'').
---------------------------------------------------------------------------

    The Commission deferred the compliance deadline for entities in 
this new Phase 6 for one year. This was due to the complex 
operational burdens these entities will face and the fact these 
entities account for less than 3 percent of total uncleared swaps 
AANA.\2\ Phase 5--which comprises entities with larger swaps 
portfolios \3\--remained subject to the prior compliance deadline.
---------------------------------------------------------------------------

    \2\ Statement of CFTC Chairman Heath P. Tarbert in Support of 
Extending Relief for Initial Margin Requirements for Uncleared Swaps 
(Mar. 18, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement031820 (citing Richard Haynes, Madison Lau, & Bruce 
Tuckman, Office of the Chief Economist, CFTC, Initial Margin Phase 5 
(Oct. 2018)).
    \3\ As a result of the March 2020 IM Rule, Phase 5 is now made 
up of entities with $50 billion to $750 billion in AANA.
---------------------------------------------------------------------------

    These timelines did not factor in the most severe economic 
downturn the world has witnessed since the Great Depression. Today 
we are doing so. Accordingly, I support our interim final rule 
(``IFR'') deferring the compliance date for the Commission's initial 
margin requirements for uncleared swaps in response to the 
coronavirus pandemic. This rule would provide a one-year extension 
for Phase 5 entities, which would otherwise become subject to 
initial margin requirements in just three months, on September 1, 
2020. I believe issuing this IFR is appropriate from both a 
substance and a process perspective.

Need for the Extension

    First, allow me to explain the substance of why an extension is 
necessary. As everyone listening is painfully aware, we are in the 
midst of a global pandemic. Economies across the world have largely 
shut down in response to social distancing needs. Market volatility 
has reached historic levels. Financial firms, like so many other 
organizations, have been forced into a near-total remote-working 
posture. These extraordinary market conditions and operational 
shifts demand that financial firms--including those regulated by the 
CFTC--devote an inordinate amount of time and resources to day-to-
day operational, business continuity, and risk-management efforts.
    Preparation for compliance with initial margin requirements 
requires procuring compliant documentation; setting up custodial 
arrangements; and establishing internal processes for the 
calculation, collection, and posting of initial margin, among other 
things. These steps are both time intensive and resource intensive. 
For many firms, the intense effort necessary to meet the imminent 
compliance deadline would divert focus and resources from their 
respective coronavirus responses. Moreover, working from home has 
made it difficult to access required legal and operational 
documentation and communicate with counterparties.
    Recognizing these concerns, the Basel Committee on Banking 
Supervision and International Organization of Securities Commissions 
have jointly extended their initial margin compliance schedule. 
Several BCBS/IOSCO members have already taken steps to implement 
this relief.
    As I have said before, the CFTC's margin rules are a key 
systemic risk mitigant. However, the market participants receiving 
an extension under this IFR have some of the smallest uncleared 
swaps portfolios. Indeed, Phase 5 entities collectively represent 
only 8 percent of total AANA across all margin phases.
    We must balance the critical need to marshal scarce operational 
resources for pandemic response against the relatively small risks 
posed by a one-year compliance delay. The circumstances here weigh 
clearly in favor of being consistent with our international 
counterparts in granting the extension.

Need for an Interim Final Rule

    Now, I will address the process for granting this extension. I 
have made very clear in the past that I believe the Commission 
should regulate via notice-and-comment rulemakings where possible. 
This gives the public a voice in the regulatory process and provides 
the agency the benefit of commenters' expertise and experience. 
Indeed, since I joined the CFTC last July, we have issued 11 final 
rules and 15 proposed rules, not counting the two we are voting on 
today.
    However, as I have said before, there are certain circumstances 
in which prior notice and comment is not an ideal regulatory 
vehicle. Congress recognized this in the Administrative Procedure 
Act. For example, the statute makes clear that agencies need not 
engage in the prior notice-and-comment process where doing so would 
be ``impracticable, unnecessary, or contrary to the public 
interest.'' In those circumstances, agencies may issue an interim 
final rule--that is, a rule that is effective after issuance without 
further public comment and agency response. The public may comment 
on the IFR after it becomes effective, and the agency may issue a 
revised final rule if those comments warrant changes to the IFR.
    Here, providing a public comment period before issuing the 
extension would be both impracticable and contrary to the public 
interest. Challenges related to the coronavirus pandemic have 
already become dire. And because the current deadline for Phase 5 
firms is only three months away, initial margin preparation demands 
are extremely pressing right now. If we opened even the shortest 
permissible comment period and incorporated those comments into a 
final rule, any relief issued likely would already be moot. Although 
we are soliciting comments on the IFR, we believe that Phase 5 
entities need relief that is effective now in order to maintain 
focus on the real business continuity and risk-management issues 
they are facing today.
    By contrast, because the Phase 6 compliance date is not until 
September 2021, the CFTC will address an extension for Phase 6 
through the traditional notice-and-comment rulemaking process. 
However, I recognize the importance of clarity and certainty for 
Phase 6 market participants. So I expect we will issue a proposed 
rule in that

[[Page 41354]]

regard in the very near term and proceed with that rulemaking as 
expeditiously as possible.
    As previously demonstrated by our staff's coronavirus-related 
no-action relief,\4\ the CFTC stands ready to do whatever is 
necessary to help regulated entities weather the current crisis. I 
hope today's compliance schedule extension will help give firms the 
capacity they need to do so.
---------------------------------------------------------------------------

    \4\ These no-action letters are available at https://www.cftc.gov/coronavirus.
---------------------------------------------------------------------------

Appendix 3--Supporting Statement of Commissioner Brian Quintenz

    I am pleased to support the interim final rule to defer the 
phase 5 compliance date of September 1, 2020 to September 1, 2021 in 
light of the unprecedented economic and social impacts of COVID-19. 
Under these difficult circumstances, I think it is appropriate to 
provide phase 5 firms with additional time to comply, ensuring that 
their already strained resources are not diverted from ongoing 
business continuity efforts. I would also support a one year 
deferral for the phase 6 compliance date, in line with the BCBS-
IOSCO recent amendments to the recommended margin framework to push 
out, respectively, the phase 5 and phase 6 compliance dates by one 
year.\1\ As I have noted previously, given the large number of firms 
brought into scope during phases 5 and 6, the estimated 7,000 
initial margin relationships that need to be negotiated, and the 
small overall percentage of swap activity these firms represent, a 
one year deferral for these final phases is appropriate in order to 
facilitate an efficient, orderly transition for the market into the 
uncleared margin regime.
---------------------------------------------------------------------------

    \1\ See Basel Committee on Banking Supervision and Board of the 
International Organization of Securities Commissions, Margin 
Requirements for Non[hyphen]Centrally Cleared Derivatives (Apr. 
2020), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD651.pdf.
---------------------------------------------------------------------------

    As we approach these final compliance deadlines, I also think it 
is appropriate to reflect on how the uncleared margin regime can be 
improved to address some of the compliance challenges experienced in 
earlier stages. During last week's meeting of the Global Markets 
Advisory Committee (GMAC), I found the presentation of the 
Subcommittee on Margin Requirements for Non-Cleared Swaps regarding 
its recommendations to improve our margin framework to be incredibly 
informative.\2\ I look forward to working with staff to review all 
of the Subcommittee's recommendations and I appreciate the hard 
work, thoughtfulness, and dedication that went into producing the 
Subcommittee's report.
---------------------------------------------------------------------------

    \2\ See Recommendations to Improve Scoping and Implementation of 
Initial Margin Requirements for Non-Cleared Swaps, Report to the 
CFTC's Global Markets Advisory Committee by the Subcommittee on 
Margin Requirements for Non-Cleared Swaps (May 2020), https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download.
---------------------------------------------------------------------------

Appendix 4--Statement of Commissioner Rostin Behnam

    A little over two months ago, the Commission cancelled a 
scheduled open public meeting due to the COVID-19 pandemic.\1\ One 
of the three matters on the agenda for deliberation that day was the 
most recent amendment to the CFTC Margin Rule, which sought to align 
the compliance schedule for initial margin or ``IM'' requirements 
with recent changes to the BCBS/IOSCO framework extending 
implementation dates through September 1, 2021. The Commission 
ultimately voted to approve a final rule, the April 2020 Final Rule, 
extending the schedule one year by dividing the last compliance 
``phase''--which had been phase 5--into two phases, now phases 5 and 
6.\2\ The primary stated purpose for the extension was to mitigate 
the potential for market disruption that could result from the large 
number of entities--approximately 700--coming into compliance with 
IM requirements at the same time.\3\ The Commission's action 
reflected further efforts to coordinate and harmonize with 
international counterparts and U.S. Prudential Regulators, who 
establish the margin requirement for the uncleared swaps of swap 
dealers and major swaps participants for whom they are the primary 
regulator.\4\
---------------------------------------------------------------------------

    \1\ Press Release Number 8131-20, CFTC, CFTC Cancels March Open 
Meeting (Mar. 16, 2020), https://www.cftc.gov/PressRoom/PressReleases/8131-20.
    \2\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 85 FR 19878 (Apr. 9, 2020).
    \3\ Id. at 19879.
    \4\ Id.
---------------------------------------------------------------------------

    Today's interim final rule will amend the CFTC Margin Rule a 
second time. The interim final rule will align part of the remaining 
compliance schedule--phase 5--with recent revisions to the BCBS/
IOSCO framework further extending the implementation schedule for 
the margin requirements for non-centrally cleared derivatives by one 
year in response to concerns expressed by market participants in the 
early stages of the COVID-19 pandemic. The interim final rule does 
not address the last compliance phase, phase 6, beginning on 
September 1, 2021. While a similar extension would preserve both the 
intent of the recent amendments to the CFTC Margin Rule and 
consistency with the BCBS/IOSCO framework, the standards for 
foregoing notice and comment rulemaking procedures under the 
Administrative Procedure Act \5\ are rightfully high and 
demonstrating separate exigency for the 2021 compliance deadline 
without notice and comment would be inappropriate given that there 
is adequate time for the process. Accordingly, the Commission is 
focusing its resources on entities that will need relief within the 
next several months.
---------------------------------------------------------------------------

    \5\ See 5 U.S.C. 553(b).
---------------------------------------------------------------------------

    I approved the April 2020 Final Rule cautiously; noting that 
this seminal part of the policy response following the 2008 
financial crisis was perhaps becoming even more critical as we 
collectively faced the uncertainty of COVID-19.\6\ As I highlighted 
in my statement, in times of market stress and volatility, margin 
not only provides confidence, but it embodies vigilance when 
responding to risks and real-world concerns. While I believed--and 
continue to believe--that it is important to address transition 
risks associated with IM implementation, it is nevertheless my 
expectation that covered entities will work diligently in the time 
they are given to come into compliance.
---------------------------------------------------------------------------

    \6\ 85 FR at 19883.
---------------------------------------------------------------------------

    I have and continue to be fully prepared to respond to the 
fallout of current market conditions as a result of the pandemic, 
and will not hesitate to act within my capacity to preserve market 
interests and protect customers and market participants, I have no 
appetite for an indefinite deferral of the final phases for IM 
implementation. We are collectively working through the COVID-19 
pandemic towards goals of continuity, resiliency, and normalcy. I do 
not believe that there is any circumstance where that equates to 
abandonment of core reforms at a time when the very relief being 
sought is a result of addressing market volatility and stress.
    I support today's interim final rule deferring for one year 
compliance for the phase 5 swap entities that would come into scope 
beginning on September 1st of this year. I base my decision on 
representations that the COVID-19 pandemic has severely and 
adversely impacted preparations for the exchange of regulatory IM. 
Such disruption will undeniably make compliance with the September 
1, 2020 deadline untenable if doing so diverts already strained 
resources from critical continuity functions. I have some concerns 
that by postponing the compliance deadline, we are inviting 
increased counterparty risk and the risk of contagion through the 
additional uncleared swaps that will be entered into during the one 
year extension period and will not be subject to IM requirements. 
Addressing claims for relief due to increased market volatility by 
delaying margin requirements for a subset of swaps seems 
counterintuitive, and I am pleased that the Commission is soliciting 
comments on the matter. I am hopeful that the Commission will take 
appropriate action if subsequent facts or comments so require.
    In closing, I'd like to recognize Commissioner Stump and her 
leadership as Sponsor of the Global Markets Advisory Committee, 
which recently adopted recommendations in connection with 
implementation of the IM requirements for uncleared swaps for the 
Commission to consider.\7\ Also, I wish to thank the staff in the 
Division of Swap Dealer and Intermediary Oversight for their 
diligent and thoughtful work on this interim final rule.
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    \7\ See Recommendations to Improve Scoping and Implementation of 
Initial Margin Requirements for Non-Cleared Swaps, Report to the 
CFTC's Global Markets Advisory Committee by the Subcommittee on 
Margin Requirements for Non-Cleared Swaps, April 2020, https://www.cftc.gov/media/3886/GMAC_05192020MarginSubcommitteeReport/download.
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Appendix 5--Concurring Statement of Commissioner Dan M. Berkovitz

    I concur with issuing the interim final rule to extend by one 
year the initial swap margin compliance deadline for ``Phase V'' 
financial entities that is currently set for September 1, 2020 
(``IFR'').

[[Page 41355]]

    As I have stated previously, the Commission should be reluctant 
to extend compliance deadlines when a long lead-in period has been 
provided. The 2020 compliance date for the swap margin rule was 
originally set in January 2016. However, the COVID-19 pandemic is 
significantly impacting business operations just as the negotiation 
and implementation of the initial margin agreements and processes 
for Phase V are in full swing leading up to the September 1, 2020 
deadline. These activities can be time consuming and require 
substantial human interaction given the need to negotiate terms and 
third party custodial agreements, and agree on margin calculation 
methods. Accordingly, while many firms were undertaking this 
process, it appears that a substantial amount of work remained for 
Phase V firms just as the COVID-19 pandemic erupted.
    With respect to the length of the extension, the progress of the 
pandemic and speed at which work operations will normalize is 
uncertain. As discussed in the IFR, on April 3, 2020, the Basel 
Committee on Banking Supervision and Board of the International 
Organization of Securities Commissions (``BCBS/IOSCO'') amended its 
existing margin policy framework to extend the relevant comparable 
compliance date to September 1, 2021.\1\ While the Commission is not 
obligated to follow this framework, doing so when reasonable and on 
the same timeline as other regulators will reduce the likelihood of 
regulatory arbitrage. Given that the existing September 1, 2020 
compliance date is fast approaching, and recognizing the benefits of 
international cooperation on this issue, I will support the one-year 
extension as provided in the IFR.
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    \1\ The BCBS/IOSCO was directed to establish a policy framework 
for implementation of margin requirements globally. See G20 
Information Centre, Cannes Summit Final Declaration, http://www.g20.utoronto.ca/2011/2011-cannes-declaration-111104-en.html.
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    At the same time, it is critical that we continue to emphasize 
the importance of requiring margin for uncleared swaps. During the 
2008 financial crisis, when margin for uncleared swaps was not 
required, American International Group (``AIG'') would have failed 
as a result of its pending default on swaps that, according to AIG 
personnel, only months earlier presented little or no risk exposure 
for AIG. The Federal Reserve System and the U.S. Department of the 
Treasury provided over $180 billion of support to prevent that 
outcome.\2\ A default by AIG would have substantially damaged its 
swap counterparties and left other market participants uncertain as 
to the knock-on effects of that default.
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    \2\ See Interpretive Guidance and Policy Statement Regarding 
Compliance with Certain Swap Regulations, 78 FR 45292, 45293-94 
(July 26, 2013).
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    Requiring margin for uncleared swaps is a critical part of our 
regulatory framework that was put in place to help prevent another 
financial crisis. Uncleared swaps activity remains vigorous. The 
requirement to post initial margin helps mitigate systemic risk and 
reduce counterparty contagion and related effects by ensuring that 
collateral is available to offset losses from the default of 
counterparties. In response to the 2008 financial crisis, the Dodd-
Frank Act required that the Commission establish minimum initial and 
variation margin regulations for certain swaps entered into by swap 
dealers.\3\ The need for margin was also recognized by the G20 
nations when the G20 directed the BCBS/IOSCO to establish the swap 
margin policy framework for global implementation of margin 
requirements.\4\
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    \3\ Commodity Exchange Act section 4s(e).
    \4\ G20 Information Centre, Cannes Summit Final Declaration, 
http://www.g20.utoronto.ca/2011/2011-cannes-declaration-111104-en.html.
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    The IFR notes that Phase V is estimated to cover about eight 
percent of the swap trading activity for firms that may be subject 
to the margin requirements, and therefore that the uncollateralized 
swaps entered into by the entities in this phase ``pose less risk to 
the financial markets than the risk posed by uncleared swaps entered 
into by entities that have already come into the scope of IM 
compliance.'' \5\ While literally correct, this statement only 
relates to relative risk with respect to other swap activities and 
says nothing about the absolute known or unknown risk posed by the 
swap activity covered by the Phase V extension. The Commission's 
statement regarding this relative risk should not be misinterpreted 
to provide justification for any further extensions or exceptions 
from the margin requirements for these entities.
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    \5\ IFR, Section II.

[FR Doc. 2020-12033 Filed 7-9-20; 8:45 am]
BILLING CODE 6351-01-P