[Federal Register Volume 86, Number 14 (Monday, January 25, 2021)]
[Rules and Regulations]
[Pages 6850-6860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27508]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AF06


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending the margin requirements for uncleared swaps 
(``Final Rule'') for swap dealers (``SD'') and major swap participants 
(``MSP'') for which there is not a prudential regulator (``CFTC Margin 
Rule''). The Final Rule amends the CFTC Margin Rule to permit the 
application of a minimum transfer amount (``MTA'') of up to $50,000 for 
each separately managed account (``SMA'') of a legal entity that is a 
counterparty to an SD or MSP in an uncleared swap transaction and to 
permit the application of separate MTAs for initial margin (``IM'') and 
variation margin (``VM'').

DATES: This Final Rule is effective February 24, 2021.

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, wg[email protected]; Liliya Bozhanova, Special Counsel, 202-418-
6232, l[email protected]; or Carmen Moncada-Terry, Special Counsel, 
202-418-5795, [email protected], Market Participants Division, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory and Regulatory Background

    In January 2016, the Commission adopted Regulations 23.150 through 
23.161, namely the CFTC Margin Rule,\1\ to implement section 4s(e) of 
the Commodity Exchange Act (``CEA''),\2\ which requires SDs and MSPs 
for which there is not a prudential regulator \3\ (``covered swap 
entity'' or ``CSE'') to meet minimum IM and VM requirements adopted by 
the Commission by rule or regulation.
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    \1\ 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 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). Commission regulations are found at 17 CFR part 1 et seq. 
(2017), and may be accessed through the Commission's website, 
https://www.cftc.gov.
    \2\ 7 U.S.C. 6s(e) (capital and margin requirements).
    \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 specifies the entities for which 
these agencies act as prudential regulators.
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    Regulations 23.152 and 23.153 require CSEs to collect or post, each 
business day, VM \4\ for uncleared swap transactions with each 
counterparty that is an SD, MSP, or financial end user,\5\ and IM \6\ 
for uncleared swap transactions for each counterparty that is an SD, 
MSP, or a financial end user that has material swaps exposure.\7\ IM 
posted or collected by a CSE must be held by one or more custodians 
that are not affiliated with the CSE or the counterparty.\8\ VM posted 
or collected by a CSE is not required to be maintained with a 
custodian.\9\
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    \4\ VM (or variation margin), as defined in Regulation 23.151, 
is the collateral provided by a party to its counterparty to meet 
the performance of its obligation under one or more uncleared swaps 
between the parties as a result of a change in the value of such 
obligations since the trade was executed or the last time such 
collateral was provided. 17 CFR 23.151.
    \5\ See definition of ``financial end user'' in Regulation 
23.151. In general, the definition covers entities involved in 
regulated financial activity, including banks, brokers, 
intermediaries, advisers, asset managers, collective investment 
vehicles, and insurers. 17 CFR 23.151.
    \6\ IM (or initial margin) is the collateral (calculated as 
provided by Sec.  23.154 of the Commission's regulations) that is 
collected or posted in connection with one or more uncleared swaps 
pursuant to Sec.  23.152. IM is intended to secure potential future 
exposure following default of a counterparty (i.e., adverse changes 
in the value of an uncleared swap that may arise during the period 
of time when it is being closed out). See CFTC Margin Rule, 81 FR at 
683.
    \7\ 17 CFR 23.152; 17 CFR 23.153.
    \8\ See 17 CFR 23.157(a).
    \9\ Regulation 23.157 does not require VM to be maintained in a 
custodial account. 17 CFR 23.157.
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    To alleviate the operational burdens associated with making de 
minimis margin transfers without resulting in an unacceptable level of 
uncollateralized credit risk, Regulations 23.152(b)(3) and 23.153(c) 
provide that a CSE is not required to collect or post IM or VM with a 
counterparty until the combined amount of such IM and VM, as computed 
under Regulations 23.154 and 23.155 respectively, exceeds an MTA of 
$500,000.\10\ The term MTA (or minimum transfer amount) is further 
defined in Regulation 23.151 as a combined amount of IM and VM, not 
exceeding $500,000, under which no exchange of IM or VM is 
required.\11\ Once the MTA is exceeded, the SD or MSP must collect or 
post the full

[[Page 6851]]

amount of both IM and VM required to be exchanged with the 
counterparty.\12\
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    \10\ 17 CFR 23.152(b)(3); 17 CFR 23.153(c); 81 FR at 653.
    \11\ 17 CFR 23.151 (defining the term ``minimum transfer 
amount'').
    \12\ See 17 CFR 23.152(b)(3); 17 CFR 23.153(c).
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    During the implementation of the CFTC Margin Rule, market 
participants identified certain operational and compliance burdens 
associated with the application of the MTA. To mitigate these burdens, 
the Division of Swap Dealer and Intermediary Oversight (``DSIO'') staff 
issued two no-action letters.\13\
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    \13\ Pursuant to a Commission plan of reorganization, DSIO was 
renamed Market Participants Division (``MPD'') effective November 8, 
2020.
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B. DSIO No-Action Letter No. 17-12 Addressing the Application of MTA to 
SMAs

    In February 2017, DSIO staff issued a no-action letter in response 
to a request for relief from the Securities Industry and Financial 
Markets Association's Asset Management Group (``SIFMA AMG'').\14\ Staff 
stated that based on SIFMA AMG's representations, it would not 
recommend enforcement action against an SD that does not comply with 
the MTA requirements of Regulations 23.152(b)(3) or 23.153(c) with 
respect to the swaps of a legal entity that is the owner of multiple 
SMAs, provided that, among other conditions, the SD applies an MTA no 
greater than $50,000 to each SMA.
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    \14\ CFTC Letter No. 17-12, Regulations 23.152(b)(3) and 
23.153(c): No-Action Position
    for Minimum Transfer Amount with respect to Separately Managed 
Accounts (Feb. 13, 2017) (``Letter 17-12''), https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-12.pdf.
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    SIFMA AMG sought no-action relief on behalf of members--asset 
management firms whose clients include large institutional investors, 
such as pension plans and endowments, that hire asset managers to 
exercise investment discretion over portions of the clients' assets for 
management in SMAs--that enter into uncleared swaps with SDs that are 
registered with the Commission and are subject to the CFTC Margin 
Rule.\15\ SIFMA AMG requested relief that would permit SDs entering 
into swaps with SMAs to treat each SMA separately for the purposes of 
applying the MTA.
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    \15\ Id.
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    SIFMA AMG argued that the application of the MTA at the SMA owner 
or legal entity level presented significant practical challenges for 
SMAs that trade uncleared swaps with a single SD. SIFMA AMG stated that 
each SMA is governed by an investment management agreement that grants 
asset managers authority over a portion of their client's assets. An SD 
may face the same legal entity as a counterparty through multiple SMAs 
administered by different asset managers. Each SMA that trades 
derivatives typically has its own payment netting set corresponding to 
each International Swaps and Derivatives Association (``ISDA'') master 
agreement and credit support annex (``CSA'') used by an asset 
manager.\16\ Because the SMAs exist independently from each other, with 
their assets held, transferred, and returned separately at the account 
level, SIFMA AMG asserted that it is impractical for asset managers to 
collectively calculate the MTA across the SMAs of a single owner and to 
move collateral, in the aggregate, across the accounts.
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    \16\ The ISDA master agreement is a standard contract published 
by ISDA commonly used in over-the-counter derivatives transactions 
that governs the rights and obligations of parties to a derivatives 
transaction. A CSA sets forth the terms of the collateral 
arrangement for the derivatives transaction.
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C. DSIO No-Action Letter No. 19-25 Concerning the Application of 
Separate MTAs for IM and VM

    In December 2019, DSIO staff issued an additional no-action letter 
concerning the application of the MTA in response to a request for 
relief from ISDA on behalf of its member SDs.\17\ DSIO stated that 
based on ISDA's representations, it would not recommend enforcement 
action against an SD or MSP that does not combine IM and VM amounts for 
the purposes of Regulations 23.152(b)(3) and 23.153(c). More 
specifically, the no-action position covers SDs or MSPs that apply 
separate MTAs for IM and VM obligations on uncleared swap transactions 
with each swap counterparty, provided that the combined MTA for IM and 
VM with respect to that counterparty does not exceed $500,000.
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    \17\ CFTC Letter No. 19-25, Regulations 23.151, 23.152, and 
23.153--Staff Time-Limited No-Action Position Regarding Application 
of Minimum Transfer Amount under the Uncleared Margin Rules (Dec. 6, 
2019) (``Letter 19-25''), https://www.cftc.gov/csl/19-25/download.
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    In its request for no-action relief, ISDA stated that separate MTAs 
for IM and VM better reflect the operational requirements and the legal 
structure of the Commission's regulations, noting that the CFTC Margin 
Rule requires IM to be segregated with an unaffiliated third party, 
while not imposing similar segregation requirements with respect to VM. 
ISDA asserted that, as a result, distinct workflows have been 
established for the settlement of IM through custodians and tri-party 
agents that are completely separate from the settlement process for VM.

D. Market Participant Feedback and Proposal

    Swap market participants, including a subcommittee established by 
the CFTC's Global Markets Advisory Committee (``GMAC Subcommittee''), 
expressed support for the adoption of regulations consistent with the 
no-action letters, noting that Letter 19-25, in particular, is time-
limited and, more generally, the codification of no-action positions 
can be beneficial in that it can provide certainty to market 
participants with respect to the application of the Commission's 
regulations.\18\
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    \18\ See Recommendations to Improve Scoping and Implementation 
of Initial Margin Requirements for Non-Cleared Swaps, Report to the 
CFTC's Global Markets Advisory Committee by the Subcommittee on 
Margin Requirements for Non-Cleared Swaps (May 2020), https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download 
(``GMAC Subcommittee Report'' or ``Report''). The Global Markets 
Advisory Committee (``GMAC'') established the GMAC Subcommittee to 
consider issues raised by the implementation of margin requirements 
for non-cleared swaps, to identify challenges associated with 
forthcoming implementation phases, and to make recommendations 
through a report. The GMAC Subcommittee issued the GMAC Subcommittee 
Report recommending various actions, including the codification of 
Letters 17-12 and 19-25. The GMAC adopted the Report and recommended 
to the Commission that it consider adopting the Report's 
recommendations.
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    Consistent with this feedback, the Commission has expressed the 
view that adopting regulations in accordance with the terms of no-
action letters, where feasible, can facilitate efforts by market 
participants to take the operation of the Commission's regulations into 
account in planning their uncleared swap activities. Accordingly, based 
on its experience implementing the CFTC Margin Rule and the 
administration of Letters 17-12 and 19-25, the Commission decided to 
issue a notice of proposed rulemaking (``Proposal'') to amend the CFTC 
Margin Rule consistent with the staff positions set forth in those no-
action letters, and to request comments on the Proposal.\19\
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    \19\ See Margin Requirements for Uncleared Swaps for Swap 
Dealers and Major Swap Participants, 85 FR 59470 (Sept. 22, 2020).
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II. Final Rule

    The Commission received six comment letters, all of which expressed 
support for the Proposal.\20\ Commenters

[[Page 6852]]

generally noted that the proposed amendments represent practical 
solutions that ease the operational burden of compliance with the CFTC 
Margin Rule without materially increasing systemic risk. Two commenters 
also noted that while consistent approaches to derivatives regulation 
are desirable, the Commission should adopt the proposed amendments even 
if the prudential regulators do not adopt similar changes.\21\ Several 
commenters highlighted the importance of the regulatory certainty that 
the adoption of regulations consistent with existing no-action relief 
would bring.\22\
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    \20\ Comments were submitted by the following entities: American 
Council of Life Insurers (``ACLI''); Futures Industry Association 
(``FIA''); Investment Company Institute (``ICI''); ISDA, Global 
Foreign Exchange Division (``GFXD'') of the Global Financial Markets 
Association (``GFMA''), and Securities Industry and Financial 
Markets Association (``SIFMA'') in a joint letter (``ISDA/GFMA/
SIFMA''); Managed Funds Association (``MFA''); and SIFMA AMG. The 
comment letters are available at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=4155.
    \21\ See ACLI at 1; FIA at 4.
    \22\ See ISDA/GFMA/SIFMA at 2; SIFMA AMG at 4.
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    The comments confirm the rationale articulated for the Proposal. As 
such, the Commission is adopting the amendments to Regulations 23.151, 
23.152(b)(3), 23.153(c) and 23.158(a), as proposed.

A. Application of MTA to SMAs

    The Commission is adopting the proposed amendment to the definition 
of MTA in Regulation 23.151 to allow a CSE to apply an MTA of up to 
$50,000 to each SMA owned by a counterparty with whom the CSE enters 
into uncleared swaps. The amendment is consistent with the terms of 
Letter 17-12, which provides that DSIO would not recommend enforcement 
action if an SD applies an MTA no greater than $50,000 to each SMA of a 
legal entity, subject to certain conditions.
    As discussed in the Proposal, when the Commission adopted the CFTC 
Margin Rule, it rejected the notion that SMAs of a legal entity should 
be treated separately from each other in applying certain aspects of 
the margin requirements for uncleared swaps.\23\ However, after 
implementing the margin requirements for several years, and in 
particular, administering the application of the MTA, including the 
staff's issuance of Letter 17-12, the Commission believes that 
separately treating SMAs, at least with respect to the application of 
the MTA, is appropriate from an operational perspective.
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    \23\ See 81 FR at 653 (rejecting commenters' request to extend 
to each separate account of a fund or plan its own initial margin 
threshold, while acknowledging that separate managers acting for the 
same fund or plan may not take steps to inform the fund or plan of 
their uncleared swap exposures on behalf of their principal on a 
frequent basis).
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    The Commission notes, as discussed in the Proposal, that certain 
owners of SMAs, such as pension funds, in administering investments for 
beneficiaries, may engage in collateral management exercises and may 
have the capability to aggregate collateral across their SMAs. As such, 
a beneficial owner may be able to aggregate the MTA across its SMAs 
that trade with a particular CSE and centralize the management of 
collateral for the SMAs, which may result in increased netting among 
the SMAs and the CSE, and more efficient collateral management. 
However, the Commission points out that other SMA owners may not have 
such capability because, as noted in the GMAC Subcommittee Report, the 
SMA owners may not be able to coordinate trading activity across their 
SMAs, given that they typically grant full investment discretion to 
their asset managers and do not employ a centralized collateral manager 
in-house.\24\
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    \24\ GMAC Subcommittee Report at 16.
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    In theory, while asset managers could coordinate with each other 
the calculation of the MTA across SMAs under their management, the 
Commission believes that accepted market practice may preclude the 
sharing of information among asset managers. In this regard, the 
Commission notes that the GMAC Subcommittee Report stated that owners 
of SMAs typically prohibit information sharing among their SMAs and 
require asset managers to keep trading information confidential, with 
the result that asset managers lack transparency and control over the 
assets of the SMA owner other than the specific assets under their 
management.
    The Commission requested comment on the feasibility of coordination 
among asset managers. Several commenters, consistent with the GMAC 
Subcommittee Report's findings, indicated that confidentiality 
requirements and logistical impediments prevent asset managers from 
aggregating IM and VM obligations across SMAs for purposes of 
determining whether the MTA threshold has been exceeded, rendering the 
application of a single MTA across SMAs impractical.\25\ Commenters 
further asserted that the ability to apply a separate MTA to each SMA 
is critical for asset managers that provide services to clients through 
an SMA structure.\26\
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    \25\ See ICI at 6; ISDA/GFMA/SIFMA at 2; SIFMA AMG at 3. See 
also MFA at 3 (noting that the amendment to the MTA definition would 
eliminate the significant burden of requiring multiple asset 
managers running SMAs for the same SMA owner to coordinate the 
calculation of the MTA among them).
    \26\ See, e.g., ICI at 6.
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    Likewise, the Commission believes that confidentiality requirements 
may also preclude communications between a CSE and individual asset 
managers of SMAs of an owner concerning the owner's overall trading 
activity. As discussed in the GMAC Subcommittee Report, a duty of 
confidentiality to the legal entity may prevent a CSE from sharing 
information across the asset managers of SMAs of a legal entity.\27\ As 
a result, even though each SMA of an owner may contribute to reaching 
the MTA limit, asset managers for the SMAs may only know the amounts of 
IM and VM being contributed by SMAs under their management.
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    \27\ The Commission notes that Regulation 23.410(c)(1)(i) 
prohibits disclosure by an SD or MSP, including a CSE, of 
confidential information provided by or on behalf of a counterparty 
to the SD or MSP. Nevertheless, Regulation 23.410(c)(2) provides 
that the SD or MSP may disclose the counterparty's confidential 
information if the disclosure is authorized in writing by the 
counterparty.
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    In light of the practical challenges that the calculation of the 
MTA across SMAs poses, as described above, the Commission is amending 
Regulation 23.151 to allow CSEs to apply an MTA of up to $50,000 for 
each SMA of a counterparty. The Commission notes, however, that under 
this application of the MTA to SMAs, as adopted, an MTA of up to 
$50,000 could be applied to an indefinite number of SMAs. This 
application of the MTA would effectively replace the aggregate limit of 
$500,000 for a particular counterparty's uncollateralized risk for 
uncleared swaps with an individual limit of $50,000 for each SMA of 
such counterparty. In turn, the counterparty could have an aggregate 
amount of uncollateralized risk in excess of $500,000.
    This application of the MTA to SMAs could incentivize owners of 
SMAs to create separate accounts by formulating trading strategies to 
reduce or avoid margin transfers. However, the Commission believes that 
the inability to net collateral across separate accounts would stem the 
indiscriminate creation of SMAs \28\ because the MTA for SMAs, as 
adopted in this Final Rule, is set at a low level (i.e., $50,000), and 
any potential benefits resulting from the avoidance of margin transfers 
would become less meaningful, as the fragmentation of an owner's 
investments among SMAs would reduce the ability to aggregate swaps 
positions and net collateral.
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    \28\ As further discussed below, the application of the MTA, as 
provided in this Final Rule, is only available for separate accounts 
of an owner that, consistent with the definition of SMA, as adopted 
by the Final Rule, are not subject to collateral agreements that 
provide for netting across separate accounts.
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    Several commenters agreed with the Commission's view that the 
potential

[[Page 6853]]

risk of an increase in the amount of uncollateralized margin is 
mitigated by, among other safeguards, the low MTA thresholds and the 
limitations on netting across separate accounts.\29\ The commenters 
further noted that the costs and practical challenges associated with 
establishing and maintaining SMAs are significant and would likely 
override the benefit of a marginal MTA increase.\30\ One commenter also 
argued that it is extremely unlikely that an asset manager could 
coordinate its activities with other SMA managers to minimize the SMA 
owner's margin requirements, given that asset managers typically 
exercise discretion over a portion of the SMA's assets and maintain 
confidentiality with respect to the SMA's trading activity.\31\ Another 
commenter pointed out that the requirement that the SMAs' asset 
managers must be granted authority over assets under their management 
under the investment management agreement \32\ creates practical as 
well as cost challenges that would further disincentivize the creation 
of unnecessary SMAs.\33\
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    \29\ See ICI at 7; MFA at 3; SIFMA AMG at 4.
    \30\ See ICI at 7, MFA at 3.
    \31\ See ICI at 7.
    \32\ As further discussed below, the Final Rule defines the term 
SMA as an account managed by an asset manager pursuant to a specific 
grant of authority to such asset manager under an investment 
management agreement between the counterparty and the asset manager 
with respect to a specified portion of the counterparty's assets.
    \33\ See SIFMA AMG at 4.
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    The Commission further notes that there are other provisions in the 
CEA and the Commission's regulations that would mitigate the increase 
in uncollateralized credit risk resulting from the absence of an 
aggregate limit in the MTA. Specifically, section 4s(j)(2) of the CEA 
requires CSEs to adopt a robust and professional risk management system 
adequate for the management of their swap activities,\34\ and 
Regulation 23.600 \35\ mandates that CSEs establish a risk management 
program to monitor and manage risks associated with their swap 
activities that includes, among other things, a description of risk 
tolerance limits.
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    \34\ See 7 U.S.C. 6s(j).
    \35\ 17 CFR 23.600.
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    The Commission is also amending Regulation 23.151 to add a 
definition for the term SMA. The new definition of SMA uses the 
definition of the term set forth in Letter 17-12. As adopted, the term 
SMA is defined as an account of a counterparty to a CSE that is managed 
by an asset manager pursuant to a specific grant of authority to such 
asset manager under an investment management agreement between the 
counterparty and the asset manager, with respect to a specified portion 
of the counterparty's assets.\36\ The definition requires that the 
swaps of the SMA (i) be entered into between the counterparty and the 
CSE by the asset manager pursuant to authority granted by the 
counterparty to the asset manager through an investment management 
agreement; and (ii) be subject to a master netting agreement that does 
not provide for the netting of IM or VM obligations across all SMAs of 
the counterparty that have swaps outstanding with the CSE.
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    \36\ The definition of the term SMA, as adopted, refers to the 
aggregate account of a counterparty managed by an asset manager 
under the investment management agreement, and not to fund or pool 
sleeves overseen by sub-advisers.
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    The definition of SMA is designed to limit the application of the 
MTA, as prescribed by the Final Rule, to SMAs that have dedicated 
netting sets under the SMAs' ISDA master agreements and CSAs, or are 
otherwise precluded from netting collateral across SMAs, and that are 
administered by asset managers with authority that is limited to assets 
specifically under their management. The Commission notes that the 
limited authority of asset managers over the assets of a legal entity 
and the practical inability to net collateral payments across SMAs pose 
obstacles in the calculation and aggregation of the MTA across SMAs 
that this Final Rule is designed to address.

B. Application of Separate MTAs for IM and VM

    The Commission is revising the margin documentation requirements 
outlined in Regulation 23.158(a), consistent with Letter 19-25, to 
recognize that a CSE can apply separate MTAs for IM and VM with each 
counterparty in determining whether IM or VM or both must be posted or 
collected with a counterparty under Regulation 23.152 (requiring CSEs 
to exchange IM with a counterparty) or Regulation 23.153 (requiring 
CSEs to exchange VM with a counterparty). Regulation 23.158(a), as 
amended, states that if a CSE and its counterparty agree to have 
separate MTAs for IM and VM, the MTAs corresponding to IM and VM must 
be specified in the margin documentation required by Regulation 23.158, 
and the MTAs, on a combined basis, must not exceed the MTA specified in 
Regulation 23.151.
    The Commission believes that the amendment to Regulation 23.158(a) 
accommodates a widespread market practice that facilitates the 
implementation of the CFTC margin requirements. In administering the 
application of the MTA, including the issuance of Letter 19-25, the 
Commission has recognized that, as a practical matter, CSEs and their 
counterparties maintain separate settlement workflows for IM and VM and 
agree to separate MTAs in each of their IM and VM CSAs, which, 
combined, do not exceed $500,000. These separate settlement workflows 
for IM and VM reflect, from an operational perspective, the different 
segregation requirements applicable to IM and VM under the CFTC Margin 
Rule.\37\
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    \37\ See 17 CFR 23.157 (requiring IM to be segregated with an 
independent custodian. The CFTC Margin Rule does not impose similar 
segregation requirements with respect to VM).
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    The Commission acknowledges that the amendment to Regulation 
23.158(a) may result in the exchange of less margin than the amount 
that would be exchanged if the MTA were computed on an aggregate 
basis.\38\ However, the Commission notes that because the total amount 
of combined IM and VM that would not be exchanged would generally not 
exceed $500,000, the differences in the total margin exchanged would 
not be material and would not result in an unacceptable level of credit 
risk. While the MTA as applied to SMAs, pursuant to the amendments to 
Regulation 23.151, may result in an aggregate MTA that exceeds 
$500,000, the Commission nonetheless believes that the increased level 
of uncollateralized risk that might result from the application of the 
MTA to SMAs will be mitigated because the MTA levels applicable to SMAs 
are set at a very low level (i.e., $50,000), which would reduce the 
incentive for SMA owners to create additional SMAs to avoid the 
transfer of margin given the inability to net collateral across SMAs, 
as provided by the Final Rule.
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    \38\ Letter 19-25 describes the application of separate MTAs for 
IM and VM with the following illustration: An SD and a counterparty 
agree to a $300,000 IM MTA and a $200,000 VM MTA. If the margin 
calculations set forth in Commission regulations 23.154 (for IM) and 
23.155 (for VM) require the SD to post $400,000 of IM with the 
counterparty and $150,000 of VM with the counterparty, the SD will 
be required to post $400,000 of IM with the counterparty (assuming 
that the $50 million IM threshold amount, defined in Commission 
regulation 23.151, for the counterparty has been exceeded). The SD, 
however, will not be obligated to post any VM with the counterparty 
as the $150,000 requirement is less than the $200,000 MTA. By 
contrast, in the absence of relief, the SD would have been required 
to post $550,000 (the full amount of both IM and VM), given that the 
combined amount of IM and VM exceeds the MTA of $500,000.
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    The Commission believes, consistent with the views expressed by 
DSIO staff in issuing Letter 19-25, that the application of separate 
MTAs for IM and VM, subject to certain conditions, will

[[Page 6854]]

reduce the cost and burdens associated with the transfer of small 
margin balances, without undermining the Commission's objective of 
requiring swap counterparties to protect themselves by mitigating their 
credit and market risks. The Commission further notes that similar 
applications of the MTA are permitted in certain foreign jurisdictions, 
including the European Union.\39\ The amendment to Regulation 23.158(a) 
therefore promotes consistent regulatory standards across 
jurisdictions, in line with the statutory mandate set forth in the 
Dodd-Frank Act \40\ and reduces the need for market participants to 
create and implement IM and VM settlement flows tailored to different 
jurisdictions.
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    \39\ See Commission Delegated Regulation (EU) 2016/2251 
Supplementing Regulation (EU) No. 648/2012 of the European 
Parliament and of the Council of July 4, 2012 on OTC Derivatives, 
Central Counterparties and Trade Repositories with Regard to 
Regulatory Technical Standards for Risk-Mitigation Techniques for 
OTC Derivative Contracts Not Cleared by a Central Counterparty (Oct. 
4, 2016), Article 25(4), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016R2251&from=EN.
    \40\ See section 752 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010), 
calling on the CFTC to consult and coordinate on the establishment 
of consistent international standards with respect to the regulation 
of swaps.
---------------------------------------------------------------------------

    A number of commenters confirmed the Commission's understanding 
that the application of separate MTAs for IM and VM facilitates 
compliance with the CFTC Margin Rule.\41\ Commenters noted that if swap 
counterparties were required to apply a single combined MTA, they would 
need to implement significant changes to the documentation and 
operational processes.\42\ In particular, ICI noted that in the absence 
of Letter 19-25 and this Final Rule, counterparties would have to 
reconcile two operational processes: Margin calculation protocols that 
account for a combined MTA and separate workflows that exist for IM and 
VM settlement in light of the Commission's segregation requirements, 
which differentiate treatment for IM and VM. \43\
---------------------------------------------------------------------------

    \41\ See ACLI at 2; MFA at 4; SIFMA AMG at 4.
    \42\ See e.g., ACLI at 2.
    \43\ See ICI at 8.
---------------------------------------------------------------------------

    Several commenters expressed support for extending the application 
of separate MTAs for IM and VM to SMAs for which an MTA of up to 
$50,000 would be applicable, noting that the stated rationale for 
proposing the revisions to Regulation 23.158(a) applies equally to SMAs 
and that allowing such application would establish a consistent 
regulatory approach to applying MTA thresholds.\44\ In addition, noting 
some ambiguity, SIFMA AMG urged the Commission to confirm that the 
ability to apply separate MTAs for IM and VM would extend to SMAs.\45\ 
In response, the Commission confirms that the amendments to Regulations 
23.151 and 23.158(a), as adopted, permit a CSE to apply separate MTAs 
for IM and VM with each counterparty, or an SMA of a counterparty, 
provided the MTAs, on a combined basis, do not exceed the respective 
limits set by Regulation 23.151. The Commission notes that the text of 
the amendment to Regulation 23.158(a) refers to Regulation 23.151, 
which, as amended, defines MTA and provides for the application of an 
MTA of up to $50,000 for each SMA of a counterparty, thus allowing for 
the application of separate amounts of IM and VM to the MTA of an SMA, 
as provided in amended Regulation 23.151.
---------------------------------------------------------------------------

    \44\ See ICI at 9; MFA at 4.
    \45\ See SIFMA AMG at 4.
---------------------------------------------------------------------------

C. Conforming Changes

    Consistent with the amendment to the definition of MTA in 
Regulation 23.151, the Commission is adopting conforming changes to 
Regulations 23.152(b)(3) and 23.153(c) by replacing ``$500,000'' with 
``the minimum transfer amount, as the term is defined in 23.151.'' The 
changes replace the reference to $500,000 in current Regulations 
23.152(b)(3) and 23.153(c), which effectively limits the MTA to 
$500,000, with a reference to the revised definition of MTA, which 
allows for the application of an MTA of up to $50,000 for each SMA.

III. Administrative Compliance

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies 
to consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities.\46\ As 
discussed in the Proposal, the amendments being adopted herein only 
affect certain SDs and MSPs and their counterparties, which must be 
eligible contract participants (``ECPs'').\47\ The Commission has 
previously established that SDs, MSPs and ECPs are not small entities 
for purposes of the RFA.\48\ Therefore, the Commission believes that 
the Final Rule will not have a significant economic impact on a 
substantial number of small entities, as defined in the RFA.
---------------------------------------------------------------------------

    \46\ 5 U.S.C. 601 et seq.
    \47\ Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e), each 
counterparty to an uncleared swap must be an ECP, as defined in 
section 1a(18) of the CEA, 7 U.S.C. 1a(18).
    \48\ See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ```Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' 77 FR 
30596, 30701 (May 23, 2012).
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    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the Final Rule will not have 
a significant economic impact on a substantial number of small 
entities.

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \49\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. The Commission may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid Office of Management 
and Budget control number. The Final Rule, as adopted, contains no 
requirements subject to the PRA.
---------------------------------------------------------------------------

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

B. Cost-Benefit Considerations

    Section 15(a) of the CEA \50\ 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.
---------------------------------------------------------------------------

    \50\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The Commission is amending Regulation 23.151 consistent with Letter 
17-12. The Commission is revising the definition of MTA in Regulation 
23.151 to permit CSEs to apply an MTA of up to $50,000 for each SMA of 
a counterparty that enters into uncleared swaps with a CSE. The 
Commission also is amending Regulation 23.151 to add a definition for 
the term SMA (or separately managed account). The Commission is also 
revising Regulation 23.158(a) consistent with Letter 19-25 to state 
that if a CSE and its counterparty agree to have separate MTAs for IM 
and VM, the respective amounts of MTA must be reflected in the margin 
documentation required by Regulation 23.158(a). Finally, the Commission 
is adopting conforming

[[Page 6855]]

changes to Regulations 23.152(b)(3) and 23.153(c) to incorporate the 
change to the definition of MTA in Regulation 23.151.
    The baseline for the Commission's consideration of the costs and 
benefits of this Final Rule is the CFTC Margin Rule. The Commission 
recognizes that to the extent market participants have relied on 
Letters 17-12 and 19-25, the actual costs and benefits of the 
amendments, as realized in the market, may not be as significant.
    The Commission notes that the consideration of costs and benefits 
below is based on the understanding that the markets function 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries; with some Commission registrants 
being organized outside of the United States; with leading industry 
members typically conducting operations both within and outside the 
United States; and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
following discussion of costs and benefits refers to the effects of the 
Final Rule on all activity subject to the amended regulations, whether 
by virtue of the activity's physical location in the United States or 
by virtue of the activity's connection with activities in, or effect 
on, U.S. commerce under section 2(i) of the CEA.\51\
---------------------------------------------------------------------------

    \51\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    As previously discussed, the Commission received six comment 
letters expressing support for the Proposal. Commenters generally noted 
that the proposed amendments are beneficial for market participants and 
characterized them as helpful and practical accommodations that reflect 
the realities of the marketplace and facilitate compliance with the 
CFTC Margin Rule. Several commenters elaborated on specific benefits of 
the amendments, noting for instance that the amendments would eliminate 
burdens associated with the application of a single MTA across SMAs of 
a counterparty, provide regulatory certainty and contribute to global 
consistency in regulatory standards. Some commenters also addressed 
concerns that the Commission had raised in the Proposal, pointing out 
mitigating factors.\52\
---------------------------------------------------------------------------

    \52\ See e.g., ICI at 7 and MFA at 3 (addressing the concern 
that permitting the application of a reduced, individualized MTA, as 
proposed, to an indefinite number of SMAs may incentivize SMA owners 
to create additional separate accounts).
---------------------------------------------------------------------------

1. Benefits
    The amendments to Regulation 23.151 allow CSEs to apply an MTA of 
up to $50,000 to SMAs of a counterparty. Under the current 
requirements, a CSE must apply the MTA with respect to each 
counterparty to an uncleared transaction. As a result, in the context 
of a counterparty that has multiple SMAs through which uncleared swaps 
are traded, with each SMA potentially giving rise to IM and VM 
obligations, the amounts of IM and VM attributable to the SMAs of the 
counterparty must be aggregated to determine whether the MTA has been 
exceeded, which would require the exchange of IM or VM.
    As previously discussed, because the assets of SMAs are separately 
held, transferred, and returned at the account level, and CSEs and SMA 
asset managers do not share trading information across SMAs, 
aggregation of IM and VM obligations across SMAs for the purpose of 
determining whether the MTA has been exceeded may be impractical, 
hindering efforts to comply with the CFTC Margin Rule. The Commission 
acknowledges, however, the possibility that, in certain contexts, an 
owner of SMAs, such as a pension fund that administers investments for 
beneficiaries, may be set up to perform collateral management exercises 
and may have the capability to aggregate collateral across SMAs. 
Nevertheless, according to industry feedback, the only practical 
alternative to fully ensure compliance with the margin requirements is 
to set the MTA for each SMA at zero, so that trading by a given SMA 
does not result in an inadvertent breach of the aggregate MTA threshold 
without the exchange of the required margin.
    The amendments to Regulation 23.151, by allowing the application of 
an MTA of up to $50,000 for each SMA of a counterparty, will ease the 
operational burdens and transactional costs associated with managing 
frequent transfers of small amounts of collateral that counterparties 
would incur if the MTA for SMAs were to be set at zero. In addition, 
the amendments give flexibility to CSEs, owners of SMAs, and asset 
managers to negotiate MTA levels within the regulatory limits that 
match the risks of the SMAs and their investment strategies, and the 
uncleared swaps being traded.
    Furthermore, because the amendments to Regulation 23.151 simplify 
the application of the MTA in the SMA context, thereby reducing the 
operational burden, market participants may be encouraged to 
participate in the uncleared swap markets through managed accounts, and 
account managers may also make their services more readily available to 
clients. As a result, trading in the uncleared swap markets may 
increase, promoting competition and liquidity.
    The amendment of Regulation 23.158(a) could likewise lead to 
efficiencies in the application of the MTA. The amendment, as adopted, 
states that if a CSE and its counterparty agree to have separate MTAs 
for IM and VM, the respective amounts of MTA must be reflected in the 
margin documentation required by Regulation 23.158(a). CSEs will thus 
be able to maintain separate margin settlement workflows for IM and VM 
to address the differing segregation treatments for IM and VM under the 
CFTC Margin Rule.
    The Commission notes that the application of separate MTAs for IM 
and VM has been adopted in other jurisdictions, including the European 
Union, and the practice is widespread. The amendments, by aligning the 
CFTC with other jurisdictions with respect to the application of the 
MTA, advance the CFTC's goal of promoting consistent international 
standards, in line with the statutory mandate set forth in the Dodd-
Frank Act.
    Finally, the amendments, as adopted, provide certainty to market 
participants who may have relied on Letters 17-12 and 19-25, and could 
thereby facilitate their efforts to take the operation of the 
Commission's regulations into account in the planning of their 
uncleared swap activities.
2. Costs
    The amendments to Regulation 23.151 could result in a CSE applying 
an MTA that exceeds, in the aggregate, the current MTA limit of 
$500,000. That is because the amendments, as adopted, permit the 
application of an MTA of up to $50,000 for each SMA of a counterparty, 
without limiting the number of SMAs to which the $50,000 threshold may 
be applied. The amendments thus could incentivize SMA owners to 
increase the number of separate accounts in order to benefit from the 
higher MTA limit. As a result, the collection and posting of margin for 
some SMAs may be delayed, since margin will not need to be exchanged 
until the MTA threshold is exceeded, which could result in the exchange 
of less collateral to mitigate the risk of uncleared swaps.
    The amendment to Regulation 23.158(a), as adopted, states that if a 
CSE and its counterparty agree to have separate MTAs for IM and VM, the 
respective amounts of MTA must be reflected in the margin documentation

[[Page 6856]]

required by Regulation 23.158(a). The amendment recognizes that CSEs 
can apply separate MTAs for IM and VM for determining whether 
Regulations 23.152(b)(3) and 23.153(c) require the exchange of IM or 
VM. The Commission acknowledges that the application of separate IM and 
VM MTAs may result in the exchange of a lower amount of total margin 
between a CSE and its counterparty to mitigate the risk of their 
uncleared swaps than the amount that would be exchanged if the IM and 
VM MTA were computed on an aggregate basis.\53\ The Commission notes 
that this cost may be mitigated because the application of separate IM 
and VM MTAs could also result in the exchange of higher rather than 
lower amounts of margin.\54\
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    \53\ Supra note 38 (explaining how the application of separate 
MTAs for IM and VM could result in the exchange of lower amounts of 
margin than if IM and VM MTA were computed on an aggregate basis).
    \54\ The following illustration explains how the application of 
separate MTAs for IM and VM could result in the exchange of higher 
amounts of margin than if IM and VM MTA were computed on an 
aggregate basis: An SD and a counterparty agree to $300,000 IM MTA, 
and $200,000 VM MTA. If the margin calculations set forth in 
Commission regulations 23.154 (for IM), and 23.155 (for VM) require 
the SD to post $200,000 of IM with the counterparty and $250,000 of 
VM with the counterparty, the SD would not be required to post IM 
with the counterparty as the $200,000 requirement is less than the 
$300,000 MTA. However, the SD would be required to post $250,000 in 
VM as the VM required exceeds the $200,000 VM MTA, even though the 
total amount of margin owed is below the $500,000 MTA set forth in 
Commission regulations 23.152(b)(3) and 23.153(c). Letter 19-25 at 
4.
---------------------------------------------------------------------------

    While the Commission recognizes that the uncollateralized exposure 
that may result from amending Regulations 23.151 and 23.158(a), in line 
with Letters 17-12 and 19-25, could increase credit risk associated 
with uncleared swaps, the Commission believes that a number of 
safeguards exist to mitigate this risk. The Commission notes that the 
amendments, as adopted, set the MTA at low levels. When the MTA is 
applied to a counterparty, the sum of the IM and VM MTAs must not 
exceed $500,000. When the MTA is applied to an SMA of a counterparty, 
the sum of the IM and VM MTAs must not exceed $50,000. In particular 
with respect to the application of the MTA to SMAs, the low level of 
the MTA may dampen the incentive to create additional SMAs to benefit 
from the potentially higher MTA threshold given the inability to net 
collateral across SMAs under the Final Rule. Several commenters 
confirmed the Commission's assessment and some added that the burdens 
and costs of creating and maintaining separate accounts would likely 
override the benefits of any marginal increase in MTA.\55\ Also, the 
Commission notes that other regulatory safeguards exist that would 
limit the potential increase in the credit exposure, including section 
4s(j)(2) of the CEA,\56\ which mandates that CSEs adopt a robust and 
professional risk management system adequate for the management of day-
to-day swap activities, and Regulation 23.600,\57\ which requires CSEs, 
in establishing a risk management program for the monitoring and 
management of risk related to their swap activities, to account for 
credit risk and to set risk tolerance limits.
---------------------------------------------------------------------------

    \55\ See ICI at 7; MFA at 3; SIFMA AMG at 3.
    \56\ 7 U.S.C. 6s(j)(2).
    \57\ 17 CFR 23.600.
---------------------------------------------------------------------------

3. Section 15(a) Considerations
    In light of the foregoing, the CFTC has evaluated the costs and 
benefits of the Final Rule pursuant to the five considerations 
identified in section 15(a) of the CEA as follows:
a. Protection of Market Participants and Public
    As discussed above, the amendments to Regulations 23.151 and 
23.158(a), which address the application of the MTA to SMAs and the 
application of separate MTAs for IM and VM, remove practical burdens in 
the application of the MTA, facilitating the implementation of the CFTC 
Margin Rule, with minimal impact on the protection of market 
participants and the public in general. Although the amendments, as 
adopted, could result in larger amounts of MTA being applied to 
uncleared swaps, potentially resulting in the exchange of reduced 
margin to offset the risk of uncleared swaps, the impact is likely to 
be negligible relative to the size of the uncleared swap positions. The 
Commission notes that the MTA thresholds are set at low levels. In 
addition, CSEs are required to monitor and manage risk associated with 
their swaps, in particular credit risk, and to set tolerance levels as 
part of the risk management program mandated by Regulation 23.600. To 
meet the risk tolerance levels, a CSE may contractually limit the MTA 
or the number of SMAs for a particular counterparty with whom the CSE 
enters into uncleared swap transactions.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
    By amending Regulation 23.151 to allow CSEs to apply an MTA of up 
to $50,000 for each SMA of a counterparty, the Commission eliminates 
burdens and practical challenges associated with the computation and 
aggregation of the MTA across multiple SMAs. In addition, the new MTA 
threshold for SMAs could have the effect of delaying how soon margin 
would be exchanged, as the aggregate MTA for SMAs is no longer limited 
to $500,000.
    The simplification of the process for applying the MTA to SMAs and 
the reduced cost that may be realized from the deferral of margin 
obligations may encourage market participants to enter into uncleared 
swaps through accounts managed by asset managers and also encourage 
asset managers to accept more clients. The amendments to Regulation 
23.151 could therefore foster competitiveness by encouraging increased 
participation in the uncleared swap markets.
    The amendment to Regulation 23.158(a) states that if a CSE and its 
counterparty agree to have separate MTAs for IM and VM, the respective 
amounts of MTA must be reflected in the margin documentation required 
by Regulation 23.158(a). The amendment recognizes that CSEs can apply 
separate MTAs for IM and VM, enabling CSEs to accommodate the different 
segregation treatments for IM and VM under the CFTC's margin 
requirements and to more efficiently comply with the CFTC Margin Rule.
    The amendments to Regulations 23.151 and 23.158(a) could have the 
overall effect of permitting larger amounts of MTA being applied to 
uncleared swaps, resulting in the collection and posting of less 
collateral to offset the risk of uncleared swaps, which could undermine 
the integrity of the markets. The Commission, however, believes that 
the uncollateralized swap exposure will be limited given that the MTA 
thresholds are set at low levels, and there are other built-in 
regulatory safeguards, such as the requirement that CSEs establish a 
risk management program under Regulation 23.600 that provides for the 
implementation of internal risk parameters for the monitoring and 
management of swap risk.
    The Commission also notes that the amendments provide certainty to 
market participants who may have relied on Letters 17-12 and 19-25, and 
thereby facilitate their efforts to take the operation of the 
Commission's regulations into account in planning their uncleared swap 
activities.
c. Price Discovery
    The amendments to Regulations 23.151 and 23.158(a) simplify the 
process for applying the MTA, reducing the burden and cost of 
implementation. Given these cost savings, CSEs and

[[Page 6857]]

other market participants may be encouraged to increase their 
participation in the uncleared swap markets. As a result, trading in 
uncleared swaps may increase, leading to increased liquidity and 
enhanced price discovery.
d. Sound Risk Management
    Because the amendments to Regulations 23.151 and 23.158(a) permit 
the application of larger amounts of MTA, less margin may be collected 
and posted to offset the risk of uncleared swaps. Nevertheless, the 
Commission believes that the risk is mitigated because the regulatory 
MTA thresholds are set at low levels, and CSEs are required to have a 
risk management program that provides for the implementation of 
internal risk management parameters for the monitoring and management 
of swap risk.
    The Commission also notes that the amendments simplify the 
application of the MTA, reducing the burden and cost of implementation, 
without leading to an unacceptable level of uncollateralized credit 
risk. Such reduced burden and cost could encourage market participants 
to increase their participation in the uncleared swap markets, 
potentially facilitating improved risk management for counterparties 
using uncleared swaps to hedge risks. Moreover, by facilitating 
compliance with certain aspects of the Commission's regulations, the 
Commission allows market participants to focus their efforts on 
monitoring and ensuring compliance with other substantive aspects of 
the CFTC Margin Rule, thus promoting balanced and sound risk 
management.
e. Other Public Interest Considerations
    The amendment to Regulation 23.158(a) addresses the application of 
separate MTAs for IM and VM, contributing to the CFTC's alignment with 
other jurisdictions, such as the European Union, which advances the 
CFTC's efforts to achieve consistent international standards. The 
CFTC's alignment with other jurisdictions with respect to the 
application of the MTA will benefit CSEs that are global market 
participants by eliminating the need to establish different settlement 
workflows tailored to each jurisdiction in which they operate.

C. Antitrust Considerations

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
objectives of the CEA, as well as the policies and purposes of the CEA, 
in issuing any order or adopting any Commission rule or regulation 
(including any exemption under section 4(c) or 4c(b)), or in requiring 
or approving any bylaw, rule, or regulation of a contract market or 
registered futures association established pursuant to section 17 of 
the CEA.\58\
---------------------------------------------------------------------------

    \58\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requested comment on whether the Proposal implicated any other specific 
public interest to be protected by the antitrust laws and received no 
comments.
    The Commission has considered the Final Rule to determine whether 
it is anticompetitive and has identified no anticompetitive effects. 
The Commission requested comment on whether the Proposal was 
anticompetitive and, if it was, what the anticompetitive effects were, 
and received no comments.
    Because the Commission has determined that the 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 17 CFR Part 23

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

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

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

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


0
2. Amend Sec.  23.151 by:
0
a. Revising the definition of ``minimum transfer amount''; and
0
b. Adding in alphabetical order a definition for ``separately managed 
account''.
    The revision and addition read as follows:


Sec.  23.151   Definitions applicable to margin requirements.

* * * * *
    Minimum transfer amount means a combined initial and variation 
margin amount under which no actual transfer of funds is required. The 
minimum transfer amount shall be $500,000. Where a counterparty to a 
covered swap entity owns two or more separately managed accounts, a 
minimum transfer amount of up to $50,000 may be applied for each 
separately managed account.
* * * * *
    Separately managed account means an account of a counterparty to a 
covered swap entity that meets the following requirements:
    (1) The account is managed by an asset manager and governed by an 
investment management agreement, pursuant to which the counterparty 
grants the asset manager authority with respect to a specified amount 
of the counterparty's assets;
    (2) Swaps are entered into between the counterparty and the covered 
swap entity by the asset manager on behalf of the account pursuant to 
authority granted by the counterparty through an investment management 
agreement; and
    (3) The swaps of such account are subject to a master netting 
agreement that does not provide for the netting of initial or variation 
margin obligations across all such accounts of the counterparty that 
have swaps outstanding with the covered swap entity.
* * * * *

0
3. Amend Sec.  23.152 by revising paragraph (b)(3) to read as follows:


Sec.  23.152   Collection and posting of initial margin.

* * * * *
    (b) * * *
    (3) Minimum transfer amount. A covered swap entity is not required 
to collect or to post initial margin pursuant to Sec. Sec.  23.150 
through 23.161 with respect to a particular counterparty unless and 
until the combined amount of initial margin and variation margin that 
is required pursuant to Sec. Sec.  23.150 through 23.161 to be 
collected or posted and that has not been collected or posted with 
respect to the counterparty is greater than the minimum transfer 
amount, as the term is defined in Sec.  23.151.
* * * * *

0
4. Amend Sec.  23.153 by revising paragraph (c) to read as follows:


Sec.  23.153   Collection and posting of variation margin.

* * * * *
    (c) Minimum transfer amount. A covered swap entity is not required 
to collect or to post variation margin pursuant to Sec. Sec.  23.150 
through 23.161 with respect to a particular counterparty unless and 
until the combined amount of initial margin and variation margin

[[Page 6858]]

that is required pursuant to Sec. Sec.  23.150 through 23.161 to be 
collected or posted and that has not been collected or posted with 
respect to the counterparty is greater than the minimum transfer 
amount, as the term is defined in Sec.  23.151.
* * * * *

0
5. Amend Sec.  23.158 by revising paragraph (a) to read as follows:


Sec.  23.158   Margin documentation.

    (a) General requirement. Each covered swap entity shall execute 
documentation with each counterparty that complies with the 
requirements of Sec.  23.504 and that complies with this section, as 
applicable. For uncleared swaps between a covered swap entity and a 
counterparty that is a swap entity or a financial end user, the 
documentation shall provide the covered swap entity with the 
contractual right and obligation to exchange initial margin and 
variation margin in such amounts, in such form, and under such 
circumstances as are required by Sec. Sec.  23.150 through 23.161. With 
respect to the minimum transfer amount, if a covered swap entity and a 
counterparty that is a swap entity or a financial end user agree to 
have separate minimum transfer amounts for initial and variation 
margin, the documentation shall specify the amounts to be allocated for 
initial margin and variation margin. Such amounts, on a combined basis, 
must not exceed the minimum transfer amount, as the term is defined in 
Sec.  23.151.
* * * * *

    Issued in Washington, DC, on December 9, 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--Voting Summary and Chairman's and 
Commissioners' Statements

Appendix 1--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 Dawn D. Stump

Overview

    I am pleased to support the final rulemaking that the Commission 
is adopting with respect to the ``minimum transfer amount'' 
provisions of its margin requirements for uncleared swaps.
    This rulemaking addresses recommendations that the Commission 
has received from its Global Markets Advisory Committee (``GMAC''), 
which I am proud to sponsor, and is based on a comprehensive report 
prepared by GMAC's Subcommittee on Margin Requirements for Non-
Cleared Swaps (``GMAC Margin Subcommittee'').\59\ It demonstrates 
the value added to the Commission's policymaking by its Advisory 
Committees, in which market participants and other interested 
parties come together to provide us with their perspectives and 
potential solutions to practical problems.
---------------------------------------------------------------------------

    \59\ Recommendations to Improve Scoping and Implementation of 
Initial Margin Requirements for Non-Cleared Swaps, Report to the 
CFTC's Global Markets Advisory Committee by the Subcommittee on 
Margin Requirements for Non-Cleared Swaps (April 2020), available at 
https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download.
---------------------------------------------------------------------------

    The rulemaking we are adopting makes two changes to the 
Commission's uncleared margin rules, which have much to commend 
them--indeed, we did not receive any comment letters opposing them. 
These rule changes further objectives that I have commented on 
before:
     The need to tailor our rules to assure that they are 
workable for those required to comply with them; and
     the benefits of codifying relief that has been issued 
by our Staff and re-visiting our rules, where appropriate.

A Different Universe Is Coming Into Scope of the Uncleared Margin Rules

    The Commission's uncleared margin rules for swap dealers, like 
the Framework of the Basel Committee on Banking Supervision and the 
Board of the International Organization of Securities Commissions 
(``BCBS/IOSCO'') \60\ on which they are based, were designed 
primarily to ensure the exchange of margin between the largest, most 
systemic, and interconnected financial institutions for their 
uncleared swap transactions with one another. Today, these 
institutions and transactions are subject to uncleared margin 
requirements that have taken effect since the rules were adopted.
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    \60\ See generally BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf.
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    Pursuant to the phased implementation schedule of the 
Commission's rules and the BCBS/IOSCO Framework, though, a different 
universe of market participants--presenting unique considerations--
will soon be coming into scope of the margin rules. It is only now, 
as we enter the final phases of the implementation schedule, that 
the Commission's uncleared margin rules will apply to a significant 
number of financial end-users, and we have a responsibility to make 
sure they are fit for that purpose. Accordingly, now is the time we 
must thoughtfully consider whether the regulatory parameters that we 
have designed for the largest financial institutions in the earlier 
phases of margin implementation need to be tailored to account for 
the practical and operational challenges posed by the exchange of 
margin when one of the counterparties is a pension plan, endowment, 
insurance provider, mortgage service provider, or other financial 
end-user.
    This rulemaking regarding the minimum transfer amount (``MTA'') 
does exactly that. The Commission's uncleared margin rules provide 
that a swap dealer is not required to collect or post initial margin 
(``IM'') or variation margin (``VM'') with a counterparty until the 
combined amount of such IM and VM exceeds the MTA of $500,000. Yet, 
the application of the MTA presents a significant operational 
challenge for institutional investors that typically hire asset 
managers to exercise investment discretion over portions of their 
assets in separately managed accounts (``SMAs'') for purposes of 
diversification. As a practical matter, neither the owner of the 
SMA, the manager of the assets in the SMA, nor the swap dealer that 
is a counterparty to the SMA is in a position to readily determine 
when the MTA has been exceeded on an aggregate basis (or to assure 
that it is not).
    To address this challenge, the Commission is amending the 
definition of MTA in its margin rules to allow a swap dealer to 
apply an MTA of up to $50,000 to each SMA owned by a counterparty 
with which the swap dealer enters into uncleared swaps. As noted in 
the release, any potential increase in uncollateralized credit risk 
as a result would be mitigated both by the conditions set out in the 
rules we are adopting, as well as existing safeguards in the 
Commodity Exchange Act (``CEA'') and the Commission's 
regulations.\61\
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    \61\ Specifically, CEA Section 4s(j)(2), 7 U.S.C. 6s(j)(2), 
requires swap dealers to adopt a robust risk management system 
adequate for the management of their swap activities, and CFTC Rule 
23.600, 17 CFR 23.600, requires swap dealers to establish a risk 
management program to monitor and manage risks associated with their 
swap activities.
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    This is a sensible approach and an appropriate refinement to 
make the Commission's uncleared margin rules workable for SMAs given 
the realities of the modern investment management environment. As I 
have stated before, no matter how well-intentioned a rule may be, if 
it is not workable, it cannot deliver on its intended purpose.\62\
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    \62\ Statement of Commissioner Dawn D. Stump Regarding Final 
Rule: Cross-Border Application of the Registration Thresholds and 
Certain Requirements Applicable to Swap Dealers and Major Swap 
Participants (July 23, 2020), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement072320.
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The Benefits of Codifying Staff Relief and Re-Visiting Our Rules

    Application of MTA to SMAs: The rule change that I have 
discussed above regarding the application of the MTA to SMAs would 
codify no-action relief in Letter No. 17-12 that our Staff issued in 
2017.\63\ The Commission's Staff often has occasion to issue relief 
or take other action in the form

[[Page 6859]]

of no-action letters, interpretative letters, or advisories on 
various issues and in various circumstances. This affords the 
Commission a chance to observe how the Staff action operates in 
real-time, and to evaluate lessons learned. With the benefit of this 
time and experience, the Commission should then consider whether 
codifying such Staff action into rules is appropriate.\64\
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    \63\ CFTC Letter No. 17-12, Commission Regulations 23.152(b)(3) 
and 23.153(c): No-Action Position for Minimum Transfer Amount with 
respect to Separately Managed Accounts (February 13, 2017), 
available at https://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-12.pdf.
    \64\ See comments of Commissioner Dawn D. Stump during Open 
Commission Meeting on January 30, 2020, at 183 (noting that after 
several years of no-action relief regarding trading on swap 
execution facilities (``SEFs''), ``we have the benefit of time and 
experience and it is time to think about codifying some of that 
relief. . . . [T]he SEFs, the market participants, and the 
Commission have benefited from this time and we have an obligation 
to provide more legal certainty through codifying these provisions 
into rules.''), available at https://www.cftc.gov/sites/default/files/2020/08/1597339661/openmeeting_013020_Transcript.pdf.
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    As I have said before, ``[i]t is simply good government to re-
visit our rules and assess whether certain rules need to be updated, 
evaluate whether rules are achieving their objectives, and identify 
rules that are falling short and should be withdrawn or improved.'' 
\65\ Experience with the Staff no-action relief in Letter No. 17-12 
supports our rule change to tailor the application of the MTA under 
the Commission's uncleared margin rules in the SMA context.
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    \65\ Statement of Commissioner Dawn D. Stump for CFTC Open 
Meeting on: (1) Final Rule on Position Limits and Position 
Accountability for Security Futures Products; and (2) Proposed Rule 
on Public Rulemaking Procedures (Part 13 Amendments) (September 16, 
2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement091619.
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    Separate MTAs for IM and VM: The second rule change regarding 
the MTA that we are adopting similarly would codify existing Staff 
no-action relief in recognition of market realities. Consistent with 
Staff no-action Letter No. 19-25,\66\ it would recognize that a swap 
dealer may apply separate MTAs for IM and VM with each counterparty, 
provided that the MTAs corresponding to IM and VM are specified in 
the margin documentation required under the Commission's 
regulations, and that the MTAs, on a combined basis, do not exceed 
the prescribed MTA.
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    \66\ CFTC Letter No. 19-25, Commission Regulations 23.151, 
23.152, and 23.153--Staff Time-Limited No-Action Position Regarding 
Application of Minimum Transfer Amount under the Uncleared Margin 
Rules (December 6, 2019), available at https://www.cftc.gov/csl/19-25/download.
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    Staff's no-action relief, and the Commission's rule amendments 
to codify that relief, take into account the separate settlement 
workflows that swap counterparties maintain to reflect, from an 
operational perspective, the different regulatory treatment of IM 
and VM.\67\ And given that the total amount of combined IM and VM 
exchanged would not exceed the prescribed MTA, separate MTAs for IM 
and VM would not materially increase the amount of credit risk at a 
given time. Under Letter No. 19-25 and this codification, swap 
dealers and their counterparties can manage MTA in an operationally 
practicable way that aligns with the market standard.
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    \67\ Under the Commission's uncleared margin rules, IM posted or 
collected by a swap dealer must be held by one or more custodians 
that are not affiliated with the swap dealer or the counterparty, 
whereas VM posted or collected by a swap dealer is not required to 
be segregated with an independent custodian. See 17 CFR 23.157.
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There Remains Unfinished Business

    While I am pleased with the steps the Commission is taking, 
there remains unfinished business in the implementation of uncleared 
margin requirements. The report of the GMAC Margin Subcommittee 
recommended several actions, beyond those that we are adopting, to 
address the hurdles associated with the application of uncleared 
margin requirements to end-users. Having been present for the 
development of the Dodd-Frank Act, I recall that the concerns 
expressed by many lawmakers at the time focused on the application 
of the new requirements to end-users. The unique challenges with 
respect to uncleared margin that caused uneasiness back in 2009-2010 
are now much more immediate as the margin requirements are being 
phased in to apply to these end-users. As the calendar turns into 
the new year, I look forward to continuing to work together to 
address the other recommendations included in the GMAC Margin 
Subcommittee's report regarding applying the uncleared margin rules 
to financial end-users. The need to do so will only become more 
urgent as time marches on.

Conclusion

    To be clear, these changes to the uncleared margin rules are not 
a ``roll-back'' of the margin requirements that apply today to the 
largest financial institutions in their swap transactions with one 
another. Rather, they reflect a thoughtful refinement of our rules 
to take account of specific circumstances in which the rules impose 
substantial practical and operational challenges (i.e., they are not 
workable) when applied to financial end-users that are now coming 
within the scope of their mandates.
    I am very appreciative of the many people whose efforts have 
contributed to bringing this rulemaking to fruition. First, the 
members of the GMAC, and especially the GMAC Margin Subcommittee, 
who devoted a tremendous amount of time to provide us with a high-
quality report on complex margin issues during the turmoil at the 
start of the pandemic. Second, Chairman Tarbert and my fellow 
Commissioners for working with me on these important issues. And 
finally, the Staff of the Market Participants Division, whose 
tireless efforts have enabled us to advance these initiatives to 
assure that our uncleared margin rules are workable for all, thereby 
enhancing compliance consistent with our oversight responsibilities 
under the CEA.

Appendix 3--Statement of Commissioner Dan M. Berkovitz

I. Introduction

    I support today's two final rules that make tailored amendments 
to the CFTC's Margin Rule.\1\ The Margin Rule requires swap dealers 
(``SDs'') and major swap participants (``MSPs'') for which there is 
no prudential regulator to post and collect, each business day, 
initial and variation margin for uncleared swap transactions with 
each counterparty that is an SD, MSP, or a financial end user with 
material swaps exposure (``MSE'').\2\ The Margin Rule is a lynchpin 
of the Dodd-Frank reforms for swaps markets, and critical to 
mitigating risks in the financial system that might otherwise arise 
from uncleared swaps.\3\ I support the final rules because they 
provide targeted, operational improvements to the Margin Rule; 
include backstops to deter any potential abuse; and are unlikely to 
increase risk to the U.S. financial system.
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    \1\ Margin Requirements for Uncleared Swaps for Swap Dealers and 
Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (``Margin Rule'').
    \2\ Although addressed in the final rules, there are currently 
no registered MSPs.
    \3\ Section 4s(e) of the Commodity Exchange Act (``CEA''), as 
amended by the Dodd-Frank Act, requires the Commission to adopt 
rules for minimum initial and variation margin for uncleared swaps 
entered into by SDs and MSPs for which there is no prudential 
regulator.
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    The two final rules address: (1) The definition of MSE and an 
alternative method for calculating initial margin (``MSE and Initial 
Margin Final Rule''); and (2) the application of the minimum 
transfer amount (``MTA'') for initial and variation margin (``MTA 
Final Rule''). The final rules align Commission requirements with 
international frameworks developed by the Basel Committee on Banking 
Supervision and the International Organization of Securities 
Commissions (``BCBS/IOSCO''),\4\ and incorporate recommendations 
made to the CFTC's Global Markets Advisory Committee.\5\ The final 
rules also build off existing CFTC staff no-action letters that in 
some cases have been in place since 2017, and that have operated 
with no apparent detrimental effects.
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    \4\ BCBS/IOSCO, Margin requirements for non-centrally cleared 
derivatives (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf. The BCBS/IOSCO framework was originally promulgated in 
2013 and later revised in 2015.
    \5\ 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 (Apr. 2020), available at 
https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download.
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II. MSE and Initial Margin Final Rule

    The MSE and Initial Margin Final Rule amends the definition of 
MSE to align it with the BCBS/IOSCO framework, including the method 
for calculating the average daily aggregate notional amount 
(``AANA'') of swaps. The final rule provides for calculations based 
on the average of the last business day in each month of a three-
month period. The Commission previously raised concerns that this 
method of AANA calculation could potentially become less 
representative of an entity's true AANA and swaps exposure, 
potentially through the use of ``window dressing'' to artificially 
reduce AANA during the measurement period.\6\
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    \6\ See Margin Rule, 81 FR at 645.
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    The MSE and Initial Margin Final Rule includes an important new 
provision to

[[Page 6860]]

address this issue. The final rule explicitly prohibits any 
``[a]ctivities not carried out in the regular course of business and 
willfully designed to circumvent calculation at month-end to evade 
meeting the definition of material swaps exposure . . . .'' \7\ The 
addition of this language to the final rule's regulatory text will 
help ensure that CFTC efforts at international harmonization will 
not come at the expense of the safety and soundness of the U.S. 
financial system.\8\ I thank the Chairman and the CFTC staff for 
working with my office to include this provision.
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    \7\ MSE and Initial Margin Final Rule at new Sec.  23.151 
(defining ``Material Swaps Exposure'').
    \8\ The preamble to the MSE and Initial Margin Final Rule also 
notes an analysis by the CFTC's Office of the Chief Economist 
indicating that the new month-end AANA calculation method captures 
substantially the same entities and total number of entities as the 
Commission's previous daily AANA calculation method. As with any 
rulemaking, the Commission is free in the future to periodically 
review its data and confirm that the new AANA calculation method is 
performing as expected.
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    The MSE and Initial Margin Final Rule will also allow SDs and 
MSPs for which there is no prudential regulator (``Covered Swap 
Entities'' or ``CSEs'') to rely on the initial margin calculations 
of the more sophisticated counterparties with whom they transact 
swaps to manage their risks. This flexibility is limited to 
circumstances where a CSE enters into uncleared swaps with an SD, 
MSP, or swap entity to hedge its customer-facing swaps. This 
amendment to the Commission's existing rules could help promote 
liquidity and competition in swaps markets by increasing choice for 
end-users that are CSE customers.
    The MSE and Initial Margin Final Rule provides helpful direction 
regarding the scope of hedging swaps for purposes of relying on a 
CSE counterparty's initial margin calculations. As set forth in the 
preamble to the final rule, a hedging swap must be consistent 
(although not identical) with the statutory definition of ``bona 
fide hedging transaction or position'' in CEA section 
4a(c)(2)(B).\9\ The final rule also makes clear that existing 
Commission regulations require a CSE that relies on its 
counterparty's initial margin calculations to also take steps to 
``monitor, identify, and address potential shortfalls in the amounts 
of [initial margin] generated by the counterparty on whose [initial 
margin] model the CSE is relying.'' \10\
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    \9\ 7 U.S.C. 6a(c)(2).
    \10\ MSE and Initial Margin Final Rule at section II(B).
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III. MTA Final Rule

    To reduce operational burdens associated with de minimis margin 
transfers, the Margin Rule provides that a CSE is not required to 
collect or post margin until the combined amount of initial margin 
and variation margin that is required to be collected or posted and 
that has not been collected or posted with respect to the 
counterparty exceeds $500,000--the MTA.\11\ This MTA level, in part, 
helps limit the amount of a counterparty's uncollateralized, 
uncleared swaps exposure and mitigate any systemic risk arising from 
such swaps.
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    \11\ 17 CFR 23.151.
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    The MTA Final Rule addresses the application of the $500,000 MTA 
level to a counterparty's ``separately managed accounts,'' as well 
as the use of separate MTAs for initial and variation margin.\12\ 
The MTA Final Rule codifies separate treatment for separately 
managed accounts and permits an MTA of $50,000 for each such account 
of a counterparty. This approach responds to practical limits on the 
ability of asset managers, for example, to aggregate initial and 
variation margin obligations across multiple separately managed 
accounts owned by the same counterparty. The MTA Final Rule also 
provides that if certain entities agree to separate MTAs for initial 
margin and variation margin, the respective amounts of MTA must be 
reflected in their required margin documentation.
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    \12\ Both aspects of the MTA Final Rule were the subject of CFTC 
staff no-action letters issued in 2017 and 2019, respectively.
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    These new provisions balance concerns over operational 
inefficiencies and practical challenges in the Commission's MTA 
rules against concerns that they may result in the exchange of less 
total margin than would be the case under the Commission's current 
requirements. Comments in response to the proposed rule noted the 
difficulties that would be associated with creating numerous 
separately managed accounts solely to evade the comparatively low 
$50,000 MTA for separately managed accounts. The MTA Final Rule also 
defines separately managed account so that the swaps of such account 
are not subject to a netting of initial or variation margin 
obligations. This potentially provides further disincentive to 
create separately managed accounts solely for the purpose of evading 
the $50,000 MTA level for such accounts.

IV. Conclusion

    Mitigating systemic risk to the U.S. financial system was a 
primary objective of the Dodd-Frank Act in 2010, and of subsequent 
Commission rulemakings to implement Dodd-Frank, including the Margin 
Rule adopted in 2016. The Commission must remain committed to the 
Margin Rule and vigilant for any large pool of uncollateralized, 
uncleared swaps exposure. Today's targeted final rules, which codify 
existing practices, include embedded backstops, and provide tailored 
operational enhancements to the Margin Rule, are unlikely to present 
systemic risks.
    I thank staff of the Market Participants Division for their work 
on these final rules.

[FR Doc. 2020-27508 Filed 1-22-21; 8:45 am]
BILLING CODE 6351-01-P