[Federal Register Volume 86, Number 212 (Friday, November 5, 2021)]
[Notices]
[Pages 61357-61369]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-24170]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93501; File No. S7-13-12]


Order Granting Conditional Exemptions Under the Securities 
Exchange Act of 1934 in Connection With the Portfolio Margining of 
Cleared Swaps and Security-Based Swaps That Are Credit Default Swaps

November 1, 2021.
AGENCY: Securities and Exchange Commission (``SEC'' or ``Commission'').

ACTION: Exemptive order.

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SUMMARY: The Commission is granting exemptive relief, subject to 
certain conditions, from compliance with certain provisions of the 
Securities Exchange Act of 1934 in connection with a program to 
portfolio margin cleared swaps customer and affiliate positions in 
cleared credit default swaps that are swaps and security-based swaps in 
a segregated account established and maintained in accordance with 
Section 4d(f) of the Commodity Exchange Act (in the case of a cleared 
swaps customer) or a cleared swaps proprietary account (in the case of 
an affiliate). This exemptive relief supersedes and replaces the

[[Page 61358]]

Commission's Order Granting Conditional Exemptions under the Securities 
Exchange Act of 1934 in Connection with Portfolio Margining of Swaps 
and Security-based Swaps issued in December 2012.

DATES: This order is effective November 1, 2021.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at 
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202) 
551-5522; Raymond Lombardo, Assistant Director, at 202-551-5755; or 
Sheila Dombal Swartz, Senior Special Counsel, at (202) 551-5545, 
Division of Trading and Markets, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-7010.

I. Introduction

    The Commission, by order, is granting conditional exemptive relief 
to SEC-registered clearing agencies also registered with the Commodity 
Futures Trading Commission (``CFTC'') as derivative clearing 
organizations (``clearing agency/DCOs'') and SEC-registered broker-
dealers also registered with the CFTC as futures commission merchants 
(``BD/FCMs''). This order (``2021 Final Order'') exempts these entities 
from compliance with certain provisions of the Securities Exchange Act 
of 1934 (``Exchange Act'') in connection with a program to portfolio 
margin cleared swaps customer and affiliate positions in cleared 
security-based swaps and swaps that are credit default swaps (``CDS'') 
in a segregated account established and maintained in accordance with 
Section 4d(f) of the Commodity Exchange Act (``CEA'') in the case of a 
cleared swaps customer (``CFTC cleared swaps customer account'') or a 
cleared swaps proprietary account in the case of an affiliate (``CFTC 
cleared swaps proprietary account'') (each a ``CFTC cleared swaps 
account''), and to calculate margin requirements on a portfolio basis.
    The 2021 Final Order supersedes and replaces the Commission's 
December 2012 order providing similar relief (``2012 Order''), and 
modifies certain of its conditions, as discussed in more detail 
below.\1\ In particular, the 2021 Final Order eliminates conditions 
(a)(1) and (a)(2) in the 2012 Order pertaining to the exemptions for 
clearing agency/DCOs.\2\ The requirements to adhere to the 2012 Order's 
conditions were designed to be triggered on the compliance date for the 
final capital, margin, and segregation requirements for security-based 
swap dealers (``SBSDs''): October 6, 2021. Conditions (a)(1) and (a)(2) 
in the 2012 Order were intended to provide an option for security-based 
swap customers to portfolio margin cleared security-based swaps and 
swaps that are CDS (``cleared CDS'') in a security-based swap account 
in accordance with Section 3E of the Exchange Act (``SEC SBS account'') 
as an alternative to a CFTC cleared swaps account.\3\
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    \1\ Order Granting Conditional Exemptions under the Securities 
Exchange Act of 1934 in Connection with Portfolio Margining of Swaps 
and Security-based Swaps, Exchange Act Release No. 68433 (Dec. 12, 
2012) 77 FR 75211 (Dec. 19, 2012).
    \2\ See 2012 Order, 77 FR 75219-20.
    \3\ The Commission has adopted capital, margin, and segregation 
requirements under the Exchange Act for security-based swaps dealers 
(``SBSDs''). See Capital, Margin, and Segregation Requirements for 
Security-Based Swap Dealers and Major Security-Based Swap 
Participants and Capital and Segregation Requirements for Broker-
Dealers, Exchange Act Release No. 86175 (June 21, 2019), 84 FR 
43872, 43956-57 (Aug. 22, 2019) (``Capital, Margin, and Segregation 
Adopting Release'').
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    The 2021 Final Order also modifies the conditions in paragraphs 
(b)(1)(ii) and (2)(ii) of the 2012 Order requiring subordination 
agreements. The modifications provide that the scope of the 
subordination only extends to money, securities, or other property held 
in the subordinating person's CFTC cleared customer or proprietary 
account. The modifications also provide that the person need not 
subordinate claims to money, securities, or other property held in the 
subordinating person's CFTC cleared customer or proprietary account to 
the claims of general creditors.
    In addition, the 2021 Final Order eliminates condition (b)(3) in 
the 2012 Order, which required approval of a BD/FCM's margin 
methodology by the Commission or Commission staff. Instead, under the 
2021 Final Order, a BD/FCM must have an internal risk management 
program that has been approved in advance by the Commission or the 
Commission staff. Further, under the 2021 Final Order, the internal 
risk management program must have certain standards drawn from the 
letters the staff of the Division of Trading and Markets (``Division 
staff'') issued to BD/FCMs to approve their margin methodologies 
pursuant to the 2012 Order.\4\ These staff letters will be withdrawn. 
The 2021 Final Order provides that any BD/FCM that received a staff 
letter approving its margin methodology prior to the issuance of the 
2021 Final Order is deemed to have an approved internal risk management 
program for the purposes of the 2021 Final Order.
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    \4\ The staff letters are available at https://www.sec.gov/rules/exorders/exordersarchive/exorders2012.shtml.
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II. Background

A. 2012 Order

    On December 14, 2012, the Commission issued the 2012 Order to 
provide relief so that clearing agency/DCOs and BD/FCMs could offer 
customers portfolio margining of cleared CDS in a CFTC cleared swaps 
account (``CDS portfolio margin program'').\5\ The 2012 Order exempts a 
clearing agency/DCO from Sections 3E(b), 3E(d) and 3E(e) of the 
Exchange Act and any rules thereunder, solely to perform the functions 
of a clearing agency/DCO under the CDS portfolio margin program, 
subject to five conditions.\6\ It further exempts a BD/FCM from 
Sections 3E(b), 3E(d), 3E(e), and 15(c)(3) of the Exchange Act, and 
Rule 15c3-3, as well as from any requirement to treat an affiliate (as 
defined in association with the ``cleared swaps proprietary account'' 
definition in CFTC Rule 22.1) as a customer for purposes of Rules 8c-1 
and 15c2-1, subject to six conditions.\7\ The conditions applicable to 
clearing agency/DCOs and BD/FCMs were designed to: (1) Protect money, 
securities, and property of security-based swap customers; (2) address 
certain differences in the statutory requirements of the Exchange Act 
and

[[Page 61359]]

the CEA; and (3) promote appropriate risk management and disclosure.\8\
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    \5\ The CFTC also issued a companion exemptive order on January 
13, 2013 permitting ICE Clear Credit and its BD/FCM clearing members 
to provide for the portfolio margining of cleared swaps and 
security-based swaps that are CDS. See CFTC, Order, Treatment of 
Funds Held in Connection with Clearing by ICE Clear Credit of Credit 
Default Swaps (Jan. 13, 2013) (``2013 CFTC Portfolio Margin 
Order''), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/icecreditclearorder011413.pdf. See also CFTC, Order, Treatment of 
Funds Held in Connection with Clearing by ICE Clear Europe of Credit 
Default Swaps (Apr. 9, 2013), available at https://www.cftc.gov/sites/default/files/stellent/groups/public/@requestsandactions/documents/ifdocs/icecleareurope4dfcds040913.pdf.
    \6\ See 2012 Order, 77 FR 75215-16 (discussing five clearing 
agency/DCO conditions).
    \7\ See 2012 Order, 77 FR 75213-14 (discussing these sections of 
the Exchange Act and the rules), 75216-19 (discussing the 
conditions), and 75220-21 (setting forth the conditions). See also 
Order Granting Exemptions from Sections 8 and 15(a)(1) of the 
Securities Exchange Act of 1934 and Rules 3b-13(b)(2), 8c-1, 10b-10, 
15a-1(c), 15a-1(d) and 15c2-1 Thereunder in Connection with the 
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps and Determining the Expiration Date for a Temporary 
Exemption from Section 29(b) of the Securities Exchange Act of 1934 
in Connection with Registration of Security-Based Swap Dealers and 
Major Security-Based Swap Participants, Exchange Act Release No. 
90308 (Nov. 2, 2020), 85 FR 70667 (Nov. 5, 2020) (providing 
exemptions from certain rules including Rules 8c-1 and 15c-1 in 
connection with the revision of the Exchange Act definition of 
``security'' to encompass security-based swaps).
    \8\ See 2012 Order, 77 FR 75214. The 2012 Order also sought 
comment on all aspects of the exemptions it provided. 77 FR 75219. 
Letters responding to this request for comment are available at 
https://www.sec.gov/comments/s7-13-12/s71312.shtml.
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B. Division Staff Letters

    On March 8, 2013, the Division staff issued temporary conditional 
approval letters to seven BD/FCMs pursuant to condition (b)(3) in the 
2012 Order \9\ permitting them to participate in the CDS portfolio 
margin program, subject to certain conditions (the ``March 8, 2013 
letters'').\10\ The conditions included a requirement to collect 
initial margin based on a multiplier of the clearing agency/DCO margin 
requirement or to take a 100% capital charge for the difference.
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    \9\ See 2012 Order, 77 FR 75220 (providing that BD/FCM must 
require minimum margin levels with respect to any customer 
transaction in a program to commingle and portfolio margin CDS at 
least equal to the amount determined using a margin methodology 
established and maintained by the BD/FCM that has been approved by 
the Commission or the Commission staff).
    \10\ The March 8, 2013 letters and other staff letters to the 
BD/FCMs discussed in this 2021 Final Order are available at: https://www.sec.gov/rules/exorders/exordersarchive/exorders2012.shtml.
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    On June 7, 2013, the Division staff issued updated temporary 
conditional letters to the seven BD/FCMs that received the March 8, 
2013 letters, and to one additional BD/FCM, setting forth revised 
conditions for participation in the CDS portfolio margin program (``the 
June 7, 2013 letters''). The relief given by the June 7, 2013 letters 
was conditioned on the BD/FCMs implementing a margin regime and 
establishing minimum risk management standards by December 7, 2013. On 
December 6, 2013, the Division staff issued letters to the BD/FCMs 
extending the December 7, 2013 date to January 31, 2014. On January 31, 
2014, the Division staff issued letters to the eight BD/FCMs 
permanently approving their margin methodologies, subject to the 
conditions in the June 7, 2013 letters (``January 31, 2014 letters''). 
Subsequent to the issuance of the January 31, 2014 letters, the 
Division staff approved the margin methodologies of two additional BD/
FCMs, subject to the conditions in the June 7, 2013 letters.\11\ All 
the letters referenced above will be withdrawn. The 2021 Final Order 
requires that the BD/FCMs have an approved internal risk management 
program. Pursuant to the 2021 Final Order, all BD/FCMs that received a 
letter approving their margin methodologies will be deemed to have an 
approved internal risk management program.
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    \11\ The Division staff also issued an additional letter 
relating to the transfer of a CDS portfolio margin program using the 
same internal risk model and same internal risk management system 
from one broker-dealer affiliate to another. The June 7, 2013 
letters and subsequent staff letters are collectively referred to 
below as the ``BD/FCM staff letters.''
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C. Previous Request for Comment

    In October 2020, the Commission published a proposed order that 
would modify conditions in the 2012 Order and supersede and replace the 
2012 Order (``2020 Proposed Order'').\12\ The Commission received 
comments on the 2020 Proposed Order.\13\ Commenters generally supported 
the Commission's approach and offered some suggested modifications.\14\ 
One commenter stated market participants have confidence in the current 
structure, including the 2012 Order, which has allowed increased 
innovation in the cleared CDS products and increased voluntary clearing 
of security-based swaps.\15\ Further, commenters supported the 
Commission's approach of seeking to preserve the status quo while 
making changes to further enhance the efficient operation of the 
cleared CDS market.\16\ The comments and the Commission's response to 
them are discussed in detail below.
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    \12\ See Proposed Order Granting Conditional Exemptions Under 
the Securities Exchange Act of 1934 in Connection With the Portfolio 
Margining of Swaps and Security-Based Swaps That Are Credit Default 
Swaps, Exchange Act Release No. 90276 (Oct. 28, 2020), 85 FR 70657 
(Nov. 5, 2020).
    \13\ The comments are available at https://www.sec.gov/comments/s7-13-12/s71312.htm.
    \14\ See Letter from Chris Edmonds, Global Head of Clearing and 
Risk, Intercontinental Exchange, Inc. (Dec. 7, 2020) (``ICE 
Letter''); Letter from Allison Lurton, General Counsel and Chief 
Legal Officer, Futures Industry Association (Dec. 7, 2020) (``FIA 
Letter''); Letter from Jason Silverstein, Esq., Managing Director 
and Associate General Counsel, SIFMA Asset Management Group, 
Jennifer W. Han, Managing Director & Counsel, Regulatory Affairs, 
Managed Funds Association (Dec. 7, 2020) (``SIFMA AMG/MFA Letter''); 
and Letter from Sarah Bessin, Associate General Counsel, Investment 
Company Institute (Dec. 7, 2020) (``ICI Letter'').
    \15\ ICE Letter.
    \16\ FIA Letter; SIFMA AMG/MFA Letter.
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III. Discussion

    Since the issuance of the 2012 Order, the SEC staff has monitored 
the operations of the BD/FCMs participating in the CDS portfolio margin 
program as well as the market for cleared CDS. The Commission is 
issuing this 2021 Final Order with modified conditions in light of: (1) 
The experience gained from this monitoring; and (2) comment letters 
addressing portfolio margining received in response to the 2012 Order, 
the 2020 Proposed Order, and in the context of the SEC's recently 
finalized rulemaking adopting capital, margin and segregation 
requirements for SBSDs.\17\ This 2021 Final Order also is in response 
to the CFTC initiating mandatory clearing of certain swaps, including 
broad-based index CDS.\18\ The following discussion describes the 
conditions of the 2021 Final Order--many of which are largely 
consistent with conditions in the 2012 Order. Modifications to the 
conditions in the 2012 Order are discussed below.
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    \17\ The comment letters received with respect to this 
rulemaking are available at https://www.sec.gov/comments/s7-08-12/s70812.shtml.
    \18\ See, e.g., CFTC Announces that Mandatory Clearing Begins 
Today, CFTC Press Release No. 6529-13 (Mar. 11, 2013) (announcing 
that swap dealers, major swap participants and private funds active 
in the swaps market are required to begin clearing certain index 
CDS); CFTC Announces that Mandatory Clearing for Category 2 Entities 
Begins Today, CFTC Press Release No. 6607-13 (June 13, 2013) 
(announcing the second phase of required clearing for certain CDS 
and interest rate swaps).
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A. Conditions for Clearing Agency/DCOs

1. Elimination of Conditions Relating To Expanding the CDS Portfolio 
Margin Program to Securities Accounts
    The conditions in paragraphs (a)(1) and (a)(2) of the 2012 Order 
were intended to provide customers the option to portfolio margin 
cleared CDS in an SEC SBS account once the SEC's margin and segregation 
rules for SBSDs are in place.\19\ In particular, paragraph (a)(1) 
required that the clearing agency/DCO, by the later of six months after 
the adoption date of the final margin and segregation rules for 
security-based swaps or the compliance date of such rules, to take all 
necessary action within its control to obtain any relief needed to 
permit its BD/FCM clearing members to maintain customer money, 
securities, and property received by the BD/FCM to margin, guarantee, 
or secure customer positions in cleared CDS in an SEC SBS account for 
the purpose of the CDS portfolio margin program. Paragraph (a)(2) 
required the clearing agency/DCO, within the same timeframe, to take 
all necessary action within its control, to establish rules and 
operational practices to permit its BD/FCM clearing members to maintain 
customer money, securities, and property received by the BD/FCM to 
margin, guarantee, or secure customer positions in cleared CDS in an 
SEC SBS account for the purpose of the CDS portfolio margin program. 
Thus, the requirements to adhere to conditions in paragraphs (a)(1) and 
(2) of the 2012 Order were triggered on the compliance date for the 
final capital, margin, and segregation requirements for SBSDs: October 
6, 2021.
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    \19\ See 2012 Order, 77 FR 75215-16 (discussing the conditions) 
and 75219-20 (setting forth the conditions).

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[[Page 61360]]

    In the 2012 Order, the Commission stated that it was important to 
ultimately provide market participants with the ability to select an 
account structure to manage their individual risks by taking into 
account the different regulatory provisions that may apply to different 
account types and any costs incurred.\20\ Market participants have been 
clearing CDS under the CDS portfolio margin program since the initial 
BD/FCM staff letters were issued in 2013. The CDS portfolio margining 
program has allowed greater efficiencies in clearing, allowing the 
offset of positions and the ability to margin cleared CDS in a single 
account. Portfolio margining facilitates margin requirements that 
better reflect the overall risks presented by a CDS portfolio, which 
may result in decreased margin costs. Because of these greater 
efficiencies and potential cost reductions available under the current 
CDS portfolio margin program in a CFTC cleared swaps account, market 
participants have not expressed a desire to portfolio margin cleared 
CDS in an SEC SBS account. This lack of market interest in a securities 
account alternative also is consistent with: (1) The comments of ICE 
Clear Credit in 2011 that it received no indication in its discussions 
with market participants that they desired a securities account option 
with respect to its petition for rulemaking to portfolio margin cleared 
CDS; and (2) the Division staff's experience in monitoring the CDS 
portfolio margin program. In the 2020 Proposed Order, therefore, the 
Commission preliminarily believed that it may be appropriate to 
eliminate the SEC SBS account conditions.\21\
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    \20\ See 77 FR 75216.
    \21\ See 2020 Proposed Order, 85 FR 70659-60.
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    Commenters supported the Commission's proposal in the 2020 Proposed 
Order to eliminate the clearing agency/DCO conditions relating to 
expanding the CDS portfolio margin program to SEC SBS accounts and 
generally agreed there is a lack of market interest in a securities 
account alternative.\22\ One commenter stated that the current cleared 
CDS portfolio margining structure is operating effectively and 
efficiently and that there has been no expressed interest by market 
participants to undertake the material additional costs and risky 
operational changes to expand the portfolio margining to SEC SBS 
accounts.\23\ This commenter also stated that requiring a securities 
account alternative would lead to material modifications to existing 
systems and create unnecessary duplicative processes.\24\ Another 
commenter stated that the program has been effective in accommodating 
the portfolio margining needs of market participants who must react 
quickly to dynamic market conditions, risk management and hedging 
requirements, and evolving portfolio compositions.\25\ This commenter 
stated that it is critical the Commission remain cognizant of the 
significant time and expense BD/FCMs, their customers, and the 
clearinghouses have already invested towards creating a safe and 
attractive model for the clearing of all CDS.\26\ Finally, one 
commenter in supporting the elimination of the securities account 
alternative stated that regulated funds typically do not engage in 
portfolio margining in a securities account or a security-based swap 
account.\27\
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    \22\ See ICE Letter; FIA Letter; SIFMA AMG/MFA Letter; ICI 
Letter.
    \23\ ICE Letter.
    \24\ ICE Letter.
    \25\ FIA Letter.
    \26\ FIA Letter.
    \27\ ICI Letter.
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    Portfolio margining cleared CDS in an SEC SBS account also would 
provide greater efficiencies and cost reductions. However, the 
Commission is eliminating these conditions because of the success of 
the current CDS portfolio margin program, the confirmed lack of market 
interest in a securities account alternative, and the comments 
supporting their elimination.\28\ Their removal, however, will not 
prohibit a clearing agency/DCO from offering an SEC SBS account option 
in the future, if market conditions change and the demand arises, 
subject to applicable regulatory approvals and relief.
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    \28\ See 2021 Final Order, ] (a).
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    Further, in connection with the elimination of conditions related 
to the SEC SBS account alternative, commenters asked the Commission to 
clarify whether single-name CDS may always be cleared through a CFTC 
cleared swaps account subject to the margin and risk management regime 
in the 2020 Proposed Order.\29\ One commenter stated that it is not 
aware of any clearing agency/DCO that offers a securities account 
option. Consequently, this commenter stated that the cleared swaps 
account is the only currently available option to clear single-name 
CDS.\30\ In response to these comments, single-name CDS that are held 
in a CFTC cleared swaps account and not part of a CDS portfolio margin 
program (i.e., an account at a BD/FCM that holds at all times only 
single-name CDS positions) would be outside the scope of this 2021 
Final Order. The exemptive relief in 2021 Final Order is conditioned on 
the requirement that cleared CDS that are security-based swaps and 
included in a CFTC cleared swaps account must be part of a CDS 
portfolio margin program. Clearing solely single-name CDS in a cleared 
CFTC swaps account without the inclusion of cleared swaps that are CDS 
at any point in time would not be considered a CDS portfolio margin 
program. For example, a CFTC cleared swaps account that is part of a 
CDS portfolio margin program that holds at various times both single-
name and index CDS positions is subject to the conditions of this 2021 
Final Order. Consequently, the 2021 Final Order only applies to cleared 
CDS, including single-name and index CDS, that are part of a CDS 
portfolio margin program. Finally, in response to the comment that a 
cleared swaps account is the only currently available option to clear 
single-name CDS, under the Commission's new segregation rules for 
security-based swap activities, a clearing agency/DCO could offer an 
SEC SBS account option to market participants to clear single-name CDS 
that are not part of a CDS portfolio margin program.\31\
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    \29\ FIA Letter; SIFMA AMG/MFA Letter.
    \30\ SIFMA AMG/MFA Letter.
    \31\ See paragraph (p) of Rule 15c3-3 (segregation requirements 
for security-based swaps). 17 CFR 240.15c3-3(p).
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2. Conditions
    The three clearing agency/DCO conditions in the 2020 Proposed Order 
are largely consistent with the conditions in paragraphs (a)(3), (4), 
and (5) of the 2012 Order, respectively.\32\ One commenter supported 
retaining these conditions and stated they largely maintain the well 
understood status quo with the 2012 Order.\33\ This commenter also 
stated that the existing portfolio margining structure for cleared CDS 
instruments has operated safely, effectively and efficiently and, 
accordingly, it is in agreement with the Commission's efforts to uphold 
the current model.\34\ The Commission agrees with the commenter and is 
adopting the three clearing agency/DCO conditions as proposed in the 
2020 Proposed Order.\35\
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    \32\ See 2020 Proposed Order, 85 FR 70660 (discussing the 
conditions) and 70665 (setting forth the conditions); see also 2012 
Order, 77 FR 75216 (discussing the conditions) and 75220 (setting 
forth the conditions).
    \33\ ICE Letter.
    \34\ ICE Letter.
    \35\ See 2021 Final Order, ]] (a)(1), (2), and (3). The 
Commission made some technical changes to the DCO/clearing agency 
conditions in the 2021 Final Order to account for the elimination of 
conditions (a)(1) and (2) from the 2012 Order. These changes include 
re-numbering the remaining clearing agency/DCO conditions and moving 
the definition of ``BD/FCM'' from condition (a)(1) in the 2012 Order 
(which would be eliminated) to condition (a)(1) in the proposed 
order (which parallels condition (a)(3) in the 2012 Order). Finally, 
the Commission is replacing the term ``shall'' in two places with 
the term ``will'' and ``must,'' respectively. No comments were 
received on these changes and the Commission is adopting them as 
proposed in the 2020 Proposed Order.

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[[Page 61361]]

    The first condition requires the clearing agency/DCO to obtain any 
other relief needed to permit a BD/FCM to maintain cleared swaps 
customer or affiliate money, securities, and property received to 
margin, guarantee, or secure cleared swaps customer or affiliate 
positions in cleared CDS in a CFTC cleared swaps customer account or a 
CFTC cleared swaps proprietary account, respectively, for the purpose 
of clearing such cleared swaps customer or affiliate positions under 
the CDS portfolio margin program.\36\ This condition is designed to 
help ensure that the exemption applies only in circumstances where the 
regulatory framework under the CEA and the CFTC's rules is applicable.
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    \36\ See 2021 Final Order, ] (a)(1). The 2021 Final Order also 
eliminates use of the generic term ``customer'' in the 2012 Order 
and instead use the more specific terms ``cleared swaps customer,'' 
``affiliate,'' ``security-based swap customer,'' and ``securities 
customer''. In addition, the 2021 Final Order adds specific language 
to clarify that cleared CDS positions of cleared swaps customers are 
held in CFTC cleared swaps customer accounts and affiliate positions 
are held in CFTC cleared swaps proprietary accounts. These changes 
reflect the different treatment each type of person and account 
would receive under the CEA and rules thereunder, and applicable 
bankruptcy laws. No comments were received on these changes and the 
Commission is adopting them as proposed in the 2020 Proposed Order.
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    The second clearing agency/DCO condition requires the organization 
to have appropriate rules and operational practices to permit a BD/FCM 
to maintain cleared swaps customer or affiliate money, securities, and 
property received to margin, guarantee, or secure cleared swaps 
customer or affiliate positions in cleared CDS in a CFTC cleared swaps 
customer account or a cleared swaps proprietary account, respectively, 
for the purpose of clearing such cleared swaps customer or affiliate 
positions under the CDS portfolio margin program.\37\ This condition 
also is designed to help ensure the exemption applies only in 
circumstances where the regulatory framework under the CEA and the 
CFTC's rules is applicable.
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    \37\ See 2021 Final Order, ] (a)(2).
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    The third clearing agency/DCO condition requires the organization 
to have rules mandating that each cleared swaps customer and affiliate 
of the BD/FCM participating in the CDS portfolio margin program must be 
an ``eligible contract participant'' as defined in Section 1a(18) of 
the CEA.\38\ Given that Congress determined it is appropriate to 
include these limitations in the Dodd-Frank Act with respect to 
eligible contract participants, it is appropriate to limit the 
exemptions in the 2021 Final Order to cleared CDS entered into with 
eligible contract participants.\39\
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    \38\ See 2021 Final Order, ] (a)(3). The 2012 Order provided 
that each ``customer'' must be an eligible contract participant. 77 
FR 75220.
    \39\ The Dodd-Frank Act limits the swaps and security-based 
swaps transactions that may be entered into by parties that are not 
eligible contract participants. For example, under Section 6(l) of 
the Exchange Act, only an eligible contract participant may enter 
into security-based swaps that are not effected on a national 
securities exchange. 15 U.S.C. 78f(l). In addition, security-based 
swaps that are not registered pursuant to the Securities Act of 1933 
(``Securities Act'') can only be sold to eligible contract 
participants. 15 U.S.C. 77e(e). Section 5(e) of the Securities Act 
specifically provides that it shall be unlawful to for any person, 
directly or indirectly, to make use of any means or instruments of 
transportation or communication in interstate commerce or of the 
mails to offer to sell, offer to buy or purchase or sell a security-
based swap to any person who is not an eligible contract 
participant, unless the transaction is registered under the 
Securities Act. Id. See also 2020 Proposed Order, 85 FR 70660.
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B. Conditions for BD/FCMs

    The first, second, fourth, fifth, and sixth BD/FCM conditions in 
the 2020 Proposed Order were generally consistent with the conditions 
in paragraphs (b)(1), (2), (4), (5) and (6) of the 2012 Order, 
respectively.\40\ As discussed below, the Commission is adopting them 
in the 2021 Final Order substantially as proposed in the 2020 Proposed 
Order.\41\
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    \40\ See 2020 Proposed Order at 85 FR 70660-64 (discussing the 
conditions) and 70665-66 (setting forth the conditions); see also 
2012 Order, 77 FR 75216-19 (discussing the conditions) and 75220-21 
(setting forth the conditions). The Commission made some technical 
and stylistic changes to these conditions, including replacing the 
term ``shall'' with ``must'' and capitalizing the first letter in 
each of the conditions (and their subparagraphs). Finally, the 
Commission inserted the phrase ``Section 8 of the Exchange Act and'' 
before ``Exchange Act Rules 8c-1 and 15c2-1'' in paragraph (b) of 
the 2020 Proposed Order to be consistent with the other rule 
references in the order, which refer to the relevant statute. No 
comments were received on these changes and the Commission is 
adopting them as proposed in the 2020 Proposed Order.
    \41\ See 2021 Final Order, ]] (b)(1), (2), (4), (5), and (6).
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    The first BD/FCM condition consists of two requirements and applies 
with respect to transactions involving persons that are not affiliates 
of the BD/FCM (i.e., cleared swaps customers).\42\ The Commission 
received no comments on the first requirement and is adopting it as 
proposed in the 2020 Proposed Order.\43\ Under this requirement, the 
BD/FCM must maintain cleared swaps customer money, securities, and 
property received to margin, guarantee or secure cleared swaps customer 
positions consisting of cleared CDS in a CFTC cleared swaps customer 
account established and maintained for the purpose of the CDS portfolio 
margin program. This condition is designed to help ensure that--in the 
absence of the security-based swap and securities customer protections 
afforded by the securities laws--collateral in the account is subject 
to the protections afforded by an alternative regulatory scheme (i.e., 
the CEA and the CFTC's rules). The intent is to avoid having the assets 
in the account fall into a regulatory gap in which neither the federal 
securities laws nor the federal commodity futures laws apply. The 
condition also is designed to limit the relief to accounts that are 
established and maintained specifically for the purpose of the CDS 
portfolio margin program.
---------------------------------------------------------------------------

    \42\ See 2021 Final Order, ] (b)(1).
    \43\ See 2021 Final Order, ] (b)(1)(i); see also 2020 Proposed 
Order, 85 FR 70660.
---------------------------------------------------------------------------

    As discussed below, the Commission received comments on the second 
requirement in the 2020 Proposed Order and, in response, is modifying 
it.\44\ Under this requirement in the 2020 Proposed Order, the BD/FCM 
needed to enter into a non-conforming subordination agreement with each 
non-affiliated cleared swaps customer that covers the customer's money, 
securities, or property held in a CFTC cleared swaps customer 
account.\45\ As proposed, the non-conforming subordination agreement 
needed to contain: (1) A specific acknowledgment by the cleared swaps 
customer that money, securities or property held in a CFTC cleared 
swaps customer account will not receive customer treatment under the 
Exchange Act or Securities Investor Protection Act of 1970 (``SIPA'') 
or be treated as ``customer property'' as defined in 11 U.S.C. 741 in a 
liquidation of the BD/FCM (``stockbroker liquidation''), and that such 
money, securities or property will be subject to any applicable 
protections under Subchapter IV of Chapter 7 of Title 11 of the United 
States Code and rules and regulations thereunder (``commodity broker 
liquidation provisions''); and (2) an affirmation by the cleared swaps 
customer that claims to ``customer property'' as defined in SIPA or 11 
U.S.C. 741 against the BD/FCM will be subordinated to the claims of 
securities

[[Page 61362]]

customers and security-based swap customers.
---------------------------------------------------------------------------

    \44\ See 2020 Proposed Order, 85 FR 70660-61 (discussing the 
condition) and 70666 (setting forth the condition).
    \45\ Id.
---------------------------------------------------------------------------

    The 2012 Order required an affirmation by the customer that all of 
its claims with respect to money, securities, or property held in the 
CDS portfolio margin account against the BD/FCM will be subordinated to 
the claims of other securities customers and security-based swap 
customers not participating in the CDS portfolio margin program.\46\ To 
better clarify that the cleared swaps customer is not subordinating 
claims to general creditors, the Commission modified condition 
(b)(1)(ii) of the 2012 Order, as stated above, in the 2020 Proposed 
Order, to provide that the cleared swaps customer must affirm that 
claims to ``customer property'' as defined in SIPA or the stockbroker 
liquidation provisions against the BD/FCM will be subordinated to the 
claims of securities customers and security-based swap customers. This 
modification was designed to more narrowly tailor the subordination to 
the portion of the debtor BD/FCM's estate that comprises ``customer 
property'' under SIPA and the stockbroker liquidation schemes.\47\ In 
other words, the intent was that the subordination not extend to the 
general estate.
---------------------------------------------------------------------------

    \46\ See 2012 Order, 77 FR 75220.
    \47\ See 2020 Proposed Order, 85 FR 70661.
---------------------------------------------------------------------------

    This condition in the 2020 Proposed Order was designed to remove 
portfolio margin cleared swaps customers from the definitions of 
``customer'' under Rule 15c3-3, SIPA, and the stockbroker liquidation 
provisions with respect to securities or cash held in CFTC cleared 
swaps customer accounts that otherwise would be subject to the 
segregation requirements of Rule 15c3-3 and the bankruptcy protections 
afforded by SIPA and the stockbroker liquidation provisions.\48\ The 
objective was to avoid a situation where the portfolio margin cleared 
swaps customers would be entitled to a ratable share of ``customer 
property'' and other protections afforded by SIPA or the stockbroker 
liquidation provisions even though their assets were held in CFTC 
cleared swaps customer accounts that were not subject to the 
segregation requirements of Rule 15c3-3. Assets held in a CFTC cleared 
swaps customer account instead would be afforded the protections of the 
rules of the CFTC governing the treatment of customer margin held by 
BD/FCMS and DCOs as well as the protections of the CEA and commodity 
broker liquidation provisions. The modified condition in the 2020 
Proposed Order was not intended to undermine these protections. The 
condition also was not intended to require portfolio margin cleared 
swaps customers to subordinate their claims, in the event that their 
claims as cleared swaps customers are not fully satisfied by the 
distribution of assets held in CFTC cleared swaps customer accounts, to 
assets that may be included in the debtor's general estate.
---------------------------------------------------------------------------

    \48\ See 85 FR 70661.
---------------------------------------------------------------------------

    Commenters generally supported the Commission's proposed 
modification to the affirmation language to provide that a cleared 
swaps customer must affirm that claims to ``customer property'' as 
defined in SIPA or the stockbroker liquidation provisions against the 
BD/FCM will be subordinated to the claims of securities customers and 
security-based swap customers. One commenter, in supporting the 
modification, stated that there is no policy basis to disadvantage 
cleared swap customers as compared to other general creditors of a BD/
FCM and, therefore, their claims to ``customer property'' should not be 
subordinated to claims of general creditors, but only to the claims of 
securities customers and security-based swap customers.\49\ Two 
commenters supported the modifications but suggested that the 
Commission further tailor the language to ensure that it only requires 
the subordination of a customer's claims for assets subject to a 
portfolio margining arrangement and not to other claims the customer 
may have against the BD/FCM, such as, for example, separate claims the 
customer may have as a securities customer in relation to a securities 
account.\50\
---------------------------------------------------------------------------

    \49\ ICI Letter.
    \50\ FIA Letter; SIFMA AMG/MFA Letter. These commenters 
suggested that the affirmation language read: ``as well as an 
affirmation by the cleared swaps customer that solely with respect 
to the distribution of ``customer property'' as defined in SIPA or 
11 U.S.C. 741 and, for the avoidance of doubt, without prejudice to 
its entitlement to ``customer property'' as defined in 11 U.S.C. 
761, its claims against the BD/FCM for such money, securities or 
property will be subordinated to the claims of securities customers 
and security-based swap customers.''
---------------------------------------------------------------------------

    The Commission agrees with these commenters that the subordination 
requirement can be further tailored to provide greater clarity that the 
subordination agreement is limited to money, securities or other 
property of the subordinating customer held in a CFTC cleared swaps 
customer account. If the subordinating customer has a separate 
securities account at the BD/FCM, the customer need not subordinate 
claims to cash or securities held in that account. To provide greater 
clarity on this point, the Commission is modifying the text of the 
subordination requirement in the 2021 Final Order. In particular, the 
requirement provides that cleared CDS swaps customer must agree that 
claims to ``customer property'' as defined in SIPA or the stockbroker 
liquidation provisions against the BD/FCM with respect to the money, 
securities, or property identified in paragraph (b)(1)(i) of the 2021 
Final Order (i.e., in the CFTC cleared swaps customer account) will be 
subordinated to the claims of securities customers and security-based 
swap customers.\51\ Thus, the language of the subordination requirement 
explicitly links to money, securities or other property of the 
subordinating customer held in a CFTC cleared swaps customer account.
---------------------------------------------------------------------------

    \51\ See 2021 Final Order, ] (b)(1)(ii). In the second sentence 
of paragraph (b)(1)(ii) of the 2021 Final Order, the word ``such'' 
was replaced with ``the'' and the phrase ``identified in paragraph 
(b)(1)(i) of this order'' was inserted immediately following the 
phrase ``money, securities or property''.
---------------------------------------------------------------------------

    In connection with the proposed clarifications to the subordination 
requirement, several commenters requested that Commission confirm that 
current cleared swap customers would not need to amend their existing 
agreements to provide revised affirmations reflecting the new language 
prescribed by the 2020 Proposed Order.\52\ Commenters suggested that 
the Commission clarify that affirmations provided pursuant to the 2012 
Order were intended to, and should be read to, provide for 
subordination of claims solely to securities customers and security-
based swap customers and not to general creditors.\53\ One commenter 
stated the revised language should be required to be included in 
affirmations only on a going-forward basis for new cleared swap 
customers.\54\ Another commenter stated that reviews and changes to 
existing documentation would be a costly and complex exercise since the 
documentation may form part of other clearing arrangements, and would 
be onerous to both BD/FCMs and their customers.\55\ Another commenter 
stated that requiring re-documentation would place a significant burden 
on its member firms.\56\ Commenters suggested that the Commission 
permit firms to notify customers of the clarification through 
disclosures or negative consents rather than re-documenting existing 
agreements.\57\ Finally, one commenter requested that for BD/FCMs whose 
existing subordination arrangements are in compliance with the 
conditions under the 2020 Proposed Order but for reference to the 2012 
Order, that the

[[Page 61363]]

Commission clarify that no further documentation or amendments would be 
required in respect to such arrangements.\58\
---------------------------------------------------------------------------

    \52\ FIA Letter; ICI Letter; SIFMA AMG/MFA Letter.
    \53\ ICI Letter.
    \54\ ICI Letter; FIA Letter.
    \55\ FIA Letter.
    \56\ SIFMA AMG/MFA Letter.
    \57\ FIA Letter; SIFMA AMG/MFA Letter.
    \58\ SIFMA AMG/MFA Letter.
---------------------------------------------------------------------------

    In response to the comments regarding whether a BD/FCM would be 
required to re-document existing agreements, based on the description 
provided by commenters of varying documentation processes and clearing 
arrangements among firms, BD/FCMs that have entered into non-conforming 
subordination agreements and other documentation with counterparties 
under the 2012 Order will need to determine if their existing 
documentation is sufficient to meet the conditions of the 2021 Final 
Order or if any amendments of, or other clarifications to, existing 
agreements is warranted. It is important that the subordination 
agreement of a customer be limited so that it does not extend to the 
general estate or to securities and cash held in a separate securities 
account. In response to comments regarding the intent of the 
modifications to the subordination language, the intent of the 
modifications in the 2021 Final Order to the subordination requirements 
in the 2012 Order is to better clarify that a cleared swaps customer is 
not subordinating claims to general creditors. This clarification will 
preserve protections for customers that are not intended to be impacted 
or diminished by the subordination requirement in the 2021 Final Order. 
In addition, in response to the comment relating to BD/FCMs whose 
existing subordination arrangements meet the conditions under the 2020 
Proposed Order but for reference to the 2012 Order, no further 
documentation or amendments would be required with respect to these 
existing subordination agreements that reference the 2012 Order if the 
agreements are in compliance with the conditions of the 2021 Final 
Order.
    In response to comments that re-documentation of existing 
arrangements will increase costs and burdens on firms, BD/FCMs must 
individually determine if their current documentation meets the 
conditions of the 2021 Final Order. Accordingly, costs and burdens will 
depend on whether existing documentation is sufficient to meet the 
conditions of the 2021 Final Order. To the extent a BD/FCM must re-
document existing arrangements, the Commission believes such costs and 
burdens associated with re-documentation are necessary to protect 
investors. As discussed above, the conditions of the 2021 Final Order 
are designed to preserve customer protection by limiting the scope of 
the subordination agreement. Finally, in response to a comment, BD/FCMs 
that enter into subordination agreements with new cleared swaps 
customers must ensure that the affirmation required by the 2021 Final 
Order is executed if they wish to take advantage of the conditional 
exemption provided by the 2021 Final Order.
    As stated above, BD/FCMs that have entered into non-conforming 
subordination agreements and other documentation with counterparties 
under the 2012 Order will need to determine if their existing 
documentation is sufficient to meet the conditions of the 2021 Final 
Order or if any amendments of, or other clarifications to, existing 
agreements is warranted. The Commission recognizes that these 
determinations and any subsequent amendments or other clarifications to 
existing arrangements may take additional time to implement. 
Consequently, the Commission is, by order, extending the time for a BD/
FCM to meet the conditions in paragraph (b)(1)(ii) of the 2021 Final 
Order until February 1, 2022, at which time BD/FCMs must satisfy all 
applicable conditions of the 2021 Final Order to continue to avail 
themselves of the conditional exemption.
    The second BD/FCM condition in the Final 2020 Order applies with 
respect to transactions involving affiliates of the BD/FCM and consists 
of three requirements. The Commission did not receive any comments on 
the first requirement and is adopting it as proposed.\59\ Under the 
this requirement, the BD/FCM must maintain money, securities, and 
property of affiliates received to margin, guarantee, or secure 
positions consisting of cleared CDS in a ``cleared swaps proprietary 
account'' as defined in CFTC Rule 22.1 for the purpose of clearing such 
positions under the CDS portfolio margin program.\60\ The purpose of 
this requirement is that under the CFTC regulatory framework certain 
affiliates are not treated as cleared swaps customers and their assets 
are held in proprietary accounts as distinct from CFTC cleared swaps 
customer accounts.\61\
---------------------------------------------------------------------------

    \59\ See 2021 Final Order, ] (b)(2); see also 2020 Proposed 
Order, 85 FR 70661.
    \60\ See 2021 Final Order, ] (b)(2)(i).
    \61\ See 17 CFR 22.1. The Commission believes that this 
condition is appropriate because affiliates of a BD/FCM that are not 
otherwise excluded from the definition of ``customer'' in Exchange 
Act Rules 8c-1 and 15c2-1 are customers whose securities positions 
cannot be commingled with the broker-dealer's own proprietary 
securities positions and therefore could not be held in a cleared 
swaps account.
---------------------------------------------------------------------------

    The comments discussed above with respect to the scope of the 
subordination agreement apply to the second requirement, which the 
Commission is modifying consistent with changes to the customer 
subordination requirement discussed above. Under this requirement, the 
BD/FCM must enter into a non-conforming subordination agreement with an 
affiliate.\62\ The non-conforming subordination agreement must contain: 
(1) A specific acknowledgment by the affiliate that the money, 
securities or property identified in paragraph (b)(2)(i) of the 2021 
Final Order (i.e., in the cleared swaps proprietary account) will not 
receive customer treatment under the Exchange Act or SIPA or be treated 
as customer property in a stockbroker liquidation of the BD/FCM, and 
that such money, securities or property will be held in a proprietary 
account in accordance with the CFTC requirements and will be subject to 
any applicable protections under the commodity broker liquidation 
provisions; and (2) an affirmation by the affiliate that claims to 
``customer property'' as defined in SIPA or 11 U.S.C. 741 against the 
BD/FCM with respect to the money, securities, or property identified in 
paragraph (b)(2)(i) of the 2021 Final Order will be subordinated to the 
claims of securities customers and security-based swap customers.
---------------------------------------------------------------------------

    \62\ See 2021 Final Order, ] (b)(2)(ii).
---------------------------------------------------------------------------

    As discussed above, these modifications provide greater clarity 
that the scope of the subordination only extends to money, securities, 
or other property held in the subordinating person's CFTC cleared 
customer or proprietary account. The modifications also provide greater 
clarity that the person need not subordinate claims to money, 
securities, or other property held in the subordinating person's CFTC 
cleared customer or proprietary account to the claims of general 
creditors.
    This requirement is designed to help ensure that affiliates clearly 
understand that any customer protection treatment otherwise available 
with respect to securities transactions under the Exchange Act, SIPA, 
or the stockbroker liquidation provisions will not be available and the 
account would be treated as a proprietary account (and not a CFTC 
cleared swaps customer account) under the CEA. Consistent with the 
condition above with respect to cleared swaps customers that are not 
affiliates, this condition is intended to remove affiliates from the 
definitions of ``customer'' under Rule 15c3-3, SIPA,

[[Page 61364]]

and the stockbroker liquidation provisions with respect to securities 
or cash held in cleared swaps proprietary accounts that otherwise would 
be subject to the segregation requirements of Rule 15c3-3 and the 
bankruptcy protections afforded by SIPA and the stockbroker liquidation 
provisions.
    The Commission did not receive any comments with respect to the 
third requirement of the second condition and is adopting it with a 
conforming modification.\63\ As proposed, this condition required that 
the BD/FCM obtain from the affiliate an opinion of counsel that the 
affiliate is legally authorized to subordinate all of its claims 
against the BD/FCM to those of securities customers and security-based 
swap customers.\64\ Consistent with the changes discussed above with 
respect to the scope of the subordination, the Commission modified this 
condition so that it requires the BD/FCM obtain from the affiliate an 
opinion of counsel that the affiliate is legally authorized to enter 
into the subordination agreement required by paragraph (b)(2)(ii) of 
the order. This conforms the condition to the modifications discussed 
above with respect to the scope of the subordination. This condition is 
designed to help ensure that affiliates of the BD/FCM do not place any 
assets in the proprietary account that the affiliate is not legally 
authorized to subordinate. Finally, consistent with the changes 
discussed above with respect to the scope of the subordination, the 
Commission is, by order, extending the time for a BD/FCM to meet the 
conditions in paragraph (b)(2)(ii) of the 2021 Final Order until 
February 1, 2022, at which time BD/FCMs must satisfy all applicable 
conditions of the 2021 Final Order to continue to avail themselves of 
the conditional exemption.
---------------------------------------------------------------------------

    \63\ See 2021 Final Order, ] (b)(2)(iii); see also 2020 Proposed 
Order, 85 FR 70661-62.
    \64\ See 2020 Proposed Order, 85 FR 70661-62. The 2012 Order 
required that the BD/FCM obtain from the affiliate an opinion of 
counsel that the affiliate is legally authorized to subordinate all 
of its claims against the BD/FCM to those of customers. See 2012 
Order, 77 FR 75220.
---------------------------------------------------------------------------

    The condition in paragraph (b)(3) of the 2012 Order provides that 
the BD/FCM must require minimum margin levels with respect to any 
customer transaction in the CDS portfolio margin program at least equal 
to the amount determined using a margin methodology established and 
maintained by the BD/FCM that has been approved by the Commission or 
the Commission staff.\65\ A commenter responding to the issuance of the 
2012 Order supported the requirement for a BD/FCM to assess the credit 
risk of counterparties based on the BD/FCM's own risk management 
standards, but argued that requiring a unique margin model beyond the 
BD/FCM's own credit risk assessment is unwarranted.\66\ This commenter 
also stated that this condition ``deters'' efficiency, capital 
formation, and competition.\67\ Another commenter responding to the 
issuance of the 2012 Order argued that the condition undermines a 
fundamental benefit of central clearing: The ability of market 
participants to rely on clearing agency/DCO margin requirements.\68\ 
This commenter believes that this condition reduces transparency and 
the ability to anticipate and verify margin calls, and that it 
discourages entities from entering the cleared CDS market.\69\
---------------------------------------------------------------------------

    \65\ See 2012 Order, 77 FR 75220.
    \66\ See Letter from Stuart J. Kaswell, Executive Vice President 
& Managing Director, General Counsel, Managed Funds Association; 
Carl B. Wilkerson, Vice President & Chief Counsel, Securities & 
Litigation, American Council of Life Insurers; and 
Ji[rcaron][iacute] Krol, Director of Government and Regulatory 
Affairs, Alternative Investment Management Association (Dec. 27, 
2013) (``MFA/ACLI/AIMA 12/27/2013 Letter'') (comment to the 2012 
Order), available at https://www.sec.gov/comments/s7-13-12/s71312.shtml; see also Letter from Stuart J. Kaswell, Executive Vice 
President & Managing Director, General Counsel, Managed Funds 
Association; Carl B. Wilkerson, Vice President & Chief Counsel, 
Securities & Litigation, American Council of Life Insurers; and 
Ji[rcaron][iacute] Krol, Director of Government and Regulatory 
Affairs, Alternative Investment Management Association (May 10, 
2013) (comment to the 2012 Order), available at https://www.sec.gov/comments/s7-13-12/s71312.shtml. See also 2020 Proposed Order, 85 FR 
70662.
    \67\ MFA/ACLI/AIMA 12/27/2013 Letter. See also 2020 Proposed 
Order, 85 FR 70662.
    \68\ See Letter from Adam C. Cooper, Senior Managing Director 
and Chief Legal Officer, Citadel LLC (Feb. 2, 2016) (``Citadel 2/2/
16 Letter'') (comment to the 2012 Order), available at https://www.sec.gov/comments/s7-13-12/s71312.shtml. See also 2020 Proposed 
Order, 85 FR 70662.
    \69\ Citadel 2/2/16 Letter; Letter from Laura Harper Powell, 
Associate General Counsel, Managed Funds Association, and Adam 
Jacobs-Dean, Managing Director, Global Head of Markets Regulation, 
Alternative Investment Management Association (Nov. 19, 2018) 
(comment to the Commission's capital, margin, and segregation 
rulemaking for SBSDs), available at https://www.sec.gov/comments/s7-08-12/s70812.shtml. See also 2020 Proposed Order, 85 FR 70662.
---------------------------------------------------------------------------

    In the context of the SEC's capital, margin and segregation 
rulemaking for SBSDs, another commenter expressed concern that the 
conditions in the 2012 Order have proven too restrictive to support a 
robust market for cleared CDS.\70\ More specifically, this commenter 
recommended that both the CFTC and SEC recognize a harmonized portfolio 
margin approach for cleared CDS that defers to the clearing agency/DCO 
margin methodologies.\71\ Finally, a commenter expressed concern that 
the margin requirements imposed by the Commission have delayed 
voluntary buy-side clearing of single-name CDS, with resulting adverse 
effects on trading volume and liquidity.\72\
---------------------------------------------------------------------------

    \70\ See Letter from Walt L. Lukken, President and Chief 
Executive Office, Futures Industry Association (Nov. 29, 2018) 
(``FIA 11/29/18 Letter'') (comment to the Commission's capital, 
margin, and segregation rulemaking for SBSDs), available at https://www.sec.gov/comments/s7-08-12/s70812.shtml. See also 2020 Proposed 
Order, 85 FR 70662.
    \71\ Letter from Walt L. Lukken, President and Chief Executive 
Office, Futures Industry Association (Nov. 19, 2018) (comment to the 
Commission's capital, margin, and segregation rulemaking for SBSDs), 
available at https://www.sec.gov/comments/s7-08-12/s70812.shtml; FIA 
11/29/18 Letter. See also 2020 Proposed Order, 85 FR 70662.
    \72\ See Letter from Stuart J. Kaswell, Executive Vice President 
& Managing Director, General Counsel, Managed Funds Association (May 
18, 2017) (comment to the Commission's capital, margin, and 
segregation rulemaking for SBSDs), available at https://www.sec.gov/comments/s7-08-12/s70812.shtml. See also 2020 Proposed Order, 85 FR 
70662.
---------------------------------------------------------------------------

    The vast majority of the BD/FCM clearing members of ICE Clear 
Credit have obtained approval of their margin methodologies from 
Commission staff.\73\ Furthermore, each BD/FCM that has received 
approval of its margin methodology already had existing margin models 
in place prior to applying to the Commission. Therefore, the firms 
needed to make some adjustments to their models in order to meet the 
minimum qualitative and quantitative standards set forth in the BD/FCM 
staff letters, but did not need to develop new margin models. To date, 
all BD/FCMs that have submitted applications to Commission staff to 
approve their internal margin methodologies have received approval.
---------------------------------------------------------------------------

    \73\ See ICC membership, available at https://www.theice.com/clear-credit/participants. Based on Division staff experience in 
monitoring the CDS portfolio margin program, the vast majority of 
positions are being cleared through ICE Clear Credit, and to a 
lesser extent, ICE Clear Europe.
---------------------------------------------------------------------------

    In response to these comments, the Commission believes that it can 
promote the prudent operation of the BD/FCMs through a process of 
approving their internal risk management programs (rather than their 
internal margin methodologies), as discussed below. This may increase 
transparency for market participants in terms of being able to 
anticipate margin requirements generated by their cleared CDS 
portfolios, as the clearing agency/DCO margin methodology will generate 
the regulatory margin requirement across all the BD/FCMs. Accordingly, 
the Commission proposed modifying the condition in paragraph (b)(3) of 
the 2012 Order to eliminate the requirement that the Commission or 
Commission staff approve the BD/FCM's margin methodology.\74\ Instead, 
the Proposed

[[Page 61365]]

2020 Order would have required the BD/FCM to adopt an internal risk 
management program that is reasonably designed to identify, measure, 
and manage the risks arising from its participation in the CDS 
portfolio margin program that has been approved in advance by the 
Commission or the Commission staff and that meets the standards 
described below (``internal risk management program'').
---------------------------------------------------------------------------

    \74\ See 2020 Proposed Order, 85 FR 70662.
---------------------------------------------------------------------------

    An internal risk management program would facilitate the 
identification, measurement, and management of a broader range of risks 
than those covered by the clearing agency/DCO margin methodology and, 
consequently, help ensure that the BD/FCMs operate in a prudent manner 
with respect to the CDS portfolio margin program. Further, an internal 
risk management program entails a more comprehensive set of measures to 
mitigate risk than a margin methodology.\75\ Consequently, based on the 
Commission staff's experience gained in monitoring the CDS portfolio 
margin program, approving a firm's internal risk management program 
(rather than its internal margin methodology) may foster a more robust 
approach to managing risk by BD/FCMs. This approach to managing risk 
also would promote consistency with the Commission's final capital 
rules for SBSDs, which include risk management requirements, as well as 
with the regulatory approach adopted by the CFTC with respect to the 
portfolio margining of cleared CDS.\76\ The requirement to have an 
internal risk management program also is a condition in the BD/FCM 
staff letters and all the firms operating under the 2012 Order have 
implemented such programs.
---------------------------------------------------------------------------

    \75\ See, e.g., 17 CFR 240.15c3-1e(d)(1) (``The VaR model used 
to calculate market and credit risk for a position must be 
integrated into the daily internal risk management system of the 
broker or dealer[.]'').
    \76\ See Capital, Margin, and Segregation Adopting Release, 84 
FR 43905 (``The Commission proposed that nonbank SBSDs be required 
to comply with Rule 15c3-4 to promote the establishment of effective 
risk management control systems by these firms.''); and 2013 CFTC 
Portfolio Margin Order (requiring participants to ``take appropriate 
measures to identify, measure, and monitor financial risk associated 
with carrying the Security-Based CDS in a cleared swaps account and 
implement risk management procedures to address those financial 
risks'').
---------------------------------------------------------------------------

    The requirement that a BD/FCM independently measure risk by 
developing and using its own internal model is not designed to impose a 
margin collection requirement (or capital charge) or diminish the role 
of the clearing agency/DCO margin methodology. Rather, it is intended 
to require the BD/FCM to independently measure the potential future 
credit risk to cleared swaps customers and affiliates participating in 
the CDS portfolio margin program under a different stress scenario in 
order to better understand risks and address them as the firm deems 
appropriate (e.g., through risk limits, threshold triggers, house 
margin, heightened monitoring, or other controls).
    Commenters generally supported the Commission's proposed standards 
for an internal risk management program.\77\ Two commenters requested 
that the Commission permit BD/FCMs to rely on the clearing agency/DCO's 
margin methodology, which is subject to supervision by the CFTC and 
Commission, unless one of its supervisors has a reasonable basis for 
concluding that the methodology underestimates the risk or is otherwise 
inconsistent with the internal risk management program.\78\ This 
alternative, however, would not cover the broader range of risks 
included in an internal risk management program. Prudent firms 
establish and maintain integrated internal risk management programs 
that include policies and procedures designed to help ensure an 
awareness of, and accountability for, the risks taken throughout the 
firm and to develop tools to address those risks. For example, there 
may be idiosyncratic risk factors with respect to a cleared swaps 
customer, an affiliate, or the BD/FCM's financial condition that are 
not covered by the margin methodology of the clearing agency/DCO.\79\ 
For these reasons, relying solely on a clearing agency/DCO's margin 
methodology, as requested by commenters, would not be an adequate 
alternative to implementing a broader risk management program in terms 
of managing the risk of cleared CDS in a portfolio margin account.
---------------------------------------------------------------------------

    \77\ FIA Letter; SIFMA AMG/MFA Letter.
    \78\ FIA Letter; SIFMA AMG/MFA Letter.
    \79\ See 2020 Proposed Order, 85 FR 70662.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission is adopting the risk 
management condition as proposed in the 2020 Proposed Order.\80\ In 
doing so, the Commission is eliminating the condition in the 2012 Order 
that the BD/FCM must require minimum margin levels with respect to any 
customer transaction in the CDS portfolio margin program at least equal 
to the amount determined using a margin methodology established and 
maintained by the BD/FCM that has been approved by the Commission or 
the Commission staff.\81\ A BD/FCM seeking approval of its internal 
risk management program will need to submit sufficient information for 
the Commission or Commission staff to be able to make a determination 
whether its program meets the required standards described below.\82\ 
In reviewing this information, the Commission or the Commission staff 
will be guided by these standards.\83\ If a BD/FCM's internal risk 
management program is approved for purposes of the 2021 Final Order, 
the program will be subject to ongoing supervision and monitoring by 
the Commission.\84\
---------------------------------------------------------------------------

    \80\ See 2021 Final Order, ] (b)(3). The 2021 Final Order 
contains a provision finding that the BD/FCMs that have received 
previous approval of their internal margin methodology from the 
Division staff are deemed to have approved internal risk management 
programs for purposes of paragraph (b)(3) of the order. These BD/
FCMs will no longer be required to have minimum margin levels with 
respect to any customer transaction in a CDS portfolio margin 
program at least equal to the amount determined using a margin 
methodology approved by the Commission or the Commission staff, as 
required by the 2012 Order. They must instead comply with the 
internal risk management program standards under condition (b)(3) of 
the 2021 Final Order. One commenter supported this approach. FIA 
Letter.
    \81\ Nothing in the 2021 Final Order precludes a BD/FCM from 
setting higher ``house'' margin requirements for some or all of its 
customers. See 17 CFR 39.13(g)(8).
    \82\ See generally 17 CFR 240.15c3-1e(a)(1). A BD/FCM must 
submit information only to the extent it is relevant to the 
portfolio margining of cleared CDS. The BD/FCM may seek confidential 
treatment for information submitted as part of such application. The 
Commission may approve a BD/FCM's internal risk management program 
that meets the standards of paragraph (c) of the 2021 Final Order 
through an order. The Commission staff may also approve a BD/FCM's 
internal risk management program that meets the standards of 
paragraph (c) of the 2021 Final Order through the same process used 
to issue the BD/FCM staff letters pursuant to the 2012 Order.
    \83\ See supra note 81.
    \84\ See 2021 Final Order, ] (c)(1)(ii)(D).
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    The Commission proposed three sets of standards for the internal 
risk management program in the 2020 Proposed Order.\85\ The Commission 
did not receive any comments on the standards and is adopting them as 
proposed in the 2020 Proposed Order.
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    \85\ See 2020 Proposed Order, 85 FR 70663-64.
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    The first standard is that the BD/FCM must calculate a future 
credit exposure for each cleared swaps customer and affiliate 
(sometimes each a ``counterparty'') using a proprietary methodology 
that meets specified minimum quantitative and qualitative model 
standards (``internal risk model'').\86\ The quantitative standards are 
that the internal risk model:
---------------------------------------------------------------------------

    \86\ See 2021 Final Order, ] (c)(1).
---------------------------------------------------------------------------

     Estimates a potential future exposure over a minimum 10-
day horizon and 99% confidence level and captures all material risk 
factors, including but not limited to general movements in credit 
spread term structure, basis risk between index and single name 
positions, and interest rate risk;

[[Page 61366]]

     Includes a concentration/liquidity requirement; and
     Includes a jump-to-default requirement for the sale of CDS 
protection equal to the largest loss of a single name exposure assuming 
a conservative recovery rate that may not exceed 40%.
    The qualitative standards are that:
     The internal risk model must be adequately documented and 
the model documentation must provide a description of the model 
assumptions, data inputs, parameters, and methodologies employed to 
measure risk;
     The internal risk model must be subject to an annual model 
review by a model group that is independent of the business function;
     The internal risk model must be subject to at least 
quarterly backtesting by counterparty or account; and
     The BD/FCM must provide written notice to the Commission 
or Commission staff prior to implementing any material change to its 
internal risk model.
    These quantitative and qualitative requirements generally are 
consistent with the quantitative and qualitative requirements for 
internal risk models under Appendix E to Rule 15c3-1 and under new Rule 
18a-1. These rules permit certain broker-dealers and SBSDs, 
respectively, to compute capital charges using internal models.\87\ For 
example, the standards in the proposed order generally would require 
that the model cover a 10-day horizon, 99% confidence level, and 
material risks, and that the BD/FCM backtest the model and subject it 
to review.\88\
---------------------------------------------------------------------------

    \87\ See 17 CFR 240.15c3-1e and 18a-1.
    \88\ See 17 CFR 15c3-1e(d).
---------------------------------------------------------------------------

    The second standard for the internal risk management program is 
that it must have the following minimum risk management elements:
     The BD/FCM must have standards to measure and manage risk 
exposure arising from counterparties' CDS portfolios that are 
independent of any central counterparty margin methodology;
     The BD/FCM must have an internal credit risk rating model 
that assesses the credit risk of each individual counterparty;
     The BD/FCM's monitoring of credit risk must include the 
prudent setting of an exposure limit for each individual counterparty, 
and the exposure limit must be reviewed if the counterparty's credit 
risk profile changes and at least quarterly;
     The BD/FCM must have the ability to limit or reduce the 
exposure to a counterparty through the collection of additional margin;
     The BD/FCM must have documented procedures to value 
positions conservatively in view of current market prices and the 
amount that might be realized upon liquidation; and
     The BD/FCM must have well-defined procedures and systems 
in place for the daily collection and payment of initial and variation 
margin.\89\
---------------------------------------------------------------------------

    \89\ See 2021 Final Order, ] (c)(2).
---------------------------------------------------------------------------

    The standards requirement is a condition in the BD/FCM staff 
letters. These risk management standards are designed to require a BD/
FCM to take prudent steps to protect the firm from losses that can 
result from failing to account for and control risk with respect to its 
CDS portfolio margin program. Requiring a BD/FCM to incorporate these 
proposed standards is designed to promote the establishment of 
effective internal risk management programs to address the risks of 
portfolio margining cleared CDS.
    The third standard for the internal risk management program is that 
the BD/FCM must report to the Commission and FINRA staffs on a monthly 
basis within 5 business days after month end or as otherwise requested 
details of its top 25 counterparties' portfolios as measured by net 
credit exposure as well as the top 25 counterparties' portfolios as 
measured by gross notional amount.\90\ This requirement is a condition 
in the BD/FCM staff letters. Based on Commission staff's experience 
with the BD/FCM staff letter requirements, this monthly reporting 
requirement is appropriate as it will assist Commission staff in 
monitoring the risk to the BD/FCM arising from its portfolio margining 
of cleared CDS. Understanding the magnitude of this risk will assist 
the Commission staff in evaluating the appropriateness of a given 
firm's internal risk management program in terms of its procedures and 
controls to mitigate risk.
---------------------------------------------------------------------------

    \90\ See 2021 Final Order, ] (c)(3).
---------------------------------------------------------------------------

    The 2021 Final Order does not include other conditions in the BD/
FCM staff letters, including the capital concentration charge. Based on 
Commission staff experience monitoring the BD/FCMs participating in the 
CDS portfolio margin program, the Commission believes that the capital 
concentration charge and other conditions in the BD/FCM staff letters 
are not necessary in light of the requirement to have a reasonably 
designed internal risk management program. A reasonably designed 
internal risk management program will provide a BD/FCM the tools to 
better understand the risks that arise from its portfolio margining of 
cleared CDS and address them as the firm deems appropriate (e.g., 
through risk limits, threshold triggers, house margin, heightened 
monitoring, or other controls). Therefore, the Commission is not 
incorporating these conditions into the 2021 Final Order.
    The Commission did not receive any comments on the fourth BD/FCM 
condition in the 2020 Proposed Order and is adopting it as 
proposed.\91\ This condition requires that the BD/FCM be in compliance 
with applicable laws and regulations relating to risk management, 
capital, and liquidity, and be in compliance with applicable clearing 
agency/DCO rules and CFTC requirements (including margin, segregation, 
and related books and records provisions) with respect to CFTC cleared 
swaps customer accounts and cleared swaps proprietary accounts subject 
to the CDS portfolio margin program.\92\ The purpose of this condition 
is to help ensure that the exemption is available only when the BD/FCM 
is in compliance with applicable regulatory requirements. The 
Commission received no comments on this condition and is adopting it as 
proposed in the 2020 Proposed Order.\93\
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    \91\ See 2020 Proposed Order, 85 FR 70664.
    \92\ See 2021 Final Order, ] (b)(4).
    \93\ See 2020 Proposed Order, 85 FR 70664.
---------------------------------------------------------------------------

    The Commission did not receive any comments on the fifth BD/FCM 
condition in the 2020 Proposed Order and is adopting it as 
proposed.\94\ This condition requires that each cleared swaps customer 
and affiliate of the BD/FCM participating in the CDS portfolio margin 
program be an ``eligible contract participant.'' \95\ As with the third 
condition in the 2021 Final Order for clearing agency/DCOs, it would be 
appropriate to limit this exemption to cleared CDS entered into with 
eligible contract participants. Eligible contract participants should 
have the expertise or resources to effectively determine the risks 
associated with engaging in these types of transactions.
---------------------------------------------------------------------------

    \94\ See 2020 Proposed Order, 85 FR 70664.
    \95\ See 2021 Final Order, ] (b)(5). The 2012 Order required 
that each customer of the BD/FCM participating in a program to 
commingle and portfolio margin CDS be an ``eligible contract 
participant'' as defined in Section 1a(18) of the CEA. 77 FR 75220.
---------------------------------------------------------------------------

    The Commission did not receive any comments on the sixth BD/FCM 
condition in the 2020 Proposed Order and is adopting it as 
proposed.\96\ This condition requires that, before receiving

[[Page 61367]]

any money, securities, or property of a cleared swaps customer or 
affiliate to margin, guarantee, or secure positions consisting of 
cleared CDS, the BD/FCM must furnish to the cleared swaps customer or 
affiliate a disclosure document containing: (1) A statement indicating 
that the cleared swaps customer's or affiliate's money, securities, and 
property will be held in a CFTC cleared swaps account, and that the 
cleared swaps customer or affiliate has elected to seek protections 
under the commodity broker liquidation provisions with respect to such 
money, securities, and property; and (2) a statement that the broker-
dealer segregation requirements of Sections 15(c)(3) and 3E of the 
Exchange Act and the rules thereunder, and any customer protections 
under SIPA and the stockbroker liquidation provisions, will not apply 
to such cleared swaps customer or affiliate money, securities, and 
property.\97\ The disclosure document must be provided to the cleared 
swaps customer or affiliate at or prior to the time that the cleared 
swaps customer or affiliate opens the CFTC cleared swaps account and, 
in all cases, prior to the BD/FCM receiving any money, securities or 
property into the CFTC cleared swaps account of the cleared swaps 
customer or affiliate. This condition is designed to provide market 
participants that elect to participate in the CDS portfolio margin 
program with important disclosures regarding the legal framework that 
will govern their transactions.
---------------------------------------------------------------------------

    \96\ See 2020 Proposed Order, 85 FR 70664.
    \97\ See 2021 Final Order, ] (b)(6).
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission finds it 
appropriate in the public interest and consistent with the protection 
of investors to exempt clearing agency/DCOs and BD/FCMs from compliance 
with certain provisions of the Exchange Act in connection with a 
program to portfolio margin cleared swaps customer and affiliate 
positions in cleared CDS that are swaps and security-based swaps in a 
segregated account established and maintained in accordance with 
Section 4d(f) of the CEA (in the case of a cleared swaps customer) or a 
cleared swaps proprietary account (in the case of an affiliate).

IV. Conclusion

    Pursuant to Sections 3E(c)(2) \98\ and 36 \99\ of the Exchange Act:
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78c-5(c)(2). Section 3E(c)(2) of the Exchange Act 
provides that the Commission may, notwithstanding Section 3E(b) of 
the Exchange Act, by rule, regulation, or order prescribe terms and 
conditions under which any money, securities, or property of a 
customer with respect to cleared security-based swaps may be 
commingled and deposited with any other money, securities, or 
property received by the broker-dealer or SBSD and required by the 
Commission to be separately accounted for and treated and dealt with 
as belonging to the security-based swap customer of the broker-
dealer or SBSD.
    \99\ 15 U.S.C. 78mm. Section 36 of the Exchange Act authorizes 
the Commission to conditionally or unconditionally exempt, by rule, 
regulation, or order any person, security, or transaction (or any 
class or classes of persons, securities, or transactions) from any 
provision of the Exchange Act or any rule or regulation thereunder, 
to the extent such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of investors.
---------------------------------------------------------------------------

    It is hereby ordered that any broker-dealer also registered as a 
futures commission merchant that has received approval of its margin 
methodology by the Commission or Commission staff prior to the date of 
this order is deemed to have an internal risk management program that 
has been approved by the Commission or the Commission staff as required 
by paragraph (b)(3) of this order. It is hereby further ordered that 
the following exemptions from Exchange Act requirements will apply:
    (a) Exemption for dually-registered clearing agencies/derivatives 
clearing organizations.
    A clearing agency registered pursuant to Section 17A of the 
Exchange Act and registered as a derivatives clearing organization 
pursuant to Section 5b of the CEA (a ``clearing agency/DCO'') will be 
exempt from Sections 3E(b), (d), and (e) of the Exchange Act and any 
rules thereunder, solely to perform the functions of a clearing agency 
for credit default swaps (``CDS'') under a program to commingle and 
portfolio margin cleared CDS for cleared swaps customer and affiliate 
positions, subject to the following conditions:
    (1) The clearing agency/DCO has obtained any other relief needed to 
permit its clearing members that are registered under Section 15(b) of 
the Exchange Act (other than paragraph (11) thereof) and also 
registered as a futures commission merchant pursuant to Section 
4f(a)(1) of the CEA (a ``BD/FCM'') (at the BD/FCM's election), to 
maintain cleared swaps customer or affiliate money, securities, and 
property received by the BD/FCM to margin, guarantee, or secure cleared 
swaps customer or affiliate positions in cleared CDS, which include 
both swaps and security-based swaps, in a segregated account 
established and maintained in accordance with Section 4d(f) of the CEA 
and rules thereunder (in the case of a cleared swaps customer) or a 
cleared swaps proprietary account (in the case of an affiliate) for the 
purpose of clearing (as a clearing member of the clearing agency/DCO) 
such cleared swaps customer or affiliate positions under a program to 
commingle and portfolio margin CDS.
    (2) The clearing agency/DCO has appropriate rules and operational 
practices to permit a BD/FCM that is a clearing member (at the BD/FCM's 
election) to maintain cleared swaps customer or affiliate money, 
securities, and property received by the BD/FCM to margin, guarantee, 
or secure cleared swaps customer or affiliate positions in cleared CDS, 
which include both swaps and security-based swaps, in a segregated 
account established and maintained in accordance with Section 4d(f) of 
the CEA and rules thereunder (in the case of a cleared swaps customer) 
or a cleared swaps proprietary account (in the case of an affiliate) 
for the purpose of clearing (as a clearing member of the clearing 
agency/DCO) such cleared swaps customer or affiliate positions under a 
program to commingle and portfolio margin CDS.
    (3) The rules of the clearing agency/DCO require that each cleared 
swaps customer and affiliate of the BD/FCM participating in a program 
to commingle and portfolio margin CDS must be an ``eligible contract 
participant'' as defined in Section 1a(18) of the CEA.
    (b) Exemption for certain BD/FCMs that elect to offer a program to 
commingle and portfolio margin cleared swaps customer and affiliate 
positions in cleared CDS. Solely to perform the functions of a BD/FCM 
for cleared CDS, with respect to any cleared swaps customer or 
affiliate money, securities, and property received by the BD/FCM to 
margin, guarantee, or secure cleared swaps customer or affiliate 
positions in security-based swaps included in a segregated account 
established and maintained in accordance with Section 4d(f) of the CEA 
and rules thereunder (in the case of a cleared swaps customer) or a 
cleared swaps proprietary account (in the case of an affiliate) under a 
program to commingle and portfolio margin cleared swaps customer or 
affiliate positions in CDS, a BD/FCM will be exempt from Exchange Act 
Sections 3E(b), (d), and (e), and Section 15(c)(3) and Rule 15c3-3 
thereunder and any requirement to treat an affiliate (as defined in 
association with the definition of ``cleared swaps proprietary 
account'' pursuant to CFTC

[[Page 61368]]

Rule 22.1) as a customer for purposes of Section 8 of the Exchange Act 
and Exchange Act Rules 8c-1 and 15c2-1 thereunder, subject to the 
following conditions:
    (1) With respect to cleared swaps customers that are not affiliates 
of the BD/FCM,
    (i) The BD/FCM must maintain cleared swaps customer money, 
securities, and property received to margin, guarantee or secure 
cleared swaps customer positions consisting of cleared CDS, which 
include both swaps and security-based swaps, in a segregated account 
established and maintained in accordance with Section 4d(f) of the CEA 
and rules thereunder for the purpose of clearing (as a clearing member 
or through a clearing member of a clearing agency/DCO operating 
pursuant to the exemption in paragraph (a) above) such cleared swaps 
customer positions under a program to commingle and portfolio margin 
CDS; and
    (ii) The BD/FCM must enter into a non-conforming subordination 
agreement with each cleared swaps customer by no later than February 1, 
2022. The agreement must contain a specific acknowledgment by the 
cleared swaps customer that the money, securities or property 
identified in paragraph (b)(1)(i) of this order will not receive 
customer treatment under the Exchange Act or SIPA or be treated as 
``customer property'' as defined in 11 U.S.C. 741 in a liquidation of 
the BD/FCM and that such money, securities or property will be subject 
to any applicable protections under Subchapter IV of Chapter 7 of Title 
11 of the United States Code and rules and regulations thereunder; as 
well as an affirmation by the cleared swaps customer that claims to 
``customer property'' as defined in SIPA or 11 U.S.C. 741 against the 
BD/FCM with respect to the money, securities, or property identified in 
paragraph (b)(1)(i) of this order will be subordinated to the claims of 
securities customers and security-based swap customers.
    (2) With respect to affiliates of the BD/FCM,
    (i) The BD/FCM maintains money, securities, and property of 
affiliates received to margin, guarantee, or secure positions 
consisting of cleared CDS, which include both swaps and security-based 
swaps, in a cleared swaps proprietary account for the purpose of 
clearing (as a clearing member of a clearing agency/DCO operating 
pursuant to the exemption in paragraph (a) above) such positions under 
a program to commingle and portfolio margin CDS;
    (ii) The BD/FCM enters into a non-conforming subordination 
agreement with each affiliate by no later than February 1, 2022. The 
agreement must contain a specific acknowledgment by the affiliate that 
the money, securities or property identified in paragraph (b)(2)(i) of 
this order will not receive customer treatment under the Exchange Act 
or SIPA or be treated as ``customer property'' as defined in 11 U.S.C. 
741 in a liquidation of the BD/FCM, and that such money, securities or 
property will be held in a proprietary account in accordance with the 
CFTC requirements and will be subject to any applicable protections 
under Subchapter IV of Chapter 7 of Title 11 of the United States Code 
and rules and regulations thereunder; as well as an affirmation by the 
affiliate that claims to ``customer property'' as defined in SIPA or 11 
U.S.C. 741 against the BD/FCM with respect the money, securities, or 
property identified in paragraph (b)(2)(i) of this order will be 
subordinated to the claims of securities customers and security-based 
swap customers; and
    (iii) The BD/FCM obtains from the affiliate an opinion of counsel 
that the affiliate is legally authorized to enter into the 
subordination agreement required by paragraph (b)(2)(ii) of this order.
    (3) The BD/FCM has adopted an internal risk management program that 
is reasonably designed to identify, measure, and manage the risks 
arising from its program to allow cleared swaps customers and 
affiliates to commingle and portfolio margin CDS that has been approved 
in advance by the Commission or the Commission staff and meets the 
standards in paragraph (c) of this order.
    (4) The BD/FCM must be in compliance with applicable laws and 
regulations relating to risk management, capital, and liquidity, and 
must be in compliance with applicable clearing agency/DCO rules and 
CFTC requirements (including segregation and related books and records 
provisions) for accounts established and maintained in accordance with 
Section 4d(f) of the CEA and rules thereunder (in the case of cleared 
swaps customers) and for cleared swaps proprietary accounts (in the 
case of affiliates), and subject to a program to commingle and 
portfolio margin CDS.
    (5) Each cleared swaps customer and affiliate of the BD/FCM 
participating in a program to commingle and portfolio margin CDS is an 
``eligible contract participant'' as defined in Section 1a(18) of the 
CEA.
    (6) Before receiving any money, securities, or property of a 
cleared swaps customer or affiliate to margin, guarantee, or secure 
positions consisting of cleared CDS, which include both swaps and 
security-based swaps, under a program to commingle and portfolio margin 
CDS, the BD/FCM must furnish to the cleared swaps customer or affiliate 
a disclosure document containing the following information:
    (i) A statement indicating that the cleared swaps customer's or 
affiliate's money, securities, and property will be held in an account 
maintained in accordance with the segregation requirements of Section 
4d(f) of the CEA (in the case of a cleared swaps customer) or a cleared 
swaps proprietary account (in the case of an affiliate), and that the 
cleared swaps customer or affiliate has elected to seek protections 
under Subchapter IV of Chapter 7 of Title 11 of the United States Code 
and the rules and regulations thereunder with respect to such money, 
securities, and property; and
    (ii) A statement that the broker-dealer segregation requirements of 
Section 15(c)(3) and Section 3E of the Exchange Act and the rules 
thereunder, and any customer protections under SIPA and the stockbroker 
liquidation provisions, will not apply to such cleared swaps customer 
or affiliate money, securities, and property.
    (c) Standards for internal risk management program. The internal 
risk management program required pursuant to paragraph (b)(3) of this 
order must have the following standards in place:
    (1) Internal Risk Model. The BD/FCM must calculate a future credit 
exposure for each cleared swaps customer and affiliate (each a 
``counterparty'') using its own proprietary methodology (``internal 
risk model'') subject to the following minimum quantitative and 
qualitative model standards:
    (i) Quantitative Requirements. (A) The internal risk model must 
estimate a potential future exposure over a minimum 10-day horizon and 
99% confidence level and capture all material risk factors, including 
but not limited to general movements in credit spread term structure, 
basis risk between index and single name positions, and interest rate 
risk;
    (B) The internal risk model must include a concentration/liquidity 
requirement; and
    (C) The internal risk model must include a jump-to-default 
requirement for the sale of CDS protection equal to the largest loss of 
a single name exposure assuming a conservative recovery rate that may 
not exceed 40%.
    (ii) Qualitative Requirements. (A) The internal risk model must be 
adequately documented and the documentation must provide a description 
of the model

[[Page 61369]]

assumptions, data inputs, parameters, and methodologies employed to 
measure risk;
    (B) The internal risk model must be subject to an annual model 
review by a model group that is independent of the business function;
    (C) The internal risk model must be subject to at least quarterly 
backtesting by counterparty or account; and
    (D) The BD/FCM must provide written notice to the Commission or 
Commission staff prior to implementing any material change to its 
internal risk model.
    (2) Minimum Risk Management System Standards. (A) The BD/FCM must 
maintain risk management system standards to measure and manage risk 
exposure arising from counterparties' CDS portfolios that are 
independent of any central counterparty margin methodology;
    (B) The BD/FCM must have an internal credit risk rating model that 
assesses the credit risk of each individual counterparty;
    (C) The BD/FCM's monitoring of credit risk must include the prudent 
setting of an exposure limit for each individual counterparty and the 
exposure limit must be reviewed if the counterparty's credit risk 
profile changes and at least quarterly;
    (D) The BD/FCM must have the ability to limit or reduce the 
exposure to a counterparty through the collection of additional margin;
    (E) The BD/FCM must have documented procedures to value positions 
conservatively in view of current market prices and the amount that 
might be realized upon liquidation; and
    (F) The BD/FCM must have well-defined procedures and systems in 
place for the daily collection and payment of initial and variation 
margin.
    (3) Monthly Reporting. The BD/FCM must report to the Commission and 
FINRA staffs on a monthly basis within 5 business days after month end 
or as otherwise requested details of its top 25 counterparties' 
portfolios as measured by net credit exposure as well as the top 25 
counterparties' portfolios as measured by gross notional amount.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-24170 Filed 11-4-21; 8:45 am]
BILLING CODE 8011-01-P