Margin and Capital Requirements for Covered Swap Entities

Vol. 79

Wednesday,

No. 185

September 24, 2014

Part III

Department of the Treasury

Office of the Comptroller of the Currency

Board of Governors of The Federal Reserve

System

Federal Deposit Insurance Corporation

Farm Credit Administration

Federal Housing Finance Agency

12 CFR Parts 45, 237, 349, et al.

Margin and Capital Requirements for Covered Swap Entities; Proposed

Rule

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 45

[Docket No. OCC–2011–0008]

RIN 1557–AD43

BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

12 CFR Part 237

[Docket No. R–1415]

RIN 7100–AD74

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 349

RIN 3064–AE21

FARM CREDIT ADMINISTRATION

12 CFR Part 624

RIN 3052–AC69

FEDERAL HOUSING FINANCE

AGENCY

12 CFR Part 1221

RIN 2590–AA45

Margin and Capital Requirements for

Covered Swap Entities

AGENCY: Office of the Comptroller of the

Currency, Treasury (‘‘OCC’’); Board of

Governors of the Federal Reserve

System (‘‘Board’’); Federal Deposit

Insurance Corporation (‘‘FDIC’’); Farm

Credit Administration (‘‘FCA’’); and the

Federal Housing Finance Agency

(‘‘FHFA’’).

ACTION: Notice of proposed rulemaking

and request for comment.

SUMMARY: The OCC, Board, FDIC, FCA,

and FHFA (each an ‘‘Agency’’ and,

collectively, the ‘‘Agencies’’) are seeking

comment on a proposed joint rule to

establish minimum margin and capital

requirements for registered swap

dealers, major swap participants,

security-based swap dealers, and major

security-based swap participants for

which one of the Agencies is the

prudential regulator

ment.

SUMMARY: The OCC, Board, FDIC, FCA,

and FHFA (each an ‘‘Agency’’ and,

collectively, the ‘‘Agencies’’) are seeking

comment on a proposed joint rule to

establish minimum margin and capital

requirements for registered swap

dealers, major swap participants,

security-based swap dealers, and major

security-based swap participants for

which one of the Agencies is the

prudential regulator. This proposed rule

implements sections 731 and 764 of the

Dodd-Frank Wall Street Reform and

Consumer Protection Act, which require

the Agencies to adopt rules jointly to

establish capital requirements and

initial and variation margin

requirements for such entities and their

counterparties on all non-cleared swaps

and non-cleared security-based swaps in

order to offset the greater risk to such

entities and the financial system arising

from the use of swaps and security-

based swaps that are not cleared.

DATES: Comments should be received on

or before November 24, 2014.

ADDRESSES: Interested parties are

encouraged to submit written comments

jointly to all of the Agencies.

Commenters are encouraged to use the

title ‘‘Margin and Capital Requirements

for Covered Swap Entities’’ to facilitate

the organization and distribution of

comments among the Agencies.

Office of the Comptroller of the

Currency. Because paper mail in the

Washington, DC area and at the OCC is

subject to delay, commenters are

encouraged to submit comments by the

Federal eRulemaking Portal or email, if

possible. Please use the title ‘‘Margin

and Capital Requirements for Covered

Swap Entities’’ to facilitate the

organization and distribution of the

comments. You may submit comments

by any of the following methods:

• Federal eRulemaking Portal—

‘‘regulations.gov’’: Go to http://

www.regulations.gov. Enter ‘‘Docket ID

OCC–2011–0008’’ in the Search Box and

click ‘‘Search’’. Results can be filtered

using the filtering tools on the left side

of the screen. Click on ‘‘Comment Now’’

to submit public comments

ization and distribution of the

comments. You may submit comments

by any of the following methods:

• Federal eRulemaking Portal—

‘‘regulations.gov’’: Go to http://

www.regulations.gov. Enter ‘‘Docket ID

OCC–2011–0008’’ in the Search Box and

click ‘‘Search’’. Results can be filtered

using the filtering tools on the left side

of the screen. Click on ‘‘Comment Now’’

to submit public comments.

• Click on the ‘‘Help’’ tab on the

Regulations.gov home page to get

information on using Regulations.gov,

including instructions for submitting

public comments.

• Email: regs.comments@

occ.treas.gov.

• Mail: Legislative and Regulatory

Activities Division, Office of the

Comptroller of the Currency, 400 7th

Street SW., Suite 3E–218, Mail Stop

9W–11, Washington, DC 20219.

• Hand Delivery/Courier: 400 7th

Street SW., Suite 3E–218, Mail Stop

9W–11, Washington, DC 20219.

• Fax: (571) 465–4326.

Instructions: You must include

‘‘OCC’’ as the agency name and ‘‘Docket

ID OCC–2011–0008’’ in your comment.

In general, OCC will enter all comments

received into the docket and publish

them on the Regulations.gov Web site

without change, including any business

or personal information that you

provide such as name and address

information, email addresses, or phone

numbers. Comments received, including

attachments and other supporting

materials, are part of the public record

and subject to public disclosure. Do not

enclose any information in your

comment or supporting materials that

you consider confidential or

inappropriate for public disclosure.

You may review comments and other

related materials that pertain to this

rulemaking action by any of the

following methods:

• Viewing Comments Electronically:

Go to http://www.regulations.gov. Enter

‘‘Docket ID OCC–2011–0008’’ in the

Search box and click ‘‘Search’’.

Comments can be filtered by Agency

using the filtering tools on the left side

of the screen

opriate for public disclosure.

You may review comments and other

related materials that pertain to this

rulemaking action by any of the

following methods:

• Viewing Comments Electronically:

Go to http://www.regulations.gov. Enter

‘‘Docket ID OCC–2011–0008’’ in the

Search box and click ‘‘Search’’.

Comments can be filtered by Agency

using the filtering tools on the left side

of the screen.

• Click on the ‘‘Help’’ tab on the

Regulations.gov home page to get

information on using Regulations.gov,

including instructions for viewing

public comments, viewing other

supporting and related materials, and

viewing the docket after the close of the

comment period.

• Viewing Comments Personally: You

may personally inspect and photocopy

comments at the OCC, 400 7th Street

SW., Washington, DC. For security

reasons, the OCC requires that visitors

make an appointment to inspect

comments. You may do so by calling

(202) 649–6700. Upon arrival, visitors

will be required to present valid

government-issued photo identification

and to submit to a security screening in

order to inspect and photocopy

comments.

• Docket: You may also view or

request available background

documents and project summaries using

the methods described above.

Board of Governors of the Federal

Reserve System: You may submit

comments, identified by Docket No. R–

1415 and RIN 7100 AD74, by any of the

following methods:

• Agency Web site: http://

www.federalreserve.gov. Follow the

instructions for submitting comments at

http://www.federalreserve.gov/apps/

foia/proposedregs.aspx.

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Email: regs.comments@

federalreserve.gov. Include the docket

number in the subject line of the

message.

• Fax: (202) 452–3819 or (202) 452–

3102.

• Mail: Address to Robert deV.

Frierson, Secretary, Board of Governors

of the Federal Reserve System, 20th

Street and Constitution Avenue NW.,

Washington, DC 20551

ttp://

www.regulations.gov. Follow the

instructions for submitting comments.

• Email: regs.comments@

federalreserve.gov. Include the docket

number in the subject line of the

message.

• Fax: (202) 452–3819 or (202) 452–

3102.

• Mail: Address to Robert deV.

Frierson, Secretary, Board of Governors

of the Federal Reserve System, 20th

Street and Constitution Avenue NW.,

Washington, DC 20551.

All public comments will be made

available on the Board’s Web site at

http://www.federalreserve.gov/apps/

foia/proposedregs.aspx as submitted,

unless modified for technical reasons.

Accordingly, comments will not be

edited to remove any identifying or

contact information. Public comments

may also be viewed electronically or in

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

1 Dodd-Frank Wall Street Reform and Consumer

Protection Act, Public Law 111–203, 124 Stat. 1376

(2010).

paper in Room MP–500 of the Board’s

Martin Building (20th and C Streets

NW.) between 9:00 a.m. and 5:00 p.m.

on weekdays.

Federal Deposit Insurance

Corporation: You may submit

comments, identified by RIN 3064–

AE21, by any of the following methods:

• Agency Web site: http://

www.fdic.gov/regulations/laws/federal/

propose.html. Follow instructions for

submitting comments on the Agency

Web site.

• Email: Comments@FDIC.gov.

Include RIN 3064–AE21 on the subject

line of the message.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street NW., Washington, DC 20429.

• Hand Delivery: Comments may be

hand delivered to the guard station at

the rear of the 550 17th Street Building

(located on F Street) on business days

between 7:00 a.m. and 5:00 p.m

nclude RIN 3064–AE21 on the subject

line of the message.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street NW., Washington, DC 20429.

• Hand Delivery: Comments may be

hand delivered to the guard station at

the rear of the 550 17th Street Building

(located on F Street) on business days

between 7:00 a.m. and 5:00 p.m.

Instructions: All comments received

must include the agency name and RIN

for this rulemaking and will be posted

without change to https://www.fdic.gov/

regulations/laws/federal/index.html,

including any personal information

provided.

Federal Housing Finance Agency: You

may submit your written comments on

the proposed rulemaking, identified by

regulatory information number: RIN

2590–AA45, by any of the following

methods:

• Agency Web site: www.fhfa.gov/

open-for-comment-or-input.

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments. If

you submit your comment to the

Federal eRulemaking Portal, please also

send it by email to FHFA at

RegComments@fhfa.gov to ensure

timely receipt by the Agency. Please

include ‘‘RIN 2590–AA45’’ in the

subject line of the message.

• Hand Delivery/Courier: The hand

delivery address is: Alfred M. Pollard,

General Counsel, Attention: Comments/

RIN 2590–AA45, Federal Housing

Finance Agency, Constitution Center

(OGC Eighth Floor), 400 7th St. SW.,

Washington, DC 20024. Deliver the

package to the Seventh Street entrance

Guard Desk, First Floor, on business

days between 9:00 a.m. and 5:00 p.m.

• U.S. Mail, United Parcel Service,

Federal Express, or Other Mail Service:

The mailing address for comments is:

Alfred M. Pollard, General Counsel,

Attention: Comments/RIN 2590–AA45,

Federal Housing Finance Agency,

Constitution Center (OGC Eighth Floor),

400 7th St. SW., Washington, DC 20024

eventh Street entrance

Guard Desk, First Floor, on business

days between 9:00 a.m. and 5:00 p.m.

• U.S. Mail, United Parcel Service,

Federal Express, or Other Mail Service:

The mailing address for comments is:

Alfred M. Pollard, General Counsel,

Attention: Comments/RIN 2590–AA45,

Federal Housing Finance Agency,

Constitution Center (OGC Eighth Floor),

400 7th St. SW., Washington, DC 20024.

All comments received by the

deadline will be posted for public

inspection without change, including

any personal information you provide,

such as your name, address, email

address and telephone number on the

FHFA Web site at http://www.fhfa.gov.

Copies of all comments timely received

will be available for public inspection

and copying at the address above on

government-business days between the

hours of 10 a.m. and 3 p.m. To make an

appointment to inspect comments

please call the Office of General Counsel

at (202) 649–3804.

Farm Credit Administration: We offer

a variety of methods for you to submit

your comments. For accuracy and

efficiency reasons, commenters are

encouraged to submit comments by

email or through the FCA’s Web site. As

facsimiles (fax) are difficult for us to

process and achieve compliance with

section 508 of the Rehabilitation Act, we

are no longer accepting comments

submitted by fax. Regardless of the

method you use, please do not submit

your comments multiple times via

different methods. You may submit

comments by any of the following

methods:

• Email: Send us an email at reg-

comm@fca.gov.

• FCA Web site: http://www.fca.gov.

Select ‘‘Law & Regulation,’’ then ‘‘FCA

Regulations,’’ then ‘‘Public Comments,’’

then follow the directions for

‘‘Submitting a Comment.’’

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Mail: Barry F. Mardock, Deputy

Director, Office of Regulatory Policy,

Farm Credit Administration, 1501 Farm

Credit Drive, McLean, VA 22102–5090

elect ‘‘Law & Regulation,’’ then ‘‘FCA

Regulations,’’ then ‘‘Public Comments,’’

then follow the directions for

‘‘Submitting a Comment.’’

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Mail: Barry F. Mardock, Deputy

Director, Office of Regulatory Policy,

Farm Credit Administration, 1501 Farm

Credit Drive, McLean, VA 22102–5090.

You may review copies of all

comments we receive at our office in

McLean, Virginia or on our Web site at

http://www.fca.gov. Once you are in the

Web site, select ‘‘Law & Regulation,’’

then ‘‘FCA Regulations,’’ then ‘‘Public

Comments,’’ and follow the directions

for ‘‘Reading Submitted Public

Comments.’’ We will show your

comments as submitted, including any

supporting data provided, but for

technical reasons we may omit items

such as logos and special characters.

Identifying information that you

provide, such as phone numbers and

addresses, will be publicly available.

However, we will attempt to remove

email addresses to help reduce Internet

spam.

FOR FURTHER INFORMATION CONTACT:

OCC: Kurt Wilhelm, Director,

Financial Markets Group, (202) 649–

6437, Carl Kaminski, Counsel,

Legislative and Regulatory Activities

Division, (202) 649–5490, or Laura

Gardy, Counsel, Securities and

Corporate Practices, (202) 649–5510, for

persons who are deaf or hard of hearing,

TTY (202) 649–5597, Office of the

Comptroller of the Currency, 400 7th

Street SW., Washington, DC 20219.

Board: Sean D. Campbell, Deputy

Associate Director, Division of Research

and Statistics, (202) 452–3760, Victoria

M. Szybillo, Counsel, (202) 475–6325, or

Anna M. Harrington, Senior Attorney,

Legal Division, (202) 452–6406,

Elizabeth MacDonald, Senior

Supervisory Financial Analyst, Banking

Supervision and Regulation, (202) 475–

6316, Board of Governors of the Federal

Reserve System, 20th and C Streets

NW., Washington, DC 20551.

FDIC: Bobby R

sion of Research

and Statistics, (202) 452–3760, Victoria

M. Szybillo, Counsel, (202) 475–6325, or

Anna M. Harrington, Senior Attorney,

Legal Division, (202) 452–6406,

Elizabeth MacDonald, Senior

Supervisory Financial Analyst, Banking

Supervision and Regulation, (202) 475–

6316, Board of Governors of the Federal

Reserve System, 20th and C Streets

NW., Washington, DC 20551.

FDIC: Bobby R. Bean, Associate

Director, Capital Markets Branch,

bbean@fdic.gov, John Feid, Senior

Policy Analyst, jfeid@fdic.gov, Ryan

Clougherty, Capital Markets Policy

Analyst, rclougherty@fdic.gov, Jacob

Doyle, Capital Markets Policy Analyst,

jdoyle@fdic.gov, Division of Risk

Management Supervision, (202) 898–

6888; Thomas F. Hearn, Counsel,

thohearn@fdic.gov, or Catherine

Topping, Counsel, ctopping@fdic.gov,

Legal Division, Federal Deposit

Insurance Corporation, 550 17th Street

NW., Washington, DC 20429.

FHFA: Robert Collender, Principal

Policy Analyst, Office of Policy Analysis

and Research, (202) 649–3196,

Robert.Collender@fhfa.gov, or Peggy K.

Balsawer, Associate General Counsel,

Office of General Counsel, (202) 649–

3060, Peggy.Balsawer@fhfa.gov, Federal

Housing Finance Agency, Constitution

Center, 400 7th St. SW., Washington, DC

20024. The telephone number for the

Telecommunications Device for the

Hearing Impaired is (800) 877–8339.

FCA: Timothy T. Nerdahl, Senior

Financial Analyst, Jeremy R. Edelstein,

Financial Analyst, Office of Regulatory

Policy, (703) 883–4414, TTY (703) 883–

4056, or Richard A. Katz, Senior

Counsel, Office of General Counsel,

ce Agency, Constitution

Center, 400 7th St. SW., Washington, DC

20024. The telephone number for the

Telecommunications Device for the

Hearing Impaired is (800) 877–8339.

FCA: Timothy T. Nerdahl, Senior

Financial Analyst, Jeremy R. Edelstein,

Financial Analyst, Office of Regulatory

Policy, (703) 883–4414, TTY (703) 883–

4056, or Richard A. Katz, Senior

Counsel, Office of General Counsel,

(703) 883–4020, TTY (703) 883–4056,

Farm Credit Administration, 1501 Farm

Credit Drive, McLean, VA 22102–5090.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Dodd-Frank Act

The Dodd-Frank Wall Street Reform

and Consumer Protection Act (the ‘‘Act’’

or ‘‘Dodd-Frank Act’’) was enacted on

July 21, 2010.1 Title VII of the Dodd-

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

2 See 7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68).

3 See 7 U.S.C. 6s; 15 U.S.C. 78o–10. Section 731

of the Dodd-Frank Act requires swap dealers and

major swap participants to register with the CFTC,

which is vested with primary responsibility for the

oversight of the swaps market under Title VII of the

Dodd-Frank Act. Section 764 of the Dodd-Frank Act

requires security-based swap dealers and major

security-based swap participants to register with the

SEC, which is vested with primary responsibility

for the oversight of the security-based swaps market

under Title VII of the Dodd-Frank Act. Section

712(d)(1) of the Dodd-Frank Act requires the CFTC

and SEC to issue joint rules further defining the

terms swap, security-based swap, swap dealer,

major swap participant, security-based swap dealer,

and major security-based swap participant. The

CFTC and SEC issued final joint rulemakings with

respect to these definitions in May 2012 and August

2012, respectively

the Dodd-Frank Act. Section

712(d)(1) of the Dodd-Frank Act requires the CFTC

and SEC to issue joint rules further defining the

terms swap, security-based swap, swap dealer,

major swap participant, security-based swap dealer,

and major security-based swap participant. The

CFTC and SEC issued final joint rulemakings with

respect to these definitions in May 2012 and August

2012, respectively. See 77 FR 30596 (May 23, 2012);

77 FR 39626 (July 5, 2012) (correction of footnote

in the SUPPLEMENTARY INFORMATION accompanying

the rule); and 77 FR 48207 (August 13, 2012). 17

CFR part 1; 17 CFR parts 230, 240 and 241.

4 Section 1a(39) of the Commodity Exchange Act

defines the term ‘‘prudential regulator’’ for

purposes of the capital and margin requirements

applicable to swap dealers, major swap

participants, security-based swap dealers and major

security-based swap participants. The Board is the

prudential regulator for any swap entity that is (i)

a State-chartered bank that is a member of the

Federal Reserve System, (ii) a State-chartered

branch or agency of a foreign bank, (iii) a foreign

bank which does not operate an insured branch, (iv)

an organization operating under section 25A of the

Federal Reserve Act (an Edge corporation) or having

an agreement with the Board under section 25 of

the Federal Reserve Act (an Agreement

corporation), and (v) a bank holding company, a

foreign bank that is treated as a bank holding

company under section 8(a) of the International

Banking Act of 1978, as amended, or a savings and

loan holding company (on or after the transfer date

established under section 311 of the Dodd-Frank

Act), or a subsidiary of such a company or foreign

bank (other than a subsidiary for which the OCC or

FDIC is the prudential regulator or that is required

to be registered with the CFTC or SEC as a swap

dealer or major swap participant or a security-based

swap dealer or major security-based swap

participant, respectively)

er the transfer date

established under section 311 of the Dodd-Frank

Act), or a subsidiary of such a company or foreign

bank (other than a subsidiary for which the OCC or

FDIC is the prudential regulator or that is required

to be registered with the CFTC or SEC as a swap

dealer or major swap participant or a security-based

swap dealer or major security-based swap

participant, respectively). The OCC is the

prudential regulator for any swap entity that is (i)

a national bank, (ii) a federally chartered branch or

agency of a foreign bank, or (iii) a Federal savings

association. The FDIC is the prudential regulator for

any swap entity that is (i) a State-chartered bank

that is not a member of the Federal Reserve System

or (ii) a State savings association. The FCA is the

prudential regulator for any swap entity that is an

institution chartered under the Farm Credit Act of

1971, as amended (the ‘‘Farm Credit Act’’). FHFA

is the prudential regulator for any swap entity that

is a ‘‘regulated entity’’ under the Federal Housing

Enterprises Financial Safety and Soundness Act of

1992, as amended (the ‘‘Federal Housing

Enterprises Financial Safety and Soundness Act’’)

(i.e., the Federal National Mortgage Association

(‘‘Fannie Mae’’) and its affiliates, the Federal Home

Loan Mortgage Corporation (‘‘Freddie Mac’’) and its

affiliates, and the Federal Home Loan Banks). See

7 U.S.C. 1a(39). In addition, OCC regulations

provide that an operating subsidiary may engage

only in activities that are permissible for its parent

to conduct directly and require operating

subsidiaries to conduct activities subject to the

same authorization, terms, and conditions as apply

to the conduct of those activities by the parent

bank. FDIC regulations for subsidiaries of state-

chartered banks incorporate similar limits to those

imposed by the OCC for operating subsidiaries

nly in activities that are permissible for its parent

to conduct directly and require operating

subsidiaries to conduct activities subject to the

same authorization, terms, and conditions as apply

to the conduct of those activities by the parent

bank. FDIC regulations for subsidiaries of state-

chartered banks incorporate similar limits to those

imposed by the OCC for operating subsidiaries.

Thus, if operating subsidiaries of a national bank or

subsidiaries of a state-chartered bank engage in

swap dealing below the aggregate de minimis dealer

registration exemption thresholds established by

the CFTC and SEC for registration as a swap dealer

or security-based swap dealer, those subsidiaries

must comply with the banking agencies’ swap

counterparty credit risk exposure safety and

soundness requirements, regardless of whether the

parent bank is registered as a swap dealer. If those

subsidiaries engage in dealing activities above the

CFTC and SEC registration thresholds, the

subsidiaries must also comply with the margin

requirements of this rule.

5 See 7 U.S.C. 6s(e)(2)(A); 15 U.S.C. 78o–

10(e)(2)(A). Section 6s(e)(1)(A) of the Commodity

Exchange Act directs registered swap dealers and

major swap participants for which there is a

prudential regulator to comply with margin and

capital rules issued by the prudential regulators,

while section 6s(e)(1)(B) directs registered swap

dealers and major swap participants for which there

is not a prudential regulator to comply with margin

and capital rules issued by the CFTC and SEC.

Section 78o–10(e)(1) generally parallels section

6s(e)(1), except that section 78o–10(e)(1)(A) refers to

registered security-based swap dealers and major

security-based swap participants for which ‘‘there

is not a prudential regulator.’’ The Agencies

construe the ‘‘not’’ in section 78o–10(e)(1)(A) to

have been included by mistake, in conflict with

section 78o–10(e)(2)(A), and of no substantive

meaning

10(e)(1) generally parallels section

6s(e)(1), except that section 78o–10(e)(1)(A) refers to

registered security-based swap dealers and major

security-based swap participants for which ‘‘there

is not a prudential regulator.’’ The Agencies

construe the ‘‘not’’ in section 78o–10(e)(1)(A) to

have been included by mistake, in conflict with

section 78o–10(e)(2)(A), and of no substantive

meaning. Otherwise, registered security-based swap

dealers and major security-based swap participants

for which there is not a prudential regulator could

be subject to multiple capital and margin rules, and

institutions regulated by the prudential regulators

and registered as security-based swap dealers and

major security-based swap participants might not be

subject to any capital and margin requirements

under section 78o–10(e).

6 See 7 U.S.C. 6s(e)(2)(B); 15 U.S.C. 78o–

10(e)(2)(B).

7 See 7 U.S.C. 6s(e)(2)(A); 6s(e)(3)(D); 15 U.S.C.

78o–10(e)(2)(A), 78o–10(e)(3)(D). Staff of the

Agencies have consulted with staff of the CFTC and

SEC in developing the proposed rule.

8 See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o–

10(e)(3)(A).

9 See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o–

10(e)(3)(A). In addition, section 1313 of the Federal

Housing Enterprises Financial Safety and

Soundness Act of 1992 requires the Director of

FHFA, when promulgating regulations relating to

the Federal Home Loan Banks, to consider the

following differences between the Federal Home

Loan Banks and Fannie Mae and Freddie Mac:

Cooperative ownership structure; mission of

providing liquidity to members; affordable housing

and community development mission; capital

structure; and joint and several liability. See 12

U.S.C. 4513. The Director of FHFA also may

consider any other differences that are deemed

appropriate. For purposes of this proposed rule,

FHFA considered the differences as they relate to

the above factors

perative ownership structure; mission of

providing liquidity to members; affordable housing

and community development mission; capital

structure; and joint and several liability. See 12

U.S.C. 4513. The Director of FHFA also may

consider any other differences that are deemed

appropriate. For purposes of this proposed rule,

FHFA considered the differences as they relate to

the above factors. FHFA requests comments from

the public about whether differences related to

these factors should result in any revisions to the

proposal.

Frank Act established a comprehensive

new regulatory framework for

derivatives, which the Act generally

characterizes as ‘‘swaps’’ (which are

defined in section 721 of the Dodd-

Frank Act to include interest rate swaps,

commodity-based swaps, and broad-

based credit swaps) and ‘‘security-based

swaps’’ (which are defined in section

761 of the Dodd-Frank Act to include

single-name and narrow-based credit

swaps and equity-based swaps).2 For the

remainder of this preamble, the term

‘‘swaps’’ refers to swaps and security-

based swaps unless the context requires

otherwise.

As part of this new regulatory

framework, sections 731 and 764 of the

Dodd-Frank Act add a new section,

section 4s, to the Commodity Exchange

Act of 1936, as amended (‘‘Commodity

Exchange Act’’) and a new section,

section 15F, to the Securities Exchange

Act of 1934, as amended (‘‘Exchange

Act’’), respectively, which require the

registration by the Commodity Futures

Trading Commission (the ‘‘CFTC’’) and

the Securities and Exchange

Commission (the ‘‘SEC’’) of swap

dealers, major swap participants,

security-based swap dealers, and major

security-based swap participants (each a

‘‘swap entity’’ and, collectively, ‘‘swap

entities’’).3 For swap entities that are

prudentially regulated by one of the

Agencies,4 sections 731 and 764 of the

Dodd-Frank Act require the Agencies to

adopt rules jointly for swap entities

under their respective jurisdictions

imposing (i) capital requirements and

security-based swap dealers, and major

security-based swap participants (each a

‘‘swap entity’’ and, collectively, ‘‘swap

entities’’).3 For swap entities that are

prudentially regulated by one of the

Agencies,4 sections 731 and 764 of the

Dodd-Frank Act require the Agencies to

adopt rules jointly for swap entities

under their respective jurisdictions

imposing (i) capital requirements and

(ii) initial and variation margin

requirements on all swaps not cleared

by a central counterparty (‘‘CCP’’).5

Swap entities that are prudentially

regulated by one of the Agencies and

therefore subject to the proposed rule

are referred to herein as ‘‘covered swap

entities.’’

Sections 731 and 764 of the Dodd-

Frank Act also require the CFTC and

SEC separately to adopt rules imposing

capital and margin requirements for

swap entities for which there is no

prudential regulator.6 The Dodd-Frank

Act requires the CFTC, SEC, and the

Agencies to establish and maintain, to

the maximum extent practicable, capital

and margin requirements that are

comparable, and to consult with each

other periodically (but no less than

annually) regarding these

requirements.7

The capital and margin standards for

swap entities imposed under sections

731 and 764 of the Dodd-Frank Act are

intended to offset the greater risk to the

swap entity and the financial system

arising from non-cleared swaps.8

Sections 731 and 764 of the Dodd-Frank

Act require that the capital and margin

requirements imposed on swap entities

must, to offset such risk, (i) help ensure

the safety and soundness of the swap

entity and (ii) be appropriate for the

greater risk associated with non-cleared

swaps.9 In addition, sections 731 and

764 of the Dodd-Frank Act require the

Agencies, in establishing capital

requirements for entities designated as

covered swap entities for a single type

or single class or category of swap or

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t

the

greater risk associated with non-cleared

swaps.9 In addition, sections 731 and

764 of the Dodd-Frank Act require the

Agencies, in establishing capital

requirements for entities designated as

covered swap entities for a single type

or single class or category of swap or

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10 See 7 U.S.C. 6s(e)(2)(C); 15 U.S.C. 78o–

10(e)(2)(C). In addition, the margin requirements

imposed by the Agencies must permit the use of

noncash collateral, as the Agencies determine to be

consistent with (i) preserving the financial integrity

of the markets trading swaps and (ii) preserving the

stability of the U.S. financial system. See 7 U.S.C.

6s(e)(3)(C); 15 U.S.C. 78o–10(e)(3)(C).

11 12 U.S.C. 221 et seq., 12 U.S.C. 1818, 12 U.S.C.

1841 et seq., 12 U.S.C. 3101 et seq. and 12 U.S.C.

1461 et seq. (Board); 12 U.S.C. 2001 et seq.; 12

U.S.C. 2241 through 2274; 12 U.S.C. 2279aa–11; 12

U.S.C. 2279bb through bb–7 (FCA); 12 U.S.C. 4513

(FHFA).

12 See Dodd-Frank Act sections 741(c) and 764(b).

13 See 7 U.S.C. 2(h); 15 U.S.C. 78c–3. Certain

types of counterparties (e.g., counterparties that are

not financial entities and are using swaps to hedge

or mitigate commercial risks) are exempt from this

mandatory clearing requirement and may elect not

to clear a swap that would otherwise be subject to

the clearing requirement.

14 G–20 Leaders, June 2010 Toronto Summit

Declaration, Annex II, ¶ 25. The dealer community

has also recognized the importance of clearing—

beginning in 2009, in an effort led by the Federal

Reserve Bank of New York, the dealer community

agreed to increase central clearing for certain credit

derivatives and interest rate derivatives

t would otherwise be subject to

the clearing requirement.

14 G–20 Leaders, June 2010 Toronto Summit

Declaration, Annex II, ¶ 25. The dealer community

has also recognized the importance of clearing—

beginning in 2009, in an effort led by the Federal

Reserve Bank of New York, the dealer community

agreed to increase central clearing for certain credit

derivatives and interest rate derivatives. See Press

Release, Federal Reserve Bank of New York, New

York Fed Welcomes Further Industry Commitments

on Over-the-Counter Derivatives (June 2, 2009),

available at www.newyorkfed.org/newsevents/news/

markets/2009/ma090602.html.

15 CCPs interpose themselves between

counterparties to a swap transaction, becoming the

buyer to the seller and the seller to the buyer and,

in the process, taking on the credit risk that each

party poses to the other. For example, when a

swaps contract between two parties that are

members of a CCP is executed and submitted for

clearing, it is typically replaced by two new

contracts—separate contracts between the CCP and

each of the two original counterparties. At that

point, the original counterparties are no longer

counterparties to each other; instead, each faces the

CCP as its counterparty, and the CCP assumes the

counterparty credit risk of each of the original

counterparties.

16 76 FR 27564 (May 11, 2011).

17 See Dodd-Frank Act section 721; 7 U.S.C.

1(a)(39).

18 See 77 FR 30596 (May 23, 2012), 77 FR 39626

(July 5, 2012) (correction of footnote in

SUPPLEMENTARY INFORMATION accompanying the

rule) and 77 FR 48207 (August 13, 2012); 17 CFR

part 1; 17 CFR parts 230, 240, and 241.

activities, to take into account the risks

associated with other types, classes, or

categories of swaps engaged in, and the

other activities conducted by swap

entities that are not otherwise subject to

regulation.10 Sections 731 and 764

become effective not less than 60 days

after publication of the final rule or

regulation implementing these sections

rt 1; 17 CFR parts 230, 240, and 241.

activities, to take into account the risks

associated with other types, classes, or

categories of swaps engaged in, and the

other activities conducted by swap

entities that are not otherwise subject to

regulation.10 Sections 731 and 764

become effective not less than 60 days

after publication of the final rule or

regulation implementing these sections.

In addition to the Dodd-Frank Act

authorities mentioned above, the

Agencies also have safety and

soundness authority over the entities

they supervise.11 The Dodd-Frank Act

specified that the provisions of its Title

VII shall not be construed as divesting

any Agency of its authority to establish

or enforce prudential or other standards

under other law.12

The capital and margin requirements

for non-cleared swaps under sections

731 and 764 of the Dodd-Frank Act

complement other Dodd-Frank Act

provisions that require all sufficiently

standardized swaps to be cleared

through a derivatives clearing

organization or clearing agency.13 This

requirement is consistent with the

consensus of the G–20 leaders to clear

derivatives through central

counterparties where appropriate.14

In the derivatives clearing process,

CCPs manage credit risk through a range

of controls and methods, including a

margining regime that imposes both

initial margin and variation margin

requirements on parties to cleared

transactions.15 Thus, the mandatory

clearing requirement established by the

Dodd-Frank Act for swaps effectively

will require any party to any transaction

subject to the clearing mandate to post

initial and variation margin in

connection with that transaction

and methods, including a

margining regime that imposes both

initial margin and variation margin

requirements on parties to cleared

transactions.15 Thus, the mandatory

clearing requirement established by the

Dodd-Frank Act for swaps effectively

will require any party to any transaction

subject to the clearing mandate to post

initial and variation margin in

connection with that transaction.

However, if a particular swap is not

cleared because it is not subject to the

mandatory clearing requirement (or

because one of the parties to a particular

swap is eligible for, and uses, an

exemption from the mandatory clearing

requirement), that swap will be a ‘‘non-

cleared’’ swap and may be subject to the

capital and margin requirements for

such transactions established under

sections 731 and 764 of the Dodd-Frank

Act.

The swaps-related provisions of Title

VII of the Dodd-Frank Act, including

sections 731 and 764, are intended in

general to reduce risk, increase

transparency, promote market integrity

within the financial system, and, in

particular, address a number of

weaknesses in the regulation and

structure of the swaps markets that were

revealed during the financial crisis of

2008 and 2009. During the financial

crisis, the opacity of swap transactions

among dealers and between dealers and

their counterparties created uncertainty

about whether market participants were

significantly exposed to the risk of a

default by a swap counterparty. By

imposing a regulatory margin

requirement on non-cleared swaps, the

Dodd-Frank Act reduces the uncertainty

around the possible exposures arising

from non-cleared swaps.

Further, the most recent financial

crisis revealed that a number of

significant participants in the swaps

markets had taken on excessive risk

through the use of swaps without

sufficient financial resources to make

good on their contracts

atory margin

requirement on non-cleared swaps, the

Dodd-Frank Act reduces the uncertainty

around the possible exposures arising

from non-cleared swaps.

Further, the most recent financial

crisis revealed that a number of

significant participants in the swaps

markets had taken on excessive risk

through the use of swaps without

sufficient financial resources to make

good on their contracts. By imposing an

initial and variation margin requirement

on non-cleared swaps, sections 731 and

764 of the Dodd-Frank Act will reduce

the ability of firms to take on excessive

risks through swaps without sufficient

financial resources. Additionally, the

minimum margin requirement will

reduce the amount by which firms can

leverage the underlying risk associated

with the swap contract.

The Agencies originally published

proposed rules to implement sections

731 and 764 of the Act in May 2011 (the

‘‘2011 proposal’’).16 Over 100 comments

were received in response to the 2011

proposal from a variety of commenters,

including banks, asset managers,

commercial end users, and various trade

associations. Like the current proposal,

the 2011 proposal was issued pursuant

to the Dodd-Frank Act and each

Agency’s safety and soundness

authority.

B. Other Dodd-Frank Act Provisions

Affecting the Margin and Capital Rule

The applicability of the prudential

regulators’ margin requirements rely in

part on regulatory action taken by the

CFTC, the SEC, and the Secretary of the

Treasury. The margin requirements will

apply to an entity listed as prudentially

regulated by the Agencies under the

definition of ‘‘prudential regulator’’ in

the Commodity Exchange Act 17 if that

entity: (1) Is a swap dealer, major swap

participant, security-based swap dealer,

major security-based swap participant

and (2) enters into a non-cleared swap

, the SEC, and the Secretary of the

Treasury. The margin requirements will

apply to an entity listed as prudentially

regulated by the Agencies under the

definition of ‘‘prudential regulator’’ in

the Commodity Exchange Act 17 if that

entity: (1) Is a swap dealer, major swap

participant, security-based swap dealer,

major security-based swap participant

and (2) enters into a non-cleared swap.

In addition, as a means of ensuring the

safety and soundness of the covered

swap entity’s non-cleared swap

activities under the proposed rule, the

requirements would apply to all of a

covered swap entity’s swap and

security-based swap activities without

regard to whether the entity has

registered as both a swaps entity and a

security-based swaps entity. Thus, for

example, for an entity that is a swap

dealer but not a security-based swap

dealer or major security-based swap

participant, the proposed rule’s

requirements would apply to all of that

swap dealer’s non-cleared swaps and

security-based swaps.

On May 23, 2012, the CFTC and SEC

adopted a final joint rule defining

‘‘swap dealer,’’ ‘‘major swap

participant,’’ ‘‘security-based swap

dealer,’’ and ‘‘major security-based swap

dealer.’’ These definitions include

quantitative thresholds in the relevant

activity that affect whether an entity

subject to the ‘‘prudential regulator’’

definition also will be subject to the

margin regulations being proposed.18

On August 13, 2012, the CFTC and

SEC adopted a final joint rule defining

‘‘swap,’’ ‘‘security-based swap,’’

‘‘foreign exchange swap,’’ and ‘‘foreign

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egulator’’

definition also will be subject to the

margin regulations being proposed.18

On August 13, 2012, the CFTC and

SEC adopted a final joint rule defining

‘‘swap,’’ ‘‘security-based swap,’’

‘‘foreign exchange swap,’’ and ‘‘foreign

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19 See 77 FR 48207 (August 13, 2012); 17 CFR part

1; 17 CFR parts 230, 240, and 241.

20 77 FR 69694 (November 20, 2013).

21 77 FR 2613 (January 1, 2012); 17 CFR 23.21.

22 78 FR 45292 (July 26, 2013); 17 CFR part 1; 79

FR 39067 (July 9, 2014); 17 CFR parts 240, 241, and

250.

23 See BCBS and IOSCO ‘‘Consultative

Document—Margin requirements for non-centrally

cleared derivatives’’ (July 2012),

available at http://www.bis.org/publ/bcbs226.pdf

and ‘‘Second consultative document—Margin

requirements for non-centrally cleared derivatives’’

(February 2013), available at http://www.bis.org/

publ/bcbs242.pdf.

24 77 FR 60057 (October 2, 2012).

25 See BCBS and IOSCO ‘‘Margin requirements for

non-centrally cleared derivatives,’’ (September

2013), available at https://www.bis.org/publ/

bcbs261.pdf.

26 The 2013 international framework refers to

swaps as ‘‘derivatives.’’ For purposes of the

discussion in this section, the terms ‘‘swaps’’ and

‘‘derivatives’’ can be used interchangeably.

27 The 2013 international framework states that

variation margin standards for physically settled FX

forwards and swaps should be addressed by

national supervisors in a manner consistent with

the BCBS supervisory guidance recommendations

for these products. See BCBS ‘‘Supervisory

guidance for managing risks associated with the

settlement of foreign exchange transactions,’’

(February 2013), available at: https://www.bis.org/

publ/bcbs241.pdf (BCBS FX supervisory guidance)

sically settled FX

forwards and swaps should be addressed by

national supervisors in a manner consistent with

the BCBS supervisory guidance recommendations

for these products. See BCBS ‘‘Supervisory

guidance for managing risks associated with the

settlement of foreign exchange transactions,’’

(February 2013), available at: https://www.bis.org/

publ/bcbs241.pdf (BCBS FX supervisory guidance).

The Board implemented the BCBS FX supervisory

guidance in SR letter 13–24 ‘‘Managing Foreign

Exchange Settlement Risks for Physically Settled

Transactions’’ (December 23, 2013) available at

http://www.federalreserve.gov/bankinforeg/

srletters/sr1324.htm. As discussed elsewhere in this

preamble, in 2012, the Secretary of the Treasury

made a determination that physically-settled

foreign exchange forwards and swaps are not to be

considered swaps under the Dodd-Frank Act. 77 FR

69694 (November 20, 2012).

exchange forward.’’ 19 On November 16,

2012, the Secretary of the Treasury

made a determination pursuant to

sections 1a(47)(E) and 1(b) of the

Commodity Exchange Act to exempt

foreign exchange swaps and foreign

exchange forwards from certain swap

requirements, including margin

requirements, that Title VII of the Dodd-

Frank Act added to the Commodity

Exchange Act.20

The CFTC has adopted a final rule

requiring registration by entities

meeting the substantive definition of

swap dealer or major swap participant

and engaging in relevant activities above

the applicable quantitative thresholds.21

As of June 29, 2014, 102 entities have

registered as swap dealers, and 2

entities have registered as major swap

participants, neither of which are

insured depository institutions or

otherwise among the entities listed in

the prudential regulator definition

finition of

swap dealer or major swap participant

and engaging in relevant activities above

the applicable quantitative thresholds.21

As of June 29, 2014, 102 entities have

registered as swap dealers, and 2

entities have registered as major swap

participants, neither of which are

insured depository institutions or

otherwise among the entities listed in

the prudential regulator definition. The

SEC has not yet imposed a registration

requirement on entities that meet the

definition of ‘‘security-based swap

dealer,’’ or ‘‘major security-based swap

participant.’’

The CFTC and SEC have also adopted

policies addressing how the Commodity

Exchange Act’s and Exchange Act’s

swap requirements will apply to ‘‘cross-

border swaps.’’ 22

C. The 2013 International Framework

Following the release of the Agencies’

2011 proposal, the Basel Committee on

Banking Supervision (‘‘BCBS’’) and the

Board of the International Organization

of Securities Commissions (‘‘IOSCO’’)

proposed an international framework for

margin requirements on non-cleared

swaps with the goal of creating an

international standard for non-cleared

swaps (the ‘‘2012 international

framework’’).23 Following the issuance

of the 2012 international framework, the

Agencies re-opened the comment period

on the Agencies’ 2011 proposal to allow

for additional comment in relation to

the 2012 international framework.24 The

2012 international framework was also

subject to extensive public comment

before being finalized in September

2013 (the ‘‘2013 international

framework’’).25

The 2013 international framework

articulates eight key principles for non-

cleared derivatives margin rules, which

are described in further detail below.

These principles represent the

minimum standards approved by BCBS

and IOSCO and recommended to the

regulatory authorities in member

jurisdictions of these organizations. Key

principles 1 through 8 are described

below.26

1

mework’’).25

The 2013 international framework

articulates eight key principles for non-

cleared derivatives margin rules, which

are described in further detail below.

These principles represent the

minimum standards approved by BCBS

and IOSCO and recommended to the

regulatory authorities in member

jurisdictions of these organizations. Key

principles 1 through 8 are described

below.26

1. Appropriate Margining Practices

Should Be in Place With Respect to All

Non-Cleared Derivative Transactions

The 2013 international framework

recommends that appropriate margining

practices be in place with respect to all

derivative transactions that are not

cleared by CCPs. The 2013 international

framework does not include a margin

requirement for physically settled

foreign exchange (FX) forwards and

swaps.27 The framework would also not

apply initial margin requirements to the

fixed physically settled FX component

of cross-currency swaps.

2. Financial Firms and Systemically

Important Nonfinancial Entities

(Covered Entities) Must Exchange Initial

and Variation Margin

The 2013 international framework

recommends bilateral exchange of

initial and variation margin for non-

cleared derivatives between covered

entities. The precise definition of

‘‘covered entities’’ is to be determined

by each national regulator, but in

general should include financial firms

and systemically important nonfinancial

entities. Sovereigns, central banks,

certain multilateral development banks,

the Bank for International Settlements

(BIS), and non-systemic, nonfinancial

firms are not included as covered

entities.

Under the 2013 international

framework, all covered entities that

engage in non-cleared derivatives

should exchange, on a bilateral basis,

the full amount of variation margin with

a zero threshold on a regular basis (e.g.,

daily). All covered entities are also

expected to exchange, on a bilateral

basis, initial margin with a threshold

not to exceed Ö50 million

luded as covered

entities.

Under the 2013 international

framework, all covered entities that

engage in non-cleared derivatives

should exchange, on a bilateral basis,

the full amount of variation margin with

a zero threshold on a regular basis (e.g.,

daily). All covered entities are also

expected to exchange, on a bilateral

basis, initial margin with a threshold

not to exceed Ö50 million. The

threshold applies on a consolidated

group, rather than legal entity, basis. In

addition, and in light of the permitted

initial margin threshold, the 2013

international framework recommends

that entities with non-cleared derivative

activity of Ö8 billion notional or more

would be subject to initial margin

requirements.

3. The Methodologies for Calculating

Initial and Variation Margin Should (i)

Be Consistent Across Covered Entities,

and (ii) Ensure That All Counterparty

Risk Exposures Are Covered With a

High Degree of Confidence

The 2013 international framework

states that the potential future exposure

of a non-cleared derivative should

reflect an estimate of an increase in the

value of the instrument that is

consistent with a one-tailed 99%

confidence level over a 10-day horizon

(or longer, if variation margin is not

collected on a daily basis), based on

historical data that incorporates a period

of significant financial stress.

The 2013 international framework

permits the amount of initial margin to

be calculated by reference to internal

models approved by the relevant

national regulator or a standardized

margin schedule, but covered entities

should not ‘‘cherry pick’’ between the

two calculation methods. Models may

allow for conceptually sound and

empirically demonstrable portfolio risk

offsets where there is an enforceable

netting agreement in effect. However,

portfolio risk offsets may only be

recognized within, and not across,

certain well-defined asset classes:

Credit, equity, interest rates and foreign

exchange, and commodities

ot ‘‘cherry pick’’ between the

two calculation methods. Models may

allow for conceptually sound and

empirically demonstrable portfolio risk

offsets where there is an enforceable

netting agreement in effect. However,

portfolio risk offsets may only be

recognized within, and not across,

certain well-defined asset classes:

Credit, equity, interest rates and foreign

exchange, and commodities. A covered

entity using the standardized margin

schedule may adjust the gross initial

margin amount (notional exposure

multiplied by the relevant percentage in

the table) by a ‘‘net-to-gross ratio,’’

which is also used in the bank

counterparty credit risk capital rules to

reflect a degree of netting of derivative

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positions that are subject to an

enforceable netting agreement.

4. To Ensure That Assets Collected as

Collateral Can Be Liquidated in a

Reasonable Amount of Time To

Generate Proceeds That Could

Sufficiently Protect Covered Entities

From Losses in the Event of a

Counterparty Default, These Assets

Should Be Highly Liquid and Should,

After Accounting for an Appropriate

Haircut, Be Able To Hold Their Value

in a Time of Financial Stress

The 2013 international framework

recommends that national supervisors

develop a definitive list of eligible

collateral assets. The 2013 international

framework includes examples of

permissible collateral types, provides a

schedule of standardized haircuts, and

indicates that model-based haircuts may

be appropriate

priate

Haircut, Be Able To Hold Their Value

in a Time of Financial Stress

The 2013 international framework

recommends that national supervisors

develop a definitive list of eligible

collateral assets. The 2013 international

framework includes examples of

permissible collateral types, provides a

schedule of standardized haircuts, and

indicates that model-based haircuts may

be appropriate. In the event that a

dispute arises over the value of eligible

collateral, the 2013 international

framework provides that both parties

should make all necessary and

appropriate efforts, including timely

initiation of dispute resolution

protocols, to resolve the dispute and

exchange any required margin in a

timely fashion.

5. Initial Margin Should Be Exchanged

on a Gross Basis and Held in Such a

Way as To Ensure That (i) the Margin

Collected Is Immediately Available to

the Collecting Party in the Event of the

Counterparty’s Default, and (ii) the

Collected Margin Is Subject to

Arrangements That Fully Protect the

Posting Party

The 2013 international framework

provides that collateral collected as

initial margin from a ‘‘customer’’

(defined as a ‘‘buy-side financial firm’’)

should be segregated from the initial

margin collector’s proprietary assets.

The initial margin collector also should

give the customer the option to

individually segregate its initial margin

from other customers’ margin. In very

specific circumstances, the initial

margin collector may use margin

provided by the customer to hedge the

risks associated with the customer’s

positions with a third party. To the

extent that the customer consents to

rehypothecation, it should be permitted

only where applicable insolvency law

gives the customer protection from risk

of loss of initial margin in instances

where either the initial margin collector

or the third party become insolvent, or

they both do

by the customer to hedge the

risks associated with the customer’s

positions with a third party. To the

extent that the customer consents to

rehypothecation, it should be permitted

only where applicable insolvency law

gives the customer protection from risk

of loss of initial margin in instances

where either the initial margin collector

or the third party become insolvent, or

they both do. Where a customer has

consented to rehypothecation and

adequate legal safeguards are in place,

the margin collector and the third party

to whom customer collateral is

rehypothecated should comply with

additional restrictions detailed in the

2013 international framework, including

a prohibition on any further

rehypothecation of the customer’s

collateral by the third party.

6. Requirements for Transactions

Between Affiliates Are Left to the

National Supervisors

The 2013 international framework

recommends that national supervisors

establish margin requirements for

transactions between affiliates as

appropriate in a manner consistent with

each jurisdiction’s legal and regulatory

framework.

7. Requirements for Margining Non-

Cleared Derivatives Should Be

Consistent and Non-Duplicative Across

Jurisdictions

Under the 2013 international

framework, home-country supervisors

may allow a covered entity to comply

with a host-country’s margin regime if

the host-country margin regime is

consistent with the 2013 international

framework. A branch may be subject to

the margin requirements of either the

headquarters’ jurisdiction or the host

country.

8. Margin Requirements Should Be

Phased in Over an Appropriate Period

of Time

The 2013 international framework

phases in margin requirements between

December 2015 and December 2019.

Covered entities should begin

exchanging variation margin by

December 1, 2015

nal

framework. A branch may be subject to

the margin requirements of either the

headquarters’ jurisdiction or the host

country.

8. Margin Requirements Should Be

Phased in Over an Appropriate Period

of Time

The 2013 international framework

phases in margin requirements between

December 2015 and December 2019.

Covered entities should begin

exchanging variation margin by

December 1, 2015. The date on which a

covered entity should begin to exchange

initial margin with a counterparty

depends on the notional amount of non-

cleared derivatives (including

physically settled FX forwards and

swaps) entered into both by its

consolidated corporate group and by the

counterparty’s consolidated corporate

group.

Currency denomination. The 2013

international framework generally lays

out a broad conceptual framework for

margining requirements on non-cleared

derivatives. It also recommends specific

quantitative levels for several

parameters such as the level of notional

derivative exposure that results in an

entity being subject to the margin

requirements (Ö8 billion), permitted

initial margin thresholds (Ö50 million),

and minimum transfer amounts

(Ö500,000). In the 2013 international

framework, all such amounts are

denominated in Euros. In this proposal

all such amounts are denominated in

U.S. dollars. The Agencies are aware

that, over time, amounts that are

denominated in different currencies in

different jurisdictions may fluctuate

relative to one another due to changes

in exchange rates. The Agencies seek

comment on whether and how

fluctuations resulting from exchange

rate movements should be addressed

ated in Euros. In this proposal

all such amounts are denominated in

U.S. dollars. The Agencies are aware

that, over time, amounts that are

denominated in different currencies in

different jurisdictions may fluctuate

relative to one another due to changes

in exchange rates. The Agencies seek

comment on whether and how

fluctuations resulting from exchange

rate movements should be addressed. In

particular, should these amounts be

expressed in terms of a single currency

in all jurisdictions to prevent such

fluctuations? Should the amounts be

adjusted over time if and when

exchange rate movements necessitate

realignment? Are there other approaches

to deal with fluctuations resulting from

significant exchange rate movements?

Are there other issues that should be

considered in connection to the effects

of fluctuating exchange rates?

II. Overview of Proposed Rule

A. Margin Requirements

The Agencies have reviewed the

comments received on the 2011

proposal and the 2013 international

framework. The Agencies believe that a

number of changes to the 2011 proposal

are warranted in order to reflect certain

comments received, as well as to

achieve the 2013 international

framework’s goal of promoting global

consistency and reducing regulatory

arbitrage opportunities. In light of the

significant differences from the 2011

proposal, the Agencies are seeking

comment on a revised proposed rule to

implement section 4s of the Commodity

Exchange Act and section 15F of the

Exchange Act (the ‘‘proposal’’ or the

‘‘proposed rule’’).

The Agencies are proposing to adopt

a risk-based approach that would

establish initial and variation margin

requirements for covered swap entities.

Consistent with the statutory

requirement, the proposed rule would

help ensure the safety and soundness of

the covered swap entity and would be

appropriate for the risk to the financial

system associated with non-cleared

swaps held by covered swap entities

re proposing to adopt

a risk-based approach that would

establish initial and variation margin

requirements for covered swap entities.

Consistent with the statutory

requirement, the proposed rule would

help ensure the safety and soundness of

the covered swap entity and would be

appropriate for the risk to the financial

system associated with non-cleared

swaps held by covered swap entities.

The proposed rule takes into account

the risk posed by a covered swap

entity’s counterparties in establishing

the minimum amount of initial and

variation margin that the covered swap

entity must exchange with its

counterparties.

In implementing this risk-based

approach, the proposed rule

distinguishes among four separate types

of swap counterparties: (i)

Counterparties that are themselves swap

entities; (ii) counterparties that are

financial end users with a material

swaps exposure; (iii) counterparties that

are financial end users without a

material swaps exposure, and (iv) other

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28 See § __.2 of the proposed rule for the various

constituent definitions that identify these four types

of swap counterparties.

29 See § __.8 and Appendix A of the proposed rule

for a complete description of the requirements for

initial margin models and standardized minimum

initial margin requirements.

30 All swap entities will be subject to a rule on

minimum margin for non-cleared swaps

promulgated by one of the Agencies, the SEC or the

CFTC.

31 The counterparty may be a covered swap entity

subject to this proposed rule or a swap entity that

is subject to the margin rules of the CFTC or SEC.

If the counterparty is a covered swap entity, it must

collect at least the amount of margin required under

this proposal

be subject to a rule on

minimum margin for non-cleared swaps

promulgated by one of the Agencies, the SEC or the

CFTC.

31 The counterparty may be a covered swap entity

subject to this proposed rule or a swap entity that

is subject to the margin rules of the CFTC or SEC.

If the counterparty is a covered swap entity, it must

collect at least the amount of margin required under

this proposal. If the counterparty is a swap entity

subject to the margin rules of the CFTC or SEC, it

must collect the amount of margin required under

the CFTC or SEC margin rules.

32 Under the proposed rule, when entering into a

swap transaction, the first collection and posting of

initial margin may be delayed for one day following

the day the swap transaction is executed.

Thereafter, posting and collecting initial margin

must be made on at least a daily basis in response

to changes in portfolio composition or any other

factors that would change the required initial

margin amounts.

33 See §§ __.3 and ___.8 of the proposed rule for

a complete description of the initial margin

requirements.

34 See § __.4 of the proposed rule for a complete

description of the variation margin requirements.

counterparties, including nonfinancial

end users, sovereigns, and multilateral

development banks.28 These categories

reflect the Agencies’ current belief that

risk-based distinctions can be made

between these types of swap

counterparties.

The proposed rule’s initial and

variation margin requirements generally

apply to the posting, as well as the

collection, of minimum initial and

variation margin amounts by a covered

swap entity from and to its

counterparties. This proposal represents

a refinement to the Agencies’ original

collection-only approach to margin

requirements based on consideration of

comments made on the 2011 proposal

and the 2013 international framework

gin requirements generally

apply to the posting, as well as the

collection, of minimum initial and

variation margin amounts by a covered

swap entity from and to its

counterparties. This proposal represents

a refinement to the Agencies’ original

collection-only approach to margin

requirements based on consideration of

comments made on the 2011 proposal

and the 2013 international framework.

While the Agencies believe that

imposing requirements with respect to

the minimum amount of initial and

variation margin to be collected is a

critical aspect of offsetting the greater

risk to the covered swap entity and the

financial system arising from the

covered swap entity’s non-cleared swap

exposure, the Agencies also believe that

requiring a covered swap entity to post

margin to other financial entities could

forestall a build-up of potentially

destabilizing exposures in the financial

system. The proposed rule’s approach

therefore is designed to ensure that

covered swap entities transacting with

other swap entities and with financial

end users in non-cleared swaps will be

collecting and posting appropriate

minimum margin amounts with respect

to those transactions.

For initial margin, the proposed rule

would require a covered swap entity to

calculate its minimum initial margin

requirement in one of two ways. The

covered swap entity may use a

standardized margin schedule, which is

set out in Appendix A of the proposed

rule. The standardized margin schedule

allows for certain types of netting and

offsetting of exposures

espect

to those transactions.

For initial margin, the proposed rule

would require a covered swap entity to

calculate its minimum initial margin

requirement in one of two ways. The

covered swap entity may use a

standardized margin schedule, which is

set out in Appendix A of the proposed

rule. The standardized margin schedule

allows for certain types of netting and

offsetting of exposures. In the

alternative, a covered swap entity may

use an internal margin model that

satisfies certain criteria outlined within

§ __.8 of the proposed rule and that has

been approved by the relevant

prudential regulator.29

Where a covered swap entity transacts

with another swap entity (regardless of

whether the other swap entity meets the

definition of a ‘‘covered swap entity’’

under the proposed rule), the covered

swap entity must collect at least the

amount of initial margin required under

the proposed rule. Likewise, the swap

entity counterparty also will be

required, under margin rules that are

applicable to that swap entity,30 to

collect a minimum amount of initial

margin from the covered swap entity.31

Accordingly, covered swap entities will

both collect and post a minimum

amount of initial margin when

transacting with another swap entity. A

covered swap entity transacting with a

financial end user with a material swaps

exposure as specified by this proposed

rule must collect at least the amount of

initial margin required by the proposed

rule and must post at least the amount

of initial margin that the covered swap

entity would be required by the

proposal to collect if the covered swap

entity were in the place of the

counterparty

ed swap entity transacting with a

financial end user with a material swaps

exposure as specified by this proposed

rule must collect at least the amount of

initial margin required by the proposed

rule and must post at least the amount

of initial margin that the covered swap

entity would be required by the

proposal to collect if the covered swap

entity were in the place of the

counterparty. In addition, a covered

swap entity must post or collect initial

margin on at least a daily basis as

required under the proposed rule in

response to changes in the required

initial margin amounts stemming from

changes in portfolio composition or any

other factors that result in a change in

the required initial margin amounts.32

The proposed rule permits a covered

swap entity to adopt a maximum initial

margin threshold amount of $65

million, below which it need not collect

or post initial margin from or to swap

entities and financial end users with

material swaps exposures. The

threshold would be applied on a

consolidated basis, and would apply

both to the consolidated covered swap

entity as well as to the consolidated

counterparty.33

With respect to variation margin, the

proposed rule generally requires a

covered swap entity to collect or post

variation margin on swaps with a swap

entity or a financial end user (regardless

of whether the financial end user has a

material swaps exposure) in an amount

that is at least equal to the increase or

decrease in the value of the swap since

the counterparties’ previous exchange of

variation margin. The proposed rule

would not permit a covered swap entity

to adopt a threshold amount below

which it need not collect or post

variation margin on swaps with swap

entity and financial end user

counterparties

as a

material swaps exposure) in an amount

that is at least equal to the increase or

decrease in the value of the swap since

the counterparties’ previous exchange of

variation margin. The proposed rule

would not permit a covered swap entity

to adopt a threshold amount below

which it need not collect or post

variation margin on swaps with swap

entity and financial end user

counterparties. In addition, a covered

swap entity must collect or post

variation margin with swap entities and

financial end user counterparties under

the proposed rule on at least a daily

basis.34

The proposed rule’s margin

provisions establish only minimum

requirements with respect to initial and

variation margin. Nothing in the

proposed rule is intended to prevent or

discourage a covered swap entity from

collecting or posting margin in amounts

greater than is required under the

proposed rule.

Under the proposal, a covered swap

entity’s collection of margin from ‘‘other

counterparties’’ that are not swap

entities or financial end users (e.g.,

nonfinancial or ‘‘commercial’’ end users

that generally engage in swaps to hedge

commercial risk, sovereigns, and

multilateral developments banks), is

subject to the judgment of the covered

swap entity. That is, under the proposed

rule, a covered swap entity is not

required to collect initial and variation

margin from these ‘‘other

counterparties’’ as a matter of course.

However, a covered swap entity should

continue with the current practice of

collecting initial or variation margin at

such times and in such forms and

amounts (if any) as the covered swap

entity determines in its overall credit

risk management of the swap entity’s

exposure to the customer

d to collect initial and variation

margin from these ‘‘other

counterparties’’ as a matter of course.

However, a covered swap entity should

continue with the current practice of

collecting initial or variation margin at

such times and in such forms and

amounts (if any) as the covered swap

entity determines in its overall credit

risk management of the swap entity’s

exposure to the customer.

Although covered swap entities

would be required to collect variation

margin from all financial end user

counterparties under the proposed rule,

no minimum initial margin requirement

would apply to transactions with those

financial end users that are not swap

entities and that do not have a material

swaps exposure. Thus, for the purpose

of the initial margin requirements,

financial end users that are not swap

entities and that do not have a material

swaps exposure would be treated in the

same manner as entities characterized as

‘‘other counterparties.’’

The Agencies believe that differential

treatment of ‘‘other counterparties’’ is

consistent with the Dodd-Frank Act’s

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35 See § __.3 and § __.4 of the proposed rule for

a complete description of the initial and variation

margin requirements that apply to ‘‘other

counterparties.’’

36 An asset-backed security guaranteed by a U.S.

Government-sponsored enterprise is eligible

collateral for purposes of initial margin if the GSE

is operating with capital support or another form of

direct financial assistance from the U.S. government

(§ __.6(a)(2)(iii)).

37 See § __.6 and Appendix B of the proposed rule

for a complete description of the eligible collateral

requirements

’

36 An asset-backed security guaranteed by a U.S.

Government-sponsored enterprise is eligible

collateral for purposes of initial margin if the GSE

is operating with capital support or another form of

direct financial assistance from the U.S. government

(§ __.6(a)(2)(iii)).

37 See § __.6 and Appendix B of the proposed rule

for a complete description of the eligible collateral

requirements.

38 The segregation requirement therefore applies

only to the minimum amount of initial margin that

a covered swap entity is required to collect by the

rule from a swap entity or financial end user with

a material swaps exposure, but applies to all

collateral (other than variation margin) that the

covered swap entity posts to any counterparty.

39 See § __.7 of the proposed rule for a complete

description of the segregation requirements.

40 See § __.9 of the proposed rule.

41 See § __.9 of the proposed rule for a complete

description of the treatment of cross-border swap

transactions.

42 7 U.S.C. 6s(e)(2); 15 U.S.C. 78o–10(e)(2).

43 See 54 FR 4186 (January 27, 1989). The general

banking risk-based capital rules are at 12 CFR part

3, Appendices A, B, and C (national banks); 12 CFR

part 167 (federal savings banks); 12 CFR part 208,

Appendices A, B, and E (state member banks); 12

CFR part 225, Appendices A, D, and E (bank

holding companies); 12 CFR part 325, Appendices

A, B, C, and D (state nonmember banks); 12 CFR

part 390, subpart Z (state savings associations). The

general risk-based capital rules are supplemented

by the market risk capital rules.

44 The Basel Committee on Banking Supervision

developed the first international banking capital

framework in 1988, entitled, International

Convergence of Capital Measurement and Capital

Standards.

45 The banking agencies’ market risk capital rules

are currently at 12 CFR part 3, Appendix B (OCC);

12 CFR parts 208 and 225, Appendix E (Board); and

12 CFR part 325, Appendix C (FDIC)

l rules.

44 The Basel Committee on Banking Supervision

developed the first international banking capital

framework in 1988, entitled, International

Convergence of Capital Measurement and Capital

Standards.

45 The banking agencies’ market risk capital rules

are currently at 12 CFR part 3, Appendix B (OCC);

12 CFR parts 208 and 225, Appendix E (Board); and

12 CFR part 325, Appendix C (FDIC). The rules

apply to banks and bank holding companies with

trading activity (on a worldwide consolidated basis)

that equals 10 percent or more of the institution’s

total assets, or $1 billion or more.

46 See BCBS, International Convergence of

Capital Measurement and Capital Standards: A

Revised Framework (2006). The banking agencies

implemented the advanced approaches of the Basel

II Accord in 2007. See 72 FR 69288 (December 7,

2010). The advanced approaches rules are codified

at 12 CFR part 3, Appendix C (OCC); 12 CFR part

Continued

risk-based approach to establishing

margin requirements. However, the

Agencies recognize that a covered swap

entity may find it prudent from a risk

management perspective to collect

margin from one or more of these ‘‘other

counterparties.’’ 35

The proposed rule limits the types of

collateral that are eligible to be used to

satisfy both the initial and variation

margin requirements. Eligible collateral

is generally limited to high-quality,

liquid assets that are expected to remain

liquid and retain their value, after

accounting for an appropriate risk-based

‘‘haircut,’’ during a severe economic

downturn. Eligible collateral for

variation margin is limited to cash only.

Eligible collateral for initial margin

includes cash, debt securities that are

issued or guaranteed by the U.S.

Department of Treasury or by another

U.S. government agency, the Bank for

International Settlements, the

International Monetary Fund, the

European Central Bank, multilateral

development banks, certain U.S

wnturn. Eligible collateral for

variation margin is limited to cash only.

Eligible collateral for initial margin

includes cash, debt securities that are

issued or guaranteed by the U.S.

Department of Treasury or by another

U.S. government agency, the Bank for

International Settlements, the

International Monetary Fund, the

European Central Bank, multilateral

development banks, certain U.S.

Government-sponsored enterprises’

(‘‘GSEs’’) debt securities, certain foreign

government debt securities, certain

corporate debt securities, certain listed

equities, and gold.36 When determining

the collateral’s value for purposes of

satisfying the proposed rule’s margin

requirements, non-cash collateral and

cash collateral that is not denominated

in U.S. dollars or the currency in which

payment obligations under the swap are

required to be settled would be subject

to an additional ‘‘haircut’’ as

determined using Appendix B of the

proposed rule.37 The limits on eligible

collateral and application of a haircut

would not apply to margin collected in

excess of what is required by the rule.

Separate from the proposed rule’s

requirements with respect to the

collection and posting of initial and

variation margin, the proposed rule also

would require a covered swap entity to

require that any collateral other than

variation margin that it posts to its

counterparty (even collateral in excess

of any required by the proposed rule) be

segregated at one or more custodians

that are not affiliates of the covered

swap entity or the counterparty (‘‘third-

party custodian’’)

of initial and

variation margin, the proposed rule also

would require a covered swap entity to

require that any collateral other than

variation margin that it posts to its

counterparty (even collateral in excess

of any required by the proposed rule) be

segregated at one or more custodians

that are not affiliates of the covered

swap entity or the counterparty (‘‘third-

party custodian’’). The proposed rule

would also require a covered swap

entity to place the initial margin it

collects (in accordance with the

proposed rule) from a swap entity or a

financial end user with material swaps

exposure at a third-party custodian.38 In

both of the foregoing cases, the

proposed rule would require that the

third-party custodian be prohibited by

agreement from certain actions with

respect to any of the funds or other

property it holds as initial margin. First,

the custodial agreement must prohibit

rehypothecating, repledging, reusing or

otherwise transferring, any of the funds

or other property the third-party

custodian holds. Second, with respect to

initial margin required to be posted or

collected, the custodial agreement must

prohibit substituting or reinvesting any

funds or other property in any asset that

would not qualify as eligible collateral

under the proposed rule. Third, the

custodial agreement must require that

after such substitution or reinvestment,

the amount net of applicable discounts

described in Appendix B continue to be

sufficient to meet the requirements for

initial margin under the proposal.39

Funds or other property held by a third-

party custodian but not required to be

posted or collected under the rule are

not subject to any of these restrictions

on collateral substitution or

reinvestment.

Given the global nature of swaps

markets and swap transactions, margin

requirements will be applied to

transactions across different

jurisdictions

initial margin under the proposal.39

Funds or other property held by a third-

party custodian but not required to be

posted or collected under the rule are

not subject to any of these restrictions

on collateral substitution or

reinvestment.

Given the global nature of swaps

markets and swap transactions, margin

requirements will be applied to

transactions across different

jurisdictions. As required by the Dodd-

Frank Act, the Agencies are proposing a

specific approach to address cross-

border non-cleared swap transactions.

Under the proposal, foreign swaps of

foreign covered swap entities would not

be subject to the margin requirements of

the proposed rule.40 In addition, certain

covered swap entities that are operating

in a foreign jurisdiction and covered

swap entities that are organized as U.S.

branches of foreign banks may choose to

abide by the swap margin requirements

of the foreign jurisdiction if the

Agencies determine that the foreign

regulator’s swap margin requirements

are comparable to those of the proposed

rule.41

B. Capital Requirements

Sections 731 and 764 of the Dodd-

Frank Act also require each Agency to

issue, in addition to margin rules, joint

rules on capital for covered swap

entities for which it is the prudential

regulator.42 The Board, FDIC, and OCC

(each a ‘‘banking agency’’ and,

collectively, the ‘‘banking agencies’’)

have had risk-based capital rules in

place for banks to address over-the-

counter (‘‘OTC’’) swaps since 1989

when the banking agencies

implemented their risk-based capital

adequacy standards (general banking

risk-based capital rules) 43 based on the

first Basel Accord.44 The general

banking risk-based capital rules have

been amended and supplemented over

time to take into account developments

in the swaps market

l rules in

place for banks to address over-the-

counter (‘‘OTC’’) swaps since 1989

when the banking agencies

implemented their risk-based capital

adequacy standards (general banking

risk-based capital rules) 43 based on the

first Basel Accord.44 The general

banking risk-based capital rules have

been amended and supplemented over

time to take into account developments

in the swaps market. These supplements

include the addition of the market risk

rule which requires banks and bank

holding companies meeting certain

thresholds to calculate their capital

requirements for trading positions

through models approved by their

primary Federal supervisor.45 In

addition, certain large, complex banks

and bank holding companies are subject

to the banking agencies’ advanced

approaches risk-based capital rule

(advanced approaches rules), based on

the advanced approaches of the Basel II

Accord.46

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208, Appendix F and 12 CFR part 225, Appendix

G (Board); and 12 CFR part 325, Appendix D

(FDIC).

47 See BCBS, Basel III: A Global Regulatory

Framework For More Resilient Banks and Banking

Systems (2010), available at www.bis.org/

publ.bcbs189.htm.

48 78 FR 62018 (October 11, 2013) (Board and

OCC); 78 FR 20754 (April 14, 2014) (FDIC). These

rules are codified at 12 CFR part 3 (national banks

and federal savings associations), 12 CFR part 217

(state member banks, bank holding companies, and

savings and loan holding companies), and 12 CFR

part 324 (state nonmember banks and state savings

associations).

49 For the duration of the conservatorships of

Fannie Mae and Freddie Mac (together, the

‘‘Enterprises’’), FHFA has directed that its existing

regulatory capital requirements would not be

binding

gs associations), 12 CFR part 217

(state member banks, bank holding companies, and

savings and loan holding companies), and 12 CFR

part 324 (state nonmember banks and state savings

associations).

49 For the duration of the conservatorships of

Fannie Mae and Freddie Mac (together, the

‘‘Enterprises’’), FHFA has directed that its existing

regulatory capital requirements would not be

binding. However, FHFA continues to closely

monitor the Enterprises’ activities. Such

monitoring, coupled with the unique financial

support available to the Enterprises from the U.S.

Department of the Treasury and the likelihood that

FHFA will promulgate new risk-based capital rules

in due course to apply to the Enterprises (or their

successors) once the conservatorships have ended,

lead to FHFA’s preliminary view that the reference

to existing capital rules is sufficient to address the

risks discussed in the text above as to the

Enterprises.

50 See 53 FR 40033 (October 13, 1988); 70 FR

35336 (June 17, 2005); 12 CFR part 615, subpart H.

51 See 66 FR 19048 (April 12, 2001); 76 FR 23459

(April 27, 2011); 12 CFR part 652.

52 The FCA recently proposed revisions to its

capital rules for all FCS institutions, except Farmer

Mac, that are comparable to the Basel III

Framework.

53 See 76 FR 27564, 27582–83 (May 11, 2011).

Section __.11 of the 2011 proposal would have

required regulated entities to collect initial and

variation margin from their swap entity

counterparties on parallel terms to the requirements

governing collection by covered swap entities under

other sections of the 2011 proposal, including with

respect to initial margin calculation methods (via

the use of a model or a standardized ‘‘lookup’’

table), documentation standards and segregation

requirements. Section __.11 of the 2011 proposal

would not have applied to swaps entered into

between regulated entities and end users

ements

governing collection by covered swap entities under

other sections of the 2011 proposal, including with

respect to initial margin calculation methods (via

the use of a model or a standardized ‘‘lookup’’

table), documentation standards and segregation

requirements. Section __.11 of the 2011 proposal

would not have applied to swaps entered into

between regulated entities and end users.

54 Where a covered swap entity’s counterparty

was another covered swap entity, the collection

requirement would have applied in both directions

to make the requirement effectively bilateral.

55 Two-way margining would not necessarily

apply in all circumstances. A regulated entity that

is not itself a swap entity would meet the proposed

definition of financial end user. As a result, if it

engaged in swap activity above the threshold set in

the definition of material swaps exposure, then the

rule would require two-way margining as to both

initial and variation margin, with respect to its

transactions with covered swap entities. If a

regulated entity does not have material swaps

exposure, then a covered swap entity and the

regulated entity would be required to exchange

variation margin with each other but would only be

required to collect or post initial margin in such

amounts as the parties determine to be appropriate.

In such circumstances, no specific amount of initial

margin would be required to be collected or posted

pursuant to this proposal.

56 Any final joint rule issued by the Agencies,

once effective, would address these safety and

soundness concerns only in circumstances where a

regulated entity is transacting with a covered swap

entity regulated by a prudential regulator. Where a

regulated entity is instead engaged in a non-cleared

swap with a swap entity that is not subject to the

oversight of one of the prudential regulators, the

applicable margin requirements would be those

issued by the regulator having jurisdiction over the

swap entity, namely the CFTC or the SEC

lated entity is transacting with a covered swap

entity regulated by a prudential regulator. Where a

regulated entity is instead engaged in a non-cleared

swap with a swap entity that is not subject to the

oversight of one of the prudential regulators, the

applicable margin requirements would be those

issued by the regulator having jurisdiction over the

swap entity, namely the CFTC or the SEC. If one

of those agencies were to diverge from the two-way

margining regime proposed here (and

recommended by the 2013 international framework)

in a manner that raises safety and soundness

concerns for FHFA or FCA with regard to their

respective regulated entities, FHFA or FCA also

may exercise its authority to adopt a special section

to account for those situations as well, either in the

final joint rulemaking, or in a separate rulemaking

or guidance at a later date.

In July 2013 the Board and the OCC

issued a final rule (revised capital

framework) implementing regulatory

capital reforms reflecting agreements

reached by the BCBS in ‘‘Basel III: A

Global Regulatory Framework for More

Resilient Banks and Banking

Systems.’’ 47 The revised capital

framework includes the capital

requirements for OTC swaps described

above. The FDIC adopted an interim

final rule that was substantively

identical to the revised capital

framework in July 2013 and later issued

a final rule in April 2014 identical to the

Board’s and the OCC’s final rule.48

FHFA’s predecessor agencies used a

methodology similar to that endorsed by

the BCBS prior to the development of its

recent revised and enhanced framework

to develop the risk-based capital rules

applicable to those entities now

regulated by FHFA. Those rules still

apply to all FHFA-regulated entities.49

FHFA is in the process of revising and

updating these regulations for the

Federal Home Loan Banks

ecessor agencies used a

methodology similar to that endorsed by

the BCBS prior to the development of its

recent revised and enhanced framework

to develop the risk-based capital rules

applicable to those entities now

regulated by FHFA. Those rules still

apply to all FHFA-regulated entities.49

FHFA is in the process of revising and

updating these regulations for the

Federal Home Loan Banks. The FCA’s

risk-based capital regulations for Farm

Credit System (‘‘FCS’’) institutions,

except for the Federal Agricultural

Mortgage Corporation (‘‘Farmer Mac’’),

have been in place since 1988 and were

last updated in 2005.50 The FCA’s risk-

based capital regulations for Farmer

Mac have been in place since 2001 and

were updated in 2011.51 On May 8,

2014, the FCA proposed revisions to its

capital rules for all FCS institutions,

except Farmer Mac, that are comparable

to the Basel III framework.52

As described below, the proposed rule

requires a covered swap entity to

comply with regulatory capital rules

already made applicable to that covered

swap entity as part of its prudential

regulatory regime. Given that these

existing regulatory capital rules

specifically take into account and

address the unique risks arising from

swap transactions and activities, the

Agencies are proposing to rely on these

existing rules as appropriate and

sufficient to offset the greater risk to the

covered swap entity and the financial

system arising from the use of swaps

that are not cleared and to protect the

safety and soundness of the covered

swap entity.

C. 2011 FCA and FHFA Special Section

In the 2011 proposal, FHFA and FCA

(but not the other Agencies) had

proposed an additional provision,

§ __.11 of FHFA’s and FCA’s proposed

rules

ufficient to offset the greater risk to the

covered swap entity and the financial

system arising from the use of swaps

that are not cleared and to protect the

safety and soundness of the covered

swap entity.

C. 2011 FCA and FHFA Special Section

In the 2011 proposal, FHFA and FCA

(but not the other Agencies) had

proposed an additional provision,

§ __.11 of FHFA’s and FCA’s proposed

rules. Proposed § __.11 would have

required any entity that was regulated

by FHFA or FCA, but was not itself a

covered swap entity, to collect initial

margin and variation margin from its

swap entity counterparty when entering

into a non-cleared swap.53 Federal

Home Loan Banks, Fannie Mae and its

affiliates, Freddie Mac and its affiliates,

and all Farm Credit System institutions

including Farmer Mac (each a

‘‘regulated entity’’ and, collectively,

‘‘regulated entities’’) would have been

subject to this provision. Regulated

entities that were covered swap entities

would have been subject to §§ 1 through

9 of the 2011 proposal with respect to

margin.

FHFA and FCA proposed § __.11 to

account for the fact that the 2011

proposal only required covered swap

entities to collect initial and variation

margin from, but did not require them

to post initial and variation margin to,

their counterparties.54 The approach

that FHFA and FCA proposed in § __.11

recognized that a default by a swap

counterparty to a regulated entity could

adversely affect the safe and sound

operations of the regulated entity. FHFA

and FCA proposed § __.11 pursuant to

each Agency’s role as safety and

soundness regulator for its respective

regulated entities.

FHFA and FCA are not re-proposing

as part of this proposal a provision

similar to that found in § __.11 of the

2011 proposal

default by a swap

counterparty to a regulated entity could

adversely affect the safe and sound

operations of the regulated entity. FHFA

and FCA proposed § __.11 pursuant to

each Agency’s role as safety and

soundness regulator for its respective

regulated entities.

FHFA and FCA are not re-proposing

as part of this proposal a provision

similar to that found in § __.11 of the

2011 proposal. Unlike the 2011

proposal, this proposal generally would

require two-way margining in swap

transactions between covered swap

entities and FHFA- and FCA-regulated

entities.55 This two-way margining

regime effectively reduces systemic risk

by protecting both the regulated entity

and its covered swap entity

counterparty from the effects of a

counterparty default, thereby

eliminating the need for FHFA and FCA

to propose a separate provision similar

to the earlier proposed § __.11.

However, should any changes adopted

as part of the final joint rule alter the

current proposed two-way margining

regime in ways that raise safety and

soundness concerns for FHFA or FCA

with regard to their respective regulated

entities, FHFA or FCA may decide to

exercise its authority to adopt a

provision similar to § __.11 of the 2011

proposal to address these concerns.56

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afety and

soundness concerns for FHFA or FCA

with regard to their respective regulated

entities, FHFA or FCA may decide to

exercise its authority to adopt a

provision similar to § __.11 of the 2011

proposal to address these concerns.56

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

57 The proposed rule defines material swaps

exposure as an average daily aggregate notional

amount of non-cleared swaps, non-cleared security-

based swaps, foreign exchange forwards and foreign

exchange swaps with all counterparties for June,

July, and August of the previous calendar year that

exceeds $3 billion, where such amount is calculated

only for business days.

58 Although the term ‘‘commercial end user’’ is

not defined in the Dodd-Frank Act, it is generally

understood to mean a company that is eligible for

the exception to the mandatory clearing

requirement for swaps under section 2(h)(7) of the

Commodity Exchange Act and section 3C(g) of the

Securities Exchange Act, respectively. This

exception is generally available to a person that (i)

is not a financial entity, (ii) is using the swap to

hedge or mitigate commercial risk, and (iii) has

notified the CFTC or SEC how it generally meets

its financial obligations with respect to non-cleared

swaps or security-based swaps, respectively. See 7

U.S.C. 2(h)(7) and 15 U.S.C. 78c–3(g).

59 Statements in the legislative history of sections

731 and 764 suggest that at least some members of

Congress did not intend, in enacting these sections,

to impose margin requirements on nonfinancial end

users engaged in hedging activities, even in cases

where they entered into swaps with swap entities

aps or security-based swaps, respectively. See 7

U.S.C. 2(h)(7) and 15 U.S.C. 78c–3(g).

59 Statements in the legislative history of sections

731 and 764 suggest that at least some members of

Congress did not intend, in enacting these sections,

to impose margin requirements on nonfinancial end

users engaged in hedging activities, even in cases

where they entered into swaps with swap entities.

Continued

Furthermore, FHFA and FCA each

reserves the right and authority to

address its safety and soundness

concerns through the Agencies’ final

joint rulemaking or through a separate

rulemaking or guidance applicable only

to its respective regulated entities.

D. The Proposed Rule and Community

Banks

The Agencies expect that the

proposed rule likely will have minimal

impact on community banks. The

Agencies anticipate that community

banks will not engage in swap activity

to the level necessary to meet the

definition of a swap dealer, major swap

participant, security-based swap dealer,

or major security-based swap

participant; and therefore, are unlikely

to fall within the proposed definition of

a covered swap entity. Because the

proposed rule imposes requirements on

covered swap entities, no community

bank will likely be directly subject to

the rule. Thus, a community bank that

enters into non-cleared interest rate

swaps with its commercial customers

would not be required to apply to those

swaps the proposed rule’s requirements

for initial margin or variation margin.

When a community bank enters into

a swap with a covered swap entity, the

covered swap entity would be required

to post and collect initial margin

pursuant to the rule only if the

community bank had a material swaps

exposure.57 The Agencies believe that

the vast majority of community banks

do not engage in swaps at or near that

level of activity

ts

for initial margin or variation margin.

When a community bank enters into

a swap with a covered swap entity, the

covered swap entity would be required

to post and collect initial margin

pursuant to the rule only if the

community bank had a material swaps

exposure.57 The Agencies believe that

the vast majority of community banks

do not engage in swaps at or near that

level of activity. Thus, for most, if not

all community banks, the proposed rule

would only require a covered swap

entity to collect initial margin that it

determines is appropriate to address the

credit risk posed by such a community

bank. The Agencies believe covered

swap entities currently apply this

approach as part of their credit risk

management practices.

The proposed rule would require a

covered swap entity to exchange daily

variation margin with a community

bank, regardless of whether the

community bank had material swaps

exposure. However, the covered swap

entity would only be required to collect

variation margin from a community

bank when the amount of both initial

margin and variation margin required to

be collected daily exceeded $650,000.

The Agencies expect that the vast

majority of community banks will have

a daily margin requirement that is below

this amount.

The Agencies seek comment on the

potential impact that this proposed rule

might have on community banks.

E. The Proposed Rule and Farm Credit

System Institutions

Similar to community banks, the

proposed rule will have a minimal

impact on the Farm Credit System.

Currently, no FCS institution, including

Farmer Mac, engage in swap activity at

the level necessary to meet the

definition of a swap dealer, major swap

participant, security-based swap dealer,

or a major security-based swap

participant. For this reason, no FCS

institution, including Farmer Mac,

would fall within the proposed

definition of a covered swap entity and,

therefore, become directly subject to this

rule

ion, including

Farmer Mac, engage in swap activity at

the level necessary to meet the

definition of a swap dealer, major swap

participant, security-based swap dealer,

or a major security-based swap

participant. For this reason, no FCS

institution, including Farmer Mac,

would fall within the proposed

definition of a covered swap entity and,

therefore, become directly subject to this

rule. Furthermore, an overwhelming

majority of FCS institutions do not

currently engage in non-cleared swaps

at or near the level that they would have

a material swaps exposure. Therefore, a

majority of FCS institutions would not

be required by this rule to exchange

initial margin with a covered swap

entity. For those few FCS institutions

that currently have a material swaps

exposure, initial margin exchange

would be mandated only when non-

cleared swap transactions with an

individual counterparty and its affiliates

exceed the $65 million threshold. All

FCS institutions, including Farmer Mac,

are financial end users and, therefore,

they must exchange variation margin

daily once the parties reach the

$650,000 minimum transfer amount.

The Agencies also seek specific

comments on the potential impact of

this proposal on FCS institutions.

III. Section by Section Summary of

Proposed Rule

A. Section __.1: Authority, Purpose,

Scope, and Compliance Dates

Sections __.1(a)–(c) of the proposal

are agency-specific. Section __.1(a) sets

out each Agency’s specific authority,

and § __.1(b) describes the purpose of

the rule, including the specific entities

covered by each Agency’s rule. Section

__.1(c) of the proposal specifies the

scope of the transactions to which the

margin requirements apply. It provides

that the margin requirements apply to

all non-cleared swaps into which a

covered swap entity enters. Each

prudential regulator is proposing rule

text for its Agency-specific version of

§ l_.1(c) that specifies the entities to

which that prudential regulator’s rule

applies

__.1(c) of the proposal specifies the

scope of the transactions to which the

margin requirements apply. It provides

that the margin requirements apply to

all non-cleared swaps into which a

covered swap entity enters. Each

prudential regulator is proposing rule

text for its Agency-specific version of

§ l_.1(c) that specifies the entities to

which that prudential regulator’s rule

applies. Section __.1(c) further states

that the margin requirements apply only

to swap and security-based swap

transactions that are entered into on or

after the relevant compliance date set

forth in § __.1(d). This section also

provides that nothing in this proposal is

intended to prevent, and nothing in this

proposal is intended to require, a

covered swap entity from independently

collecting margin in amounts greater

than are required under this proposed

rule.

1. Treatment of Swaps With Commercial

End User Counterparties

Following passage of the Dodd-Frank

Act, various parties expressed concerns

regarding whether sections 731 and 764

of the Dodd-Frank Act authorize or

require the CFTC, SEC, and Agencies to

establish margin requirements with

respect to transactions between a

covered swap entity and a ‘‘commercial

end user’’ (i.e., a nonfinancial

counterparty that is neither a swap

entity nor a financial end user and

engages in swaps to hedge commercial

risk).58 Pursuant to other provisions of

the Dodd-Frank Act, nonfinancial end

users that engage in swaps to hedge

their commercial risks are exempt from

the requirement that all swaps

designated for clearing by the CFTC or

SEC be cleared by a CCP, and, therefore

they are exempt from the requirement to

post initial margin and variation margin

to the CCP

ngages in swaps to hedge commercial

risk).58 Pursuant to other provisions of

the Dodd-Frank Act, nonfinancial end

users that engage in swaps to hedge

their commercial risks are exempt from

the requirement that all swaps

designated for clearing by the CFTC or

SEC be cleared by a CCP, and, therefore

they are exempt from the requirement to

post initial margin and variation margin

to the CCP. Commenters to the 2011

proposal argued that swaps with

commercial end users should also be

excluded from the scope of margin

requirements imposed for non-cleared

swaps under sections 731 and 764,

asserting that commercial firms engaged

in hedging activities pose a reduced risk

to their counterparties and the stability

of the U.S. financial system and that

including these types of counterparties

in the scope of the proposal would

undermine the goals of excluding these

firms from the clearing requirements.59

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

See, e.g., 156 Cong. Rec. S5904 (daily ed. July 15,

2010) (statement of Sen. Lincoln).

60 In the case of a nonfinancial end user with a

strong credit profile, under current market

practices, a swap dealer would likely not require

margin—in essence, it would extend unsecured

credit to the end user with respect to the underlying

exposure. For counterparties with a weak credit

profile, a swap dealer would likely make a different

credit decision and require the counterparty to post

margin.

61 See 7 U.S.C. 2(h)(7)(C)(iii), 7 U.S.C. 2(h)(7)(D)

and 15 U.S.C. 78c–3(g)(4).

62 ‘‘Foreign exchange forward and foreign

exchange swap’’ is defined to mean any foreign

exchange forward, as that term is defined in section

1a(24) of the Commodity Exchange Act (7 U.S.C

ak credit

profile, a swap dealer would likely make a different

credit decision and require the counterparty to post

margin.

61 See 7 U.S.C. 2(h)(7)(C)(iii), 7 U.S.C. 2(h)(7)(D)

and 15 U.S.C. 78c–3(g)(4).

62 ‘‘Foreign exchange forward and foreign

exchange swap’’ is defined to mean any foreign

exchange forward, as that term is defined in section

1a(24) of the Commodity Exchange Act (7 U.S.C.

1a(24)), and foreign exchange swap, as that term is

defined in section 1a(25) of the Commodity

Exchange Act (7 U.S.C. 1a(25)).

In formulating the proposed rule, the

Agencies have carefully considered

these concerns and statements. The

plain language of sections 731 and 764

provides that the Agencies adopt rules

for covered swap entities imposing

margin requirements on all non-cleared

swaps. Those sections do not, by their

terms, exclude a swap with a

counterparty that is a commercial end

user. Importantly, sections 731 and 764

also direct the Agencies to adopt margin

requirements that (i) help ensure the

safety and soundness of the covered

swap entity and (ii) are appropriate for

the risk associated with the non-cleared

swaps. Thus, the statute requires the

Agencies to take a risk-based approach

to establishing margin requirements.

Further, the Dodd-Frank Act does not

contain an express exemption for

commercial end users from the margin

requirements of sections 731 and 764 of

the Dodd-Frank Act. The Agencies note

that the application of margin

requirements to non-cleared swaps with

nonfinancial end users could be viewed

as lessening the effectiveness of the

clearing requirement exemption for

these nonfinancial end users.

The 2011 proposal permitted a

covered swap entity to adopt, where

appropriate, initial and variation margin

thresholds below which the covered

swap entity would not be required to

collect initial or variation margin from

nonfinancial end users

ith

nonfinancial end users could be viewed

as lessening the effectiveness of the

clearing requirement exemption for

these nonfinancial end users.

The 2011 proposal permitted a

covered swap entity to adopt, where

appropriate, initial and variation margin

thresholds below which the covered

swap entity would not be required to

collect initial or variation margin from

nonfinancial end users. The proposal

noted the lesser risk posed by these

types of counterparties to covered swap

entities and financial stability with

respect to exposures below these

thresholds. The Agencies received many

comments on this aspect of the 2011

proposal. In particular, commenters

requested that swap transactions with

nonfinancial end users and a number of

other counterparties, including

sovereigns and multilateral

development banks, be explicitly

excluded from the margin requirements.

The proposal takes a different

approach to nonfinancial end users than

the 2011 proposal. Like the 2011

proposal, this proposal follows the

statutory framework and proposes a

risk-based approach to imposing margin

requirements. Unlike the 2011 proposal,

this proposal does not require that the

covered swap entity determine a

specific, numerical threshold for each

nonfinancial end user counterparty.

Rather, the proposed rule does not

require a covered swap entity to collect

initial margin and variation margin from

nonfinancial end users and certain other

counterparties as a matter of course, but

instead requires it to collect initial and

variation margin at such times and in

such forms and amounts (if any) as the

covered swap entity determines would

appropriately address the credit risk

posed by swaps entered into with ‘‘other

counterparties.’’ 60 The Agencies believe

that this approach is consistent with

current market practice as well as with

well-established internal credit

processes and standards of swap

entities, based on safety and soundness,

that require covered swap entities to use

an integrated app

p entity determines would

appropriately address the credit risk

posed by swaps entered into with ‘‘other

counterparties.’’ 60 The Agencies believe

that this approach is consistent with

current market practice as well as with

well-established internal credit

processes and standards of swap

entities, based on safety and soundness,

that require covered swap entities to use

an integrated approach in evaluating the

risk of their counterparties in extending

credit, including in the form of a swap,

and manage the overall credit exposure

to the counterparty.

The proposal takes a similar approach

to margin requirements for transactions

between covered swap entities and

sovereign entities; multilateral

development banks; the Bank for

International Settlements; captive

finance companies exempt from clearing

pursuant to the Dodd-Frank Act; and

Treasury affiliates exempt from clearing

pursuant to the Dodd-Frank Act.61 The

Agencies believe that this approach is

consistent with the statute, which

requires the margin requirements to be

risk-based, and is appropriate in light of

the lower risks that these types of

counterparties generally pose to the

safety and soundness of covered swap

entities and U.S. financial stability.

2. Compliance Dates

Section __.1(d) of the proposal

includes a set of compliance dates by

which covered swap entities must

comply with the minimum margin

requirements for non-cleared swaps.

The compliance dates of the proposal

are consistent with the 2013

international framework. The proposed

rule would be effective with respect to

any swap to which a covered swap

entity becomes a party on or after the

relevant compliance date and would

continue to apply regardless of future

changes in the measured swaps

exposure of the covered swap entity and

its affiliates or the counterparty and its

affiliates.

For variation margin, the compliance

date is December 1, 2015 for all covered

swap entities with respect to covered

swaps with any counterparty

ed swap

entity becomes a party on or after the

relevant compliance date and would

continue to apply regardless of future

changes in the measured swaps

exposure of the covered swap entity and

its affiliates or the counterparty and its

affiliates.

For variation margin, the compliance

date is December 1, 2015 for all covered

swap entities with respect to covered

swaps with any counterparty. The

Agencies believe that the collection of

daily variation margin is currently a best

practice and, as such, current swaps

business operations for covered swap

entities of all sizes will be able to

achieve compliance with the proposed

rule by December 1, 2015. Therefore,

there is no phase-in for the variation

margin requirements.

As reflected in the table below, for

initial margin, the compliance dates

range from December 1, 2015 to

December 1, 2019 depending on the

average daily aggregate notional amount

of non-cleared swaps, non-cleared

security-based swaps, foreign exchange

forwards and foreign exchange swaps

(‘‘covered swaps’’) of the covered swap

entity and its counterparty for June, July

and August of that year.62

COMPLIANCE DATE SCHEDULE FOR INITIAL MARGIN

Compliance date

Initial margin requirements

December 1, 2015 ..................

Initial margin where both the covered swap entity combined with its affiliates and the counterparty combined

with its affiliates have an average daily aggregate notional amount of covered swaps for June, July and Au-

gust of 2015 that exceeds $4 trillion.

December 1, 2016 ..................

Initial margin where both the covered swap entity combined with its affiliates and the counterparty combined

with its affiliates have an average daily aggregate notional amount of covered swaps for June, July and Au-

gust of 2016 that exceeds $3 trillion.

December 1, 2017 .................

ed swaps for June, July and Au-

gust of 2015 that exceeds $4 trillion.

December 1, 2016 ..................

Initial margin where both the covered swap entity combined with its affiliates and the counterparty combined

with its affiliates have an average daily aggregate notional amount of covered swaps for June, July and Au-

gust of 2016 that exceeds $3 trillion.

December 1, 2017 ..................

Initial margin where both the covered swap entity combined with its affiliates and the counterparty combined

with its affiliates have an average daily aggregate notional amount of covered swaps for June, July and Au-

gust of 2017 that exceeds $2 trillion.

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

63 See proposed rule §§ __.4(d) and __.8(b).

64 12 U.S.C. 371c–1(a).

COMPLIANCE DATE SCHEDULE FOR INITIAL MARGIN—Continued

Compliance date

Initial margin requirements

December 1, 2018 ..................

Initial margin where both the covered swap entity combined with its affiliates and the counterparty combined

with its affiliates have an average daily aggregate notional amount of covered swaps for June, July and Au-

gust of 2018 that exceeds $1 trillion.

December 1, 2019 ..................

Initial margin for any other covered swap entity with respect to covered swaps with any other counterparty.

The Agencies expect that covered

swap entities likely will need to make

a number of operational and legal

changes to their current swaps business

operations in order to achieve

compliance with the proposed rule,

including potential changes to internal

risk management and other systems,

trading documentation, collateral

arrangements, and operational

technology and infrastructure

erparty.

The Agencies expect that covered

swap entities likely will need to make

a number of operational and legal

changes to their current swaps business

operations in order to achieve

compliance with the proposed rule,

including potential changes to internal

risk management and other systems,

trading documentation, collateral

arrangements, and operational

technology and infrastructure. In

addition, the Agencies expect that

covered swap entities that wish to

calculate initial margin using an initial

margin model will need sufficient time

to develop such models and obtain

regulatory approval for their use.

Accordingly, the compliance dates have

been structured to ensure that the

largest and most sophisticated covered

swap entities and counterparties that

present the greatest potential risk to the

financial system comply with the

requirements first. These swap market

participants should be able to make the

required operational and legal changes

more rapidly and easily than smaller

entities that engage in swaps less

frequently and pose less risk to the

financial system.

Section __.1(e) provides that once a

covered swap entity and its

counterparty must comply with the

margin requirements for non-cleared

swaps based on the compliance dates in

§ __.1(d), the covered swap entity and

its counterparty shall remain subject to

the margin requirements from that point

forward. As an example, December 1,

2016 is the relevant compliance date

where both the covered swap entity

combined with its affiliates and its

counterparty combined with its

affiliates have an average aggregate daily

notional amount of covered swaps that

exceeds $3 trillion. If the notional

amount of the swap activity for the

covered swap entity or the counterparty

drops below that threshold amount of

covered swaps in subsequent years,

their swaps would nonetheless remain

subject to the margin requirements

ts affiliates and its

counterparty combined with its

affiliates have an average aggregate daily

notional amount of covered swaps that

exceeds $3 trillion. If the notional

amount of the swap activity for the

covered swap entity or the counterparty

drops below that threshold amount of

covered swaps in subsequent years,

their swaps would nonetheless remain

subject to the margin requirements. On

December 1, 2019, any covered swap

entity that did not have an earlier

compliance date becomes subject to the

margin requirements with respect to

non-cleared swaps entered into with

any counterparty.

3. Treatment of Swaps Executed Prior to

the Applicable Compliance Date under

a Netting Agreement

The Agencies note that a covered

swap entity may enter into swaps on or

after the proposed rule’s compliance

date pursuant to the same master netting

agreement that governs existing swaps

entered into with a counterparty prior to

the compliance date. As discussed

below, the proposed rule permits a

covered swap entity to (i) calculate

initial margin requirements for swaps

under an eligible master netting

agreement (‘‘EMNA’’) with the

counterparty on a portfolio basis in

certain circumstances, if it does so using

an initial margin model; and (ii)

calculate variation margin requirements

under the proposed rule on an

aggregate, net basis under an EMNA

with the counterparty. Applying the

proposed rule in such a way would, in

some cases, have the effect of applying

it retroactively to swaps entered into

prior to the compliance date under the

EMNA

o basis in

certain circumstances, if it does so using

an initial margin model; and (ii)

calculate variation margin requirements

under the proposed rule on an

aggregate, net basis under an EMNA

with the counterparty. Applying the

proposed rule in such a way would, in

some cases, have the effect of applying

it retroactively to swaps entered into

prior to the compliance date under the

EMNA. The Agencies expect that the

covered swap entity will comply with

the margin requirements with respect to

all swaps governed by an EMNA,

regardless of the date on which they

were entered into, consistent with

current industry practice.63 A covered

swap entity would need to enter into a

separate master netting agreement for

swaps entered into after the proposed

rule’s compliance date in order to

exclude swaps entered into with a

counterparty prior to the compliance

date.

4. Non-Cleared Swaps Between Covered

Swap Entities and Their Affiliates

The proposed rule prescribes margin

requirements on all non-cleared swaps

between a covered swap entity and its

counterparties. In particular, the

proposal generally would cover swaps

between banks that are covered swap

entities and their affiliates that are

financial end users, including affiliates

that are subsidiaries of a bank, such as

operating subsidiaries, Edge Act

subsidiaries, agreement corporation

subsidiaries, financial subsidiaries, and

lower-tier subsidiaries of such

subsidiaries. The Agencies note that

other applicable laws require

transactions between banks and their

affiliates to be on an arm’s length basis

ffiliates that are

financial end users, including affiliates

that are subsidiaries of a bank, such as

operating subsidiaries, Edge Act

subsidiaries, agreement corporation

subsidiaries, financial subsidiaries, and

lower-tier subsidiaries of such

subsidiaries. The Agencies note that

other applicable laws require

transactions between banks and their

affiliates to be on an arm’s length basis.

In particular, section 23B of the Federal

Reserve Act provides that many

transactions between a bank and its

affiliates must be on terms and under

circumstances, including credit

standards, that are substantially the

same or at least as favorable to the bank

as those prevailing at the time for

comparable transactions with or

involving nonaffiliated companies.64

The requirements of section 23B

generally would mean that a bank

engaging in a swap with an affiliate

should do so on the same terms

(including the posting and collecting of

margin) that would prevail in a swap

between the bank and a nonaffiliated

company. Since the proposed rule will

apply to a swap between a bank and a

nonaffiliated company, it will also

apply to a swap between a bank and an

affiliate.

While section 23B applies to

transactions between a bank and its

financial subsidiary, it does not apply to

transactions between a bank and other

subsidiaries, such as an operating

subsidiary, an Edge Act subsidiary, or

an agreement corporation subsidiary.

The proposed rule does not exempt a

bank’s swaps with these affiliates and

would therefore impose margin

requirements on all swaps between a

bank and a subsidiary, including a

subsidiary that is not covered by section

23B.

B. Section __.2: Definitions

Section __.2 of the 2011 proposal

defined its key terms. In particular, the

2011 proposal defined the four types of

swap counterparties that formed the

basis of the 2011 proposal’s risk-based

approach to margin requirements

fore impose margin

requirements on all swaps between a

bank and a subsidiary, including a

subsidiary that is not covered by section

23B.

B. Section __.2: Definitions

Section __.2 of the 2011 proposal

defined its key terms. In particular, the

2011 proposal defined the four types of

swap counterparties that formed the

basis of the 2011 proposal’s risk-based

approach to margin requirements.

Section ___.2 also provided other key

operative terms needed to calculate the

amount of initial and variation margin

required under other sections of the

2011 proposal.

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

65 See 2011 proposal § __.2(y) (2011).

66 See 7 U.S.C. 2(h)(7); 15 U.S.C. 78c–3(g).

67 See 2011 proposal § __.2(r) (2011).

68 As described further below, the proposal does

not distinguish between high-risk and low-risk

financial end users in this manner.

69 Initial margin means the collateral as calculated

in accordance with § __.8 that is posted or collected

in connection with a non-cleared swap. See

proposed rule § __.2; see also proposed rule § __.3

(describing initial margin requirements). Variation

margin means a payment by one party to its

counterparty to meet performance of its obligations

under one or more non-cleared swaps between the

parties as a result of a change in value of such

obligations since the last time such payment was

made. See proposed rule § __.2; see also proposed

rule § __.4 (describing variation margin

requirements).

70 Counterparty is defined to mean, with respect

to any non-cleared swap or non-cleared security-

based swap to which a covered swap entity is a

party, each other party to such non-cleared swap or

non-cleared security-based swap

of such

obligations since the last time such payment was

made. See proposed rule § __.2; see also proposed

rule § __.4 (describing variation margin

requirements).

70 Counterparty is defined to mean, with respect

to any non-cleared swap or non-cleared security-

based swap to which a covered swap entity is a

party, each other party to such non-cleared swap or

non-cleared security-based swap. Non-cleared swap

means a swap that is not a cleared swap, as that

term is defined in section 1a(7) of the Commodity

Exchange Act (7 U.S.C. 1a(7)) and non-cleared

security-based swap means a security-based swap

that is not, directly or indirectly, submitted to and

cleared by a clearing agency registered with the

SEC. Clearing agency is defined to have the

meaning specified in section 3(a)(2) of the

Securities Exchange Act (15 U.S.C. 78c(a)(23)) and

derivatives clearing organization is defined to have

the meaning specified in section 1a(15) of the

Commodity Exchange Act (7 U.S.C. 1a(15)). See

proposed rule § __.2.

71 The term ‘‘nonfinancial end user’’ is not used

in the proposal. Nonfinancial end users would be

treated as ‘‘other counterparties’’ in the proposal.

See proposed rule § __.3(d) & __.4(c).

72 The financial entity definition in the 2011

proposal includes a person predominantly engaged

in activities that are in the business of banking, or

in activities that are financial in nature, as defined

in section 4(k) of the BHC Act. See 7 U.S.C. 2(h)(7);

15 U.S.C. 78c–3(g). The Agencies requested

comment on how covered swap entities should

make this determination, and whether they should

use an approach similar to that developed by the

Board for purposes of Title I of the Dodd-Frank Act.

See 68 FR 20756 (April 5, 2013)

f banking, or

in activities that are financial in nature, as defined

in section 4(k) of the BHC Act. See 7 U.S.C. 2(h)(7);

15 U.S.C. 78c–3(g). The Agencies requested

comment on how covered swap entities should

make this determination, and whether they should

use an approach similar to that developed by the

Board for purposes of Title I of the Dodd-Frank Act.

See 68 FR 20756 (April 5, 2013). Section 4(k) of the

BHC Act includes conditions that do not define

whether an activity is itself financial but were

imposed on bank holding companies to ensure that

the activity is conducted by bank holding

companies in a safe and sound manner or to comply

with another provision of law. Staff of the Agencies

recognize that by simply choosing not to comply

with the conditions imposed on the manner in

which those activities must be conducted by bank

holding companies, a firm could avoid being

considered to be engaged in activities that are

financial in nature.

1. Overview of 2011 Proposal and

Comments on Swap Counterparty

Definitions

The four types of counterparties

defined in the 2011 proposal were (in

order of highest to lowest risk): (i) Swap

entities; (ii) high-risk financial end

users; (iii) low-risk financial end users;

and (iv) nonfinancial end users. The

2011 proposal defined ‘‘swap entity’’ as

any entity that is required to register as

a swap dealer, major swap participant,

security-based swap dealer or major

security-based swap participant.65

Section __.2 of the 2011 proposal

defined a financial end user largely

based on the definition of a ‘‘financial

entity’’ that is ineligible for the

exemption from the mandatory clearing

requirements of sections 723 and 763 of

the Dodd-Frank Act, and also included

foreign governments.66 As noted above,

the 2011 proposal also distinguished

between margin requirements for high-

risk and low-risk financial end users

proposal

defined a financial end user largely

based on the definition of a ‘‘financial

entity’’ that is ineligible for the

exemption from the mandatory clearing

requirements of sections 723 and 763 of

the Dodd-Frank Act, and also included

foreign governments.66 As noted above,

the 2011 proposal also distinguished

between margin requirements for high-

risk and low-risk financial end users.

Section __.2 of the 2011 proposal

defined a financial end user

counterparty as a low-risk financial end

user only if (i) its swaps fall below a

specified ‘‘significant swaps exposure’’

threshold; (ii) it predominantly uses

swaps to hedge or mitigate the risks of

its business activities; and (iii) it is

subject to capital requirements

established by a prudential regulator or

state insurance regulator. The 2011

proposal defined a nonfinancial end

user as any counterparty that is an end

user but is not a financial end user.67

The Agencies requested comment on

whether the 2011 proposal’s

categorization of various types of

counterparties by risk, and the key

definitions used to implement this risk-

based approach, were appropriate, or

whether alternative approaches or

definitions would better reflect the

purposes of sections 731 and 764 of the

Dodd-Frank Act. As discussed above,

many commenters argued that

nonfinancial end users should not be

subject to the margin requirements and

urged that the language and intent of the

statute did not require the imposition of

margin on nonfinancial end users

, were appropriate, or

whether alternative approaches or

definitions would better reflect the

purposes of sections 731 and 764 of the

Dodd-Frank Act. As discussed above,

many commenters argued that

nonfinancial end users should not be

subject to the margin requirements and

urged that the language and intent of the

statute did not require the imposition of

margin on nonfinancial end users.

Many commenters also argued that

particular types of entities should either

be excluded from the term financial end

user or be classified as a low-risk

financial end user instead of a high-risk

financial end user.68 In particular,

commenters argued that the following

entities should be excluded from the

definition of financial end user: (i)

Foreign sovereigns; (ii) states and

municipalities; (iii) multilateral

development banks; (iv) captive finance

companies; (v) Treasury affiliates; (vi)

cooperatives exempt from clearing; (vii)

pension plans; (viii) payment card

networks; and (ix) special purpose

vehicles. A few commenters contended

that small financial end users should be

treated as nonfinancial end users

because these entities use swaps mostly

to hedge risk.

2. 2014 Proposal for Swap Counterparty

Definitions

Section __.2 of the proposal defines

key terms used in the proposed rule,

including the types of counterparties

that form the basis of the proposal’s

risk-based approach to margin

requirements and other key terms

needed to calculate the required amount

of initial margin and variation margin.69

As noted above, this proposal

distinguishes among four separate types

of counterparties: 70 (i) Counterparties

that are themselves swap entities; (ii)

counterparties that are financial end

users with a material swaps exposure;

of the proposal’s

risk-based approach to margin

requirements and other key terms

needed to calculate the required amount

of initial margin and variation margin.69

As noted above, this proposal

distinguishes among four separate types

of counterparties: 70 (i) Counterparties

that are themselves swap entities; (ii)

counterparties that are financial end

users with a material swaps exposure;

(iii) counterparties that are financial end

users without a material swaps

exposure; and (iv) other counterparties,

including nonfinancial end users,

sovereigns, and multilateral

development banks. Below is a general

description of the significant terms

defined in § __.2.71

a. Swap Entity

Similar to the 2011 proposal, this

proposal defines ‘‘swap entity’’ by

reference to the Securities Exchange Act

and the Commodity Exchange Act to

mean a security-based swap dealer, a

major security-based swap participant, a

swap dealer, or a major swap

participant.

b. Financial End User

The proposal’s definition of financial

end user takes a different approach than

the 2011 proposal, which, as noted

above, was based on the definition of a

‘‘financial entity’’ that is ineligible for

the exemption from mandatory clearing

requirements of sections 723 and 763 of

the Dodd-Frank Act. In order to provide

certainty and clarity to counterparties as

to whether they would be financial end

users for purposes of this proposal, the

financial end user definition provides a

list of entities that would be financial

end users as well as a list of entities

excluded from the definition

the exemption from mandatory clearing

requirements of sections 723 and 763 of

the Dodd-Frank Act. In order to provide

certainty and clarity to counterparties as

to whether they would be financial end

users for purposes of this proposal, the

financial end user definition provides a

list of entities that would be financial

end users as well as a list of entities

excluded from the definition. This

approach would mean that covered

swap entities would not need to make

a determination regarding whether their

counterparties are predominantly

engaged in activities that are financial in

nature, as defined in section 4(k) of the

Bank Holding Company Act of 1956, as

amended (the ‘‘BHC Act’’).72 In contrast

to the 2011 proposal, the Agencies now

are proposing to rely, to the greatest

extent possible, on the counterparty’s

legal status as a regulated financial

entity.

Under the proposal, financial end

user includes a counterparty that is not

a swap entity but is:

• A bank holding company or an

affiliate thereof; a savings and loan

holding company; a nonbank financial

institution supervised by the Board of

Governors of the Federal Reserve

System under Title I of the Dodd-Frank

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

73 The Agencies expect that state-chartered

financial cooperatives that provide financial

services to their members, such as lending to their

members and entering into swaps in connection

with those loans, would be treated as financial end

users, pursuant to this aspect of the proposed rule’s

coverage of credit or lending entities.

Wall Street Reform and Consumer

Protection Act (12 U.S.C. 5323);

• A depository institution; a foreign

bank; a Federal credit union, State

credit union as defined in section 2 of

the Federal Credit Union Act (12 U.S.C

ng into swaps in connection

with those loans, would be treated as financial end

users, pursuant to this aspect of the proposed rule’s

coverage of credit or lending entities.

Wall Street Reform and Consumer

Protection Act (12 U.S.C. 5323);

• A depository institution; a foreign

bank; a Federal credit union, State

credit union as defined in section 2 of

the Federal Credit Union Act (12 U.S.C.

1752(1) & (6)); an institution that

functions solely in a trust or fiduciary

capacity as described in section

2(c)(2)(D) of the Bank Holding Company

Act (12 U.S.C. 1841(c)(2)(D)); an

industrial loan company, an industrial

bank, or other similar institution

described in section 2(c)(2)(H) of the

Bank Holding Company Act (12 U.S.C.

1841(c)(2)(H));

• An entity that is state-licensed or

registered as a credit or lending entity,

including a finance company; money

lender; installment lender; consumer

lender or lending company; mortgage

lender, broker, or bank; motor vehicle

title pledge lender; payday or deferred

deposit lender; premium finance

company; commercial finance or

lending company; or commercial

mortgage company; but excluding

entities registered or licensed solely on

account of financing the entity’s direct

sales of goods or services to customers;

• A money services business,

including a check casher; money

transmitter; currency dealer or

exchange; or money order or traveler’s

check issuer;

• A regulated entity as defined in

section 1303(20) of the Federal Housing

Enterprises Financial Safety and

Soundness Act of 1992 (12 U.S.C.

4502(20)) and any entity for which the

Federal Housing Finance Agency or its

successor is the primary federal

regulator;

• Any institution chartered and

regulated by the Farm Credit

Administration in accordance with the

Farm Credit Act of 1971, as amended,

12 U.S.C. 2001 et seq.;

• A securities holding company; a

broker or dealer; an investment adviser

as defined in section 202(a) of the

Investment Advisers Act of 1940 (15

U.S.C

al Housing Finance Agency or its

successor is the primary federal

regulator;

• Any institution chartered and

regulated by the Farm Credit

Administration in accordance with the

Farm Credit Act of 1971, as amended,

12 U.S.C. 2001 et seq.;

• A securities holding company; a

broker or dealer; an investment adviser

as defined in section 202(a) of the

Investment Advisers Act of 1940 (15

U.S.C. 80b–2(a)); an investment

company registered with the SEC under

the Investment Company Act of 1940

(15 U.S.C. 80a–1 et seq.); or a company

that has elected to be regulated as a

business development company

pursuant to section 54(a) of the

Investment Company (15 U.S.C. 80a–

53);

• A private fund as defined in section

202(a) of the Investment Advisers Act of

1940 (15 U.S.C. 80–b–2(a)); an entity

that would be an investment company

under section 3 of the Investment

Company Act of 1940 (15 U.S.C. 80a–3)

but for section 3(c)(5)(C); or an entity

that is deemed not to be an investment

company under section 3 of the

Investment Company Act of 1940

pursuant to Investment Company Act

Rule 3a–7 of the Securities and

Exchange Commission (17 CFR 270.3a–

7);

• A commodity pool, a commodity

pool operator, or a commodity trading

advisor as defined in, respectively,

sections 1a(10), 1a(11), and 1a(12) of the

Commodity Exchange Act (7 U.S.C.

1a(10), 7 U.S.C. 1a(11), 7 U.S.C. 1a(12));

or a futures commission merchant;

• An employee benefit plan as

defined in paragraphs (3) and (32) of

section 3 of the Employee Retirement

Income and Security Act of 1974 (29

U.S.C

l, a commodity

pool operator, or a commodity trading

advisor as defined in, respectively,

sections 1a(10), 1a(11), and 1a(12) of the

Commodity Exchange Act (7 U.S.C.

1a(10), 7 U.S.C. 1a(11), 7 U.S.C. 1a(12));

or a futures commission merchant;

• An employee benefit plan as

defined in paragraphs (3) and (32) of

section 3 of the Employee Retirement

Income and Security Act of 1974 (29

U.S.C. 1002);

• An entity that is organized as an

insurance company, primarily engaged

in writing insurance or reinsuring risks

underwritten by insurance companies,

or is subject to supervision as such by

a State insurance regulator or foreign

insurance regulator;

• An entity that is, or holds itself out

as being, an entity or arrangement that

raises money from investors primarily

for the purpose of investing in loans,

securities, swaps, funds or other assets

for resale or other disposition or

otherwise trading in loans, securities,

swaps, funds or other assets;

• An entity that would be a financial

end user as described above or a swap

entity, if it were organized under the

laws of the United States or any State

thereof; or

• Notwithstanding the specified

exclusions described below, any other

entity that [Agency] has determined

should be treated as a financial end

user.

In developing this definition of

financial end user, the Agencies sought

to provide certainty and clarity to

covered swap entities and their

counterparties regarding whether

particular counterparties would qualify

as financial end users and be subject to

the margin requirements of the

proposed rule. The Agencies tried to

strike a balance between the desire to

capture all financial counterparties,

without being overly broad and

capturing commercial firms and

sovereigns. Financial firms present a

higher level of risk than other types of

counterparties because the profitability

and viability of financial firms is more

tightly linked to the health of the

financial system than other types of

counterparties

o

strike a balance between the desire to

capture all financial counterparties,

without being overly broad and

capturing commercial firms and

sovereigns. Financial firms present a

higher level of risk than other types of

counterparties because the profitability

and viability of financial firms is more

tightly linked to the health of the

financial system than other types of

counterparties. Because financial

counterparties are more likely to default

during a period of financial stress, they

pose greater systemic risk and risk to the

safety and soundness of the covered

swap entity. In case the list of financial

end users in the proposal does not

capture a particular entity, the last part

of this definition would allow an

Agency to require a covered swap entity

to treat a counterparty as a financial end

user for margin purposes, where

appropriate for safety and soundness

purposes or to address systemic risk.

In developing the list of financial

entities, the Agencies sought to include

entities subject to Federal statutes that

impose registration or chartering

requirements on entities that engage in

specified financial activities, such as

deposit taking and lending, securities

and swaps dealing, or investment

advisory activities; as well as asset

management and securitization entities.

For example, certain securities

investment funds as well as

securitization vehicles are covered, to

the extent those entities would qualify

as private funds defined in section

202(a) of the Investment Advisers Act of

1940, as amended (the ‘‘Advisers Act’’).

In addition, certain real estate

investment companies would be

included as financial end users as

entities that would be investment

companies under section 3 of the

Investment Company Act of 1940, as

amended (the ‘‘Investment Company

Act’’), but for section 3(c)(5)(C), and

certain other securitization vehicles

would be included as entities deemed

not to be investment companies

pursuant to Rule 3a–7 of the Investment

Company Act

t companies would be

included as financial end users as

entities that would be investment

companies under section 3 of the

Investment Company Act of 1940, as

amended (the ‘‘Investment Company

Act’’), but for section 3(c)(5)(C), and

certain other securitization vehicles

would be included as entities deemed

not to be investment companies

pursuant to Rule 3a–7 of the Investment

Company Act.

Because Federal law largely looks to

the States for the regulation of the

business of insurance, the proposed

definition broadly includes entities

organized as insurance companies or

supervised as such by a State insurance

regulator. This element of the proposed

definition would extend to reinsurance

and monoline insurance firms, as well

as insurance firms supervised by a

foreign insurance regulator.

The Agencies are also proposing to

cover, as financial end users, the broad

variety and number of nonbank lending

and retail payment firms that operate in

the market. To this end, the Agencies

are proposing to include State-licensed

or registered credit or lending entities

and money services businesses, under

proposed regulatory language

incorporating an inclusive list of the

types of firms subject to State law.73

However, the Agencies recognize that

the licensing of nonbank lenders in

some states extends to commercial firms

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sinesses, under

proposed regulatory language

incorporating an inclusive list of the

types of firms subject to State law.73

However, the Agencies recognize that

the licensing of nonbank lenders in

some states extends to commercial firms

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

74 The National Rural Utility Cooperative Finance

Cooperation is an example of another financial

cooperative.

75 Most cooperatives are producer, consumer, or

supply cooperatives and, therefore, they are not

financial end users. However, many of these

cooperatives have financing subsidiaries and

affiliates. These financing subsidiaries and affiliates

would not be financial end users under this

proposal if they qualify for an exemption under

sections 2(h)(7)(C)(iii) or 2(h)(7)(D) of the

Commodity Exchange Act or section 3C(g)(4) of the

Securities Exchange Act of 1934.

76 Section 2(h)(7)(c)(ii) of the Commodity

Exchange Act and section 3C(g)(4) of the Securities

Exchange Act of 1934 authorize the CFTC and the

SEC, respectively, to exempt small depository

institutions, small Farm Credit System institutions,

and small credit unions with total assets of $10

billion or less from the mandatory clearing

requirements for swaps and security-based swaps.

See 7 U.S.C. 2(h)(7) and 15 U.S.C. 78c–3(g).

Additionally, the CFTC, pursuant to its authority

under section 2(h)(1)(A) of the Commodity

Exchange Act, enacted 17 CFR part 50, subpart C,

section 50.51, which allows cooperative financial

entities, including those with total assets in excess

of $10 billion, to elect an exemption from

mandatory clearing of swaps that: (1) They enter

into in connection with originating loans for their

members; or (2) hedge or mitigate commercial risk

related to loans or swaps with their members

Exchange Act, enacted 17 CFR part 50, subpart C,

section 50.51, which allows cooperative financial

entities, including those with total assets in excess

of $10 billion, to elect an exemption from

mandatory clearing of swaps that: (1) They enter

into in connection with originating loans for their

members; or (2) hedge or mitigate commercial risk

related to loans or swaps with their members.

77 The Agencies’ procedures would generally

provide an adequate opportunity for the covered

swap entity to raise objections to the Agency’s

proposed action and for the Agency to respond.

78 See, e.g., 68 FR 20756 (April 5, 2013).

79 Sovereign entity is defined to mean a central

government (including the U.S. government) or an

agency, department, or central bank of a central

government. See proposed rule § l.2. A sovereign

entity would include the European Central Bank for

purposes of this exclusion.

80 Multilateral development bank is defined to

mean the International Bank for Reconstruction and

Development, the Multilateral Investment

Guarantee Agency, the International Finance

Corporation, the Inter-American Development

Bank, the Asian Development Bank, the African

Development Bank, the European Bank for

Reconstruction and Development, the European

Investment Bank, the European Investment Fund,

the Nordic Investment Bank, the Caribbean

Development Bank, the Islamic Development Bank,

the Council of Europe Development Bank, and 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 [AGENCY] determines poses

comparable credit risk. See proposed rule § l.2.

that provide credit to the firm’s

customers in the ordinary course of

business. Accordingly, the Agencies are

proposing to exclude an entity

registered or licensed solely on account

of financing the entity’s direct sales of

goods or services to customers

vernment is a shareholder or contributing

member or which the [AGENCY] determines poses

comparable credit risk. See proposed rule § l.2.

that provide credit to the firm’s

customers in the ordinary course of

business. Accordingly, the Agencies are

proposing to exclude an entity

registered or licensed solely on account

of financing the entity’s direct sales of

goods or services to customers. The

Agencies request comment on whether

this aspect of the proposed rule

adequately maintains a distinction

between financial end users and

commercial end users.

Under the proposed rule, those

cooperatives that are financial

institutions, such as credit unions, FCS

banks and associations, and other

financial cooperatives 74 are financial

end users because their sole business is

lending and providing other financial

services to their members, including

engaging in swaps in connection with

such loans.75 Cooperatives that are

financial end users may qualify for an

exemption from clearing,76 and

therefore, they may enter into non-

cleared swaps with covered swap

entities that are subject to the proposed

rule.

The Agencies remain concerned,

however, that now or in the future, one

or more types of financial entities might

escape classification under the specific

Federal or State regulatory regimes

included in the proposed definition of

a financial end user. The Agencies have

accordingly included two additional

prongs in the definition. First, the

Agencies have included language that

would cover an entity that is, or holds

itself out as being, an entity or

arrangement that raises money from

investors primarily for the purpose of

investing in loans, securities, swaps,

funds or other assets for resale or other

disposition or otherwise trading in

loans, securities, swaps, funds or other

assets

al

prongs in the definition. First, the

Agencies have included language that

would cover an entity that is, or holds

itself out as being, an entity or

arrangement that raises money from

investors primarily for the purpose of

investing in loans, securities, swaps,

funds or other assets for resale or other

disposition or otherwise trading in

loans, securities, swaps, funds or other

assets. The Agencies request comment

on the extent to which there are (or may

be in the future) pooled investment

vehicles that are not captured by the

other prongs of the definition (such as

the provisions covering private funds

under the Advisers Act or commodity

pools under the Commodity Exchange

Act). The Agencies also request

comment on whether this aspect of the

definition of financial end user provides

sufficiently clear guidance to covered

swap entities and market participants as

to its intended scope, and whether it

adequately maintains a distinction

between financial end users and

commercial end users.

Second, as previously explained, the

proposed rule would allow an Agency

to require a covered swap entity to treat

an entity as a financial end user for

margin purposes, as appropriate for

safety and soundness purposes, or to

mitigate systemic risks. In such case,

consistent with the Agency’s

supervisory procedures, the Agency that

is the covered swap entity’s prudential

regulator would notify the covered swap

entity in writing of the regulator’s

intention to require treatment of the

counterparty as a financial end user,

and the date by which such treatment is

to be implemented.77

To address the classification of

foreign entities as financial end users,

the Agencies are proposing to require

the covered swap entity to determine

whether a foreign counterparty would

fall within another prong of the

financial end user definition if the

foreign entity was organized under the

laws of the United States or any State

the date by which such treatment is

to be implemented.77

To address the classification of

foreign entities as financial end users,

the Agencies are proposing to require

the covered swap entity to determine

whether a foreign counterparty would

fall within another prong of the

financial end user definition if the

foreign entity was organized under the

laws of the United States or any State.

The Agencies recognize that this

approach would impose upon covered

swap entities the difficulties associated

with analyzing a foreign counterparty’s

business activities in light of a broad

array of U.S. regulatory requirements.

The alternative, however, would require

covered swap entities to gather a foreign

counterparty’s financial reporting data

and determine the relative amount of

enumerated financial activities in which

the counterparty is engaged over a

rolling period.78 The Agencies request

comment on whether some other

method or approach would adequately

assure that the rule’s objectives with

respect to covered swap entity safety

and soundness and reductions of

systemic risk can be achieved, in a

fashion that can be more readily

operationalized by covered swap

entities.

Unlike the 2011 proposal, the

proposal excludes certain types of

counterparties from the definition of

financial end user. In particular, the

proposal states that the term ‘‘financial

end user’’ does not generally include

any counterparty that is:

• A sovereign entity; 79

• A multilateral development bank; 80

• The Bank for International

Settlements;

• A captive finance company that

qualifies for the exemption from

clearing under section 2(h)(7)(C)(iii) of

the Commodity Exchange Act and

implementing regulations; or

• A person that qualifies for the

affiliate exemption from clearing

pursuant to section 2(h)(7)(D) of the

Commodity Exchange Act or section

3C(g)(4) of the Securities Exchange Act

and implementing regulations

Settlements;

• A captive finance company that

qualifies for the exemption from

clearing under section 2(h)(7)(C)(iii) of

the Commodity Exchange Act and

implementing regulations; or

• A person that qualifies for the

affiliate exemption from clearing

pursuant to section 2(h)(7)(D) of the

Commodity Exchange Act or section

3C(g)(4) of the Securities Exchange Act

and implementing regulations.

The Agencies note the exclusion for

sovereign entities, multilateral

development banks and the Bank for

International Settlements is generally

consistent with the 2013 international

framework which recommended that

margin requirements not apply to

sovereigns, central banks, multilateral

development banks or the Bank for

International Settlements. The last two

categories that are excluded from the

financial end user definition were

excluded by Title VII of the Dodd-Frank

Act from the definition of financial

entity subject to mandatory clearing.

The Agencies also believe that this

approach is appropriate as these entities

generally pose less systemic risk to the

financial system in addition to posing

less counterparty risk to a swap entity.

Thus, the Agencies believe that

application of the margin requirements

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Federal Register / Vol. 79, No. 185 / Wednesday, September 24, 2014 / Proposed Rules

81 As is further discussed below, these entities

excluded from the definition of ‘‘financial end

users,’’ as well as nonfinancial counterparties, are

treated as ‘‘other counterparties’’ with respect to the

proposed variation margin requirements. With

respect to the proposed initial margin requirements,

the ‘‘other counterparties’’ category also includes

financial end users that do not have a material

swaps exposure

below, these entities

excluded from the definition of ‘‘financial end

users,’’ as well as nonfinancial counterparties, are

treated as ‘‘other counterparties’’ with respect to the

proposed variation margin requirements. With

respect to the proposed initial margin requirements,

the ‘‘other counterparties’’ category also includes

financial end users that do not have a material

swaps exposure.

82 As a specific example of the calculation for

material swaps exposure, consider a financial end

user (together with its affiliates) with a portfolio

consisting of two non-cleared swaps (e.g., an equity

swap, an interest rate swap) and one non-cleared

security-based credit swap. Suppose that the

notional value of each swap is exactly $10 billion

on each business day of June, July, and August of

2015. Furthermore, suppose that a foreign exchange

forward is added to the entity’s portfolio at the end

of the day on July 31, 2015, and that its notional

value is $10 billion on every business day of August

2015. On each business day of June and July 2015,

the aggregate notional amount of non-cleared

swaps, security-based swaps and foreign exchange

forwards and swaps is $30 billion. Beginning on

August 1, 2015 the aggregate notional amount of

non-cleared swaps, security-based swaps and

foreign exchange forwards and swaps is $40 billion.

The daily average aggregate notional value for June,

July and August of 2015 is then (22 × $30 billion

+23 × $30 billion + 21 × $40 billion)/(22 + 23 + 21)

= $33.18 billion, in which case this entity would

be considered to have a material swaps exposure for

every date in 2016.

83 See section 2(k) of the Bank Holding Company

Act, 12 U.S.C. 1841(k).

84 See section 2(d) of the Bank Holding Company

Act, 12 U.S.C. 1841(d); 12 CFR 225.2(o).

85 The term subsidiary is used in § __.9 to

describe certain entities that are eligible for

substituted compliance.

86 See, e.g., section 2(a)(2) of the Bank Holding

Company Act, 12 U.S.C. 1841(a)(2)

osu

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