[Federal Register Volume 85, Number 133 (Friday, July 10, 2020)]
[Proposed Rules]
[Pages 41463-41469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14254]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AF03


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is seeking comment on a proposed amendment to the margin 
requirements for uncleared swaps for swap dealers (``SD'') and major 
swap participants (``MSP'') for which there is no prudential regulator 
(the ``CFTC Margin Rule''). As adopted in January 2016, the CFTC Margin 
Rule, which mandates the collection and posting of variation margin and 
initial margin (``IM''), was to take effect under a phased compliance 
schedule extending from September 1, 2016, to September 1, 2020. On 
April 9, 2020, the Commission published in the Federal Register a final 
rule extending the September 1, 2020 compliance date by one year to 
September 1, 2021, for a portion of what was to be the final phase 
consisting of entities with smaller average daily aggregate notional 
amounts of swaps and certain other financial products (the ``Smaller 
Portfolio Group'') to reduce the potential market disruption that could 
result from a large number of entities coming into the scope of 
compliance on September 1, 2020 (``April 2020 Final Rule''). 
Subsequently, on May 28, 2020, to mitigate the operational challenges 
faced by certain entities subject to the CFTC Margin Rule as a result 
of the coronavirus disease 2019 (``COVID-19'') pandemic, the Commission 
adopted an interim final rule (the ``IFR'') extending the September 1, 
2020 compliance date for certain entities by one year (``IFR Extension 
Group'') to September 1, 2021. This rulemaking proposal (``Proposal'') 
would further delay the compliance date for the Smaller Portfolio Group 
from September 1, 2021, to September 1, 2022, to avoid market 
disruption due to a large number of entities being required to comply 
by September 1, 2021, under the revised compliance schedule.

DATES: Comments must be received on or before September 8, 2020.

ADDRESSES: You may submit comments, identified by RIN 3038-AF03, 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 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. 
Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR chapter I.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the FOIA.

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

SUPPLEMENTARY INFORMATION:

[[Page 41464]]

I. Background

    Section 4s(e) of the Commodity Exchange Act (``CEA'') \2\ requires 
the Commission to adopt rules establishing minimum initial and 
variation margin requirements for all swaps \3\ that are (i) entered 
into by an SD or MSP for which there is no prudential regulator \4\ 
(collectively, ``covered swap entities'' or ``CSEs'') and (ii) not 
cleared by a registered derivatives clearing organization (``uncleared 
swaps'').\5\ To offset the greater risk to the SD \6\ or MSP \7\ and 
the financial system arising from the use of uncleared swaps, these 
requirements must (i) help ensure the safety and soundness of the SD or 
MSP and (ii) be appropriate for the risk associated with the uncleared 
swaps held by the SD or MSP.\8\
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    \2\ 7 U.S.C. 6s(e) (capital and margin requirements).
    \3\ 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.
    \4\ 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.
    \5\ 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.
    \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 4s(e)(3)(A), 7 U.S.C. 6s(e)(3)(A).
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    The Basel Committee on Banking Supervision and the Board of the 
International Organization of Securities Commissions (``BCBS/IOSCO'') 
established an international framework for margin requirements for 
uncleared derivatives in September 2013 (the ``BCBS/IOSCO 
Framework'').\9\ After the establishment of the BCBS/IOSCO Framework, 
on January 6, 2016, the CFTC, consistent with section 4s(e), 
promulgated rules requiring CSEs to collect and post initial and 
variation margin for uncleared swaps,\10\ adopting the implementation 
schedule set forth in the BCBS/IOSCO Framework, including the revised 
implementation schedule adopted on March 18, 2015.\11\
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    \9\ See generally BCBS and IOSCO, Margin requirements for non-
centrally cleared derivatives (Sept. 2013), https://www.bis.org/publ/bcbs261.pdf.
    \10\ 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 
through 23.159 and 23.161. In May 2016, the Commission amended the 
CFTC Margin Rule to add Commission regulation 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).
    \11\ 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.\12\ Consistent with 
this revision to the international framework, the Commission 
promulgated the April 2020 Final Rule, which amended the compliance 
schedule for the IM requirements under the CFTC Margin Rule by 
splitting the last phase of compliance into two compliance phases 
beginning on September 1, 2020, and September 1, 2021, 
respectively.\13\
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    \12\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (July 2019), https://www.bis.org/bcbs/publ/d475.pdf (``2019 BCBS/IOSCO Margin Framework'').
    \13\ 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.\14\ On March 13, 2020, President 
Donald J. Trump declared a national emergency due to the COVID-19 
pandemic.\15\ The disease has impacted individuals across the world and 
severely disrupted domestic and international business, and adversely 
impacted the global economy.
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    \14\ 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.
    \15\ 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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    In response to significant concerns regarding the COVID-19 
outbreak, BCBS/IOSCO decided to amend its margin policy framework to 
further extend the implementation schedule for the margin requirements 
for non-centrally cleared derivatives by one year.\16\ 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.\17\
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    \16\ 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'').
    \17\ 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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    After taking into consideration the revised BCBS/IOSCO 
implementation schedule, in May 2020, the Commission amended the IM 
compliance schedule for the IFR Extension Group, which otherwise would 
have been required to comply with the IM requirements beginning on 
September 1, 2020, to extend the compliance date to September 1, 
2021.\18\ The Commission accomplished this change by means of an 
interim final rule in order to address the immediate impact of the 
COVID-19 pandemic on the IFR Extension Group in an expedited and timely 
manner; however, the Commission did not extend the compliance date for 
the Smaller Portfolio Group, which is still September 1, 2021, the same 
day as the revised IFR Extension Group compliance date.
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    \18\ See CFTC Unanimously Approves an Interim Final Rule and a 
Proposed Rule at May 28 Open Meeting (May 28, 2020) (announcing 
unanimous approval by the Commission of an interim final rule 
extending the September 1, 2020 compliance date for the IM 
requirements to September 1, 2021). 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. 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. 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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[[Page 41465]]

II. Proposed Changes to the CFTC Margin Rule

    Covered swap entities are required to post and collect IM with 
counterparties that are SDs, MSPs, or financial end users with material 
swap exposure (``MSE'') \19\ (``covered counterparties'') in accordance 
with a compliance schedule set forth in Commission regulation 
23.161.\20\ After the amendments described above, the compliance 
schedule comprises five compliance dates, from September 1, 2016 to 
September 1, 2021, staggered such that CSEs and covered counterparties, 
starting with the largest average daily aggregate notional amounts 
(``AANA'') of uncleared swaps and certain other financial products, and 
then successively lesser AANA, are required to come into compliance 
with the IM requirements in a series of five phases.
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    \19\ Commission regulation 23.151 provides that MSE for an 
entity means that the entity and its margin affiliates have an 
average daily aggregate notional amount of uncleared swaps, 
uncleared security-based swaps, foreign exchange forwards, and 
foreign exchange swaps with all counterparties for June, July or 
August of the previous calendar year that exceeds $8 billion, where 
such amount is calculated only for business days. A company is a 
``margin affiliate'' of another company if: (i) Either company 
consolidates the other on a financial statement prepared in 
accordance with U.S. Generally Accepted Accounting Principles, the 
International Financial Reporting Standards, or other similar 
standards; (ii) both companies are consolidated with a third company 
on a financial statement prepared in accordance with such principles 
or standards; or (iii) for a company that is not subject to such 
principles or standards, if consolidation as described in paragraph 
(1) or (2) of this definition would have occurred if such principles 
or standards had applied. 17 CFR 23.151.
    \20\ 17 CFR 23.161.
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    The fourth compliance date, September 1, 2019, brought within the 
scope of compliance CSEs and covered counterparties each exceeding $750 
billion in AANA. The fifth and last compliance date (``phase 5'') was 
originally scheduled to occur on September 1, 2020 and as described in 
Section I above, was split into two phases with the compliance date for 
the Smaller Portfolio Group extended to September 1, 2021. Following 
the adoption of the IFR, the IFR Extension Group compliance date was 
also extended to September 1, 2021 and as a result, the IFR Extension 
Group and Smaller Portfolio Group are currently required to begin IM 
compliance on the same day.
    The IFR Extension Group and the Smaller Portfolio Group, together, 
comprise CSEs and their covered counterparties that are not yet subject 
to the IM requirements, including financial end user counterparties 
with an MSE exceeding $8 billion in AANA. The onset of the compliance 
phase starting on September 1, 2021, would result in a very large 
reduction in the AANA threshold for financial end user counterparties. 
Specifically, entities in the fourth phase were subject to a $750 
billion AANA threshold, and beginning on September 1, 2021, entities 
would come within the scope of IM compliance if their AANA exceeds $8 
billion.
    According to the CFTC's Office of the Chief Economist (``OCE''), 
compared with the first through fourth phase of compliance, which 
brought approximately 40 entities into scope, the two groups now 
subject to the September 1, 2021 compliance date would bring into scope 
approximately 700 entities, along with 7,000 swap trading 
relationships.\21\ This means that approximately 700 entities may have 
to amend or enter into up to 7,000 new sets of credit support or other 
IM agreements in order to continue to engage in swap transactions.
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    \21\ Richard Haynes, Madison Lau, & Bruce Tuckman, Initial 
Margin Phase 5, at 4-7 (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''). The OCE Study defines ``a `relationship' as an 
entity and a swap dealer, where the entity is an aggregation of 
related affiliates.''
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    The Commission adopted the April 2020 Final Rule postponing the 
compliance date for the Smaller Portfolio Group in order to address 
concerns that the large number of counterparties preparing to meet the 
September 1, 2020 deadline would seek to engage the same limited number 
of entities that provide IM required services, involving, among other 
things, the preparation of IM-related documentation, the approval and 
implementation of risk-based models for IM calculation, and in some 
cases the establishment of custodial arrangements. In the preamble to 
the April 2020 Final Rule, the Commission stated that compliance delays 
could lead to disruption in the markets; for example, some 
counterparties could, for a time, be restricted from entering into 
uncleared swaps and therefore might be unable to use swaps to hedge 
their financial risk.
    Because the IFR postponed the compliance date for the IFR Extension 
Group to the same date as the Smaller Portfolio Group in response to 
the COVID-19 pandemic, both groups face again effectively the same 
issues that the April 2020 Final Rule intended to address, including 
the limited number of entities that provide IM required services. In 
recognition of this concern, the most recent BCBS/IOSCO margin 
framework revision recommended extending the September 1, 2021 deadline 
for smaller entities to September 1, 2022.\22\ The Commission's 
proposed amendment, which is consistent with both the revised BCBS/
IOSCO framework and the Commission's rationale for adopting the April 
2020 Final Rule, would further delay the compliance date for the 
Smaller Portfolio Group entities to alleviate the potential market 
disruptions described above. The proposed amendment also would be 
consistent with similar actions by the prudential regulators and the 
Commission's international counterparts.\23\ By helping to achieve 
regulatory harmonization with respect to uncleared swaps margin, the 
Proposal may help to reduce regulatory arbitrage.
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    \22\ See 2020 BCBS/IOSCO Margin Framework.
    \23\ The prudential regulators recently issued an interim final 
rule to, among other things, revise their margin compliance schedule 
consistent with the revised BCBS/IOSCO implementation schedule. See 
Agencies finalize amendments to swap margin rule (June 25, 2020), 
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200625b.htm (``Prudential Regulators' June 2020 IFR''). In 
addition, the European Securities and Markets Authority (ESMA), the 
European Banking Authority (EBA) and the European Insurance and 
Occupational Pensions Authority (EIOPA), collectively known as the 
European Supervisory Authorities (ESAs), issued joint draft 
Regulatory Technical Standards (RTS) proposing, among other 
amendments, changes to the European Union margin rules to 
effectively implement the 2020 BCBS/IOSCO Margin Framework 
implementation schedule revisions. See Final Report, EMIR RTS on 
Various Amendments to the Bilateral Margin Requirements in View of 
the International Framework (May 4, 2020), https://www.esma.europa.eu/sites/default/files/library/esas_2020_09__-__final_report_-_bilateral_margin_amendments.pdf. The ESAs submitted 
the draft RTS for endorsement by the European Commission.
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    In proposing the change in the Smaller Portfolio Group compliance 
date in the April 2020 Final Rule, the Commission also considered the 
relatively small amount of swap activity of the financial end users 
that would be subject to the one year extension. The OCE estimated in 
2018 the average AANA per entity subject to the original September 1, 
2020 compliance date to be $54 billion, compared to an average $12.71 
trillion AANA for each entity in the earlier phases 1, 2, and 3 and $1 
trillion in phase 4. OCE has also estimated that the total AANA for the 
Smaller Portfolio Group that would be subject to the one year extension 
is approximately four percent of the total AANA across all the 
phases.\24\ Given the relatively small amount of swap activity of the 
financial end users in the Smaller Portfolio Group, the Commission

[[Page 41466]]

believes the proposed compliance date extension would have a muted 
impact on the systemic risk mitigating effects of the IM requirements 
during the extension period.
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    \24\ The methodology for calculating AANA is described in the 
OCE Initial Margin Phase 5 Study at 3.
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    The muted impact on systemic risk reflects the relatively small 
size of portfolios of entities in the Smaller Portfolio Group compared 
to the larger swap portfolios of entities that are already required to 
exchange IM pursuant to the CFTC Margin Rule. In the Commission's view, 
although the impact of Smaller Portfolio Group swap activity on 
systemic risk is likely to be muted during the one year delay, the time 
limited risk for the additional year should not be interpreted as 
dismissive of the longer term regulatory implications of this swap 
activity. The exchange of IM by entities with relatively small 
portfolios supports the health and stability of the overall financial 
system.
    Accordingly, the Commission is committed to implementing the full 
CFTC Margin Rule as directed by Congress.
    Hence, the Commission proposes to further amend Commission 
regulation 23.161(a), which sets forth the schedule for compliance with 
the CFTC Margin Rule, to delay the compliance date for the Smaller 
Portfolio Group by another year.
    Request for comment: The Commission requests comment regarding the 
proposed amendments to Commission regulation 23.161. The Commission 
specifically requests comment on the following questions:
     The CFTC Margin Rule, including the original compliance 
schedule, was adopted in January 2016 and many, although not all, firms 
in the Smaller Portfolio Group will have expected for some time that 
they are likely to fall within that group. Given the amount of time 
some of these firms have known of the need to establish IM-related 
arrangements, is it necessary to provide another one year delay to 
September 1, 2022 for these firms? Might a decision to delay the 
compliance date by one year for the Smaller Portfolio Group result in 
unnecessary expense if firms have already undertaken preparatory work, 
which might need to be redone the following year? Are there other 
approaches the Commission could take to bring about earlier compliance 
with the IM requirements? For example, should the Commission include in 
the rule text a stated expectation that Smaller Portfolio Group 
entities proceed expeditiously to establish and implement IM 
arrangements prior to September 1, 2022?

III. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \25\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. The Commission may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid Office of Management 
and Budget control number. This Proposal contains no requirements 
subject to the PRA.
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    \25\ 44 U.S.C. 3501 et seq.
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B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the regulations they propose will have a significant 
economic impact on a substantial number of small entities.\26\ This 
Proposal only affects SDs and MSPs that are subject to the CFTC Margin 
Rule and their covered counterparties, all of which are required to be 
eligible contract participants (``ECPs'').\27\ The Commission has 
previously determined that SDs, MSPs, and ECPs are not small entities 
for purposes of the RFA.\28\ Therefore, the Commission believes that 
this Proposal will not have a significant economic impact on a 
substantial number of small entities, as defined in the RFA.
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    \26\ 5 U.S.C. 601 et seq.
    \27\ Each counterparty to an uncleared swap must be an ECP, as 
the term is defined in section 1a(18) of the CEA, 7 U.S.C. 1a(18) 
and Commission regulation 1.3, 17 CFR 1.3. See 7 U.S.C. 2(e).
    \28\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and 
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001) 
(ECPs).
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    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that this Proposal will not have 
a significant economic impact on a substantial number of small 
entities. The Commission invites comment on the impact of this Proposal 
on small entities.

C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA. Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the section 15(a) considerations. 
Further, the Commission reflected upon the extraterritorial reach of 
this Proposal and notes where this reach may be especially relevant.
    This Proposal would delay the compliance schedule for the CFTC 
Margin Rule for CSEs and covered counterparties in the Smaller 
Portfolio Group, including financial end user counterparties exceeding 
the MSE threshold of $8 billion in AANA. These entities would come into 
scope in a final sixth phase, beginning September 1, 2022.
    As discussed above, the Commission believes that with the adoption 
of the IFR and the resulting reapplication of the same compliance 
deadline for both the Smaller Portfolio Group and the IFR Extension 
Group, the resulting large number of counterparties that would be 
required to comply with the IM requirements for the first time on 
September 1, 2021, could cause certain market disruptions. Some CSEs 
and covered counterparties may be strained given the demand for 
resources and services to meet the September 2021 deadline and 
operationalize the exchange of IM, involving, among other things, 
counterparty onboarding, approval and implementation of risk-based 
models for the calculation of IM, and documentation associated with the 
exchange of IM.
    The baseline against which the benefits and costs associated with 
this Proposal are compared is the uncleared swaps markets as they exist 
today, including the impact of the current compliance schedule and the 
implementation of the September 1, 2021 deadline. With this as the 
baseline for this Proposal, the following are the benefits and costs of 
this Proposal.
1. Benefits
    As described above, this Proposal will extend the compliance 
schedule for the IM requirements for the Smaller Portfolio Group to 
September 1, 2022. The extension may benefit some entities in the 
Smaller Portfolio Group by allowing them to trade uncleared swaps more 
easily and cheaply over this period. It also may benefit entities in 
the IFR Extension Group by making it easier for them to obtain the 
resources needed to comply with IM requirements. The Proposal is 
specifically intended to alleviate the potential market disruption 
resulting from the large number of

[[Page 41467]]

counterparties that would come into scope under the current compliance 
schedule and the strain on the uncleared swaps markets resulting from 
the increased demand for limited resources and services to set up 
operations to comply with the IM requirements, including counterparty 
onboarding, adoption and implementation of risk-based models to 
calculate IM, and documentation associated with the exchange of IM. In 
contrast with the CFTC's existing requirements mandating that the 
entities in the Smaller Portfolio Group comply with initial margin 
requirements at the same time as entities in the IFR Extension Group, 
the Proposal reduces the potential for bottlenecks by creating a one 
year separation in the applicable compliance dates for the two 
categories of entities.
    The Proposal would provide a 12-month delay for smaller 
counterparties that comprise the Smaller Portfolio Group to September 
1, 2022, whose swap trading may not pose the same level of risk, to 
prepare for their compliance with the IM requirements. The Proposal 
therefore would promote the smooth and orderly transition into IM 
compliance for both the IFR Extension Group and the Smaller Portfolio 
Group.
    The Proposal would amend the CFTC Margin Rule consistent with the 
revised BCBS/IOSCO 2020 Margin Framework, and the Prudential 
Regulators' June 2020 IFR amending the IM compliance schedule. The 
Proposal therefore promotes harmonization with international and 
domestic margin regulatory requirements thereby reducing the potential 
for regulatory arbitrage.
2. Costs
    The Proposal would extend the time frame for compliance with the IM 
requirements for the smallest, in terms of notional amount, CSEs and 
covered counterparties, including SDs and MSPs and financial end users 
that exceed an MSE of $8 billion, by an additional 12 months. Swaps 
entered into during this period with the smallest CSEs have the 
potential to be treated as legacy swaps and thus would not be subject 
to the IM requirements. In the event that IM would have been collected 
on any of these swaps,\29\ by delaying the compliance date one year, 
these positions would increase the level of counterparty credit risk to 
the financial system. While potentially meaningful, this risk is a 
relatively lesser concern because these legacy swap portfolios would be 
entered into with counterparties that engage in lower levels of 
notional trading.
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    \29\ While all entities that are covered by the Commission's 
margin requirements are required to exchange variation margin, the 
Commission notes that some entities may not be required to post and 
collect IM, as certain thresholds must be met before the posting and 
collection of IM are required.
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3. Section 15(a) Considerations
    In light of the foregoing, the CFTC has evaluated the costs and 
benefits of this Proposal pursuant to the five considerations 
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
    This Proposal would protect market participants and the public 
against the potential disruption that may be caused by the large number 
of counterparties that would come into scope of the IM requirements at 
the end of the current compliance schedule.
    Under the proposed compliance schedule, fewer counterparties would 
come into scope by September 1, 2021 and many small counterparties 
would be able to defer compliance until the last compliance date on 
September 1, 2022. As such, the demand for resources and services to 
achieve operational readiness would be reduced, mitigating the 
potential strain on the uncleared swaps markets.
    Inasmuch as this Proposal delays the implementation of IM for the 
smallest CSEs, there may not be as much IM posted to protect the 
financial system as would otherwise be the case.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Proposal would be expected to make the uncleared swaps markets 
more efficient by facilitating counterparties' transition into 
compliance with the IM requirements, thus avoiding inefficiencies in 
the documentation and implementation process. Counterparties would have 
additional time to document their swap relationships and set up 
adequate processes to operationalize the exchange of IM. As such, the 
Proposal would promote more even competition among counterparties in 
the uncleared swaps markets, as it would remove the potential incentive 
of CSEs to prioritize arrangements with larger counterparties to the 
detriment of smaller counterparties and would help maintain the current 
state of market efficiency.
    By preventing the market disruption that would result from the 
large number of counterparties that would come into scope at the end of 
the current compliance schedule, the Proposal promotes the financial 
integrity of the markets, reducing the probability of disruption 
resulting from the heightened demand for limited financial 
infrastructure resources. On the other hand, for a one year period, 
there would be less IM posted overall, making uncleared swaps markets 
more susceptible to financial contagion where the default of one 
counterparty could lead to subsequent defaults of other counterparties 
potentially harming market integrity.
(c) Price Discovery
    This Proposal may enhance or negatively impact price discovery. 
Without the Proposal, counterparties, in particular smaller 
counterparties, may be discouraged from trading uncleared swaps because 
they may not be able to secure resources and services in a timely 
manner to operationalize the exchange of IM, or may forgo such trading 
absent relief from the requirement to post regulatory IM. The reduction 
in uncleared swaps trading may reduce liquidity and harm price 
discovery. Conversely, by further delaying implementation of the IM 
requirements for the Smaller Portfolio Group, during the delay period, 
the pricing of the swaps entered into by those counterparties may be 
adjusted to incorporate additional risks that would otherwise have been 
covered by IM. These additional adjustments, which may vary from swap 
dealer to swap dealer, could result in pricing differentiations between 
swaps entered into by some Smaller Portfolio Group entities and 
comparable swaps entered into by entities already subject to the margin 
requirements. As result, the ability of entities in the Smaller 
Portfolio Group to compare prices may be reduced, harming effective 
market price discovery by these entities.
(d) Sound Risk Management
    As discussed above, by delaying the compliance date for the Smaller 
Portfolio Group, swaps entered into during this period would not be 
subject to the IM requirements, potentially increasing the level of 
counterparty credit risk to the financial system. At the same time, 
this Proposal would stave off the potential market disruption that 
could result from the large number of counterparties that would come 
into the scope of the IM requirements at the end of the current 
compliance schedule. The delayed compliance schedule would alleviate 
the potential disruption in establishing the financial infrastructure 
for the exchange of IM between in-scope entities and would give 
counterparties time to prepare for IM compliance and to establish

[[Page 41468]]

operational processes tailored to their uncleared swaps and associated 
risks.
(e) Other Public Interest Considerations
    The Proposal promotes harmonization with international and domestic 
margin regulatory requirements, reducing the potential for regulatory 
arbitrage. The Proposal would amend the CFTC Margin Rule consistent 
with the revised BCBS/IOSCO margin framework, and the Prudential 
Regulators' June 2020 IFR amending the IM compliance schedule.
4. Request for Comments on Cost-Benefit Considerations
    The Commission invites public comment on its cost-benefit 
considerations, including the section 15(a) factors described above. 
Commenters are also invited to submit any data or other information 
that they may have quantifying or qualifying the costs and benefits of 
the proposed amendments with their comment letters. In particular, the 
Commission seeks specific comment on the following:
    (a) Has the Commission accurately identified all the benefits of 
this Proposal? Are there other benefits to the Commission, market 
participants, and/or the public that may result from the adoption of 
this Proposal that the Commission should consider? Please provide 
specific examples and explanations of any such benefits.
    (b) Has the Commission accurately identified all the costs of this 
Proposal? Are there additional costs to the Commission, market 
participants, and/or the public that may result from the adoption of 
this Proposal that the Commission should consider? Please provide 
specific examples and explanations of any such costs. For example, is 
there a potential for increased counterparty credit risk in trades or 
contagion involving firms that will get the benefit of the proposed 
margin deadline extension, i.e., with respect to trades for those 
entities during the period between September 2021 and September 2022? 
Is it possible to identify reliably the amount of any such increase in 
potential risk? Should the margin amounts that these firms are required 
to post by contract, rather than by CFTC regulations, be considered as 
a risk mitigant during that period?
    (c) Does this Proposal impact the section 15(a) factors in any way 
that is not described above? Please provide specific examples and 
explanations of any such impact.

D. Antitrust Laws

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the 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 the Act.\30\
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    \30\ 7 U.S.C. 19(b).
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    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether this Proposal implicates any other specific 
public interest to be protected by the antitrust laws.
    The Commission has considered this Proposal to determine whether it 
is anticompetitive and has preliminarily identified no anticompetitive 
effects. The Commission requests comment on whether this Proposal is 
anticompetitive and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that this 
Proposal is not anticompetitive and has no anticompetitive effects, the 
Commission has not identified any less anticompetitive means of 
achieving the purposes of the CEA. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the CEA that would otherwise be served by adopting this 
Proposal.

List of Subjects in 17 CFR Part 23

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

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

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

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

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

0
2. In Sec.  23.161, republish paragraph (a) introductory text and 
revise paragraph (a)(7) to read as follows:


Sec.  23.161   Compliance dates.

    (a) Covered swap entities shall comply with the minimum margin 
requirements for uncleared swaps on or before the following dates for 
uncleared swaps entered into on or after the following dates:
* * * * *
    (7) September 1, 2022 for the requirements in Sec.  23.152 for 
initial margin for any other covered swap entity for uncleared swaps 
entered into with any other counterparty.
* * * * *

    Issued in Washington, DC, on June 26, 2020, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

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

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

Appendix 1--Commission Voting Summary

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

Appendix 2--Statement of Commissioner Rostin Behnam

    Today's notice of proposed rulemaking (``NPRM'') is necessitated 
as a result of global policy and domestic regulatory considerations 
to address the impact of the COVID-19 pandemic on potential market 
disruption that could result from a large number of entities 
simultaneously coming into compliance with the initial margin (or 
``IM'') requirements of the CFTC Margin Rule.\1\ In our attempts to 
remain consistent with revisions to the BCBS/IOSCO international 
framework's implementation schedule, we have now created an 
additional compliance phase, moving from five to six, and postponing 
full compliance by one year to September 1, 2021.\2\ This seems 
reasonable, save for the fact that our last action to provide relief 
for those who would have to come into compliance in September of 
this year has resulted in a reuniting of phases five and six, 
reintroducing the same set of concerns regarding potential market 
disruptions we sought to avoid. Accordingly, we are here today with 
a new NPRM to further postpone the compliance date for the final 
phase, phase six, to September 1, 2022.
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    \1\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 85 FR 19878 (Apr. 9, 2020).
    \2\ 85 FR 19878; Interim Final Rule: Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants, _ FR 
___ (___, 2020), voting draft available at https://www.cftc.gov/PressRoom/PressReleases/8168-20.
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    I will support the NPRM today because it is, at this time, being 
presented as the swiftest means to establish a realistic compliance 
deadline for which we will hold

[[Page 41469]]

covered entities accountable. The circumstances of the COVID-19 
pandemic are significant cause for concern, and I believe the 
Commission has responded with workable, targeted solutions aimed at 
ensuring our policies remain intact when the rigor of our 
regulations prove too burdensome to balance with competing 
overarching financial stability concerns.
    However, as I have maintained throughout this process, delaying 
IM requirements as a means to provide temporary, targeted relief to 
address increased market volatility seems counterintuitive.\3\ 
Moreover, as we continue to prolong compliance, we inevitably invite 
further requests for deferral of an indefinite nature. As the ten 
year anniversary of the Dodd-Frank Act \4\ approaches, we cannot 
presume that the risks this core-reform seeks to address have 
morphed into anything of lesser concern, and I will not support any 
further relief absent truly compelling facts and lockstep agreement 
with the prudential regulators responsible for establishing margin 
requirements for swap dealers and major swap participants within 
their respective jurisdictions.
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    \3\ Rostin Behnam, Commissioner, Statement of Commissioner 
Rostin Behnam Regarding Interim Final Rule with Request for Comment 
on Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants (May 28, 2020),https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement052820.
    \4\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
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Appendix 3--Concurring Statement of Commissioner Dan M. Berkovitz

    I concur with issuing for public comment the proposal to extend 
the swap initial margin compliance date to September 1, 2022 for 
certain financial entities that have smaller swap portfolios 
(``Proposal'').
    This is the second extension for these entities. The original 
compliance date was September 1, 2020. The reasons for this proposed 
extension are essentially the same as the first extension. The first 
extension was meant to avoid congestion in negotiating and 
implementing thousands of initial margin arrangements for the 
approximately 700 entities that would otherwise have needed to enter 
into initial margin arrangements by September 1, 2020. The extension 
split the compliance timeline for the smaller swap portfolio 
entities from the timeline for the entities with larger portfolios. 
The larger portfolio entities were still expected to comply by 
September 1, 2020, but the compliance date for the smaller entities 
was extended to September 1, 2021. However, more recently, in light 
of the disruptions caused by the Covid-19 pandemic, the compliance 
date for the larger swap portfolio entities was extended to 
September 1, 2021, thus again establishing the same compliance date 
for both the larger and smaller swap portfolio groups.
    Although the Proposal is based on essentially the same rationale 
as the first extension for the smaller entities, I am not 
presupposing that the full extension is necessary. The smaller swap 
portfolio entities and their swap dealers will have had nearly six 
years to prepare for the deadline as of September 1, 2021. These 
entities, as well as the larger portfolio entities for which 
September 1, 2021 is the deadline, will have had plenty of time to 
spread the negotiation and implementation process out over those 
many years. It is my understanding that many of the larger swap 
portfolio entities were already well on the way to completing the 
necessary documentation when the Covid-19 pandemic struck. The 
Proposal includes several questions as to whether the further 
extension in the Proposal could increase costs by possibly stopping 
and restarting negotiations again. In determining whether an 
extension will be finalized in regulation, the Commission will 
benefit from input from the public through the notice and comment 
process provided for in the Administrative Procedure Act.
    For these reasons, I concur in the issuance of the Proposal and 
look forward to comments from the public.
[FR Doc. 2020-14254 Filed 7-9-20; 8:45 am]
BILLING CODE 6351-01-P