[Federal Register Volume 85, Number 217 (Monday, November 9, 2020)]
[Rules and Regulations]
[Pages 71246-71251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23473]


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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: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting amendments to the margin requirements for 
uncleared swaps for swap dealers (``SD'') and major swap participants 
(``MSP'') for which there is not a prudential regulator (the ``CFTC 
Margin Rule''). Specifically, the CFTC Margin Rule mandated the 
collection and posting of variation margin and initial margin (``IM'') 
under a phased compliance schedule extending from September 1, 2016, to 
September 1, 2020. The Commission is hereby amending the compliance 
schedule to further delay the compliance date for entities with smaller 
average daily aggregate notional amounts (``AANA'') of swaps and 
certain other financial products (the ``Smaller Portfolio Group'') from 
September 1, 2021, to September 1, 2022, to avoid market disruption due 
to the large number of entities being required to comply by September 
1, 2021, as a result of the adoption of the interim final rule (``Final 
Rule'').

DATES: This final rule is effective December 9, 2020.

FOR FURTHER INFORMATION CONTACT: Joshua B. Sterling, Director, 202-418-
6056, [email protected]; Thomas J. Smith, Deputy Director, 202-418-
5495, [email protected]; Warren Gorlick, Associate Director, 202-418-
5195, [email protected]; 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:

I. Background

    Section 4s(e) of the Commodity Exchange Act (``CEA'') \1\ requires 
the Commission to adopt rules establishing minimum initial and 
variation margin requirements for all swaps \2\ that are (i) entered 
into by an SD or MSP for which there is not a prudential regulator \3\ 
(collectively, ``covered swap entities'' or ``CSEs'') and (ii) not 
cleared by a registered derivatives clearing organization (``uncleared 
swaps'').\4\ To offset the greater risk to the SD \5\ or MSP \6\ 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.\7\
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    \1\ 7 U.S.C. 6s(e) (capital and margin requirements).
    \2\ 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.
    \3\ 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.
    \4\ 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.
    \5\ CEA section 1a(49), 7 U.S.C. 1a(49) (swap dealer 
definition); Commission regulation 1.3 (further definition of swap 
dealer).
    \6\ CEA section 1a(32), 7 U.S.C. 1a(32) (major swap participant 
definition); Commission regulation 1.3 (further definition of major 
swap participant).
    \7\ 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 International 
Organization of Securities Commissions (``BCBS/IOSCO'') established an 
international framework for margin requirements for uncleared 
derivatives in September 2013 (the ``BCBS/IOSCO Framework'').\8\ 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,\9\ adopting the implementation schedule set forth in the BCBS/
IOSCO Framework, including the revised implementation schedule adopted 
on March 18, 2015.\10\
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    \8\ See generally BCBS and IOSCO, Margin requirements for non-
centrally cleared derivatives (Sept. 2013), https://www.bis.org/publ/bcbs261.pdf.
    \9\ 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 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).
    \10\ 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.\11\ Consistent with 
this revision to the international framework, the Commission 
promulgated the April 2020 Final Rule,\12\ which amended the

[[Page 71247]]

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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    \11\ 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'').
    \12\ 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 the Smaller Portfolio 
Group, which were required to comply with IM requirements in the 
last phase of compliance, to reduce the potential market disruption 
that could result from the large number of entities that would come 
into the scope of compliance on September 1, 2020, absent the 
amendment of the compliance schedule (``April 2020 Final Rule'').
    \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 coronavirus disease 2019 
(``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 certain entities by one year (``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 (``IFR'') \19\ 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 Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 85 FR 41346 (July 10, 2020). A 
Global Markets Advisory Committee (``GMAC'') subcommittee also 
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 (May 
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.
    \19\ Subsequently, on July 10, 2020, to mitigate the operational 
challenges faced by certain entities subject to the CFTC Margin Rule 
as a result of the COVID-19 pandemic, the Commission published in 
the Federal Register an interim final rule extending the September 
1, 2020 compliance date for the IFR Extension Group to September 1, 
2021.
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    As a result of the IFR, the IFR Extension Group and the Smaller 
Portfolio Group are effectively consolidated into one phase and will be 
required to begin compliance at the same time on September 1, 2021. The 
IFR Extension Group and the Smaller Portfolio Group will face 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 Commission, after adopting the IFR 
extending the IFR Extension Group compliance date to September 1, 2021, 
approved a notice of proposed rulemaking to amend and extend the IM 
compliance schedule for the Smaller Portfolio Group to September 1, 
2022 (``Proposal'').\20\
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    \20\ See Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 85 FR 41463 (July 10, 2020).
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II. Final Rule

    The Commission is adopting the Final Rule to amend the CFTC Margin 
Rule to extend the compliance schedule for the IM requirements for the 
Smaller Portfolio Group. As a result of this rule amendment, the 
compliance date of September 1, 2021, applicable to the Smaller 
Portfolio Group, will be delayed by one year, and entities in this 
group will now be required to comply with the IM requirements in a 
final sixth phase beginning on September 1, 2022. As stated in the 
Proposal, the extension of the schedule for compliance with the IM 
requirements is consistent with the 2020 BCBS/IOSCO Margin Framework 
and similar action undertaken by the U.S. prudential regulators and the 
Commission's international counterparts.\21\
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    \21\ The U.S. prudential regulators (i.e., the Board of 
Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation, and the Office of the Comptroller of the 
Currency) recently issued an interim final rule to revise their 
margin compliance schedule consistent with the revised BCBS/IOSCO 
implementation schedule. See Margin and Capital Requirements for 
Covered Swap Entities, 85 FR 39464 (July 1, 2020). 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), submitted, for endorsement by the 
European Commission, joint draft Regulatory Technical Standards 
(RTS) proposing changes to the European Union margin rules to 
effectively implement the 2020 BCBS/IOSCO Margin Framework's 
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.
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    The Commission received one comment letter expressing support for 
the Proposal to extend the CFTC compliance schedule for the Smaller 
Portfolio Group. \22\ This comment letter, which was a joint industry 
letter submitted by eleven trade associations, stated that deferral of 
the Smaller Portfolio Group compliance date is necessary to facilitate 
orderly preparation for the exchange of regulatory IM between CSEs and 
covered counterparties expected to come into the scope of the IM

[[Page 71248]]

requirements in the last phases of compliance. The comment letter went 
on to note that given the disruptive nature of the pandemic, 
notwithstanding robust business continuity plans, efforts to prepare 
for the final phases of regulatory IM have been disrupted due to 
personnel, systems, and other issues, and, therefore, the commenters 
appreciate the additional time afforded to market participants in the 
Proposal.
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    \22\ Comment letter no. 62694 from the International Swaps and 
Derivatives Association, the Securities Industry and Financial 
Markets Association, SIFMA Asset Management Group, the Global 
Financial Markets Association, the Global Foreign Exchange Division 
of GFMA, Managed Funds Association, Investment Adviser Association, 
the Institute of International Bankers, the Investment Company 
Institute, the U.S. Chamber's Center for Capital Markets 
Competitiveness (CCMC) and the American Council of Life Insurers 
(Aug. 5, 2020), https://comments.cftc.gov/Handlers/PdfHandler.ashx?id=29412.
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    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'') \23\ (``covered counterparties'') in accordance 
with a phased compliance schedule set forth in Commission regulation 
23.161.\24\ The compliance schedule, which originally extended from 
September 1, 2016 to September 1, 2020, and comprised five phases, 
brings into compliance with the IM requirements CSEs and covered 
counterparties on staggered dates, starting with entities with the 
largest AANA of uncleared swaps and certain other financial products, 
and then progressively with successively lesser AANA.
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    \23\ 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.
    \24\ 17 CFR 23.161.
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    The April 2020 Final Rule split the fifth and last phase of 
compliance into two phases, extending the compliance date for the 
Smaller Portfolio Group to September 1, 2021. Subsequently, the IFR 
extended the IFR Extension Group's September 1, 2020 compliance date to 
September 1, 2021, and as a result, the IFR Extension Group and Smaller 
Portfolio Group would be required to begin IM compliance on the same 
day absent the Commission's adoption of this Final Rule.
    Absent the Commission's adoption of the Proposal in this Final 
Rule, the onset of the compliance phase starting on September 1, 2021, 
would result in a very large number of entities coming into compliance 
simultaneously, because the AANA threshold for compliance with the IM 
requirements would be significantly reduced. Specifically, entities in 
the fourth phase were subject to a $750 billion AANA threshold, and 
beginning on September 1, 2021, under the schedule being revised by the 
Final Rule, entities will 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 fewer than 40 entities into scope, the two 
groups now subject to the September 1, 2021 compliance date will bring 
into scope approximately 670 entities, along with 7,500 swap trading 
relationships.\25\ This means that approximately 670 entities may have 
to amend or enter into up to 7,500 new sets of credit support or other 
IM agreements in order to continue to engage in swap transactions.
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    \25\ 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, which postponed 
the compliance date for the Smaller Portfolio Group, 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 moved 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 would face, absent the Commission's 
adoption of this Final Rule, effectively the same issues that the April 
2020 Final Rule intended to address, including the limited number of 
entities that provide IM-required services. The Commission is adopting 
the Final Rule to further delay the compliance date for the Smaller 
Portfolio Group entities to alleviate the potential market disruption 
described above, consistent with the rationale for the Commission's 
adoption of the April 2020 Final Rule.
    The Final Rule will align the CFTC Margin Rule with the 2020 BCBS/
IOSCO Margin Framework and is in line with similar efforts by the U.S. 
prudential regulators and international counterparts.\26\ The Final 
Rule will thus advance the Commission's goal of achieving regulatory 
harmonization with respect to uncleared swaps margin and may help 
reduce regulatory arbitrage.
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    \26\ See supra note 19.
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    The Commission notes that the Smaller Portfolio Group comprises 
entities with a relatively small amount of swap activity. The OCE 
estimates that the average AANA per entity subject to the original 
September 1, 2020 compliance date is about $59 billion, compared to an 
average $10.6 trillion AANA for each entity in the earlier phases 1, 2, 
and 3 and $1 trillion in phase 4. OCE also estimates that the total 
AANA for the Smaller Portfolio Group would be approximately four 
percent of the total AANA across all the phases.\27\ Given the 
relatively small amount of swap activity of entities in the Smaller 
Portfolio Group, the Commission believes that delaying compliance with 
the IM requirements by one year for such group will have a muted impact 
on the systemic risk mitigating effects of the IM requirements. In 
addition, the Commission notes that the potential for systemic risk 
also is reduced because the Final Rule does not relieve Smaller 
Portfolio Group firms from their existing obligations to cover their 
current exposure on a daily basis through mandated variation margin 
payments once such firms have reached the minimum transfer amount, as 
this term is defined in the Commission's rules.\28\
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    \27\ The methodology for calculating AANA is described in the 
OCE Initial Margin Phase 5 Study at 3.
    \28\ 17 CFR 23.151.
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    Although the impact of Smaller Portfolio Group swap activity on 
systemic risk is likely to be muted during the one year delay, the 
Commission notes that 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 Commission believes that the 
exchange of IM by entities with relatively small portfolios

[[Page 71249]]

supports the health and stability of the overall financial system.

III. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \29\ 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 Final Rule, as adopted, contains no 
requirements subject to the PRA.
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    \29\ 44 U.S.C. 3501 et seq.
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B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies, in 
promulgating regulations, consider whether the regulations they propose 
will have a significant economic impact on a substantial number of 
small entities, and, if so, to provide a flexibility analysis regarding 
the economic impact on those entities.\30\ In the Proposal, the 
Commission certified that it would not have a significant economic 
impact on a substantial number of small entities. The Commission 
requested comments with respect to the RFA and received no comments.
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    \30\ 5 U.S.C. 601 et seq.
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    As discussed in the Proposal, the Final Rule only affects SDs and 
MSPs that are subject to the CFTC Margin Rule and their covered 
counterparties, all of which are required to be eligible contract 
participants (``ECPs'').\31\ The Commission has previously determined 
that SDs, MSPs, and ECPs are not small entities for purposes of the 
RFA.\32\ Therefore, the Commission believes that this Final Rule will 
not have a significant economic impact on a substantial number of small 
entities, as defined in the RFA.
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    \31\ 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).
    \32\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (SDs and MSPs) and 
Opting Out of Segregation, 66 FR 20740, 20743 (April 25, 2001) 
(ECPs).
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    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that this Final Rule will not 
have a significant economic impact on a substantial number of small 
entities.

C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA. Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following five broad areas 
of market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the section 15(a) considerations. 
Further, the Commission has considered the extraterritorial reach of 
the Final Rule and notes where this reach may be especially relevant.
    This Final Rule extends the compliance schedule for the CFTC Margin 
Rule for CSEs and covered counterparties in the Smaller Portfolio 
Group, including financial end user counterparties exceeding the MSE 
threshold of $8 billion in AANA. As a result of the Commission's 
adoption of this Final Rule, these entities will come into scope in a 
final sixth phase, which will begin on September 1, 2022.
    As discussed above, the Commission believes that with the earlier 
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 have been required to comply with the IM requirements for the 
first time on September 1, 2021, absent the Final Rule, could have 
caused certain market disruptions. Some CSEs and covered counterparties 
would have been 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 Final Rule are compared is the uncleared swaps markets as they 
exist today, including the impact of the compliance schedule being 
amended herein, which would have required IM compliance by September 1, 
2021. With this as the baseline, the following are the benefits and 
costs of this Final Rule.
    The Commission sought comment on all aspects of the cost and 
benefit considerations in the Proposal but received no substantive 
comments.
1. Benefits
    As described above, this Final Rule extends the compliance schedule 
for the IM requirements for the Smaller Portfolio Group to September 1, 
2022. The extension benefits entities in the Smaller Portfolio Group by 
allowing them to trade uncleared swaps more easily and cheaply over 
this period. It also benefits entities in the IFR Extension Group by 
making it easier for them to obtain the resources needed to comply with 
the IM requirements. This Final Rule is specifically intended to 
alleviate the potential market disruption resulting from the large 
number of counterparties that would have come into scope on September 
1, 2021, under the compliance schedule being amended, 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 the IM requirements at the same time as 
entities in the IFR Extension Group, the Final Rule reduces the 
potential for bottlenecks by creating a one-year separation in the 
applicable compliance dates for the two categories of entities.
    The Final Rule provides 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 as entities in the IFR 
Extension Group, to prepare for their compliance with the IM 
requirements. The Final Rule therefore promotes the smooth and orderly 
transition into IM compliance for both the IFR Extension Group and the 
Smaller Portfolio Group.
    The Final Rule amends the CFTC Margin Rule consistent with the 2020 
BCBS/IOSCO Margin Framework and the prudential regulators' June 2020 
IFR amending the IM compliance schedule. The Final Rule therefore 
promotes harmonization with international and domestic margin 
regulatory requirements, thereby reducing the potential for regulatory 
arbitrage.

[[Page 71250]]

2. Costs
    The Final Rule extends 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. Uncleared 
swaps entered into during this period with the smallest CSEs may be 
treated as legacy swaps not subject to the IM requirements. As IM might 
not be required to be collected on some of these swaps,\33\ the one-
year compliance delay may increase the level of counterparty credit 
risk to the financial system. While potentially meaningful, in the 
Commission's view 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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    \33\ 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 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
    This Final Rule will protect market participants and the public 
against the potential disruption that may have been caused by the large 
number of counterparties that would have come into the scope of the IM 
requirements on September 1, 2021, under the compliance schedule being 
amended by this Final Rule.
    Under the revised compliance schedule set forth in the Final Rule, 
fewer counterparties will come into scope by September 1, 2021, and 
many small counterparties will 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 will be 
reduced, mitigating the potential strain on the uncleared swaps 
markets.
    Inasmuch as this Final Rule delays the implementation of IM for the 
smallest CSEs, there may not be as much IM posted to protect the 
financial system as would otherwise be the case.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Final Rule is 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 will have 
additional time to document their swap relationships and set up 
adequate processes to operationalize the exchange of IM. As such, the 
Final Rule could promote more even competition among counterparties in 
the uncleared swaps markets, as the one-year delay period may remove 
the potential incentive for CSEs to prioritize arrangements with larger 
counterparties to the detriment of smaller counterparties and may thus 
help maintain the current state of market efficiency.
    By preventing the market disruption that would have resulted from 
the large number of counterparties that would have come into scope by 
September 1, 2021, and the use of finite financial infrastructure 
resources, the Final Rule promotes the financial integrity of the 
markets. On the other hand, for a one-year period, there will be less 
IM posted overall, making uncleared swaps markets more susceptible to 
financial contagion where the default of one counterparty could lead to 
subsequent defaults of other counterparties, potentially harming market 
integrity.
(c) Price Discovery
    This Final Rule may enhance or negatively impact price discovery. 
Absent the Final Rule, counterparties, in particular smaller 
counterparties, may have been discouraged from trading uncleared swaps 
because they may not have been able to secure resources and services in 
a timely manner to operationalize the exchange of IM. The resultant 
reduction in uncleared swaps trading may have reduced liquidity and 
harmed price discovery. Conversely, the delay in implementation of the 
IM requirements for the Smaller Portfolio Group may cause those 
counterparties to adjust the pricing of their swaps to incorporate 
additional risks that would otherwise have been covered by IM. These 
additional adjustments could result in pricing differentiations between 
swaps entered into by some Smaller Portfolio Group entities and 
entities already subject to the margin requirements. As a result, the 
ability of entities in the Smaller Portfolio Group to compare realized 
trade prices may be reduced, harming effective market price discovery 
by these entities.
(d) Sound Risk Management
    As discussed above, the Final Rule will delay the compliance date 
for the Smaller Portfolio Group by one year. As a result, swaps entered 
into during the one-year period will not be subject to the IM 
requirements, potentially increasing the level of counterparty credit 
risk to the financial system. At the same time, the Final Rule will 
reduce the potential market disruption that could have resulted from 
the large number of counterparties that would have come into the scope 
of the IM requirements at the end of the compliance schedule being 
amended, which would have required compliance by September 1, 2021. The 
delayed compliance schedule will alleviate the potential disruption in 
establishing the financial infrastructure for the exchange of IM 
between in-scope entities and will give counterparties time to prepare 
for IM compliance and to establish operational processes tailored to 
their uncleared swaps and associated risks. In addition, to the extent 
some entities would have been precluded from trading swaps during that 
one-year period, the rule allows those firms to continue their current 
risk management practices.
(e) Other Public Interest Considerations
    The Final Rule promotes harmonization with international and 
domestic margin regulatory requirements, reducing the potential for 
regulatory arbitrage. The Final Rule amends the CFTC Margin Rule 
consistent with the 2020 BCBS/IOSCO Margin Framework, and the 
prudential regulators' June 2020 IFR amending the IM compliance 
schedule.

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.'' \34\
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    \34\ 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 
requested comment on whether this Proposal implicates any other 
specific public

[[Page 71251]]

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

List of Subjects in 17 CFR Part 23

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

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

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

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


0
2. Amend Sec.  23.161 by revising paragraph (a)(7) as follows:


Sec.  23.161   Compliance dates.

    (a) * * *
    (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 October 20, 2020, by the 
Commission.
Robert Sidman,
Deputy Secretary of the Commission.

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

Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants--Commission Voting Summary and 
Commissioner's Statement

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 Commissioner Brian Quintenz

    I support today's final rule that extends the last phase of 
compliance for initial margin requirements to September 1, 2022. In 
light of the unprecedented economic and social impacts of COVID-19 
and the potential market disruption that could result from a large 
number of entities coming into scope on September 1, 2021, I 
strongly support an additional one year deferral for these firms. As 
I have noted previously, given the large number of firms covered by 
the final compliance phases, 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 delay 
for these firms is appropriate in order to facilitate an efficient, 
orderly transition for the market into the uncleared margin regime. 
In addition, today's final rule also ensures the Commission is 
consistent with the BCBS-IOSCO recommended margin framework and with 
actions taken by U.S. prudential regulators to extend the margin 
compliance schedule.\1\
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    \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.

[FR Doc. 2020-23473 Filed 11-6-20; 8:45 am]
BILLING CODE 6351-01-P