[Federal Register Volume 88, Number 151 (Tuesday, August 8, 2023)]
[Proposed Rules]
[Pages 53409-53431]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16572]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AF36


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

AGENCY: Commodity Futures Trading Commission

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to amend the margin requirements for uncleared 
swaps applicable to swap dealers (``SDs'') and major swap participants 
(``MSPs'') for which there is no prudential regulator. The proposed 
amendment would revise the definition of ``margin affiliate'' to 
provide that certain collective investment vehicles (``investment 
funds'' or ``funds'') that receive all of their start-up capital, or a 
portion thereof, from a sponsor entity (``seeded funds'') would be 
deemed not to have any margin affiliates for the purposes of 
calculating certain thresholds that trigger the requirement to exchange 
initial margin (``IM'') for uncleared swaps. This proposed amendment 
(``Seeded Funds Proposal'') would effectively relieve SDs and MSPs from 
the requirement to post and collect IM with certain eligible seeded 
funds for their uncleared swaps for a period of three years from the 
date on which the eligible seeded fund's asset manager first begins 
making investments on behalf of the fund (``trading inception date''). 
The Commission is also proposing to eliminate a provision disqualifying 
the securities issued by certain pooled investment funds (``money 
market and similar funds'') that transfer their assets through 
securities lending, securities borrowing, repurchase agreements, 
reverse repurchase agreements, and similar arrangements from being used 
as eligible IM collateral, thereby expanding the scope of assets that 
qualify as eligible collateral (``Money Market Funds Proposal''). 
Additionally, the Commission is proposing an amendment to the haircut 
schedule set forth in a Commission Regulation to add a footnote that 
was inadvertently omitted when the rule was originally promulgated.

DATES: With respect to the proposed amendments, comments must be 
received on or before October 10, 2023.

ADDRESSES: You may submit comments, identified by RIN 3038-AF36, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Center, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. 
Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein are 
found at 17 CFR Chapter I.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://comments.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the FOIA.

FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, 202-418-
5283, [email protected]; Thomas J. Smith, Deputy Director, 202-418-5495, 
[email protected]; Warren Gorlick, Associate Director, 202-418-5195, 
[email protected]; Rafael Martinez, Associate Director, 202-418-5462, 
[email protected]; or Liliya Bozhanova, Special Counsel, 202-418-6232, 
[email protected], Market Participants Division, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street NW, 
Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Statutory and Regulatory Background

    Section 4s(e) of the Commodity Exchange Act (``CEA'' or ``Act'') 
\2\ requires the Commission to adopt rules establishing minimum initial 
and variation margin requirements for all swaps \3\ that are: (i) 
entered into by an SD \4\ or MSP \5\ for which there is no prudential 
regulator \6\ (collectively, ``covered swap entities'' or ``CSEs''); 
\7\ and (ii) not cleared by a registered derivatives clearing 
organization (``uncleared swaps'').\8\ To offset the greater risk to 
the SD or MSP and the financial system arising from the use of 
uncleared swaps, these requirements must: (i) help ensure the safety 
and soundness of the SD or MSP; and (ii) be appropriate for the risk 
associated with

[[Page 53410]]

the uncleared swaps held by the SD or MSP.\9\ In 2016, the Commission 
promulgated Commission Regulations 23.150 through 23.161 (``CFTC Margin 
Rule'') to implement section 4s(e).\10\
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    \2\ 7 U.S.C. 6s(e) (capital and margin requirements).
    \3\ CEA section 1a(47), 7 U.S.C. 1a(47) (swap definition); 
Commission Regulation 1.3, 17 CFR 1.3 (further definition of a 
swap). A swap includes, among other things, an interest rate swap, 
commodity swap, credit default swap, and currency swap.
    \4\ CEA section 1a(49), 7 U.S.C. 1a(49) (swap dealer 
definition); Commission Regulation 1.3 (further definition of swap 
dealer).
    \5\ CEA section 1a(32), 7 U.S.C. 1a(32) (major swap participant 
definition); Commission Regulation 1.3 (further definition of major 
swap participant).
    \6\ CEA section 1a(39), 7 U.S.C. 1a(39) (defining the term 
``prudential regulator'' to include the Board of Governors of the 
Federal Reserve System; the Office of the Comptroller of the 
Currency; the Federal Deposit Insurance Corporation; the Farm Credit 
Administration; and the Federal Housing Finance Agency). The 
definition of ``prudential regulator'' further specifies the 
entities for which these agencies act as prudential regulators. The 
prudential regulators published final margin requirements in 
November 2015. See generally Margin and Capital Requirements for 
Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential 
Regulators Margin Rule''). The Prudential Regulators Margin Rule is 
substantially similar to the CFTC Margin Rule.
    \7\ CEA section 4s(e)(1)(B), 7 U.S.C. 6s(e)(1)(B). SDs and MSPs 
for which there is a prudential regulator must meet the margin 
requirements for uncleared swaps established by the applicable 
prudential regulator. CEA section 4s(e)(1)(A), 7 U.S.C. 6s(e)(1)(A).
    \8\ CEA section 4s(e)(2)(B)(ii), 7 U.S.C. 6s(e)(2)(B)(ii). In 
Commission Regulation 23.151, the Commission further defined this 
statutory language to mean all swaps that are not cleared by a 
registered derivatives clearing organization or a derivatives 
clearing organization that the Commission has exempted from 
registration as provided under the CEA. 17 CFR 23.151.
    \9\ CEA section 4s(e)(3)(A), 7 U.S.C. 6s(e)(3)(A).
    \10\ See generally Margin Requirements for Uncleared Swaps for 
Swap Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) 
(``Final Margin Rule'') (adopting the CFTC Margin Rule). The CFTC 
Margin Rule became effective April 1, 2016 and is codified in part 
23 of the Commission's regulations. 17 CFR 23.150-23.159, 23.161. In 
May 2016, the Commission amended the CFTC Margin Rule to add 
Commission Regulation 23.160, 17 CFR 23.160, providing rules on its 
cross-border application. See generally Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants--Cross-
Border Application of the Margin Requirements, 81 FR 34818 (May 31, 
2016).
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    The CFTC Margin Rule imposes IM requirements on uncleared swaps 
entered into by CSEs and certain specified counterparties. More 
specifically, Commission Regulation 23.152 requires CSEs to collect and 
post IM \11\ with each counterparty that is an SD, MSP or financial end 
user (``FEU'') with material swaps exposure (``MSE'').\12\ Commission 
Regulation 23.151 defines the term FEU by listing entities, persons, 
and arrangements whose business is financial in nature, including 
certain funds.\13\
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    \11\ IM (or initial margin) is the collateral (calculated as 
provided by Commission Regulation 23.154) that is collected or 
posted in connection with one or more uncleared swaps pursuant to 
Commission Regulation 23.152. IM is intended to secure potential 
future exposure following default of a counterparty (i.e., adverse 
changes in the value of an uncleared swap that may arise during the 
period of time when it is being closed out). See CFTC Margin Rule, 
81 FR at 683.
    \12\ See 17 CFR 23.152. Commission Regulation 23.151 provides 
that MSE for an entity means that the entity and its margin 
affiliates have an average month-end aggregate notional amount of 
uncleared swaps, uncleared security-based swaps, foreign exchange 
forwards, and foreign exchange swaps with all counterparties for 
March, April, or May of the current calendar year that exceeds $8 
billion, where such amount is calculated only for the last day of 
the month. 17 CFR 23.151.
    \13\ See 17 CFR 23.151 for a full list of entities subject to 
the FEU definition as well as a list of entities excluded from the 
definition. Among other entities, persons, and arrangements, whose 
business is financial in nature, the definition of FEU includes 
counterparties that are not an SD or MSP and are: (i) investment 
companies registered with the Securities and Exchange Commission 
under the Investment Company Act of 1940; (ii) private funds as 
defined in section 202(a) of the Investment Advisers Act of 1940; 
entities that would be investment companies under section 3 of the 
Investment Company Act of 1940; or entities that are deemed not to 
be investment companies under section 3 of the Investment Company 
Act of 1940 pursuant to Investment Company Act Rule 3a-7 of the 
Securities and Exchange Commission; (iii) commodity pools; and (iv) 
entities, persons, or arrangements that are, or hold themselves out 
as being, entities, persons, or arrangements that raise money from 
investors, accept money from clients, or use their own money 
primarily for investing, or trading, or facilitating the investing 
or trading, in loans, securities, swaps, funds, or other assets.
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    Commission Regulation 23.161 sets forth a phase-in schedule for 
compliance with the CFTC Margin Rule.\14\ Under the schedule, which 
commenced on September 1, 2016 and concluded on September 1, 2022, 
entities have been required to comply with the IM requirements with 
respect to their uncleared swaps in staggered phases, starting with 
entities with higher average aggregate notional amount of uncleared 
swaps and certain other financial products (``AANA''), and then 
successively those with lesser AANA.\15\ The AANA is calculated at a 
group level (i.e., taking into consideration the AANA of the CSE 
combined with its margin affiliates,\16\ and the AANA of the 
counterparty combined with its margin affiliates). During the last 
phase of compliance, which started on September 1, 2022, CSEs and 
eligible covered counterparties \17\ that had not come into the scope 
of the IM requirements in prior phases of the phase-in schedule, 
including FEUs with MSE of more than $8 billion, became subject to the 
IM requirements.
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    \14\ 17 CFR 23.161.
    \15\ Id.
    \16\ Commission Regulation 23.151 provides that a company is a 
``margin affiliate'' of another company if: (i) either company 
consolidates the other on a financial statement prepared in 
accordance with U.S. Generally Accepted Accounting Principles 
(``U.S. GAAP''), the International Financial Reporting Standards 
(``IFRS''), or other similar standards; (ii) both companies are 
consolidated with a third company on a financial statement prepared 
in accordance with such principles or standards; or (iii) for a 
company that is not subject to such principles or standards, if 
consolidation as described in paragraph (1) or (2) of this 
definition would have occurred if such principles or standards had 
applied. 17 CFR 23.151.
    \17\ The term ``covered counterparty'' is defined in Commission 
Regulation 23.151 as FEU with MSE or a swap entity, including an SD 
or MSP, that enters into swaps with a CSE. See 17 CFR 23.151.
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    Under this phase-in approach, a fund with MSE will come within the 
scope of the IM requirements if it undertakes an uncleared swap with a 
CSE. The CSE and the fund will not be required to post and collect IM 
for their uncleared swaps until the IM threshold amount of $50 million 
has been exceeded. The IM threshold amount will be calculated based on 
the credit exposure from uncleared swaps between the CSE and its margin 
affiliates on the one hand, and the fund and its margin affiliates on 
the other.\18\
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    \18\ Commission Regulation 23.151 defines the term ``IM 
threshold amount'' to mean an aggregate credit exposure of $50 
million resulting from all uncleared swaps between an SD and its 
margin affiliates (or an MSP and its margin affiliates) on the one 
hand, and the SD's (or MSP's) counterparty and its margin affiliates 
on the other. See 17 CFR 23.151.
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    The CFTC Margin Rule provides that the IM requirements may be 
satisfied with only certain types of collateral. Commission Regulation 
23.156(a)(1) sets forth the types of collateral that CSEs can post or 
collect as IM with covered counterparties, including cash funds, 
certain securities issued by the U.S. government or other sovereign 
entities, certain publicly traded debt or equity securities, securities 
issued by money market and similar funds, and gold.\19\
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    \19\ See 17 CFR 23.156(a)(1).
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    Under Commission Regulation 23.156(a)(1)(ix), the securities of 
money market and similar funds \20\ may qualify as eligible collateral 
if the investments of the fund are limited to securities that are 
issued by, or unconditionally guaranteed as to the timely payment of 
principal and interest by, the U.S. Department of Treasury, and 
immediately-available cash denominated in U.S. dollars; \21\ or to 
securities denominated in a common currency and issued by, or fully 
guaranteed as to the payment of principal and interest by, the European 
Central Bank, or a sovereign entity that is assigned no higher than a 
20 percent risk weight under the capital rules applicable to swap 
dealers subject to regulation by a prudential regulator, and 
immediately-available cash denominated in the same currency.\22\ Also, 
the asset managers of the money market and similar fund may not 
transfer the assets of the fund through securities lending, securities 
borrowing, repurchase agreements, or other means (``repurchase or 
similar arrangements'') that involve the fund having rights to acquire 
the same or similar assets from the transferee (``asset transfer 
restriction'').\23\
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    \20\ Although the scope of the eligible pooled investment funds 
described in Commission Regulation 23.156(a)(1)(ix) does not fully 
coincide with the regulatory definition of money market funds in 
Rule 2a-7 under the Investment Company Act (17 CFR 270.2a-7), for 
simplicity purposes, these funds will be referred to as ``money 
market and similar funds.'' The securities of money market and 
similar funds may also be used as collateral for variation margin 
(``VM'') for uncleared swaps between a CSE and a financial end user, 
provided that the securities qualify as eligible collateral under 
Commission Regulation 23.156(a)(1)(ix). See 17 CFR 23.156(b)(1)(ii). 
VM (or variation margin), as defined in Commission Regulation 
23.151, is the collateral provided by a party to its counterparty to 
meet the performance of its obligations under one or more uncleared 
swaps between the parties as a result of a change in the value of 
such obligations since the trade was executed or the last time such 
collateral was provided. 17 CFR 23.151.
    \21\ 17 CFR 23.156(a)(1)(ix)(A).
    \22\ 17 CFR 23.156(a)(1)(ix)(B).
    \23\ 17 CFR 23.156(a)(1)(ix)(C).
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II. Market Participant Feedback

    In January 2020, the CFTC's Global Markets Advisory Committee 
(``GMAC'') established a subcommittee of market participants to 
consider issues raised by

[[Page 53411]]

the implementation of margin requirements for non-cleared swaps, to 
identify challenges associated with forthcoming implementation phases, 
and to prepare a report with recommendations.\24\ The subcommittee 
issued a report with its recommendations in May 2020 (``Margin 
Subcommittee Report'' or ``Report''), and the GMAC voted to adopt the 
Margin Subcommittee Report and recommended to the Commission that it 
consider adopting the Report's recommendations.\25\
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    \24\ Membership of the GMAC Subcommittee on Margin Requirements 
was comprised of a wide range of industry participants that had 
expertise in, and experience with, margin requirements for non-
cleared swaps and the impact of the requirements on the marketplace 
and market participants. The Subcommittee included representatives 
of SDs, FEUs, asset managers, and third-party service providers, 
among other market participants. The full list of members is 
available at https://www.cftc.gov/About/AdvisoryCommittees/GMAC.
    \25\ See Recommendations to Improve Scoping and Implementation 
of Initial Margin Requirements for Non-Cleared Swaps, Report to the 
CFTC's Global Markets Advisory Committee by the Subcommittee on 
Margin Requirements for Non-Cleared Swaps (May 2020), https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download.
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    Among other things, the Margin Subcommittee Report asserted that 
the current criteria for determining whether a counterparty comes 
within the scope of the IM requirements unduly penalizes certain funds. 
Because, under accounting consolidation principles, a fund will 
generally be consolidated with its sponsor entity during the period in 
which the start-up capital provided by the sponsor entity exceeds that 
of third-party investors and represents up to 100 percent of the 
ownership interest in the fund (``seeding period''), such fund, 
referred to as a seeded fund, will be considered a margin affiliate of 
the sponsor entity.\26\ As such, the seeded fund will be required to 
calculate AANA on an aggregate basis with the sponsor entity and the 
sponsor entity's margin affiliates. Although the fund may individually 
have small amounts of AANA, due to its affiliation with the sponsor 
entity and its margin affiliates, the fund may have MSE, on a 
collective basis with the sponsor entity and its margin affiliates, and 
may come within the scope of the IM requirements. As such, a CSE that 
undertakes uncleared swaps with the fund would be required to exchange 
IM with the fund.
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    \26\ Supra note 16. See also CFTC Margin Rule, 81 FR at 646-47.
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    The Report noted that regulators in other major financial markets, 
including Australia, Canada, the European Union (``EU''), and Japan, 
have adopted the Basel Committee on Banking Supervision and Board of 
the International Organization of Securities Commissions' (``BCBS/
IOSCO'') Framework for margin requirements for non-centrally cleared 
derivatives (``BCBS/IOSCO Framework'') \27\ without requiring seeded 
funds to be consolidated with the sponsor and to be treated as a margin 
affiliate of the sponsor.\28\
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    \27\ See BCBS/IOSCO, Margin requirements for non-centrally 
cleared derivatives (April 2020), https://www.bis.org/bcbs/publ/d499.pdf. The BCBS/IOSCO Framework, which was established in 2013 
and most recently amended in 2020, sets out minimum standards for 
margin requirements for non-centrally cleared derivatives. In 
connection with the requirement for all covered entities to exchange 
IM with a threshold not to exceed [euro]50 million applied at the 
level of the consolidated group, the Framework specifies that 
``investment funds that are managed by an investment advisor are 
considered distinct entities that are treated separately when 
applying the threshold as long as the funds are distinct legal 
entities that are not collateralized by or are otherwise guaranteed 
or supported by other investment funds or the investment advisor in 
the event of fund insolvency or bankruptcy.''
    \28\ Margin Subcommittee Report at 7 and 29.
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    The Margin Subcommittee Report also recommended that the Commission 
eliminate the asset transfer restriction in paragraph (C) of Commission 
Regulation 23.156(a)(1)(ix). The Report stated that ``the ability to 
use redeemable securities in a pooled investment fund, more typically 
referred to as a money market fund (``MMF''), as eligible collateral in 
the U.S. has been severely restricted by [such] condition.'' \29\
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    \29\ Id. at 6.
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    The Report noted that MMFs use repurchase and similar arrangements 
to earn returns on cash and other high quality assets, to avoid any 
cash drag on performance, to diversify their investments, and to 
mitigate their potential exposure to their custodian's insolvency and 
any consolidation issues with respect to any cash held at the 
custodian.\30\ MMF asset managers, as fiduciaries, determine the types 
of investments and transactions that are in the best interest of the 
MMF and its investors.\31\ The Report further stated that nearly all 
U.S. MMFs engage in some form of repurchase or similar arrangements, 
and cited research that found that, given the asset transfer 
restriction, the securities of only four MMFs, would qualify as 
eligible collateral.\32\
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    \30\ Id. at 27.
    \31\ Id.
    \32\ Margin Subcommittee Report at 24.
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    Having considered the GMAC Subcommittee's arguments and based on 
its experience administering the CFTC Margin Rule for several years, 
the Commission preliminarily believes that, for the purpose of 
determining whether a CSE should exchange IM with a seeded fund for 
their uncleared swaps, the seeded fund should be treated as a separate 
legal entity, not affiliated with the sponsor entity, for a period of 
three years and subject to certain limitations. Similarly, the 
Commission preliminarily believes that the current restriction on the 
use of securities of money market and similar funds that transfer their 
assets through repurchase and similar arrangements should be removed.

III. Proposals

A. Seeded Funds Proposal

    The Commission is proposing to revise the definition of ``margin 
affiliate'' to provide that a seeded fund that meets certain 
requirements (described in further detail below) (``eligible seeded 
fund''), would be deemed not to have any margin affiliates for the 
purpose of calculating the fund's MSE and the IM threshold amount, for 
a period of three years from the fund's trading inception date 
(``eligible seeded fund exception''). The Commission is also proposing 
to define the term ``eligible seeded fund'' to set forth the conditions 
that investment funds must meet to qualify for the eligible seeded fund 
exception.
1. Commission Regulation 23.151--Amendments to the Definition of 
``Margin Affiliate''
    Under the CFTC Margin Rule, a company is a ``margin affiliate'' of 
another company if, based on accounting principles, either company 
consolidates the other, or both companies are consolidated with a third 
company, on a financial statement.\33\ The Commission is proposing to 
adopt the eligible seeded fund exception through an amendment of the 
definition of ``margin affiliate,'' which would provide that an 
eligible seeded fund would be deemed not to have margin affiliates 
solely for the purposes of calculating the fund's MSE and the IM 
threshold amount for a period of three years after the fund's trading 
inception date, notwithstanding the consolidation of the fund with 
another entity under U.S. GAAP, IFRS, or other similar accounting 
standards.
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    \33\ Supra note 16.
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    This proposed eligible seeded fund exception would effectively 
relieve CSEs that enter into uncleared swaps with an eligible seeded 
fund from the requirement to exchange IM with such fund for three years 
after the fund's trading inception date. In addition, uncleared swaps 
entered into between a CSE and an eligible seeded fund during the 
three-year period would continue to

[[Page 53412]]

be relieved from the IM requirement after expiration of such 
period.\34\ At the end of the three-year period, a fund that meets the 
accounting standards for consolidation due to a sponsor entity holding 
a significant equity stake in the fund would be deemed to have margin 
affiliates. As a result, a CSE would be required to exchange IM with 
the fund, if the fund, on a consolidated group basis, has MSE and the 
IM threshold amount has been exceeded, for swaps entered into following 
the expiration of the three-year period.
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    \34\ For purposes of clarity, the Commission notes, however, 
that if at any point during the three-year period from the fund's 
trading inception date, the fund's AANA, calculated on an individual 
entity basis, exceeds the MSE threshold and the fund, individually, 
with its counterparty and the counterparty's margin affiliates 
crosses the IM threshold amount, the exchange of IM would be 
required.
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    The proposed eligible seeded fund exception is intended to address 
challenges confronted by seeded funds that have limited individual 
swaps exposure, but, due to their affiliation with an entity or group 
of entities, have on a collective basis sufficient AANA to meet the MSE 
threshold, therefore requiring CSEs undertaking uncleared swaps with 
the funds to post and collect IM with such funds. To limit the relief 
to only such funds, the proposed treatment would be applicable only to 
funds that have one or more margin affiliates that are already subject 
to the IM requirements and post and collect IM pursuant to Commission 
Regulation 23.152. Also, the Commission notes that notwithstanding the 
proposed eligible seeded fund exception, CSEs would still be required 
to count the uncleared swaps that they undertake with eligible seeded 
funds for purposes of calculating their own AANA.
    Market participants, including the members of the GMAC Margin 
Subcommittee, have argued that absent relief, seeded funds would 
experience a performance drag given that a portion of their investment 
would be committed to, and segregated as, IM and would also incur 
operational costs that are not commensurate with the size of their 
uncleared swaps activity and the risks of their swaps. In addition, the 
overall ability of start-up funds to attract new investors may be 
compromised as a result.\35\
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    \35\ Margin Subcommittee Report at 32.
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    In its Report, the GMAC Margin Subcommittee discussed the costs 
that seeded funds would incur if the funds were consolidated with their 
sponsor entities and were treated as margin affiliates of their sponsor 
entities, including the cost of setting up and maintaining margin 
accounts and establishing custodial arrangements to segregate IM 
collateral under Commission Regulation 23.157.\36\ The seeded funds 
would also be required to engage in negotiation of complex margin 
documentation and develop compliance infrastructures to handle the 
exchange of IM.\37\ The Report further observed that, given their 
typically small size, seeded funds are likely to encounter difficulties 
in establishing the necessary margin documentation and processes, as 
CSEs and custodians, which face competing demands for resources and 
services to operationalize the exchange of IM, may prioritize larger 
counterparties.\38\
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    \36\ For purposes of clarity, these arguments, as well as the 
proposed rule amendments, pertain only to the margin requirements 
for uncleared swap transactions. The proposed amendments would not 
impact any potential margin requirements that a seeded fund would 
have to meet in connection with futures contracts or cleared swap 
transactions.
    \37\ Margin Subcommittee Report at 32.
    \38\ Id.
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    The Margin Subcommittee Report stated that although seeded funds 
may be consolidated with other entities on a financial statement, they 
are legally and operationally distinct and, as a result, may not be 
able to share information about their exposure for purposes of managing 
the $50 million IM threshold amount above which IM for uncleared swaps 
must be exchanged. In addition to operational challenges, the Report 
indicated that potential confidentiality obligations may prevent the 
different affiliates within the seeded fund's consolidated group from 
sharing uncleared swaps exposure information. As an example, the Report 
noted that because of regulatory restrictions, an insurance company 
that sponsors a seeded fund would not be permitted to share information 
about the fund's trading activity with an affiliate engaging in swap 
transactions for purposes of hedging general insurance risk.
    Finally, the Report stated that seeded funds that do not otherwise 
hold assets qualifying as eligible IM collateral under Commission 
Regulation 23.156 \39\ would need to hold larger cash reserves, which 
would be unavailable to implement the fund's investment strategy, or 
would need to incur the costs of converting fund assets into eligible 
IM collateral. The operational costs and potential difficulties arising 
in the execution of margin documentation could also either negatively 
impact a seeded fund's performance or inhibit its ability to trade, 
defeating the purpose of the original seed capital.\40\
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    \39\ Id.
    \40\ Margin Subcommittee Report at 31.
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    The Commission notes that the proposed eligible seeded fund 
exception is consistent with the approach in other countries. 
Jurisdictions such as Australia, Canada and the EU have adopted 
provisions that permit investment funds to be treated as distinct, 
separate entities for purposes of calculating the relevant IM 
thresholds, subject to conditions similar to those that the Commission 
intends to adopt through the proposed definition of ``eligible seeded 
fund'' discussed below.\41\
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    \41\ Margin Subcommittee Report at 29. As noted in the Report, 
Canada has excluded investment funds from consolidated margin 
calculations via the Office of the Superintendent for Financial 
Institutions of Canada Guideline E-22 Margin Requirements for Non-
centrally Cleared Derivatives effective as of June 2017, Section 
1.1. Scope of Applicability, Footnote 2, available at https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/e22.aspx; 
the EU adopted a similar approach via Commission Delegated 
Regulation No. 2016/2251 of October 4, 2016, Supplementing 
Regulation (EU) No.648/2012 of the European Parliament and of the 
Council of July 4, 2012 on OTC Derivatives, Central Counterparties 
and Trade Repositories with Regard to Regulatory Technical Standards 
for Risk-Mitigation Techniques for OTC Derivative Contracts Not 
Cleared by a Central Counterparty, 2016 O.J. L340/11, Articles 
28(3); 29(3) and 39(2), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv%3AOJ.L_.2016.340.01.0009.01.ENG; 
and the Australian Prudential Regulatory Authority noted, in 
paragraph 25 of Prudential Standard CPS 226 (available here https://www.apra.gov.au/sites/default/files/prudential_standard_cps_226_margining_and_risk_mitigation_for_non-centrally_cleared_derivatives.pdf) that for purposes of calculating 
the IM threshold, an investment fund may be treated separately from 
the investment adviser and other investment vehicles, provided 
certain conditions are met. The Margin Subcommittee Report also 
noted that Japan has adopted a similar approach, however, the 
Commission could not verify that assertion because the Report did 
not provide a citation to the relevant Japanese rules.
---------------------------------------------------------------------------

    The proposed approach is also consistent with the BCBS-IOSCO 
Framework, which provides that investment funds should be treated as 
separate legal entities when applying the IM threshold amount provided 
that they are distinct legal entities that are not collateralized or 
otherwise guaranteed or supported by other investment funds or the 
investment advisor in the event of fund insolvency or bankruptcy.\42\ 
As such, the proposed approach would contribute to global harmonization 
with respect to the treatment of investment funds, preventing potential 
reductions in liquidity or trading disruptions due to non-U.S. funds' 
limiting their trading activities to non-U.S. counterparties to take 
advantage of approaches to

[[Page 53413]]

consolidation that exist in other jurisdictions.
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    \42\ BCBS-IOSCO Framework, Footnote 10, supra note 27.
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    The Commission recognizes, however, that the proposed amendments 
would be a departure from the prudential regulators' approach, whose 
margin requirements for uncleared swaps include a definition of 
``margin affiliate'' that is equivalent to the current definition in 
the CFTC Margin Rule. Furthermore, the prudential regulators have 
reserved the right to include any entity as an affiliate or a 
subsidiary based on the conclusion that an entity may provide 
significant support to, or may be materially subject to the risks of 
losses of, another entity.\43\ As noted below, the Commission requests 
comment on whether it should proceed with the Seeded Funds Proposal if 
the prudential regulators do not amend their rules in a manner 
consistent with the proposal.
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    \43\ See Prudential Regulators Margin Rule at 74859-60.
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    The Commission preliminarily believes that the proposed approach 
supports the CFTC Margin Rule's objective of imposing margin 
requirements that are commensurate with the risk of uncleared swaps 
entered into by CSEs.\44\ The Commission preliminarily believes, as 
discussed in the Margin Subcommittee Report, that seeded investment 
funds do not pose significant risks to their swap counterparties or the 
financial system given that typically their capitalization does not 
exceed $50-100 million and the funds have limited notional exposure. 
The Report cited the results of an informal sampling conducted in 2018 
among members of the Securities Industry and Financial Markets 
Association's Asset Management Group (``SIFMA AMG'') and the American 
Council of Life Insurers. According to the Report, the respondents 
identified a total of 33 funds that would be within the scope of the IM 
requirements due to their derivatives notional exposures being 
consolidated with entities with MSE. The average gross notional 
exposure for each seeded fund was $32 million. As the Report concluded, 
none of these funds would be within the scope of the IM requirements 
absent consolidation with their sponsor entity. Given their size and 
limited individual swap activity, the Commission preliminarily believes 
that affording relief to seeded funds at the early stages of formation 
from coming within the scope of the IM requirements is consistent with 
the CFTC Margin Rule's risk-based approach.
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    \44\ See Section 4s(e)(3)(A)(2) of the CEA (directing the 
Commission to adopt margin requirements ``appropriate to the risks 
associated with'' the uncleared swaps held by the SD or the MSP). 7 
U.S.C. 6s(e)(3)(A).
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    The Commission also preliminarily believes that safeguards already 
present in the CEA and CFTC regulations would mitigate the increase in 
uncollateralized credit risk resulting from swap transactions between 
CSEs and seeded funds that would be relieved from the IM requirements 
given the disaggregation of eligible seeded funds from their sponsor 
entities and other affiliated entities for purposes of calculating the 
funds' MSE and the IM threshold amount. The Commission notes that 
notwithstanding the relief, uncleared swap transactions between CSEs 
and eligible seeded funds would still be subject to the VM 
requirements.\45\ Moreover, section 4s(j)(2) of the CEA mandates CSEs 
to adopt a robust and professional risk management system adequate for 
the management of their swap activities \46\ and Commission Regulation 
23.600 requires that CSEs, in establishing a risk management program to 
monitor and manage risks associated with their swap activities, must 
account for credit risk and must set risk tolerance limits.\47\
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    \45\ See 17 CFR 23.153.
    \46\ See 7 U.S.C. 6s(j).
    \47\ 17 CFR 23.600.
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    As an additional safeguard, the proposed eligible seeded fund 
exception would be applicable only for a period of three years from an 
eligible seeded fund's trading inception date. The three-year term is 
designed to cover the period during which the fund would work towards 
establishing a performance track record and towards attracting 
unaffiliated investors.\48\
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    \48\ Market participants have noted that after three years, 
investment funds have typically established a sufficient record to 
draw in third-party investors and are no longer consolidated with 
their sponsor entity for AANA calculation purposes. See Margin 
Subcommittee Report at 30.
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    In adopting the CFTC Margin Rule, the Commission stated that the 
requirement to calculate MSE and the IM threshold amount on a 
consolidated basis was intended to prevent CSEs and their 
counterparties from creating legal entities and netting sets that have 
no economic basis and are constructed solely for the purpose of 
applying additional thresholds to evade margin requirements.\49\ 
Consistent with this goal, the Commission intends for the eligible 
seeded fund exception to be applied only for purposes of calculating 
MSE and the IM threshold amount of the eligible seeded fund. Under the 
Seeded Funds Proposal, a fund's sponsor entity and other margin 
affiliates would continue to include the eligible seeded fund's 
exposure in the calculation of their MSE and the IM threshold amount, 
unless they independently qualify for the proposed eligible seeded fund 
exception. As such, the proposed treatment for eligible seeded funds 
would not serve as an incentive for a sponsor entity to create seeded 
funds merely to reduce its own exposure and circumvent the 
applicability of the IM requirements.
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    \49\ CFTC Margin Rule, 81 FR at 652.
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    In addition, the Commission proposes to make the eligible seeded 
fund exception available only with respect to funds that have a bona 
fide business and economic purpose, meaning that the funds are not 
created for the sole purpose of evading the IM compliance thresholds. 
Rather, the exception is intended for funds that engage in genuine 
efforts to test their investment strategy and distribute the funds' 
shares to third-party investors.\50\ To that end, in addition to 
relying on anti-evasion provisions already existing in the Commission 
regulations \51\ to address

[[Page 53414]]

the potential circumvention of the IM compliance thresholds, the 
Commission proposes to limit the availability of the proposed treatment 
for seeded funds to entities that meet certain requirements. These 
requirements would be incorporated in the proposed definition of 
``eligible seeded fund'' discussed below.
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    \50\ The Commission notes that this position is consistent with 
the policy approach taken by the prudential regulators and the 
Commission in the regulations implementing the requirements of 
section 619 of the Dodd-Frank Act, commonly referred to as the 
``Volcker Rule.'' The implementing regulations recognize the concept 
of a seeding period and exempt banking entities that acquire and 
retain an ownership interest in a covered fund (as the concept is 
defined under the implementing regulations) from some of the 
prohibitions of the Rule during the seeding period, under certain 
conditions. See 12 CFR 248.12(a)(1) and (2). In particular, these 
conditions include that the covered fund must actively seek 
unaffiliated investors to reduce, through redemption, sale, 
dilution, or other methods, the aggregate amount of all ownership 
interests of the banking entity in the covered fund to the amount 
permitted under the regulations. 12 CFR 248.12(a)(2)(i). Also, the 
aggregate value of all ownership interests of the banking entity and 
its affiliates in all covered funds acquired and retained under the 
relevant exemptions must not exceed 3 percent of the tier 1 capital 
of the banking entity. 12 CFR 248.12(a)(2)(iii). Although the 
Commission is not proposing identical conditions, the Commission is 
proposing to incorporate a number of requirements to achieve the 
same purpose as appropriate in the context of the CFTC Margin Rule, 
including the requirement in the proposed definition discussed below 
that an ``eligible seeded fund'' be managed pursuant to a written 
investment strategy that follows a written plan to reduce each 
sponsor entity's ownership interest in the fund.
    \51\ See Commission regulation 23.402(a)(1)(ii) (requiring CSEs 
to have written policies and procedures to prevent the evasion, or 
participation in or facilitation of an evasion, of any provision of 
the CEA or Commission regulation). 17 CFR 23.402(a)(1)(ii). See also 
the definition of MSE in Commission Regulation 23.151 (stating that 
activities not carried out in the regular course of business and 
willfully designed to circumvent the calculation of the AANA at 
month-end to evade meeting the definition of MSE shall be 
prohibited). 17 CFR 23.151. The Commission also reminds market 
participants that section 4b of the CEA prohibits any person 
entering into a swap with another person from cheating, defrauding, 
or willfully deceiving, or attempting to cheat, defraud, or deceive, 
the other person. 7 U.S.C. 6b.
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2. Commission Regulation 23.151--Definition of ``Eligible Seeded Fund''
    The Commission proposes to amend Commission Regulation 23.151 by 
adding a definition for the term ``eligible seeded fund.'' ``Eligible 
seeded fund'' would be defined as a collective investment vehicle that 
has received a part or all of its start-up capital from a parent and/or 
affiliate (each, a sponsor entity) and that meets certain specified 
conditions.
    A seeded fund would meet the proposed definition of eligible seeded 
fund if, among other conditions: (i) the fund is a distinct legal 
entity from each sponsor entity; (ii) the fund is managed by an asset 
manager pursuant to an agreement that requires the fund's assets to be 
managed in accordance with a specified written investment strategy; 
(iii) the fund's asset manager has independence in carrying out its 
management responsibilities and exercising its investment discretion, 
and to the extent applicable, has independent fiduciary duties to other 
investors of the fund; and (iv) the fund's written investment strategy 
includes a written plan for reducing each sponsor entity's ownership 
interests in the fund that stipulates divestiture targets over the 
three-year period after the seeded fund's trading inception date. 
Additionally, to meet the ``eligible seeded fund'' definition, in 
respect of any of the seeded fund's obligations, a fund must not be 
collateralized, guaranteed, or otherwise supported, directly or 
indirectly, by any sponsor entity, any margin affiliate of any sponsor 
entity, other collective investment vehicles, or the fund's asset 
manager. These conditions are designed to ensure that the sponsor 
entity would not retain a level of influence or exposure that is 
materially above that of other minority or passive investors and that 
the fund would follow a genuine plan to emerge from the seeding phase 
by attracting unaffiliated investors.
    To ensure that the three-year period contemplated by the eligible 
seeded fund exception is not reinstated, due to rollovers of fund 
assets or similar activities, the proposed definition would require 
that the seeded fund has not received any of its assets, directly or 
indirectly, from an eligible seeded fund that has relied on the 
proposed exception.
    Furthermore, the Seeded Funds Proposal is intended to be limited to 
those seeded funds that, absent amendments to the CFTC Margin Rule, 
would have to exchange IM due to their consolidation with a group that 
collectively exceeds the thresholds triggering compliance with the IM 
requirements. That is, the Seeded Funds Proposal, consistent with the 
Margin Subcommittee Report, is intended to address seeded funds that 
are ``seeded'' by parent entities that have MSE and thus cause the 
seeded funds to come within the scope of the IM requirements. For 
purposes of targeting these seeded funds, the proposed definition of 
``eligible seeded fund'' would require as a condition for qualification 
that at least one of the seeded fund's margin affiliates must be 
subject to the IM requirements and must be required to post and collect 
IM pursuant to Commission Regulation 23.152.
    Finally, the proposed definition of ``eligible seeded fund'' would 
provide that the seeded fund must not be a securitization vehicle. This 
condition is designed to further limit the proposed treatment of seeded 
funds only to funds subject to the Margin Subcommittee Report's 
recommendation. The Commission notes that in adopting the CFTC Margin 
Rule, despite receiving multiple comments from industry representatives 
to exclude securitization vehicles from the definition of FEU, and 
recommendations subsequent to the adoption of the rule, the Commission 
has maintained the position that there are sufficient reasons to keep 
these entities within the scope of the IM requirements. The Commission 
stated in the preamble to the final CFTC Margin Rule that the relevant 
IM compliance thresholds would address concerns related to the 
applicability of the IM requirements to these entities.\52\ At this 
time, the Commission does not believe that it is prudent to extend the 
proposed eligible seeded fund exception to such entities.
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    \52\ See CFTC Margin Rule, 81 FR at 683.
---------------------------------------------------------------------------

    In adopting the CFTC Margin Rule, the Commission modified the 
proposed definition of ``margin affiliate,'' which relied on the 
concept of legal control as a criterion for affiliation, to the current 
definition based on accounting consolidation, in consideration of a 
concern that the proposed definition may have been over-inclusive. The 
Commission noted that the accounting consolidation analysis typically 
results in a positive outcome (consolidation) at a higher level of an 
affiliation relationship than the 25 percent voting interest standard 
of the legal control test.\53\
---------------------------------------------------------------------------

    \53\ Id. at 647.
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    The Commission recognized, however, that consolidation between a 
seeded fund and the sponsor may occur during the seeding period or 
other periods in which the sponsor may hold an outsized portion of the 
fund's interest. The Commission stated that during those periods, when 
an entity may hold up to 100 percent of the ownership interests of an 
investment fund, it was appropriate to treat the investment fund as an 
affiliate.\54\ The Commission further stated that such treatment may be 
likewise justified for a sponsor or asset manager and a special purpose 
entity created for asset management when accounting standards, such as 
GAAP and IFRS variable interest standards, require consolidation for 
such entities even though the manager might not hold an interest 
comparable to a majority equity or voting control share given the level 
of influence and exposure typically retained by the manager.\55\
---------------------------------------------------------------------------

    \54\ Id.
    \55\ Id.
---------------------------------------------------------------------------

    The Commission notes that subsequently, in letters to the CFTC, 
SIFMA AMG (on behalf of its asset manager members) requested relief 
from the treatment as margin affiliate for seeded funds, consistent 
with the arguments made in the Margin Subcommittee Report described 
above. While acknowledging that a sponsor of a seeded investment fund 
has influence beyond that of a passive, unaffiliated investor, SIFMA 
AMG urged that seeded funds not be consolidated with their sponsors in 
applying the CFTC's margin requirements because there are structural 
and contractual safeguards that limit the sponsor's influence and 
exposure with respect to the seeded fund.\56\ In particular, SIFMA AMG 
noted that each seeded fund is a distinct legal entity that is managed 
by an investment manager pursuant to an investment advisory agreement 
that, among other things, requires the assets of the fund to be managed 
in accordance with specified investment guidelines, objectives, and 
strategies, and not

[[Page 53415]]

capriciously at the desire of the fund sponsor.\57\
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    \56\ Letter by SIFMA AMG to the Commission and the Prudential 
Regulators Regarding Final Margin Rules for Uncleared Swap 
Transactions (Jan., 19, 2016) (``SIFMA AMG 2016 Letter'') at 3; see 
also Margin Subcommittee Report at 16.
    \57\ SIFMA AMG 2016 Letter at 3.
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    Further, the Margin Subcommittee Report noted that neither the 
sponsor nor its commonly consolidated entities controls or has 
transparency into the management or trading of the seeded fund.\58\ 
Moreover, the Report stated that, typically, the sponsor or affiliate 
of a seeded fund does not guarantee the obligations of the seeded fund 
or participate in or control the management of the fund.\59\ The Report 
further noted that the sponsor's exposure to the seeded fund is 
generally capped at its investment, similar to any other passive 
investor in a third-party instrument or vehicle.\60\
---------------------------------------------------------------------------

    \58\ Margin Subcommittee Report at 16.
    \59\ Margin Subcommittee Report at 6 and16.
    \60\ Margin Subcommittee Report at 16.
---------------------------------------------------------------------------

    These arguments highlight the safeguards generally exhibited in 
seeded funds. As previously noted, the Commission is proposing to 
incorporate these safeguards, among other conditions, in the proposed 
definition of ``eligible seeded fund'' as requirements to be met by a 
fund in order to benefit from the proposed treatment for eligible 
seeded funds, discussed in more detail above. In proposing these 
conditions, the Commission seeks to ensure that eligible seeded funds 
are sufficiently independent and risk-remote from other entities in 
their group such that treating them separately for purposes of 
determining whether the thresholds for compliance with the IM 
requirements have been met would be justified.
    In particular, the proposed requirements that the fund is managed 
in accordance with a written investment strategy, by an asset manager 
that maintains independence in carrying out its management 
responsibilities and exercising its investment discretion, and that, to 
the extent applicable, has independent fiduciary duties to other 
investors in the fund, seek to ensure that no sponsor entity or an 
affiliate of a sponsor entity has control or transparency into the 
management or trading of the seeded fund. Furthermore, the proposed 
condition that the fund's investment strategy follows a written plan 
for reducing each sponsor entity's ownership interest in the fund aims 
to reserve the benefit of the proposed approach to seeded funds that 
have a genuine economic purpose and intentions to emerge from the 
seeding phase.
    In addition, the proposed definition of ``eligible seeded fund'' 
would prohibit a fund sponsor entity, entities affiliated with a 
sponsor entity, other collective investment vehicles, or the fund's 
asset manager from collateralizing, guaranteeing or otherwise directly 
or indirectly providing support in respect of any of the fund's 
obligations. The Commission proposes this condition in recognition that 
the sponsor of a seeded fund or its asset manager may be motivated to 
provide financial assistance to the seeded fund whose uncleared swaps 
may be uncollateralized as a result of the Seeded Funds Proposal, which 
might heighten the risk of the fund's swap positions and weaken the 
fund's financial condition. The sponsor entity or the asset manager may 
also be inclined to provide financial assistance to the fund because of 
reputational or other concerns even in the absence of a guarantee or 
formal commitment, and at the risk of exhausting its own resources, 
raising the risk of contagion and systemic risk, in particular during 
times of widespread financial stress. The Commission preliminarily 
believes that the requirements in the proposed definition of ``eligible 
seeded fund,'' which seek to ensure the fund's genuine independence, 
would serve as effective safeguards against financial contagion.
    The Commission also intends to rely on tools that already exist 
under the CEA and the Commission regulations to address evasion 
concerns. In particular, the Commission notes that Commission 
Regulation 23.402(a)(ii) requires CSEs to have written policies and 
procedures to prevent the evasion, or participation in or facilitation 
of an evasion, of any provision of the CEA or the Commission 
regulations.\61\ The Commission also reminds market participants that 
section 4b of the CEA prohibits any person entering into a swap with 
another person from cheating, defrauding, or willfully deceiving, or 
attempting to cheat, defraud, or deceive, the other person.\62\
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    \61\ 17 CFR 23.402(a)(ii). As discussed above, the Commission 
also notes that the definition of MSE in Commission Regulation 
23.151 prohibits activities not carried out in the regular course of 
business and willfully designed to circumvent the calculation of the 
AANA at month-end to evade meeting the definition of MSE shall be 
prohibited. 17 CFR 23.151.
    \62\ 7 U.S.C. 6b.
---------------------------------------------------------------------------

    Request for comments: The Commission requests comments regarding 
the proposed amendments to Commission Regulation 23.151, generally. The 
Commission specifically requests comment on the following questions:
    1. Under the Seeded Funds Proposal, eligible seeded funds would be 
deemed not to have margin affiliates for purposes of calculating the 
fund's MSE and the IM threshold amount during a period of three years 
from the fund's trading inception date. As such, CSEs that undertake 
uncleared swaps with such funds and would otherwise be required to 
exchange IM with the funds, may be relieved from such obligation, as 
only each fund's individual exposure would be considered in determining 
whether the IM requirements apply to uncleared swaps between CSEs and 
the fund. As a result, less margin may be collected and posted for 
uncleared swaps than would be otherwise required under the current 
requirements. Is the Seeded Funds Proposal appropriate in light of the 
resulting potential uncollateralized swap risk?
    2. The Commission recognizes that the proposed eligible seeded fund 
exception would not only benefit the eligible seeded funds but would 
also relieve CSEs from their obligation to post IM with seeded funds 
that would otherwise come within the scope of the CFTC IM requirements. 
Should only the eligible seeded fund, and not its CSE counterparty, be 
relieved of the IM obligation?
    3. Should the Commission impose any additional limits or conditions 
to the proposed eligible seeded fund exception such as: (i) imposing a 
separate MSE and/or IM threshold amount, calculated on the basis of the 
eligible seeded fund's individual exposure and proportionate to the 
perceived risks associated with funds' swap activities, (ii) imposing a 
limit on the total number of eligible seeded funds to which a sponsor 
entity provides start-up capital that may rely on the eligible seeded 
fund exception, or (iii) requiring that all eligible seeded funds, 
consolidated within the same group on the basis of accounting 
principles, aggregate their exposures for purposes of calculating the 
MSE and IM threshold amounts that apply to such funds?
    4. What are the costs associated with a seeded fund calculating IM 
and establishing a relationship with a custodian to transfer IM?
    5. The proposed amendments to Commission Regulation 23.151, in 
particular the requirements in the proposed definition of ``eligible 
seeded fund,'' aim to ensure that the relevant funds are genuinely and 
practically independent and risk-remote from their sponsor entities and 
other affiliates. Do the proposed amendments incorporate sufficient 
safeguards to achieve this goal? Given that other entities such as 
sponsor entities or the asset manager may be incentivized to provide 
resources to a seeded fund in financial distress even in the absence of 
an

[[Page 53416]]

explicit business arrangement or guarantee, potentially putting their 
own financial position at risk and thereby increasing the risk of 
contagion and systemic risk, what measures could the Commission take to 
limit the potential risks to such other entities and ultimately to the 
financial system?
    6. The Commission proposes to include, among other conditions, a 
requirement providing that a fund would qualify as an eligible seeded 
fund only if one or more of the seeded fund's margin affiliates is 
required to post and collect IM pursuant to Commission Regulation 
23.152. This condition is intended to limit the availability of the 
proposed eligible seeded fund exception only to funds that, for reasons 
described in the Margin Subcommittee Report, are disadvantaged 
domestically and globally due to their affiliation with a group that 
has MSE. Is this condition appropriate? Should the condition be amended 
to ensure that the Commission is appropriately circumscribing the 
proposed treatment of eligible seeded funds?
    7. The Commission also proposes to include, among other conditions, 
a requirement providing that to qualify as an eligible seeded fund, the 
seeded fund's investment strategy must follow a written plan for 
reducing each sponsor entity's ownership interest in the seeded fund 
that stipulates divestiture targets over the three-year period after 
the seeded fund's trading inception date. Should the Commission include 
more specific requirements in connection with the written plan?
    8. The Prudential Regulators Margin Rule contains a definition of 
``margin affiliate'' that is equivalent to the current definition under 
the CFTC Margin Rule. Furthermore, the prudential regulators have 
reserved the right to include any entity as an affiliate or a 
subsidiary based on the conclusion that an entity may provide 
significant support to, or may be materially subject to the risks or 
losses of, another entity. If the Commission amends Commission 
Regulation 23.151, counterparties that trade with both prudentially 
regulated SDs and CFTC-regulated SDs may need to adjust their swap-
related documentation and collateral management systems to reflect the 
different margin requirements that may apply under the CFTC's and the 
prudential regulators' rules. In that regard, the Commission requests 
information on the potential additional costs associated with 
maintaining two separate and distinct documentation and collateral 
management processes. How much weight should the Commission give with 
respect to the possible challenge that counterparties may need to 
maintain two separate and distinct documentation and collateral 
management systems? Should the Commission proceed to adopt the proposed 
amendments to Commission Regulation 23.151 if the prudential regulators 
do not adopt similar regulatory changes?
    9. The Commission intends that the final rule will become effective 
30 days after its publication in the Federal Register. With respect to 
the Seeded Funds Proposal, are there any comments on the effective 
date?

B. Money Market Funds Proposal

    The Commission proposes to amend Commission Regulation 
23.156(a)(1)(ix) to eliminate the restriction on the use of securities 
of money market and similar funds that transfer their assets through 
repurchase or similar arrangement (the asset transfer restriction). The 
Commission is also proposing an amendment to the haircut schedule set 
forth in Commission Regulation 23.156(a)(3)(i)(B) to add a footnote 
that was inadvertently omitted when the rule was originally 
promulgated.
1. Commission Regulation 23.156(a)(1)(ix)--Elimination of the Asset 
Transfer Restriction
    In adopting the CFTC Margin Rule, the Commission added redeemable 
securities in money market and similar funds to the list of eligible 
collateral in response to comments arguing for the inclusion of MMF 
securities as eligible collateral for IM.\63\ The Commission explained 
that the addition of money market and similar fund securities to the 
list of eligible collateral would provide flexibility while maintaining 
a level of safety, noting that to qualify, such fund securities would 
need to meet the conditions in Commission Regulation 23.156(a)(1)(ix), 
including the asset transfer restriction in paragraph (C), which has 
the effect of disqualifying the securities of funds that transfer their 
assets through repurchase or similar arrangements.\64\
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    \63\ See CFTC Margin Rule, 81 FR at 666.
    \64\ Id.
---------------------------------------------------------------------------

    As discussed above, market participants, and the GMAC Margin 
Subcommittee, have urged the Commission to eliminate the asset transfer 
restriction in paragraph (C), noting that it disqualifies the 
securities of most MMFs and significantly restricts the ability of swap 
counterparties to use such form of collateral.\65\ Based on its 
experience implementing the margin requirements for several years and 
for the reasons described below, the Commission preliminarily 
recommends the elimination of the restriction.
---------------------------------------------------------------------------

    \65\ Margin Subcommittee Report at 23.
---------------------------------------------------------------------------

    MMFs are regulated, short-term investment vehicles that are subject 
to liquidity and diversification requirements under U.S. regulations, 
such as SEC Rule 2a-7.\66\ The MMFs that could qualify as eligible IM 
collateral under Commission Regulation 23.156 invest in high quality 
underlying instruments, namely securities issued or unconditionally 
guaranteed as to the timely payment of principle and interest by the 
U.S. Department of the Treasury and cash. More generally, the Margin 
Subcommittee Report stated that the Commission has recognized MMFs as 
safe, high quality investments, noting that, for example, Commission 
Regulation 1.25 permits the investment of customer margin by futures 
commission merchants (``FCM'') in MMFs without an asset transfer 
restriction.\67\
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    \66\ 17 CFR 270.2a-7.
    \67\ Margin Subcommittee Report at 26. In the Commission's view, 
the fact that Commission Regulation 1.25 permits investments in 
interests in money market funds without imposing restrictions on 
repurchase agreements and similar arrangements is not dispositive in 
considering the proposed amendment to Commission Regulation 
23.156(a)(1)(ix). Commission Regulation 1.25 was adopted under a 
different regime (concerning FCMs and derivative clearing 
organizations) and addresses different concerns than those 
Commission Regulation 23.156 aims to target.
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    The elimination of the asset transfer restriction in paragraph (C) 
of Commission Regulation 23.156(a)(1)(ix) would allow for a broader 
range of money market and similar fund securities to qualify as 
eligible IM collateral.\68\ This is consistent with the Commission's 
intent in identifying certain fund securities as eligible collateral 
when it adopted the CFTC Margin Rule. The Commission stated that it 
intended to permit MMF securities to be pledged as IM collateral in 
order to permit flexibility, while also ``maintaining a level of 
safety.'' \69\ As noted above, according to the Margin Subcommittee 
Report, most multi-billion dollar MMFs available to the institutional 
marketplace use repurchase or similar arrangements as part of their 
management strategy.\70\ Given the widespread use of repurchase and 
similar arrangements by MMFs,

[[Page 53417]]

only a few of the MMFs currently available to institutional clients 
satisfy the asset transfer restriction in paragraph (C).\71\ As a 
result, unless the restriction is eliminated, this form of margin 
collateral would be of very limited availability to swap 
counterparties, contrary to the intent of the Commission.
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    \68\ If adopted, the amendment would also result in an expanded 
scope of money market and similar fund securities that can serve as 
VM for uncleared swap transactions between a CSE and an FEU, given 
that Commission Regulation 23.156(b)(1)(ii), defining the types of 
assets qualifying as VM collateral for these transactions, 
incorporates the assets identified as eligible collateral for IM in 
Commission Regulation 23.156(a)(1).
    \69\ See 81 FR at 666.
    \70\ Margin Subcommittee Report at 27.
    \71\ Id. at 24 (noting that a leading custodial bank has 
researched all the U.S. MMFs currently available to its 
institutional clients in the U.S. and found that only four would 
meet the requirements of Commission Regulation 23.156(a)(1)(ix)).
---------------------------------------------------------------------------

    The Commission preliminarily believes that expanding the scope of 
eligible money market and similar fund securities may lead to more 
efficient collateral management practices. In particular with respect 
to the use of MMF securities as IM collateral, the Margin Subcommittee 
Report noted that many custodians offer money market sweep programs, 
which facilitate buy-side market participants' timely meeting margin 
calls in cash that is subsequently used to purchase MMF securities, 
thereby avoiding the settlement delays or additional costs associated 
with the purchase and posting of non-cash assets.\72\ This is 
particularly important given that under the custodian arrangement rules 
under Commission Regulation 23.157, IM collateral in cash must be 
promptly converted into other types of eligible collateral, such as 
securities of MMF or similar funds, to avoid the possibility that cash 
collateral may become a deposit liability of the custodian and to 
prevent rehypothecation by the custodian.\73\
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    \72\ Under Commission Regulation 23.157, a custodian may accept 
and hold cash collateral as IM only if the funds are subsequently 
used to purchase an asset that qualifies as an eligible form of 
collateral under Commission Regulation 23.156(a)(1)(ii) through (x).
    \73\ See 81 FR at 671.
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    Moreover, the Report stated that the use of MMF securities as 
collateral may enable market participants to avoid potential negative 
interest rate charges that may be applied by custodian banks on cash 
collateral.\74\ Finally, according to the Report, the sweep of cash 
into MMF securities helps market participants mitigate the risk of 
custodian insolvency as non-cash assets would not be consolidated with 
the custodian's balance sheet or estate from a supplemental leverage 
ratio \75\ or bankruptcy perspective.\76\
---------------------------------------------------------------------------

    \74\ See Margin Subcommittee Report at 27.
    \75\ The supplementary leverage ratio represents the amount of 
common equity capital that banks or bank holding companies must hold 
relative to their total leverage exposure. CSEs and SD or MSP 
counterparties that are banks or bank holding companies and 
supervised by a U.S. banking regulator may be subject to this 
requirement. For further information, see Regulatory Capital Rules: 
Regulatory Capital, Revisions to the Supplementary Leverage Ratio, 
79 FR 57725 (Sept. 26, 2014).
    \76\ Margin Subcommittee Report at 26-27.
---------------------------------------------------------------------------

    Allowing a broader selection of money market and similar fund 
securities to serve as collateral may address the potential 
concentration of margin collateral in the securities of a few MMFs.\77\ 
The removal of the asset transfer restriction could lead to an 
increased use of MMF securities as margin collateral. The Commission 
acknowledges the risk of concentration of collateral in particular 
assets and reiterates, as stated in the preamble to the CFTC Margin 
Rule, that CSEs should take concentration into account and prudently 
manage their margin collateral.\78\ For the same reasons, the 
Commission preliminarily believes that CSEs should consider the overall 
investment strategy of a money market or similar fund, including the 
terms of repurchase or similar arrangements the fund may undertake, in 
determining whether to use the fund's securities to meet margin 
obligations under the CFTC rules.
---------------------------------------------------------------------------

    \77\ As noted above, according to the Margin Subcommittee Report 
(citing research by a leading custodian bank), only four MMFs have 
securities that qualify as eligible collateral under the current 
rules. See Margin Subcommittee Report at 24.
    \78\ See 81 FR at 666.
---------------------------------------------------------------------------

    The Commission explained in the preamble to the CFTC Margin Rule 
that the asset transfer restriction in paragraph (C) of Commission 
Regulation 23.156(a)(1)(ix) was included to ensure consistency with the 
prohibition against rehypothecation of IM collateral under Commission 
Regulation 23.157(c)(1). After further consideration and based on its 
experience implementing the margin requirements for several years, the 
Commission now preliminarily believes that although these rules are 
similar in that they aim to mitigate loss, the objectives of these 
rules are distinguishable as further discussed below.
    Commission Regulation 23.157 provides for the segregation of IM 
collateral with a third-party custodian to ensure that: (i) the IM is 
available to a counterparty when its counterparty defaults and a loss 
is realized that exceeds the amount of VM that has been collected as of 
the time of default; and (ii) the IM is returned to the posting party 
after its swap obligations have been fully discharged.\79\ In this 
context, the prohibition in Commission Regulation 23.157(c)(1) against 
rehypothecation, repledging, reuse, or other transfer (through 
securities lending, repurchase agreement, reverse repurchase agreement, 
or other means) of funds or property held by the custodian advances the 
Commission's goal of ensuring that the pledged assets are available to 
the non-defaulting party in the event of a default by its 
counterparty.\80\ In the preamble to the CFTC Margin Rule, the 
Commission explained that rehypothecation could allow the collateral 
posted by one counterparty to be used by the other counterparty as 
collateral for additional swaps, resulting in rehypothecation chains 
and embedded leverage throughout the financial system.\81\
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    \79\ Id. at 670.
    \80\ In this regard, the Margin Subcommittee Report stated that 
``in [ ] MMF sweep arrangements, under no circumstances does the 
pledgor's custodian have any right to rehypothecate, reuse the IM 
collateral or take any other independent actions with respect to the 
pledged MMF shares. Instead, the CSE and financial end user agree 
upfront in the collateral documentation to the list of eligible MMFs 
and any associated haircuts, as pledgor any cash sweep into a MMF is 
instructed by the financial end user or its manager and absent any 
default, any transfers into and out of the collateral account by the 
custodian is instructed by the financial end user and agreed to by 
the CSE (as secured party).'' Margin Subcommittee Report at 25.
    \81\ Id. at 688, n. 392 (describing as an example, the situation 
where a default or liquidity event that occurs at one link along the 
rehypothecation chain may induce further defaults or liquidity 
events for other links in the rehypothecation chain as access to the 
collateral for other positions may be obstructed by a default 
further up the chain, and also explaining that in the event of 
default along a rehypothecation chain, there is an increased chance 
that each party along the chain will ask for the rehypothecated 
collateral to be returned to them at the same time, leaving just one 
party with the collateral).
---------------------------------------------------------------------------

    In contrast, Commission Regulation 23.156(a) aims to identify 
assets as eligible collateral that are liquid, and, with haircuts, will 
hold their value in times of financial stress.\82\ Current paragraph 
(C) of Commission Regulation 23.156(a)(1)(ix) furthers the goal that 
money market and similar fund securities posted as IM collateral remain 
liquid and retain their value during times of financial stress. More 
specifically, paragraph (C) disqualifies the securities of money market 
and similar funds that transfer their assets through repurchase or 
similar arrangements to mitigate the potential impact of such transfers 
on the liquidity or value of fund securities.
---------------------------------------------------------------------------

    \82\ Id. at 665.
---------------------------------------------------------------------------

    For example, if the counterparty to a money market and similar fund 
in a repurchase or similar arrangement does not fulfill its obligation 
under the

[[Page 53418]]

arrangement, the fund may be left holding assets that might not be 
easily resold or that might not provide sufficient compensation for the 
assets tendered in the repurchase arrangement, in particular during a 
period of financial stress, reducing the overall net asset value of the 
fund and the price of the fund's securities. Also, the inability to 
liquidate assets that a money market and similar fund might be left 
holding upon the failure of a repurchase or similar arrangement, or the 
inability to extract assets originally tendered in the repurchase 
arrangement, may impact a fund's ability to promptly respond to 
redemption requests, which may hinder the liquidity of the money market 
and similar funds' securities, making the securities less suitable as 
margin collateral.\83\ Repurchase and similar arrangements may 
therefore undermine efforts that collateral be ``subject to low credit, 
market, and liquidity risk.'' \84\
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    \83\ The Commission, however, notes that any potential risk of 
such a repurchase or similar arrangement may be mitigated by the 
standard industry practice of applying haircuts to non-cash 
collateral in repurchase or similar arrangements to compensate for 
the risk that the value of the collateral may decline over the term 
of the arrangement. See Primer: Money Market Funds and the Repo 
Market, Prepared by the staff of the Division of Investment 
Management, U.S. Securities and Exchange Commission at pp. 5-6.
    \84\ 81 FR at 667 (noting that the CFTC Margin Rule does not 
allow CSEs to fulfill the margin requirements with any asset not 
included in the list of eligible collateral set forth in Commission 
Regulation 23.156, as the use of alternative types of collateral 
could introduce liquidity, price volatility, or other risks of 
collateral during a period of stress that could further exacerbate 
such stress and could undermine efforts to ensure that collateral be 
subject to low credit, market, and liquidity risk).
---------------------------------------------------------------------------

    As discussed above, the asset transfer restriction was included in 
the CFTC Margin Rule to provide consistency with the prohibition 
against rehypothecation of IM collateral, given the possibility that 
assets exchanged by parties in a repurchase or similar arrangement 
might be lost in a chain of transactions similar to the chain of 
hypothecations that the Commission intended to avert by prohibiting the 
rehypothecation of IM collateral by custodians under Commission 
Regulation 23.157(c)(1). However, unlike in the rehypothecation 
situation, where collateral might be lost at any link of the chain with 
the posting counterparty in the uncleared swap transaction potentially 
losing its collateral without any recourse, in the repurchase or 
similar arrangement context, each party to the arrangement would be 
partially secured because the parties would exchange assets with each 
other under the arrangement. Hence, the risk of loss would be 
mitigated. If a party to the repurchase arrangement defaults by failing 
to return assets tendered by its counterparty, the counterparty would 
not lose the entire value of its assets as it would hold the assets 
committed by the other party under the arrangement.\85\
---------------------------------------------------------------------------

    \85\ Of course, it might experience some loss as the retained 
assets might not fully compensate such party for the unreturned 
assets.
---------------------------------------------------------------------------

    While acknowledging the concerns associated with repurchase and 
similar arrangements, the Commission preliminarily believes that the 
flexibility and safety that it aimed to achieve by specifically 
identifying assets as eligible collateral, including certain money 
market and similar fund securities, may be advanced even if repurchase 
and similar arrangements are not restricted for the purpose of 
qualifying money market and similar fund securities as eligible 
collateral. In that regard, based on its experience administering the 
CFTC Margin Rule, the Commission preliminarily believes that risks 
associated with repurchase and similar arrangements would be adequately 
addressed even in the absence of the asset transfer restriction by 
safeguards already present in the CFTC regulations, as further 
discussed below, which, in the Commission's view, can achieve the 
desired level of safety with respect to fund securities without 
restricting a fund's ability to undertake repurchase or similar 
transactions.
    First, Commission Regulation 23.156(a)(1)(ix)(A) and (B) qualify as 
eligible collateral the securities of money market and similar funds 
that invest only in securities issued or unconditionally guaranteed by 
the U.S. Department of the Treasury, the European Central Bank or 
certain other sovereign entities, and cash. The Commission 
preliminarily believes that these provisions ensure that money market 
and similar fund securities present the fundamental characteristics of 
liquidity and value stability contemplated by the CFTC Margin Rule.\86\ 
In addition, the Commission notes that subparagraphs (A) and (B) of 
Commission Regulation 23.156(a)(1)(ix) effectively limit the types of 
assets that a money market and similar fund can receive in repurchase 
or similar arrangements. As such, the securities of money market and 
similar funds will qualify as eligible collateral only if the types of 
assets that the fund receives in a repurchase or similar arrangement 
are those described in subparagraphs (A) and (B).
---------------------------------------------------------------------------

    \86\ See 81 FR at 665.
---------------------------------------------------------------------------

    Second, Commission Regulation 23.156(c) requires that CSEs monitor 
the market value and eligibility of all collateral and, to the extent 
that the market value has declined, promptly collect or post additional 
eligible collateral to maintain compliance with Commission Regulations 
23.150 through 23.161.\87\ Thus, even if the value or liquidity of 
pledged money market and similar fund securities may be affected by a 
repurchase or similar arrangement undertaken by the fund, CSEs have the 
obligation to monitor the value and suitability of the fund's 
securities as margin collateral and collect or post additional eligible 
collateral to compensate for collateral deficiencies.
---------------------------------------------------------------------------

    \87\ 17 CFR 23.156(c).
---------------------------------------------------------------------------

    In addition, section 4s(j)(2) of the CEA requires CSEs to adopt a 
robust and professional risk management system that is adequate for the 
management of their swap activities,\88\ and Commission Regulation 
23.600 mandates that CSEs establish a risk management program to 
monitor and manage risks associated with their swap activities 
including, among other things, credit and liquidity risks. In 
particular, pursuant to Commission Regulation 23.600(c)(4), credit risk 
policies and procedures should provide for the regular valuation of 
collateral used to cover credit exposures and the safeguarding of 
collateral to prevent loss, disposal, rehypothecation, or use unless 
appropriately authorized, and liquidity risk policies and procedures 
should provide for, among other things, the assessment of procedures 
for liquidating all non-cash collateral in a timely manner and without 
a significant effect on price, and the application of appropriate 
collateral haircuts that accurately reflect market and credit risk.\89\
---------------------------------------------------------------------------

    \88\ See 7 U.S.C. 6s(j).
    \89\ 17 CFR 23.600.
---------------------------------------------------------------------------

    Given these safeguards and the recognition that the asset transfer 
restriction is severely limiting the use of money market and similar 
fund securities as eligible collateral, the Commission preliminary 
believes that it is appropriate to eliminate the asset transfer 
restriction. The Commission also notes that the elimination of the 
restriction would bring the CFTC's eligible collateral framework more 
in line with the SEC approach, which does not impose asset transfer 
restrictions on funds whose securities are used as collateral for 
margining purposes and expressly permits the use of government money 
market fund securities as collateral, thereby potentially leading to a 
reduction in costs for those market participants that dually register 
as SDs and security-based swap SDs with the CFTC and the SEC, 
respectively.

[[Page 53419]]

2. Commission Regulation 23.156(a)(3)--Amendments to the Haircut 
Schedule
    Commission Regulation 23.156(a)(3) sets forth percentage discounts 
to be applied to the value of eligible collateral collected or posted 
to satisfy IM requirements, varying according to asset class (``haircut 
requirements'').\90\ The haircut requirements are intended to address 
the possibility that the value of non-cash eligible collateral may 
decline between a counterparty's default and the close out of such 
counterparty's swap positions by the CSE.\91\
---------------------------------------------------------------------------

    \90\ 17 CFR 23.156(a)(3). Also, Commission Regulation 
23.156(b)(1)(ii) provides that assets that qualify as eligible 
collateral for IM can be used as collateral for VM for swap 
transactions between a CSE and a FEU, subject to the applicable 
haircuts for each asset. See also supra note 20.
    \91\ 81 FR at 668.
---------------------------------------------------------------------------

    Although the Commission intended to align its margin rule for 
uncleared swaps with the Prudential Regulators Margin Rule, in adopting 
its rule, the Commission inadvertently omitted a footnote to the 
haircut schedule included in the Prudential Regulators Margin Rule.\92\ 
The Commission is therefore proposing an amendment to Commission 
Regulation 23.156(a)(3) to incorporate the omitted footnote. The 
footnote, consistent with the footnote in the Prudential Regulators 
Margin Rule, would describe the haircut applicable to the securities of 
money market and similar funds. The haircut for such money market and 
similar fund securities would be the weighted average discount on all 
assets within the funds (the discount for each asset is specified in 
Commission Regulation 23.156(a)(3)) at the end of the prior month. The 
footnote would further specify that the weights to be applied in the 
weighted average should be calculated as a fraction of each fund's 
total market value that is invested in each asset with a given discount 
amount.
---------------------------------------------------------------------------

    \92\ Prudential Regulators Margin Rule at 74910.
---------------------------------------------------------------------------

    Request for comments: The Commission requests comment regarding the 
proposed amendments to Commission Regulation 23.156, generally. The 
Commission specifically requests comment on the following questions:
    10. Does the existing asset transfer restriction significantly 
limit the use of money market and similar fund securities as eligible 
collateral under the CFTC Margin Rule?
    11. Under the Money Market Funds Proposal, the securities of 
certain money market and similar funds that engage in repurchase or 
similar arrangements would qualify as eligible collateral. A money 
market and similar fund that engages in asset transfer transactions 
under a repurchase or similar arrangement may be exposed to increased 
risks, which may affect the liquidity and value of the fund's 
securities pledged as collateral under the CFTC Margin Rule. In light 
of the potential increased risk, should the Commission consider an 
alternative to the proposed rule amendment, such as allowing the 
securities of money market and similar funds to qualify as eligible 
collateral only if a fund's repurchase or similar arrangements are 
cleared? Should the Commission impose any additional limits or 
conditions, such as restrictions on the type and terms of the 
repurchase or similar arrangements permitted for money market and 
similar funds for their shares to qualify as eligible collateral?
    12. If the Commission eliminates the asset transfer restriction, 
should the Commission impose an additional haircut beyond that required 
by the haircut schedule in Commission Regulation 23.156(a)(3), as 
revised by the proposed amendment? If an additional haircut were to be 
adopted, what should the haircut be and how should the haircut be 
calculated? Should such an additional haircut be proportionate to the 
net asset value of the assets of a money market and similar fund that 
are subject to repurchase or similar arrangements? Or instead, should 
the additional haircut be a fixed percentage similar to the percentages 
applicable to other assets that qualify as eligible collateral under 
the haircut schedule, as it may be less complex to administer? Should 
such additional fixed haircut apply to all securities of money market 
and similar funds that are used as eligible collateral, or be 
applicable only to such securities of money market and similar funds 
that engage in repurchase or similar arrangements?
    13. Given the potential impact that repurchase or similar 
agreements may have on the liquidity and value of securities of money 
market and similar funds that may be used as eligible collateral, 
should there be a percentage cap on the amount of assets that a fund 
can use for repurchase or similar arrangements, such as 10 percent of 
the total net asset value of the fund?
    14. To gain a better understanding of the risks posed by repurchase 
and similar arrangements, the Commission requests information 
concerning the types of counterparties that typically face money market 
and similar funds in repurchase or similar agreements; the extent to 
which repurchase and similar arrangements are used by money market and 
similar funds; and whether the market treats differently money market 
and similar funds according to the types of repurchase and similar 
arrangements the funds enter into and the extent of repurchase 
agreements or arrangements the funds engage in. Further, the Commission 
requests comment with respect to the manner in which, and the extent to 
which, CSEs will meet their obligation to monitor the value and 
suitability of securities of money market and similar funds pledged as 
margin collateral where the funds engage in repurchase or similar 
arrangements.
    15. Are the regulatory safeguards referenced in the Money Market 
Funds Proposal adequate to address the potential risks that may arise 
from the proposal? Are there other regulatory safeguards that the 
Commission should consider?
    16. Are there any risks associated with the Money Market Funds 
Proposal that the Commission has not considered? In addition to the 
possible measures discussed above, including a possible additive 
haircut, or a percentage cap on the amount of assets that funds could 
use in repurchase and similar agreements, are there other measures that 
the Commission could take to mitigate such risks?
    17. The Prudential Regulators Margin Rule contains an equivalent 
asset transfer restriction. If the Commission amends Commission 
Regulation 23.156, counterparties that trade with both prudentially 
regulated SDs and CFTC-regulated SDs may need to adjust their swap-
related documentation and collateral management systems to reflect the 
different treatments for fund securities under the CFTC's and the 
prudential regulators' rules. In that regard, the Commission requests 
information on the potential additional costs associated with 
maintaining two separate and distinct documentation and collateral 
management processes. How much weight should the Commission give with 
respect to the possible challenge that counterparties may need to 
maintain two separate and distinct documentation and collateral 
management systems? Should the Commission proceed to adopt the proposed 
amendments to Commission Regulation 23.156 if the prudential regulators 
do not adopt similar regulatory changes?
    18. The Commission intends that the final rule will become 
effective 30 days after its publication in the Federal Register. With 
respect to the Money Market Funds Proposal, are there any comments on 
the effective date?

[[Page 53420]]

IV. Administrative Compliance

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies 
to consider whether the rules they propose pursuant to the notice-and-
comment provisions of the Administrative Procedure Act, or any other 
law, will have a significant economic impact on a substantial number of 
small entities and provide a regulatory flexibility analysis respecting 
the impact or issue a certification that the rule does not have such 
impact.\93\ The Commission previously has established certain 
definitions of ``small entities'' to be used in evaluating the impact 
of its regulations on small entities in accordance with the RFA.\94\ 
The proposed amendments would only affect certain SDs and MSPs and 
their counterparties, which must be eligible contract participants 
(``ECPs'').\95\ The Commission has previously established that SDs, 
MSPs and ECPs are not small entities for purposes of the RFA.\96\
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    \93\ See 5 U.S.C. 601(2), 603, 604, and 605.
    \94\ See Registration of Swap Dealers and Major Swap 
Participants, 77 FR 2613 (Jan. 19, 2012).
    \95\ Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e), each 
counterparty to an uncleared swap must be an ECP, as defined in 
section 1a(18) of the CEA, 7 U.S.C. 1a(18). Section 1a(18) of the 
CEA defines ECP by listing certain entities and individuals whose 
business is financial in nature or that meet defined asset or net 
worth thresholds, as well certain government entities.
    \96\ See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ```Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' 77 FR 
30596, 30701 (May 23, 2012).
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    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the proposed amendments will 
not have a significant economic impact on a substantial number of small 
entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \97\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. The Commission may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid Office of Management 
and Budget control number. The proposed amendments contain no 
requirements subject to the PRA.
---------------------------------------------------------------------------

    \97\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA.\98\ Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following five broad areas 
of market and public concern: (1) protection of market participants and 
the public; (2) efficiency, competitiveness and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the section 15(a) considerations, and 
seeks comments from interested persons regarding the nature and extent 
of such costs and benefits.
---------------------------------------------------------------------------

    \98\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    As described in more detail above, under the Seeded Funds Proposal, 
the Commission is proposing to amend the definition of ``margin 
affiliate'' to provide for a limited eligible seeded fund exception, 
pursuant to which, during a period of three years after the fund's 
trading inception date, a seeded fund meeting certain specified 
requirements would be deemed to not have margin affiliates for purposes 
of calculating the fund's MSE and the IM threshold. This proposed 
treatment for eligible seeded funds would effectively relieve CSEs that 
enter into uncleared swaps with certain seeded funds from the 
requirement to exchange IM with the seeded funds during the three-year 
period after the funds' trading inception date. The Seeded Funds 
Proposal would make the proposed treatment available only with respect 
to eligible seeded funds that, among other requirements: (i) are 
distinct legal entities from each sponsor entity; (ii) have one or more 
margin affiliates that are required to post and collect IM; (iii) are 
managed by an asset manager pursuant to an agreement that requires the 
assets of the fund to be managed in accordance with a specified written 
investment strategy; (iv) have an asset manager who maintains 
independence in carrying out its management responsibilities and 
exercising its investment discretion, and has independent fiduciary 
duties to other investors in the fund (if any), such that no sponsor 
entity or any margin affiliate of a sponsor entity controls or has 
transparency into the management or trading of the seeded fund; (v) 
follow a written plan for the reduction of the sponsor entity's 
ownership interest in the fund that stipulates divestiture targets over 
the three-year period after the seeded fund's trading inception date; 
(vi) are not collateralized, guaranteed or otherwise supported, 
directly or indirectly by any sponsor entity, any margin affiliate of a 
sponsor entity, other collective investment vehicles, or the seeded 
fund's asset manager, in respect of any of the fund's obligations; 
(vii) have not received any of their assets, directly or indirectly, 
from an eligible seeded fund that has relied on the proposed eligible 
seeded fund exception; and (viii) are not securitization vehicles.
    Under the Money Market Funds Proposal, the Commission is proposing 
to eliminate the asset transfer restriction in paragraph (C) of 
Commission Regulation 23.156(a)(1)(ix), which has the effect of 
disqualifying as eligible collateral the securities of money market and 
similar funds that transfer their assets through repurchase or similar 
arrangements. The Margin Subcommittee Report indicated that the asset 
transfer restriction significantly limits the money market fund 
securities that are available for use as collateral under the CFTC 
Margin Rule.\99\
---------------------------------------------------------------------------

    \99\ As previously noted, according to the Margin Subcommittee 
Report (citing research by a leading custodian bank), the securities 
of only four MMFs would qualify as eligible collateral under the 
current rules. See Margin Subcommittee Report at 24.
---------------------------------------------------------------------------

    The baseline against which the benefits and costs associated with 
the proposed rule amendments are compared is the uncleared swaps 
markets as they exist today, including the treatment of seeded funds 
and the securities of money market and similar funds under the current 
CFTC Margin Rule.
    The Commission notes that the consideration of costs and benefits 
below is based on the understanding that the markets function 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries; with some Commission registrants 
being organized outside of the United States; with leading industry 
members typically conducting operations both within and outside the 
United States; and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
below discussion of costs and benefits refers to the effects of these 
proposed amendments on all activity subject to the proposed amended 
regulations, whether by virtue of the activity's physical location in 
the United States or by virtue of the activity's connection with 
activities in, or effect on, U.S.

[[Page 53421]]

commerce under section 2(i) of the CEA.\100\
---------------------------------------------------------------------------

    \100\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The Commission recognizes that the proposed rules may impose 
additional costs on market participants, including CSEs. Although the 
Commission has endeavored to assess the expected costs and benefits of 
the proposed rulemaking in quantitative terms, due to the lack of data 
and information to estimate those costs, the Commission has identified 
and considered the costs and benefits of the proposal in qualitative 
terms. The lack of data and information to estimate costs is 
attributable to the nature of the proposal and uncertainty relating to 
how particular market participants would implement the proposed rules. 
The Commission specifically requests data and information from market 
participants and other commenters to allow it to better estimate the 
costs of the proposal.
1. General Cost-Benefits Considerations
Seeded Funds Proposal
(a) Benefits
    The Seeded Funds Proposal would effectively relieve CSEs entering 
into uncleared swaps with eligible seeded funds from the requirement to 
collect IM from the funds, subject to specified conditions. Absent the 
Seeded Funds Proposal, seeded funds would be disadvantaged domestically 
and globally in comparison to similar investment funds that are not 
margin affiliates of an entity required to exchange IM or are subject 
to the rules of jurisdictions such as Australia, Canada and the EU that 
treat certain investment funds as separate legal entities, consistent 
with the international standards established by the BCBS-IOSCO 
Framework.\101\ The Seeded Funds Proposal would therefore level the 
playing field domestically and globally with respect to the treatment 
of seeded funds. However, the Seeded Funds Proposal may incentivize 
trading with CSEs over SDs or MSPs subject to the U.S. prudential 
regulators' margin rules given that the prudential regulators might not 
revise their rules in a manner consistent with the Seeded Funds 
Proposal and the prudential regulators' rules may continue to require 
that seeded funds calculate the MSE and IM threshold amount on a 
consolidated basis with their margin affiliates.
---------------------------------------------------------------------------

    \101\ Margin Subcommittee Report at 7, 30 and 33.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Seeded Funds 
Proposal would tend to benefit seeded funds whose AANA falls below the 
$8 billion MSE threshold and that, given their level of swap activity, 
such seeded funds would pose relatively low risk to the uncleared swaps 
market and the U.S financial system in general. In that regard, the 
Margin Subcommittee Report stated that seeded funds have limited 
notional exposure and their capitalization typically does not exceed 
$50-100 million.\102\ The Report further cited an informal sampling of 
members of SIFMA AMG and the American Council of Life Insurers 
conducted in 2018, which indicated that a total of 33 funds would be in 
scope of the CFTC margin requirements due to their derivatives notional 
exposures being consolidated with entities with MSE. Individually, each 
of the funds had an average gross notional exposure of $32 
million.\103\
---------------------------------------------------------------------------

    \102\ Margin Subcommittee Report at 31.
    \103\ Id.
---------------------------------------------------------------------------

    As a result, in the Commission's preliminary view, the Seeded Funds 
Proposal, if adopted, would address seeded funds that tend to engage in 
less uncleared swap trading activity and, in the aggregate, pose less 
systemic risk than entities that meet the MSE threshold. The impacted 
eligible seeded funds, which would be in an initial stage of 
development, would presumably have fewer resources to devote to IM 
compliance and hence would benefit from being discharged from posting 
IM during their seeding period without contributing significantly to 
systemic risk. The eligible seeded fund's sponsor entities and their 
margin affiliates that do not independently qualify for the proposed 
eligible seeded fund exception would continue to include the eligible 
seeded funds' exposure in their calculation of the MSE and IM threshold 
amount. The CSE counterparty to the eligible seeded fund would also 
still be required to count the uncleared swaps that it undertakes with 
the eligible seeded fund for purposes of calculating its own AANA. The 
Commission preliminarily believes that the flexibility provided by the 
eligible seeded fund exception would be instrumental for investment 
funds during the seeding period when funds typically use all their 
resources to establish a performance track record to attract 
unaffiliated investors.
    In addition, the Commission believes that the Seeded Funds Proposal 
would be beneficial for CSEs that enter into swap transactions with 
investment funds. As a result of the proposed amendments, CSEs would 
apply a consistent approach in their swap dealing activities with U.S. 
and non-U.S. investment funds, which may lead to cost efficiencies. 
Also, as noted in the Margin Subcommittee Report, a consistent approach 
to seeded funds would reduce the incentive for non-U.S. funds to avoid 
business with CSEs given the perceived more onerous treatment of funds 
in the U.S.\104\
---------------------------------------------------------------------------

    \104\ Margin Subcommittee Report at 30.
---------------------------------------------------------------------------

    The proposed eligible seeded fund exception may also incentivize 
some market participants to expand their swap business or enter into 
the swaps markets because, by counting their AANA and uncleared swaps 
credit exposure individually, seeded funds may not meet the thresholds 
that would bring them within the scope of the IM requirements. This 
would relieve CSEs entering into uncleared swaps with the funds from 
the requirement to exchange IM with the funds. In turn, the elimination 
of IM-related costs may encourage uncleared swaps trading between CSEs 
and investment funds and increase the pool of potential swap 
counterparties, enhancing competition and liquidity and facilitating 
price discovery in the uncleared swaps markets.
(b) Costs
    Amending the definition of ``margin affiliate'' to provide for a 
limited eligible seeded fund exception under which seeded funds would 
be deemed to not have margin affiliates for purposes of calculating the 
funds' MSE and the IM threshold amount, subject to specified 
conditions, may lead to the exchange of less margin between a CSE and a 
seeded fund. The Commission recognizes that the uncollateralized 
exposure that may result from the proposed change to the ``margin 
affiliate'' definition could increase credit risk associated with 
uncleared swaps. The Commission believes, however, that a number of 
safeguards exist to mitigate this risk. The Commission notes that 
seeded funds that would qualify for the eligible seeded fund exception 
would typically be smaller entities that have limited swaps 
activity.\105\ To grow in size, the funds would have to attract 
unaffiliated investors, which may result in such funds no longer being 
subject to consolidation with their sponsor entity.
---------------------------------------------------------------------------

    \105\ See Margin Subcommittee Report at 31.
---------------------------------------------------------------------------

    As such, the eligible seeded fund exception under the Seeded Funds 
Proposal would primarily impact the exchange of IM between a CSE and 
investment funds that are in their seeding period. During that period, 
such investment funds would pose less risk to a CSE counterparty and 
the financial system as a whole given the small size of the funds and 
the scope of their derivatives activity. To ensure that

[[Page 53422]]

eligible seeded funds are afforded the benefit of a separate treatment 
from margin affiliates only during the seeding period, the Commission 
proposes to limit the applicability of the eligible seeded fund 
exception only to three years after the fund's trading inception date. 
To ensure that the three-year period is not reinstated as a result of 
rollovers of fund assets or similar activities, the proposed definition 
of eligible seeded fund would include a condition that the seeded fund 
has not received, directly or indirectly, any of its assets from an 
eligible seeded fund that has relied on the eligible seeded fund 
exception to the definition of ``margin affiliate.'' The Commission 
further notes that, pursuant to section 4s(j)(2) of the CEA and 
Commission Regulation 23.600, CSEs are required to monitor and manage 
risks related to their swap activities, including credit risk, and set 
risk tolerance limits.\106\ Thus, if the credit risk associated with 
CSEs' transactions with eligible seeded funds exceeds the CSEs' risk 
tolerance limits, CSEs would be expected to take mitigating measures.
---------------------------------------------------------------------------

    \106\ 7 U.S.C. 6s(j)(2) (mandating that CSEs adopt a robust and 
professional risk management system adequate for the management of 
day-to-day swap activities) and 17 CFR 23.600 (requiring CSEs, in 
establishing a risk management program for the monitoring and 
management of risk related to their swap activities, to account for 
credit risk and to set risk tolerance limits).
---------------------------------------------------------------------------

    In certain circumstances, the increase in uncollateralized credit 
risk resulting from the Seeded Funds Proposal could also negatively 
impact the sponsor entity or the asset manager of a seeded fund. In 
particular, if a seeded fund is facing financial distress, a sponsor 
entity or the fund's asset manager may be incentivized to intervene, 
because of reputational risks or other concerns, and contribute 
additional resources even in the absence of an explicit business 
arrangement to provide financial support or a guarantee. Similarly, if 
the fund is suffering the consequences of a swap counterparty default, 
the sponsor entity or the asset manager may contribute financial 
resources to improve the fund's condition and increase its own 
exposure, potentially putting at risk its own financial position. Thus, 
the fund's uncollateralized exposure may lead the sponsor entity or the 
asset manager to incur risks, increasing the potential for contagion 
and systemic risk. To account for these risks, the Commission is 
proposing to define the term ``eligible seeded fund'' to incorporate 
requirements meant to ensure that seeded funds are genuinely 
independent and that the risks associated with their activities are not 
assumed by other entities such as their sponsor entities or asset 
managers. Specifically, among other conditions, the seeded fund would 
have to be a distinct legal entity from each sponsor entity that is not 
collateralized, guaranteed, or otherwise supported, directly or 
indirectly, by any sponsor entity, any margin affiliate of any sponsor 
entity, other collective investment vehicles, or the seeded fund's 
asset manager, in respect of any of the fund's obligations. This should 
mitigate the incentive for the sponsor's assets to be used if the 
seeded fund fails.
    Treating seeded funds as separate unaffiliated legal entities for 
purposes of calculating the thresholds for determining whether 
compliance with the IM requirements is required could also incentivize 
swap counterparties to create legal entities that have no economic 
basis and are constructed solely for the purpose of applying additional 
thresholds to evade margin requirements. To address these concerns, the 
Commission proposes to limit the applicability of the eligible seeded 
fund exception by providing that eligible seeded funds would be deemed 
not to have margin affiliates solely for the purpose of calculating the 
fund's MSE and IM threshold amount. As such, under the Seeded Funds 
Proposal, the eligible seeded funds' sponsor entities and their margin 
affiliates would continue to include the eligible seeded funds' 
exposures in the calculation of the IM compliance thresholds applicable 
to such sponsor entities and margin affiliates. In addition, the 
Commission proposes to include, in the proposed definition of 
``eligible seeded fund,'' conditions designed to ensure that funds that 
qualify as eligible seeded funds have a bona fide business purpose. In 
particular, the proposed definition provides that the eligible seeded 
fund must be managed by an asset manager pursuant to an agreement that 
requires that the assets of the fund be managed in accordance with a 
specified written investment strategy and that the asset manager has 
independence in carrying out its management responsibilities and 
exercising its investment discretion, and to the extent applicable, has 
independent fiduciary duties to other investors in the fund, such that 
no sponsor entity or a margin affiliate of a sponsor entity controls or 
has transparency into the management or trading of the seeded fund. 
Furthermore, the proposed definition of eligible seeded fund would 
require that the seeded fund's investment strategy must follow a 
written plan for reducing the sponsor entity's ownership interest in 
the fund.
    The Commission, therefore, believes that the costs associated with 
the potential evasion of the IM requirements would be mitigated by the 
proposed rule amendment, which would be narrowly tailored to make 
available the proposed approach only for purposes of calculating the IM 
compliance thresholds applicable to seeded funds that meet specified 
requirements and only during the three years that follow the fund's 
trading inception date. In addition, the Commission intends to use its 
anti-evasion authority to prevent circumvention of the margin 
requirements.\107\
---------------------------------------------------------------------------

    \107\ See supra note 51.
---------------------------------------------------------------------------

    Furthermore, given that the U.S. prudential regulators may not 
amend their margin requirements in line with the Seeded Funds Proposal, 
if the Commission finalizes the proposal described herein, the 
Commission acknowledges the possibility that its requirements with 
respect to the treatment of eligible seeded funds may diverge from that 
of the U.S. prudential regulators, requiring funds that engage in swaps 
transactions with both CSEs and prudentially-regulated SDs to adjust 
their swap-related documentation and IM processes to reflect such 
different treatments. Thus, market participants may incur additional 
costs by having to maintain two separate and distinct types of 
documentation and IM management processes. Similar costs may also be 
incurred by CSEs that already transact with seeded funds that are 
currently consolidated. Also, as discussed previously, given that the 
Seeded Funds Proposal would provide for an eligible seeded fund 
exception from the definition of ``margin affiliate,'' effectively 
providing for the funds' deconsolidation for purposes of calculating 
the funds' MSE and IM threshold amount, seeded funds may favor CSEs as 
counterparties over SDs or MSPs subject to the prudential regulators' 
margin rules, which might not be revised to provide for a similar 
eligible seeded fund exception.
    As noted above, to better assess the impact of a potential 
divergence between the CFTC Margin Rule and the Prudential Regulators 
Margin Rule, the Commission is requesting information on the potential 
costs associated with maintaining distinct documentation and IM 
management processes.
Money Market Funds Proposal
(a) Benefits
    The Money Market Funds Proposal would expand the scope of assets 
that

[[Page 53423]]

qualify as eligible collateral. In this regard, the GMAC Margin 
Subcommittee Report stated that absent elimination of the asset 
transfer restriction, the securities of very few MMFs would qualify as 
eligible collateral, noting that nearly all U.S. MMFs engage in some 
form of repurchase or similar arrangements.\108\ The Money Market Funds 
Proposal may therefore reduce the potential concentration of collateral 
in the few MMFs whose securities currently qualify as eligible 
collateral under Commission Regulation 23.156(a)(1)(ix), which could 
lead to greater diversity of assets used for collateral, thereby 
reducing the riskiness of IM assets.
---------------------------------------------------------------------------

    \108\ Margin Subcommittee Report at 24.
---------------------------------------------------------------------------

    Also, the Money Market Funds Proposal, by increasing the number of 
MMFs whose securities qualify as eligible collateral, may promote more 
efficient collateral management practices. The Margin Subcommittee 
Report stated that custodians offer money market sweep programs that 
afford institutional clients of such custodians the ability to timely 
and efficiently meet margin calls without settlement delay, avoiding 
other transaction costs that would otherwise arise in the absence of 
the sweep programs. Such direct sweeps from cash into MMF securities 
mitigate the risk of insolvency by the custodian because non-cash 
collateral deposited with the custodian will not be consolidated in the 
custodian's balance sheet. The Margin Subcommittee Report also stated 
that the use of MMFs may avoid the risk of potential negative interest 
rate charges that may be applied by custodian banks on cash collateral.
    By eliminating the asset transfer restriction, the Money Market 
Funds Proposal could also promote asset management policies that 
improve the performance of money market and similar funds. Without the 
restriction, the funds may undertake repurchase or similar arrangements 
that increase returns for investors, including the return for CSEs that 
post money market and similar fund securities as margin collateral for 
uncleared swaps, contributing to the fund securities' liquidity and 
retention of value even during periods of financial stress.
    In summary, these benefits will accrue to CSEs and their 
counterparties that enter into uncleared swaps transactions. As 
discussed above, the potential concentration in certain types of 
collateral has been acknowledged previously by the Commission as a 
potential risk that CSEs should consider in managing their margin 
collateral. CSEs and their counterparties will also benefit from the 
more efficient use of their capital as discussed above and enhanced 
returns on securities posted as collateral. Furthermore, the proposal 
may lead to reduced costs for those market participants that dually 
register as SDs and security-based swap SDs with the CFTC and the SEC, 
respectively, as the proposed amendment would bring the CFTC's eligible 
collateral framework more in line with the SEC approach, which does not 
impose asset transfer restrictions on funds whose securities are used 
as collateral for margining purposes and expressly permits the use of 
government money market fund securities as collateral.
(b) Costs
    The elimination of the asset transfer restriction in paragraph (C) 
of Commission Regulation 23.156(a)(1)(ix) would remove a safeguard 
intended to ensure that money market and similar fund securities posted 
as margin collateral remain liquid and maintain their value in times of 
financial stress. More specifically, paragraph (C) prevents the 
transfer of money market and similar fund assets through repurchase or 
similar arrangements to mitigate the impact of such transfers on the 
liquidity or value of fund securities. For example, if a counterparty 
to a money market and similar fund in a repurchase or similar 
arrangement defaults, the fund may be left holding assets that, in 
times of financial stress, may not be easily resold and might not 
compensate for the value of assets tendered in the repurchase 
arrangement. Such a default would reduce the overall net asset value of 
the fund and the price of the fund's securities. Also, the inability to 
liquidate assets that a money market and similar fund might be left 
holding upon the failure of a repurchase or similar arrangement or the 
inability to extract assets originally tendered in the repurchase 
arrangement may impact the fund's ability to promptly respond to 
redemption requests, hindering the liquidity of the fund's securities, 
making them less suitable as margin collateral. The Commission, 
however, notes that subparagraphs (A) and (B) of Commission Regulation 
23.156(a)(1)(ix), which are not being amended, limit the types of 
assets that a money market and similar fund can receive in repurchase 
or similar arrangements to those assets specifically identified in 
those paragraphs, alleviating in part the risks associated with 
repurchase or similar arrangements.
    In light of the proposed elimination of the asset transfer 
restriction, the Commission is also seeking input on whether it would 
be appropriate to include an additional haircut beyond that required by 
the haircut schedule in Commission Regulation 23.156(a)(3), as 
corrected by the proposed amendment discussed herein.
    The Commission further notes that Commission Regulation 23.156(c) 
requires that CSEs monitor the market value and eligibility of all 
collateral and, to the extent that the market value has declined, 
promptly collect or post additional eligible collateral to maintain 
compliance with Commission Regulations 23.150 through 23.161.\109\ 
Thus, even if the value or liquidity of pledged money market and 
similar fund securities may be affected by repurchase or similar 
arrangements undertaken by the fund, CSEs have the obligation to 
monitor the value and suitability of the fund's securities as margin 
collateral and collect or post additional eligible collateral to 
compensate for collateral deficiencies.
---------------------------------------------------------------------------

    \109\ 17 CFR 23.156(c).
---------------------------------------------------------------------------

    The elimination of the asset transfer restriction could give rise 
to other costs. Given that the U.S. prudential regulators may not amend 
their margin requirements in line with the proposed rule amendments, if 
the amendments proposed herein are adopted as final, the CFTC and U.S. 
prudential regulators' margin rules would diverge with respect to the 
treatment of securities of money market and similar funds as eligible 
collateral, requiring parties that trade with both prudentially-
regulated SDs and CSEs to adjust their swap-related documentation and 
collateral management systems to reflect such different treatments. 
Thus, market participants may incur additional costs by having to 
maintain two separate and distinct types of documentation and 
collateral management systems. Also, the Money Market Funds Proposal 
may incentivize trading with CSEs over SDs or MSPs subject to the U.S. 
prudential regulators' margin rules given that the prudential 
regulators might not revise their rules in a manner consistent with the 
Money Market Funds Proposal and the prudential regulators' rules may 
continue to restrict the use of securities of money market and similar 
funds that transfer their assets through repurchase and similar 
agreements.
    At the same time, the Commission notes that the removal of the 
asset transfer restriction would bring the CFTC's eligible collateral 
framework closer to the approach adopted by the Securities and Exchange 
Commission (``SEC''), which does not impose asset

[[Page 53424]]

transfer restrictions with respect to money market and similar fund 
securities and expressly permits the use of government money market 
fund securities as collateral.\110\ Therefore, although there is the 
potential for greater costs as a result of divergence with the U.S. 
prudential regulators, there may be lower costs overall, given that 
many CSEs are also cross-registered with the SEC as security-based SDs.
---------------------------------------------------------------------------

    \110\ 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, Securities and Exchange Commission, 84 FR 43872, 43919 
(Aug. 22, 2019). In the preamble to its final rule, the SEC noted 
that the final rule does not specifically exclude any type of 
security provided it has a ready market, is readily transferable, 
and does not consist of securities or money market instruments 
issued by the counterparty or a party related to the nonbank 
security-based SD or major security-based swap participant, or the 
counterparty. Generally, U.S. government money market funds should 
be able to serve as collateral under these conditions.
---------------------------------------------------------------------------

2. Section 15(a) Considerations
    In light of the foregoing, the CFTC has evaluated the costs and 
benefits of the proposals pursuant to the five considerations 
identified in section 15(a) of the CEA as follows:
Seeded Funds Proposal
(a) Protection of Market Participants and the Public
    As discussed, the Seeded Funds Proposal would provide that, during 
a period of three years from the fund's trading inception date, a 
seeded fund meeting specific requirements would be deemed not to have 
margin affiliates solely for purposes of calculating the fund's MSE and 
the IM threshold amount. As a result, only the seeded fund's individual 
AANA would be used to determine whether the fund has MSE, and only the 
individual credit exposure of the fund resulting from the fund's swaps 
with a CSE would be used to determine whether the posting and 
collection of IM is required, and not the exposures calculated on an 
aggregate basis with the fund's sponsor entities and other margin 
affiliates, as currently required under the CFTC Margin Rule.
    The Seeded Funds Proposal is thus proposing an approach to eligible 
seeded funds that is consistent with the BCBS-IOSCO Framework and 
similar approaches adopted by jurisdictions such as Australia, Canada 
and the EU.\111\ As such, the Seeded Funds Proposal would eliminate a 
disadvantage that U.S. investment funds face compared to non-U.S. funds 
that are not subject to a consolidation requirement. The Seeded Funds 
Proposal would also address the potential liquidity drain and trading 
disruptions that CSEs might encounter if non-U.S. investments funds 
were to avoid doing uncleared swaps business with the CSEs because of 
the current treatment of seeded funds in the U.S. under the CFTC Margin 
Rule. In addition, the Seeded Funds Proposal would level the playing 
field between U.S. seeded funds that are consolidated within a group of 
entities that collectively have MSE and other domestic investment funds 
that are not part of a group whose combined exposure exceeds the 
threshold for compliance with the IM requirements, while, at the same 
time, potentially spurring greater interest in seeded funds as 
potential counterparties.
---------------------------------------------------------------------------

    \111\ See supra notes 27 and 41.
---------------------------------------------------------------------------

    As a result of the Seeded Funds Proposal, less collateral may be 
collected by seeded funds given that individually they may not meet the 
threshold for exchanging IM. A seeded fund's uncollateralized swaps 
exposure may negatively impact the sponsor entities of the fund or its 
asset manager, given that, for reputational reasons, a sponsor entity 
or the asset manager may provide financial support to the seeded fund 
in times of financial distress, potentially putting at risk their own 
financial position.
    The Seeded Funds Proposal may also have implications for CSEs 
entering into uncleared swap transactions with the fund's sponsor 
entity. Specifically, a CSE evaluating the creditworthiness of its 
counterparty--the fund's sponsor entity--may not be aware of the 
sponsor entity's potentially weakened financial position. As such, the 
Seeded Funds Proposal, by allowing seeded funds' exposures to not be 
consolidated with the exposures of their sponsor entities and other 
margin affiliates for purposes of determining the applicability of the 
IM requirements, may increase the risk of contagion.
    The Commission, however, believes that such concerns are mitigated 
by the requirements incorporated in the proposed definition of eligible 
seeded fund, including the condition that the seeded fund is not 
collateralized, guaranteed or otherwise supported, directly or 
indirectly by any sponsor entity, any margin affiliate of any sponsor 
entity, other collective investment vehicles, or the fund's asset 
manager in respect of any of the fund's obligations. These conditions 
are intended to ensure that seeded funds are genuinely independent and 
risk remote from the sponsor entities.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    The Seeded Funds Proposal would amend the definition of ``margin 
affiliate'' in Commission Regulation 23.151 to provide an exception for 
eligible seeded funds, which would effectively relieve CSEs from the 
requirement to exchange IM for uncleared swaps with such eligible 
seeded funds, subject to specified conditions. This eliminates a 
competitive disadvantage between seeded funds that are consolidated 
with their sponsor entities and margin affiliates, which collectively 
exceed the thresholds for compliance with the IM requirements on the 
one hand, from those investment funds whose sponsor entities and margin 
affiliates do not have collective exposures exceeding such thresholds 
on the other. This would potentially spur greater interest in seeded 
funds as potential counterparties. In addition, the proposed amendment 
to the ``margin affiliate'' definition would level the playing field 
between U.S. funds and non-U.S. investment funds from jurisdictions 
that do not require fund swaps exposures to be considered on a 
consolidated basis for purposes of determining whether compliance with 
the IM requirements is required.
    The Seeded Funds Proposal would relieve CSEs entering into 
uncleared swaps with eligible seeded funds from the requirement to 
exchange IM with the funds if the funds meet specified requirements. 
This would reduce the operational costs associated with the exchange of 
IM for CSEs and their eligible seeded funds counterparties and would 
allow seeded funds to allocate their financial resources to testing 
their investment strategy and attracting unaffiliated investors. The 
cost reduction may also incentivize more market participants to enter 
into uncleared swaps. The Seeded Funds Proposal would thus promote 
efficiency in the uncleared swaps market by increasing the pool of swap 
counterparties and fostering competition.
    Given that the Seeded Funds Proposal would relieve CSEs from the 
exchange of IM with certain eligible seeded funds for their uncleared 
swaps, the uncollateralized credit exposure for the uncleared swaps 
would increase and could undermine the integrity of the markets. The 
Commission, however, believes that the increased exposure would be 
limited given the relatively limited derivatives activity of seeded 
funds that would benefit from the eligible seeded fund exception. In

[[Page 53425]]

addition, the proposed relief is narrowly tailored given the 
requirements incorporated in the proposed definition of ``eligible 
seeded fund'' and the fact that it would only apply for purposes of 
calculating the MSE and IM threshold amount applicable to the eligible 
seeded funds, and not for the calculation of the IM compliance 
thresholds applicable to the funds' sponsor entities and margin 
affiliates that do not independently qualify as eligible seeded funds 
(nor for the funds' CSE counterparties).
(c) Price Discovery
    By amending the definition of ``margin affiliate'' in Commission 
Regulation 23.151, the Seeded Funds Proposal would relieve CSEs from 
the requirement to exchange IM when entering into uncleared swaps with 
an eligible seeded fund. As a counterparty to a CSE, an eligible seeded 
fund therefore would not have to incur operational costs associated 
with setting up and maintaining processes and documentation to exchange 
IM. The relief would permit eligible seeded funds to direct more 
resources to building a successful performance track record and 
attracting new investors. As a result, the overall cost of entering 
into an uncleared swap transaction may decrease, incentivizing 
increased participation in the uncleared swaps markets. In turn, the 
trading of uncleared swaps may increase, leading to increased liquidity 
and enhanced price discovery.
(d) Sound Risk Management
    Because the Seeded Funds Proposal would relieve CSEs from the 
obligation to exchange IM with certain seeded funds, less margin may be 
collected and posted to offset the risk of uncleared swaps, which could 
increase the risk of default. Nevertheless, the Commission believes 
that the uncollateralized risk would be mitigated because during the 
seeding period, investment funds are typically small and the extent of 
uncleared swap activity a seeded fund may undertake with CSEs may be 
limited. In addition, CSEs are required to manage the risk associated 
with their uncleared swaps, including those swaps that might be 
uncollateralized, by maintaining a robust and professional risk 
management program that provides, among other things, for the 
implementation of internal parameters for the monitoring and management 
of swap risk, including credit risk.
    The Commission also notes that the Seeded Funds Proposal, by 
relieving CSEs from the requirement to exchange IM with certain seeded 
funds, would reduce the operational costs of both CSEs and their 
eligible seeded fund counterparties, potentially encouraging more 
market participants to enter the uncleared swaps market. As such, by 
increasing the pool of swap counterparties, the Seeded Funds Proposal 
would encourage the careful consideration and selection of 
counterparties, promoting sound risk management.
(e) Other Public Interest Considerations
    By proposing a treatment of certain investment funds that is 
consistent with the BCBS/IOSCO Framework, the Seeded Funds Proposal 
would alleviate the potential disadvantage that U.S. seeded funds have 
compared to non-U.S. investment funds, which may be perceived to be 
subject to more favorable regulatory regimes than in the United States 
given the differing consolidation treatments applicable to funds.
    However, given that the U.S. prudential regulators may not amend 
their margin requirements in line with the proposed amendments, the 
possibility exists that the CFTC and U.S. prudential regulators' 
differing rules may motivate certain investment funds to undertake 
swaps with particular SDs based on which U.S. regulatory agency is 
responsible for setting margin requirements for such SDs. In that 
sense, the change can lead to trades that do not reflect the relative 
merits of competing SDs. The divergence could also lead to additional 
costs for investment funds that trade with both CSEs and prudentially-
regulated SDs because such funds would need to adjust their swap 
related documentation and collateral management systems to reflect the 
different margin requirements that may apply under the CFTC's and the 
prudential regulators' rules.
Money Market Funds Proposal
(a) Protection of Market Participants and the Public
    The Commission believes that the Money Market Funds Proposal would 
protect market participants and the public by eliminating the asset 
transfer restriction and allowing a broader range of money market and 
similar fund securities to serve as collateral, thus addressing the 
potential that margin collateral may be concentrated in the securities 
of a few money market and similar funds and leading to greater 
diversification by increasing the range of assets that may be used as 
collateral.
    The elimination of the asset transfer restriction would also 
promote effective asset management policies for the benefit of fund 
investors and market participants in general. Without the restriction, 
money market and similar funds that otherwise would have refrained from 
undertaking repurchase or similar arrangements to avoid the 
disqualification of their securities as eligible collateral may enter 
into such arrangements. The arrangements might generate higher returns 
for investors, including for CSEs that use money market and similar 
fund securities as margin collateral for uncleared swaps, and enable 
funds to meet their commitments to investors concerning fund 
performance.
    Nevertheless, market participants might be harmed by the rule 
change if a counterparty to the money market or similar fund in a 
repurchase or similar arrangement defaults, and the fund is unable to 
recover assets tendered to the counterparty in the arrangement and is 
left holding assets of lesser value. The fund's overall net asset value 
may decline, reducing the value and liquidity of the fund's securities. 
This potential outcome would make the securities less suitable as 
collateral for margining uncleared swaps.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    By eliminating the asset transfer restriction, the Money Market 
Funds Proposal would allow a broader range of money market and similar 
fund securities to serve as collateral for margining uncleared swaps, 
increasing diversification in the assets that can be used as 
collateral, and fostering competition among the funds whose securities 
qualify as eligible collateral under the Proposal.
    The elimination of the asset transfer restriction would also 
promote effective asset management policies for the benefit of fund 
investors and market participants in general. Without the restriction, 
money market or similar funds would be able to undertake repurchase and 
similar agreements, which may enable them to generate higher returns 
for investors, including for CSEs that use the funds' securities as 
collateral, and to meet commitments to investors concerning fund 
performance.
    Notwithstanding these benefits, the proposed elimination of the 
asset transfer restriction might negatively impact market participants. 
If a money market and similar fund undertakes a repurchase or similar 
arrangement and the fund's counterparty in the arrangement defaults, 
the fund may be unable to recover assets it tendered in the arrangement 
and may be left holding assets of lesser value. The fund's overall net 
asset value may decrease, affecting the value and liquidity of the 
fund's

[[Page 53426]]

securities. This potential outcome would make the fund's securities 
less suitable as collateral for margining uncleared swaps.
(c) Price Discovery
    As previously discussed, with the removal of the asset transfer 
restriction, fund managers may have more flexibility in determining the 
type of investment and transactions that are in the best interest of 
their fund and investors, leading to higher returns for investors, 
including CSEs using money market and similar fund securities as margin 
collateral for uncleared swaps. With such increased returns, the 
overall costs of entering into an uncleared swap transaction may 
decrease, incentivizing increased participation in the uncleared swaps 
markets. In turn, trading in uncleared swaps may increase, leading to 
increased liquidity and enhanced price discovery.
(d) Sound Risk Management
    The proposed amendment would eliminate the asset transfer 
restriction, allowing the use of securities of money market funds that 
undertake repurchase or similar arrangements as collateral for the 
margining of uncleared swaps. As such, even if the asset manager for a 
money market and similar fund, as a fiduciary, acts in the best 
interest of the fund and its investors, there is the risk that the fund 
may incur a loss if the fund's counterparty in a repurchase or similar 
arrangement defaults. Such a default would leave the fund holding 
assets that it may not be able to easily resell in times of financial 
stress, which might impact the value and liquidity of pledged fund 
securities and make them less suitable as margin collateral for 
uncleared swaps. The Commission, however, notes that any potential risk 
of such a repurchase or similar arrangement may be mitigated by the 
standard industry practice of applying haircuts to non-cash collateral 
in repurchase or similar arrangements to compensate for the risk that 
the value of collateral may decline over the term of the 
arrangement.\112\
---------------------------------------------------------------------------

    \112\ See Primer: Money Market Funds and the Repo Market, 
Prepared by the staff of the Division of Investment Management, U.S. 
Securities and Exchange Commission at pp. 5-6.
---------------------------------------------------------------------------

    In addition, the Commission notes that Commission Regulation 
23.156(c) requires that CSEs monitor the market value and eligibility 
of all collateral and, to the extent that the market value has 
declined, promptly collect or post additional eligible collateral to 
maintain compliance with Commission Regulations 23.150 through 23.161. 
Thus, even if the value or liquidity of pledged money market and 
similar fund securities may be affected by repurchase or similar 
arrangements undertaken by the fund, CSEs have the obligation to 
monitor the value and suitability of the fund securities as margin 
collateral and collect or post additional eligible collateral to 
compensate for collateral deficiencies, although the risk that a fund's 
repurchase or similar arrangements may fail remains. The Commission 
further notes, however, that subparagraphs (A) and (B) of Commission 
Regulation 23.156(a)(1)(ix), which are not being amended, limit the 
types of assets that a money market and similar fund can receive in 
repurchase or similar arrangements to those assets specifically 
identified in those paragraphs, alleviating in part the risks 
associated with repurchase or similar arrangements.
    While the Money Market Funds Proposal could lead to more 
variability in the value of the assets used as IM, it can also promote 
sound risk management in that it increases the range of money market 
and similar fund securities available as collateral for the margining 
of uncleared swaps, reducing the chance of concentration in a few money 
market and similar funds and the risks associated with such 
concentration. As such, the removal of the restriction may incentivize 
the increased use of money market and similar fund securities as 
collateral. Consistent with Commission Regulation 23.156(c), which 
requires CSEs to monitor the market value and eligibility of collateral 
posted or collected as margin for uncleared swaps, the Commission notes 
that CSEs must take into account the potential concentration of 
collateral in particular assets and prudently manage margin collateral.
(e) Other Public Interest Considerations
    As is the case for the Seeded Funds Proposal, it is possible that 
the U.S. prudential regulators may not amend their margin rule in line 
with the Money Market Funds Proposal. As such, the prudential 
regulators and the Commission would diverge with respect to the 
treatment of money market and similar funds securities as eligible 
collateral for margining uncleared swaps. This divergence might lead to 
increased costs for market participants that trade both uncleared swaps 
subject to the CFTC's and the prudential regulators' margin rules, as 
they may need to adjust or even maintain separate documentation and 
collateral management systems to address the differing treatments for 
fund securities under the different rules.
    On the other hand, the Money Market Funds Proposal may lead to 
reduced costs for those market participants that dually register as SDs 
and security-based swap SDs with the CFTC and the SEC, respectively, as 
the proposed amendment would bring the CFTC's eligible collateral 
framework more in line with the SEC approach, which does not impose 
asset transfer restrictions on funds whose securities are used as 
collateral for margining purposes and expressly permits the use of 
government money market fund securities as collateral.
Request for Comments on Cost-Benefit Considerations
    The Commission invites public comment on its cost-benefit 
considerations, including the section 15(a) factors described above. 
Commenters are also invited to submit any data or other information 
they may have quantifying or qualifying the costs and benefits of the 
proposed amendments. In particular, the Commission seeks specific 
comment on the following:
    1. Has the Commission accurately identified all the benefits of the 
proposed amendments? Are there other benefits to the Commission, market 
participants, and/or the public that may result from the adoption of 
the proposed amendments that the Commission should consider? Please 
provide specific examples and explanations of any such benefits.
    2. Has the Commission accurately identified all the costs of the 
proposed amendments? Are there additional costs to the Commission, 
market participants and/or the public that may result from the adoption 
of the proposed amendments that the Commission should consider? Please 
provide specific examples and explanations of any such costs.
    3. Do the proposed amendments impact the section 15(a) factors in 
any way that is not described above? Please provide specific examples 
and explanations of any such impact.
    4. Does the existing asset transfer restriction significantly limit 
the use of money market and similar fund securities as eligible 
collateral under the CFTC Margin Rule?

D. Antitrust Laws

    Section 15(b) of the CEA requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of this Act, in issuing any order or adopting any Commission 
rule or regulation

[[Page 53427]]

(including any exemption under section 4(c) or 4c(b)), or in requiring 
or approving any bylaw, rule or regulation of a contract market or 
registered futures association established pursuant to section 17 of 
this Act.\113\
---------------------------------------------------------------------------

    \113\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

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

List of Subjects in 17 CFR Part 23

    Capital and margin requirements, Major Swap Participants, Swap 
Dealers, Swaps.

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

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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

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

0
2. In Sec.  23.151, add the definition of ``Eligible seeded fund'' in 
alphabetical order and revise the definition of ``Margin affiliate''.
    The addition and revision read as follows:


Sec.  23.151  Definitions applicable to margin requirements.

* * * * *
    Eligible seeded fund: An eligible seeded fund is a collective 
investment vehicle that has received a part or all of its start-up 
capital from a parent and/or affiliate (each, a sponsor entity) where:
    (1) The seeded fund is a distinct legal entity from each sponsor 
entity;
    (2) One or more of the seeded fund's margin affiliates is required 
to post and collect initial margin pursuant to Sec.  23.152;
    (3) The seeded fund is managed by an asset manager pursuant to an 
agreement that requires the seeded fund's assets to be managed in 
accordance with a specified written investment strategy;
    (4) The seeded fund's asset manager has independence in carrying 
out its management responsibilities and exercising its investment 
discretion, and, to the extent applicable, has independent fiduciary 
duties to other investors in the fund, such that no sponsor entity or 
any of the sponsor entity's margin affiliates controls or has 
transparency into the management or trading of the seeded fund;
    (5) The seeded fund's investment strategy follows a written plan 
for reducing each sponsor entity's ownership interest in the seeded 
fund that stipulates divestiture targets over the three-year period 
after the date on which the seeded fund's asset manager first begins to 
make investments on behalf of the fund;
    (6) In respect of any of the seeded fund's obligations, the seeded 
fund is not collateralized, guaranteed, or otherwise supported, 
directly or indirectly, by any sponsor entity, any margin affiliate of 
any sponsor entity, other collective investment vehicle, or the seeded 
fund's asset manager;
    (7) The seeded fund has not received any of its assets, directly or 
indirectly, from an eligible seeded fund that has relied on the 
exception provided in paragraph 2 of the definition of margin affiliate 
in Sec.  23.151; and
    (8) The seeded fund is not a securitization vehicle.
* * * * *
    Margin affiliate has the following meaning:
    (1) A company is a margin affiliate of another company if:
    (i) Either company consolidates the other on a financial statement 
prepared in accordance with U.S. Generally Accepted Accounting 
Principles, the International Financial Reporting Standards, or other 
similar standards,
    (ii) Both companies are consolidated with a third company on a 
financial statement prepared in accordance with such principles or 
standards, or
    (iii) For a company that is not subject to such principles or 
standards, if consolidation as described in paragraph (i) or (ii) of 
this definition would have occurred if such principles or standards had 
applied.
    (2) Eligible seeded fund exception. Notwithstanding paragraph (1) 
of this definition, until the date that is three years after the date 
on which an eligible seeded fund's asset manager first begins to make 
investments on behalf of the fund, an eligible seeded fund will be 
deemed not to have any margin affiliates solely for purposes of 
calculating the fund's material swaps exposure and the initial margin 
threshold amount.
* * * * *
0
3. In Sec.  23.156:
0
a. Republish the introductory text of paragraph (a)(1);
0
b. Republish the introductory text of paragraph (a)(1)(ix);
0
c. Republish paragraph (a)(1)(ix)(A);
0
d. Revise paragraph (a)(1)(ix)(B);
0
e. Remove paragraph (a)(1)(ix)(C);
0
f. Revise paragraph (a)(3)(i)(B).
    The republications and revisions read as follows:


Sec.  23.156  Forms of Margin

    (a) * * * (1) Eligible collateral. A covered swap entity shall 
collect and post as initial margin for trades with a covered 
counterparty only the following types of collateral:
* * * * *
    (ix) Securities in the form of redeemable securities in a pooled 
investment fund representing the security-holder's proportional 
interest in the fund's net assets and that are issued and redeemed only 
on the basis of the market value of the fund's net assets prepared each 
business day after the security-holder makes its investment commitment 
or redemption request to the fund, if the fund's investments are 
limited to the following:
    (A) Securities that are issued by, or unconditionally guaranteed as 
to the timely payment of principal and interest by, the U.S. Department 
of the Treasury, and immediately-available cash funds denominated in 
U.S. dollars; or
    (B) Securities denominated in a common currency and issued by, or 
fully guaranteed as to the payment of principal and interest by, the 
European Central Bank or a sovereign entity that is assigned no higher 
than a 20 percent risk weight under the capital rules applicable to 
swap dealers subject to regulation by a prudential regulator, and 
immediately-available cash funds denominated in the same currency; or
* * * * *
    (3) * * *
    (i) * * *
    (B) The discounts set forth in the following table:

[[Page 53428]]



                    Standardized Haircut Schedule \1\
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Cash in same currency as swap obligation................             0.0
Eligible government and related debt (e.g., central                  0.5
 bank, multilateral development bank, GSE securities
 identified in paragraph (a)(1)(v) of this section):
 Residual maturity less than one-year...................
Eligible government and related debt (e.g., central                  2.0
 bank, multilateral development bank, GSE securities
 identified in paragraph (a)(1)(v) of this section):
 Residual maturity between one and five years...........
Eligible government and related debt (e.g., central                  4.0
 bank, multilateral development bank, GSE securities
 identified in paragraph (a)(1)(v) of this section):
 Residual maturity greater than five years..............
Eligible corporate debt (including eligible GSE debt                 1.0
 securities not identified in paragraph (a)(1)(v) of
 this section): Residual maturity less than one-year....
Eligible corporate debt (including eligible GSE debt                 4.0
 securities not identified in paragraph (a)(1)(v) of
 this section): Residual maturity between one and five
 years..................................................
Eligible corporate debt (including eligible GSE debt                 8.0
 securities not identified in paragraph (a)(1)(v) of
 this section): Residual maturity greater than five
 years..................................................
Equities included in S&P 500 or related index...........            15.0
Equities included in S&P 1500 Composite or related index            25.0
 but not S&P 500 or related index.......................
Gold....................................................            15.0
Additional (additive) haircut on asset in which the                  8.0
 currency of the swap obligation differs from that of
 the collateral asset...................................
------------------------------------------------------------------------
\1\ The discount to be applied to an eligible investment fund is the
  weighted average discount on all assets within the eligible investment
  fund at the end of the prior month. The weights to be applied in the
  weighted average should be calculated as a fraction of the fund's
  total market value that is invested in each asset with a given
  discount amount. As an example, an eligible investment fund that is
  comprised solely of $100 of 91 day Treasury bills and $100 of 3 year
  U.S. Treasury bonds would receive a discount of (100/200) * 0.5 + (100/
  200) * 2.0 = (0.5) * 0.5 + (0.5) * 2.0 = 1.25 percent.

* * * * *

    Issued in Washington, DC, on July 31, 2023, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

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

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

Appendix 1--Voting Summary

    On this matter, Chairman Behnam and Commissioners Mersinger and 
Pham voted in the affirmative. Commissioner Goldsmith Romero voted 
in the negative. Commissioner Johnson voted to concur.

Appendix 2--Statement of Chairman Rostin Behnam

    Today the Commission considered an eligible seeded funds 
proposal and a money market funds proposal within a notice of 
proposed rulemaking on margin requirements for uncleared swaps for 
swap dealers (SDs) and major swap participants (MSPs) for which 
there is no prudential regulator. The proposal would amend the 
CFTC's margin rule for SDs and MSPs, as promulgated in 2016, to 
incorporate two recommendations in the 2020 report to the CFTC's 
Global Markets Advisory Committee (GMAC) by the Subcommittee on 
Margin Requirements for Non-Cleared Swaps (the ``GMAC Subcommittee 
Report'').\1\
---------------------------------------------------------------------------

    \1\ See Recommendations to Improve Scoping and Implementation of 
Initial Margin Requirements for Non-Cleared Swaps, Report to the 
CFTC's Global Markets Advisory Committee by the Subcommittee on 
Margin Requirements for Non-Cleared Swaps (May 2020), https://www.cftc.gov/media/3886/GMAC_051920MarginSubcommitteeReport/download.
---------------------------------------------------------------------------

    The seeded funds proposal would revise the definition of 
``margin affiliate'' in Commission Regulation 23.151 to provide that 
certain investment funds that receive all of their start-up capital, 
or a portion thereof, from a sponsor entity would be deemed not to 
have any margin affiliates for the purposes of calculating certain 
thresholds that trigger the requirement to exchange initial margin 
for uncleared swaps. This proposed amendment would effectively 
relieve SDs and MSPs from the requirement to post and collect 
initial margin with a limited number of eligible seeded funds for 
their uncleared swaps for a period of three years from the date on 
which the eligible seeded fund's asset manager first begins making 
investments on behalf of the fund. While today's proposal builds 
upon the GMAC Subcommittee Report's 2020 recommendation, the 
proposal today also sets forth eight carefully calibrated conditions 
to ensure that only the investment funds that were intended to be 
targeted by the GMAC Subcommittee Report's recommendations are 
eligible to qualify for the seeded funds exception.
    I support today's seeded funds proposal as it is consistent with 
the CFTC's margin rule risk-based approach of imposing margin 
requirements that are commensurate with the risk of uncleared swaps 
entered into by SDs and MSPs; is appropriately calibrated to 
acknowledge the operational challenges for start-up funds; and 
supports international harmonization as the approach is consistent 
with the BCBS-IOSCO Framework.
    The money market funds proposal would eliminate the current 
provision in Commission Regulation 23.156(a)(1)(ix)(C) that 
disqualifies certain securities issued by certain money market funds 
(MMFs) from being used as eligible initial margin collateral. This 
would expand the scope of assets that qualify as eligible 
collateral. I support today's MMF proposal as it would remove a 
restriction that has unintentionally and severely restricted the use 
of securities of MMF and similar assets that transfer their assets 
through repurchase and similar arrangements. According to the GMAC 
Subcommittee Report, the impact of the restriction was that only 
securities of four U.S. MMFs would meet the requirements to be used 
as eligible collateral.\2\
---------------------------------------------------------------------------

    \2\ Id. at 24.
---------------------------------------------------------------------------

    Lastly, the proposal would also add a footnote that was 
inadvertently omitted for the haircut schedule in Regulation 
23.156(a)(3)(i)(B), when the Commission originally promulgated the 
margin rule in 2016.
    I look forward to receiving public comments on this proposal.

Appendix 3--Dissenting Statement of Commissioner Christy Goldsmith 
Romero

    I cannot support the proposed rule.

Seeded Funds

    I am concerned that the proposed exception to initial margin 
requirements for seeded funds rolls back Dodd-Frank Act reforms 
designed for financial stability. I cannot support the Commission 
changing our existing requirements--requirements that match U.S. 
banking regulator requirements. The proposed change would relieve 
initial margin requirements for uncleared swaps that are not 
prudentially regulated in certain affiliate transactions known as 
``seeded funds'' for three years.\1\
---------------------------------------------------------------------------

    \1\ Seeded funds are investment vehicles that receive start-up 
capital from a sponsor entity. Under the Commission's current 
regulatory requirements, a seeded fund is treated as a margin 
affiliate of a sponsor entity for the purpose of triggering the 
exchange of initial margin for uncleared swaps.
---------------------------------------------------------------------------

    The buildup of uncleared swap positions during the crisis 
exposed swap entities to losses, putting the financial system at 
risk. Dodd-Frank Act reforms required all uncleared swaps be subject 
to initial and variation margin requirements, whether prudentially 
regulated or not.\2\ Post Dodd-

[[Page 53429]]

Frank, the Commission and federal banking agencies adopted margin 
rules to protect the safety and soundness of swap entities and to 
guard against risks to financial stability.
---------------------------------------------------------------------------

    \2\ 7 U.S.C. 6s(e)(2)--Registration and regulation of swap 
dealers and major swap participants. Dodd Frank Act reforms provide 
that:
    (A) Swap dealers and major swap participants that are banks. The 
prudential regulators, in consultation with the Commission and the 
Securities and Exchange Commission, shall jointly adopt rules for 
swap dealers and major swap participants, with respect to their 
activities as a swap dealer or major swap participant, for which 
there is a prudential regulator imposing--(i) capital requirements; 
and (ii) both initial and variation margin requirements on all swaps 
that are not cleared by a registered derivatives clearing 
organizations.
    (B) Swap dealers and major swap participants that are not banks. 
The Commission shall adopt rules for swap dealers and major swap 
participants, with respect to their activities as a swap dealer or 
major swap participant, for which there is not a prudential 
regulator imposing--(i) capital requirements; and (ii) both initial 
and variation margin requirements on all swaps that are not cleared 
by a registered derivatives clearing organization (emphasis added). 
See Section 4s(e) of the Commodity Exchange Act.
---------------------------------------------------------------------------

    Dodd Frank Act reforms in the Commodity Exchange Act required 
that to offset the greater risk to the swap dealer or major swap 
participant and the financial system arising from the use of 
uncleared swaps, the Commission's margin requirements for uncleared 
swaps must (i) help ensure the safety and soundness of the swap 
dealer or major swap participant and (ii) be appropriate for the 
risk associated with the uncleared swaps held by the swap dealer or 
major swap participant.\3\
---------------------------------------------------------------------------

    \3\ 7 U.S C. 6s(e)(3)(A); CEA section 4s(e)(3)(A).
---------------------------------------------------------------------------

    I do not find that standard to be met in the proposed rule. Post 
Dodd-Frank, regulators recognized that derivatives transactions with 
affiliated parties can pose important risks that necessitate margin 
requirements. The Commission and banking regulators adopted the same 
definition of ``margin affiliate'' to cover both swaps that are, and 
are not, prudentially regulated. The proposed rule would depart from 
that definition where there is not a prudential regulator.
    The proposed rule raises concerns about the prudence of the 
Commission having two different definitions of ``margin affiliate'' 
for swap dealers, particularly when the majority of swap dealers (55 
of 106) are prudentially regulated, and they account for a 
substantial majority of swap activity. In a regulatory system where 
jurisdiction is shared with other U.S. market and banking 
regulators, it is important that the Commission maintain regulatory 
harmonization with U.S. regulators where we can. Otherwise, we risk 
a race to the bottom.
    The proposed rule discusses the importance of harmonization with 
global regulation but not U.S. banking regulations. And this 
proposed rule came from recommendations by the Global Markets 
Advisory Committee in 2020 (during the last Administration). The 
majority of the nonbank swap dealers are U.S.-domiciled (27 of 51). 
Also, importantly, the GMAC public interest representative from 
Better Markets at that time did not vote for these recommendations.
    I have serious concerns with potentially increasing risks 
related to uncleared swaps, including risks to financial stability 
by adopting a definition that harmonizes with global regulation, but 
not domestic banking regulation. U.S. banking regulators are aware 
of the Basel Committee on Banking Supervision and the International 
Organization for Securities Commission's ``International Margin 
Framework,'' but have chosen not to change their definition of 
``margin affiliate.''
    Likewise, I do not support the Commission changing our existing 
definition. I appreciate that Commission staff have tried to put 
constraints on this initial margin exception.\4\ The constraints are 
not enough in my view to break from U.S. banking regulators on the 
definition of margin affiliate. I am concerned that the effect of 
this proposal would be to roll back Dodd-Frank Act reforms. Given 
that those reforms were designed to promote the safety and soundness 
of U.S. financial institutions and our financial system, I am 
concerned that this change could produce unacceptable levels of 
risk, possibly even systemic risk and harm to financial stability. 
We do not know the full consequences of this change. While it may 
save costs for these start-up funds, we cannot increase any risk to 
financial stability of institutions or our financial system.
---------------------------------------------------------------------------

    \4\ For example, the exception requires that the seeded fund 
``is not a securitization vehicle.'' Should the Commission move 
forward with this proposed rule, I have other concerns that I invite 
public comment. This includes whether the proposed 3-year exception 
period is too long a runway. Also, whether the exemption is meant to 
apply to private funds? Private funds are part of a ``shadow banking 
system'', and unlike banks, are not fully subject to risk, 
liquidity, or capital restrictions. Private funds and shadow banking 
contributed to the 2008 financial crisis, which has grown larger 
since the crisis, and continues to pose risks to American investors, 
pensioners, and the U.S. financial system.
---------------------------------------------------------------------------

    Therefore, I must dissent.

Money Market Funds

    I have concerns about the Commission's proposal to expand money 
market funds that could be used for eligible non-cash collateral for 
swap dealers for initial margin. The proposal contemplates 
eliminating the restriction on the money market fund's use of 
repurchase agreements or similar agreements.
    In Dodd-Frank Act reforms contained in the Commodity Exchange 
Act section 4s(e)(3)(C), Congress provided that ``[i]n prescribing 
margin requirements,'' the Commission ``shall permit the use of 
noncash collateral'' as ``determine[d] to be consistent with--
preserving the financial integrity of markets trading'' non-cleared 
derivatives and ``preserving the stability of the United States 
financial system.'' I have not seen an analysis that such standard 
is met. I am very interested in public comment about whether that 
standard is met.
    We must not forget the lessons of the 2008 financial crises, 
including when the Reserve Primary Fund ``broke the buck'', and the 
role it had in the 2008 crisis. Money market funds are designed to 
give retail customers and institutional investors a market-based 
instrument that is highly liquid with lower risk and limited 
volatility. For many Americans, money market funds often appear on 
their bank app, right next to checking and savings accounts, as they 
are financial vehicles often thought of as similar to a bank 
account. That's why it came as such a shock when the Reserve Primary 
Fund broke the buck.
    I was counsel to the SEC Chairman when the Reserve Primary Fund 
broke the buck, which contributed to Lehman failing, and short-term 
lending drying up. Repurchase agreements also contributed to 
liquidity problems at financial institutions. In my role as the 
Special Inspector General for TARP, I reported to Congress about the 
interconnectedness of these events. These experiences show how 
interconnected money market funds and repurchase agreements are to 
the overall stability of our financial institutions and the broader 
financial system.
    As a result, the SEC and other regulators implemented reforms to 
make money market funds more stable and repurchase agreements more 
transparent. Despite these reforms, in March 2020, during the Covid-
19 pandemic, money market funds and the short-term funding markets 
experienced stress when institutional investors withdrew cash from 
money market funds to avoid liquidity fees and gates, safeguards 
that were part of post-crisis reforms.
    With 2008 and 2020 as the backdrop, the Commission must be 
careful how it approaches changes to our regulations that impact 
money market funds and the short-term funding markets. These are 
highly interconnected markets. Changes in one can impact changes in 
the other markets. Before we take any action, it will be critical 
for the Commission to determine that the change is ``consistent with 
preserving the financial integrity of markets trading'' non-cleared 
derivatives and ``preserving the stability of the United States 
financial system.'' I look forward to public comment on whether the 
rule meets this standard.
    I thank the staff for their work. I am also grateful to the 
former GMAC members. It must be remembered that advisory committees' 
role is to advise the Commission. While I may not agree with their 
recommendations, I am grateful for their service.

Appendix 4--Statement of Commissioner Caroline D. Pham

    I support the notice of proposed rulemaking on margin 
requirements for uncleared swaps for swap dealers and major swap 
participants (Seeded Funds and MMFs Proposal) because it provides a 
solution for seeded funds, and it supports greater liquidity by 
providing more flexibility for money market and similar funds that 
use repos, among other things. I thank the team in the Market 
Participants Division for their dedication to ensuring the 
Commission's uncleared swaps rules do not unduly burden market 
participants, and for proposing workable solutions to challenges 
that arose during an implementation period. I specifically commend 
Amanda Olear, Tom Smith, Warren Gorlick, Rafael Martinez, and Liliya 
Bozhanova for their work on the proposal.
    This Seeded Funds and MMFs Proposal, looking at the big picture, 
actually benefits

[[Page 53430]]

the end investors who will be able to more efficiently deploy 
capital, access liquidity, and provide investment returns at less 
cost to funds, such as pension plans that manage Americans' hard-
earned savings. The key public interest here is providing more 
liquidity to markets. We have seen over the past several years many 
recent market stresses, which seem to occur with greater and greater 
frequency and high volatility, low liquidity market conditions. 
Where there is shallow depth of liquidity, costs for end users, 
customers, and investors go up, and access to markets is restricted. 
When there is not enough liquidity, risks to financial stability 
increase. The most significant and systemic financial crises in 
recent years, including the 2008 financial crisis, were caused by a 
critical lack of liquidity in markets, and our post-crisis reforms 
have traded less credit risk for more liquidity risk.
    Simply put, less liquidity means higher costs and more risk. And 
risk to not only financial stability, but also systemic risk. In 
light of ongoing capital reforms, it is incumbent upon me to remind 
everyone that of course markets are interconnected, and that's why 
we need to take a holistic approach to market structure with a full 
understanding of the impact of various regulatory regimes, 
particularly the impact of prudential requirements on the ability of 
markets to function well, and especially the ability for market 
participants to access markets for the benefit of American savers.
    As an advocate for good policy that enables growth, progress, 
and access to markets, I strongly support workable solutions to any 
problems with our rules. While regulations play a critical role in 
safeguarding our markets, we must acknowledge that issues--ranging 
from technical \1\ to policy--must be continuously evaluated for 
regulations to remain both effective and relevant in an ever-
changing landscape.
---------------------------------------------------------------------------

    \1\ Statement of Commissioner Caroline D. Pham on Staff Letter 
Regarding ADM Investor Services, Inc., U.S. Commodity Futures 
Trading Commission (June 16, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement061623.
---------------------------------------------------------------------------

    The first step in evaluating our regulations is to conduct 
thorough assessments and identify areas for improvement. 
Collaboration and open dialogue are key to formulating well-rounded 
solutions that consider the interests of all impacted. That is why I 
am grateful for the efforts of former Commissioner Dawn Stump, who, 
as sponsor of the Global Markets Advisory Committee (GMAC), 
established the GMAC's Subcommittee on Margin Requirements for Non-
Cleared Swaps to evaluate the CFTC's uncleared margin rules.\2\ The 
subcommittee's thorough assessment, engagement with stakeholders, 
and practical, flexible recommendations have given staff a 
comprehensive roadmap to follow in implementing fixes that minimize 
adverse impacts on market participants. I appreciate that staff is 
continuing \3\ to try to adopt the recommendations that came out of 
the GMAC subcommittee.
---------------------------------------------------------------------------

    \2\ CFTC Commissioner Stump Announces New GMAC Subcommittee on 
Margin Requirements for Non-Cleared Swaps, U.S. Commodity Futures 
Trading Commission (Oct. 28, 2019), https://www.cftc.gov/PressRoom/PressReleases/8064-19.
    \3\ In 2020, the Commission adopted rules that addressed 
different GMAC recommendations on the uncleared margin rules. See 
Statement of Commissioner Dawn D. Stump in Support of Final 
Uncleared Margin Rules Based on Recommendations of Global Markets 
Advisory Committee, U.S. Commodity Futures Trading Commission (Dec. 
8, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/stumpstatement120820. Commissioner Mersinger has advocated for 
adopting additional recommendations. See Dissenting Statement of 
Commissioner Summer K. Mersinger Regarding CFTC's Regulatory Agenda, 
U.S. Commodity Futures Trading Commission (Jan. 9, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement010923. 
Commissioner Pham now sponsors the GMAC. See Commissioner Pham 
Announces CFTC Global Markets Advisory Committee Meeting on July 17, 
U.S. Commodity Futures Trading Commission (July 17, 2023), https://www.cftc.gov/PressRoom/Events/opaeventgmac071723.
---------------------------------------------------------------------------

    The adoption of margin requirements for uncleared swaps was a 
key pillar of the 2008 financial crisis reform.\4\ Today, we 
continue to appreciate that the requirements help ensure the 
exchange of margin between large, systemic, and interconnected 
financial institutions for their uncleared swap transactions.
---------------------------------------------------------------------------

    \4\ G20 Pittsburgh Summit (Sept. 24-25, 2009).
---------------------------------------------------------------------------

    Consistent with the G20 commitments, the Commodity Exchange Act 
(CEA or Act) \5\ requires that the Commission adopt rules 
establishing margin requirements for all uncleared swaps that are 
entered into by a swap dealer or major swap participant for which 
there is no prudential regulator. These requirements help ensure the 
safety and soundness of the swap dealer or major swap participant. 
In 2016, the Commission adopted Regulations 23.150 through 23.161 to 
implement section 4s(e).\6\
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    \5\ 7 U.S.C. 6s(e) (capital and margin requirements).
    \6\ See Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (effective 
April 1, 2016 and codified in part 23 of the Commission's 
regulations). 17 CFR 23.150--23.159, and 23.161. In May 2016, the 
Commission added Regulation 23.160 (17 CFR 23.160), providing rules 
on its cross-border application. See Margin Requirements for 
Uncleared Swaps for Swap Dealers and Major Swap Participants--Cross-
Border Application of the Margin Requirements, 81 FR 34818 (May 31, 
2016).
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    Currently, a fund with material swaps exposure will fall within 
the scope of the initial margin requirements if it undertakes an 
uncleared swap with a covered swap entity. The covered swap entity 
and the fund will not be required to post and collect initial margin 
for their uncleared swaps until the initial margin threshold amount 
of $50 million has been exceeded. The initial margin threshold 
amount will be calculated based on the credit exposure from 
uncleared swaps between the covered swap entity and its margin 
affiliates on the one hand, and the fund and its margin affiliates 
on the other.\7\ As discussed above, this requirement has unduly 
burdened certain funds.
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    \7\ Commission Regulation 23.151 defines the term ``IM threshold 
amount'' to mean an aggregate credit exposure of $50 million 
resulting from all uncleared swaps between an SD and its margin 
affiliates (or an MSP and its margin affiliates) on the one hand, 
and the SD's (or MSP's) counterparty and its margin affiliates on 
the other. See 17 CFR 23.151.
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    Initial margin requirements may be satisfied with only certain 
types of collateral.\8\ Under Regulation 23.156(a)(1)(ix), the 
securities of money market and similar funds \9\ may qualify as 
eligible collateral if the investments of the fund are limited to 
securities that are issued by, or unconditionally guaranteed as to 
the timely payment of principal and interest by, the U.S. Department 
of Treasury, and immediately-available cash denominated in U.S. 
dollars; \10\ or to securities denominated in a common currency and 
issued by, or fully guaranteed as to the payment of principal and 
interest by, the European Central Bank, or a sovereign entity that 
is assigned no higher than a 20 percent risk weight under the 
capital rules applicable to swap dealers subject to regulation by a 
prudential regulator, and immediately-available cash denominated in 
the same currency.\11\ Also, the asset managers of the money market 
and similar fund may not transfer the assets of the fund through 
securities lending, securities borrowing, repurchase agreements, or 
any other means that involve the fund having rights to acquire the 
same or similar assets from the transferee.\12\ As discussed above, 
this requirement has unintentionally restricted funds.
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    \8\ Commission Regulation 23.156(a)(1) sets forth the types of 
collateral that CSEs can post or collect as IM with covered 
counterparties, including cash funds, certain securities issued by 
the U.S. government or other sovereign entities, certain publicly 
traded debt or equity securities, securities issued by money market 
and similar funds, and gold. 17 CFR 23.156(a)(1).
    \9\ Although the scope of the eligible pooled investment funds 
described in Commission Regulation 23.156(a)(1)(ix) does not fully 
coincide with the regulatory definition of money market funds in 
Rule 2a-7 under the Investment Company Act (17 CFR 270.2a-7), for 
simplicity purposes, these funds will be referred to as ``money 
market and similar funds.''
    \10\ 17 CFR 23.156(a)(1)(ix)(A).
    \11\ 17 CFR 23.156(a)(1)(ix)(B).
    \12\ 17 CFR 23.156(a)(1)(ix)(C).
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    Of course, compliance with significant reforms necessarily 
entails significant resource expenditure by regulated entities. 
Because of the vast number of counterparties impacted by the 
uncleared margin rules, swap dealers and major swap participants 
have been forced to engage in significant operational and 
technological development to avoid disruptions which would limit 
their options for taking on and hedging risk.\13\ As I have stated 
in the past, it is imperative that the Commission continuously--or 
at least periodically--evaluate its rules to ensure they are 
functioning as intended, and propose workable solutions to any 
challenges discovered to ensure that firms are able to effectively 
comply with our rules.\14\
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    \13\ Joint ISDA-SIFMA Report, Initial Margin for Non-Centrally 
Cleared Derivatives: Issues for 2019 and 2020, 3-4 (July 2018), 
https://www.isda.org/a/D6fEE/ISDA-SIFMA-Initial-Margin-Phase-in-White-Paper-July-2018.pdf.
    \14\ See, e.g., Statement of Commissioner Caroline D. Pham 
Regarding Reporting and Information Requirements for Derivatives 
Clearing Organizations, U.S. Commodity Futures Trading Commission 
(Nov. 10, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement111022b.

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[[Page 53431]]

    I encourage commenters to comment on whether the Commission's 
proposal sufficiently addresses the practical and operational 
issues, and whether it gives sufficient time for firms to implement 
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and comply with a final rule.

[FR Doc. 2023-16572 Filed 8-7-23; 8:45 am]
BILLING CODE 6351-01-P