# Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants-Cross-Border Application of the Margin Requirements > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-12612 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** May 31, 2016 - **Citation:** 81 FR 34818 ## Text 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: Final rule. SUMMARY: On January 6, 2016, the Commodity Futures Trading Commission (“Commission” or “CFTC”) published final regulations to implement section 4s(e) of the Commodity Exchange Act, which requires the Commission to adopt initial and variation margin requirements for uncleared swaps of swap dealers and major swap participants that do not have a Prudential Regulator (collectively, “Covered Swap Entities” or “CSEs”). In this release, the Commission is adopting a rule to address the cross-border application of the Commission's margin requirements for CSEs' uncleared swaps. DATES: The final rule is effective August 1, 2016. FOR FURTHER INFORMATION CONTACT: Laura B. Badian, Assistant General Counsel, 202-418-5969, lbadian@cftc.gov ; Paul Schlichting, Assistant General Counsel, 202-418-5884, pschlichting@cftc.gov ; or Elise (Pallais) Bruntel, Counsel, (202) 418-5577, ebruntel@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. Introduction B. Key Considerations in the Cross-Border Application of the Margin Regulations II. The Final Rule A. Key Definitions 1. U.S. Person a. Proposed Rule b. Comments c. Final Rule 2. Guarantees a. Proposed Rule b. Comments c. Final Rule 3. Foreign Consolidated Subsidiary (“FCS”) a. Proposed Rule b. Comments c. Final Rule 4. Counterparty Representations B. Applicability of Margin Requirements To Cross-Border Uncleared Swaps 1. Proposed Rule 2. Substituted Compliance a. Comments b. Final Rule 3. Exclusion a. Comments b. Final Rule 4. Special Provisions for Non-Segregation Jurisdictions a. Comments b. Final Rule 5. Special Provisions for Non-Netting Jurisdictions a. Comments b. Final Rule C. Comparability Determinations 1. Proposed Rule 2. Comments 3. Final Rule III. Related Matters A. Regulatory Flexibility Act B. Paperwork Reduction Act 1. Information Collection—Comparability Determinations 2. Information Collection—Non-Segregation Jurisdictions 3. Information Collection—Non-Netting Jurisdictions C. Cost-Benefit Considerations 1. Introduction 2. Key Definitions a. U.S. Person b. Guarantees c. Foreign Consolidated Subsidiary 3. Application a. Substituted Compliance b. Exclusion c. Non-Segregation Jurisdictions and Non-Netting Jurisdictions 4. Comparability Determinations 5. Section 15(a) Factors a. Protection of Market Participants and the Public b. Efficiency, Competitiveness, and Financial Integrity c. Price Discovery d. Sound Risk Management Practices e. Other Public Interest Considerations Table A—Application of the Final Rule I. Background A. Introduction In the wake of the 2008 financial crisis, Congress enacted Title VII of the Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), 1 which modified the Commodity Exchange Act (“CEA”) 2 to establish a comprehensive regulatory framework for swaps. A cornerstone of this framework is the reduction of systemic risk to the U.S. financial system through the establishment of margin requirements for uncleared swaps. CEA section 4s(e), added by section 731 of the Dodd-Frank Act, directs the Commission to adopt rules establishing minimum initial and variation margin requirements on all swaps that are not cleared by a registered derivatives clearing organization (“DCO”). 3 To offset the greater risk to the swap dealer or major swap participant and the financial system arising from the use of uncleared swaps, the Commission's margin requirements must (i) help ensure the safety and soundness of the swap dealer or major swap participant, and (ii) be appropriate for the risk associated with the uncleared swaps held as a swap dealer or major swap participant. 4 Under CEA section 4s(e), the Commission's margin requirements apply to each swap dealer or major swap participant for which there is no Prudential Regulator (collectively, “Covered Swap Entities” or “CSEs”). 5 The Commission published final margin requirements for CSEs in January 2016. 6 1 Public Law 111-203, 124 Stat. 1376 (2010). 2 7 U.S.C. 1 et seq. 3 See 7 U.S.C. 6s(e)(2)(B)(ii). 4 7 U.S.C. 6s(e)(3)(A). 5 See 7 U.S.C. 6s(e)(1)(B). Swap dealers and major swap participants for which there is a Prudential Regulator must meet the margin requirements for uncleared swaps established by the applicable Prudential Regulator. 7 U.S.C. 6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining the term “Prudential Regulator” to include the Board of Governors of the Federal Reserve System; the Office of the Comptroller of the Currency; the Federal Deposit Insurance Corporation; the Farm Credit Administration; and the Federal Housing Finance Agency). The Prudential Regulators published final margin requirements in November 2015. See Margin and Capital Requirements for Covered Swap Entities, 80 FR 74840 (Nov. 30, 2015) (“Prudential Regulators' Final Margin Rule”). 6 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 FR 636 (Jan. 6, 2016) (the “Final Margin Rule”). The Final Margin Rule, which became effective April 1, 2016, is codified in part 23 of the Commission's regulations. See 17 CFR 23.150-159, 161. In July 2015, consistent with its authority in CEA sections 4s(e) and 2(i), 7 the Commission proposed a rule to address the cross-border application of the Commission's margin requirements (the “proposed rule”). 8 The proposed rule set out the circumstances under which a CSE would be allowed to satisfy the Commission's margin requirements by complying with comparable foreign margin requirements (“substituted compliance”); offered certain CSEs a limited exclusion from the Commission's margin requirements (the “Exclusion”); and outlined a framework for assessing whether a foreign jurisdiction's margin requirements are comparable to the Commission's requirements (“comparability determinations”). The Commission developed the proposed rule after close consultation with the Prudential Regulators and in light of comments from and discussions with market participants and foreign regulators. 9 7 See 7 U.S.C. 2(i). Section 2(i) of the CEA states that the provisions of the CEA 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 this Act that was enacted by the Wall Street Transparency and Accountability Act of 2010. 8 See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants—Cross-Border Application of the Margin Requirements, 80 FR 41376 (July 14, 2015) (“Proposal”). 9 In 2014, in conjunction with reproposing its margin requirements, the Commission requested comment on three alternative approaches to the cross-border application of its margin requirements: (i) A transaction-level approach consistent with the Commission's guidance on the cross-border application of the CEA's swap provisions, see Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 FR 45292 (July 26, 2013) (“Guidance”); (ii) an approach consistent with the Prudential Regulators' proposed cross-border framework for margin, see Margin and Capital Requirements for Covered Swap Entities, 79 FR 57348 (Sept. 24, 2014) (“Prudential Regulators' Proposed Margin Rule”); and (iii) an entity-level approach that would apply margin rules on a firm-wide basis (without any exclusion for swaps with non-U.S. counterparties). See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59898 (Oct. 3, 2014) (“Proposed Margin Rule”). Following a review of comments received in response to this release, the Commission's Global Markets Advisory Committee (“GMAC”) hosted a public panel discussion on the cross-border application of margin requirements. The Commission requested comment on all aspects of the proposed rule. After a careful review of the comments, 10 the Commission is adopting a final rule largely as proposed but with some modifications, as described below (the “Final Rule”). 11 10 The Commission received eighteen comment letters in response to the Proposal: Alternative Investment Management Association and Investment Association (Sept. 11, 2015) (“AIMA/IA”); American Bankers Association and ABA Securities Association (Sept. 14, 2015) (“ABA/ABASA”); American Council of Life Insurers (Sept. 14, 2015) (“ACLI”); Americans for Financial Reform (Sept. 14, 2015) (“AFR”); Chris Barnard (Sept. 14, 2015) (“Barnard”); Better Markets, Inc. (Sept. 14, 2015) (“Better Markets”); Financial Services Roundtable (Sept. 14, 2015) (“FSR”); FMS-Wertmanagement (Sept. 14, 2015) (“FMS-WM”); Institute for Agriculture and Trade Policy (Sept. 14, 2015) (“IATP”); Investment Company Institute Global (Sept. 14, 2015) (“ICI Global”); International Swaps and Derivatives Association, Inc. (Sept. 11, 2015) (“ISDA”); Institute of International Bankers and Securities Industry and Financial Markets Association (Sept. 14, 2015) (“IIB/SIFMA”); Japanese Bankers Association (Sept. 13, 2015) (“JBA”); LCH.Clearnet Group Ltd. (Sept. 14, 2015) (“LCH.Clearnet”); Managed Funds Association (Sept. 14, 2015) (“MFA”); PensionsEurope (Sept. 14, 2015) (“PensionsEurope”); Asset Management Group of the Securities Industry and Financial Markets Association (Sept. 14, 2015) (“SIFMA AMG”); and Vanguard (Sept. 14, 2015) (“Vanguard”). The comment file is available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1600 . 11 The Final Rule is codified at 17 CFR 23.160. B. Key Considerations in the Cross-Border Application of the Margin Regulations The overarching objective of the cross-border margin framework is to further the congressional mandate to ensure the safety and soundness of CSEs in order to offset the greater risk to CSEs and the financial system arising from the use of swaps that are not cleared. 12 Margin's primary function is to protect a CSE from counterparty default, allowing it to absorb losses and continue to meet its obligations using collateral provided by the defaulting counterparty. 13 While the requirement to post margin protects the counterparty in the event of the CSE's default, it also functions as a risk management tool, limiting the amount of leverage a CSE can incur by requiring that it have adequate eligible collateral to enter into an uncleared swap. In this way, margin serves as a first line of defense not only in protecting the CSE but in containing the amount of risk in the financial system as a whole, reducing the potential for contagion arising from uncleared swaps. 14 12 See 7 U.S.C. 6s(e)(3)(A). 13 See Proposal, 80 FR at 41377. 14 Although margin and capital are, by design, complementary, they serve equally important but different risk mitigation functions. Unlike margin, capital is difficult to rapidly adjust in response to changing risk exposures. Capital therefore can be viewed as a backstop in the event that margin is insufficient to cover losses resulting from a counterparty default. The Commission proposed capital rules in 2011. See Capital Requirements for Swap Dealers and Major Swap Participants, 76 FR 27802 (May 12, 2011) (“Proposed Capital Rule”). The Commission intends to repropose capital rules later this year. The Commission recognizes that, to achieve the goals of the Dodd-Frank Act, its cross-border framework must take into account the global state of the swap market. The nature of modern financial markets means that risk is not static or contained by geographic boundaries. Market participants engage in swaps on a 24-hour basis in global markets, and many financial entities operate through a complex web of branches, subsidiaries, and affiliates that are scattered across the globe. 15 These branches and affiliated entities are highly interdependent, sharing not only information technology and operational support but risk management, treasury, and custodial functions. Risks from a swap entered into by an affiliated entity in one jurisdiction may be transferred to another affiliate in a different jurisdiction through inter-affiliate transactions. As part of their risk management practices, swap dealers also commonly lay off the risk of client-facing swaps in the interdealer market, which, as a result of consolidation among global financial institutions, has become concentrated among a relatively small number of dealers. 16 These developments, along with others, have led to a highly interconnected global swap market, where risks originating in one jurisdiction and entity are easily transferred to other jurisdictions and entities, increasing the possibility of cascading defaults. 15 The largest U.S. banks have somewhere between 2,000 to 3,000 affiliated global entities, hundreds of which are based in the Cayman Islands. Data from the National Information Center (NIC), a repository of financial data and institutional characteristics of banks and other entities regulated by the Federal Reserve, show the increasing complexity of U.S. banks' foreign operations. See NIC, available at http://www.ffiec.gov/nicpubweb/nicweb/nichome.aspx . For instance, in 1990, there were 1,300 foreign nonbank subsidiaries in the database; at the end of 2014, there were more than 6,000. Foreign ownership is also highly concentrated in a few large firms: Goldman Sachs and Morgan Stanley own more than 2,000 foreign nonbank subsidiaries and, together with General Electric, own 63 percent of all foreign bank subsidiaries. Citigroup, JPMorgan Chase, and Bank of America account for 75 percent of all foreign branches. 16 According to the Quarterly Report on Bank Trading and Derivatives Activities issued by the Office of the Comptroller of the Currency (OCC) for the second quarter of 2015, the notional value of derivative contracts held by insured U.S. commercial banks and savings associations was $197.9 trillion. See Office of the Comptroller of the Currency, Quarterly Report on Bank Trading and Derivatives Activities Second Quarter 2015, 1 (2015), available at http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq215.pdf . At the same time, four large commercial banks with the most derivatives activity—Goldman Sachs, JPMorgan Chase Bank NA, Citibank, and Bank of America NA—held 91.1% of the notional amount of these derivatives contracts. Id. at 11, 16. Contracts for swaps specifically accounted for $117.5 trillion of the $197.9 trillion total notional. Id. at 16. As the 2008 financial crisis illustrated, the global nature of the swap market heightens the potential that risks assumed by a firm overseas stemming from its uncleared swaps 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. Complex financial and operational relationships among domestic and international affiliates, including guarantees from U.S. entities at entities like American International Group (AIG) and Lehman Brothers Holding Inc., demonstrated how the transfer of risk across multinational affiliated entities, including risk associated with swaps, is not always transparent and can be difficult to fully assess. More recent events, including major losses from J.P. Morgan Chase & Co.'s “London Whale” or the near failure of FCXM Inc. following trading losses at its London and Singapore affiliates, illustrate the continued potential for cross-border activities to have a significant impact on U.S. entities and markets. The global nature of the swap market, coupled with the interconnectedness of market participants, also necessitate that the Commission recognize the supervisory interests of foreign regulatory authorities and consider the impact of its choices on market efficiency and competition, which are vital to a well-functioning global swap market. 17 Foreign jurisdictions are at various stages of implementing margin reforms. To the extent that other jurisdictions adopt requirements with different coverage or timelines, the Commission's margin requirements may lead to competitive burdens for U.S. entities and deter non-U.S. persons from transacting with U.S. CSEs and their affiliates overseas. The Commission's substituted compliance regime—a central element of the Final Rule—is intended to address these concerns without compromising the congressional mandate to protect the safety and soundness of CSEs and the stability of the U.S. financial system. 17 In determining the extent to which the Dodd-Frank swap provisions apply to activities overseas, the Commission strives to protect U.S. interests, as determined by Congress in Title VII, and minimize conflicts with the laws of other jurisdictions, consistent with principles of international comity. See Guidance, 78 FR at 45300-01 (referencing the Restatement (Third) of Foreign Relations Law of the United States). Substituted compliance has long been a central element of the Commission's cross-border policy. 18 It is an approach that recognizes that market participants in a globalized swap market are subject to multiple regulators and potentially face duplicative or conflicting regulations. Under the Final Rule's substituted compliance regime, the Commission would, under certain circumstances, allow a CSE to satisfy the Commission's margin requirements by instead complying with the margin requirements in the relevant foreign jurisdiction. Substituted compliance helps preserve the benefits of an integrated, global swap market by reducing the degree to which market participants will be subject to multiple sets of regulations. Further, substituted compliance encourages collaboration and coordination among U.S. and foreign regulators in establishing robust regulatory standards for the global swap market. 18 For example, under part 30 of the Commission's regulations, if the Commission determines that the foreign regulatory regime would offer comparable protection to U.S. customers transacting in foreign futures and options and there is an appropriate information-sharing arrangement between the home supervisor and the Commission, the Commission has permitted foreign brokers to comply with their home regulations (in lieu of the applicable Commission regulations), subject to appropriate conditions. See, e.g., Foreign Futures and Options Transactions, 67 FR 30785 (May 8, 2002); Foreign Futures and Options Transactions, 71 FR 6759 (Feb. 9, 2006). The Commission is mindful of the challenges involved in implementing a substituted compliance framework for margin. If implemented properly, substituted compliance has the potential to enhance market efficiency and liquidity and foster global coordination of margin requirements without compromising the safety and soundness of CSEs and the U.S. financial system. However, if substituted compliance were extended to foreign jurisdictions that do not have adequate oversight or protections with regard to uncleared swaps, the effectiveness of the Commission's margin requirements could be undermined, importing additional risk into the financial system. The Commission therefore believes that close coordination with its foreign counterparts is essential to ensuring that the benefits of substituted compliance are achieved. Consistent with the congressional mandate to coordinate rules “to the maximum extent practicable,” 19 in developing the Final Rule, Commission staff worked closely with staff of the Prudential Regulators to align the Final Rule with the cross-border framework in the Prudential Regulators' Final Margin Rule. 20 Aligning with the Prudential Regulators' cross-border margin rule is particularly important given the composition of the global swap market. 21 Currently, approximately 106 swap dealers and major swap participants are provisionally registered with the Commission. Of those entities, an estimated 54 are CSEs subject to the Commission's margin rules, with the remaining 52 entities falling within the scope of the Prudential Regulators' margin rules. Of the 54 CSEs subject to the Commission's margin requirements, approximately 33 CSEs are affiliated with a prudentially-regulated swap entity. Therefore, substantial differences between the Commission's and Prudential Regulators' cross-border regulations could lead to competitive disparities between affiliates within the same corporate structure, leading to market inefficiencies and incentives to restructure their businesses in order to avoid the more stringent cross-border margin framework. 19 See 7 U.S.C. 6s(e)(3)(D)(ii). 20 See Prudential Regulators' Final Margin Rule, 80 FR 74840. The cross-border provision is section __.9 of the Prudential Regulators' Final Margin Rule and is substantially similar to the Commission's Final Rule. 21 The Securities and Exchange Commission (“SEC”) has not yet finalized similar rules imposing margin requirements for security-based swap dealers and major security-based swap participants. The SEC proposed its margin rule in October 2012. See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR 70214 (Nov. 23, 2012). In granting the Commission new authority over swaps under the Dodd-Frank Act, Congress also called for coordination and cooperation with foreign regulatory authorities. 22 Consistent with that mandate, and building on international efforts to develop a global margin framework, 23 the Commission closely consulted with its foreign counterparts in developing the Final Rule. As other jurisdictions finalize their margin rules and the Commission implements its cross-border margin framework, the Commission is committed to continuing to coordinate with foreign regulators, with a view toward mitigating any conflicting or otherwise substantially divergent margin requirements for uncleared swaps across jurisdictions. 22 15 U.S.C. 8325(a) (added by section 752 of the Dodd-Frank Act). 23 In October 2011, the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”), in consultation with the Committee on Payment and Settlement Systems (“CPSS”) and the Committee on Global Financial Systems (“CGFS”), formed a Working Group on Margining Requirements (“WGMR”) to develop international standards for margin requirements for uncleared swaps. Representatives of 26 regulatory authorities participated, including the Commission. In September 2013, the WGMR published a final report articulating eight key principles for non-cleared derivatives margin rules. These principles represent the minimum standards approved by BCBS and IOSCO and their recommendations to the regulatory authorities in member jurisdictions. See BCBS/IOSCO, Margin requirements for non-centrally cleared derivatives (updated March 2015) (“BCBS/IOSCO framework”), available at http://www.bis.org/bcbs/publ/d317.pdf . II. The Final Rule The Commission is adopting rules regarding how the Commission's margin requirements will apply to cross-border uncleared swaps. Broadly speaking, the final cross-border framework is designed to address the risks to a CSE, as an entity, associated with its uncleared swaps, consistent with CEA section 2(i) 24 and the statutory objectives of the margin requirements. As discussed above, section 4s(e) was enacted to address the risks to CSEs and to the U.S. financial system arising from uncleared swaps. The source of risk to a CSE is not confined to its uncleared swaps with U.S. counterparties or to swaps transacted within the United States. Risk arising from uncleared swaps involving non-U.S. counterparties can potentially have a substantial adverse effect on a CSE and therefore the stability of the U.S. financial system. Nevertheless, certain categories of uncleared swaps will be eligible for substituted compliance or the Exclusion based on the Commission's consideration of comity principles and the impact of the Final Rule on market efficiency and competition. 24 See 7 U.S.C. 2(i). The sections that follow summarize, as appropriate, the approach taken in the proposed rule, the comments received in response, and the resulting Final Rule. Section A discusses certain key definitions (“U.S. person,” “guarantee,” and “Foreign Consolidated Subsidiary” or “FCS”) in the Final Rule, which inform how the Commission's margin requirements apply to market participants in the cross-border context. Section B describes the cross-border application of the Commission's margin requirements, including the circumstances under which substituted compliance and the limited Exclusion are available and the application of two special provisions designed to accommodate swap activities in jurisdictions that do not have a legal framework to support custodial arrangements and netting in compliance with the Final Margin Rule (“non-segregation jurisdictions” 25 and “non-netting jurisdictions,” respectively). 26 Section C describes the Commission's framework for issuing comparability determinations. 25 As used in this release, a “non-segregation jurisdiction” is a jurisdiction where inherent limitations in the legal or operational infrastructure of the foreign jurisdiction make it impracticable for the CSE and its counterparty to post initial margin pursuant to custodial arrangements that comply with the Final Margin Rule, as further described in section II.B.4.b. 26 As used in this release, a “non-netting jurisdiction” is a jurisdiction in which a CSE cannot conclude, with a well-founded basis, that the netting agreement with a counterparty in that foreign jurisdiction meets the definition of an “eligible master netting agreement” set forth in the Final Margin Rule, as described in section II.B.5.b. As a preliminary matter, the Commission notes that several commenters requested Commission action outside the scope of the Final Rule, including modifications to the substantive margin requirements 27 or the Guidance. 28 The Commission notes that concerns regarding the general nature and application of the initial and variation margin requirements were addressed in the Final Margin Rule. Notably, the Final Margin Rule included substantial modifications from the Proposed Margin Rule that further aligned the Commission's margin requirements with the BCBS-IOSCO framework, which should further reduce the potential for conflicts with the margin requirements of foreign jurisdictions. 29 With respect to the Guidance, the Commission reiterates its intention to periodically review its cross-border policy in light of future developments, including its experience following adoption of the Final Rule. 30 27 See, e.g., ACLI at 2-3 (Commission should defer to International Standards with respect to acceptable forms of collateral for margin); FMS-WM at 1-2 (legacy portfolio entity backed by full faith and credit of sovereign government should be considered a “sovereign entity” within scope of Commission's margin requirements); ISDA at 14-15 (inter-affiliate swaps should be exempt from initial margin requirements and accounting standards to determine consolidation should be applied throughout margin rules); JBA at 6 (Commission should work with foreign counterparts to harmonize aspects of its margin rules, including treatment of “legacy trades,” inter-affiliate trades, and forms of eligible collateral); LCH.Clearnet at 4 (differences in approach to margin requirements between cleared and uncleared swaps should promote central clearing). 28 See, e.g., AFR at 2 (adopting cross-border approach to margin alone would create “serious problems”); AIMA/IA at 4 (Commission should amend Guidance to include U.S. person definition in the proposed rule); Better Markets at 6 (adopting cross-border approach to margin alone would be “a disservice to the comprehensive existing Guidance;” should instead make “targeted, limited changes” to Guidance); ICI Global at 7-8 (one U.S. person definition should apply consistently with respect to cross-border application of all swap requirements); IIB/SIFMA at 17-19 (proposed U.S. person and guarantee definitions should replace corresponding interpretations in Guidance); ISDA at 12 (same); JBA at 11-12 (same); SIFMA AMG at 4, 9-13 (same); Vanguard at 5 (same). 29 For example, the Final Margin Rule raised the material swaps exposure level from $3 billion to the BCBS-IOSCO standard of $8 billion, which reduces the number of entities that must collect and post initial margin. See Final Margin Rule, 81 FR at 644. In addition, the definition of uncleared swaps was broadened to include DCOs that are not registered with the Commission but pursuant to Commission orders are permitted to clear for U.S. persons. See id. at 638. 30 See Guidance, 78 FR at 45297. See also United States v. Edge Broadcasting Co., 509 U.S. 418, 434 (1993) (“[A]n agency does not have to make progress on every front before it can make progress on any front.”). See also Personal Watercraft Indus. Ass'n v. Dep't of Commerce, 48 F.3d 540, 544 (D.C. Cir. 1995). Commenters also requested that the Commission delay the cross-border application of its margin rules until after it has made comparability determinations. 31 Although the Commission declines to establish an open-ended delay in applying its margin rules, it remains committed to coordinating with foreign regulators to implement its cross-border margin framework in a workable manner. 31 See, e.g., ABA/ABASA at 3 (“sufficient time” for foreign jurisdictions to adopt margin rules); AIMA/IA at 3 (“sufficient time” to reach agreement with foreign counterparts); ISDA at 16-17 (12 months after margin rules are finalized in U.S., EU, and Japan, or two-year “transitional comparability determination,” providing substituted compliance for all foreign jurisdictions that adopt rules based on BCBS-IOSCO framework, while Commission undertakes comparability analysis); JBA at 3, 4 (at least 18 months after margin rules are finalized in the U.S., EU, and Japan); PensionsEurope at 3 (12-18 months); SIFMA AMG at 4, 14-15 (at least 18 months). A. Key Definitions The extent to which substituted compliance and the Exclusion are available depends on whether the relevant swap involves a U.S. person, a guarantee by a U.S. person, or a “Foreign Consolidated Subsidiary” (or “FCS”). The Final Rule adopts definitions of “U.S. person,” “guarantee,” and “Foreign Consolidated Subsidiary” solely for purposes of the margin rules. These definitions are discussed below. 1. U.S. Person Under the Final Rule, the term “U.S. person” is defined to include individuals or entities whose activities have a significant nexus to the U.S. market as a result of their being domiciled or organized in the United States or by virtue of the strength of their connection to the U.S. markets, even if they are domiciled or organized outside the United States. As discussed in section II.B.2.b.i. below, U.S. CSEs 32 are generally subject to the margin rules with only partial substituted compliance and are not eligible for the Exclusion. 32 See 17 CFR 23.160(a)(8) (defining “U.S. CSE” as a CSE that is a “U.S. person,” as defined in the Final Rule). See also 17 CFR 23.160(a)(4) (defining “non-U.S. CSE” as a CSE that is not a U.S. person). a. Proposed Rule In the proposed rule, the term “U.S. person” was defined to mean the following: • Any natural person who is a resident of the United States (proposed § 23.160(a)(10)(i)); • Any estate of a decedent who was a resident of the United States at the time of death (proposed § 23.160(a)(10)(ii)); • 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 as 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 that has its principal place of business in the United States, including any branch of the legal entity (proposed § 23.160(a)(10)(iii)); • Any pension plan for the employees, officers or principals of a legal entity as described in paragraph (a)(10)(iii) of proposed § 23.160, unless the pension plan is primarily for foreign employees of such an entity (proposed § 23.160(a)(10)(iv)); • 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 § 23.160(a)(10)(v)); • 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 (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 § 23.160(a)(10)(vi)); and • 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 (vi) of proposed § 23.160 (proposed § 23.160(a)(10)(vii)). 33 33 See proposed 17 CFR 23.160(a)(10). See also proposed 17 CFR 23.160(a)(5) (defining “non-U.S. person” as any person that is not a “U.S. person”). The Commission explained that, as indicated in paragraphs (iii) and (vi) of the proposed rule, a legal entity's status as a U.S. person would be determined at the entity level and would therefore include a foreign branch of a U.S. person. 34 An affiliate or subsidiary of a U.S. person that is organized or incorporated outside the United States, however, would not be deemed a “U.S. person” solely by virtue of its affiliation with the U.S. person. 35 The Commission also stated that a swap counterparty should generally be permitted to reasonably rely on its counterparty's written representation with regard to its status as a U.S. person. 36 34 See Proposal, 80 FR at 41383 (stating that the definition includes any foreign operations that are part of the U.S. legal person, regardless of their location); proposed 17 CFR 23.160 (a)(10)(iii), (vi) (defining such U.S. persons to include “any branch of the legal entity”). 35 See Proposal, 80 FR at 41383 (explaining that 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). 36 See id. (recognizing that the information necessary to accurately assess a counterparty's U.S. person status may be available only through overly burdensome due diligence). The proposed rule was generally consistent with the U.S. person interpretation set forth in the Guidance, with certain exceptions. 37 Notably, the proposed rule did not define “U.S. person” to include a commodity pool, pooled account, investment fund, or other collective investment vehicle that is majority-owned by one or more U.S. persons (the “U.S. majority-owned fund prong”). 38 The proposed rule also did not include a catchall provision, thereby limiting the definition of “U.S. person” for purposes of the margin rule to persons enumerated in the rule. 39 Finally, paragraph (vi) of the proposed rule (the “unlimited U.S. responsibility prong”) represented a modified version of a similar concept from the Guidance, which interprets “U.S. person” to include a legal entity “directly or indirectly majority-owned” by one or more U.S. person(s) that bear unlimited responsibility for the legal entity's liabilities and obligations. 40 37 See Proposal, 80 FR at 41382-84. See also Guidance, 78 FR at 45308-17 (setting forth the interpretation of “U.S. person” for purposes of the Guidance). 38 See Proposal, 80 FR at 41383. See also Guidance, 78 FR 45313-14 (discussing the U.S. majority-ownership prong for purposes of the Guidance). The Guidance interpreted “majority-owned” in this context to mean the beneficial ownership of more than 50 percent of the equity or voting interests in the collective investment vehicle. See id. at 45314. 39 See Proposal, 80 FR at 41383. See also Guidance, 78 FR at 45316 (discussing the inclusion of the prefatory phrase “include, but not be limited to” in the interpretation of “U.S. person” in the Guidance). 40 See Proposal, 80 FR at 41383. See also Guidance, 78 FR at 45312-13 (discussing the unlimited U.S. responsibility prong for purposes of the Guidance). The Commission requested comment on all aspects of the proposed definition of “U.S person,” including whether the definition should include a U.S. majority-owned fund prong or an unlimited U.S. responsibility prong and whether it should be identical to the U.S. person definition adopted by the SEC. 41 41 See Proposal, 80 FR at 41384. See also 17 CFR 240.3a71-3(a)(4) (setting forth the definition of “U.S. person” adopted by the SEC for purposes of security-based swap regulation). b. Comments In general, commenters raised few objections to the proposed “U.S. person” definition. Nearly all commenters supported the absence of a U.S. majority-owned fund prong, 42 and several expressly supported the absence of a catchall provision. 43 With respect to the U.S. majority-owned funds prong, commenters argued that U.S. ownership alone is not indicative of whether a fund's activities have a direct and significant effect on the U.S. financial system 44 and that identifying and tracking a fund's beneficial ownership may pose a significant challenge in certain circumstances. 45 Commenters added that characterizing such U.S. majority-owned funds as U.S. persons may lead to duplicative margin requirements because such funds will likely also be subject to foreign regulation. 46 42 See e.g., AIMA/IA at 3-4; FSR at 2, 8; IATP at 4; IIB/SIFMA at 18; ISDA at 12; JBA at 11; MFA at 3, 5-6; SIFMA AMG at 10, Vanguard at 5. 43 See e.g., IIB/SIFMA at 17; ISDA at 12 (the absence the prefatory phrase “includes, but is not limited to” would “increase legal certainty”); SIFMA AMG at 10-11. 44 See e.g., AIMA/IA at 3; FSR at 8; IATP at 4; IIB/SIFMA at 18 (fund owners are not direct counterparties to swap and their risk of loss is limited to extent of their investment in the fund); MFA at 6. 45 See e.g., AIMA/IA at 3-4 (highlighting challenges presented by nominee accounts); IATP at 4 (ownership can be complex and variable over the life of a fund); IIB/SIFMA at 18 (highlighting challenges associated with funds formed before adoption of Guidance); SIFMA AMG at 10. But see MFA at 5-6 (funds organized or having a principal place of business in the United States are properly included in the U.S. person definition). 46 See AIMA/IA at 4 (“comparable foreign rules” will apply to limit the likelihood and impact of a counterparty default); FSR at 8 (neither SEC nor EU regulators have proposed exercising jurisdiction over an entity on the basis of majority control); ISDA at 12 (neither BCBS-IOSCO framework nor proposed EU rules impose rules on funds based on jurisdiction of its owners). A few commenters, however, requested changes regarding the unlimited U.S. responsibility prong. ISDA and JBA recommended that, consistent with the Guidance, the Commission require that the U.S. person(s) bearing unlimited responsibility for the obligations and liabilities of the legal entity have a majority ownership stake in the entity. ISDA argued broadly that, to avoid confusion and regulatory overlap, legal entities that have multiple owners with unlimited liability for the obligations and liabilities of the legal entity should only be subject to the jurisdiction of the majority owner. 47 JBA argued that the definition should be consistent with the Guidance in order to avoid the possibility that the Commission's margin requirements would apply to a “broader scope of U.S. persons relative to other swap regulations.” 48 IIB/SIFMA requested that the unlimited U.S. responsibility prong be removed altogether, arguing that unlimited responsibility is “largely equivalent” to a guarantee and should therefore be afforded the same treatment. 49 47 See ISDA at 12. 48 See JBA at 11-12. 49 See IIB/SIFMA at 17-18 (while guarantor may have legal defenses to enforcement of guarantee, both U.S. guarantee and unlimited U.S. responsibility prong create risk to U.S. persons only to the extent that legal entity incurs losses and fails to perform obligations). Commenters also made certain other recommendations to further conform the U.S. person definition to the interpretation of “U.S. person” in the Guidance. 50 ICI Global, SIFMA AMG, and Vanguard requested that the Commission confirm that, as indicated in the Guidance, a pool, fund or other collective investment vehicle that is publicly offered only to non-U.S. persons and not offered to U.S. persons would not fall within the scope of the U.S. person definition. 51 SIFMA AMG also added that language in paragraphs (iii) and (vi) specifying that a legal entity deemed a U.S. person would include “any branch of the legal entity” was unnecessarily confusing. 52 50 As indicated above, several commenters recommended generally that the Commission establish a uniform definition of “U.S. person” that would apply both in the context of the cross-border application of the margin rules and with respect to the other swaps regulatory topics covered by the Guidance. See supra note 28. 51 See ICI Global at 5-7 (clarification is necessary to avoid imposing Dodd-Frank Act swap provisions on entities that only have “nominal nexus” to United States); SIFMA AMG at 10-12 (reclassifying such funds as U.S. persons solely for purposes of margin rule would be extremely complicated and burdensome for asset managers and their clients); Vanguard at 5. See also Guidance, 78 FR at 45314 (providing that a collective investment vehicle that is publicly offered only to non-U.S. persons and not offered to U.S. persons generally would not fall within any of the prongs of the “U.S. person” interpretation in the Guidance). 52 SIFMA AMG at 12 (such language, which is not present in corresponding prongs of U.S. person interpretation in Guidance, could “cause confusion in terms of whether a person having any branches in the United States needs to take into account its U.S. person status, including in assessing the entity's principal place of business”). Finally, FSR and JBA requested that, in the interest of harmonizing margin requirements and reducing compliance costs, the Commission should, consistent with the SEC's cross-border rules, exclude from the U.S. person definition certain designated international organizations. 53 IATP argued, however, that such exclusion would be either unnecessary or inappropriate. 54 53 See FSR at 8; JBA at 12 (while international financial institutions “are invested by the U.S. government, financial institutions generally separate them from the U.S. country risk in evaluating their credit risk in practice”). See also 17 CFR 240.3a71-3(a)(4)(iii) (defining “U.S. person” for purposes of the SEC's regulation of security-based swaps to exclude 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). 54 See IATP at 4 (intergovernmental organizations should “voluntarily practice” the margin requirements in order to “realize the objectives of the [sic] intergovernmental investment charters”). c. Final Rule The Final Rule defines “U.S. person” as proposed, but the Commission is providing some additional clarifications in response to commenters. As stated in the Proposal, the definition generally follows a traditional, territorial approach to defining a U.S. person, and the Commission believes that this definition offers a clear, objective basis for determining those individuals or entities that should be identified as U.S. persons. Under the Final Rule, a legal person's status as a U.S. person is determined at the entity level and therefore includes any foreign operations that are part of the legal person, regardless of their location. Consistent with this approach, the definition includes any foreign branch of a U.S. person. 55 The status of a legal entity as a U.S. person would not generally affect whether a separately incorporated or organized legal entity 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 being affiliated with a U.S. person. 56 55 The Commission clarifies that the inclusion of “any branch of the legal entity” in sections 23.160(a)(10)(iii) and (vi) of the Final Rule is intended to make clear that the definition includes both foreign and U.S. branches of an entity and does not introduce any additional criteria for determining an entity's U.S. person status. 56 See also 17 CFR 23.160(a)(5) (defining “non-U.S. person” as any person that is not a U.S. person). Sections 23.160(a)(10)(i) through (v) and (vii) of the Final Rule identify certain persons as U.S. persons by virtue of being domiciled or organized in 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. 57 Persons domiciled or organized in the United States are likely to have significant financial and legal relationships in the United States and are therefore appropriately included within the definition of “U.S. person.” 57 See, e.g., 17 CFR 4.7(a)(1)(iv) (defining “Non-United States person” for purposes of part 4 of the Commission regulations, which applies to commodity pool operators). Consistent with this traditional approach, section 23.160(a)(10)(iii) of the Final Rule includes 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 section, the Commission interprets “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. v. 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.” 58 58 559 U.S. 77, 80 (2010). The Commission is of the view that determining the principal place of business of an investment fund may require consideration of additional factors beyond those applicable to operating companies. In the case of a fund, the senior personnel that direct, control, and coordinate a fund's activities are generally not the named directors or officers of the fund but rather persons employed by the fund's investment adviser or the fund's promoter. Therefore, consistent with the Guidance, the Commission would generally 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. 59 59 See Guidance, 78 FR at 45309-12 (providing 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). Note that the examples included in the Guidance are for illustrative purposes only and do not purport to address all potential variations in the structure of collective investment vehicles or all factors relevant to determining whether a collective investment vehicle's principal place of business is in the United States. Section 23.160(a)(10)(vi) of the Final Rule defines “U.S. person” to 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. 60 In such cases, the U.S. person owner(s) serve as a financial backstop for all of the legal entity's obligations and liabilities. Creditors and counterparties accordingly look to the U.S. person owner(s) when assessing the risk of dealing with the entity. 61 Because the U.S. person owner(s)' responsibility is unlimited, the amount of equity the U.S. owner(s) have in the legal entity would not be relevant. 60 The Commission does not view the unlimited U.S. responsibility prong as equivalent to a U.S. guarantee (as “guarantee” is defined in the Final Rule). As stated in the Guidance, a guarantee does not necessarily provide for “unlimited responsibility for the obligations and liabilities of the guaranteed entity” in the same sense that the owner of an unlimited liability corporation bears such unlimited liability. See 78 FR at 45312. 61 By extension, by virtue of their unlimited responsibility for the legal entity's swap obligations, the U.S. person owner(s) have an interest in the swap activities of the legal entity to the same extent as if the swap activities were conducted by the U.S. person directly. In line with the proposed rule, the Final Rule does not include a U.S. majority-owned funds prong. Although the U.S. owners of such funds may be adversely impacted in the event of a counterparty default, the Commission believes that, on balance, 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, are excluded from the Commission's margin rules only in limited circumstances (namely, when these funds transact 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 result, coupled with the implementation issues raised by commenters, persuade the Commission that including a U.S. majority-owned funds prong in the scope of the “U.S. person” definition would not be appropriate for purposes of the margin rules. 62 The Final Rule's U.S. person definition also does not include the prefatory phrase “includes, but is not limited to” that was included in the Guidance. As stated in the proposed rule, the Commission believes that this catchall should not be included in order to provide legal certainty regarding the application of U.S. margin requirements to cross-border swaps. 62 Such a fund may nevertheless be a U.S. person by virtue of fitting within the scope of § 23.160(a)(10)(iii) (entities organized or having a principal place of business in the United States). In response to commenters, the Commission further clarifies that whether a pool, fund or other collective investment vehicle is publicly offered only to non-U.S. persons and not offered to U.S. persons would not be relevant in applying § 23.160(a)(10)(iii). The Commission notes that, as discussed in the proposed rule, the Final Rule defines “U.S. person” in a manner that is substantially similar to the definition used by the SEC in the context of cross-border regulation of security-based swaps. 63 The Commission further believes that any differences, such as the inclusion of an unlimited U.S. responsibility prong, are necessary and appropriate in the context of the cross-border application of margin requirements for uncleared swaps, for the reasons discussed above. 64 With respect to the designated international organizations excluded from the SEC's U.S. person definition, the Commission notes that a similar exclusion is unnecessary in the context of the cross-border application of the Commission's margin rules, given that such entities are generally considered non-financial end users under the Final Margin Rule and are therefore unaffected by application of the margin requirements for uncleared swaps. 65 63 See Proposal, 80 FR at 41382 n.46 (discussing the SEC's “U.S. person” definition for purposes of security-based swap regulation). 64 The SEC does not include the U.S. responsibility prong in its U.S. person definition, but instead treats a legal entity where one or more U.S. person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity as a non-U.S. person with a guarantee. The Commission believes that, for the reasons stated above, these entities should be included as a U.S. person rather than being treated as a non-U.S. person with a guarantee for purposes of the margin requirements for uncleared swaps. 65 Under the Final Margin Rule, the following international organizations are expressly considered non-financial end users: (1) The International Bank for Reconstruction and Development; (2) The Multilateral Investment Guarantee Agency; (3) The International Finance Corporation; (4) The Inter-American Development Bank; (5) The Asian Development Bank; (6) The African Development Bank; (7) The European Bank for Reconstruction and Development; (8) The European Investment Bank; (9) The European Investment Fund; (10) The Nordic Investment Bank; (11) The Caribbean Development Bank; (12) The Islamic Development Bank; (13) The Council of Europe Development Bank; and (14) Any other entity that provides financing for national or regional development in which the U.S. government is a shareholder or contributing member or which the Commission determines poses comparable credit risk). See 17 CFR 23.151 (defining “financial end user,” “non-financial end user,” and “multilateral development bank”). Under the Final Margin Rule, CSEs are not required to exchange margin with non-financial end users. 2. Guarantees Under the Final Rule, the term “guarantee” is defined to include arrangements, pursuant to which one party to an uncleared swap has rights of recourse against a guarantor, with respect to its counterparty's obligations under the uncleared swap. As discussed in section II.B.2.b.i. below, non-U.S. CSEs whose obligations under the relevant swap are guaranteed by a U.S. person (“U.S. Guaranteed CSEs”) 66 are eligible for substituted compliance to the same extent as U.S. CSEs and are similarly ineligible for the Exclusion. 66 This release uses the term “U.S. Guaranteed CSE” for convenience only. Whether a non-U.S. CSE falls within the meaning of the term “U.S. Guaranteed CSE” varies on a swap-by-swap basis, such that a non-U.S. CSE may be considered a U.S. Guaranteed CSE for one swap and not another, depending on whether the non-U.S. CSE's obligations under such swap are guaranteed by a U.S. person. a. Proposed Rule The proposed rule defined the term “guarantee” as an arrangement pursuant to which one party to a swap with a non-U.S. counterparty has rights of recourse against a U.S. person, with respect to the non-U.S. counterparty's obligations under the swap. The proposed rule defined “rights of recourse” as a conditional or unconditional legally enforceable right to receive or otherwise collect payment, in whole or in part. An arrangement would constitute a “guarantee” regardless of whether the rights of recourse were conditioned upon the non-U.S. counterparty's insolvency or failure to meet its obligations under the relevant swap or 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. The Commission requested comment on all aspects of its proposed definition of “guarantee,” including whether it would be appropriate to distinguish guarantee arrangements with a legally enforceable right of recourse from those without direct recourse. 67 67 See Proposal, 80 FR at 41385. b. Comments Most commenters supported the proposed definition of “guarantee.” 68 Commenters generally preferred it to the broader interpretation of “guarantee” in the Guidance, which includes other types of financial arrangements and support ( e.g., keepwell agreements and liquidity puts), 69 and agreed that it would promote legal certainty and lower compliance costs as a result. 70 IIB/SIFMA further argued the proposed definition is appropriate in the margin context and consistent with CEA section 2(i) because, absent such a legal relationship to a U.S. person, a non-U.S. person would not have a sufficient connection with activities in U.S. commerce to warrant the application of U.S. margin rules. 71 Commenters expressed concern, however, that multiple “guarantee” definitions could lead to confusion and recommended that the Commission apply the proposed “guarantee” definition throughout its cross-border policy. 72 68 See FSR at 2, 9; IATP at 5; IIB/SIFMA at 18-19; ISDA at 12; JBA at 12; SIFMA AMG at 4, 13. 69 See IIB/SIFMA at 18-19; ISDA at 12; JBA at 12; SIFMA AMG at 13. 70 See IIB/SIFMA at 18-19; ISDA at 12 (interpretation of “guarantee” in Guidance requires facts-and-circumstances analysis to determine whether arrangement supports a party's ability to pay or perform under swap); JBA at 12; SIFMA AMG at 13 (expressing approval that the proposed definition aligns with guarantee definition adopted by SEC). 71 See IIB/SIFMA at 18-19. See also FSR at 9 (“transaction-level” swap risk would not transfer back to United States absent right of recourse against a U.S. person and “entity-level” risk would be captured by other regulatory requirements, such as capital rules). 72 See ISDA at 12; JBA at 12; SIFMA AMG at 13. AFR and Better Markets opposed the proposed “guarantee” definition. 73 Both expressed a preference for the broader interpretation of “guarantee” in the Guidance and, like other commenters, recommended that the term have one consistent meaning. 74 AFR argued that both implicit guarantees, such as when a parent entity faces reputational incentives to provide financial support for a subsidiary, and other formal agreements that obligate a U.S. person to provide financial support, create a direct and significant nexus to the U.S. financial system and should be included within the scope of the term “guarantee.” 75 Accordingly, the proposed definition of “guarantee” may not fully capture the risk to the U.S. financial markets. 76 AFR suggested that the policy objective of increasing the availability of substituted compliance in the margin context would be better achieved by adopting the broad interpretation of “guarantee” in the Guidance and instead limiting the availability of substituted compliance with respect to swaps involving an “explicit recourse guarantee.” 77 73 AFR at 3, 5-7; Better Markets at 4. 74 See AFR at 3 (adopting different definition solely for purposes of margin rules would not only complicate overall set of cross-border rules, but establish an “extremely poor precedent” for narrowing guarantee concept in applying rest of Guidance); Better Markets at 4 (proposed definition is “less robust” than interpretation of guarantee in Guidance and should not be different in margin context). 75 See AFR at 6. 76 See id. 77 See id. at 5-6. c. Final Rule The Final Rule defines “guarantee” for purposes of the cross-border application of the Commission's margin rules to mean an arrangement pursuant to which one party to an uncleared swap has rights of recourse against a guarantor, with respect to its counterparty's obligations under the uncleared swap. 78 For these purposes, a party to an uncleared swap has rights of recourse against a guarantor if the party has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from the guarantor with respect to its counterparty's obligations under the uncleared swap. A counterparty has a right of recourse against a guarantor even if the right of recourse is conditioned upon its counterparty's insolvency or failure to meet its obligations under the swap, and regardless of whether the counterparty seeking to enforce the guarantee is first required to make a demand for payment or performance from its counterparty before proceeding against the guarantor. Further, the term “guarantee” applies equally regardless of whether the U.S. guarantor is affiliated with either counterparty or is an unaffiliated third party. In addition, the terms of the guarantee need not necessarily be included within the swap documentation or even otherwise reduced to writing, so long as a party to the swap has legally enforceable rights of recourse under the laws of the relevant jurisdiction. 78 See 17 CFR 23.160(a)(2). The Final Rule's definition of guarantee is generally consistent with the proposed rule's definition of guarantee, but reflects certain changes that are intended to more closely align it with the definition included in the Prudential Regulators' Final Margin Rule. 79 Language has been added to the Final Rule to address the concerns of the Commission and Prudential Regulators that swaps could be structured in a manner that would avoid application of the margin requirements to swaps that are guaranteed by a U.S. person. 80 Under this additional language, the term “guarantee” also encompasses any arrangement pursuant to which the guarantor itself has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from any other guarantor with respect to the counterparty's obligations under the uncleared swap. Under the Final Rule, such arrangement will be deemed a guarantee of the counterparty's obligations under the uncleared swap by the other guarantor. 79 The Final Rule also includes certain technical edits that would not affect the substance of the rule as compared to the proposed rule. 80 Based on this change to the definition of “guarantee,” the Final Rule differs from the proposed rule in that it treats certain non-U.S. persons as if they were U.S. persons. To illustrate, consider a swap between a non-U.S. CSE (“Party A”) and a non-U.S. person (“Party B”). Party B's obligations under the swap are guaranteed by a non-U.S. affiliate (“Party C”), who in turn has a guarantee from its U.S. CSE parent entity on Party C's swap obligations (“Parent D”). The Final Rule would deem a guarantee to exist between Party B and Parent D with respect to Party B's obligations under the swap with Party A. 81 81 This example is included for illustrative purposes only, and is not intended to cover all examples of swaps that could be affected by changes in the Final Rules. The Commission is cognizant that many other financial arrangements or support, other than a recourse guarantee as defined in the Final Rule, may be provided by a U.S. person to a non-U.S. CSE. The Commission acknowledges that these other financial arrangements or support may transfer risk directly back to the U.S. financial system, with possible significant adverse effects, in a manner similar to an arrangement that is covered by the definition of a “guarantee” in the Final Rule. However, the Commission believes that, in the context of the Final Rule, non-U.S. CSEs benefitting from such other forms of U.S. financial support will likely meet the definition of an FCS, a concept included in the final margin rules adopted by the Prudential Regulators, and thereby be adequately covered by the Commission's margin requirements. In this way, the Commission believes that the Final Rule achieves the dual goals of protecting the U.S. markets while promoting a workable cross-border margin framework that closely tracks the cross-border application of the Prudential Regulators' Final Margin Rule. 82 82 The Commission has determined that using the term “explicit recourse guarantee” in lieu of the broader “guarantee” would, in light of the Prudential Regulators' use of the comparable term “guarantee,” likely only cause confusion without making any substantive difference with respect to the cross-border application of the Commission's margin requirements. 3. Foreign Consolidated Subsidiary (“FCS”) Under the Final Rule, the term “Foreign Consolidated Subsidiary” identifies non-U.S. CSEs that are consolidated for accounting purposes with an ultimate parent entity that is a U.S. person (a “U.S. ultimate parent entity”). As further discussed in section II.B.2.b.ii. below, substituted compliance would be broadly available to an FCS to the same extent as any other non-U.S. CSE, but such an FCS would not be eligible for the Exclusion. a. Proposed Rule The proposed rule defined a “Foreign Consolidated Subsidiary” as a non-U.S. CSE in which an “ultimate parent entity” 83 that is a U.S. person has a controlling interest, in accordance with U.S. generally accepted accounting principles (“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 its consolidated financial statements, in accordance with U.S. GAAP. 84 The Commission explained that the fact that an entity is included in the consolidated financial statements of another entity is an indication of potential risk to the other entity that offers a clear and objective standard for the application of margin requirements. The Commission further explained that, as a result of the FCS' direct connection to, and the possible negative impact of its swap activities on, its U.S. ultimate parent entity and the U.S. financial system, an FCS raises a more substantial supervisory concern in the United States relative to other non-U.S. CSEs. 83 See proposed 17 CFR 23.160(a)(6) (defining “ultimate parent entity” as 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). 84 Under U.S. GAAP, 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. GAAP). The Commission requested comment on all aspects of its proposed FCS definition, including whether the Commission should instead adopt the “control test” proposed by the Prudential Regulators, which focused solely on the level of ownership and control a U.S. person would have over a non-U.S. subsidiary. 85 85 See Proposal, 80 FR at 41386. See also Prudential Regulators' Proposed Margin Rule, 79 FR at 57379. b. Comments A few commenters expressed strong support for the FCS concept. 86 AFR and Better Markets characterized it as an improvement to the cross-border approach to margin taken in the Guidance, calling it a “logical and reasonable approach” to capturing non-U.S. subsidiaries of U.S. swap entities that may expect an implicit guarantee from a U.S. parent and an “effective remedy to evasion.” 87 AFR stated that, by virtue of being included in the same consolidated financial statement, an FCS has a direct financial impact on its U.S. ultimate parent entity, even absent a direct recourse guarantee. 88 86 See AFR at 4-5; Better Markets at 5; IATP at 3, 5-6. 87 See AFR at 4 (FCS concept “economizes” Commission resources by tying regulatory coverage to “easily available” accounting information). See also Better Markets at 5 (Guidance should be amended to apply FCS concept to all Title VII requirements). 88 See AFR at 4. See also IATP at 3 (inclusion in another's consolidated financial statement indicates a potential risk to that entity). Nevertheless, AFR and IATP expressed some concern over the reliance on U.S. GAAP, particularly with respect to its ability to capture off-balance sheet entities. 89 IATP suggested that the Commission consider including in the FCS definition an option to carry out the consolidated financial reporting according to International Financial Reporting Standards (“IFRS”). 90 AFR also expressed concern that reliance on U.S. GAAP may not capture all entities that could expect an implicit guarantee from a U.S. parent, including privately held entities that are not required to prepare consolidated financial statements under U.S. GAAP, and certain variable interest entities or owned funds. 91 89 See AFR at 5 (prior to the passage of U.S. Financial Accounting Standards Board (“U.S. FASB”) Statements Nos. 166 and 167, U.S. GAAP accounting failed to properly require the consolidation of many securitization entities and such gaps could appear in the future). 90 See IATP at 6 (reliance on IFRS should be predicated on the IFRS agreeing with U.S. FASB participation and offering improved handling of off-balance sheet entities compared to U.S. GAAP). 91 See AFR at 4-5. AFR and IATP therefore urged the Commission to expand the FCS definition in a few ways. Both recommended that the FCS definition include entities whose U.S. parent entity is not required to prepare consolidated financial statements ( e.g., a private partnership) but that would otherwise meet the standard for consolidation. 92 AFR argued that failing to include such entities within the meaning of “FCS” could result in entities with a similar nexus to the U.S. financial system being treated differently based on factors such as whether the ultimate parent is publicly traded. 93 AFR also urged the Commission to incorporate a facts-and-circumstances test for determining when a foreign subsidiary's relationship with its U.S. parent may create a sufficient nexus to require compliance with U.S. margin rules. 94 92 See AFR at 4-5; IATP at 6 (it would not be “inconceivable” for U.S. CSE to spin off swaps trading activities as private partnerships). 93 See AFR at 5. 94 See id. A few commenters opposed the FCS concept altogether. 95 IIB/SIFMA argued that, absent a legal obligation to provide support, an FCS's potential effect on its U.S. ultimate parent entity is not sufficiently “direct” to create a nexus to the U.S. financial system within the meaning of CEA section 2(i). 96 Nevertheless, most commenters, including IIB/SIFMA, preferred the proposed FCS definition to the control test proposed by the Prudential Regulators. 97 IIB/SIFMA also appreciated that the proposed FCS definition would foreclose the possibility of such a non-U.S. CSE having multiple parent entities. 98 95 See, e.g., AIMA/IA at 3 (touting potential operational costs involved with obtaining counterparty representations regarding FCS status); FSR at 10 (FCS concept is “not necessary” because FCSs will be subject to foreign regulation); IIB/SIFMA at 19-20 (Commission should not distinguish FCSs from other non-U.S. CSEs). 96 See IIB/SIFMA at 14 (“chain of intervening factors and events,” including “materiality” of FCS to parent entity, that could affect a U.S. parent's decision to provide support is too long and uncertain). 97 See FSR at 10 (a control test may not clearly identify the non-U.S. covered swap entities that are likely to raise greater supervisory concerns); IATP at 6; IIB/SIFMA at 19-20 (reliance on the familiar standards of U.S. GAAP would promote legal certainty); ISDA at 13 (a control test is not appropriate for the application of margin rules). 98 See IIB/SIFMA at 19-20. c. Final Rule The Final Rule defines “Foreign Consolidated Subsidiary” as proposed. 99 Specifically, “Foreign Consolidated Subsidiary” means a non-U.S. CSE in which an ultimate parent entity that is a U.S. person has a controlling financial 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. 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. 100 99 See 17 CFR 23.160(a)(1). 100 See 17 CFR 23.160(a)(6). The definition of “Foreign Consolidated Subsidiary” refers only to the U.S ultimate parent entity. The Commission believes that this is appropriate because consolidated financial statements are the financial statements of a group under the control of the ultimate parent entity. Where the ultimate parent entity is a non-U.S. person, the non-U.S. CSE is not categorized as an FCS and therefore would be eligible for the Exclusion (assuming that the other conditions of the Exclusion are satisfied), for the reasons discussed in section II.B.3. The Commission believes that the FCS concept offers a clear, bright-line test for identifying those non-U.S. CSEs whose uncleared swap activities present a greater supervisory interest relative to other non-U.S. CSEs. Under U.S. GAAP, an FCS' financial statements are consolidated with its U.S. ultimate parent entity by virtue of the parent's controlling financial interest in the FCS. By virtue of having its financial statements consolidated with those of its U.S. ultimate parent, the financial position, operating results and statement of cash flows of an FCS are included in the financial statements of its U.S. ultimate parent entity and therefore affect the financial position, risk profile and market value of the U.S. ultimate parent. Because of the FCS' direct relationship with, and the possible negative impact of its swap activities on, its U.S. ultimate parent entity and the U.S. financial system, an FCS raises greater supervisory concern in the United States relative to other non-U.S. CSEs (in each case provided that the obligations under the relevant swap are not guaranteed by a U.S. person). 101 101 The Commission notes that it has a relatively greater supervisory interest in FCSs than other non-U.S. CSEs, even if they have a U.S. subsidiary or affiliate, because an FCS's ultimate parent entity is a U.S. person. Further, the Commission continues to believe that, in the absence of a direct recourse guarantee from a U.S. person, an FCS should not be treated in the same manner as a U.S. CSE or U.S. Guaranteed CSE. In contrast with a U.S. Guaranteed CSE, in the event of the FCS's default, the U.S. ultimate parent entity does not have a legal obligation to fulfill the obligations of the FCS. Rather that decision would depend on the business judgment of its parent. By relying on a consolidation test, the FCS concept 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. The Commission further believes that, as some commenters noted, reliance on familiar U.S. GAAP accounting standards will promote legal certainty. In particular, the Commission notes that consolidation accounting is a longstanding part of U.S. GAAP and that all non-U.S. CSEs with a U.S. ultimate parent entity currently prepare consolidated financial statements. With respect to the definition's reliance on U.S. GAAP, the Commission notes that since the 2008 financial crisis, the U.S. FASB made significant changes to the consolidation model for variable interest entities (“VIEs”) and that as a result of these changes, more VIEs (including special purpose vehicles) are being consolidated with other entities ( i.e., their parent entities) under U.S. GAAP. Furthermore, because the U.S. GAAP consolidation requirement adequately addresses these VIEs, the Commission believes that the addition of IFRS as an option is likely to inject unnecessary complexity and costs in many circumstances. 102 Accordingly, the Commission believes that the U.S. GAAP consolidation test in the FCS definition is sufficiently similar to the IFRS consolidation standard with respect to VIEs so that additional reliance on the IFRS standard would be neither necessary nor beneficial. 103 102 The Commission notes that the standards for consolidation under U.S. GAAP's VIE model are similar to the consolidation standards that would apply under IFRS, as both consider control over one entity by the other. The Commission further notes that it does not believe that special purpose vehicles are likely to be used to conduct swaps business. Even if such vehicles transact in swaps and, consequently, register as CSEs, the ultimate parent entity would likely exercise control over them because these vehicles typically rely on parental support or guarantees to maintain their credit standards. Such control would lead to consolidation under U.S. GAAP. 103 The Commission notes that although privately held companies are not under a regulatory obligation to prepare and file consolidated financial statements pursuant to U.S. GAAP, they nevertheless are likely to prepare consolidated financial statements for other purposes ( e.g., to provide to creditors as a condition to loan or to private investors), in which case their foreign subsidiaries may fall within the parameters of the FCS definition. 4. Counterparty Representations The proposed rule provided that market participants should generally be permitted to reasonably rely on counterparty representations with regard to their status as a U.S. person. The Commission received comments regarding its proposed reliance standard 104 and a request that the Commission also permit reliance on counterparty representations with respect to the guarantee and FCS definitions. 105 104 See, e.g., SIFMA AMG at 12 (standard for reliance on counterparty representations with respect to U.S. person status is consistent with that articulated in Guidance and Commission's external business conduct rules; proposed rule could be read to require “further, unnecessary diligence”). 105 See, e.g., id. The Commission acknowledges that the information necessary for a swap counterparty to accurately assess the status of its counterparties as U.S. persons or FCSs, or to determine whether a non-U.S. counterparty's obligations under a swap are guaranteed by a U.S. person, may be unavailable, or available only through overly burdensome due diligence. For this reason, the Commission believes that a market participant should generally be permitted to reasonably rely on written counterparty representations in each of these respects. The Commission clarifies that, consistent with the reliance standard articulated in the Commission's external business conduct rules, 106 market participants may reasonably rely on such a counterparty representation unless it has information that would cause a reasonable person to question the accuracy of the representation. 106 See 17 CFR 23.402(d). B. Applicability of Margin Requirements to Cross-Border Uncleared Swaps The following sections discuss the cross-border application of the margin requirements to swaps between CSEs and their counterparties, including when substituted compliance and the Exclusion are applicable. Section 1 provides a brief overview of the proposed rule; section 2 addresses the availability of substituted compliance; section 3 addresses the availability of the Exclusion; section 4 discusses a special provision in the Final Rule for non-segregation jurisdictions; and section 5 discusses a special provision in the Final Rule for non-netting jurisdictions. 1. Proposed Rule Under the proposed rule, the application of substituted compliance and the scope of the Exclusion closely tracked the Prudential Regulators' Proposed Margin Rule. 107 Specifically: 107 See 79 FR at 57379-81. • A U.S. CSE would be required to comply with the Commission's margin rules for all uncleared swaps but would be eligible for substituted compliance with respect to the requirement to post (but not the requirement to collect) initial margin for swaps with certain non-U.S. counterparties (referred to herein as “partial substituted compliance”). 108 108 U.S. CSEs would not be eligible for substituted compliance with respect to the requirement that they collect initial margin or the requirement to post or collect variation margin. • A U.S. Guaranteed CSE would receive the same treatment as a U.S. CSE. • A non-U.S. CSE whose obligations under the relevant swap are not guaranteed by a U.S. person would be eligible for substituted compliance unless the counterparty to the swap is a U.S. CSE or U.S. Guaranteed CSE, in which case substituted compliance would be available with respect to the requirement to collect (but not the requirement to post) initial margin (also referred to as “partial substituted compliance”). • A non-U.S. CSE would be eligible for an exclusion from the Final Margin Rule when trading with a non-U.S. person counterparty provided that (a) neither party's obligations under the relevant swap are guaranteed by a U.S. person; (b) neither party is an FCS; and (c) the swap is not conducted by or through a U.S. branch of a non-U.S. CSE. The Commission requested comment on all aspects of the proposed rule, including how the rule should treat FCSs ( e.g., whether they should be offered the same treatment as U.S. Guaranteed CSEs or conversely be offered the Exclusion), whether U.S. branches should be eligible for the Exclusion, and whether the Commission should provide exceptions related to certain “emerging markets” or non-netting jurisdictions. 109 109 See Proposal, 80 FR at 41387, 88-91. 2. Substituted Compliance a. Comments Most commenters argued for the greater availability of substituted compliance. Some requested that all CSEs, whether a U.S. persons or a non-U.S. person, be eligible for full substituted compliance with respect to all comparable foreign margin requirements, including any swap dealer in a BCBS-IOSCO framework-compliant jurisdiction. 110 Others phrased their requests in narrower terms, arguing for the broader availability of substituted compliance for U.S. CSEs and/or U.S. Guaranteed CSEs when trading with non-U.S. persons. 111 Commenters generally argued that requiring CSEs to comply with the Commission's margin requirements in the face of comparable foreign margin requirements would undermine international efforts to develop a consistent global swaps regime and impose unnecessary and costly compliance burdens, resulting in competitive disparities and market inefficiencies. 112 Several commenters also argued that the proposed rule would involve substantial operational costs, including categorizing market participants and developing appropriate documentation. 113 110 See, e.g., AIMA/IA at 4-5 (substituted compliance should be “all encompassing, and applicable to all parties to a transaction”); ICI Global at 2, 9 (substituted compliance should be made available “without qualification” wherever foreign jurisdiction's margin requirements are comparable); ISDA at 2, 7-8 (substituted compliance should be available for any transaction subject to foreign requirements comparable to BCBS-IOSCO framework); SIFMA AMG 4, 6-8 (market participants should be allowed “to comply with a single set of substantive margin requirements for all uncleared swaps”). See also ABA/ABASA at 3 (market participants should be allowed to rely on substituted compliance “to the greatest possible degree across the markets in and structures through which they operate”). 111 See, e.g., FSR at 7 (U.S. CSEs should be able to rely on substituted compliance for both posting and collecting of initial margin when trading with non-U.S. CSEs and their foreign branches be extended full substituted compliance); IIB/SIFMA at 4-9 (substituted compliance should be available for U.S. CSEs and U.S. Guaranteed CSEs with respect to all margin requirements, including posting and collecting both initial and variation margin); JBA at 8-9 (availability of substituted compliance for U.S. Guaranteed CSEs is too limited); PensionsEurope at 2 (“full substituted compliance,” including collection of initial margin and variation margin, should be available for transactions between U.S. Guaranteed CSEs and “financial institutions without a U.S. nexus”). 112 See, e.g., AIMA/IA at 1; FSR at 3-7; ICI Global at 8-9. See also Vanguard at 2 (applying substituted compliance on a “transaction-by-transaction basis” would undermine “the fundamental risk mitigation tool of cross-transactional close-out netting”). 113 See, e.g., AIMA/IA at 1 (proposed rule would require a “significant amount of replacement and additional documentation to account for different counterparty combinations”); ISDA at 5 (operational complexity of proposed substituted compliance regime would further increase operating costs); IIB/SIFMA at 7 (CSEs would not know sufficient information about businesses of their counterparties to categorize them, and non-U.S. counterparties would not be familiar with, and would be reluctant to hire counsel to determine, all U.S. laws relevant to making the determination); SIFMA AMG at 6 (highlighting complications in determining availability of substituted compliance on basis of counterparty status in context of block trades). With respect to U.S. CSEs and U.S. Guaranteed CSEs, IIB/SIFMA and ISDA argued that compliance with the Commission's margin requirements was not necessary to prevent the transmission of risk to the U.S. financial system because the risk would be adequately addressed by comparable foreign margin requirements. 114 IIB/SIFMA argued that the proposed substituted compliance regime could actually increase liquidity risk by discouraging non-U.S. counterparties from trading with U.S. CSEs and U.S. Guaranteed CSEs in order to avoid costs associated with understanding and complying with the Commission's margin requirements, and that the resulting increased concentration of bilateral credit exposures among U.S. CSEs and U.S. Guaranteed CSEs would increase the risk of contagion in U.S. markets. 115 ISDA further argued that “[c]omity and respect for the supervisory interests of non-U.S. regulators” argue in favor of full substituted compliance or exclusion for swaps involving non-U.S. person counterparties. 116 FSR argued that substituted compliance is at least necessary for foreign branches because they are likely to be subject to foreign margin requirements and pose the same concerns to foreign regulators as the U.S. branches of non-U.S. CSEs pose to U.S. regulators. 117 114 See IIB/SIFMA at 5; ISDA at 6-7. See also ICI Global at 9 (by not permitting substituted compliance in certain instances, Commission would effectively be determining that foreign margin requirements are not “good enough” despite being found comparable). 115 See IIB/SIFMA at 6-7. 116 See ISDA at 6. 117 See FSR at 7-8. See also AIMA/IA at 3 (absence of substituted compliance for foreign branches of U.S. CSEs is an “apparent gap[ ]”). Several commenters raised concerns with regard to the proposal to allow partial substituted compliance. 118 SIMFA AMG argued that partial substituted compliance would be “inconsistent with the importance of bilateral margining,” add unnecessary costs and complexity, and increase the potential for margin disputes. 119 AIMA/IA argued that developing a legal agreement allowing for the transfer of margin amounts according to more than one margin regime would be “commercially and legally problematic.” 120 As a result, market participants would default to complying with the Commission's margin requirements, negating the value of substituted compliance. 121 ISDA similarly argued that developing a standardized model for initial margin that could account for different margin rules in one netting set would be “impractical” in the available timeframe for compliance. 122 FSR argued that partial substituted compliance was not “in the spirit of the International Standards” 123 and pointed out that its usefulness may be questionable, given that no other foreign jurisdiction has proposed a similar approach. 124 118 See, e.g., AIMA/IA at 4; FSR at 7; ISDA at 3, 5; SIFMA AMG at 10. 119 See SIFMA AMG at 10 (highlighting additional complexities in calculating margin for clients using multiple asset managers). 120 See AIMA/IA at 4. 121 See id. 122 See ISDA at 9 (counterparties wanting to use a single custodian could face additional challenges, as the custodial arrangement would have to be drafted to accommodate overlapping and potentially inconsistent requirements for segregation). 123 See proposed 17 CFR 23.160(a)(3) (defining “International Standards” as based on the BCBS-IOSCO framework). 124 See FSR at 7. IATP, on the other hand, supported the proposed substituted compliance regime. 125 IATP agreed that FCSs should be granted substituted compliance but not U.S. Guaranteed Affiliates because losses from the swaps of an FCS may have a negative impact on the foreign jurisdiction's economy. 126 IATP also agreed that U.S. Guaranteed Affiliates should not be eligible for substituted compliance with respect to the requirement to collect initial margin from a non-U.S. counterparty. 127 AFR described the proposed rule as creating a “very significant scope for substituted compliance” with respect to non-U.S. CSEs, but suggested that the scope would not be a concern provided the substituted compliance were limited to foreign rules that are “very similar” to U.S. margin requirements. 128 125 See IATP at 3-4 (proposed rule would provide “the greatest opportunity for effective risk mitigation against swaps counterparty default” and would be a “critical step” to ensuring that “de-guaranteed” swaps “will not continue to elude effective regulation”). 126 See IATP at 7. 127 See id. 128 See AFR at 7. See also id. at 4 (scope of substituted compliance could become “overbroad” given that proposed rule included narrow definition of “guarantee” and limited Foreign Consolidated Subsidiaries to subsidiaries of registered CSEs). b. Final Rule The Commission has determined to adopt a cross-border framework largely as proposed, but with certain modifications to address concerns raised by commenters and to further align the rule with the cross-border approach adopted by the Prudential Regulators. Generally speaking, the cross-border margin framework in the Final Rule reflects the Commission's efforts to carefully tailor the application of the Commission's margin requirements to address comity considerations and mitigate potential adverse impact on market efficiency and competition without compromising the safety and soundness of CSEs. The availability of substituted compliance under the Final Rule therefore depends on the degree of nexus the CSEs and their counterparties have to the U.S. financial system, as indicated by their status ( e.g., whether they are U.S. persons or non-U.S. persons whose obligations under the relevant swap are guaranteed by a U.S. person). i. Uncleared Swaps of U.S. CSEs and U.S. Guaranteed CSEs As a general rule, the Commission believes that, in light of their position in the U.S. financial system, U.S. persons and U.S. Guaranteed CSEs should be required to comply with the Commission's margin requirements. Under the Final Rule, however, U.S. CSEs and U.S. Guaranteed CSEs would be eligible for substituted compliance with respect to the requirement to post (but not the requirement to collect) initial margin provided that the counterparty is a non-U.S. person whose obligations under the relevant swap are not guaranteed by a U.S. person. By virtue of their being domiciled or organized in the United States, U.S. CSEs give rise to greater supervisory interests relative to other CSEs. U.S. Guaranteed CSEs create a similar supervisory interest because, as discussed in the proposed rule, the swap of a non-U.S. CSE whose obligations under the swap are guaranteed by a U.S. person is identical, in relevant aspects, to a swap entered into directly by a U.S. person. Nevertheless, the Commission believes that, in the interest of comity, permitting substituted compliance for the limited requirement of posting initial margin would be reasonable. While requiring a CSE to post initial margin protects the counterparty in the event of default by the CSE, it also serves as a risk management tool because it limits the amount of leverage a CSE can incur by requiring that it have adequate eligible collateral to enter into an uncleared swap. Accordingly, when the counterparty is a non-U.S. person (whose obligations under the swap are not guaranteed by a U.S. person), the Commission believes that substituting the foreign margin requirements with regard to the initial margin posted would be reasonable. The Commission further believes that allowing substituted compliance in this limited instance may reduce transaction costs for U.S. CSEs when trading with non-U.S. counterparties 129 and thereby mitigate potential competitive disparities (relative to other CSEs and non-CFTC registered dealers operating in the foreign jurisdiction), while ensuring that the U.S. CSE is adequately protected in the event of default of the non-U.S. counterparty. The availability of substituted compliance is limited to circumstances where the non-U.S. counterparty's obligations under the relevant swap are not guaranteed by a U.S. person in order to avoid incentivizing market participants to structure their swaps solely for purposes of avoiding application of the Commission's margin requirements. 130 129 That is, if the initial margin amount required to be posted under the foreign rule is lower than the amount required under the Commission's Final Margin Rule, and the parties elect for the CSE to post margin pursuant to the foreign margin requirements, the lower margin may reduce the U.S. CSE's funding costs. 130 For example, if partial substituted compliance were available for non-U.S. counterparties that are guaranteed by a U.S. person, a swap between a U.S. CSE and a U.S. counterparty could be restructured as a swap between a U.S. CSE and a non-U.S. counterparty that is guaranteed by a U.S. person in order to avoid application of the Commission's margin requirements. The Commission does not believe that partial substituted compliance would prohibit the use of a single netting set for calculating initial margin. Under the Final Rule, a U.S. CSE can comply with the Commission's initial margin requirements by posting pursuant to comparable foreign margin requirements. Accordingly, from the Commission's perspective, one netting set could encompass swaps that comply with both foreign and CFTC initial margin requirements. 131 131 The Commission similarly does not expect that reliance on partial substituted compliance will hinder the development or use of a standardized model for initial margin, as the Commission believes that a single model could be developed to satisfy the initial margin requirements of multiple jurisdictions. The Commission understands that CSEs relying on partial substituted compliance may face certain costs or challenges not experienced by non-U.S. CSEs that are eligible for full substituted compliance. Nevertheless, as discussed above, the Commission believes that granting substituted compliance more broadly ( e.g., permitting both collection and posting of initial margin pursuant to the foreign requirements) would not be appropriate for a swap transaction involving a U.S. CSE or a U.S. Guaranteed CSE. Moreover, U.S. CSEs and U.S. Guaranteed CSEs that elect to rely on partial substituted compliance may realize savings in the form of reduced funding costs (to the extent that foreign jurisdiction requires less initial margin to be posted), and their non-U.S. counterparties may experience lower operational costs as a result of only having to comply with their home jurisdiction's requirements. Finally, the Commission does not believe it would be appropriate to broaden the scope of substituted compliance available to swaps conducted through foreign branches of U.S. CSEs. A foreign branch is legally indistinguishable from the U.S. CSE itself, such that the whole U.S. CSE, and not merely the foreign branch, holds itself out to the market and assumes the risks of any uncleared swap transactions conducted by or through the foreign branch. Accordingly, swaps conducted through a foreign branch of a U.S. CSE are appropriately treated the same as swaps of the U.S. CSE as a whole. Moreover, if the Commission were to allow broader substituted compliance for swaps conducted through foreign branches than swaps conducted domestically, U.S. CSEs could be incentivized to conduct swap activity through foreign branches to avoid direct compliance with Commission's margin requirements. ii. Uncleared Swaps of Non-U.S. CSEs (Including FCSs) Whose Obligations Under the Relevant Swap Are Not Guaranteed by a U.S. Person Under the Final Rule, consistent with the Proposed Rule, non-U.S. CSEs (including FCSs) 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 U.S. CSEs and U.S. Guaranteed CSEs. Specifically, where the obligations of a non-U.S. CSE (including an FCS) under the relevant swap are not guaranteed by a U.S. person, substituted compliance is available with respect to its uncleared swaps with any counterparty, other than a U.S. CSE or a U.S. Guaranteed CSE. 132 132 With respect to uncleared swaps of a non-U.S. CSE whose obligations under the swap are not guaranteed by a U.S. person, on the one hand, with a U.S. CSE or a U.S. Guaranteed CSE, on the other hand, 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 above. The broad substituted compliance framework available to this category of non-U.S. CSEs reflects the Commission's recognition of foreign jurisdictions' supervisory interest in CSEs that are domiciled and operating in their jurisdictions. In addition, the Commission understands that compliance with two sets of margin regulations may lead to costs and burdens for non-U.S. CSEs not faced by their competitors in the local jurisdiction and may provide disincentives for foreign clients to transact with a non-U.S. CSE. The Commission believes that making substituted compliance broadly available to non-U.S. CSEs that are not guaranteed by a U.S. person may help to reduce the potential adverse impact on market efficiency and competition, without compromising the protections for the non-U.S. CSE and the U.S. financial markets. As discussed in the next section, a non-U.S. CSE that is not an FCS will be eligible for the Exclusion from the Commission's margin rules under certain circumstances. However, uncleared swaps entered into by an FCS will not be eligible for any exclusion because of its relationship with its U.S. ultimate parent entity, and because of the possible negative impact of its swap activities on its U.S. ultimate parent entity and the U.S. financial system. As explained in section II.A.3.c. above, the financial position, operating results, and statement of cash flows of an FCS are included in the financial statements of the U.S. ultimate parent entity and therefore have a direct impact on the consolidated entity's financial position, risk profile, and market value. The Commission is also concerned that extending the Exclusion to FCSs would incentivize U.S. entities to conduct their swap activities with non-U.S. counterparties through non-U.S. subsidiaries solely in order to avoid application of the Dodd-Frank Act margin requirements, leading to further bifurcation between U.S. and non-U.S. swap business. The Commission recognizes that its decision not to extend the Exclusion to FCSs could put them at a disadvantage relative to other non-U.S. market participants/swap dealers (including those that are CSEs). 133 However, given the supervisory concerns raised by the nexus between FCSs and their U.S. ultimate parent entity, the Commission believes that extending the Exclusion to an FCS would not further the paramount statutory objective of ensuring the safety and soundness of a CSE and the stability of U.S. financial markets. The Commission notes that potential competitive disparities may be mitigated to the extent that the relevant foreign jurisdiction implements comparable margin requirements. 133 For example, a non-U.S. CSE relying on the Exclusion or non-CFTC registered swap dealers may be able to realize cost savings and offer better pricing terms to foreign clients. 3. Exclusion a. Comments Several commenters supported the Exclusion because they believed that it recognized the absence of a U.S. jurisdictional nexus. 134 Nevertheless, these commenters requested that the Exclusion be expanded to include U.S. branches of non-U.S. CSEs and FCSs. 135 134 See ICI Global at 2, 5; IIB/SIFMA at 10. 135 See id. See also ISDA at 3 (Exclusion should be expanded to include any swap between a non-U.S. CSE, whether or not guaranteed, and any non-U.S. person counterparty that is not guaranteed by a U.S. person). With respect to U.S. branches, IIB/SIFMA argued that distinguishing them would not be necessary from a risk-mitigation perspective because the risk remains with the non-U.S. CSE outside the United States regardless of whether the non-U.S. CSE involves U.S. personnel. 136 ISDA and ICI Global further argued that treating U.S. branches differently from the rest of the CSE could create “significant operational issues and credit risks.” 137 ICI Global stated that the same ISDA Master Agreement typically governs all transactions involving both the U.S. and non-U.S. branches of a non-U.S. CSE, and that not granting the Exclusion to swaps between a non-U.S. person and a U.S. branch of a non-U.S. CSE (whose obligations are not guaranteed by a U.S. person) may require parties to document transactions with the U.S. branch under a separate master agreement, which could create operational difficulties. 138 ICI Global also expressed concern that disparate treatment of U.S. branches could lead to additional credit risk because counterparties might lose netting benefits under bankruptcy laws. 139 136 See IIB/SIFMA at 16. 137 See IIB/SIFMA at 16; ICI Global at 10-11. 138 See ICI Global at 10-11. 139 See also ISDA at 11 (fragmenting netting sets could increase risk and discourage use and employment of U.S. personnel). With respect to FCSs, ICI Global argued that consolidation is insufficient to create a “direct” U.S. nexus because the U.S. ultimate parent is not under a legal obligation to support the FCS. 140 IIB/SIFMA added that foreign jurisdictions have not proposed to apply margin rules to foreign, non-guaranteed subsidiaries and that the Commission should extend the Exclusion to avoid overlapping requirements that could lead market participants to avoid trading with an FCS. 141 Although substituted compliance would potentially be available in place of the Exclusion, ISDA asserted that the difference between the Exclusion and substituted compliance is not costless, as affected swap dealers would incur costs of complying with any conditions imposed with respect to substituted compliance and with the Commission's exercise of its related examination authority, in addition to lost business that could result if substituted compliance is not “seamless” and counterparties are “inconvenienced” by its application. 142 140 See ICI Global at 11. See also IIB/SIFMA at 14 (CEA section 2(i) does not authorize the Commission to regulate a foreign subsidiary solely due to potential for support from and risk to a U.S. parent entity because, absent a legal obligation to provide support, the “chain of intervening factors and events” that might lead to such support would not satisfy “direct” requirement in CEA section 2(i)). 141 See IIB/SIFMA at 15. 142 See id. at 7. As an alternative to extending the Exclusion to FCSs, IIB/SIFMA suggested that the Commission grant an exclusion to FCSs operating without a U.S. guarantee when transacting with non-U.S. persons operating without a U.S. guarantee, up to an aggregate 5 percent limit on the notional trading volume in uncleared swaps entered into by commonly controlled FCSs under the exclusion relative to the total notional swap trading volume of entities within the common U.S. ultimate parent entity's consolidated group. 143 IIB/SIFMA argued that such a limited exclusion would achieve the Commission's risk mitigation objectives without directly regulating wholly non-U.S. counterparties. 144 143 See IIB/SIFMA at 16. 144 See id. Both AFR and Better Markets expressed support for the proposal not to extend the Exclusion to FCSs, describing it as a means of addressing the issue of de-guaranteeing. 145 AFR nevertheless expressed concern that the Exclusion would apply to a non-U.S. CSE when entering into a swap with a foreign subsidiary that is a financial end user that has a U.S. ultimate parent, and suggested that the Commission also deny the Exclusion in this case. 146 AFR also suggested that the Commission “supplement” its approach by further denying the Exclusion to a non-consolidated, non-U.S. subsidiary that could, based on the facts and circumstances, have a “major impact on the financial well-being of the parent,” including circumstances where the parent does not use U.S. GAAP accounting. 147 145 See AFR at 2 (proposed rule would go “some distance” toward limiting evasion of Commission's margin requirements); Better Markets at 5 (proposed rule “adequately captures” many foreign affiliates that may have escaped U.S. margin requirements through de-guaranteeing). 146 See AFR at 8 (foreign subsidiary of a U.S. financial end user that is not a CSE would not be defined as an FCS even if consolidated). 147 See AFR at 3. See also Better Markets at 2 (Exclusion is needlessly complicated and indirect and Commission should address issue more completely by reverting to and updating approach in Guidance). b. Final Rule The Commission has determined to adopt the Exclusion largely as proposed, with a modification that preserves the Commission's intent with respect to the treatment of inter-affiliate swaps under the Final Margin Rule. Under the Final Rule, an uncleared swap entered into by a non-U.S. CSE with a non-U.S. counterparty (including a non-U.S. CSE) is 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 an FCS. 148 This approach reflects the Commission's recognition of foreign jurisdictions' strong supervisory interest in the uncleared swaps of non-U.S. CSEs and their non-U.S. counterparties, both of which are domiciled and operate abroad. Under these circumstances, the Commission believes that it is appropriate to make a limited exception to the principle of firm-wide application of margin requirements, consistent with comity principles, so as to exclude a narrow class of uncleared swaps involving a non-U.S. CSE and a non-U.S. counterparty. 149 148 The Exclusion also does not apply if the counterparty is a U.S. branch of a non-U.S. CSE. See 17 CFR 23.160(b)(2)(ii). 149 The Commission disagrees that the Commission lacks a jurisdictional nexus with respect to swaps subject to the Exclusion. To the contrary, as discussed above, by the terms of the relevant statutory provision, CEA section 4s(e), and the underlying purpose of that provision, the Commission's authority to adopt margin rules applies to all CSEs, U.S. and non-U.S., and extends to all of their uncleared swaps, regardless of the counterparties' domicile or the location of the swaps transaction. The Commission notes that a non-U.S. CSE that can avail itself of the Exclusion is still subject to the Commission's margin rules with respect to all other uncleared swaps ( i.e., those that do not qualify for the Exclusion), with the possibility of substituted compliance. And any excluded swaps may be covered by the margin requirements of another jurisdiction that adheres to the BCBS-IOSCO framework. 150 Additionally, the non-U.S. CSE would be subject to the Commission's capital requirements, which, as proposed, would impose a capital charge for uncollateralized exposures. 151 150 In this regard, the Commission notes that, as indicated in supra note 23, representatives of 26 regulatory authorities (comprising 17 nations) participated in the WGMR that developed the BCBS-IOSCO framework. As of today, 24 of these 26 regulatory authorities that participated in the WGMR have proposed a regulatory framework for margin for uncleared swaps, all of which are consistent with the BCBS-IOSCO framework. In addition, these 24 regulatory authorities have jurisdiction over more than 90% of the swaps activities in the world by any measure. 151 See Proposed Capital Rule, 76 FR 27802. The Commission considered comments urging a broader scope of the Exclusion to include, for example, any FCSs so long as their swaps are not guaranteed by a U.S. person or alternatively, do not exceed a “de minimis” level of swap activity. However, the Commission does not believe that extending the Exclusion to uncleared swaps of FCSs is appropriate given the nature of their relationship to their U.S. ultimate parent entity. The limited scope of the Exclusion reflects that the benefits of the margin requirement are achieved when it is applied to all CSEs and on a firm-wide basis and therefore, any exception needs to be carefully tailored to avoid creating a significant supervisory gap and inappropriate levels of risk to the CSE and the U.S. financial system. The Commission also disagrees with comments that the Exclusion is overly broad because it would extend to a swap between a non-U.S. CSE and a foreign subsidiary of a U.S. financial end user. 152 The Commission notes that such a foreign subsidiary would not be an FCS even if it is consolidated with its U.S. parent because it is not a CSE. The Commission believes that a swap between such a foreign subsidiary and a non-U.S. CSE should be eligible for the Exclusion because financial end users are not covered swap entities and are likely to include many entities that do not conduct a significant level of swap activities; as such, their swap activities would not have the same effect on the U.S. ultimate parent entity as would a covered swap entity's. Therefore, the Exclusion applies to qualifying non-U.S. CSEs when transacting with foreign subsidiaries that are financial end users that have a U.S. ultimate parent entity. 152 The term “financial end user” is defined in section 23.150 of the Final Margin Rule. Under the Final Margin Rule, a CSE is not required to collect initial margin from its affiliate, provided, among other things, that affiliate collects initial margin on its market-facing swaps or is subject to comparable initial margin collection requirements (in the case of non-U.S. affiliates that are financial end users) on its own market-facing swaps. In order to preserve the Commission's intent with respect to the treatment of inter-affiliate swaps under the Final Margin Rule, the Exclusion is not available if the market-facing swap of the non-U.S. CSE (that is otherwise eligible for the Exclusion) is not subject to comparable initial margin collection requirements in the home jurisdiction and any of the risk associated with the uncleared swap is transferred, directly or indirectly, through inter-affiliate transactions, to a U.S. CSE or a U.S. Guaranteed CSE. This condition is intended to ensure that inter-affiliate swaps are not used to avoid the requirement to collect initial margin from third-parties. 153 The limitation on the Exclusion is consistent with that rationale. 153 See 17 CFR 23.159. Under the Final Rule, uncleared swaps of a U.S. branch of a non-U.S. CSE are not eligible for the Exclusion. The Commission does not believe extending the Exclusion to U.S. Branches would be appropriate. Generally speaking, U.S. branches of foreign banks 154 have a Prudential Regulator and must therefore comply with the Prudential Regulators' margin rules. The Prudential Regulators' Final Margin Rule does not grant an exclusion for the uncleared swaps of such U.S. branches on the basis that U.S. branches of foreign banks clearly operate within the United States and could pose risk to the U.S. financial system. 155 To the extent that a U.S. branch of a non-U.S. CSE is subject to the Commission's requirements rather than a Prudential Regulator, the Final Rule appropriately harmonizes with the Prudential Regulators. 156 Additionally, given that U.S. branches operate within the United States, allowing their swaps to be excluded from application of the Commission's margin requirements could disadvantage U.S. CSEs when competing with U.S. branches for U.S. clients 157 and create incentives for CSEs to operate through U.S. branches solely for purposes of avoiding the Dodd-Frank Act margin requirements. Accordingly, the Commission believes that a non-U.S. CSE should be subject to the Commission's margin requirements when conducting swap activities from within the United States by or through a U.S. branch. 158 154 See Prudential Regulators' Final Margin Rule, 80 FR at 74901 (setting forth the definition of “foreign bank” for purposes of the Prudential Regulators' Final Margin Rule). 155 See Prudential Regulators' Final Margin Rule, 80 FR at 74883. 156 Under the International Banking Act of 1978, 12 U.S.C. 3101 et seq., U.S. branches are generally treated the same as national banks operating in that same location and are subject to the same laws, regulations, policies, and procedures that apply to national banks. 157 That is, a U.S. branch of a non-U.S. CSE that is permitted to operate outside of the Commission's margin requirements may, by virtue of being subject to reduced or even no margin requirements, be able to offer a more competitive price to U.S. clients than a U.S. CSE. 158 As noted above in section II.B.3.a., some commenters suggested that not extending the Exclusion to U.S. branches of non-U.S. CSEs could require non-U.S. CSEs to document transactions with the U.S. branch under a separate ISDA Master Agreement, creating operational challenges. However, because such U.S. branches are eligible for substituted compliance, use of a separate credit support agreement to document transactions with a non-U.S. CSE's U.S. branch should only be necessary where foreign margin requirements are not comparable. Although the Commission acknowledges that the non-U.S. CSE may need to use a separate credit support agreement for U.S. branch transactions in this limited case, the Commission nevertheless believes that it would not be appropriate to extend the Exclusion to U.S. branches of non-U.S. CSEs for the reasons discussed above. 4. Special Provision for Non-Segregation Jurisdictions 159 159 The term “emerging market” is not used in the Final Rule because some jurisdictions covered by this provision of the Final Rule are not aptly described by that term. a. Comments Several commenters supported the creation of a de minimis exception similar to the emerging markets exemption set out in the Guidance. 160 Specifically, commenters recommended that U.S. CSEs be exempt from the margin requirements when trading with “emerging market counterparties” provided that the aggregate notional volume of its uncleared swaps with emerging market counterparties does not exceed 5 percent of the CSEs' total notional swap trading volume, both cleared and uncleared. 161 They further recommended defining “emerging market counterparty” as a non-U.S. person that is (a) not a registered CSE, (b) not guaranteed by a U.S. person, and (c) not located in a jurisdiction covered by a comparability determination for uncleared swaps margin rules issued by the Commission. 162 Commenters generally agreed that the exception should apply to foreign branches of U.S. CSEs, 163 but some commenters also recommended that it be extended to U.S. Guaranteed CSEs 164 and FCSs. 165 For swaps between U.S. Guaranteed CSEs and emerging market counterparties, ABA/ABASA and IIB/SIFMA recommended that the de minimis threshold apply to the aggregate volume of uncleared swaps guaranteed by a particular U.S. person, rather than to the trading volume of the U.S. Guaranteed CSE itself. 166 160 See, e.g., ABA/ABASA at 3-5; IIB/SIFMA at 3, 11-13; ISDA at 2, 9-10; JBA at 10. 161 See ABA/ABASA at 5. See also ISDA at 9-10 (further recommending that Commission impose recordkeeping requirement as condition to exemption, as was included in Guidance). 162 See ABA/ABASA at 4-5; IIB/SIFMA at 13. See also ISDA at 9 (“emerging market counterparty” should be defined as any non-U.S. person that is not guaranteed by a U.S. person and that is not located in one of six jurisdictions identified in Guidance as having submitted requests for comparability determinations). 163 See ABA/ABASA at 1 n.5 (exemption should apply to “U.S.-based banking organizations, however they are operating in emerging markets, including, but not limited to, through a foreign branch of a prudentially-regulated CSE”); IIB/SIFMA; ISDA. 164 See ABA/ABASA at 1 n.5, 3; IIB/SIFMA at 12; ISDA at 9. 165 See ISDA at 10 (availability of the exemption should be extended to FCSs if Commission does not otherwise make Exclusion available to them). 166 See ABA/ABASA at 5; IIB/SIFMA at 13 (approach would be appropriate given that risk to U.S. guarantor provides basis for extraterritorial application of margin rules to U.S. Guaranteed CSEs). In support of such an exception, commenters argued that legal and operational constraints in emerging market jurisdictions could make compliance with margin rules difficult, if not impossible. 167 As a result, broad application of the margin requirements to these swaps could negatively impact the competitiveness of registered CSEs. 168 Commenters argued that by limiting the exception to CSEs with a de minimis level of swaps activity, the Commission could accomplish the goal of ensuring a CSE's safety and soundness but with less disruption to existing business relationships than the exchange of initial and variation margin would impose. 169 IIB/S [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-12612. Public record. Not legal advice.