Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants-Cross-Border Application of the Margin Requirements

Federal RegisterJul 14, 2015

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AC97

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants—Cross-Border Application of the Margin Requirements

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Proposed rule.

SUMMARY:

On October 3, 2014, the Commission published proposed regulations to implement section 4s(e) of the Commodity Exchange Act, as added by section 731 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). This provision requires the Commission to adopt initial and variation margin requirements for swap dealers (“SDs”) and major swap participants (“MSPs”) that do not have a Prudential Regulator (collectively, “CSEs” or “Covered Swap Entities”). In the October 3, 2014 proposing release, the Commission also issued an Advance Notice of Proposed Rulemaking (“ANPR”) requesting public comment on the cross-border application of such margin requirements. In this release, the Commission is proposing a rule for the application of the Commission's margin requirements to cross-border transactions.

DATES:

Comments must be received on or before September 14, 2015.

ADDRESSES:

You may submit comments, identified by RIN 3038-AC97 and “Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants—Cross-Border Application of the Margin Requirements” by any of the following methods:

•

CFTC Web site: http://comments.cftc.gov

. Follow the instructions for submitting comments through the Comments Online process on the Web site.

•

Mail:

Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

•

Hand Delivery/Courier:

Same as Mail, above.

•

Federal eRulemaking Portal: http://www.regulations.gov

. Follow the instructions for submitting comments.

Please submit your comments using only one of these methods.

All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to

http://www.cftc.gov

. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that may be exempt from disclosure under the Freedom of Information Act, a petition for confidential treatment of the exempt information may be submitted according to the established procedures in § 145.9 of the Commission's regulations, 17 CFR 145.9.

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

www.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 Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT:

Laura B. Badian, Assistant General Counsel, 202-418-5969,

lbadian@cftc.gov

, or Paul Schlichting, Assistant General Counsel, 202-418-5884,

pschlichting@cftc.gov

, Office of the General Counsel, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

A. Dodd-Frank Act and the Scope of This Rulemaking

B. Key Considerations in the Cross-Border Application of the Margin Regulations

C. Advance Notice of Proposed Rulemaking

1. Guidance Approach

2. Prudential Regulators' Approach

3. Entity-Level Approach

4. Comments on the Alternative Approaches Discussed in the ANPR

II. The Proposed Rule

A. Overview

1. Use of Hybrid, Firm-Wide Approach

B. Key Definitions

1. U.S. Person

2. Guarantees

3. Foreign Consolidated Subsidiaries

C. Applicability of Margin Requirements to Cross-Border Uncleared Swaps

1. Uncleared Swaps of U.S. CSEs or Non-U.S. CSEs Whose Obligations Under the Relevant Swap Are Guaranteed by a U.S. Person

2. Uncleared Swaps of Non-U.S. CSEs (Including Foreign Consolidated Subsidiaries) Whose Obligations Under the Relevant Swap Are Not Guaranteed by a U.S. Person

3. Exclusion for Uncleared Swaps of Non-U.S. CSEs Where Neither Counterparty's Obligations Under the Relevant Swap Are Guaranteed by a U.S. Person and Neither Counterparty Is a Foreign Consolidated Subsidiary Nor a U.S. Branch of a Non-U.S. CSE

4. U.S. Branches of Non-U.S. CSEs

D. Substituted Compliance

E. General Request for Comments

III. Related Matters

A. Regulatory Flexibility Act

B. Paperwork Reduction Act

C. Cost-Benefit Considerations

1. Introduction

2. Proposed Rule

a. U.S. Person

b. Availability of Substituted Compliance and Exclusion

i. Uncleared Swaps of U.S. CSEs or of Non-U.S. CSEs Whose Obligations Under the Relevant Swap Are Guaranteed by a U.S. Person

ii. Uncleared Swaps of Non-U.S. CSEs Whose Obligations Under the Relevant Swap Are Not Guaranteed by a U.S. Person

iii. Exclusion for Uncleared Swaps of Non-U.S. CSEs Where Neither Counterparty's Obligations Under the Relevant Swap Are Guaranteed by a U.S. Person and Neither Counterparty Is a Foreign Consolidated Subsidiary Nor a U.S. Branch of a Non-U.S. CSE

iv. Foreign Consolidated Subsidiaries

v. U.S. Branch of a Non-U.S. CSE

c. Alternatives

d. Comparability Determinations

3. Section 15(a) Factors

a. Protection of Market Participants and the Public

b. Efficiency, Competitiveness, and Financial Integrity

i. Efficiency

ii. Competitiveness

iii. Financial Integrity of Markets

c. Price Discovery

d. Sound Risk Management Practices

e. Other Public Interest Considerations

4. General Request for Comment

I. Background

A. Dodd-Frank Act and the Scope of This Rulemaking

In the fall of 2008, as massive losses spread throughout the financial system and many major financial institutions failed or narrowly escaped failure with government intervention, confidence in the financial system was replaced by panic, credit markets seized up, and trading in many markets grounded to a halt. The financial crisis revealed the vulnerability of the U.S. financial system to widespread systemic risk resulting from, among other things, excessive leverage, poor risk management practices at financial firms, and the lack of integrated supervisory oversight of financial institutions and

financial markets.

The financial crisis also highlighted the contagion risks of under-collateralized counterparty exposures in a highly interconnected financial system.

See

Financial Crisis Inquiry Commission, “The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States,” Jan. 2011, at xviii-xxv, 307-8, 363-5, 386,

available at http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

Id.

at xxiv-xxv, 49-51.

In the wake of the financial crisis, Congress enacted the provisions of the Commodity Exchange Act (“CEA”) relating to swaps in Title VII of the Dodd-Frank Act,

which establishes a comprehensive new regulatory framework for swaps. One of the cornerstones of this regulatory framework is the reduction of systemic risk to the U.S. financial system through the establishment of margin requirements for uncleared swaps.

Pub. L. 111-203, 124 Stat. 1376 (2010).

The Financial Crisis Inquiry Commission stated in its report that the failure of American International Group, Inc. (“AIG”) was possible because the sweeping deregulation of over-the-counter derivatives (including credit default swaps) effectively eliminated federal and state regulation of these products, including capital and margin requirements that would have reduced the likelihood of AIG's failure.

Id.

at 352.

Section 731 of the Dodd-Frank Act added a new section 4s, which directs the Commission to adopt rules establishing minimum initial and variation margin requirements for SDs and MSPs on all swaps that are not cleared by a registered derivatives clearing organization. Section 4s(e) further provides that the margin requirements must: (i) Help ensure the safety and soundness of the SD or MSP; and (ii) be appropriate for the risk associated with the uncleared swaps held as a SD or MSP.

Section 4s(e)(3)(A)(i) of the CEA, 7 U.S.C. 6s(e)(3)(A)(i).

The Dodd-Frank Act also requires that the Prudential Regulators,

in consultation with the Commission and the Securities and Exchange Commission (“SEC”), adopt a joint margin rule. Accordingly, each SD and MSP for which there is a Prudential Regulator must meet margin requirements established by the applicable Prudential Regulator, and each SD and MSP for which there is no Prudential Regulator must comply with the Commission's margin requirements. Further, the Dodd-Frank Act requires that the Commission, the Prudential Regulators and the SEC, to the maximum extent practicable, establish and maintain comparable minimum capital and minimum initial and variation margin requirements, including the use of noncash collateral, for SDs and MSPs.

The term “Prudential Regulator” is defined in section 1a(39) of the CEA, as amended by section 721 of the Dodd-Frank Act. This definition includes the Board of Governors of the Federal Reserve System (“FRB”); the Office of the Comptroller of the Currency (“OCC”); the Federal Deposit Insurance Corporation (“FDIC”); the Farm Credit Administration; and the Federal Housing Finance Agency.

See

section 4s(e)(3)(D)(ii) of the CEA, 7 U.S.C. 6s(e)(3)(D)(ii), which was added by section 731 of the Dodd-Frank Act. The Prudential Regulators, the Commission, and the SEC are also required to consult periodically (but not less frequently than annually) on minimum capital requirements and minimum initial and variation margin requirements.

See

section 4s(e)(3)(D)(i) of the CEA, 7 U.S.C. 6s(e)(3)(D)(i).

In determining whether, and the extent to which, section 4s(e) should apply to a CSE's swap activities outside the United States, the Commission focused on the text and objectives of that provision together with the language of section 2(i) of the CEA.

As discussed further below, the primary reason for the margin requirement is to protect CSEs in the event of a counterparty default. That is, in the event of a default by a counterparty, margin protects the CSE by allowing it to absorb the losses using collateral provided by the defaulting entity and to continue to meet all of its obligations. In addition, margin functions as a risk management tool by limiting the amount of leverage that a CSE can incur. Specifically, by requiring a CSE to post margin to its counterparties, the margin requirements ensure that a CSE has adequate eligible collateral to enter into an uncleared swap.

See

7 U.S.C. 2(i). Section 2(i) of the CEA states that the provisions of the Act relating to swaps that were enacted by the Wall Street Transparency and Accountability Act of 2010 (including any rule prescribed or regulation promulgated under that Act), shall not apply to activities outside the United States unless those activities—(1) have a direct and significant connection with activities in, or effect on, commerce of the United States; or (2) contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of the Act [CEA] that was enacted by the Wall Street Transparency and Accountability Act of 2010.

Risk arising from uncleared swaps can potentially have a substantial adverse effect on any CSE—irrespective of its domicile or the domicile of its counterparties—and therefore the stability of the U.S. financial system because each CSE has a sufficient nexus to the U.S. financial system to require registration as a CSE. In light of the role of margin in ensuring the safety and soundness of CSEs and preserving the stability of the U.S. financial system, and consistent with section 2(i), section 4s(e)'s margin requirements extend to all CSEs on a cross-border basis.

Pursuant to its new section 4s(e) authority, on October 3, 2014, the Commission published reproposed regulations to implement initial and variation margin requirements on uncleared swaps (“Proposed Margin Rules”) for SDs and MSPs that do not have a Prudential Regulator (collectively, “CSEs” or “Covered Swap Entities”).

In the same release, the Commission also published an ANPR requesting public comment on the cross-border application of such margin requirements. In this release, the Commission is proposing a rule for the application of the Commission's uncleared swap margin requirements to cross-border transactions (referred to herein as the “Proposed Rule”).

The Commission's Proposed Margin Rules are set forth in proposed rules §§ 23.150 through 23.159 of part 23 of the Commission's regulations, proposed as 17 CFR 23.150 through 23.159.

See

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59898 (Oct. 3, 2014). In September 2014, the Prudential Regulators published proposed regulations to implement initial and variation margin requirements for SDs and MSPs that have a Prudential Regulator.

See

Margin and Capital Requirements for Covered Swap Entities, 79 FR 53748 (Sept. 24, 2014),

available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf

. The Commission originally proposed margin rules for public comment in 2011.

See

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 FR 23732 (April 28, 2011).

B. Key Considerations in the Cross-Border Application of the Margin Regulations

The swaps market is global in nature. Swaps are routinely entered into between counterparties located in different jurisdictions. Dealers and other market participants conduct their swaps business through subsidiaries, affiliates, and branches dispersed across geographical boundaries. The global and highly interconnected nature of the swaps market heightens the potential that risks assumed by a firm overseas can be transmitted across national borders to cause or contribute to substantial losses to U.S. persons and threaten the stability of the entire U.S. financial system. Therefore, it is important that margin requirements for uncleared swaps apply on a cross-border basis in a manner that effectively addresses risks to U.S. persons and the U.S. financial system.

The Commission recognizes that non-U.S. CSEs and non-U.S. counterparties may be subject to comparable or different rules in their home jurisdictions. Conflicting and duplicative requirements between U.S. and foreign margin regimes could potentially lead to market inefficiencies

and regulatory arbitrage, as well as competitive disparities that undermine the relative position of U.S. CSEs and their counterparties. Therefore, it is essential that a cross-border margin framework takes into account the global nature of the swaps market and the supervisory interests of foreign regulators with respect to entities and transactions covered by the Commission's margin regime.

In developing the proposed cross-border framework, the Commission is guided by principles of international comity, which counsels due regard for the important interests of foreign sovereigns.

See

Restatement (Third) of Foreign Relations Law of the United States (the “Restatement”). The Restatement provides that even where a country has a basis for jurisdiction, it should not prescribe law with respect to a person or activity in another country when the exercise of such jurisdiction is unreasonable.

See

Restatement section 403(1). The reasonableness of such an exercise of jurisdiction, in turn, is to be determined by evaluating all relevant factors, including certain specifically enumerated factors where appropriate: (a) The link of the activity to the territory of the regulating state,

i.e.,

the extent to which the activity takes place within the territory, or has substantial, direct, and foreseeable effect upon or in the territory; (b) the connections, such as nationality, residence, or economic activity, between the regulating state and the persons principally responsible for the activity to be regulated, or between that state and those whom the regulation is designed to protect; (c) the character of the activity to be regulated, the importance of regulation to the regulating state, the extent to which other states regulate such activities, and the degree to which the desirability of such regulation is generally accepted; (d) the existence of justified expectations that might be protected or hurt by the regulation; (e) the importance of the regulation to the international political, legal, or economic system; (f) the extent to which the regulation is consistent with the traditions of the international system; (g) the extent to which another state may have an interest in regulating the activity; and (h) the likelihood of conflict with regulation by another state.

See

Restatement section 403(2).

Notably, the Restatement does not preclude concurrent regulation by multiple jurisdictions. However, where concurrent jurisdiction by two or more jurisdictions creates conflict, the Restatement recommends that each country evaluate its own interests in exercising jurisdiction and those of the other jurisdiction, and where possible, to consult with each other.

In granting the Commission new authorities under the Dodd-Frank Act, Congress also reaffirmed and called for coordination and cooperation among domestic and foreign regulators. Section 752(a) of the Dodd-Frank Act requires the Commission, the Prudential Regulators, and the SEC to consult and coordinate with foreign regulatory authorities on the “establishment of consistent international standards” with respect to the regulation of swaps.

In this regard, the Commission recognizes that efforts are underway by other domestic and foreign regulators to implement margin reform and that regulatory harmonization and coordination are indispensable to achieving a workable cross-border framework.

15 U.S.C. 8325(a) (added by section 752 of the Dodd-Frank Act). Also, before commencing any rulemaking or issuing an order regarding swaps, the Commission must consult and coordinate to the extent possible with the SEC and the Prudential Regulators for the purposes of assuring regulatory consistency and comparability, to the extent possible.

See

15 U.S.C. 8302(a)(1) (added by section 712(a)(1) of the Dodd-Frank Act).

In developing a cross-border framework for margin regulations, the Commission aims to strike the proper balance among these sometimes competing considerations. To that end, the Commission has consulted and coordinated with the Prudential Regulators and foreign regulatory authorities. Commission staff worked closely with the staff of the Prudential Regulators, and the Proposed Rule is closely aligned with the cross-border proposal that was published by the Prudential Regulators in September 2014. In addition, Commission staff has participated in numerous bilateral and multilateral discussions with foreign regulatory authorities addressing national efforts to implement margin reform and the possibility of conflicts and overlaps between U.S. and foreign regulatory regimes. Recognizing that systemic risks arising from global and interconnected swaps market must be addressed through coordinated regulatory requirements for margin across international jurisdictions, the Commission has played an active role in encouraging international harmonization and coordination of margin requirements for uncleared swaps.

The Commission notes that its collaboration with the Basel Committee on Banking Supervision (“BCBS”) and the Board of the International Organization of Securities Commissions (“IOSCO”) as a member of the Working Group on Margining Requirements (“WGMR”) resulted in the issuance of a final margin policy framework for non-cleared, bilateral derivatives in September 2013 (referred to herein as the “BCBS-IOSCO framework”).

Individual regulatory authorities across major jurisdictions (including the EU, Japan, and the United States) have since started to develop their own margin rules.

The Proposed Rule is consistent with the standards in the final BCBS-IOSCO framework, and we have been in continuous communication with regulators in the EU and Japan as we developed our cross-border margin proposal. Although at this time foreign jurisdictions do not yet have their margin regimes in place, the Commission has participated in ongoing, collaborative discussions with regulatory authorities in the EU and Japan regarding their cross-border approaches to the margin rules, including the anticipated scope of application of margin requirements in their jurisdiction to cross-border swaps, their plans for recognizing foreign margin regimes, and their anticipated timelines.

See

Margin Requirements for Non-centrally Cleared Derivatives (Sept. 2013),

available at http://www.bis.org/publ/bcbs261.pdf

See

European Banking Authority, European Securities and Markets Authority, and European Insurance and Occupational Pensions Authority, Consultation Paper on draft regulatory technical standards on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012 (for the European Market Infrastructure Regulation) (April 14, 2014),

available at https://www.eba.europa.eu/documents/10180/655149/JC+CP+2014+03+%28CP+on+risk+mitigation+for+OTC+derivatives%29.pdf

, and Second Consultation Paper on draft regulatory technical standards on risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP under Article 11(15) of Regulation (EU) No 648/2012 (for the European Market Infrastructure Regulation) (Jun. 10, 2015),

available at https://www.eba.europa.eu/documents/10180/1106136/JC-CP-2015-002+JC+CP+on+Risk+Management+Techniques+for+OTC+derivatives+.pdf

; Financial Services Agency of Japan, draft amendments to the “Cabinet Office Ordinance on Financial Instruments Business” and “Comprehensive Guidelines for Supervision” with regard to margin requirements for non-centrally cleared derivatives (July 3, 2014). Available in Japanese at

http://www.fsa.go.jp/news/26/syouken/20140703-3.html

The Commission believes that its ongoing bilateral and multilateral discussions with foreign regulatory authorities in major jurisdictions (including the EU and Japan) are critical to fostering international cooperation and harmonization and in reducing conflicting and duplicative regulatory requirements. The Commission expects that these discussions will continue as it finalizes and then implements its framework for the application of margin requirements to cross-border transactions, and as other jurisdictions develop their own respective approaches.

C. Advance Notice of Proposed Rulemaking

The ANPR sought public comment on three potential alternative approaches to the cross-border application of its margin requirements: (1) A transaction-level approach that is consistent with the Commission's cross-border guidance (“Guidance Approach”);

(2) an

approach that is consistent with the approach proposed by the Prudential Regulators (the “Prudential Regulators' Approach”);

and (3) an entity-level approach described in the ANPR (“Entity-Level Approach”). To provide context for the discussion of the Proposed Rule, the three alternative approaches discussed in the ANPR are summarized below.

Interpretative Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 2013) (“Guidance”). The Commission addressed, among other things, how the swap provisions in the Dodd-Frank Act (including the margin requirement for uncleared swaps) generally would apply on a cross-border basis. In this regard, the Commission stated that as a general policy matter it expected to apply the margin requirement as a transaction-level requirement.

See

Margin and Capital Requirements for Covered Swap Entities, 79 FR 53748 (Sept. 24, 2014),

available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf

1. Guidance Approach

Under the first alternative discussed in the ANPR, the Commission's margin requirements would be applied on a transaction-level basis, consistent with its cross-border Guidance.

The Commission stated in the Guidance that it would generally treat its margin requirements for uncleared swaps as a transaction-level requirement. Consistent with the rationale stated in the Guidance, under this transaction-level approach, the Commission's Proposed Margin Rules would apply to a U.S. SD/MSP (other than a foreign branch of a U.S. bank that is a SD/MSP) for all of its uncleared swaps, regardless of whether its counterparty is a U.S. person,

without substituted compliance.

See

Interpretative Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 2013).

The scope of the term “U.S. person” as used in the Cross-Border Guidance Approach and the Entity-Level Approach would be the same as under the Guidance.

See

Guidance at 45316-45317 for a summary of the Commission's interpretation of the term “U.S. person.”

However, under this approach the margin requirements would apply to a non-U.S. SD/MSP (whether or not it is a “guaranteed affiliate”

or an “affiliate conduit”

) only with respect to its uncleared swaps with a U.S. person counterparty and a non-U.S. counterparty that is a guaranteed affiliate or an affiliate conduit; the margin requirements would not apply to uncleared swaps with a non-U.S. person counterparty that is not a guaranteed affiliate or an affiliate conduit. Where the non-U.S. counterparty is a guaranteed affiliate or an affiliate conduit, the Commission would allow substituted compliance (

i.e.,

the non-U.S. SD/MSP would be permitted to comply with the margin requirements of its home country's regulator if the Commission determines that such requirements are comparable to the Commission's margin requirements).

Under the Guidance,

id.

at 45318, the term “guaranteed affiliate” refers to a non-U.S. person that is an affiliate of a U.S. person and that is guaranteed by a U.S. person. The scope of the term “guarantee” under the Guidance Approach and the Entity-Level Approach would be the same as under note 267 of the Guidance and accompanying text.

Under the approach discussed in the Guidance,

id.

at 45359, the factors that are relevant to the consideration of whether a person is an “affiliate conduit” include whether: (i) The non-U.S. person is majority-owned, directly or indirectly, by a U.S. person; (ii) the non-U.S. person controls, is controlled by, or is under common control with the U.S. person; (iii) the non-U.S. person, in the regular course of business, engages in swaps with non-U.S. third party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of, its U.S. affiliate(s), and enters into offsetting swaps or other arrangements with such U.S. affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its U.S. affiliates; and (iv) the financial results of the non-U.S. person are included in the consolidated financial statements of the U.S. person. Other facts and circumstances also may be relevant.

Where the uncleared swap is between a non-U.S. SD/MSP (whether or not it is a guaranteed affiliate or an affiliate conduit) and a foreign branch of a U.S. bank that is a SD/MSP, substituted compliance would be available if certain conditions are met.

2. Prudential Regulators' Approach

The second alternative discussed in the ANPR was the Prudential Regulators' Approach to cross-border application of the margin requirements.

Under the Prudential Regulators' proposal issued in September 2014 (the “September proposal”), the Prudential Regulators would apply the margin requirements to all uncleared swaps of CSEs under their supervision with a limited exception.

Specifically, the Prudential Regulators would not apply their margin requirements to any foreign non-cleared swap of a foreign covered swap entity.

This exclusion would only be available where neither the non-U.S. SD/MSP's nor the non-U.S. counterparty's obligations under the relevant swap are guaranteed by a U.S. person and neither party is “controlled” by a U.S. person. Under the “control” test used in the September proposal, the term “control” of another company means: (1) Ownership, control, or power to vote 25 percent or more of a class of voting securities of the company, directly or indirectly or acting through one or more other persons; (2) ownership or control of 25 percent or more of the total equity of the company, directly or indirectly or acting through one or more other persons; or (3) control in any manner of the election of a majority of the directors or trustees of the company.

See

section 9 of the proposed rule on Margin and Capital Requirements for Covered Swap Entities, 12 CFR part 237 (Sept. 24, 2014) for a complete description of the proposed cross-border application of margin requirements to swaps by the Prudential Regulators,

available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf

A summary of the Prudential Regulators' Approach to the cross-border application of their proposed margin requirements is included in the ANPR.

See

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59917(Oct. 3, 2014). For further information on the Prudential Regulators' Approach generally,

see

Margin and Capital Requirements for Covered Swap Entities, 79 FR 53748 (Sept. 24, 2014),

available at http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf

The Prudential Regulators define a “foreign covered swap entity” as any covered swap entity that is

not

(i) an entity organized under U.S. or State law, including a U.S. branch, agency, or subsidiary of a foreign bank; (ii) a branch or office of an entity organized under U.S. or State law; or (iii) an entity controlled by an entity organized under U.S. or State law. Under the Prudential Regulators' proposal, a “foreign non-cleared swap” would include any non-cleared swap of a foreign covered swap entity to which neither the counterparty nor any guarantor (on either side) is (i) an entity organized under U.S. or State law, including a U.S. branch, agency, or subsidiary of a foreign bank; (ii) a branch or office of an entity organized under U.S. or State law; or (iii) a covered swap entity controlled by an entity organized under U.S. or State law.

3. Entity-Level Approach

Under the third alternative discussed in the ANPR, margin requirements would be treated as an entity-level requirement. Under this Entity-Level Approach, the Commission would apply its proposed cross-border rules on margin on a firm-wide level—that is, to all uncleared swaps activities of a SD/MSP registered with the Commission, irrespective of whether the counterparty is a U.S. person, and with no possibility of exclusion. This approach takes into account that a non-U.S. SD/MSP entering into uncleared swaps faces counterparty credit risk regardless of where the swap is executed or whether the counterparty is a U.S. person.

That risk, if it leads to a default by the non-U.S. SD/MSP, could cause adverse consequences to its U.S. counterparties and the U.S. financial system. At the same time, in recognition of international comity, under this approach the Commission would consider, where appropriate, allowing CSEs to avail themselves of substituted compliance.

A summary of the Entity-Level Approach to the cross-border application of the Proposed Margin Rules is included in the ANPR.

See

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59917 (Oct. 3, 2014).

4. Comments on the Alternative Approaches Discussed in the ANPR

After publishing the ANPR, the Commission received comments that responded to the three alternative approaches.

There was no consensus

among commenters on a preferable approach.

Comment letters received in response to the ANPR may be found on the Commission's Web site

at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1528

Several commenters supported the Guidance Approach, with modifications, on the basis that margin rules should not apply to swaps between a foreign swap dealer and a foreign, non-guaranteed counterparty.

Some of these commenters suggested modifications to the availability of substituted compliance in the approach described in the Guidance.

For example, one commenter suggested that the Commission should treat non-U.S. margin requirements that conform to the BCBS-IOSCO framework as “essentially identical” to the Commission's regime and therefore accessible to all SDs as a means of complying with the Commission's margin requirements.

Another commenter suggested that the Commission modify its approach to substituted compliance outlined in the Guidance to allow substituted compliance for trades between U.S. persons and non-U.S. persons at such parties' mutual agreement.

In addition, some commenters that supported the Guidance Approach expressed the view that it should include an emerging markets exception.

Still another commenter argued that the Commission's Guidance correctly classified margin as a transaction-level rather than an entity-level requirement because, as with the clearing requirement, it is practicable to separate out transactions which are subject to the margin requirements and transactions which are not. This commenter stated that it would be an odd result if the Commission were to determine that the reach of the clearing requirement was not as great as that of the margin requirement, given that both requirements are intended to address counterparty credit risk.

See

International Swaps and Derivatives Association, Inc. (“ISDA”) (Nov. 24, 2014), Managed Funds Association (“MFA”) (Dec. 2, 2014), and INTL FCStone Inc. (Dec. 3, 2014).

See

ISDA (Nov. 24, 2014) and MFA (Dec. 2, 2014).

See

ISDA (Nov. 24, 2014).

See

MFA (Dec. 2, 2014).

See

ISDA (Nov. 24, 2014) and American Bankers Association (Nov. 25, 2014).

See

INTL FCStone Inc. (Dec. 3, 2014).

In contrast, some commenters argued against adopting the Guidance Approach. One commenter argued that the Guidance Approach has become a significant driver of conflict between U.S. and European regulatory requirements, and is undermining the goal of a globally coordinated regulatory framework.

Another commenter argued that this approach provides an excessively broad exemption for “non-guaranteed” foreign affiliates of U.S. banks, and that it is completely inappropriate to apply such an exemption to a crucial prudential requirement such as derivatives margin, which could pose major risks to the financial system by encouraging a race to the bottom among jurisdictions concerning margin requirements.

See

Alternative Investment Management Association (“AIMA”) (Dec. 2, 2014).

See

Americans for Financial Reform (“AFR”) (Dec. 2, 2014).

Other commenters generally supported the Entity-Level Approach, with modifications, on the basis that it captures all registrants' uncleared trades, regardless of the domicile of the registrant or the counterparty. These commenters generally favored this approach because, rather than exempting foreign to foreign transactions, it makes substituted compliance available for these transactions. One commenter stated that the Entity-Level Approach is the most appropriate choice because it provides market participants with more certainty in determining which jurisdiction's margin requirements apply. Further, this commenter stated that the Entity-Level Approach is consistent with how collateral is currently handled under a single master agreement and would mitigate legal uncertainty and operational errors that can arise if trades are subject to different margin requirements under the same master agreement.

Another commenter favored the Entity-Level Approach because it imposes prudential rules on all swaps activities of U.S.-headquartered firms, regardless of where the swap transaction is booked. This commenter stated that both the Prudential Regulators' Approach and the Guidance Approach provide a means for U.S. firms to escape U.S. oversight.

See

Securities Industry and Financial Markets Association, Asset Management Group (Nov. 24, 2014).

See

Public Citizen (Dec. 2, 2014).

Another commenter supported a cross-border approach that combines the Guidance Approach with certain enhancements found in the Entity-Level Approach. This commenter suggested that the Entity-Level Approach correctly subjects certain non-U.S. SDs and MSPs to U.S. regulations—at least with respect to variation margin and the collection of initial margin—where the Guidance Approach would permit substituted compliance to both parties in all respects. However, this commenter stated that the Entity-Level Approach also contains provisions that are significantly weaker than the Guidance Approach, such as making substituted compliance available to certain non-U.S. counterparties of U.S. SDs or MSPs. This commenter also expressed the view that the Guidance Approach correctly requires both counterparties to fully comply with U.S. rules in all transactions involving a U.S. SD or MSP.

See

Better Markets, Inc. (Dec. 2, 2014).

Commenters generally did not support the Prudential Regulators' Approach as their first choice, but two commenters thought it might be workable with modifications. The first commenter stated that if the Commission elects not to adopt the “Entity-Level” Approach, the Prudential Regulators' Approach might be workable, although this commenter had reservations about situations where different jurisdictions' regimes apply to the same transaction.

The other commenter argued that if its first choice, the Entity-Level Approach, is not adopted, the Prudential Regulators' Approach is greatly superior to the Guidance Approach, as it would apply margin requirements to foreign affiliates of U.S. banks that are classified as SDs or MSPs, regardless of whether such affiliates are nominally guaranteed. However, this commenter argued that the Prudential Regulators' Approach is flawed in that, like the Guidance Approach, it would exempt controlled foreign subsidiaries of U.S. banks that are not registered with the Commission as swaps entities.

See

AIMA (Dec. 2, 2014).

See

AFR (Dec. 2, 2014).

Two commenters specifically argued against the Prudential Regulators' Approach. One commenter contended that the Prudential Regulators' Approach provides limited clarity on how the “control” test should be applied, which means that foreign bank subsidiaries of U.S. banks cannot be certain whether they are subject to U.S. rules or foreign rules, and provides limited guidance as to how foreign covered swaps entities can determine whether a financial end-user counterparty is a U.S. entity or a foreign entity, in comparison to the clear “U.S. person” standard in the Guidance.

The other commenter is concerned with the Prudential Regulators' Approach as it relates to funds. This commenter stated that the Prudential Regulators' definition of “foreign non-cleared swap” effectively classifies funds organized outside of the United States, but with a U.S. principal place of business (

e.g.,

funds with a U.S.-based manager), as foreign entities. This

commenter stated that if funds with a U.S.-based manager are not considered “U.S. persons” subject to U.S. derivatives regulation, even though they have a substantial U.S. nexus, they would likely be required to margin their covered swaps in accordance with the foreign margin rules to which their non-U.S. CSE counterparty is subject, which would give too much deference to the foreign regulatory regime.

See

Committee on Capital Markets Regulation (Nov. 24, 2014).

See

MFA (Dec. 2, 2014).

One commenter asserted that both the Prudential Regulators' Approach and the Guidance Approach would appropriately exclude swaps between foreign-headquartered swap entities that are not controlled or guaranteed by a U.S. person and a non-U.S. person that is not guaranteed by a U.S. person from the scope of the margin rules, noting that if U.S. rules require the foreign-headquartered swap entity to post margin, this would create the potential for conflicts or inconsistencies with its home country margin requirements.

See

Institute of International Bankers (Nov. 24, 2014). This commenter also stated that these foreign swaps would have little effect on the U.S. financial system in the event of a default; further, under the Dodd-Frank Act, the risk to the United States of a default by the foreign-headquartered swap entity on its swaps with U.S. counterparties would already be mitigated by capital and margin collection requirements.

One commenter did not explicitly support any of the three approaches, noting that all of the proposals diverge in potentially significant ways from the final framework developed by BCBS and IOSCO and the OTC margin framework proposed in April 2014 by European supervisory agencies, and that none of the proposals embrace substituted compliance in a comprehensive manner that would address cross-border conflicts or inconsistencies that could arise. This commenter suggested that the Commission should use an outcomes-based approach that looks to whether giving full recognition to an equivalent foreign OTC margin framework as a whole would ensure an acceptable reduction of aggregate unmargined risk.

See

Securities Industry and Financial Markets Association (“SIFMA”) (Nov. 24, 2014).

II. The Proposed Rule

A. Overview

Based on, among other things, consideration of the comments to the ANPR and after close consultation with the Prudential Regulators, the Commission is proposing a rule for the application of the Commission's Proposed Margin Rules to cross-border transactions (as noted above, the proposed cross-border margin rule is referred to herein as the “Proposed Rule”). As discussed above, a cross-border framework for margin necessarily involves consideration of significant, and sometimes competing, legal and policy considerations, including the impact on market efficiency and competition.

The Commission, in developing the Proposed Rule, aims to balance these considerations to effectively address the risk posed to the safety and soundness of CSEs, while creating a workable framework that reduces the potential for undue market disruptions and promotes global harmonization. The Commission also recognizes that there are other possible approaches to applying the margin rules in the cross-border context. Accordingly, the Commission invites public comment regarding all aspects of the Proposed Rule.

The Commission's consideration of the costs and benefits associated with the Proposed Rule is discussed in section III.C. below.

1. Use of Hybrid, Firm-Wide Approach

The Proposed Rule is a combination of the entity- and transaction-level approaches and is closely aligned with the Prudential Regulators' Approach. In general, under the Proposed Rule, margin requirements are designed to address the risks to a CSE, as an entity, associated with its uncleared swaps (entity-level); nevertheless, certain uncleared swaps would be eligible for substituted compliance or excluded from the Commission's margin rules based on the counterparties' nexus to the United States relative to other jurisdictions (transaction-level).

Although margin is calculated for individual transactions or positions, and therefore, could be applied on a transaction-level basis, the Commission believes that as a general matter margin requirements should apply on a firm-wide basis, irrespective of the domicile of the counterparties or where the trade is executed. The primary reason for collecting margin from counterparties is to protect an entity in the event of a counterparty default. That is, in the event of a default by a counterparty, margin protects the non-defaulting counterparty by allowing it to absorb the losses using collateral provided by the defaulting entity and to continue to meet all of its obligations. In addition, margin functions as a risk management tool by limiting the amount of leverage that a CSE can incur. Specifically, by requiring a CSE to post margin to its counterparties, the margin requirements ensure that a CSE has adequate eligible collateral to enter into an uncleared swap. In this way, margin serves as a first line of defense to protect a CSE as a whole from risk arising from uncleared swaps.

The source of counterparty credit risk to a CSE, however, is not confined to its uncleared swaps with U.S. counterparties. Risk arising from uncleared swaps involving non-U.S. counterparties can potentially have a substantial adverse effect on a CSE—including a non-U.S. CSE—and therefore the stability of the U.S. financial system because CSEs have a sufficient nexus to the U.S. financial system to require registration as a CSE. Given the function of margin, the Commission believes that margin should be treated as an entity-level requirement in the cross-border context, and thus not take into account the domicile of CSE counterparties or where the trade is executed.

The Commission also believes that treating margin as an entity-level requirement is consistent with the role of margin in a CSE's overall risk management program. Margin, by design, is complementary to capital.

That is, margin and capital requirements serve different but equally important risk mitigation functions that are best implemented at the entity-level. Unlike margin, capital is difficult to rapidly adjust in response to changing risk exposures; thus, capital can be viewed as a backstop, in the event that the margin is not enough to cover all of the losses that resulted from the counterparty default. Standing alone, either capital or margin may not be enough to prevent a CSE from failing, but together, they are designed to reduce the probability of default by the CSE and limit the amount of leverage that can be undertaken by CSEs (and other market participants), which ultimately mitigates the possibility of a systemic event.

See

BCBS and IOSCO, Margin requirements for non-centrally cleared derivatives (Sept. 2013) at 3,

available at http://www.bis.org/publ/bcbs261.pdf

Section 4s(e) of the CEA, 7 U.S.C. 6s(e), directs the Commission to adopt capital requirements for SDs and MSPs. The Commission proposed capital rules in 2011.

See

Capital Requirements for Swap Dealers and Major Swap Participants, Notice of proposed rulemaking, 76 FR 27802 (May 12, 2011).

At the same time, the Commission recognizes that a CSE's uncleared swaps with a particular counterparty may implicate the supervisory interests of foreign regulators and it is important to calibrate the cross-border application of the margin requirements to mitigate, to the extent possible and consistent with the Commission's regulatory interests, the potential for conflicts or duplication with other jurisdictions. Therefore, the Proposed Rule, while applying margin

requirements to a CSE as a whole, also permits a U.S. CSE or non-U.S. CSE to avail itself of substituted compliance (to the extent applicable under the Proposed Rule) by complying with the margin requirements of the relevant foreign jurisdiction in lieu of compliance with the Commission's margin requirements, provided that the Commission finds that such jurisdiction's margin requirements are comparable to the Commission's margin requirements, as further discussed in section II.D. below.

In addition, the Proposed Rule provides for a limited exclusion of uncleared swaps between non-U.S. CSEs and non-U.S. counterparties (the “Exclusion”) in certain circumstances. The Commission recognizes that the supervisory interest of foreign regulators in certain uncleared swaps between non-U.S. CSEs and their non-U.S. counterparties may equal or exceed the supervisory interest of the United States. The Proposed Rule takes into account the interests of other jurisdictions and balances those interests with the supervisory interests of the United States in order to calibrate the application of margin rules to non-U.S. CSEs' swaps with non-U.S. counterparties. Accordingly, the Commission believes that it would be appropriate to not apply the Commission's margin rules to uncleared swaps meeting the criteria for the Exclusion, which is described in section II.C.3. below.

B. Key Definitions

The Proposed Rule uses certain key definitions to establish a proposed framework for the application of margin requirements in a cross-border context. Specifically, the Proposed Rule defines the terms “U.S. person,” “guarantee,” and “Foreign Consolidated Subsidiary” in order to identify those persons or transactions that, because of their substantial connection or impact on the U.S. market, raise or implicate greater supervisory interest relative to other CSEs, counterparties, and uncleared swaps that are subject to the Commission's margin rules. These definitions are discussed below.

1. U.S. Person

Generally speaking, the term “U.S. person” would be defined to include those individuals or entities whose activities have a significant nexus to the U.S. market by virtue of their organization or domicile in the United States or the depth of their connection to the U.S. market, even if domiciled or organized outside the United States. The proposed definition generally follows the traditional, territorial approach to defining a U.S. person, and the Commission believes that this definition provides an objective and clear basis for determining those individuals or entities that should be identified as a U.S. person.

In addition, the Commission notes that the proposed definition of “U.S. person” is similar to the definition of “U.S. person” used by the SEC in the context of cross-border security-based swaps. In the SEC's August 2014 release adopting rules and providing guidance regarding the application of Title VII of the Dodd-Frank Act to cross-border security-based swap activities and persons engaged in those activities, the SEC defined the term “U.S. person” in Rule 240.3a71-3(a)(4)(i) under the Securities Exchange Act of 1934 to mean, except as provided in paragraph (a)(4)(iii) of the rule, any person that is (1) A natural person resident in the United States (Rule 240.3a71-3(a)(4)(i)(A)); (2) A partnership, corporation, trust, investment vehicle, or other legal person organized, incorporated, or established under the laws of the United States or having its principal place of business in the United States (Rule 240.3a71-3(a)(4)(i)(B)); (3) An account (whether discretionary or non-discretionary) of a U.S. person (Rule 240.3a71-3(a)(4)(i)(C)); or (4) An estate of a decedent who was a resident of the United States at the time of death(Rule 240.3a71-3(a)(4)(i)(D)).

Paragraph (a)(4)(ii) of SEC Rule 240.3a71-3 also defines, for purposes of that section, “principal place of business” to mean the location from which the officers, partners, or managers of the legal person primarily direct, control, and coordinate the activities of the legal person. With respect to an externally managed investment vehicle, this location is the office from which the manager of the vehicle primarily directs, controls, and coordinates the investment activities of the vehicle.

Paragraph (a)(4)(iii) of SEC Rule 240.3a71-3 states that the term “U.S. person” does not include the International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies and pension plans, and any other similar international organizations, their agencies and pension plans.

Paragraph (a)(4)(iv) of SEC Rule 240.3a71-3 states that a person shall not be required to consider its counterparty to a security-based swap to be a U.S. person if such person receives a representation from the counterparty that the counterparty does not satisfy the criteria set forth in paragraph (a)(4)(i) of that section, unless such person knows or has reason to know that the representation is not accurate; for the purposes of this final rule a person would have reason to know the representation is not accurate if a reasonable person should know, under all of the facts of which the person is aware, that it is not accurate.

See

Application of “Security-Based Swap Dealer” and “Major Security-Based Swap Participant” Definitions to Cross-Border Security-Based Swap Activities; Final rule; interpretation (Republication), 79 FR 47371 (Aug. 12, 2014).

The Proposed Rule would define a “U.S. person” for purposes of the cross-border application of the margin rules to mean:

(1) Any natural person who is a resident of the United States (Proposed Rule § 23.160(a)(10)(i));

(2) Any estate of a decedent who was a resident of the United States at the time of death (Proposed Rule § 23.160(a)(10)(ii));

(3) Any corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of entity similar to any of the foregoing (other than an entity described in paragraph (a)(10)(iv) or (v) of proposed § 23.160) (a legal entity), in each case that is organized or incorporated under the laws of the United States or having its principal place of business in the United States, including any branch of the legal entity (Proposed Rule § 23.160(a)(10)(iii));

(4) Any pension plan for the employees, officers or principals of a legal entity described in paragraph (a)(10)(iii) of proposed § 23.160, unless the pension plan is primarily for foreign employees of such entity (Proposed Rule § 23.160(a)(10)(iv));

(5) Any trust governed by the laws of a state or other jurisdiction in the United States, if a court within the United States is able to exercise primary supervision over the administration of the trust (Proposed Rule § 23.160(a)(10)(v));

(6) Any legal entity (other than a limited liability company, limited liability partnership or similar entity where all of the owners of the entity have limited liability) owned by one or more persons described in paragraphs (a)(10)(i) through (a)(10)(v) of proposed § 23.160 who bear(s) unlimited responsibility for the obligations and liabilities of the legal entity, including any branch of the legal entity (Proposed Rule § 23.160(a)(10)(vi)); and

(7) Any individual account or joint account (discretionary or not) where the beneficial owner (or one of the beneficial owners in the case of a joint account) is a person described in paragraphs (a)(10)(i) through (a)(10)(vi) of proposed § 23.160 (Proposed Rule § 23.160(a)(10)(vii)).

See

§ 23.160(a)(10) of the Proposed Rule.

A non-U.S. person is defined to be any person that is not a U.S. person.

See

§ 23.160(a)(5) of the Proposed Rule.

The proposed definition is generally consistent with the definition of this term set forth in the Guidance, with certain exceptions discussed below.

Prongs (1), (2), (3), (4), (5), and (7) (Proposed Rule § 23.160(a)(10)(i), (ii), (iii), (iv), (v), and (vii)) identify certain persons as a “U.S. person” by virtue of their domicile or organization within the United States. The Commission has traditionally looked to where a legal entity is organized or incorporated (or in the case of a natural person, where he or she resides) to determine whether it

is a U.S. person.

In the Commission's view, these persons—by virtue of their decision to organize or locate in the United States and because they are likely to have significant financial and legal relationships in the United States—are appropriately included within the definition of “U.S. person” for purposes of the proposed cross-border margin framework.

See, e.g.,

17 CFR 4.7(a)(1)(iv) (defining “Non-United States person” for purposes of part 4 of the Commission regulations relating to commodity pool operators).

Under prong (3) (Proposed Rule § 23.160(a)(10)(iii)), consistent with its traditional approach, the Commission proposes to define “U.S. person” also to include persons that are organized or incorporated outside the United States, but have their principal place of business in the United States. For purposes of this prong, the Commission proposes to interpret “principal place of business” to mean the location from which the officers, partners, or managers of the legal person primarily direct, control, and coordinate the activities of the legal person. This interpretation is consistent with the Supreme Court's decision in

Hertz Corp.

Friend,

which described a corporation's principal place of business, for purposes of diversity jurisdiction, as the “place where the corporation's high level officers direct, control, and coordinate the corporation's activities.”

See Hertz Corp.

Friend,

559 U.S. 77, 80 (2010).

The Commission is of the view that the application of the principal place of business concept to a fund may require consideration of additional factors beyond those applicable to operating companies. In the case of a fund, the Commission notes that the senior personnel that direct, control, and coordinate a fund's activities are generally not the persons who are named as directors or officers of the fund, but rather are persons who work for the fund's investment adviser or the fund's promoter. Therefore, consistent with the Guidance, the Commission generally would consider the principal place of business of a fund to be in the United States if the senior personnel responsible for either (1) the formation and promotion of the fund or (2) the implementation of the fund's investment strategy are located in the United States, depending on the facts and circumstances that are relevant to determining the center of direction, control and coordination of the fund.

See

the Guidance, 78 FR 45309-45312, for guidance on application of the principal place of business test to funds and other collective investment vehicles in the context of cross-border swaps, including examples of how the Commission's approach could apply to a consideration of whether the “principal place of business” of a fund is in the United States in particular hypothetical situations. However, because of variations in the structure of collective investment vehicles as well as the factors that are relevant to the consideration of whether a collective investment vehicle has its principal place of business in the United States under the Guidance, these examples were included in the Guidance for illustrative purposes only.

Prong (6) (Proposed Rule § 23.160(a)(10)(vi)) of the proposed definition of “U.S. person” would include certain legal entities owned by one or more U.S. person(s) and for which such person(s) bear unlimited responsibility for the obligations and liabilities of the legal entity. As noted above, the Guidance included a similar concept in the definition of the term “U.S. person;” however the definition contained in the Guidance would generally characterize a legal entity as a U.S. person if the entity were “directly or indirectly majority-owned” by one or more persons falling within the term “U.S. person” and such U.S. person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity. Where a U.S. person serves as a financial backstop for all of a legal entity's obligations and liabilities, creditors and counterparties look to the U.S. person when assessing the risk in dealing with the entity, regardless of the amount of equity owned by the U.S. person. Under such circumstances, because the U.S. person has unlimited responsibility for all of the legal entity's obligations, the Commission believes that the legal entity should be deemed to be a U.S. person.

The Proposed Rule would not include the U.S. majority-ownership prong that was included in the Guidance (50% U.S. person ownership of a fund or other collective investment vehicle).

Some commenters have argued that a majority ownership test for funds should not be included on the basis that ownership alone is not indicative of whether the activities of a non-U.S. fund with a non-U.S.-based manager has a direct and significant effect on the U.S. financial system, and that it is difficult to determine the identity of the beneficial owner of a fund in certain fund structures (

e.g.,

fund-of-funds or master-feeder). Alternatively, an argument for retaining the majority-ownership test would be that many of these funds have large U.S. investors, who can be adversely impacted in the event of a counterparty default. On balance, the Commission believes the majority-ownership test should not be included in the definition of U.S. person for purposes of the margin rules. Non-U.S. funds with U.S. majority-ownership, even if treated as a non-U.S. person, would be excluded from the Commission's margin rules only in limited circumstances (namely, when these funds trade with a non-U.S. CSE that is not a consolidated subsidiary of a U.S. entity or a U.S. branch of a non-U.S. CSE). This, coupled with the implementation issues raised by commenters, persuades the Commission not to propose to define those funds that are majority-owned by U.S. persons (and that would otherwise not fall within the definition of a “U.S. person”), as U.S. persons.

The Commission's definition of the term “U.S. person” as used in the Guidance included a prong (iv) which covered “any commodity pool, pooled account, or collective investment vehicle (whether or not it is organized or incorporated in the United States) of which a majority ownership is held, directly or indirectly, by a U.S. person(s).”

The proposed definition of “U.S. person” determines a legal person's status at the entity level and thus includes any foreign operations that are part of the U.S. legal person, regardless of their location. Consistent with this approach, the definition of “U.S. person” under the Proposed Rule would include a foreign branch of a U.S. person.

Under the proposed definition, the status of a legal person as a U.S. person would not affect whether a separately incorporated or organized legal person in the affiliated corporate group is a U.S. person. Therefore, an affiliate or a subsidiary of a U.S. person that is organized or incorporated in a non-U.S. jurisdiction would not be deemed a “U.S. person” solely by virtue of its relationship with a U.S. person.

The proposed “U.S. person” definition does not include the prefatory phrase “includes, but is not limited to” that was included in the Guidance. The Commission believes that this prefatory phrase should not be included in order to provide legal certainty regarding the application of U.S. margin requirements to cross-border swaps.

The Commission understands that the information necessary for a swap counterparty to accurately assess the status of its counterparties as U.S. persons may not be available, or may be available only through overly burdensome due diligence. For this reason, the Commission believes that a swap counterparty generally should be permitted to reasonably rely on its counterparty's written representation in determining whether the counterparty is within the definition of the term “U.S. person.” In this context, the Commission's policy is to interpret the “reasonable” standard to be satisfied

when a party to a swap conducts reasonable due diligence on its counterparties, with what is reasonable in a particular situation to depend on the relevant facts and circumstances.

The Commission notes that under the External Business Conduct Rules, a SD or MSP generally meets its due diligence obligations if it reasonably relies on counterparty representations, absent indications to the contrary. As in the case of the External Business Rules, the Commission believes that allowing for reasonable reliance on counterparty representations encourages objectivity and avoids subjective evaluations, which in turn facilitates a more consistent and foreseeable determination of whether a person is within the Commission's interpretation of the term “U.S. person.”

Under the Proposed Rule, a “non-U.S. person” is any person that is not a “U.S. person” (as defined in the Proposed Rule).

References in this preamble to a “U.S. counterparty” are to a swap counterparty that is a “U.S. person” under the Proposed Rule, and references to a “non-U.S. counterparty” are to a swap counterparty that is a “non-U.S. person” under the Proposed Rule.

See

§ 23.160(a)(5) of the Proposed Rule.

Under the Proposed Rule, a “U.S. CSE” is a CSE that is a U.S. person. The term “U.S. CSE” includes a foreign branch of a U.S. CSE. A “non-U.S. CSE” is any CSE that is not a U.S. person.

Request for Comment.

The Commission requests comment on all aspects of the proposed definition of “U.S. person,” including the following:

1. Does the proposed definition of “U.S. person” appropriately identify all individuals or entities that should be designated as U.S. persons? Is the proposed definition too narrow or broad? Why?

2. Should the definition of “U.S. person” include the U.S. majority-ownership prong for funds and other collective investment vehicles, as set forth in the Guidance? Please explain.

3. Should the definition of “U.S. person” include certain legal entities owned by one or more persons described in prongs (1), (2), (3), (4), or (5) (Proposed Rule § 23.160(a)(10)(i), (ii), (iii), (iv) or (v)) of the proposed U.S. person definition who bear(s) unlimited responsibility for the obligations and liabilities of the legal entity? Please explain.

4. Should the definition of “U.S. person” be identical to the definition of “U.S. person” that the SEC adopted in its August 2014 rulemaking? For example:

a. Should the definition of “U.S. person” exclude certain designated (and any similar) international organizations, their agencies and pension plans, with headquarters in the United States?

b. Should the Commission define the term “principal place of business” as the location from which the officers, partners, or managers of a legal person primarily direct, control, and coordinate the activities of the legal person, and specify that in the case of an externally managed investment vehicle, this location is the office from which the manager of the vehicle primarily directs, controls, and coordinates the investment activities of the vehicle?

c. Should the Commission delete prong (6) (Proposed Rule § 23.160(a)(10)(vi)) of the proposed definition of “U.S. person” which includes certain legal entities owned by one or more U.S. person(s) and for which such person(s) bear unlimited responsibility for the obligations and liabilities of the legal entity and instead treat such arrangements as recourse guarantees?

d. Should any other changes be made to the proposed definition of “U.S. person” to conform it to the definition adopted by the SEC?

2. Guarantees

Under the Proposed Rule, uncleared swaps of non-U.S. CSEs, where the non-U.S. CSE's obligations under the uncleared swap are guaranteed by a U.S. person, would be treated the same as uncleared swaps of a U.S. CSE. The Commission believes that this treatment is appropriate because the swap of a non-U.S. CSE whose obligations under the swap are guaranteed by a U.S. person is identical, in relevant respects, to a swap entered directly by a U.S. person. That is, by virtue of the guarantee, the U.S. guarantor is responsible for the swap it guarantees in a manner similar to a direct counterparty to the swap. The U.S. person guarantor effectively acts jointly with the non-U.S. person whose swap it guarantees to engage in swaps transactions. The counterparty, pursuant to the recourse guarantee, looks to both the direct non-U.S. counterparty and its U.S. guarantor in entering into the swap.

The Proposed Rule would define the term “guarantee” as an arrangement pursuant to which one party to a swap transaction with a non-U.S. counterparty has rights of recourse against a U.S. person guarantor (whether such guarantor is affiliated with the non-U.S. counterparty or is an unaffiliated third party) with respect to the non-U.S. counterparty's obligations under the relevant swap transaction. Under the Commission's proposal, a party to a swap transaction has rights of recourse against the U.S. person guarantor if the party has a conditional or unconditional legally enforceable right, in whole or in part, to receive payments from, or otherwise collect from, the U.S. person in connection with the non-U.S. person's obligations under the swap.

Accordingly, the term “guarantee” would apply whenever a party to the swap has a legally enforceable right of recourse against the U.S. guarantor of a non-U.S. counterparty's obligations under the relevant swap, regardless of whether such right of recourse is conditioned upon the non-U.S. counterparty's insolvency or failure to meet its obligations under the relevant swap, and regardless of whether the counterparty seeking to enforce the guarantee is required to make a demand for payment or performance from the non-U.S. counterparty before proceeding against the U.S. guarantor.

See

§ 23.160(a)(2) of the Proposed Rule.

Under the Proposed Rule, the terms of the guarantee need not necessarily be included within the swap documentation or even otherwise reduced to writing (so long as legally enforceable rights are created under the laws of the relevant jurisdiction), provided that a swap counterparty has a conditional or unconditional legally enforceable right, in whole or in part, to receive payments from, or otherwise collect from, the U.S. person in connection with the non-U.S. person's obligations under the swap.

Further, the definition of “guarantee” is intended to encompass any swap of a non-U.S. person where the counterparty to the swap has rights of recourse, regardless of the form of the arrangement, against at least one U.S. person (either individually or jointly or severally with others) for the non-U.S. person's obligations under the swap.

Further, the Commission's proposed definition of guarantee would not be affected by whether the U.S. guarantor is an affiliate of the non-U.S. CSE because, in each case, the swap counterparty has a conditional or unconditional legally enforceable right, in whole or in part, to receive payments from, or otherwise collect from, the U.S. person in connection with the non-U.S. person's obligations under the swap.

The Commission notes that the definition of “guarantee” in the Proposed Rule is narrower in scope than the one used in the Guidance.

In proposing this definition, the Commission is cognizant that many other types of financial arrangements or support, other than a guarantee as defined in the Proposed Rule, may be provided by a U.S. person to a non-U.S. CSE (

e.g.,

keepwells and liquidity puts,

certain types of indemnity agreements, master trust agreements, liability or loss transfer or sharing agreements). The Commission understands that these other financial arrangements or support transfer risk directly back to the U.S. financial system, with possible significant adverse effects, in a manner similar to a guarantee with a direct recourse to a U.S. person. The Commission, however, believes that application of a narrower definition of guarantee for purposes of identifying those uncleared swaps that should be treated like uncleared swaps of a U.S. CSEs would reduce the potential for conflict with the non-U.S. CSE's home regulator. Moreover, the Commission believes that a non-U.S. CSE that has been provided with financial arrangements or support from a U.S. person that do not fall within the term “guarantee” as defined in the Proposed Rule in many cases is likely to meet the definition of a “Foreign Consolidated Subsidiary” and therefore, as discussed in the next section, would be subject to the Commission's margin requirements, with substituted compliance (but not the Exclusion) available. Therefore, the Commission believes that a narrow definition of guarantee would achieve a more workable framework for non-U.S. CSEs, without undermining protection of U.S. persons and U.S. financial system.

In the Guidance, the Commission interpreted the term “guarantee” generally to include not only traditional guarantees of payment or performance of the related swaps, but also other formal arrangements that, in view of all the facts and circumstances, support the non-U.S. person's ability to pay or perform its swap obligations with respect to its swaps.

The Commission is aware that some non-U.S. CSEs removed guarantees in order to fall outside the scope of certain Dodd-Frank requirements. The proposed coverage of foreign subsidiaries of a U.S. person as a “Foreign Consolidated Subsidiary,” which is discussed in the next section, and whose swaps would not be eligible for the Exclusion under any circumstances (as discussed in section II.C.3. below), would address the concern that even without a guarantee, as defined under the Guidance or in the Proposed Rule, foreign subsidiaries of a U.S. person with a substantial nexus to the U.S. financial system are adequately covered by the margin requirements.

Request for Comment.

The Commission seeks comment on all aspects of the proposed definition of “guarantee,” including the following:

1. Should the broader use of the term “guarantee” in the Guidance be used instead of the proposed definition, and if so, why? Would an alternative definition be more effective in light of the purpose of the margin requirements, and if so, why?

2. Is the Commission's assumption that a non-U.S. CSE is likely to meet the definition of a “Foreign Consolidated Subsidiary” when it has been provided with financial arrangements or support from a U.S. person that do not fall within the term “guarantee” (as defined in the Proposed Rule) correct? If not, why not?

3. Is it appropriate to distinguish, for purposes of the Proposed Rule, between those arrangements under which a party to the swap has a legally enforceable right of recourse against the U.S. guarantor and those arrangements where there is not direct recourse against a U.S. guarantor?

3. Foreign Consolidated Subsidiaries

The Proposed Rule uses the term “Foreign Consolidated Subsidiary” in order to identify swaps of those non-U.S. CSEs whose obligations under the relevant uncleared swap are not guaranteed by a U.S. person but that raise substantial supervisory concern in the United States, as a result of the possible negative impact on their U.S. parent entities and the U.S. financial system. Consolidated financial statements report the financial position, results of operations and statement of cash flows of a parent entity together with subsidiaries in which the parent entity has a controlling financial interest (which are required to be consolidated under U.S. generally accepted accounting principles (“GAAP”)). In the Commission's view, the fact that an entity is included in the consolidated financial statements of another is an indication of potential risk to the other entity that offers a clear and objective standard for the application of margin requirements.

Specifically, the Proposed Rule defines the term “Foreign Consolidated Subsidiary” as a non-U.S. CSE in which an ultimate parent entity

that is a U.S. person has a controlling interest, in accordance with U.S. GAAP, such that the U.S. ultimate parent entity includes the non-U.S. CSE's operating results, financial position and statement of cash flows in the U.S. ultimate parent entity's consolidated financial statements, in accordance with U.S. GAAP.

Under the Proposed Rule, the term “ultimate parent entity” means the parent entity in a consolidated group in which none of the other entities in the consolidated group has a controlling interest, in accordance with U.S. GAAP.

In the case of Foreign Consolidated Subsidiaries whose obligations under the relevant swap are not guaranteed by a U.S. person, substituted compliance would be broadly available under the Proposed Rule to the same extent as other non-U.S. CSEs whose obligations under the relevant swap are not guaranteed by a U.S. person, even though the financial position, operating results, and statement of cash flows of the Foreign Consolidated Subsidiary have a direct impact on the financial position, risk profile and market value of the consolidated group (which includes a U.S. parent entity); however, the Exclusion would not be available for swaps with a Foreign Consolidated Subsidiary because their swap activities have a direct impact on the financial position, risk profile, and market value of a U.S. parent entity that consolidates the Foreign Consolidated Subsidiary's financial statements and a potential spill-over effect on the U.S. financial system.

The Exclusion under the Proposed Rule is discussed in section II.C.3. below.

The Commission believes that not extending the Exclusion to Foreign Consolidated Subsidiaries under the Proposed Rule would be appropriate because the U.S. parent entity that consolidates the Foreign Consolidated Subsidiary's financial statements may have an incentive to provide support to a Foreign Consolidated Subsidiary, or the Foreign Consolidated Subsidiary may pose financial risk to the U.S. parent entity. In addition, market participants (including counterparties) may have the expectation that the parent entity will provide support to the Foreign Consolidated Subsidiary although, whether the U.S. parent entity actually steps in to fulfill the obligations of the Foreign Consolidated Subsidiary would depend on a business judgment rather than a legal obligation.

Notably, although consolidation has a direct impact on the U.S. parent entity, the U.S. parent entity stands in a different legal position than a U.S. guarantor because, in the absence of a direct recourse guarantee, the U.S. parent entity has no legal obligation to pay or perform under the relevant swap if the Foreign Consolidated Subsidiary defaults on its swap obligations. Therefore, the Commission believes that, in the absence of a direct recourse

guarantee from a U.S. person, uncleared swaps with a Foreign Consolidated Subsidiary should not be treated the same as swaps with a U.S. CSE or a non-U.S. CSE whose obligations under the relevant swap are guaranteed by a U.S. person.

For example, when General Electric announced on April 10, 2015 that it would guarantee repayment of approximately $210 billion of debt from GE Capital, the prices of some GE Capital bonds reportedly went up as much as 1.5% even though previously the parent company had provided other support but not an unconditional guarantee. According to an article in the Wall Street Journal, Russell Solomon, an analyst at Moody's Investors Service, stated: “We've always assumed that GE would support GE Capital almost no matter what . . . But now this says they'll support it no matter what.” Similarly, the article reports that Standard & Poor's Rating Services stated that General Electric's decision to back GE Capital debt “strengthens our view of GE's support, by buttressing the parent's proven willingness and ability to support its subsidiary with a contractual obligation to do so.”

See

Mike Cherney and Katy Burne, WSJ, Apr. 10, 2015,

available at http://www.wsj.com/articles/ges-move-alters-the-bond-market-1428707800

The Commission considered proposing a “control” test similar to that proposed by the Prudential Regulators. The “control test” in the Prudential Regulators' proposal is based solely on an entity's ownership level and control of the election of the board,

which may or may not clearly identify, depending on the facts and circumstances, those non-U.S. CSEs that are likely to raise greater supervisory concerns than other non-U.S. CSEs (in each case whose obligations under the relevant swap are not guaranteed by a U.S. person). Therefore, the Commission is using a “consolidation test” rather than a “control test” in the proposed definition of a “Foreign Consolidated Subsidiary” in order to provide a clear, bright-line test for identifying those non-U.S. CSEs whose uncleared swaps are likely to raise greater supervisory concerns.

Under the Prudential Regulators' proposal, the term “control” of another company means: (1) Ownership, control, or power to vote 25 percent or more of a class of voting securities of the company, directly or indirectly or acting through one or more other persons; (2) ownership or control of 25 percent or more of the total equity of the company, directly or indirectly or acting through one or more other persons; or (3) control in any manner of the election of a majority of the directors or trustees of the company.

Request for Comment.

The Commission seeks comment on all aspects of the Proposed Rule's definition of “Foreign Consolidated Subsidiary,” including:

1. Does the proposed definition of a “Foreign Consolidated Subsidiary” appropriately capture those non-U.S. CSEs that should not be eligible for the Exclusion? If not, please explain and provide an alternative(s).

2. The consolidation test in the definition of a “Foreign Consolidated Subsidiary” is intended to provide a clear, bright-line test for identifying those non-U.S. CSEs whose uncleared swaps are likely to raise greater supervisory concerns relative to other non-guaranteed non-U.S. CSEs. Should the proposed consolidation test be used in lieu of the control test proposed by the Prudential Regulators? Why or why not? Should the Commission use both a consolidation test and a control test? If so, please explain. Would any other tests or criteria be more appropriate? If so, please explain what tests or criteria should be used and why they are more appropriate.

3. Under the definition of Foreign Consolidated Subsidiary, the Commission is using U.S. GAAP as the standard for purposes of determining whether an entity consolidates another entity. In reviewing registration data of CSEs, the Commission believes that this definition balances the goals of the statute and the burdens placed on the industry; however, should the Commission also consider including in the definition of Foreign Consolidated Subsidiary, non-U.S. CSEs whose U.S. ultimate parent entity uses a different standard than U.S. GAAP in determining whether a parent entity must consolidate an entity for financial reporting purposes? If so, please explain why.

4. Should the Commission also include in the definition of “Foreign Consolidated Subsidiary” those non-U.S. CSEs whose U.S. ultimate parent entity is not required to prepare consolidated financial statements under any accounting standard or for any other reason (

e.g.,

the U.S. ultimate parent entity is not a public company under federal securities laws and is not required to prepare consolidated financial statements by private investors or debtholders as a condition to investing or financing), but which would consolidate the non-U.S. CSE if it were required to prepare consolidated financial statements in accordance with U.S. GAAP? If so, please explain why?

5. Under the definition of Foreign Consolidated Subsidiary, the Commission is only including non-U.S. CSEs whose financial statements are consolidated by an ultimate parent entity that is a U.S. person. Should the Commission also include immediate and intermediate parent entities of the non-U.S. CSE in the definition? If so, please explain why?

C. Applicability of Margin Requirements to Cross-Border Uncleared Swaps

The following section describes the application of the Commission's margin rules to cross-border swaps between CSEs and various types of counterparties, as well as when the Exclusion from the Commission's margin requirements would be applicable. Table A to this release (see below) illustrates how the Proposed Rule would apply to specific transactions between various types of counterparties, and should be read in conjunction with the rest of the preamble and the text of the Proposed Rule.

1. Uncleared Swaps of U.S. CSEs or Non-U.S. CSEs Whose Obligations Under the Relevant Swap Are Guaranteed by a U.S. Person

Under the Proposed Rule, the Commission's margin rules

would apply to all uncleared swaps of U.S. CSEs,

with no exclusions. By their nature, U.S. CSEs have a significant impact on the U.S. swaps market, and the Commission therefore has a strong interest in ensuring their viability. However, substituted compliance would be available with respect to initial margin posted to (but not collected from) any non-U.S. counterparty (including a non-U.S. CSE) whose obligations under the uncleared swap are not guaranteed by a U.S. person. The Commission proposes to provide substituted compliance in this situation (assuming that the non-U.S. counterparty is subject to comparable margin requirements in a foreign jurisdiction) because the swap counterparty is a non-U.S. person and where its swap obligations are not guaranteed by a U.S. person, the foreign regulator may have equal or greater interest in the collection of margin by the non-U.S. counterparty. However, substituted compliance would not apply to the collection of margin by the U.S. CSE from the non-U.S. counterparty, as the Commission has a significant regulatory interest in the collection of margin by the U.S. CSE, which protects the U.S. CSE and the U.S. financial system from counterparty credit risk.

The Commission's Proposed Margin Rules are set forth in proposed §§ 23.150 through 23.159 of part 23 of the Commission's regulations, proposed as 17 CFR 23.150 through 23.159.

Foreign branches of a U.S. CSE are treated as part of the related principal entity and hence an uncleared swap executed by or through a foreign branch would be treated as an uncleared swap of a U.S. CSE.

The same treatment that applies to U.S. CSEs would also apply to a non-U.S. CSE whose obligations under the relevant swap are guaranteed by a U.S. person. The Commission believes that this result is appropriate because the economics of the transaction are no different from a trade entered directly by the U.S. guarantor, as discussed in section II.B.2. above. In addition, the Commission believes that treating uncleared swaps of these entities differently from those of U.S. CSEs would lead to unwarranted competitive distortions. That is, the non-U.S. CSE that enters into a swap with a direct recourse guarantee from a U.S. person would be positioned to benefit from more competitive pricing when dealing with non-U.S. counterparties (as compared to U.S. CSEs) to the extent

that either substituted compliance or the Exclusion would be available.

The Commission believes that requiring U.S. CSEs and non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S. person to comply with its margin requirements, with only limited substituted compliance for margin posted to (but not collected from) any non-U.S. counterparty (including a non-U.S. CSE) whose obligations under the uncleared swap are not guaranteed by a U.S. person, would help ensure their safety and soundness and support the stability of the U.S. financial markets, reducing the likelihood of another financial crisis affecting the U.S. economy.

Request for Comment.

The Commission requests comments on all aspects of the proposed treatment of uncleared swaps of U.S. CSEs and/or non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S. person, including:

1. Is the Proposed Rule's treatment of U.S. CSEs and non-U.S. CSEs whose obligations under the swap are guaranteed by a U.S. person appropriate? If not, please explain. If a different treatment should apply to U.S. CSEs or non-U.S. CSEs whose obligations under the swap are guaranteed by a U.S. person, please describe the alternative treatment that should apply and explain why.

2. What are the competitive implications of the proposed treatment of uncleared swaps of non-U.S. CSEs whose obligations under the swap are guaranteed by a U.S. person?

3. Does the proposed treatment of non-U.S. CSEs whose obligations under the swap are guaranteed by a U.S. person appropriately take into account the supervisory interest of a non-U.S. CSE's home jurisdiction?

2. Uncleared Swaps of Non-U.S. CSEs (Including Foreign Consolidated Subsidiaries) Whose Obligations Under the Relevant Swap Are Not Guaranteed by a U.S. Person

Under the Proposed Rule, non-U.S. CSEs (including Foreign Consolidated Subsidiaries) whose obligations under the relevant uncleared swap are not guaranteed by a U.S. person may avail themselves of substituted compliance to a greater extent than if their obligations under the swap were guaranteed by a U.S. person. The Commission believes that this approach is appropriate since a non-U.S. CSE whose swap obligations are not guaranteed by a U.S. person (including a Foreign Consolidated Subsidiary), on balance, may implicate equal or greater supervisory concerns on the part of a foreign regulator relative to the supervisory interest of the Commission (in comparison to U.S. CSEs or non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S. person, because the Commission has a significant regulatory interest in uncleared swaps of these CSEs). Under the Proposed Rule, where the obligations of a non-U.S. CSE (including a Foreign Consolidated Subsidiary) under the relevant swap are not guaranteed by a U.S. person, substituted compliance would be available with respect to its uncleared swaps with any counterparty, except where the counterparty is a U.S. CSE or a non-U.S. CSE whose obligations under the relevant swap are guaranteed by a U.S. person.

With respect to uncleared swaps with a U.S. CSE or a non-U.S. CSE whose obligations under the relevant swap are guaranteed by a U.S. person, substituted compliance would only be available for initial margin collected by the non-U.S. CSE whose obligations under the relevant swap are not guaranteed by a U.S. person, as discussed in section II.C.1.

Further, uncleared swaps entered into by Foreign Consolidated Subsidiaries would not be eligible for the Exclusion under the Proposed Rule. As described above, the financial position, operating results, and statement of cash flows of a Foreign Consolidated Subsidiary are incorporated into the financial statements of the U.S. ultimate parent entity and therefore, likely have a direct impact on the consolidated entity's financial position, risk profile, and market value. Under these circumstances, and given the importance of margin in mitigating counterparty credit risk, the Commission has greater supervisory concerns with respect to the uncleared swaps of a Foreign Consolidated Subsidiary than other non-U.S. CSEs. Therefore, the Commission believes that extending the Exclusion to a Foreign Consolidated Subsidiary would not further the goal of ensuring the safety and soundness of a CSE and the stability of U.S. financial markets. The Commission is also concerned that extending the Exclusion to Foreign Consolidated Subsidiaries would encourage a U.S. entity to use their non-U.S. subsidiaries to conduct their swap activities with non-U.S. counterparties, possibly bifurcating the U.S. entity's U.S. and non-U.S.-facing businesses, and potentially resulting in separate pools of liquidity.

Request for Comment.

The Commission requests comments on all aspects of the proposed treatment of uncleared swaps of non-U.S. CSEs (including Foreign Consolidated Subsidiaries) whose obligations under the relevant swap are not guaranteed by a U.S. person, including:

1. The Proposed Rule makes substituted compliance more broadly available to a Foreign Consolidated Subsidiary whose obligations under the relevant swap are not guaranteed by a U.S. person than a non-U.S. CSE (including a Foreign Consolidated Subsidiary) whose obligations under the relevant swap are guaranteed by a U.S. person. Should Foreign Consolidated Subsidiaries be treated the same as non-U.S. CSEs that are guaranteed by a U.S. person and if not, what treatment is appropriate?

2. What are the competitive implications of the proposed treatment of Foreign Consolidated Subsidiaries (relative to other non-U.S. CSEs)? Does the proposed treatment appropriately take into account the supervisory interest of a non-U.S. CSE's home jurisdiction?

Under the Proposed Rule, an uncleared swap entered into by a non-U.S. CSE with a non-U.S. person counterparty (including a non-U.S. CSE) would be excluded from the Commission's margin rules, provided that neither counterparty's obligations under the relevant swap are guaranteed by a U.S. person and neither counterparty is a Foreign Consolidated Subsidiary nor a U.S. branch of a non-U.S. CSE.

See § 23.160(b)(2)(ii) of the Proposed Rule.

As discussed above, the Commission believes that, given the importance of margin to the safety and soundness of a CSE, as a general matter, margin requirements should apply to the uncleared swaps of a CSE, without regard to the domicile of the counterparty or where the trade is executed. At the same time, the Commission believes that it is appropriate to make a limited exception to this principle of firm-wide application of margin requirements in the cross-border context, consistent with section 4s(e) of the CEA

and comity principles, so as to exclude a narrow class of uncleared swaps involving a

non-U.S. CSE and a non-U.S. counterparty.

Section 4s(e)(3)(A) of the CEA, 7 U.S.C. 6s(e)(3)(A). The section calls for, among other things, that margin requirements “be appropriate for the risks associated with the non-cleared swaps held as a swap dealer or major market participant.”

The Commission notes that a non-U.S. CSE that can avail itself of the Exclusion would still be subject to the Commission's margin rules with respect to all uncleared swaps not meeting the criteria for the Exclusion, albeit with the possibility of substituted compliance. The non-US CSE would also be subject to the Commission's capital requirements, which, as proposed, would impose a capital charge for uncollateralized exposures.

Additionally, any excluded swaps would most likely be covered by the margin requirements of another jurisdiction that adheres to the BCBS-IOSCO framework.

See

Capital Requirements of Swap Dealers and Major Swap Participants, Notice of proposed rulemaking, 76 FR 27802 (May 12, 2011).

The non-U.S. CSE that qualifies for the exclusion would be eligible for substituted compliance, with respect to all margin requirements, if its counterparty to the uncleared swap is a U.S. person that is not a CSE. If the uncleared swap is with a U.S. CSE, substituted compliance would only be available with respect to initial margin posed by the U.S. CSE counterparty.

The Commission also recognizes that the supervisory interest of foreign regulators in the uncleared swaps of non-U.S. CSEs (and their non-U.S. counterparties) that are eligible for the Exclusion may equal or exceed the supervisory interest of the United States in such uncleared swaps. Both counterparties are domiciled outside the United States and likely would be subject to the supervision of a foreign regulator. As discussed above, the Commission believes that a workable cross-border framework must take into account the interests of other jurisdictions and balance those interests with the supervisory interests of the United States in order to calibrate the application of margin rules to non-U.S. CSEs' swaps with non-U.S. counterparties. Such an approach would help mitigate the potential for conflicts with other jurisdictions and ultimately promote global harmonization. For all of the foregoing reasons, the Commission believes that it would be appropriate to not apply the Commission's margin rules to uncleared swaps meeting the criteria for the Exclusion.

The Commission acknowledges that similar mitigating factors and comity considerations may apply to Foreign Consolidated Subsidiaries, but as discussed above, a Foreign Consolidated Subsidiary's financial position, operating results, and statement of cash flows are directly reflected in its U.S. Ultimate Parent entity's financial statements, which implicates greater supervisory concerns. Therefore, the Commission believes that it has a greater regulatory interest in Foreign Consolidated Subsidiaries than other non-U.S. CSEs (that are not guaranteed by a U.S. person), and that the uncleared swaps of Foreign Consolidated subsidiaries should not be excluded from the margin requirements.

Further, the Commission believes that the uncleared swaps of a U.S. branch of a non-U.S. CSE should not be excluded from the margin requirements for the reasons discussed in the next section.

Request for Comment.

The Commission is requesting comments on all aspects of the proposed Exclusion, including:

1. In light of the mitigating factors cited above and the Commission's supervisory interest in the safety and soundness of all CSEs and the critical role that margin plays in helping ensure the safety and soundness of CSEs, is the proposed Exclusion appropriate, and if not, please explain why not? Is the scope of the Exclusion appropriate, or should it be broader or narrower, and if so, why?

2. Under the Proposed Rule, uncleared swaps with a Foreign Consolidated Subsidiary would not be eligible for the Exclusion from the Commission's margin requirements. Should Foreign Consolidated Subsidiaries be eligible for the Exclusion and if so, why?

4. U.S. Branches of Non-U.S. CSEs

The Proposed Rule treats uncleared swaps executed through or by a U.S. branch of a non-U.S. CSE the same as those swaps of a non-U.S. CSE, except that the Exclusion from the margin rules would not be available to a U.S. branch of a non-U.S. CSE.

Generally speaking, because the risks posed by uncleared swaps are borne by a CSE as a whole, it should not matter if the transaction is entered by or through a U.S. branch or office within the United States. Nevertheless, the Commission believes that extending the Exclusion (to the extent than the Exclusion might otherwise apply to the non-U.S. CSE, as discussed above) would not be appropriate in the case of uncleared swaps executed by or through a U.S. branch of a non-U.S. CSE.

The Commission notes that non-U.S. CSEs can conduct their swap dealing business within the United States utilizing a number of different legal structures, including a U.S. subsidiary or a U.S. branch or office. Excluding uncleared swaps conducted by or through U.S. branches of non-U.S. CSEs would give these non-U.S. CSEs an unfair advantage when dealing with non-U.S. clients relative to U.S. CSEs (including those CSEs that are subsidiaries of foreign entities). That is, a U.S. branch of a non-U.S. CSE that is permitted to operate outside of the Commission's margin requirements would be able to offer a more competitive price to non-U.S. clients than a U.S. CSE. The Commission believes that when a non-U.S. CSE is conducting its swap activities within the United States through a branch or office located in the United States, it should be subject to U.S. margin laws. However, the Commission also believes that, consistent with comity principles, substituted compliance should be available for uncleared swaps executed by or through a U.S. branch of a non-U.S. CSE whose obligations under the relevant swap are not guaranteed by a U.S. person with any counterparty (except where the counterparty is a U.S. CSE or a non-U.S. CSE whose obligations under the relevant swap are guaranteed by a U.S. person).

With respect to uncleared swaps with a U.S. CSE or a non-U.S. CSE whose obligations under the relevant swap are guaranteed by a U.S. person, substituted compliance would only be available for initial margin collected by the U.S. branch of a non-U.S. CSE whose obligations under the relevant swap are not guaranteed by a U.S. person.

See

section II.C.1.

Request for Comment.

The Commission seeks comment on the Proposed Rule's treatment of uncleared swaps conducted by or through a “U.S. branch of a non-U.S. CSE.” In particular, the Commission requests comment on the following questions:

1. How should the Commission determine whether a swap is executed through or by a U.S. branch of a non-U.S. CSE for purposes of applying the Commission's margin rules on a cross-border basis? Should the Commission base the determination of whether the swap activity is conducted at a U.S. branch of a non-U.S. CSE for purposes of applying the Commission's margin rules on a cross-border basis on the same analysis as is used in the Volcker rule?

Under the Volcker rule, personnel that arrange, negotiate, or execute a purchase or sale conducted under the exemption for trading activity of a foreign banking entity must be located outside of the United States.

See

Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds; Final Rule, 79 FR 5808 (Jan. 31, 2014). Thus, for example, personnel in the United States cannot solicit or sell to or arrange for trades conducted under this exemption. Personnel in the United States also cannot serve as decision makers in transactions conducted under this exemption. Personnel that engage in back-office functions, such as clearing and settlement of trades, would not be considered to arrange, negotiate, or execute a purchase or sale for purposes of this provision.

Id.

at 5927, n.1526.

2. The Commission seeks comment on the proposed treatment of U.S. branches

of non-U.S. CSEs, including whether these branches should be eligible for the Exclusion in light of the policy objectives outlined above. If the Exclusion should be available, please explain why. The Commission also seeks comment regarding whether the scope of substituted compliance for U.S. branches of non-U.S. CSEs under the Proposed Rule is appropriate. If not, please explain why.

D. Substituted Compliance

As noted above, consistent with CEA section 2(i) and comity principles, the Commission would allow CSEs to comply with comparable margin requirements in a foreign jurisdiction under certain circumstances. In this release, we are proposing to establish a standard of review that will apply to Commission determinations regarding whether some or all of the relevant foreign jurisdiction's margin requirements are comparable to the Commission's corresponding margin requirements, as well as procedures for requests for comparability determinations, including eligibility requirements and submission requirements.

Specifically, the Commission would permit a U.S. CSE or a non-U.S. CSE, as applicable, to avail itself of substituted compliance (to the extent applicable under the Proposed Rule) by complying with the margin requirements of the relevant foreign jurisdiction in lieu of compliance with the Commission's margin requirements, provided that the Commission finds that such jurisdiction's margin requirements are comparable to the Commission's margin requirements. Failure to comply with the applicable foreign margin requirements could result in a violation of the Commission's margin requirements. Further, all CSEs, regardless of whether they rely on a comparability determination, would remain subject to the Commission's examination and enforcement authority.

Under Commission regulations 23.203 and 23.606, all records required by the CEA and the Commission's regulations to be maintained by a registered swap dealer or MSP shall be maintained in accordance with Commission regulation 1.31 and shall be open for inspection by representatives of the Commission, the United States Department of Justice, or any applicable prudential regulator. The Commission believes that, before a non-U.S. CSE should be permitted to rely on substituted compliance, it should assure the Commission that it can provide the Commission with prompt access to books and records and submit to onsite inspection and examination. The Commission further expects that access to books and records and the ability to inspect and examine a non-U.S. CSE will be a condition to any comparability determination.

The Commission is proposing a comparability standard that is outcome-based with a focus on whether the margin requirements in the foreign jurisdiction achieve the same regulatory objectives as the CEA's margin requirements. Under this outcome-based approach, the Commission would not look to whether a foreign jurisdiction has implemented specific rules and regulations that are identical to rules and regulations adopted by the Commission. Rather, the Commission would evaluate whether a foreign jurisdiction has rules and regulations that achieve comparable outcomes. If it does, the Commission believes that a comparability determination may be appropriate, even if there may be differences in the specific elements of a particular regulatory provision.

As noted below, because the Commission would make comparability determinations on an element-by-element basis, it is possible that a foreign jurisdiction's margin requirements would be comparable with respect to some, but not all, elements of the margin requirements.

In evaluating whether a foreign jurisdiction's margin requirements are comparable to the Commission's margin requirements, the Commission would consider whether the foreign jurisdiction's margin rules are consistent with international standards.

That is, the Commission would determine, considering all relevant facts and circumstances, whether a foreign jurisdiction has adopted margin rules that adequately address the BCBS-IOSCO framework. The Commission believes that considering this factor is appropriate because BCBS and IOSCO established this framework to ensure globally harmonized margin rules for uncleared derivative transactions. Individual regulatory authorities across major jurisdictions (including the EU, Japan, and the United States) have started to develop their own margin rules consistent with the final BCBS-IOSCO framework for non-centrally cleared, bilateral derivatives.

If the foreign jurisdiction's margin rules are not consistent with international standards, then the Commission may not find the rules comparable. In providing information to the Commission for a determination, applicants should include, among other things, information describing any difference between the foreign jurisdiction's margin requirements and international standards.

Under the Proposed Rule, the term “international standards” means the margin policy framework for non-cleared, bilateral derivatives issued by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions in September 2013, as subsequently updated, revised, or otherwise amended, or any other international standards, principles or guidance relating to margin requirements for non-cleared, bilateral derivatives that the Commission may in the future recognize, to the extent that they are consistent with United States law (including the margin requirements in the Commodity Exchange Act).

See

§ 23.160(a)(3) of the Proposed Rule. For further information regarding the margin policy framework for non-cleared, bilateral derivatives issued by the Basel Committee on Banking Supervision and the International Organization of Securities in September 2013,

see

note 12,

supra.

See

note 13,

supra.

See

§ 23.160(c)(2)(iii) of the Proposed Rule.

Under the proposal, once the Commission has determined that a foreign jurisdiction's margin requirements adhere to the BCBS-IOSCO framework, the Commission would evaluate the various elements of the foreign jurisdiction's margin requirements.

Because the Commission is not proposing to make a binary determination of comparability (

i.e.,

all or nothing), but instead would make comparability determinations on an element-by-element basis, it is possible that a foreign margin system would be comparable with respect to some, but not all, elements of the margin requirements. For instance, a foreign jurisdiction may impose variation margin requirements on a non-U.S. CSE's uncleared swaps with financial end-users that achieve outcomes comparable to the Commission's margin requirements, but the same foreign jurisdiction may not achieve comparable regulatory outcomes with respect to segregation and rehypothecation requirements. By assessing each of the relevant elements separately, the Commission would have the flexibility to determine, with respect to one element of the requirements, that the outcomes are comparable, but not another. The elements that the Commission would be analyzing, among others, would include, but not be limited to: (i) The transactions subject to the foreign jurisdiction's margin requirements; (ii) the entities subject to the foreign jurisdiction's margin requirements; (iii) the methodologies for calculating the amounts of initial and variation margin; (iv) the process and standards for approving models for calculating initial and variation margin models; (v) the timing and manner in which initial and variation margin must be collected and/or paid; (vi) any threshold levels or amounts; (vii) risk management controls for the calculation of initial and variation margin; (viii) eligible collateral for initial and variation margin; (ix) the requirements of custodial arrangements, including

rehypothecation and the segregation of margin; (x) documentation requirements relating to margin; and (xi) the cross-border application of the foreign jurisdiction's margin regime.

See

§ 23.160(c)(2) of the Proposed Rule.

Moreover, the Commission would expect that the applicant, at a minimum, describe how the foreign jurisdiction's margin requirements addresses each of the above-referenced elements, and identify the specific legal and regulatory provisions that correspond to each element (and, if necessary, whether the foreign jurisdiction's margin requirements do not address a particular element), and describe the objectives of the foreign jurisdiction's margin requirements. Further, the applicant would be required to furnish copies of the foreign jurisdiction's margin requirements (including an English translation of any foreign language document) and any other information or documentation that the Commission deems appropriate.

In addition, in paragraph (c)(3) of the Proposed Rule,

the Commission sets out its standard of review that would take into consideration all other relevant factors, including but not limited to, the scope and objectives of the foreign jurisdiction's margin requirement(s) for uncleared swaps; how the foreign jurisdiction's margin requirements compare to international standards; whether the foreign jurisdiction's margin requirements achieve comparable outcomes to the Commission's corresponding margin requirements; the ability of the relevant regulatory authority or authorities to supervise and enforce compliance with the foreign jurisdiction's margin requirements; and any other facts and circumstances the Commission deems relevant.

See

§ 23.160(c)(3) of the Proposed Rule.

The submission should include a description of the ability of the relevant foreign regulatory authority or authorities to supervise and enforce compliance with the foreign jurisdiction's margin requirements, including the powers of the foreign regulatory authority or authorities to supervise, investigate, and discipline entities for compliance with the margin requirements and the ongoing efforts of the regulatory authority or authorities to detect, deter, and ensure compliance with the margin requirements.

See

§ 23.160(c)(2)(iv) of the Proposed Rule.

The Proposed Rule provides that any CSE that is eligible for substituted compliance may apply, either individually or collectively. In addition, the Proposed Rule provides that a foreign regulatory authority that has direct supervisory authority over one or more covered swap entities and that is responsible for administering the relevant foreign jurisdiction's margin requirements may submit a request for a comparability determination with respect to some or all of the Commission's margin requirements. Persons requesting a comparability determination may want to coordinate their application with other market participants and their home regulators to simplify and streamline the process. Once a comparability determination is made for a jurisdiction, it will apply for all entities or transactions in that jurisdiction to the extent provided in the Proposed Rule and the determination, subject to any conditions specified by the Commission.

The Commission expects that the comparability determination process would require close consultation, cooperation, and coordination with other appropriate U.S. regulators and relevant foreign regulators. Further, the Commission expects that, in connection with a comparability determination, the foreign regulator(s) would enter into, or would have entered into, an appropriate memorandum of understanding (“MOU”) or similar arrangement with the Commission.

In issuing a Comparability Determination, the Commission may impose any terms and conditions it deems appropriate.

Further, the Proposed Rule would provide that the Commission may, on its own initiative, further condition, modify, suspend, terminate, or otherwise restrict a comparability determination in the Commission's discretion. This could result, for example, from a situation where, after the Commission issues a comparability determination, the basis of that determination ceases to be true. In this regard, the Commission would require an applicant to notify the Commission of any material changes to information submitted in support of a comparability determination (including, but not limited to, changes in the relevant foreign jurisdiction's supervisory or regulatory regime) as the Commission's comparability determination may no longer be valid.

The violation of such terms and conditions may constitute a violation of the Commission's margin requirements and/or result in the modification or revocation of the comparability determination.

The Commission expects to impose this obligation as one of the conditions to the issuance of a comparability determination.

Request for Comment.

The Commission is seeking comments on all aspects of the proposed standard of review that will apply to Commission determinations regarding whether some or all of the relevant foreign jurisdiction's margin requirements are comparable to the Commission's corresponding margin requirements, as well as proposed procedures for requests for comparability determinations, including eligibility requirements and submission requirements. Among other things, commenters may wish to submit comments on the following questions:

1. Please provide comments on the appropriate standard of review for comparability determinations and the degree of comparability and comprehensiveness that should be applied to comparability determinations.

2. Are the proposed procedures, including eligibility requirements and submission requirements, for comparability determinations appropriate?

3. Many foreign jurisdictions are in the process of implementing margin reform. Should the Commission develop an interim process that takes into account a different implementation timeline? Please provide details and address competitive implications for U.S. CSEs and non-U.S. CSEs that are required to comply with the Commission's margin regulations.

4. In the Guidance, the Commission discussed “a de minimis” exemption with respect to transaction-level requirements for foreign branches of U.S. swap dealers located in “emerging markets” that, in the aggregate, constitute less than 5 percent of the firm's notional swaps.

The Proposed Rule does not contain an exemption for CSEs operating in “emerging markets.” Should the Commission develop an exemption for emerging markets? If so, what should be the eligibility criteria or conditions? For example, should the Commission provide an exemption where a non-U.S. CSE is operating in a jurisdiction that does not permit the related collateral to be held outside that jurisdiction and/or that lacks legal or operational infrastructure relating to proper segregation of initial margin? Should the Commission require the CSE to collect initial and variation margin from its counterparty in eligible emerging market jurisdictions, but only require the CSE to post variation margin? Should the Commission limit the type of eligible collateral that could be used in eligible emerging market jurisdictions? Which jurisdictions, if any, should qualify as “emerging markets” for purposes of the exemption? What should be the process for determining that the qualifying criteria are met? Please provide quantitative data, to the extent practical.

See

the Guidance, 78 FR 45351.

5. As some emerging market jurisdictions' laws may not support legally enforceable netting

arrangements, which would then, under the Proposed Margin Rules and under certain circumstances, require that a CSE and its counterparty post and collect gross margin, should the Commission, if it does not provide for an emerging markets exception, permit the CSE and its counterparty to collect/post variation margin on a net basis? If so, what conditions, if any, should the Commission place on this requirement to ensure that CSEs and the U.S. financial system are adequately protected?

6. Is the scope of substituted compliance under the Proposed Rule appropriate? Should additional or fewer transactions be eligible for substituted compliance, and if so, how should the Proposed Rule be modified?

E. General Request for Comments

In addition to the specific requests for comments included above, the Commission seeks comment on all aspects of the Proposed Rule. Commenters are encouraged to address, among other things, the scope and application of the Proposed Rule, costs and benefits of the Proposed Rule, alternatives to the Proposed Rule, practical implications for CSEs and other market participants and the market generally related to the Proposed Rule, whether the Proposed Rule sufficiently supports the statutory goals of ensuring the safety and soundness of the CSE and protecting the financial system against the risks associated with uncleared swaps, and whether the Proposed Rule sufficiently takes into account principles of international comity. In particular, the Commission requests comment on the following:

1. Does the Proposed Rule's approach to the cross-border application of margin requirements satisfy the Commission's statutory requirements, including the requirement to help ensure the safety and soundness of CSEs, and the requirement that the Commission, the Prudential Regulators, and the SEC, to the maximum extent practicable, establish and maintain comparable minimum initial and variation margin requirements?

2. Would it be more appropriate to apply the margin requirements at the entity-level, without any exclusion? If yes, please explain.

3. Would it be more appropriate to apply the margin requirements at a transaction-level? If yes, please explain.

4. Is the scope of the Proposed Rule appropriate, or should it be changed, and if so, how?

5. Would an alternative approach to the Proposed Rule better achieve the Commission's statutory requirements or otherwise be preferable or more appropriate? If yes, please explain.

6. Does the Commission's Proposed Rule strike the right balance between the Commission's supervisory interest in offsetting the risk to CSEs and the financial system arising from the use of uncleared swaps and international comity principles? If not, please explain.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) requires that agencies consider whether the regulations they propose will have a significant economic impact on a substantial number of small entities.

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.

The proposed regulation establishes a mechanism for CSEs

to satisfy margin requirements by complying with comparable margin requirements in the relevant foreign jurisdiction as described in paragraph (c) of the Proposed Rule,

but only to the extent that the Commission makes a determination that complying with the laws of such foreign jurisdiction is comparable to complying with the corresponding margin requirement(s) for which the determination is sought.

5 U.S.C. 601

et seq.

47 FR 18618 (Apr. 30, 1982).

Section 23.151 of the Proposed Margin Rules defines CSEs as a SD or MSP for which there is no prudential regulator.

See

§ 23.160(c) of the Proposed Rule.

The Commission previously has determined that SDs and MSPs are not small entities for purposes of the RFA.

Thus, the Commission is of the view that there will not be any small entities directly impacted by this rule.

See

77 FR 30596, 30701 (May 23, 2012).

The Commission notes that under the Proposed Margin Rules, SDs and MSPs would only be required to collect and post margin on uncleared swaps when the counterparties to the uncleared swaps are either other SDs and MSPs or financial end users. As noted above, SDs and MSPs are not small entities for RFA purposes. Furthermore, any financial end users that may be indirectly

impacted by the Proposed Rule would be similar to eligible contract participants (“ECPs”), and, as such, they would not be small entities.

Further, to the extent that there are any foreign financial entities that would not be considered ECPs, the Commission expects that there would not be a substantial number of these entities significantly impacted by the Proposed Rule. As noted above, most foreign financial entities would likely be ECPs to the extent they would trade in uncleared swaps. The Commission expects that only a small number of foreign financial entities that are not ECPs, if any, would trade in uncleared swaps.

The RFA focuses on direct impact to small entities and not on indirect impacts on these businesses, which may be tenuous and difficult to discern.

See Mid-Tex Elec. Coop., Inc.

FERC,

773 F.2d 327, 340 (D.C. Cir. 1985);

Am. Trucking Assns.

EPA,

175 F.3d 1027, 1043 (D.C. Cir. 1985).

As noted in paragraph (1)(xii) of the definition of “financial end user” in § 23.151 of the Proposed Margin Rules, a financial end-user includes a person that would be a financial entity described in paragraphs (1)(i)-(xi) of that definition, if it were organized under the laws of the United States or any State thereof. The Commission believes that this prong of the definition of financial end-user would capture the same type of U.S. financial end-users that are ECPs, but for them being foreign financial entities. Therefore, for purposes of the Commission's RFA analysis, these foreign financial end-users will be considered ECPs and therefore, like ECPs in the U.S., not small entities.

Accordingly, the Commission finds that there will not be a substantial number of small entities impacted by the Proposed Rule. Therefore, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations 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”) 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. This proposed rulemaking would result in the collection of information requirements within the meaning of the PRA, as discussed below. The proposed rulemaking contains collections of information for which the Commission has not previously received control numbers from the Office of Management and Budget (“OMB”). If adopted, responses to this collection of information would be required to obtain or retain benefits. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The Commission has submitted to OMB an information collection request to obtain an OMB control number for the collections contained in this proposal.

Section 731 of the Dodd-Frank Act, amended the CEA,

to add, as section

4s(e) thereof, provisions concerning the setting of initial and variation margin requirements for SDs and MSPs. Each SD and MSP for which there is a Prudential Regulator, as defined in section 1a(39) of the CEA, must meet margin requirements established by the applicable Prudential Regulator, and each CSE must comply with the Commission's regulations governing margin. With regard to the cross-border application of the swap provisions enacted by Title VII of the Dodd-Frank Act, section 2(i) of the CEA provides the Commission with express authority over activities outside the United States relating to swaps when certain conditions are met. Section 2(i) of the CEA provides that the provisions of the CEA relating to swaps enacted by Title VII of the Dodd-Frank Act (including Commission rules and regulations promulgated thereunder) shall not apply to activities outside the United States unless those activities (1) have a direct and significant connection with activities in, or effect on, commerce of the United States or (2) contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of Title VII.

Because margin requirements are critical to ensuring the safety and soundness of a CSE and supporting the stability of the U.S. financial markets, the Commission believes that its margin rules should apply on a cross-border basis in a manner that effectively addresses risks to the registered CSE and the U.S. financial system.

7 U.S.C. 1

et seq.

7 U.S.C. 2(i).

As noted above, the Proposed Rule would establish margin requirements for uncleared swaps of CSEs on a firm-wide, entity-level basis (with substituted compliance available in certain circumstances), except as to a narrow class of uncleared swaps between a non-U.S. CSE and a non-U.S. counterparty that fall within the Exclusion. The Proposed Rule would establish a procedural framework in which the Commission would consider permitting compliance with comparable margin requirements in a foreign jurisdiction to substitute for compliance with the Commission's margin requirements in certain circumstances. The Commission would consider whether the requirements of such foreign jurisdiction with respect to margin of uncleared swaps are comparable to the Commission's margin requirements.

Specifically, the Proposed Rule would provide that a CSE who is eligible for substituted compliance may submit a request, individually or collectively, for a comparability determination.

Persons requesting a comparability determination may coordinate their application with other market participants and their home regulators to simplify and streamline the process. Once a comparability determination is made for a jurisdiction, it would apply for all entities or transactions in that jurisdiction to the extent provided in the determination, as approved by the Commission. In providing information to the Commission for a comparability determination, applicants must include, at a minimum, information describing any differences between the relevant foreign jurisdiction's margin requirements and international standards,

and the specific provisions of the foreign jurisdiction that govern: (i) The transactions subject to the foreign jurisdiction's margin requirements; (ii) the entities subject to the foreign jurisdiction's margin requirements; (iii) the methodologies for calculating the amounts of initial and variation margin; (iv) the process and standards for approving models for calculating initial and variation margin models; (v) the timing and manner in which initial and variation margin must be collected and/or paid; (vi) any threshold levels or amounts; (vii) risk management controls for the calculation of initial and variation margin; (viii) eligible collateral for initial and variation margin; (ix) the requirements of custodial arrangements, including rehypothecation and the segregation of margin; (x) documentation requirements relating to margin; and (xi) the cross-border application of the foreign jurisdiction's margin regime.

A CSE may apply for a comparability determination only if the uncleared swap activities of the CSE are directly supervised by the authorities administering the foreign regulatory framework for uncleared swaps. Also, a foreign regulatory agency may make a request for a comparability determination only if that agency has direct supervisory authority to administer the foreign regulatory framework for uncleared swaps in the requested foreign jurisdiction.

See

note 74,

supra,

for a discussion of the definition of “international standards” under the Proposed Rule. See also § 23.160(a)(3) of the Proposed Rule.

See

§ 23.160(c)(2) of the Proposed Rule for submission requirements.

In addition, the Commission would expect the applicant, at a minimum, to describe how the foreign jurisdiction's margin requirements addresses each of the above-referenced elements, and identify the specific legal and regulatory provisions that correspond to each element (and, if necessary, whether the relevant foreign jurisdiction's margin requirements do not address a particular element). Further, the applicant must describe the objectives of the foreign jurisdiction's margin requirements, the ability of the relevant regulatory authority or authorities to supervise and enforce compliance with the foreign jurisdiction's margin requirements, including the powers of the foreign regulatory authority or authorities to supervise, investigate, and discipline entities for compliance with the margin requirements and the ongoing efforts of the regulatory authority or authorities to detect, deter, and ensure compliance with the margin requirements. Finally, the applicant must furnish copies of the foreign jurisdiction's margin requirements (including an English translation of any foreign language document) and any other information and documentation that the Commission deems appropriate.

See

§ 23.160(c)(2)(v) and (vi) of the Proposed Rule.

In issuing a Comparability Determination, the Commission may impose any terms and conditions it deems appropriate.

In addition, the Proposed Rule would provide that the Commission may, on its own initiative, further condition, modify, suspend, terminate, or otherwise restrict a comparability determination in the Commission's discretion. This could result, for example, from a situation where, after the Commission issues a comparability determination, the basis of that determination ceases to be true. In this regard, the Commission would require an applicant to notify the Commission of any material changes to information submitted in support of a comparability determination (including, but not limited to, changes in the foreign jurisdiction's supervisory or regulatory regime) as the Commission's comparability determination may no longer be valid.

The violation of such terms and conditions may constitute a violation of the Commission's margin requirements and/or result in the modification or revocation of the comparability determination.

The Commission expects to impose this obligation as one of the conditions to the issuance of a comparability determination.

The collection of information that is proposed by this rulemaking is necessary to implement sections 4s(e) of the CEA, which mandates that the Commission adopt rules establishing minimum initial and variation margin requirements for CSEs on all swaps that are not cleared by a registered derivatives clearing organization, and section 2(i) of the CEA, which provides that the provisions of the CEA relating to swaps that were enacted by Title VII of the Dodd-Frank Act (including any rule prescribed or regulation promulgated thereunder) apply to

activities outside the United States that have a direct and significant connection with activities in, or effect on, commerce of the United States.

The information collection would be necessary for the Commission to consider whether the requirements of the foreign rules are comparable to the applicable requirements of the Commission's rules.

Section 2(i) of the CEA provides that the provisions of the CEA relating to swaps that were enacted by Title VII of the Dodd-Frank Act (including any rule prescribed or regulation promulgated thereunder), shall not apply to activities outside the United States unless those activities (1) have a direct and significant connection with activities in, or effect on, commerce of the United States or (2) contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of Title VII of the CEA.

As noted above, any CSE who is eligible for substituted compliance may make a request for a comparability determination. Currently, there are approximately 102 CSEs provisionally registered with the Commission. The Commission further estimates that of the approximately 102 CSEs, approximately 61 CSEs would be subject to the Commission's margin rules as they are not subject to a Prudential Regulator. However, the Commission notes that any foreign regulatory agency that has direct supervisory authority over one or more CSEs and that is responsible to administer the relevant foreign jurisdiction's margin requirements may apply for a comparability determination. Further, once a comparability determination is made for a jurisdiction, it would apply for all entities or transactions in that jurisdiction to the extent provided in the determination, as approved by the Commission. The Commission estimates that it will receive requests for a comparability determination from 17 jurisdictions, consisting of the 16 jurisdictions within the G20, plus Switzerland,

and that each request would impose an average of 10 burden hours.

Because the Commission's proposed margin requirements are based on the BCBS-IOSCO framework and one of the factors that the Commission will consider in making its determination is the comparability to these international standards, the Commission estimates that in all likelihood, it will receive applications from all 16 jurisdictions within the G20, plus Switzerland.

Based upon the above, the estimated hour burden for collection is calculated as follows:

Number of respondents:

17.

Frequency of collection:

Once.

Estimated annual responses per registrant:

Estimated aggregate number of annual responses:

17.

Estimated annual hour burden per registrant:

10 hours.

Estimated aggregate annual hour burden:

170 hours (17 registrants × 10 hours per registrant).

Information Collection Comments.

The Commission invites the public and other Federal agencies to comment on any aspect of the reporting burdens discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (2) evaluate the accuracy of the Commission's estimate of the burden of the proposed collection of information; (3) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (4) minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.

Comments may be submitted directly to the Office of Information and Regulatory Affairs, by fax at (202) 395-6566 or by email at

OIRAsubmissions@omb.eop.gov

. Please provide the Commission with a copy of submitted comments so that all comments can be summarized and addressed in the final rule preamble. Refer to the

ADDRESSES

section of this notice of proposed rulemaking for comment submission instructions to the Commission. A copy of the supporting statements for the collections of information discussed above may be obtained by visiting

RegInfo.gov.

OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this document in the

Federal Register

. Therefore, a comment is best assured of having its full effect if OMB receives it within 30 days of publication.

C. Cost-Benefit Considerations

1. Introduction

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 or issuing certain orders.

100

Section 15(a) further specifies that the costs and benefits shall be evaluated in light of 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) factors.

100

7 U.S.C. 19(a).

In promulgating the Proposed Margin Rules,

101

the Commission considered the costs and benefits associated with its choices regarding the scope and extent to which it would apply its proposed margin requirements to uncleared swaps of a CSE, including those related to the setting of the material swap exposure for financial entities, and related substantive requirements, such as the determination of eligible collateral and acceptable custodial arrangements. In addition, in light of the fact that section 4s(e), by its terms, applies to uncleared swaps of all CSEs, regardless of the domicile of the CSE (or its counterparties), the costs and benefits discussed in the Proposed Margin Rules'

Federal Register

release relate both to the domestic and cross-border application of the margin rule.

102

The cost and benefit considerations (“CBC”) set out in this proposal are intended to augment the CBC set forth in the Proposed Margin Rules'

Federal Register

release and address cost and benefit considerations related to the Commission's choices regarding the extent to which it would recognize compliance with comparable foreign requirements as an alternative means of compliance with the Commission's margin rules (“substituted compliance”) and the extent to which it would exclude uncleared swaps from the Commission's margin rules. Further, in considering the relevant costs and benefits of the Proposed Margin Rules, the Commission used as its baseline the swaps market as it existed at the time of the Proposed Margin Rules'

Federal Register

release; because this Proposed Rule addresses the cross-border application of the Proposed Margin Rules, the Commission is using as its baseline the swaps market as it would operate once the Proposed Margin Rules were fully implemented.

101

The Commission's Proposed Margin Rules are set forth in proposed §§ 23.150 through 23.159 of part 23 of the Commission's regulations, proposed as 17 CFR 23.150 through 23.159.

See

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59898 (Oct. 3, 2014).

102

See

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59920-59926 (Oct. 3, 2014).

As discussed in section I.B. above, in developing the proposed cross-border framework in the Proposed Rule, the

Commission is mindful of the global and highly interconnected nature of the swaps market—and that risk exposures overseas can quickly manifest in the United States and pose substantial threat to the U.S. financial system. At the same time, the Commission also recognizes that competitive distortions and market inefficiencies can result—and the benefits of the BCBS-IOSCO framework lost—if due consideration is not given to comity principles. The Commission has also carefully considered the impact of its choices in determining whether (and, if so, under what circumstances) substituted compliance would be available or whether (and, if so, under what circumstances) swaps would be deemed excluded, including the effect of its choices on efficiency, competition, market integrity and transparency.

The Commission is aware of the potentially significant trade-offs inherent in its policy decisions. For instance, the Commission's choice not to exclude from its margin requirements certain foreign-facing swaps involving U.S. CSEs and non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S. person may make it more costly for such firms to conduct their swaps business, particularly in foreign jurisdictions, and put them at a competitive disadvantage relative to non-U.S. CSEs whose obligations under the relevant swap are not guaranteed by a U.S. person. It could also make foreign counterparties less willing to deal with U.S. CSEs and non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S. person. On the other hand, full application of the margin requirements to these CSEs may enhance the safety and soundness of these CSEs and consequently, the U.S. financial system. In addition, the extent, if any, to which either of the aforementioned disadvantages would arise depends on whether competitors of such CSEs must comply with comparable margin requirements. In developing the proposed cross-border framework in the Proposed Rule, the Commission has attempted to appropriately consider competing concerns in seeking to effectively address the risk posed to the safety and soundness of CSEs, while creating a workable framework that mitigates the potential for undue market distortions and that promotes global harmonization.

The Commission's consideration of the costs and benefits associated with the proposed framework is complicated by the fact that other jurisdictions may adopt requirements with different scope or on different timelines. Currently, no foreign jurisdiction has finalized rules for margin of uncleared swaps. However, the EU

103

and Japan

104

have proposed such rules, each of which are based on the BCBS-IOSCO framework.

105

The extent to which, if at all, foreign jurisdictions will follow the BCBS-IOSCO framework and the differences between the requirements implemented overseas and the Commission's margin requirements will affect the costs and benefits related to the Proposed Rule. Thus, for example, if a margin rule in a particular foreign jurisdiction is less rigorous than the Commission's margin rule, those CSEs (U.S. and non-U.S. CSEs) that are subject to the Commission's margin rule may be competitively disadvantaged relative to those dealers that are eligible for Exclusion from the Commission's margin rule for certain swaps or are outside the Commission's jurisdiction.

106

103

See

available at https://www.eba.europa.eu/documents/10180/655149/JC+CP+2014+03+%28CP+on+risk+mitigation+for+OTC+derivatives%29.pdf

available at https://www.eba.europa.eu/documents/10180/1106136/JC-CP-2015-002+JC+CP+on+Risk+Management+Techniques+for+OTC+derivatives+.pdf

104

See

Financial Services Agency of Japan, draft amendments to the “Cabinet Office Ordinance on Financial Instruments Business” and “Comprehensive Guidelines for Supervision” with regard to margin requirements for non-centrally cleared derivatives (July 3, 2014). Available in Japanese at

http://www.fsa.go.jp/news/26/syouken/20140703-3.html

105

See

Margin Requirements for Non-centrally Cleared Derivatives, Sept. 2013,

available at http://www.bis.org/publ/bcbs261.pdf

. The Commission is not incorporating the details of the EU and Japanese proposals in this CBC, because they have not been adopted and would be subject to change upon adoption.

106

As discussed in section I.B. above, in the interest of promoting global harmonization, the Commission has consulted and coordinated with the Prudential Regulators and foreign regulatory authorities. In addition, the Commission staff has participated in numerous bilateral and multilateral discussions with foreign regulatory authorities discussing national efforts to implement margin reform and the possibility of conflicts and overlaps between U.S. and foreign regulatory regimes. Although at this time foreign jurisdictions do not yet have their margin regimes in place, the Commission has participated in ongoing, collaborative discussions with regulatory authorities in the EU and Japan regarding their cross-border approaches to the margin rules, including the anticipated scope of application of margin requirements in their jurisdiction to cross-border swaps, their plans for recognizing foreign margin regimes, and their anticipated timelines. The Commission expects that these discussions will continue as it finalizes and then implements its margin rules, and as other jurisdictions develop their own margin rules and approaches to cross-border applications.

In sum, given that foreign jurisdictions do not yet have in place their margin rules, it is not possible to fully evaluate the costs and benefits associated with the Proposed Rule, and in particular, the implications for the safety and soundness of CSEs and competition. However, to the extent that a foreign regime's margin requirements are comparable, any differences between the Commission's margin requirements and foreign margin requirements would be insignificant and, therefore, mitigate the potential for undue risk to the CSE and competitive distortions. However, if a foreign regime's margin requirements are not deemed comparable, this may put a CSE at a competitive disadvantage when competing with non-U.S. firms that are not registered with the Commission because these non-CFTC registered dealers would have a cost advantage that could affect their pricing terms to clients.

In the sections that follow, the Commission considers: (i) Costs and benefits associated with the proposed definition of U.S. person; (ii) the proposed framework for substituted compliance; (iii) the proposed exclusion from the margin rule; (iv) the submission of requests for a comparability determination; and (v) alternatives considered and the cost and benefit of such alternatives. Wherever reasonably feasible, the Commission has endeavored to quantify the costs and benefits of this proposed rulemaking. In a number of instances, the Commission currently lacks the data and information required to precisely estimate costs and benefits. Where it was not feasible to quantify (

e.g.,

because of the lack of accurate data or appropriate metrics), the Commission has endeavored to consider the costs and benefits of these rules in qualitative terms.

2. Proposed Rule

The Proposed Rule sets forth a definition of “U.S. person,” describing the circumstances under which substituted compliance or the exclusion would be available, and would establish a process for the submission of requests for a comparability determination. In addition to issues related to financial integrity of markets, competition and market distortions noted above, the U.S. person definition and comparability determination process entail monetary costs for CSEs and market participants because a market participant may have

to expend resources to determine whether it (or its counterparty) is a U.S. person. A CSE seeking to rely on substituted compliance could incur costs in connection with the submission of a request for a comparability determination, although this would not be the case in circumstances where the relevant jurisdiction has itself attained a comparability finding from the Commission. In this section, we describe the most significant considerations that we have taken into account in formulating the Proposed Rule.

a. U.S. Person

Under the Proposed Rule, the term “U.S. person” would be defined so as to identify activities having a substantial nexus to the U.S. market because they are undertaken by individuals or entities organized or domiciled in the United States or because of other connections to the U.S. market. The definition is intended to identify those individuals and entities whose swap activities have a substantial nexus to U.S. markets even when they transact in swaps with a non-U.S. CSE. As noted in section II.B.1. above, this proposed definition generally follows the traditional, territorial approach to defining a U.S. person. The chief benefit of this territorial approach is that it is objective and clear—and the Commission believes that the industry has largely followed a similar definition of “U.S. person” included in the Guidance.

The Commission considered including the U.S. majority-ownership prong that was included in the Guidance (50% U.S. person ownership of a fund or other collective investment vehicle), but has determined not to propose it.

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The Commission understands that unlike other corporate structures, certain types of funds, specifically fund-of-funds and master-feeder structures, would require an adviser or administrator to look through to other fund entities in the fund structure, in ascertaining whether a beneficial owner of the fund is a U.S. person. The Commission further understands that this may be difficult to determine in some cases. In addition, the Commission believes that other elements of the U.S. person definition would in many circumstances cover these funds as a “U.S. person.”

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Even if a non-U.S. fund with U.S. majority-ownership is treated as a non-U.S. person, such fund would be excluded from the Commission's margin rules only in limited circumstances (namely, when the fund trades with a non-U.S. CSE that is not a consolidated subsidiary of a U.S. entity or a U.S. branch of a non-U.S. CSE). Additionally, any excluded swaps would most likely be covered by another jurisdiction that adheres to the BCBS-IOSCO standards. The Commission anticipates that non-U.S. CSEs will generally be required, in their home jurisdiction, to collect margin from these non-U.S. funds.

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Therefore, non-U.S. CSEs would generally be protected in the event of a default by a non-U.S. fund even if the uncleared swap with the non-U.S. fund falls within the Exclusion.

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Accordingly, the Commission believes that treatment of non-U.S. funds with U.S. majority-ownership as non-U.S. persons will not have a substantial impact on the safety and soundness of CSEs or the stability of the U.S. financial system; at the same time, the Commission believes that excluding the majority-ownership prong would alleviate any burden associated with determining whether a fund qualifies as a U.S. person under this criterion.

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At this time, we do not have information as to what portion of the funds that would have been covered by the U.S. majority-ownership prong are hedge funds.

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Further, as noted earlier, a non-U.S. CSE that can avail itself of the Exclusion would still be subject to the Commission's margin rules with respect to all uncleared swaps not meeting the criteria for the Exclusion, albeit with the possibility of substituted compliance. The Commission further believes that the possibility of a cascading event affecting U.S. counterparties and the U.S. market more broadly as a result of a default by the non-U.S. CSE would also be mitigated because the non-U.S. CSE would be subject to U.S. margin requirements (with the possibility of substituted compliance to the extent applicable) when entering into a swap with U.S. counterparties.

As noted in section II.B.1. above, prong (6) (Proposed Rule § 23.160(a)(10)(vi)) of the proposed “U.S. person” definition would capture certain legal entities owned by one or more U.S. person(s) and for which such person(s) bear unlimited responsibility for the obligations and liabilities of the legal entity. In the case of the Guidance, the “U.S. person” definition would generally characterize a legal entity as a U.S. person if the entity were “directly or indirectly majority-owned” by one or more persons falling within the term “U.S. person” and such U.S. person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity. Because this prong of the proposed definition of “U.S. person” is broader in scope, the Commission believes that this may result in more legal entities meeting the U.S. person definition. In addition, to the extent that this prong of the proposed definition of “U.S. person” expands the number of market participants that would be deemed to be a “U.S. person,” the Commission believes that the benefits that would have been provided to otherwise non-U.S. CSEs from being able to avail themselves of substituted compliance and the Exclusion would not be realized.

The proposed “U.S. person” definition does not include the prefatory phrase “includes, but is not limited to” that was included in the Guidance. The Commission believes that this prefatory phrase should not be included in the Proposed Rule in order to provide legal certainty regarding the application of U.S. margin requirements to cross-border swaps.

Finally, the Commission believes that the definition of “U.S. person” provides a clear and objective basis upon which to identify a U.S. person, and that identifying whether a counterparty is a “U.S. person” should be relatively straightforward because, as noted above, the Commission believes that a swap counterparty generally should be permitted to reasonably rely on its counterparty's written representation in determining whether the counterparty is within the definition of the term “U.S. person.”

b. Availability of Substituted Compliance and Exclusion

i. Uncleared Swaps of U.S. CSEs or of Non-U.S. CSEs Whose Obligations Under the Relevant Swap Are Guaranteed by a U.S. Person

As set out in Table A to this release, under the Proposed Rule, the Commission's margin rules would generally apply to all uncleared swaps of U.S. CSEs. For U.S. CSEs, substituted compliance would only be available with respect to the requirement to post initial margin and only if the counterparty is a non-U.S. person (including a non-U.S. CSE) whose obligations under the uncleared swap are not guaranteed by a U.S. person. Uncleared swaps with U.S. CSEs would never qualify for the Exclusion. Under the Proposed Rule, non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S. person would receive the same treatment as U.S. CSEs.

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The Commission believes

that this result is appropriate because a swap of an entity guaranteed by that U.S. person will have economic and financial implications that are likely to be very similar to the economic and financial implications of a swap entered into directly by the U.S. guarantor, as discussed in section II.B.2. above.

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As discussed in section II.B.2, under the Proposed Rule the Commission is defining a

guarantee narrower than in the Guidance, and in doing so, the Commission has broadened the availability of substituted compliance and th

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