Final Rule and Interim Final Rule Regarding Swap Margin Requirements
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FDIC Financial Institution Letters › Final Rule and Interim Final Rule Regarding Swap Margin Requirements
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Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
1 83 FR 50805 (October 10, 2018). The QFC Rules
are codified as follows: 12 CFR part 47 (OCC’s QFC
Rule); 12 CFR part 252, subpart I (Board’s QFC
Rule); 12 CFR part 382 (FDIC’s QFC Rule).
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 45
[Docket No. OCC–2019–0023]
RIN 1557–AE69
FEDERAL RESERVE SYSTEM
12 CFR Part 237
[Docket No. R–1682]
RIN 7100–AF62
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 349
RIN 3064–AF08
FARM CREDIT ADMINISTRATION
12 CFR Part 624
RIN 3052–AD38
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1221
RIN 2590–AB03
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: Final rule.
SUMMARY: The OCC, Board, FDIC, FCA,
and FHFA (each, an agency, and
collectively, the agencies) are adopting
a final rule that amends the agencies’
regulations requiring swap dealers and
security-based swap dealers under the
agencies’ respective jurisdictions to
exchange margin with their
counterparties for swaps that are not
centrally cleared (Swap Margin Rule).
The Swap Margin Rule as adopted in
2015 takes effect under a phased
compliance schedule spanning from
2016 through 2020, and the entities
covered by the rule continue to hold
swaps in their portfolios that were
entered into before the effective dates of
the rule. Such swaps are grandfathered
from the Swap Margin Rule’s
requirements until they expire
according to their terms
argin Rule).
The Swap Margin Rule as adopted in
2015 takes effect under a phased
compliance schedule spanning from
2016 through 2020, and the entities
covered by the rule continue to hold
swaps in their portfolios that were
entered into before the effective dates of
the rule. Such swaps are grandfathered
from the Swap Margin Rule’s
requirements until they expire
according to their terms. The final rule
permits swaps entered into prior to an
applicable compliance date (legacy
swaps) to retain their legacy status in
the event that they are amended to
replace an interbank offered rate (IBOR)
or other discontinued rate, modifies
initial margin requirements for non-
cleared swaps between affiliates,
introduces an additional compliance
date for initial margin requirements,
clarifies the point in time at which
trading documentation must be in place,
permits legacy swaps to retain their
legacy status in the event that they are
amended due to technical amendments,
notional reductions, or portfolio
compression exercises, and makes
technical changes to relocate the
provision addressing amendments to
legacy swaps that are made to comply
with the Qualified Financial Contract
Rules, as defined in the Supplementary
Information section. In addition, the
final rule addresses comments received
in response to the agencies’ publication
of the interim final rule that would
preserve the status of legacy swaps
meeting certain criteria if the United
Kingdom withdraws from the European
Union (hereafter ‘‘Brexit) without a
negotiated settlement agreement.
DATES: The final rule is effective August
31, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: Chris McBride, Director for
Market Risk, Treasury and Market Risk
Policy, (202) 649–6402, or Allison
Hester-Haddad, Counsel, Chief
Counsel’s Office, (202) 649–5490, for
persons who are deaf or hearing
impaired, TTY (202) 649–5597, Office of
the Comptroller of the Currency, 400 7th
Street SW, Washington, DC 20219
nal rule is effective August
31, 2020.
FOR FURTHER INFORMATION CONTACT:
OCC: Chris McBride, Director for
Market Risk, Treasury and Market Risk
Policy, (202) 649–6402, or Allison
Hester-Haddad, Counsel, Chief
Counsel’s Office, (202) 649–5490, for
persons who are deaf or hearing
impaired, TTY (202) 649–5597, Office of
the Comptroller of the Currency, 400 7th
Street SW, Washington, DC 20219.
Board: Constance Horsley, Deputy
Associate Director, (202) 452–5239,
Lesley Chao, Lead Financial Institution
Policy Analyst, (202) 974–7063, or John
Feid, Principal Economist, (202) 452–
2385, Division of Supervision and
Regulation; Patricia Yeh, Senior
Counsel, (202) 452–3089, or Justyna
Bolter, Senior Attorney, (202) 452–2686,
Legal Division; for users of
Telecommunication Devices for the Deaf
(TDD) only, contact 202–263–4869;
Board of Governors of the Federal
Reserve System, 20th and C Streets NW,
Washington, DC 20551.
FDIC: Irina Leonova, Senior Policy
Analyst, ileonova@fdic.gov, Capital
Markets Branch, Division of Risk
Management Supervision, (202) 898–
3843; Thomas F. Hearn, Counsel,
thohearn@fdic.gov, Legal Division,
Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC
20429.
FCA: Jeremy R. Edelstein, Associate
Director, Timothy T. Nerdahl, Senior
Policy Analyst, Clayton D. Milburn,
Senior Financial Analyst, Finance and
Capital Markets Team, Office of
Regulatory Policy, (703) 883–4414, TTY
upervision, (202) 898–
3843; Thomas F. Hearn, Counsel,
thohearn@fdic.gov, Legal Division,
Federal Deposit Insurance Corporation,
550 17th Street NW, Washington, DC
20429.
FCA: Jeremy R. Edelstein, Associate
Director, Timothy T. Nerdahl, Senior
Policy Analyst, Clayton D. Milburn,
Senior Financial Analyst, Finance and
Capital Markets Team, 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.
FHFA: Christopher Vincent, Senior
Financial Analyst, Office of Financial
Analysis, Modeling & Simulations, (202)
649–3685, Christopher.Vincent@
fhfa.gov, or James P. Jordan, Associate
General Counsel, Office of General
Counsel, (202) 649–3075,
James.Jordan@fhfa.gov, Federal Housing
Finance Agency, Constitution Center,
400 7th St. SW, Washington, DC 20219.
The telephone number for the
Telecommunications Device for the
Hearing Impaired is (800) 877–8339.
SUPPLEMENTARY INFORMATION:
I. Introduction
The agencies are adopting the recently
proposed amendments to the agencies’
regulations that require swap dealers
and security-based swap dealers under
the agencies’ respective jurisdictions to
exchange margin with their
counterparties for swaps that are not
centrally cleared (Swap Margin Rule or
Rule), with certain adjustments (final
rule). As discussed in detail below, the
final rule (1) permits swaps entered into
prior to an applicable compliance date
(legacy swaps) to retain their legacy
status in the event that they are
amended to replace an interbank offered
rate (IBOR) or other discontinued rate,
(2) modifies initial margin requirements
for non-cleared swaps between covered
swap entities and their affiliates, (3)
introduces an additional compliance
date for initial margin requirements, (4)
clarifies the point in time at which
trading documentation must be in place,
y
status in the event that they are
amended to replace an interbank offered
rate (IBOR) or other discontinued rate,
(2) modifies initial margin requirements
for non-cleared swaps between covered
swap entities and their affiliates, (3)
introduces an additional compliance
date for initial margin requirements, (4)
clarifies the point in time at which
trading documentation must be in place,
(5) permits legacy swaps to retain their
legacy status in the event that they are
amended due to technical amendments,
notional reductions, or portfolio
compression exercises, (6) makes
technical changes to relocate the
provision within the rule addressing
amendments to legacy swaps that are
made to comply with the qualified
financial contract rules (QFC Rules),1
and (7) addresses comments received in
response to the agencies’ publication of
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Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
2 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, 124 Stat. 1376
(2010). See 7 U.S.C. 6s; 15 U.S.C. 78o–10. Sections
731 and 764 of the Dodd-Frank Act added a new
section 4s to the Commodity Exchange Act of 1936,
as amended, and a new section, section 15F, to the
Securities Exchange Act of 1934, as amended,
respectively, which require registration with the
Commodity Futures Trading Commission (CFTC) of
swap dealers and major swap participants and the
U.S. Securities and Exchange Commission (SEC) of
security-based swap dealers and major security-
based swap participants (each a swap entity and,
collectively, swap entities). Section 1a(39) of the
Commodity Exchange Act of 1936, as amended,
defines the term ‘‘prudential regulator’’ for
purposes of the margin requirements applicable to
swap dealers, major swap participants, security-
based swap dealers and major security-based swap
participants. See 7 U.S.C. 1a(39)
and major security-
based swap participants (each a swap entity and,
collectively, swap entities). Section 1a(39) of the
Commodity Exchange Act of 1936, as amended,
defines the term ‘‘prudential regulator’’ for
purposes of the margin requirements applicable to
swap dealers, major swap participants, security-
based swap dealers and major security-based swap
participants. See 7 U.S.C. 1a(39).
3 A ‘‘swap’’ is defined in section 721 of the Dodd-
Frank Act to include, among other things, an
interest rate swap, commodity swap, equity swap,
and credit default swap, and a security-based swap
is defined in section 761 of the Dodd-Frank Act to
include a swap based on a single security or loan
or on a narrow-based security index. See 7 U.S.C.
1a(47); 15 U.S.C. 78c(a)(68).
4 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (September
2013), available at https://www.bis.org/publ/
bcbs261.pdf.
5 80 FR 74840 (November 30, 2015).
6 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (March 2015),
available at https://www.bis.org/bcbs/publ/
d317.pdf.
7 The applicable compliance date for a covered
swap entity is based on the average daily aggregate
notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps of
the covered swap entity and its counterparty
(accounting for their respective affiliates) for each
business day in March, April, and May of that year.
The applicable compliance dates for initial margin
requirements that are currently in place, and the
corresponding average daily aggregate notional
amount thresholds, are: September 1, 2016, $3
trillion; September 1, 2017, $2.25 trillion;
September 1, 2018, $1.5 trillion; September 1, 2019,
$0.75 trillion; and September 1, 2020, all swap
entities and counterparties. See § __.1(e) of the
Swap Margin Rule. In this final rule, the agencies
are also adding one additional year to this schedule
for certain counterparties.
8 84 FR 59970 (Nov
amount thresholds, are: September 1, 2016, $3
trillion; September 1, 2017, $2.25 trillion;
September 1, 2018, $1.5 trillion; September 1, 2019,
$0.75 trillion; and September 1, 2020, all swap
entities and counterparties. See § __.1(e) of the
Swap Margin Rule. In this final rule, the agencies
are also adding one additional year to this schedule
for certain counterparties.
8 84 FR 59970 (Nov. 7, 2019).
9 Summaries of these meetings may be found at
the internet sites where the agencies’ have posted
public comments on the NPR. See, e.g., https://
www.federalreserve.gov/apps/foia/
proposedregs.aspx.
10 Closeout risk is the risk associated with the
period following a confirmed default wherein the
defaulting counterparty is unable to perform on the
swap contract and the cost of legally closing out the
existing swap and establishing a replacement swap
with a new counterparty is unknown.
the interim final rule dealing with
Brexit-related issues.
A. Background on the Swap Margin
Rule
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-
Frank Act) required the agencies to
jointly adopt rules that establish capital
and margin requirements for swap
entities that are prudentially regulated
by one of the agencies (covered swap
entities).2 These capital and margin
requirements apply to swaps that are
not cleared by a registered derivatives
clearing organization or a registered
clearing agency (non-cleared swaps).3
For the remainder of this preamble, the
term ‘‘non-cleared swaps’’ refers to non-
cleared swaps and non-cleared security-
based swaps unless the context requires
otherwise
f the agencies (covered swap
entities).2 These capital and margin
requirements apply to swaps that are
not cleared by a registered derivatives
clearing organization or a registered
clearing agency (non-cleared swaps).3
For the remainder of this preamble, the
term ‘‘non-cleared swaps’’ refers to non-
cleared swaps and non-cleared security-
based swaps unless the context requires
otherwise.
The Basel Committee on Banking
Supervision (BCBS) and the Board of
the International Organization of
Securities Commissions (IOSCO)
established an international framework
for margin requirements on non-cleared
derivatives in September 2013 (BCBS/
IOSCO Framework).4 Following the
establishment of the BCBS/IOSCO
Framework, on November 30, 2015, the
agencies published the Swap Margin
Rule, which includes many of the
principles and other aspects of the
BCBS/IOSCO Framework.5 In particular,
the Swap Margin Rule adopted the
implementation schedule set forth in
the BCBS/IOSCO Framework, including
the revised implementation schedule
adopted on March 18, 2015.6
The Swap Margin Rule established an
effective date of April 1, 2016, with a
phased-in compliance schedule for the
initial and variation margin
requirements.7 On or after March 1,
2017, all covered swap entities were
required to comply with the variation
margin requirements for transactions
with other swap entities and financial
end user counterparties. The Swap
Margin Rule presently requires all
covered swap entities to comply with
the initial margin requirements for non-
cleared swaps with all financial end
users with a material swaps exposure
and with all swap entities by September
1, 2020.
B
re
required to comply with the variation
margin requirements for transactions
with other swap entities and financial
end user counterparties. The Swap
Margin Rule presently requires all
covered swap entities to comply with
the initial margin requirements for non-
cleared swaps with all financial end
users with a material swaps exposure
and with all swap entities by September
1, 2020.
B. Overview of the Notice of Proposed
Rulemaking and General Summary of
Comments
On November 7, 2019, the agencies
sought comment on a proposal to revise
certain parts of the Swap Margin Rule
to facilitate the implementation of
prudent risk management strategies at
covered swap entities (proposed rule or
proposal).8 The proposed amendments
permitted legacy swaps to retain their
legacy status in the event that they are
amended to replace an interbank offered
rate (IBOR) or other discontinued rate,
introduced an additional compliance
date for initial margin requirements,
clarified the point in time at which
trading documentation must be in place,
and permitted legacy swaps to retain
their legacy status in the event that they
are amended due to technical
amendments, notional reductions, or
portfolio compression exercises. The
proposal would also have made
technical changes to relocate the
provision within the rule addressing
amendments to legacy swaps that are
made to comply with the QFC Rules.
The proposal would also have no
longer required covered swap entities to
collect initial margin for non-cleared
swaps with affiliates. However, inter-
affiliate transactions would have
continued to be subject to variation
margin requirements. Inter-affiliate
transactions of covered swap entities
regulated by the FDIC, the OCC, and the
Board also would continue to be subject
to other applicable rules and
regulations.
The agencies received approximately
20 comments on the proposal, from U.S
cleared
swaps with affiliates. However, inter-
affiliate transactions would have
continued to be subject to variation
margin requirements. Inter-affiliate
transactions of covered swap entities
regulated by the FDIC, the OCC, and the
Board also would continue to be subject
to other applicable rules and
regulations.
The agencies received approximately
20 comments on the proposal, from U.S.
financial institutions, public interest
groups, trade associations, academic
institutions, and other interested
parties. Agency staff also met with some
commenters at those commenters’
request to discuss their comments on
the proposal.9
Most commenters supported the
proposal’s relief to amend certain legacy
swaps for certain reasons and the
proposal’s addition of a compliance
phase for smaller entities, as a
meaningful way to assist market
participants in managing and
prioritizing their resources, mitigating
potential trading disruptions related to
the transition of IBORs to other interest
rates, complying with documentation
requirements, and engaging in certain
trade life-cycle events.
With respect to removing the initial
margin requirement for inter-affiliate
transactions, some commenters
supported the proposal while others
expressed the view that the proposal
would increase risks to covered swap
entities individually and financial
stability more broadly. For example, a
few commenters shared their view that
collateralization (in the form of initial
margin collected from a covered swap
entity’s affiliate) is a highly effective
tool for reducing closeout risk.10 These
commenters were concerned that the
proposed rule would eliminate an
estimated $40 billion in collateral held
by covered swap entities, which, in
their view, is necessary for closeout
risk-absorption
enters shared their view that
collateralization (in the form of initial
margin collected from a covered swap
entity’s affiliate) is a highly effective
tool for reducing closeout risk.10 These
commenters were concerned that the
proposed rule would eliminate an
estimated $40 billion in collateral held
by covered swap entities, which, in
their view, is necessary for closeout
risk-absorption. Some of the
commenters also expressed the view
that banking organizations are using
inter-affiliate swaps for the primary
purpose of concentrating the risks of the
organizations’ world-wide derivatives
activities onto the books of the covered
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Federal Register / Vol. 85, No. 127 / Wednesday, July 1, 2020 / Rules and Regulations
11 83 FR 50805 (October 10, 2018). The QFC Rules
are codified as follows: 12 CFR part 47 (OCC’s QFC
Rule); 12 CFR part 252, subpart I (Board’s QFC
Rule); 12 CFR part 382 (FDIC’s QFC Rule).
12 Follow-on amendments may include, for
example, spread adjustments resulting from the
move from a term rate to an overnight rate, from an
unsecured rate to a secured rate, or from a change
in tenor.
swap entities subject to the Swap
Margin Rule, i.e., U.S. insured
depository institutions.
By contrast, commenters supporting
the removal of the initial margin
requirement for inter-affiliate
transactions asserted that the proposal
would align the Swap Margin Rule with
the margin requirements of some other
domestic and foreign jurisdictions and
facilitate more balanced and effective
risk management practices across the
spectrum of risks faced within banking
organizations that engage in non-cleared
swaps.
As discussed below in this
SUPPLEMENTARY INFORMATION section, the
final rule adopts, with certain
adjustments in response to the
comments received, the proposal that
ements of some other
domestic and foreign jurisdictions and
facilitate more balanced and effective
risk management practices across the
spectrum of risks faced within banking
organizations that engage in non-cleared
swaps.
As discussed below in this
SUPPLEMENTARY INFORMATION section, the
final rule adopts, with certain
adjustments in response to the
comments received, the proposal that
(1) permits swaps entered into prior to
an applicable compliance date (legacy
swaps) to retain their legacy status in
the event that they are amended to
replace an IBOR or other discontinued
rate, (2) modifies the initial margin
requirement for non-cleared swaps
between covered swap entities and their
affiliates, (3) introduces an additional
compliance date for initial margin
requirements, (4) clarifies the point in
time at which trading documentation
must be in place, (5) permits legacy
swaps to retain their legacy status in the
event that they are amended due to
technical amendments, notional
reductions, or portfolio compression
exercises, (6) makes technical changes
to relocate the provision within the rule
addressing amendments to legacy swaps
that are made to comply with the
qualified financial contract rules (QFC
Rules),) 11 and (7) addresses comments
received in response to the agencies’
publication of the interim final rule
dealing with Brexit-related issues.
II. Interbank Offered Rates
A. Summary of Proposed Rule
Due to the potential discontinuation
of LIBOR at the end of 2021, covered
swap entities face uncertainty about the
way their swap contracts that include an
interest rate based on LIBOR and other
IBORs will operate after a permanent
discontinuation. An interest rate is a
critical term for calculating payments
under a swap contract, be it an interest
rate swap or another type of swap that
includes a reference interest rate as one
of the mechanisms for determining
payments or premiums
ertainty about the
way their swap contracts that include an
interest rate based on LIBOR and other
IBORs will operate after a permanent
discontinuation. An interest rate is a
critical term for calculating payments
under a swap contract, be it an interest
rate swap or another type of swap that
includes a reference interest rate as one
of the mechanisms for determining
payments or premiums. In many
instances, covered swap entities may
decide to amend existing swap contracts
to replace an IBOR before the IBOR
becomes discontinued. Such
amendments may also trigger follow-on
amendments that the counterparties
determine are necessary to maintain the
economics of the contract.12 Absent
revisions to the Swap Margin Rule, an
amendment to a legacy swap could
affect the legacy status of such a swap
and make it subject to the margin
requirements of the rule. In order to
enable covered swap entities and their
counterparties to minimize disturbance
to the financial markets, the agencies
proposed to provide relief to permit
covered swap entities to amend the
interest rates in a legacy swap contract,
based on certain conditions of
eligibility, and to adopt necessary
follow-on amendments, without the
swap losing its legacy status.
B. Method of Amendment
1. Proposal
In recognition of the ongoing efforts to
transition away from certain IBORs due
to their potential discontinuation, the
agencies proposed to amend the Swap
Margin Rule to remove impediments
that would limit the ability of covered
swap entities to replace certain interest
rates in their legacy non-cleared swaps
without the
swap losing its legacy status.
B. Method of Amendment
1. Proposal
In recognition of the ongoing efforts to
transition away from certain IBORs due
to their potential discontinuation, the
agencies proposed to amend the Swap
Margin Rule to remove impediments
that would limit the ability of covered
swap entities to replace certain interest
rates in their legacy non-cleared swaps.
Proposed § __.1(h) recognized that these
replacements could be carried out using
a variety of legal mechanisms by
permitting amendments accomplished
by the parties’ adherence to a protocol,
contractual amendment of an agreement
or confirmation, or execution of a new
contract in replacement of and
immediately upon termination of an
existing contract (i.e., tear-up), subject
to certain limitations found in § __
.1(h)(3).
2. Final Rule
Commenters were supportive of the
flexibility that the agencies provided
regarding the method of amendment,
particularly the flexibility to make
amendments to an individual non-
cleared swap or on a netting set level.
Several commenters requested a
technical change to the language in
proposed § __.1(h) to clarify that the
method of adherence to a protocol is
itself a contractual amendment. To
make this clarification, the agencies are
replacing the language ‘‘contractual
amendment of an agreement or
confirmation’’ with ‘‘other amendment
of a contract or confirmation’’ to make
clear that both an adherence to a
protocol as well as other amendments
are permissible methods of amendment
to a legacy swap, and also to maintain
consistency in using the term ‘‘contract’’
rather than ‘‘agreement’’ in § __.1(h).
The agencies are also making non-
substantive parallel changes to the rule
text to clarify that the execution of a
new contract or confirmation in
replacement of and immediately upon
termination of an existing contract or
confirmation is a permitted method of
amendment
o a legacy swap, and also to maintain
consistency in using the term ‘‘contract’’
rather than ‘‘agreement’’ in § __.1(h).
The agencies are also making non-
substantive parallel changes to the rule
text to clarify that the execution of a
new contract or confirmation in
replacement of and immediately upon
termination of an existing contract or
confirmation is a permitted method of
amendment.
A few commenters also requested that
the agencies expand § __.1(h) to include
new, non-legacy swaps entered into
solely for managing the transition away
from IBORs, or new, non-legacy swaps
designed to transition an existing swap
away from an IBOR even if the swap
may not be amended or terminated.
These commenters suggested this
expansion would facilitate use of basis
swaps to offset IBOR exposure from
legacy swaps against new exposure to a
risk-free rate (RFR). One commenter
argued this would be roughly
economically equivalent to directly
amending one or more existing swaps to
eliminate the IBOR exposure and
replacing it with an RFR.
The agencies are not expanding the
regulation beyond the methods that
were proposed in § __.1(h).) The
alternative suggested by the commenters
would be ineffective in resolving the
problem the agencies seek to address.
As long as covered swap entities hold
existing swaps contractually obligating
them to exchange payments based on
IBORs, they bear the risk that those
IBORs will be discontinued. If a covered
swap entity hedges that IBOR exposure
to another benchmark by executing a
new basis swap, one leg of that swap
will necessarily be linked to the IBOR.
While the agencies believe there may be
certain circumstances in which sound
risk management by a covered swap
entity would include new trading
activity between IBOR and non-IBOR
market exposures (with contract dates
ending by December 2021), these
activities go beyond the scope of relief
the agencies are providing with this
rule.
C. Purpose of Amendments
1
arily be linked to the IBOR.
While the agencies believe there may be
certain circumstances in which sound
risk management by a covered swap
entity would include new trading
activity between IBOR and non-IBOR
market exposures (with contract dates
ending by December 2021), these
activities go beyond the scope of relief
the agencies are providing with this
rule.
C. Purpose of Amendments
1. Proposal
The proposed rule described the type
of interest rate that can be replaced and
the accompanying changes that would
be permitted. Proposed §§ __
.1(h)(3)(i)(A) and (B) would permit
amendments that are made solely to
accommodate the replacement of an
IBOR or of any other non-IBOR interest
rate that a covered swap entity
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13 The replacement rate is also expected to be
consistent with international standards, such as the
IOSCO Principles for Financial Benchmarks. See
https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD415.pdf.
reasonably expects to be discontinued
or reasonably determines has lost its
relevance as a reliable benchmark due to
a significant impairment with an
alternate interest rate.
2. Final Rule
The agencies did not receive any
comments on this part of the proposed
rule and are adopting it as proposed.
D. Permitted Interest Rates
1. Proposal
The proposed rule provided that an
IBOR could be replaced, including but
not limited to LIBOR, TIBOR, BBSW,
SIBOR, CDOR, EURIBOR, and HIBOR.
Although the current uncertainty
surrounding interest rates is tied to
IBORs, the agencies also proposed a
second, more subjective standard that
would be applicable to other categories
of interest rates, should the need arise
in the future
Proposal
The proposed rule provided that an
IBOR could be replaced, including but
not limited to LIBOR, TIBOR, BBSW,
SIBOR, CDOR, EURIBOR, and HIBOR.
Although the current uncertainty
surrounding interest rates is tied to
IBORs, the agencies also proposed a
second, more subjective standard that
would be applicable to other categories
of interest rates, should the need arise
in the future. This forward-looking
standard was designed to encourage
covered swap entities to resolve critical
uncertainties before an interest rate is
discontinued, or loses its market
relevance, in order to minimize
disturbance to the markets.
The proposed rule (§ __.1(h)(3)(i)(C))
also contemplated that an interest rate
may need to be replaced more than one
time. For example, an IBOR may first be
replaced with fallback provisions at a
time when a permanent alternative
interest rate is not yet available or not
yet agreed upon by the swap
participants, or amendment
documentation has not yet been
developed. Subsequently, fallback
provisions may be replaced with
permanent alternative interest rates. If
the original interest rate that is being
replaced is an IBOR or any other non-
IBOR interest rate that otherwise met
the requirements of the proposed rule
and that a covered swap entity
reasonably expects to be discontinued
or reasonably determines has lost its
relevance as a reliable benchmark due to
a significant impairment, the non-
cleared swap may be amended more
than once to accommodate ongoing
developments toward a permanent
replacement interest rate. The proposed
rule did not limit the number of
amendments that could take place, as
long as the interest rate that was
originally present in the non-cleared
swap met the criteria in either proposed
§ __.1(h)(3)(i)(A) or § __.1(h)(3)(i)(B)
ficant impairment, the non-
cleared swap may be amended more
than once to accommodate ongoing
developments toward a permanent
replacement interest rate. The proposed
rule did not limit the number of
amendments that could take place, as
long as the interest rate that was
originally present in the non-cleared
swap met the criteria in either proposed
§ __.1(h)(3)(i)(A) or § __.1(h)(3)(i)(B).
The proposed rule would not permit
subsequent amendments that change
interest rates or other terms of the non-
cleared swap for any purpose other than
for those purposes explicitly set out in
§ __.1(h), without triggering application
of the margin requirements.
To benefit from the treatment of this
new legacy swap provision, a covered
swap entity must make the amendments
to the non-cleared swap solely to
accommodate the replacement of an
interest rate described in the proposed
rule. The proposed rule was flexible as
to the incoming replacement interest
rate by leaving it up to the
counterparties to select a mutually
agreeable replacement interest rate. The
proposed rule provided examples of the
Secured Overnight Funding Rate
(SOFR), the AMERIBOR and the
Overnight Bank Funding Rate as some
potential alternatives suggested by some
market participants. The agencies
expected that any replacement interest
rate, including any successor
replacement interest rate, would be
agreed upon by the parties after
assessing its complexity, safety and
soundness, and taking into
consideration associated risk
management practices.13
2. Final Rule
The agencies received several
comments expressing concern that the
proposed rule could be read as applying
to interest rate swaps only and
requesting similar relief for all other
asset categories of swaps, including
foreign exchange, equity, commodity,
and credit default swaps
ity, safety and
soundness, and taking into
consideration associated risk
management practices.13
2. Final Rule
The agencies received several
comments expressing concern that the
proposed rule could be read as applying
to interest rate swaps only and
requesting similar relief for all other
asset categories of swaps, including
foreign exchange, equity, commodity,
and credit default swaps. The agencies
are clarifying that amendments to the
rule permit amendments to interest rates
but do not restrict the categories of
swaps where those interest rates appear
and thus do not restrict the categories of
swaps in which those amendments
could be made. Interest rates could be
used in a variety of different categories
of swaps, such as an underlying interest
rate index in an interest rate swap or as
a discounting interest rate for collateral
or payment calculations in a
commodity, foreign exchange, equity, or
credit swap. In other words, the relief
provided applies to all categories of
non-cleared swaps that include or refer
to an IBOR or any other interest rate
described in paragraphs (h)(3)(i)(A)–(C)
of the final rule.
One commenter requested that the
agencies extend the relief in the
Proposal to cover amendments made
solely to accommodate the replacement
of any reference instrument (e.g.,
iTraxx) reasonably expected to be
discontinued or reasonably determined
to have lost its relevance as a reliable
benchmark due to a significant
impairment. The agencies note that
there is no current expectation or
indication that any major non-interest
rate reference instrument is expected to
be discontinued. Moreover, the
expected discontinuation of IBORs
place these interest rates in a special
position that does not extend to periodic
revisions of underlying reference
instruments in commodity, foreign
exchange, credit, equity, or other swaps
agencies note that
there is no current expectation or
indication that any major non-interest
rate reference instrument is expected to
be discontinued. Moreover, the
expected discontinuation of IBORs
place these interest rates in a special
position that does not extend to periodic
revisions of underlying reference
instruments in commodity, foreign
exchange, credit, equity, or other swaps.
The agencies are not modifying the final
rule to allow the replacement of a non-
interest rate reference instrument while
retaining the legacy status of the swap.
If any expectation of discontinuation
arises in the future, the agencies may
reconsider their position.
One commenter requested
clarification that any new intermediate
or permanent interest rate does not
necessarily have to be viewed by the
market as a ‘‘successor’’ to the IBOR or
other discontinued rate, but that the
counterparties to the swap contract
simply have to agree on the appropriate
replacement interest rate. The agencies
confirm this understanding.
Commenters expressed concern that
changes to the discounting methods to
adopt RFRs used by some central
counterparties (CCPs) would require
conforming changes to over-the-counter
swaptions that may be presented to
these CCPs for clearing. The agencies
have modified the proposed rule to
allow legacy swaps to be amended to
reflect these changes to the discount
interest rate and remain legacy swaps.
The agencies did not receive any
other comments on this part of the
proposed rule and are adopting it
largely as proposed.
E. Follow-On Amendments
1. Proposal
In the proposed rule, the agencies
acknowledged that replacing an interest
rate could require other contractual
changes to maintain the economics of
the non-cleared swap and to preserve
the relative economic values to the
parties after incorporating changes to
the interest rate
n this part of the
proposed rule and are adopting it
largely as proposed.
E. Follow-On Amendments
1. Proposal
In the proposed rule, the agencies
acknowledged that replacing an interest
rate could require other contractual
changes to maintain the economics of
the non-cleared swap and to preserve
the relative economic values to the
parties after incorporating changes to
the interest rate. The proposed rule
would permit changes that incorporate
spreads and other adjustments that
accompany and implement the
replacement interest rate amendment.
The proposed rule would also permit
other, more administrative and
technical changes necessary to
operationalize the determination of
payments or other exchanges of
economic value using the replacement
interest rate, including changes to
determination dates, calculation agents,
and payment dates. These types of
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14 See CFTC Letter No. 19–28 (December 17,
2019), in section V.A., providing regulatory relief
from the mandatory clearing requirement, and
CFTC Letter 19–26 (December 17, 2019), in section
E.1., which granted relief from the CFTC’s margin
requirements for non-cleared swaps. In both
situations, the counterparties previously relied on
the end-user exemptions end-user exemptions in
the CEA and applicable CFTC regulations.
15 Id. The agencies’ determination is specific to
these two CFTC no-action letters, and more
specifically to section V.A. of CFTC Letter No. 19–
28 and section E.1. of CFTC Letter No. 19–26. The
agencies are not applying CFTC no-action letters to
modify the terms of the Swap Margin Rule in any
other regard.
administrative changes may be
necessary to adjust computations and
operational provisions to reflect the
differences between an IBOR and the
replacement interest rate or rates
specifically to section V.A. of CFTC Letter No. 19–
28 and section E.1. of CFTC Letter No. 19–26. The
agencies are not applying CFTC no-action letters to
modify the terms of the Swap Margin Rule in any
other regard.
administrative changes may be
necessary to adjust computations and
operational provisions to reflect the
differences between an IBOR and the
replacement interest rate or rates. The
agencies envisioned that a number of
contractual changes could be necessary
to maintain the economics of the non-
cleared swap, and for this reason, the
proposed rule would permit these
changes. However, the agencies did not
believe that the relief being provided for
interest rate replacement purposes
should be expansively applied to
encompass all changes to a legacy swap.
Accordingly, the proposed rule text
clarified that the proposed safe harbor
for legacy swaps would be unavailable
if the amendments extend the maturity
or increase the total effective notional
amount of the non-cleared swap,
irrespective of the reason for those
changes.
2. Final Rule
The agencies received several
comments requesting reconsideration of
the restriction on extending the maturity
or increasing the total effective notional
amount of the non-cleared swap. Day
count conventions or other factors such
as final settlement or final payment
occurring on the 30th of the month
versus the 15th of the month may result
in an extension of the remaining
maturity of a swap. Since the
counterparty to a non-cleared swap may
not know the size of the final payment
until the end of the interest period, the
swap may incorporate a payment delay,
with the final maturity shifting as a
result. Commenters also explained that
the replacement of an IBOR may
increase the total effective notional
amount of the non-cleared swap under
a few scenarios
ng
maturity of a swap. Since the
counterparty to a non-cleared swap may
not know the size of the final payment
until the end of the interest period, the
swap may incorporate a payment delay,
with the final maturity shifting as a
result. Commenters also explained that
the replacement of an IBOR may
increase the total effective notional
amount of the non-cleared swap under
a few scenarios. For example, a fixed-
for-floating IBOR swap may use a 30/
360 day count fraction market
convention, but the market standard for
a replacement reference benchmark rate
swap may use an actual/360 day count
fraction market convention. Under this
scenario, the notional amount would
need to be adjusted to ensure that the
payment amounts on the fixed leg of the
replacement reference benchmark rate
swap are the same compared to the
IBOR swap.
In response to these comments, the
agencies understand that certain
differences in market conventions may
not yet be well established or expected.
The agencies are preserving the
proposal’s restriction on extensions of
maturity and increases of total effective
notional amount, but adding language
allowing extensions and increases as
necessary to accommodate the
differences between market conventions
for an outgoing interest rate and its
replacement. Market conventions could
include changes in day count
conventions, settlement date, or final
payment date.
Several commenters also explained
that counterparties may employ
portfolio compression to effectuate
amendments to legacy swaps for the
purpose of eliminating IBORs, and that
differences between market conventions
for an outgoing interest rate and its
replacement in this context could also
affect the remaining maturity and total
effective notional amount of portfolios
of IBOR swaps. The agencies are adding
new paragraph (h)(3)(iii) to
accommodate portfolio compression
exercises that are driven by the sole
purpose of replacing an interest rate
described in paragraph (h)(3)(i)
een market conventions
for an outgoing interest rate and its
replacement in this context could also
affect the remaining maturity and total
effective notional amount of portfolios
of IBOR swaps. The agencies are adding
new paragraph (h)(3)(iii) to
accommodate portfolio compression
exercises that are driven by the sole
purpose of replacing an interest rate
described in paragraph (h)(3)(i). In such
a case, portfolio compression would not
be subject to the limitations in
paragraph (h)(4), but may not extend the
maturity or increase the total effective
notional amount of the non-cleared
swap or non-cleared security-based
swap beyond what is necessary to
accommodate the differences between
market conventions for an outgoing
interest rate and its replacement.
Commenters also expressed a concern
that changes associated with the
liquidity of specific maturities of swaps
with a replacement interest rate may
result in an increase in the remaining
maturity of the non-cleared swap. For
example, a swap with a four-year
remaining maturity may not be as liquid
as a swap with a five-year remaining
maturity. Given that this rationale for an
extension of maturity can significantly
increase the remaining maturity of a
legacy swap, the agencies believe that it
could lead to inappropriate extensions
or evasion of the requirements of the
rule. Accordingly, the agencies are not
permitting an extension of the
remaining maturity for liquidity or
similar reasons.
F. End Date
The proposed rule did not specify an
end date by which IBOR-related
amendments must be completed, but
requested comment on that issue.
Several commenters agreed with the
agencies’ approach to not specify an end
date, explaining that amendments
related to fallbacks or other transitions
to replacement interest rates may not be
completed in one step or within a given
time frame. Accordingly, the agencies
are not adopting any specific end date
by which IBOR-related amendments
must be completed.
G
ted comment on that issue.
Several commenters agreed with the
agencies’ approach to not specify an end
date, explaining that amendments
related to fallbacks or other transitions
to replacement interest rates may not be
completed in one step or within a given
time frame. Accordingly, the agencies
are not adopting any specific end date
by which IBOR-related amendments
must be completed.
G. Exemptions for Commercial and
Cooperative End Users
One commenter requested that the
agencies clarify how the Swap Margin
Rule treats post-compliance date non-
cleared swaps that qualified for the
commercial/cooperative end user
exemption from the rule under § __
.1(d)(1), if such swaps are amended to
accommodate changes to referenced
benchmark interest rates. The
commenter expressed concern that post-
compliance date non-cleared swaps
originally exempted under
§ __.1(d)(1) will need to be amended by
commercial end users or cooperatives to
remove an IBOR benchmark interest
rate. Specifically, the commenter noted
that the amended swaps might become
subject to temporary mismatches
between the rate referenced by such
swaps and the commercial arrangements
being hedged, thereby raising questions
about their exempt status.
The commenter’s request is based on
two no-action letters that the CFTC
issued pertaining to non-cleared swaps
in which the counterparty qualified for
an exemption or exception from
mandatory clearing and/or non-cleared
margin requirements under the
Commodity Exchange Act (CEA) or
CFTC regulations.14
The scope of the agencies’ exemption
for commercial and cooperative end
users in § __.1(d)(1) is, by its terms, tied
to the scope of the commercial end user
exemptions in the CEA and their
implementing regulations. No-action
letters are not included under the
agencies’ regulations
earing and/or non-cleared
margin requirements under the
Commodity Exchange Act (CEA) or
CFTC regulations.14
The scope of the agencies’ exemption
for commercial and cooperative end
users in § __.1(d)(1) is, by its terms, tied
to the scope of the commercial end user
exemptions in the CEA and their
implementing regulations. No-action
letters are not included under the
agencies’ regulations. However, for the
same reasons the agencies are amending
§ __.1(h) to preserve the legacy status of
swaps during the IBOR transition, the
agencies will treat commercial and
cooperative end user swaps originally
exempted under § __.1(d)(1) as
remaining within the scope of
§ __.1(d)(1) if those swaps are
effectuated under the terms of the two
applicable CFTC no-action letters.15
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16 Swap Margin Rule §§ __.11(b)(1) (posting initial
margin); (b)(2) (initial margin threshold amount);
(d) (custody of margin); (e) (margin model holding
period); and (f) (standardized margin amounts).
17 Swap Margin Rule § __.11(c). This subsection
creates no variations from the generally-applicable
requirements of § __.4. Accordingly, the agencies
proposed to remove it, and § __.4 directly applies
to covered swap entities engaging in swap
transactions with affiliates on the same terms as it
applies with any other counterparty.
18 If the net value to the covered swap entity of
the portfolio with the counterparty (the current
exposure amount) was positive at the time of the
default, the covered swap entity already holds
variation margin—collected from the counterparty
on a daily basis as required by the Swap Margin
Rule—to cover that amount
th affiliates on the same terms as it
applies with any other counterparty.
18 If the net value to the covered swap entity of
the portfolio with the counterparty (the current
exposure amount) was positive at the time of the
default, the covered swap entity already holds
variation margin—collected from the counterparty
on a daily basis as required by the Swap Margin
Rule—to cover that amount. The Swap Margin
Rule’s variation margin provisions require covered
swap entities to recalculate the monetary value of
the portfolio of swaps with each counterparty every
business day. If the monetary value of the portfolio
to the covered swap entity has increased, the
covered swap entity is required to collect additional
variation margin collateral from the counterparty. If
the monetary value has decreased, the covered
swap entity is required to return an equivalent
amount of variation margin collateral to the
counterparty. §§ __.2 ‘‘variation margin’’ and
Continued
III. Non-Cleared Swaps Between
Covered Swap Entities and an Affiliate
The agencies proposed to amend the
treatment of affiliate transactions in the
Swap Margin Rule by creating an
exemption from the initial margin
requirements for non-cleared swaps
between affiliates. The agencies also
proposed, however, to retain the
requirement that affiliates exchange
variation margin. Twenty-two interested
persons submitted public comments to
the agencies on the proposal, including
individuals, banking and securities
trade groups, public interest advocacy
groups, and one custodian bank
from the initial margin
requirements for non-cleared swaps
between affiliates. The agencies also
proposed, however, to retain the
requirement that affiliates exchange
variation margin. Twenty-two interested
persons submitted public comments to
the agencies on the proposal, including
individuals, banking and securities
trade groups, public interest advocacy
groups, and one custodian bank.
After consideration of these public
comments, as discussed below, the
agencies are adopting the rule as
proposed with a modification (1)
requiring a covered swap entity to
calculate and monitor the amount of
inter-affiliate initial margin that would
otherwise be required to be collected by
such covered swap entity under the
Swap Margin Rule; and (2) requiring a
covered swap entity to collect initial
margin from its affiliates on all new
non-cleared swaps if the aggregate
initial margin calculation amount
exceeds 15 percent of the covered swap
entity’s Tier 1 capital (‘‘15% Tier 1
Threshold’’). This requirement will
apply to inter-affiliate swaps executed
on any business day the 15% Tier 1
Threshold is exceeded and remain in
place as long as the 15%Tier 1 threshold
has been exceeded. A covered swap
entity will not be required to collect
initial margin from its affiliates if the
aggregate inter-affiliate initial margin
calculation amount is 15 percent or less
of the covered swap entity’s Tier 1
capital. For purposes of the calculation
described above and as further
discussed below, a covered swap entity
will treat non-cleared swaps between a
subsidiary of the covered swap entity
and an affiliate as if the non-cleared
swaps were its own. Additionally, the
agencies are also clarifying one aspect of
the initial margin requirement for
affiliates
of the covered swap entity’s Tier 1
capital. For purposes of the calculation
described above and as further
discussed below, a covered swap entity
will treat non-cleared swaps between a
subsidiary of the covered swap entity
and an affiliate as if the non-cleared
swaps were its own. Additionally, the
agencies are also clarifying one aspect of
the initial margin requirement for
affiliates. The final rule clarifies that
non-cleared swaps between affiliates
remain subject to § __.3(d), which
describes the initial margin
requirements that apply to non-cleared
swaps between a covered swap entity
and counterparties that are not subject
to the Swap Margin Rule’s requirement
to calculate and exchange initial margin
on a daily basis. That section provides
that a covered swap entity shall collect
initial margin at such times and in such
forms and such amounts (if any), that
the covered swap entity determines
appropriately addresses the credit risk
posed by the counterparty and the risks
of such non-cleared swap.
A. Main Proposal
The agencies proposed to amend
§ __.11 of the Swap Margin Rule, which
currently establishes a special set of six
regulatory requirements for swap
transactions between a covered swap
entity and an affiliate. Five of these
provisions concern the requirement for
a covered swap entity to collect initial
margin for covered swap transactions
with an affiliate. Each of these five
provisions focuses on a particular aspect
of the Swap Margin Rule’s initial margin
requirements as they generally apply to
non-affiliated counterparties, and
provides corresponding exemptions
from or reductions to that particular
aspect of the Swap Margin Rule’s
requirements whenever the
counterparty is an affiliate of the
covered swap entity.16 The agencies
proposed to replace this set of five
exemptive provisions with a single
exemption from the initial margin
exchange requirement contained in
§ __.3 of the Swap Margin Rule
terparties, and
provides corresponding exemptions
from or reductions to that particular
aspect of the Swap Margin Rule’s
requirements whenever the
counterparty is an affiliate of the
covered swap entity.16 The agencies
proposed to replace this set of five
exemptive provisions with a single
exemption from the initial margin
exchange requirement contained in
§ __.3 of the Swap Margin Rule. The
agencies proposed to retain the sixth
regulatory requirement in § __.11, which
is the requirement for covered swap
entities to collect and post variation
margin for affiliate swap transactions
pursuant to § __.4 of the Swap Margin
Rule.17
B. Comments and Considerations for the
Final Rule
Twelve commenters representing the
views of covered swap entities and their
counterparties expressed support for the
proposed rule. Commenters in this
group generally expressed the view that
inter-affiliate swaps are an important
risk management tool, the use of which
would be facilitated by the proposed
rule. Several of these commenters
further expressed the view that the risks
of inter-affiliate swaps are better
addressed by other means, such as
capital, credit risk limits, and variation
margin. Many also noted the inter-
affiliate provisions of the current Swap
Margin Rule are inconsistent with those
of the CFTC and most G20 regulators.
One commenter estimates that $39.4
billion of inter-affiliate initial margin
collateral was held at year-end 2018 by
the group of covered swap entities that
first became subject to the Swap Margin
Rule in 2016.
Eight commenters, including public
interest advocacy groups and
individuals, expressed opposition to the
agencies’ proposal, and provided several
different grounds for their objections.
These views are grounded on similar
core concerns, which the agencies have
evaluated as follows
r-end 2018 by
the group of covered swap entities that
first became subject to the Swap Margin
Rule in 2016.
Eight commenters, including public
interest advocacy groups and
individuals, expressed opposition to the
agencies’ proposal, and provided several
different grounds for their objections.
These views are grounded on similar
core concerns, which the agencies have
evaluated as follows.
One concern centers on some
commenters’ view that initial margin
serves a special loss-absorbing function
in the inter-affiliate context, and the
agencies’ proposal would increase risks
to covered swap entities individually
and financial stability more broadly by
removing this protection. One
commenter discussed the specific
function of initial margin and contrasted
it with variation margin.
Initial margin is a risk management
tool designed to mitigate a covered swap
entity’s exposure to market risk
associated with a counterparty’s default
by requiring a counterparty to obtain
and provide financial collateral equal to
the potential future exposure (PFE) the
covered swap entity would face if the
counterparty defaults. Under the Swap
Margin Rule, a covered swap entity
accordingly collects high-quality
collateral from its counterparty equal to
this PFE, placed in third-party custody
to provide a source of payment to offset
this risk. This PFE is the measurement
of the exposure due to the defaulting
counterparty’s inability to continue
performing on the swap contracts
during the period after the
counterparty’s default but before the
covered swap entity closes out its
positions with the defaulting
counterparty and establishes similar
trades with a new counterparty
dy
to provide a source of payment to offset
this risk. This PFE is the measurement
of the exposure due to the defaulting
counterparty’s inability to continue
performing on the swap contracts
during the period after the
counterparty’s default but before the
covered swap entity closes out its
positions with the defaulting
counterparty and establishes similar
trades with a new counterparty.
In practice, it can take a varying
number of days after default for the
covered swap entity to establish new
trades with new counterparties as
necessary to replace or re-hedge the
defaulted swaps.18 The process of
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‘‘variation margin amount,’’ __.4. It is generally
industry practice to use cash as variation margin
collateral; however, if non-cash financial collateral
is used, the covered swap entity must re-value it
each day and adjust the daily variation margin
collection or return amounts to reflect those
changes as well. § __.6(e). If the event triggering the
counterparty’s default under a swap is the
counterparty’s failure to provide additional
collateral in response to a margin call, then the
dealer’s current credit exposure will be
undercollateralized by the amount of the day’s
changes in current exposure and/or collateral value.
19 For example, internationally-active banking
organizations face the financial risks of each
location in which they operate, and one important
tool is the coordination by international supervisors
to ensure equivalent supervisory requirements are
implemented across jurisdictions, normalizing
market conditions in each location
the day’s
changes in current exposure and/or collateral value.
19 For example, internationally-active banking
organizations face the financial risks of each
location in which they operate, and one important
tool is the coordination by international supervisors
to ensure equivalent supervisory requirements are
implemented across jurisdictions, normalizing
market conditions in each location. For any banking
organization with important sources of revenue
spread across more than one entity, the strength of
the banking organization could be materially
affected in the absence of successful strategic
management of all the business components.
Supervisors play an important role in assessing
whether the organization’s management maintains
an effective process for identifying, measuring, and
managing all key risks in this regard. Organization-
wide capital, leverage, and liquidity considerations
are important supervisory considerations. Other
measures include amount limits, concentration
limits, collateral amount and quality, qualitative
transaction restrictions, or market equivalency
standards. Even matters such as addressing market
concerns about ring-fencing available assets can
have a significant benefit in reducing a U.S. bank’s
foreign exposures.
obtaining new swaps contracts with
new counterparties creates additional
costs that can vary depending on
prevailing market conditions at the time
default occurs and in the subsequent
days needed to obtain the new
contracts. This potential range of costs
represents the covered swap entity’s
PFE.
As the commenter noted, because
these costs will vary depending on
whatever market conditions actually
exist at the unknown future time when
the counterparty defaults, the Swap
Margin Rule requires covered swap
entities to calculate PFE based on the
premise that its market costs will be on
the high end of the expected range,
statistically speaking
presents the covered swap entity’s
PFE.
As the commenter noted, because
these costs will vary depending on
whatever market conditions actually
exist at the unknown future time when
the counterparty defaults, the Swap
Margin Rule requires covered swap
entities to calculate PFE based on the
premise that its market costs will be on
the high end of the expected range,
statistically speaking. Because of this
uncertainty, the amount of initial
margin collateral a covered swap entity
will collect under the Swap Margin Rule
is significantly higher than the daily
amount of variation margin exchanged,
which is based on current and known
changes in the market conditions that
change the value of the portfolio of
swaps.
Commenters expressing concern
about PFE risk asserted that
collateralization (in the form of initial
margin collected from the covered swap
entity’s affiliate) is an effective tool for
reducing the close-out and re-hedging
risk described above. These commenters
objected that the proposed rule would
eliminate an estimated $40 billion in
collateral held by covered swap entities
that, in the commenters’ views, is
necessary for mitigating PFE risk.
However, it is incumbent on supervisors
to evaluate multiple approaches to
controlling the overall risk of inter-
affiliate swaps exposures, and to
consider which of the available
approaches to deploy depending on
how those risks occur (and evolve) in
the industry. Inter-affiliate counterparty
credit risk, in the form of PFE, is one of
several risks that affiliated banking
organizations need to manage. The
nature of these risks, their potential
severity, and the mechanisms to manage
them in tandem vary such that no single
approach to address all risks in isolation
is appropriate
eploy depending on
how those risks occur (and evolve) in
the industry. Inter-affiliate counterparty
credit risk, in the form of PFE, is one of
several risks that affiliated banking
organizations need to manage. The
nature of these risks, their potential
severity, and the mechanisms to manage
them in tandem vary such that no single
approach to address all risks in isolation
is appropriate. Supervisors have a
variety of tools at their disposal to
ensure protection of a banking
organization’s financial integrity, in
light of the banking organization’s
particular scope of activities (both
financial and geographic).19 Initial
margin can be effective in addressing
the PFE risks of inter-affiliate
transactions within a banking
organization, but viewing it as a
comprehensive solution is a simplistic
approach.
Some of these commenters also
expressed the view that banking
organizations are using inter-affiliate
swaps for the primary purpose of
concentrating the risks of the
organizations’ world-wide derivatives
activities onto the books of the covered
swap entities covered by the prudential
regulators’ Swap Margin Rule, i.e., U.S.
insured depository institutions (IDIs).
These views are not consistent with the
agencies’ supervisory experience since
the rule took effect. As described in
greater detail below, the agencies
observe that internationally active
banking organizations that have a cross-
border organizational structure relying
on separate legal entities must use inter-
affiliate swaps to manage the risks of the
overall banking organization’s outward-
facing derivatives exposures. Other
internationally active banks, operating
cross-border through branching
structures, do not have the need to use
inter-affiliate swaps for risk
management
ng organizations that have a cross-
border organizational structure relying
on separate legal entities must use inter-
affiliate swaps to manage the risks of the
overall banking organization’s outward-
facing derivatives exposures. Other
internationally active banks, operating
cross-border through branching
structures, do not have the need to use
inter-affiliate swaps for risk
management.
As the agencies discussed in the
proposal, actual supervisory experience
in the years since the agencies imposed
the Swap Margin Rule’s current
requirements has raised two inter-
related concerns at the institution-
specific level and the systemic level
about the utility of initial margin to
address exposures arising from inter-
affiliate swap transactions. These
concerns surround impediments to a
banking organization’s best management
practices for cross-border swap risks,
and whether these risks are more
appropriately addressed through other
regulatory and supervisory mechanisms
as discussed below, and limitations on
the effectiveness of inter-affiliate margin
to address systemic cross-border market
risks, also discussed below.
1. Effects of the Inter-Affiliate Initial
Margin Requirement on Banking
Organizations
Some covered swap entities covered
by the Swap Margin Rule are
internationally active banking
organizations and their swaps activities
are carried out in a cross-border
marketplace. Some commenters
perceive that U.S. banking organizations
use inter-affiliate swaps primarily to
transfer the risks of all their foreign
derivatives activities into the U.S.
insured depository institution.
However, the agencies observe a
redistribution of risk based instead on
the international scope of the banking
organization’s business
es
are carried out in a cross-border
marketplace. Some commenters
perceive that U.S. banking organizations
use inter-affiliate swaps primarily to
transfer the risks of all their foreign
derivatives activities into the U.S.
insured depository institution.
However, the agencies observe a
redistribution of risk based instead on
the international scope of the banking
organization’s business.
In the market for non-cleared
derivatives, inter-dealer trading activity
for certain types of derivatives is heavily
concentrated in one geographic location,
while the marketplace for other types of
derivatives takes place in a different
geographic location. An internationally
active U.S. banking organization
participates as a covered swap entity in
a number of these marketplaces by
establishing a place of business in each,
such as a locally incorporated business
entity, or a foreign branch of the main
U.S. bank. The banking organization
also has swap customers at home and
abroad and services them by
establishing a place of business in the
same geographic locations as the
customers.
If a customer in one market (e.g., the
U.K.) needs a non-cleared swap that is
traded in the local market (e.g., a
sterling interest rate swap), the U.K.
operation of the banking organization
handles the entire transaction locally.
On the other hand, if a U.S. customer
needs the same sterling interest rate
swap, the U.S.-based establishment of
the banking organization enters into the
swap with the customer (collecting
margin and exchanging periodic
payments on the swap) while the
banking organization uses its U.K
establishment to execute on the market-
facing sterling interest rate swap (also
exchanging margin with its counterparty
in that market)
mer
needs the same sterling interest rate
swap, the U.S.-based establishment of
the banking organization enters into the
swap with the customer (collecting
margin and exchanging periodic
payments on the swap) while the
banking organization uses its U.K
establishment to execute on the market-
facing sterling interest rate swap (also
exchanging margin with its counterparty
in that market). Best safety and
soundness practices in risk management
dictate that the banking organization’s
personnel with the expertise in a class
of derivatives be located in the relevant
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20 When a non-bank affiliate enters into a non-
cleared swap with its counterparty, and then enters
into an inter-affiliate swap with a U.S. institution
to manage the market risk component, commenters
also expressed the view that the affiliate thereby
‘‘transfers the risk’’ of the non-cleared swap into the
U.S. institution. The agencies have considered this
viewpoint and note that the affiliate continues to
face the counterparty, actively managing the
counterparty credit risk and exchanging margin in
accordance with the same margin standards as the
U.S. has imposed pursuant to the BCBS–IOSCO
framework. To the extent these counterparties are
also financial intermediaries, they are themselves
subject to the same margin standards, buttressing
their financial resiliency. Because the prudential
regulators’ margin rules apply to covered swap
entities that are foreign banks, in many instances
those margin rules are, in fact, identical.
21 Commenters in the group objecting to the
agencies’ initial margin proposal did not object to
maintaining the Rule’s variation margin
requirement. As one commenter noted, variation
margin performs a different function than initial
margin
rudential
regulators’ margin rules apply to covered swap
entities that are foreign banks, in many instances
those margin rules are, in fact, identical.
21 Commenters in the group objecting to the
agencies’ initial margin proposal did not object to
maintaining the Rule’s variation margin
requirement. As one commenter noted, variation
margin performs a different function than initial
margin. Where initial margin is calibrated to PFE,
variation margin reflects the ongoing shift in market
value of a swap contract between the covered swap
entity and the counterparty on a daily basis.
Because a non-cleared swap creates bilateral
payment obligations between the two parties, the
current market value of the cash flows due to be
paid to one party will usually be higher than the
current market value of the cash flows due to be
paid to other party, depending on how the market
value for the underlying reference asset or rate rises
or falls. In this regard, the agencies note that
variation margin requires ongoing daily payments
from the party that is ‘‘out of the money’’ over to
the party that is ‘‘in the money.’’ Internationally
active banking organizations routinely exchange
variation margin on inter-affiliate swaps, but not
exclusively as a counterparty default risk mitigation
tool. For strategic purposes, banking organizations
internally measure and evaluate the relative
profitability of their differing lines of business and
locations (typically by comparing profits for the
location as a ratio of the level of regulatory capital
and funding costs associated with the location). The
exchange of variation margin is a natural way for
the two different locations (trading desks) to assign
the profitability of the swap to the right desk for
these internal measurements, and related purposes
ffering lines of business and
locations (typically by comparing profits for the
location as a ratio of the level of regulatory capital
and funding costs associated with the location). The
exchange of variation margin is a natural way for
the two different locations (trading desks) to assign
the profitability of the swap to the right desk for
these internal measurements, and related purposes.
22 One commenter expressed the view that these
considerations would potentially address the
commenter’s concerns about PFE risk transfer from
affiliates, but also posited that the agencies were
unconcerned about the potential absence of these
factors in issuing the proposal. The agencies note
that the presence of these important risk
management measures is a supervisory expectation
for banking organizations engaged in the practice.
The agencies also note the commenter presumes the
Swap Margin Rule’s methodology for determining
the initial margin collection amount—which
represents the agencies’ implementation of Section
3.1 of the BCBS–IOSCO Framework’s requirement
for portfolio replacement costs designed to address
unexpected third-party counterparty defaults based
on a probability statistical model using a 10-day
holding period and presuming a period of severe
market stress—is properly calibrated for the close-
out risk of interaffiliate transactions that are already
subject to several additional prudential risk-
reducing requirements and reduced information
gaps. Moreover, the agencies note that Element 6 of
the BCBS–IOSCO Framework itself excludes
interaffiliate swaps from the scope of the
Framework and did not contemplate that Section
3.1 of the BCBS–IOSCO Framework would be
applied to them.
23 See, e.g., https://www.bis.org/ifc/publ/
ifcb31n.pdf (U.S.-based banking organizations
engage in derivatives activities across G–10
countries actively, with non-U.S. market
participation exceeding U.S
he BCBS–IOSCO Framework itself excludes
interaffiliate swaps from the scope of the
Framework and did not contemplate that Section
3.1 of the BCBS–IOSCO Framework would be
applied to them.
23 See, e.g., https://www.bis.org/ifc/publ/
ifcb31n.pdf (U.S.-based banking organizations
engage in derivatives activities across G–10
countries actively, with non-U.S. market
participation exceeding U.S. market participation in
the aggregate); see also, Guidance for § 165(d)
Resolution Plan Submissions by Domestic Covered
Companies, 84 FR 1438 (February 4, 2019).
market location, where they can obtain
the most advantageous swap terms, such
as best pricing or a wider range of
maturities. On the customer side,
market expectations are that the banking
organization will locate personnel in the
same location as the customer.
As a result, international banking
organizations using inter-affiliate swaps
as a risk management tool under this
business model are hedging market risk
arising from the nature of their world-
wide customer needs (e.g., dollar swaps,
euro swaps) and managing it in the
corresponding market location. A
foreign customer’s need for a U.S. dollar
swap product would engage the
involvement of the U.S. banking
organization’s U.S. bank affiliate, due
not to the depository institution status
of the U.S. bank or some bias in favor
of the banking organization’s home
market, but rather to its place as the
banking organization’s locus of market
activity in the dollar market. As in the
example above, if a U.S. customer of the
U.S. bank sought a sterling swap
product, the opposite occurs. Moreover,
if a non-U.S. customer in one location
needs a type of swap traded in another
non-U.S. location, the risk can be
transferred between them without any
direct U.S. intermediation.20
For internationally-active banking
organizations, U.S. supervisors consider
this arrangement a better risk
management practice than using the
U.S
sought a sterling swap
product, the opposite occurs. Moreover,
if a non-U.S. customer in one location
needs a type of swap traded in another
non-U.S. location, the risk can be
transferred between them without any
direct U.S. intermediation.20
For internationally-active banking
organizations, U.S. supervisors consider
this arrangement a better risk
management practice than using the
U.S. location to manage the market-
facing risk of the swap through local
trading (in a less liquid market for that
that type of exposure), or U.S. personnel
endeavoring to make trades with foreign
dealers in the relevant market (through
cross-border communication and
contracts).21 As discussed below, this is
occurring in the context of supervisory
oversight of the banking organization
aimed at ensuring the affiliates are in
good financial standing, utilizing an
appropriate system of market and credit
risk limits, and the affiliates themselves
obtain robust initial margin from their
counterparties, to protect the affiliates
from PFE risk if their counterparties
should default.22
Also, as the agencies discussed in the
proposal, some internationally active
U.S. banking organizations utilize the
same arrangement without creating
inter-affiliate PFE, because they set up
their foreign establishments as a foreign
branch of the U.S. bank. From an entity
and accounting standpoint, the U.S.
bank can transact with the customer and
hedge its cross-border swap risk through
foreign swap contracts, all within the
same entity (and without the need to
create an internal swap).
The risk presented to the U.S. bank by
the foreign-market swaps themselves is
identical under both structural
alternatives, whether the banking
organization uses a foreign branch or a
foreign affiliate
U.S.
bank can transact with the customer and
hedge its cross-border swap risk through
foreign swap contracts, all within the
same entity (and without the need to
create an internal swap).
The risk presented to the U.S. bank by
the foreign-market swaps themselves is
identical under both structural
alternatives, whether the banking
organization uses a foreign branch or a
foreign affiliate. That risk is managed
through several tools, including the
banking organization’s board-approved
system of risk limits governing its
participation in the foreign swap
market; the banking organization’s
underwriting and ongoing monitoring of
the credit risk of the counterparties it
faces through swap transactions in the
foreign swap market; and the collection
of variation margin and initial margin
requirements from those foreign market
counterparties, under margin
regulations developed on a coordinated
basis by U.S. and foreign regulators
through an established, formal process.
The addition of an affiliated entity
instead of a branch may have the effect
of creating other regulatory and risk
issues to be considered, but these are
separate from the risks of the foreign
swap itself and are addressed under
separate supervisory and regulatory
frameworks.
The participation of U.S. banking
organizations in the derivatives markets
abroad is substantial, making attempts
to ‘‘compartmentalize’’ the exposures of
significant market affiliates on the basis
of legal separation and collateral
exclusively challenging.23 Sound risk
management for banking organizations
necessitates ongoing assessments of
financial performance across the
organization and corrective incremental
responses to undesirable changes in key
risk metrics.
The agencies’ structural concerns
described above have arisen with the
benefit of hindsight in the time since the
Rule was finalized
ion and collateral
exclusively challenging.23 Sound risk
management for banking organizations
necessitates ongoing assessments of
financial performance across the
organization and corrective incremental
responses to undesirable changes in key
risk metrics.
The agencies’ structural concerns
described above have arisen with the
benefit of hindsight in the time since the
Rule was finalized. In 2014 and 2015,
the future structure of the cross-border
non-cleared swaps market was
potentially subject to significant change
in response to key factors such as
growth in the cleared derivatives market
(reducing non-cleared activity), industry
acclamation to significant expected cost
increases attributable to the robust
world-wide margin regimes about to
take effect, and new regulatory
resolution planning requirements,
causing internal restructuring within
banking organizations in response to
these factors. These unknowns, and the
costs of the inter-affiliate initial margin
requirement, could have reasonably
been expected to curtail existing use of
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24 See 80 FR at 74,893 (‘‘It is likely the behavior
of swap market participants, including affiliate
counterparties, will respond to incentives created
by these swap margin requirements. Such changes
could have a dramatic effect on the pattern of
affiliate swap transactions which would itself have
a significant impact on the amounts of initial
margin that are ultimately collected on inter-
affiliate transactions.’’)
25 In this regard, it is worth noting that the
analysis in this Supplementary Information Section
evaluates comments on the proposal from the
perspective of the Swap Margin Rule
have a dramatic effect on the pattern of
affiliate swap transactions which would itself have
a significant impact on the amounts of initial
margin that are ultimately collected on inter-
affiliate transactions.’’)
25 In this regard, it is worth noting that the
analysis in this Supplementary Information Section
evaluates comments on the proposal from the
perspective of the Swap Margin Rule. The
evaluation of risk for inter-affiliate trades and the
best way to address such risks from a regulatory
perspective could change depending on, among
other things, the statutory authority on which a
regulatory requirement is premised.
26 In the EU, intragroup transactions are fully
exempt (not only initial margin, but also variation
margin), unless the relevant affiliates are subject to
specific and identified legal impediments to funds
transfers between them, such as currency exchange
restrictions, identified defects in one of the
affiliate’s formal resolution plans, or other specific
legal restriction that significantly affects the transfer
of funds between the affiliates. See Commodity
Futures Trading Commission Comparability
Determination for the European Union, 82 FR
48394, 48399–48400 (October 18, 2017) (comparing
CFTC non-cleared swap margin rules to comparable
EU rules, discussing EU reliance on appropriate
centralized risk evaluation, measurement, and
control procedures between cross-border affiliates,
and margin rule comparability determinations
outside the EU); see also Commission Implementing
Decision (EU) 2017/1857 (October 13, 2017) (EU
comparability determination for US transactions
subject to the CFTC non-cleared margin rules),
available at https://eur-lex.europa.eu/legal-content/
EN/TXT/PDF/?uri=CELEX:32017D1857&from=ES;
European Supervisory Authorities, EMIR RTS on
various amendments to the bilateral margin
requirements in view of the international
framework (December 5, 2019) (notice of proposed
amendments to EMIR non-cleared derivatives
margin rule to grant an add
ubject to the CFTC non-cleared margin rules),
available at https://eur-lex.europa.eu/legal-content/
EN/TXT/PDF/?uri=CELEX:32017D1857&from=ES;
European Supervisory Authorities, EMIR RTS on
various amendments to the bilateral margin
requirements in view of the international
framework (December 5, 2019) (notice of proposed
amendments to EMIR non-cleared derivatives
margin rule to grant an additional extension of the
exemption from comparability determination
requirements), available at https://eba.europa.eu/
sites/default/documents/files/document_library//
ESAs%202019%2020%20-
%20Final%20Report%20-
%20Bilateral%20margin%20amendments.pdf. In
Japan, prudential regulators address inter-affiliate
non-cleared derivatives with existing capital
standards and risk-management principles in the
first instance, with margin as a voluntary
alternative. See Commodity Futures Trading
Commission Amendment to Comparability
Determination for the Japan, 84 FR 12074, 12079
(April 1, 2019). All other major jurisdictions also
exempt inter-affiliate non-cleared derivatives from
margin requirements, including Canada (https://
www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/
Pages/e22.aspx, both initial and variation margin);
Australia (https://www.apra.gov.au/sites/default/
files/prudential_standard_cps_226_margining_and_
risk_mitigation_for_non-centrally_cleared_
derivatives.pdf, initial margin); Hong Kong (https://
www.hkma.gov.hk/media/eng/doc/key-functions/
banking-stability/supervisory-policy-manual/CR-G-
14.pdf, both initial and variation margin); and
Singapore (https://www.mas.gov.sg/-/media/MAS/
Regulations-and-Financial-Stability/Regulations-
Guidance-and-Licensing/Securities-Futures-and-
Fund-Management/Regulations-Guidance-and-
Licensing/Guidelines/Guidelines-on-Margin-
Requirements-for-NonCentrally-Cleared-OTC-
Derivatives-Contracts-revised-on-5-October-
2018.pdf, both initial and variation margin)
itial and variation margin); and
Singapore (https://www.mas.gov.sg/-/media/MAS/
Regulations-and-Financial-Stability/Regulations-
Guidance-and-Licensing/Securities-Futures-and-
Fund-Management/Regulations-Guidance-and-
Licensing/Guidelines/Guidelines-on-Margin-
Requirements-for-NonCentrally-Cleared-OTC-
Derivatives-Contracts-revised-on-5-October-
2018.pdf, both initial and variation margin).
27 Two commenters suggested the affiliate’s use of
leverage to acquire initial margin collateral was a
choice, and the affiliate could instead raise
additional equity or retain earnings to fund it. This
is not consistent with the agencies’ supervisory and
policy-making experience for internationally-active
banks, where public policy and competitiveness
concerns serve to establish and maintain capital
requirements that must address not only adequacy,
but regime equivalency.
28 7 U.S.C. 6s(e)(3); 15 U.S.C. 78o–10(e)(3).
inter-affiliate non-cleared swaps.24 For
example, some internationally-active
covered swap entities conducted their
cross-border business through foreign
branches, and others might have
restructured to eliminate the need for
inter-affiliate swaps. The agencies’ past
expectations of reductions in inter-
affiliate swap activity have not been
borne out through the completion of the
Swap Margin Rule’s implementation
phase. In addition, among the
prudential regulators, the banking
agencies continue to assess the proper
calibration of regulatory capital
requirements including enhanced
recognition of collateralization (or the
lack of it) for closeout risk.25
2. System-Wide Effectiveness of Inter-
Affiliate Initial Margin Requirements
Commenters objecting to the agencies’
proposal also expressed the view that
the agencies are engaging in a ‘‘race to
the bottom’’ to the extent the agencies
discussed how inter-affiliate initial
margin requirements have not been
universally applied by other domestic
and foreign regulators
t) for closeout risk.25
2. System-Wide Effectiveness of Inter-
Affiliate Initial Margin Requirements
Commenters objecting to the agencies’
proposal also expressed the view that
the agencies are engaging in a ‘‘race to
the bottom’’ to the extent the agencies
discussed how inter-affiliate initial
margin requirements have not been
universally applied by other domestic
and foreign regulators. As stated in the
proposal, the agencies raise this concern
in the context of observing that limited
application of the initial margin
requirements to one slice of the market
is a blunt tool for enhancing financial
stability among interconnected financial
market participants. With the benefit of
hindsight, the agencies observe that
other regulators developing their
implementing rules in 2015 and beyond
have not implemented the same
comprehensive inter-affiliate margin
collection requirements that the
agencies did in 2015.26 As a result,
certain anticipated systemic protections
that would have accrued from
comprehensive inter-affiliate initial
margin practices world-wide will not be
realized.
Commenters opposing the agencies’
proposal also expressed the view that
the agencies were eliminating an
estimated $40 billion of initial margin
collateral that will serve a ‘‘loss
absorbing capacity’’ to protect against
potential affiliate default on their swaps
exposures. Initial margin, however, is
not loss-absorbing in the same sense as
equity capital; initial margin collateral
is funded with borrowings from the
banking organization’s creditors.27 The
practice in banking organizations of
providing collateral to their bank
affiliates as security for the banking
organization’s financial obligations is a
routine and expected aspect of the
business. But it is accompanied by
market expectations on behalf of each
banking organization’s creditors if the
aggregate extent to which it is employed
in the banking organization materially
exceeds established expectations
anizations of
providing collateral to their bank
affiliates as security for the banking
organization’s financial obligations is a
routine and expected aspect of the
business. But it is accompanied by
market expectations on behalf of each
banking organization’s creditors if the
aggregate extent to which it is employed
in the banking organization materially
exceeds established expectations.
During periods of market distress, those
creditors’ claims are potentially
subordinated to the bank’s claim on the
banking organization’s assets, placing
additional stress on the banking
organization’s access to funding if the
subordination effects are materially
beyond the norm.
C. Description of the Final Rule
After considering commenters’ range
of views about the proposed rule, the
agencies have determined to finalize it
consistent with the proposal, with two
revisions.
First, the agencies are including a
limit on the aggregate amount that a
covered swap entity may recognize
pursuant to the inter-affiliate initial
margin exemption provided under the
final rule. This limit, as further
described below, is set at 15 percent of
the covered swap entity’s tier 1 capital.
The agencies are incorporating the 15%
Tier 1 Threshold into § __.11 as an
augmentation to reflect safety and
soundness and financial system risk
concerns of the Board, the FDIC, and the
OCC surrounding the status of covered
swap entities that are U.S. insured
depository institutions.28 The agencies,
in their supervisory experience, have
observed that covered swap entities
have collected inter-affiliate initial
margin under the current rule at levels
that do not exceed this limit.
Nevertheless, the agencies’
determinations underlying the decision
to issue this final rule are informed
significantly by the agencies’
supervisory experience overseeing inter-
affiliate swap activities at covered swap
entities during the first four years the
Swap Margin Rule has been in effect
inter-affiliate initial
margin under the current rule at levels
that do not exceed this limit.
Nevertheless, the agencies’
determinations underlying the decision
to issue this final rule are informed
significantly by the agencies’
supervisory experience overseeing inter-
affiliate swap activities at covered swap
entities during the first four years the
Swap Margin Rule has been in effect.
Accordingly, the agencies believe it is
appropriate to apply the 15% Tier 1
Threshold as an augmentation, as the
agencies continue to supervise covered
swap entities further into the maturation
of the international derivatives market
reforms that have been under
development since 2010. This
augmentation will address additional
supervisory concerns that may arise at
a covered swap entity whose tier 1
capital base is contracting in an
unusually rapid pattern, a situation that
evidences the institution is experiencing
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29 Section __.2 of the current rule defines the
‘‘initial margin collection amount’’ as the amount
of initial margin the covered swap entity calculates
for a counterparty using the covered swap entity’s
approved initial margin model under § __.8 (or if
the covered swap entity does not have an initial
margin model, the standardized approach under
Appendix A).
30 The final rule specifies that tier 1 capital for
this purpose is comprised of common equity tier 1
capital and additional tier 1 capital, as defined in
the agencies’ respective regulations at 12 CFR
3.20(b)–(c) (OCC); 12 CFR 217.20(b)–(c) (Board); 12
CFR 324.20(b)–(c) (FDIC); 12 CFR 628.20(b)–(c) for
Farm Credit System banks and associations and 12
CFR 652.61(b) for the Federal Agricultural Mortgage
Corporation (FCA); and 12 CFR 1240(b)–(c) (FHFA)
ose is comprised of common equity tier 1
capital and additional tier 1 capital, as defined in
the agencies’ respective regulations at 12 CFR
3.20(b)–(c) (OCC); 12 CFR 217.20(b)–(c) (Board); 12
CFR 324.20(b)–(c) (FDIC); 12 CFR 628.20(b)–(c) for
Farm Credit System banks and associations and 12
CFR 652.61(b) for the Federal Agricultural Mortgage
Corporation (FCA); and 12 CFR 1240(b)–(c) (FHFA).
Covered swap entities are required to use the tier
1 capital amounts reported in their most recent Call
Report.
31 The final rule does not require the covered
swap entity to begin collecting initial margin on its
portfolio of interaffiliate swaps that were executed
before the business day on which the 15% Tier 1
Threshold is exceeded.
32 The rule provides that if any subsidiary of the
covered swap entity executes a non-cleared swap
with any other affiliated swap entity or financial
end user, the covered swap entity must treat that
swap as its own for purposes of complying with
these requirements. Additionally, the agencies have
added an expanded definition of a ‘‘subsidiary’’ to
§ __.11(d) for these purposes, consistent with the
structure of the expanded ‘‘affiliate’’ definition. The
agencies have also incorporated language in § __
.11(a)(5)(ii) for multi-tier CSE structures that permit
the lower tier CSEs to count their inter-affiliate non-
cleared swaps as part of the top-tier IDI’s 15% Tier
1 Threshold if the top-tier IDI collects initial margin
for additional inter-affiliate swaps entered into by
the lower tier CSEs after the limit is reached. This
is intended to greatly simply the limit calculations
for multi-tiered CSEs, while still ensuring the
requirements of § __.11(a) are fully satisfied at the
IDI level
filiate non-
cleared swaps as part of the top-tier IDI’s 15% Tier
1 Threshold if the top-tier IDI collects initial margin
for additional inter-affiliate swaps entered into by
the lower tier CSEs after the limit is reached. This
is intended to greatly simply the limit calculations
for multi-tiered CSEs, while still ensuring the
requirements of § __.11(a) are fully satisfied at the
IDI level.
33 Covered swap entities may avail themselves of
the option, pursuant to § __.5(a)(3)(ii) of the current
rule, to place these swaps in a separate netting set
for purposes of calculating the initial margin
collection amount on a portfolio basis under an
eligible master netting agreement.
34 The agencies have also made corresponding
technical revisions to the language of § __.11 to
provide an exemption from the requirements to post
initial margin under § __.3(b), consistent with the
current rule. This exemption is not subject to the
15% Tier 1 Threshold.
35 Specifically, see §§ __.9(a) and __.9(d)(3)(i)–(ii).
These entities are often governed by non-U.S.
regulatory capital requirements and they do not file
Call Reports; U.S. branches and agencies of foreign
banks are not subject to stand-alone capital
requirements.
36 See footnote 27, supra.
37 For applicable transactions with U.S. affiliates,
these foreign firms will be covered by § __.11(b),
exempting them from posting initial margin to
affiliates pursuant to § __.3(b). These foreign firms
will be subject to § __.4, requiring them to exchange
variation margin, which is standard practice for
these firms, and § __.11(c), requiring swap dealers
to collect initial margin at such times and in such
forms and such amounts (if any) that the covered
swap entity determines appropriately address the
credit risk posed by the counterparty and the risks
of the swap, consistent with § __.3(d).
heightened levels of stress, or whose
inter-affiliate derivative exposures
increase in an unusually rapid pattern
d § __.11(c), requiring swap dealers
to collect initial margin at such times and in such
forms and such amounts (if any) that the covered
swap entity determines appropriately address the
credit risk posed by the counterparty and the risks
of the swap, consistent with § __.3(d).
heightened levels of stress, or whose
inter-affiliate derivative exposures
increase in an unusually rapid pattern.
Thus, the agencies have set it at a level
that exceeds the typical initial margin
collection amounts at the affected
covered swap entities, to accommodate
expected levels and taking into
consideration a range of those levels
that varies somewhat across those
covered swap entities.
This provision requires a covered
swap entity to calculate the initial
margin collection amount 29 each
business day for each counterparty that
is a swap entity or a financial end-user
with a material swaps exposure that is
an affiliate, and aggregate these amounts
to determine whether the aggregate
amount exceeds the 15% Tier 1
Threshold.30 When a covered swap
entity calculates the 15 percent
threshold, it must include all non-
cleared swaps between the covered
swap entity and its affiliates (which
includes subsidiaries of the covered
swap entity) plus all non-cleared swaps
between an covered swap entity
subsidiary and other affiliates (but not
double counting non-cleared swaps
with the parent covered swap entity). So
long as the aggregate remains below the
15% Tier 1 Threshold, the covered swap
entity is exempt from the requirement to
collect initial margin from its affiliates
ich
includes subsidiaries of the covered
swap entity) plus all non-cleared swaps
between an covered swap entity
subsidiary and other affiliates (but not
double counting non-cleared swaps
with the parent covered swap entity). So
long as the aggregate remains below the
15% Tier 1 Threshold, the covered swap
entity is exempt from the requirement to
collect initial margin from its affiliates.
If, however, the aggregate exceeds the
15% Tier 1 Threshold on any business
day, the final rule requires the covered
swap entity to collect initial margin on
any additional non-cleared swap
executed with an affiliated swap entity
or financial end user.31 Once the 15
percent threshold is exceeded, the
covered swap entity is required to
collect initial margin on all new
transactions with its affiliates (which
includes the covered swap entity
subsidiaries). Also, if a covered swap
entity subsidiary enters into a non-
cleared swap with an affiliate other than
the covered swap entity,32 the covered
swap entity must collect initial margin
from the affiliate, and the subsidiary
does not need to also collect initial
margin for the affiliate for that non-
cleared swap. This provision is
designed to provide protection for the
covered swap entity. Initial margin
collection takes place pursuant to the
generally-applicable initial margin
requirement specified in § __.3(a) of the
current rule, commencing the day after
execution of the non-cleared swap and
with updates each business day as
specified in § __.3(c).33 The covered
swap entity is obligated to continue
initial margin collection on these new
swaps until they terminate under their
own terms. If, however, the covered
swap entity’s aggregate initial margin
collection amount calculation falls
below the 15% Tier 1 Threshold, the
covered swap entity is no longer
obligated to maintain initial margin on
these non-cleared swaps
ied in § __.3(c).33 The covered
swap entity is obligated to continue
initial margin collection on these new
swaps until they terminate under their
own terms. If, however, the covered
swap entity’s aggregate initial margin
collection amount calculation falls
below the 15% Tier 1 Threshold, the
covered swap entity is no longer
obligated to maintain initial margin on
these non-cleared swaps. Consistent
with § __.11(d) of the current rule, the
covered swap entity is permitted to
maintain custody of non-cash initial
margin collateral collected pursuant to
these requirements with the covered
swap entity itself or with an affiliate,
but is otherwise subject to the
segregation requirements of § __.7 of the
current rule.34
As part of this addition, the agencies
are making associated changes to § __.9
of the Swap Margin Rule. Section __.9
addresses cross-border application of
the Swap Margin Rule to certain foreign
financial firms that are organized under
non-U.S. law and operate abroad, and
that fall within the scope of the Rule
because they are also registered with the
CFTC or SEC as swap dealers or
security-based swap dealers. These
firms include foreign-chartered banks,
and foreign-chartered subsidiaries of
Edge corporations and agreement
corporations.35 Under the current rule,
these foreign firms are currently not
subject to comprehensive initial margin
collection requirements for affiliate
swap transactions under the laws of
their home counties.36 However, if they
engage in a swap transaction with a U.S.
affiliate, § __.9 currently requires them
to collect initial margin from the U.S.
affiliate.
The amendment to § __.11 that the
agencies issue today would apply to
these foreign firms, absent a change to
§ __.9. As discussed above, the 15
percent threshold in § __.11 is an
augmentation reflecting safety and
soundness and financial system risk
concerns of covered swap entities that
are U.S. insured depository institutions
es them
to collect initial margin from the U.S.
affiliate.
The amendment to § __.11 that the
agencies issue today would apply to
these foreign firms, absent a change to
§ __.9. As discussed above, the 15
percent threshold in § __.11 is an
augmentation reflecting safety and
soundness and financial system risk
concerns of covered swap entities that
are U.S. insured depository institutions.
Imposing the 15 percent threshold
requirement on these foreign firms is
not relevant to these concerns and could
even have the incongruous result of
requiring a U.S. covered swap entity to
post initial margin collateral to an
affiliated foreign firm. Accordingly, the
agencies are adding a new subsection § _
_.9(h), which provides that these foreign
firms are exempt from the requirement
to collect initial margin from their
affiliates under § __.3(a), and the foreign
firms are not subject to the 15 percent
threshold under § __.11(a) unless they
are subsidiaries of a covered swap entity
subject to the requirements of § __.11. In
that case, the firm is treated the same as
any other subsidiary, as described
above, and the parent covered swap
entity is required to treat inter-affiliate
exposures between the subsidiary and
an affiliate as if it is its own.37
Second, the agencies are also
including an additional revision that is
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reated the same as
any other subsidiary, as described
above, and the parent covered swap
entity is required to treat inter-affiliate
exposures between the subsidiary and
an affiliate as if it is its own.37
Second, the agencies are also
including an additional revision that is
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38 80 FR 74840, 74844 (November 30, 2015).
39 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o–10(e)(3)(A).
40 80 FR at 74866; see also 79 FR 57348, 57354–
55 (September 24, 2014).
41 The agencies also note that the Swap Margin
Rule imposes margin requirements on a covered
swap entity’s non-cleared swaps with affiliates,
specifically the variation margin collection
requirement of § __4(a)–(b), and the above-described
requirement of § __.3(d).
42 Some commenters also expressed the view that
the agencies are obligated to perform an analysis of
the PFEs between covered swap entities and their
affiliates, using the Swap Margin Rule’s framework
consistent with the Rule’s current
treatment of counterparties that are not
subject to the Rule’s quantitative
requirement to exchange and segregate
initial margin on a daily basis.
Section __.3 of the Rule contains the
core initial margin requirement,
directing covered swap entities to
collect and post initial margin as
calculated under § __.8. Accordingly, in
drafting the proposed rule text for the
initial margin exemption in proposed
§ __.11(a), the agencies exempted swaps
between affiliates from § __.3 in its
entirety. In the final rule, the agencies
have revised the text of the exemption
in § __.11, in order to preserve the
applicability of § __.3(d).
Section __.3(d) addresses
counterparties who are not financial end
users with a material swaps exposure or
swap entities
for the
initial margin exemption in proposed
§ __.11(a), the agencies exempted swaps
between affiliates from § __.3 in its
entirety. In the final rule, the agencies
have revised the text of the exemption
in § __.11, in order to preserve the
applicability of § __.3(d).
Section __.3(d) addresses
counterparties who are not financial end
users with a material swaps exposure or
swap entities. These counterparties are
not subject to daily initial margin
exchange pursuant to § __.3(a)–(c). For
these other counterparties, § __.3(d)
requires covered swap entities to collect
initial margin at such times and in such
forms and such amounts (if any) that the
covered swap entity determines
appropriately address the credit risk
posed by the counterparty and the risks
of the swap. When the agencies adopted
the Rule in 2015, this provision was
included to reflect prudent risk
management practices in the industry
before the Rule’s issuance, whereby an
institution would include initial margin
on a case-by-case basis for any type of
swap counterparty, as part of their
internal risk management practices, if
the institution judged it to be
appropriate.38
The agencies, in assessing the risk of
PFE to a covered swap entity in
transacting swaps with an affiliate, have
determined that an across-the-board
requirement in the Swap Margin Rule to
collect initial margin from affiliates is
not the best approach. That being said,
the agencies do not assess inter-affiliate
swaps to be risk-free, and there can still
be circumstances in which the agencies
would expect a covered swap entity to
incorporate initial margin as well as
variation margin into its risk
management for exposures to a
particular affiliate or particular swaps.
Accordingly, the agencies have revised
the text of § __.11 to treat inter-affiliate
swaps the same way as swaps with
other counterparties pursuant to
§ __.3(d)
e can still
be circumstances in which the agencies
would expect a covered swap entity to
incorporate initial margin as well as
variation margin into its risk
management for exposures to a
particular affiliate or particular swaps.
Accordingly, the agencies have revised
the text of § __.11 to treat inter-affiliate
swaps the same way as swaps with
other counterparties pursuant to
§ __.3(d).
Commenters that addressed the
agencies’ proposed definition of an
‘‘affiliate’’ for purposes of § __.11
supported it. The agencies are adopting
it without change.
D. Federal Reserve Board Statement on
Sections 23A and 23B of the Federal
Reserve Act
Although this final rule will exempt
non-cleared swaps between a bank and
its affiliates from the initial margin
requirements of the swap margin rule
under the conditions described above,
swaps between a bank and its affiliates
are of course also subject to sections
23A and 23B of the Federal Reserve Act
and the Board’s Regulation W.
The Board’s position is that, under
section 23A, bank-affiliate derivatives
generally can be valued at the bank’s
current exposure to the affiliate.
Accordingly, the Board believes that a
bank must collect 23A-compliant
variation margin from its affiliates to
cover its current exposure on bank-
affiliate derivatives, but generally is not
required to collect initial margin to
cover the bank’s potential future
exposure on the transactions.
Under section 23B, a bank’s swaps
with its affiliates must be on terms and
conditions that are substantially the
same, or at least as favorable to the
bank, as those prevailing at the time for
comparable transactions with third
parties. In part because of the swap
margin rule and in part due to natural
evolution in the financial markets,
comparable swap transactions between
a bank and a third party today involve
the bank collecting initial margin from,
and posting initial margin to, the
counterparty
ame, or at least as favorable to the
bank, as those prevailing at the time for
comparable transactions with third
parties. In part because of the swap
margin rule and in part due to natural
evolution in the financial markets,
comparable swap transactions between
a bank and a third party today involve
the bank collecting initial margin from,
and posting initial margin to, the
counterparty.
In many cases the Board finds it
reasonable to conclude that a bank-
affiliate swap with no initial margin
requirement is at least as favorable to
the bank as a comparable bank-
nonaffiliate swap with two-way initial
margin requirements. This occurs where
the two-way initial margining described
above requires each of the two
counterparties to give the other
counterparty a contractual term of
roughly equivalent value. In the Board’s
view, situations where the bank and
affiliate each agree not to require an
equivalent exchange of initial margin
from the other will generally create a set
of contractual terms that is roughly
equally favorable to the bank as a two-
way initial margin regime.
Some cases of specific bank-affiliate
swap arrangements without initial
margin requirements could raise issues
under section 23B, however, as can
every affiliate transaction depending on
the facts and circumstances of the
arrangement. In the Board’s view,
relevant facts for the section 23B
analysis include the relative
creditworthiness of the bank vs. the
affiliate, whether the bank-affiliate swap
portfolio is more likely to create
potential future exposure of the bank to
the affiliate or vice versa, and whether
or not the affiliate requires initial
margin from the bank under the swap
arrangement.
E. Other Comments
Four commenters expressed the view
that the agencies are without the
statutory authority to adopt the
proposed rule. One among these
commenters provided an analysis of the
language Congress used in requiring the
prudential regulators to issue the margin
requirements
rsa, and whether
or not the affiliate requires initial
margin from the bank under the swap
arrangement.
E. Other Comments
Four commenters expressed the view
that the agencies are without the
statutory authority to adopt the
proposed rule. One among these
commenters provided an analysis of the
language Congress used in requiring the
prudential regulators to issue the margin
requirements. In this commenter’s view,
the meaning of the words Congress
chose are so prescriptive that they
compel the agencies to impose initial
margin and variation margin
requirements on all swap transactions
within the scope of the legislation.
The agencies note that, in requiring
the prudential regulators to issue margin
and capital requirements, the statutory
language also mandates that the
requirements shall help ensure the
safety and soundness of covered swap
entities and be appropriate for the risk
associated with the swaps held by the
covered swap entity.39 The agencies
have previously considered the same
line of analysis pursued by the
commenters, in connection with
adopting the Swap Margin Rule in
2015.40 The agencies have concluded
that the statutes direct the agencies to
employ a risk-based approach to
imposing margin requirements, and the
agencies have done so by imposing rules
that vary depending on the type of
counterparty in light of the risks
presented.41
Commenters that opposed the
agencies’ proposal also expressed the
view that the agencies’ discussion and
analysis in the SUPPLEMENTARY
INFORMATION section of the proposal was
deficient. The commenters were of the
view that the agencies discussed the
same factors in 2015 and 2019, but in
the first instance the agencies
determined initial margin was required
to address the risk of inter-affiliate swap
exposures, whereas in the second
instance the agencies drew the opposite
conclusion.42 In this regard, the
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es discussed the
same factors in 2015 and 2019, but in
the first instance the agencies
determined initial margin was required
to address the risk of inter-affiliate swap
exposures, whereas in the second
instance the agencies drew the opposite
conclusion.42 In this regard, the
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for quantifying initial margin collection amounts, in
order to quantify how much PFEs would increase
as a result of the proposed change. As the agencies
discussed above, however, the Rule’s methodology
for evaluating the PFE of an unaffiliated
counterparty is not an appropriate measurement of
inter-affiliate risk. Among other things, it does not
take relevant additional risk management factors
into account, and it was originally formulated with
the expectation it would not be applied to inter-
affiliate swaps.
43 80 FR 74887–889.
44 See supra note 7.
45 The Swap Margin Rule does not require initial
margin to be exchanged with any counterparty
whose AANA is less than $8 billion as of the
previous June, July, and August. See § __.3 and the
definition of ‘‘material swaps exposure’’ in § __.1.
46 The industry’s implementation work to execute
new trading documentation to meet variation
margin compliance obligations by 2017 largely
excluded any required documentation for initial
margin, due to the greater operational complexity
associated with ‘‘T+1’’ portfolio reconciliation of
internally-modeled initial margin amounts and
third-party segregation of initial margin collateral.
47 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (July 2019),
available at https://www.bis.org/bcbs/publ/
d475.pdf.
48 See 80 FR 74857 (November 30, 2015).
49 80 FR 74886–74887 (November 30, 2015)
lexity
associated with ‘‘T+1’’ portfolio reconciliation of
internally-modeled initial margin amounts and
third-party segregation of initial margin collateral.
47 See BCBS and IOSCO ‘‘Margin requirements for
non-centrally cleared derivatives,’’ (July 2019),
available at https://www.bis.org/bcbs/publ/
d475.pdf.
48 See 80 FR 74857 (November 30, 2015).
49 80 FR 74886–74887 (November 30, 2015).
agencies note that the analysis in 2015
did not propound the imposition of an
across-the-board inter-affiliate initial
margin requirement, and the agencies
carefully evaluated the extent to which
numerous aspects of the Rule’s initial
margin requirements should be reduced
commensurate with the risks the
agencies anticipated.43 In issuing these
revisions, the agencies have performed
the same probing analysis of the
relevant factors, based on industry
practices as they have settled after the
Rule’s compliance period.
IV. Additional Compliance Date for
Initial Margin Requirements
A. Proposal
The agencies proposed to give
covered swap entities an additional year
to implement initial margin
requirements for certain smaller
counterparties. The implementation of
both initial and variation margin
requirements started on September 1,
2016. With respect to initial margin
requirements, the requirements in the
Swap Margin Rule were implemented in
five phases from September 1, 2016,
through September 1, 2020, depending
on the size of the covered swap entity’s
portfolio of non-cleared swaps and the
counterparty’s portfolio of non-cleared
swaps. Variation margin requirements
for all covered swap entities and
counterparties were completely phased
in by March 1, 2017. This schedule was
consistent with BCBS/IOSCO
Framework when the Swap Margin Rule
was adopted in 2015
,
through September 1, 2020, depending
on the size of the covered swap entity’s
portfolio of non-cleared swaps and the
counterparty’s portfolio of non-cleared
swaps. Variation margin requirements
for all covered swap entities and
counterparties were completely phased
in by March 1, 2017. This schedule was
consistent with BCBS/IOSCO
Framework when the Swap Margin Rule
was adopted in 2015.
The phase-in schedule for initial
margin is based on the average daily
aggregate notional amount (AANA) of
non-cleared swaps for March, April, and
May, held in each party’s market-wide
portfolio, measured separately from the
standpoint of the covered swap entity
and the standpoint of the
counterparty.44 With the recent
occurrence of the fourth phase of initial
margin compliance obligations on
September 1, 2019—for covered swap
entities and counterparties with an
AANA of $750 billion to $1.5 trillion—
the group currently scheduled for the
fifth phase of compliance in the
upcoming year includes all remaining
entities within the scope of the initial
margin requirements, spanning AANAs
from $8 billion up to $750 billion.45
The industry raised significant
concerns about the operational and
other difficulties associated with
beginning to exchange initial margin
with the large number of relatively
small counterparties encompassed in
the Swap Margin Rule’s fifth phase.46
Following the revisions adopted in July
2019 to the BCBS/IOSCO Framework to
permit an additional phase for smaller
counterparties, the agencies proposed to
amend the Swap Margin Rule to add an
additional phase for smaller
counterparties.47 Specifically, the
agencies proposed to amend the
compliance schedule to add a sixth
phase of compliance for certain smaller
entities that are currently subject to the
‘‘phase five’’ compliance deadline
BCBS/IOSCO Framework to
permit an additional phase for smaller
counterparties, the agencies proposed to
amend the Swap Margin Rule to add an
additional phase for smaller
counterparties.47 Specifically, the
agencies proposed to amend the
compliance schedule to add a sixth
phase of compliance for certain smaller
entities that are currently subject to the
‘‘phase five’’ compliance deadline. The
proposed amendments would have
required compliance by September 1,
2020, for counterparties with an AANA
ranging from $50 billion up to $750
billion, while the compliance date for
all other counterparties (with an AANA
ranging from a ‘‘material swaps
exposure’’ of $8 billion up to $50
billion) would have been extended to
September 1, 2021.
B. Final Rule
Commenters supported the proposed
amendments to the compliance
schedule, specifically, the additional
phase six for all other counterparties
(i.e., with an AANA of $8 billion up to
$50 billion) with a compliance date of
September 1, 2021. Commenters noted
that the proposal did not clarify the
convention that should be used for
calculating the AANA for purposes of
the proposed phase six and therefore, by
default, the calculation would be based
on the methodology for calculating
‘‘material swaps exposure,’’ which is
determined based on an entity’s and its
affiliates AANA for June, July, and
August of the previous calendar year (in
this case, 2020). Several commenters
recommended that the agencies clarify
that, for purposes of the new phase six,
the calculation is based on the AANA
for March, April, and May of the same
year, which is consistent with the
BCBS/IOSCO Framework. One
commenter recommended that the
calculation of ‘‘material swaps
exposure’’ be based on the AANA for
March, April, and May, beginning in
2021 and thereafter, and asserted this
approach would maintain consistency
with the BCBS/IOSCO Framework and
other foreign jurisdictions.
The final rule adopts the additional
phase six as proposed
r, which is consistent with the
BCBS/IOSCO Framework. One
commenter recommended that the
calculation of ‘‘material swaps
exposure’’ be based on the AANA for
March, April, and May, beginning in
2021 and thereafter, and asserted this
approach would maintain consistency
with the BCBS/IOSCO Framework and
other foreign jurisdictions.
The final rule adopts the additional
phase six as proposed. The agencies
acknowledge that a change to the AANA
calculation for phase six would result in
greater consistency with the BCBS/
IOSCO Framework, but are not adopting
the recommended change to the month
calculation convention because basing
AANA on June, July, and August of the
previous calendar year will provide end
users subject to phase six with more
time to prepare for compliance with
initial margin requirements following
meeting the material swaps exposure
threshold. Moreover, the definition of
material swaps exposure is not being
amended as part of this final rule. The
material swaps exposure definition was
not raised as an issue in the proposal,
as an amendment to that definition
would affect more than just the phase-
in periods in § __.1(e). The agencies
confirm that the material swaps
exposure is to be calculated based on
the previous year.48 For example, for the
period January 1, 2022 through
December 31, 2022, an entity would
determine whether it had a material
swaps exposure with reference to June,
July, and August of 2021.
V. Documentation Requirements
A. Proposal
The agencies proposed to amend the
documentation requirements under
§ __.10 of the Swap Margin Rule
exposure is to be calculated based on
the previous year.48 For example, for the
period January 1, 2022 through
December 31, 2022, an entity would
determine whether it had a material
swaps exposure with reference to June,
July, and August of 2021.
V. Documentation Requirements
A. Proposal
The agencies proposed to amend the
documentation requirements under
§ __.10 of the Swap Margin Rule.
Pursuant to § __.10 of the Rule, a
covered swap entity must execute
trading documentation with each
counterparty that falls within the scope
of the Rule’s definition of a ‘‘swap
entity’’ or a ‘‘financial end user’’
regarding credit support arrangements
unless the swap entity or financial end
user is explicitly exempt from the Rule
pursuant to § __.1(d).49 The
documentation must provide the
covered swap entity the contractual
rights and obligations to collect and post
initial and variation margin in such
amounts, in such form, and under such
circumstances as are required by the
Rule. The documentation must also
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50 Id.
51 Under § __.3, a covered swap entity must
collect or post initial margin when it calculates an
initial margin amount that, after subtracting the
initial margin threshold amount (not including any
portion of the initial margin threshold amount
already applied by the covered swap entity or its
affiliates to other non-cleared swaps or non-cleared
security-based swaps with the counterparty or its
affiliates), exceeds zero
entity must
collect or post initial margin when it calculates an
initial margin amount that, after subtracting the
initial margin threshold amount (not including any
portion of the initial margin threshold amount
already applied by the covered swap entity or its
affiliates to other non-cleared swaps or non-cleared
security-based swaps with the counterparty or its
affiliates), exceeds zero.
52 BCBS/IOSCO statement on the final
implementation phases of the Margin requirements
for non-centrally cleared derivatives, March 5, 2019,
available at https://www.iosco.org/library/pubdocs/
pdf/IOSCOPD624.pdf, stating that ‘‘the framework
does not specify documentation, custodial or
operational requirements if the bilateral initial
margin amount does not exceed the framework’s
Ö50 million initial margin threshold. It is expected,
however, that covered entities will act diligently
when their exposures approach the threshold to
ensure that the relevant arrangements needed are in
place if the threshold is exceeded.’’
53 CFTC Letter No. 19–13 (June 06, 2019) at 8.
specify the methods, procedures, rules,
and inputs for determining the value of
each non-cleared swap for purposes of
calculating variation margin and the
procedures by which any disputes
concerning the valuation of non-cleared
swaps or the valuation of assets
collected or posted as initial margin or
variation margin may be resolved.
Finally, the documentation must also
describe the methods, procedures, rules,
and inputs used to calculate initial
margin for non-cleared swaps entered
into between the covered swap entity
and the counterparty.50 The proposed
rule clarified that under § __.10 of the
Rule, a covered swap entity is not
required to execute initial margin
trading documentation with a
counterparty prior to the time that it is
required to collect or post initial margin
pursuant to § __.3.51
B. Final Rule
Commenters supported the proposed
amendment to § __.10 of the Rule
the covered swap entity
and the counterparty.50 The proposed
rule clarified that under § __.10 of the
Rule, a covered swap entity is not
required to execute initial margin
trading documentation with a
counterparty prior to the time that it is
required to collect or post initial margin
pursuant to § __.3.51
B. Final Rule
Commenters supported the proposed
amendment to § __.10 of the Rule. The
agencies are adopting the amendment to
§ __.10 of the Rule as proposed.
In addition, the preamble to the
proposal discussed the operation of the
custody agreement requirements in
§ __.7 of the Swap Margin Rule. Under
§ __.7, custody agreements are required
to be in place only after initial margin
is required to be collected or posted
pursuant to § __.3, or when initial
margin is posted by a covered swap
entity beyond an amount required by
the Rule. The agencies explained that
they expect that covered swap entities
will closely monitor their exposures and
take appropriate steps to ensure that
trading documentation is in place at
such time as initial margin is required
to be exchanged pursuant to § __.3. The
agencies noted that this view is
consistent with statements of the BCBS
and IOSCO with respect to
internationally agreed standards for
margin requirements for non-centrally
cleared derivatives.52 Commenters
supported this clarification, and the
agencies reaffirm their statement
regarding the execution of custody
agreements required pursuant to § __.7
of the Rule.
VI. Portfolio Compression Exercises
and Other Amendments
A. Summary of Proposed Rule
The Swap Margin Rule applies to
non-cleared swaps entered into on or
after the applicable compliance date.
The agencies are concerned about
amendments to a swap that was entered
into before the applicable compliance
date if the amendments would have the
effect of allowing covered swap entities
and their counterparties to evade or
otherwise artificially delay
implementation of margin requirements
Margin Rule applies to
non-cleared swaps entered into on or
after the applicable compliance date.
The agencies are concerned about
amendments to a swap that was entered
into before the applicable compliance
date if the amendments would have the
effect of allowing covered swap entities
and their counterparties to evade or
otherwise artificially delay
implementation of margin requirements.
In particular, the agencies are concerned
that market participants might amend
legacy swaps, rather than entering into
new swaps and exchanging margin
pursuant to the Rule once the legacy
swaps expire according to their original
terms. The proposed rule permitted
certain amendments, particularly non-
material amendments to non-economic
terms, as well as amendments that are
made to reduce operational or
counterparty risk, such as notional
reductions and portfolio compressions,
to be executed while still allowing those
amended legacy swaps to remain
exempt from the Swap Margin Rule.
The proposed rule clarified the
agencies’ implementation of the legacy
swaps provisions of the Swap Margin
Rule since its adoption in 2015. The
proposed rule was intended to permit
amendments to legacy swaps arising
from certain routine industry practices
over the life-cycle of a non-cleared swap
that are carried out for logistical
reasons, risk-management purposes, or
IBOR replacement. The proposed rule
covered amendments that do not raise
concerns that the covered swap entity is
seeking to evade or otherwise delay the
application of margin requirements for
non-cleared swaps.
B. Technical Changes
1
rom certain routine industry practices
over the life-cycle of a non-cleared swap
that are carried out for logistical
reasons, risk-management purposes, or
IBOR replacement. The proposed rule
covered amendments that do not raise
concerns that the covered swap entity is
seeking to evade or otherwise delay the
application of margin requirements for
non-cleared swaps.
B. Technical Changes
1. Proposal
The proposed rule recognized the
legacy status of a non-cleared swap that
has been amended to reflect technical
changes, such as addresses, the
identities of parties for delivery of
formal notices, and other administrative
or operational provisions of the non-
cleared swap that do not alter the non-
cleared swap’s underlying asset or
indicator, such as a security, currency,
interest rate, commodity, or price index,
the remaining maturity, or the total
effective notional amount. For example,
an interest rate swap documentation
amendment that changes the
counterparty’s contact person or a
weather swap documentation
amendment that changes the margin
payment instructions would not impact
those swaps’ legacy status. However, an
interest rate swap amendment to the
fixed leg interest rate or a weather swap
amendment to the measurement of the
precipitation level would impact those
swaps’ legacy status as it is intended to
change the economic valuation of the
swap. The technical changes permitted
by the proposed rule are necessary to
reflect changes in a counterparty’s
circumstances, but are not associated
with a desire by either party to increase
or decrease its exposure to market risk
factors.
2. Final Rule
Commenters were supportive of the
proposal. Commenters agreed with the
agencies that amendments made for
logistical or risk management purposes
arising from routine industry practices
over the life-cycle of the swap, should
not cause legacy swaps to lose their
legacy status
sociated
with a desire by either party to increase
or decrease its exposure to market risk
factors.
2. Final Rule
Commenters were supportive of the
proposal. Commenters agreed with the
agencies that amendments made for
logistical or risk management purposes
arising from routine industry practices
over the life-cycle of the swap, should
not cause legacy swaps to lose their
legacy status. One commenter requested
that the agencies permit any technical
amendment that does not affect the
economic obligations of the parties or
the valuation of the legacy swap. Two
commenters requested clarification that
the language in the proposed rule aligns
with the CFTC’s Division of Swap
Dealer and Intermediary Oversight’s
June 6, 2019 No Action Position
wherein the CFTC took a no action
position on legacy swaps that are
amended, ‘‘provided that no term is
amended that would affect the
economic obligations of the parties or
the valuation’’ of the swap or that are
partially terminated or partially novated
subject to certain conditions.53 The
agencies are clarifying that the language
in the proposed rule is intended to align
with the CFTC’s No Action Position.
With respect to the language in
§ __.1(h)(5)(i), a commenter requested a
technical change from usage of the word
‘‘indicator,’’ because it is not a common
term in the industry, to the word
‘‘reference.’’ The agencies are amending
the rule to reflect this technical change.
The agencies did not receive any
other comments on this part of the
proposed rule and are adopting it,
subject to the technical change
discussed, as proposed.
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term in the industry, to the word
‘‘reference.’’ The agencies are amending
the rule to reflect this technical change.
The agencies did not receive any
other comments on this part of the
proposed rule and are adopting it,
subject to the technical change
discussed, as proposed.
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C. Reduction in Notional Amount
1. Proposal
The proposed rule recognized the
legacy status of a non-cleared swap that
has been amended solely to reduce the
notional amount of the non-cleared
swap, without altering other terms of
the original non-cleared swap. For these
purposes, a reduction in notional
amount may be achieved through a
partial termination of the original non-
cleared swap, with the remaining non-
terminated non-cleared swap being able
to retain its legacy status. A reduction
in notional amount could also be
achieved by novating a portion of the
original non-cleared swap’s notional
amount to a third party. The original
non-cleared swap, with a lower notional
amount, would retain legacy status, but
the novated portion would not retain
legacy status.
2. Final Rule
The agencies did not receive
comments on this amendment and are
adopting it as proposed.
C. Portfolio Compression Exercises
1. Proposal
The proposed rule recognized the
legacy status of non-cleared swaps that
have been modified as part of certain
portfolio compression exercises used as
a risk management tool or for IBOR
replacement. In compression, offsetting
trades between two or more parties are
amended or torn up and replaced,
which reduces the size of gross
derivatives exposures and generally
reduces the number or frequency of
payments between parties, thus
maintaining or reducing the overall risk
profile of the portfolio
in
portfolio compression exercises used as
a risk management tool or for IBOR
replacement. In compression, offsetting
trades between two or more parties are
amended or torn up and replaced,
which reduces the size of gross
derivatives exposures and generally
reduces the number or frequency of
payments between parties, thus
maintaining or reducing the overall risk
profile of the portfolio.
In a simple bilateral form of
compression between two
counterparties, the dealer agrees with
another dealer to compress trades so
that offsetting positions are cancelled
and only the net amount remains,
without any change to the overall
market exposures. The resulting net
position is documented by amending
one of the original swaps. This
‘‘amended swap’’ method is the
predominant method used in
compressions of non-cleared interest
rate swaps. Compression can also be
done on a multilateral basis among more
than two counterparties, and is often
even more efficient, as trades across
multiple dealers involved in a
compression exercise can be offset,
reducing the risk in each relationship
across the various counterparties
involved in the compression. The
resulting net position is documented by
creating a replacement swap reflecting
the net position. This ‘‘replacement
swap’’ method is predominantly used in
compression exercises for non-cleared
credit default swaps, but it can also be
used for interest rate swap compression.
Compression often results in the
cancellation of offsetting positions, but
it could also result in new trades being
booked into an existing non-cleared
portfolio to reflect the netted-down risk
of the original portfolio.
2. Final Rule
Commenters were generally
supportive of this amendment to
maintain legacy status of non-cleared
swap after portfolio compression
exercises. Commenters noted that
portfolio compression generally reduces
gross derivative exposures and reduces
the frequency of payment, reducing the
portfolio’s risk profile
portfolio to reflect the netted-down risk
of the original portfolio.
2. Final Rule
Commenters were generally
supportive of this amendment to
maintain legacy status of non-cleared
swap after portfolio compression
exercises. Commenters noted that
portfolio compression generally reduces
gross derivative exposures and reduces
the frequency of payment, reducing the
portfolio’s risk profile.
The agencies are modifying the
language in § __.1(h)(4) to make clear
that when parties engage in portfolio
compression, the resulting replacement
swap from the compression exercise is
accorded legacy treatment so long as it
meets the limitations in § __.1(h)(4). As
described above, in order to separate
compression for the purposes of
replacing an interest rate listed in
§ __.1(h)(3)(i) and compression for other
risk reducing or risk neutral purposes,
the rule now has a section for the former
(under § __.1(h)(3)) and the latter (under
§ __.1(h)(4)). The rule also makes clear
that the resulting non-cleared swap or
non-cleared security-based swap from
the portfolio compression exercises may
not (1) exceed the sum of the total
effective notional amounts of all of the
swaps that were submitted to the
compression exercise that had the same
or longer remaining maturity as the
resulting swap; or (2) exceed the longest
remaining maturity of all the swaps
submitted to the compression exercise.
This is consistent with the proposal.
As in other areas of the final rule,
supervisors may review these changes to
confirm that covered swap entities are
not purposefully avoiding the
requirements of the rule.
VII. Technical Changes
The proposed rule would have
deleted § __.1(e)(7), which includes an
amendment relating to the QFC Rules.
The text of § __.1(e)(7), with slight
modifications, would have been moved
to § __.1(h)(1), so that it would reside in
the section of the Swap Margin Rule
dedicated to legacy swap amendments
entities are
not purposefully avoiding the
requirements of the rule.
VII. Technical Changes
The proposed rule would have
deleted § __.1(e)(7), which includes an
amendment relating to the QFC Rules.
The text of § __.1(e)(7), with slight
modifications, would have been moved
to § __.1(h)(1), so that it would reside in
the section of the Swap Margin Rule
dedicated to legacy swap amendments.
The methods of amendment listed in
§ __.1(h) would have applied not only to
IBOR replacements, but also to any
other contractual modifications
permitted under § __.1(h), including
amendments relating to the QFC Rules.
The agencies did not receive any
comments on this part of the proposed
rule and are adopting it as proposed.
VIII. Comments Regarding Broader
Changes to the Swap Margin Rule
Several commenters that supported
the proposed rule also requested
broader changes to the rule. Some
commenters requested a carve-out for
seeded funds and an alternative
approach to US GAAP accounting
analysis for purposes of determining the
application of the rule. These
commenters asserted that the limited
and passive nature of the relationship
between seeded funds and their
sponsors does not warrant the
requirement to aggregate a seeded fund’s
swap exposures with those of its parent
or other commonly consolidated entities
for the purpose of calculation material
swap exposure. One commenter
requested the agencies make an
announcement to deprioritize
compliance with any enforcement of the
swap margin rule with respect to seeded
funds. Another commenter stated that
non-public and mutual insurance
companies that are not required to
perform GAAP accounting analysis do
not routinely do so because the cost to
perform such analysis for limited
purposes is significant. They suggested
engagement with the regulators to
determine if an alternative approach
may be available
of the
swap margin rule with respect to seeded
funds. Another commenter stated that
non-public and mutual insurance
companies that are not required to
perform GAAP accounting analysis do
not routinely do so because the cost to
perform such analysis for limited
purposes is significant. They suggested
engagement with the regulators to
determine if an alternative approach
may be available.
Other commenters representing
nonprofit organizations, asset managers,
mutual funds, other institutional asset
managers, and custodian banks
recommended the types of eligible
collateral be expanded to include
certain types of money market mutual
funds and exchange traded funds.
Commenters also requested exclusion of
seeded funds from the definition of a
consolidated group through limited rule
making. Other commenters raised
concerns with the current $50 million
initial margin threshold and requested
that an additional 6-month grace period
be provided after a financial end user
crosses the initial margin threshold. In
addition, commenters requested a less
frequent calculation of the initial margin
threshold amount because of the burden
associated with the testing and
monitoring in-scope counterparties.
Commenters also requested that the
agencies work with regulated entities to
develop an approach for the allocation
of the initial margin amounts and the
minimum transfer amount across
multiple asset managers for a given
client.
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testing and
monitoring in-scope counterparties.
Commenters also requested that the
agencies work with regulated entities to
develop an approach for the allocation
of the initial margin amounts and the
minimum transfer amount across
multiple asset managers for a given
client.
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54 84 FR 9940 (March 19, 2019).
55 See European Council Press Release ‘‘Brexit:
Council adopts decision to conclude the withdraw
agreement’’ (January 30, 2020), available at https://
www.consilium.europa.eu/en/press/press-releases/
2020/01/30/brexit-council-adopts-decision-to-
conclude-the-withdrawal-agreement/.
Commenters also requested that the
agencies exclude physically settled
foreign exchange swaps from the
material swaps exposure calculation
and consider making comparability and
substitute compliance determination for
foreign jurisdictions.
The agencies are not adopting these
broader proposed changes in this final
rule because they fall outside the scope
of the changes the agencies sought
comment on in the proposed rule. The
agencies will continue to evaluate the
requirements of this rule to ensure they
meet the agencies’ objectives.
IX. Brexit IFR
The agencies issued an interim final
rule, which became effective on March
19, 2019, to provide certainty for
covered swap entities as they prepare
for the event commonly described as
‘‘Brexit.’’ 54 In particular, the interim
final rule provided a covered swap
entity with the ability to continue to
service its cross-border clients in the
event that the U.K. withdraws from the
E.U. without a Withdrawal Agreement.
A Withdrawal Agreement between the
UK and EU was ratified in January
2020.55 The Withdrawal Agreement
addresses certain EU-related matters
that will immediately be affected by the
withdrawal itself and a transition
period
covered swap
entity with the ability to continue to
service its cross-border clients in the
event that the U.K. withdraws from the
E.U. without a Withdrawal Agreement.
A Withdrawal Agreement between the
UK and EU was ratified in January
2020.55 The Withdrawal Agreement
addresses certain EU-related matters
that will immediately be affected by the
withdrawal itself and a transition
period. The transition period will run
until December 31, 2020 and could be
extended by one or two years.
The agencies received one comment
letter on the interim final rule. The
commenter requested that the agencies
amend the interim final rule to exclude
swaps with a flip clause. The comment
raised an issue that was not within the
scope of the interim final rule.
Accordingly, the agencies are not
making any revisions to the rule and are
retaining it as a final rule as initially
adopted.
X. Administrative Law Matters
Paperwork Reduction Act Analysis
Certain provisions of the final
rulemaking contain ‘‘collection of
information’’ requirements within the
meaning of the Paperwork Reduction
Act (PRA) of 1995 (44 U.S.C. 3501–
3521). In accordance with the
requirements of the PRA, the agencies
may not conduct or sponsor, and a
respondent is not required to respond
to, an information collection unless it
displays a currently valid Office of
Management and Budget (OMB) control
number.
The agencies reviewed the final
rulemaking and determined that it
reduces certain recordkeeping
requirements that have been previously
cleared under various OMB control
numbers. In order to be consistent
across the agencies, the agencies are also
applying a conforming methodology for
calculating the burden estimates. The
agencies are proposing to extend for
three years, with revision, these
information collections. The OCC and
FDIC have submitted to OMB for review
under section 3507(d) of the PRA (44
U.S.C. 3507(d)) and section 1320.11 of
the OMB’s implementing regulations (5
CFR 1320)
across the agencies, the agencies are also
applying a conforming methodology for
calculating the burden estimates. The
agencies are proposing to extend for
three years, with revision, these
information collections. The OCC and
FDIC have submitted to OMB for review
under section 3507(d) of the PRA (44
U.S.C. 3507(d)) and section 1320.11 of
the OMB’s implementing regulations (5
CFR 1320). The Board has reviewed the
information collection under its
delegated authority. The OMB control
numbers are 1557–0251 (OCC), 3064–
0204 (FDIC), and 7100–0364 (Board).
The FCA has determined the final
rulemaking has no PRA implications
because Farm Credit System institutions
are Federally chartered
instrumentalities of the United States
and instrumentalities of the United
States are specifically excepted from the
definition of ‘‘collection of information’’
contained in 44 U.S.C. 3502(3). The
FHFA has determined that the final
rulemaking does not contain any
collection of information for which the
agency must obtain clearance under the
PRA.
Current Actions
The final rulemaking removes the
record keeping requirement in § __.11(b)
that a covered swap entity shall
calculate the amount of initial margin
that would be required to be posted to
an affiliate that is a financial end user
with material swaps exposure pursuant
to § __.3(b) and provide documentation
of such amount to each affiliate on a
daily basis.
Final Revision, With Extension, of the
Following Information Collections
Title of information collection:
Reporting and Recordkeeping
Requirements Associated with Swaps
Margin and Swaps Push-Out.
Frequency: Annual and event
generated.
Affected public: Businesses or other
for-profit.
Estimated average hours per response:
Reporting
Section __.1(d)—1 hour (on average of
1,000 times per year).
Sections __.8(c) and __.8(d)—240
hours.
Section __.8(f)(3)—50 hours.
Section __.9(e)—10 hours (on average
of 3 times per year)
Requirements Associated with Swaps
Margin and Swaps Push-Out.
Frequency: Annual and event
generated.
Affected public: Businesses or other
for-profit.
Estimated average hours per response:
Reporting
Section __.1(d)—1 hour (on average of
1,000 times per year).
Sections __.8(c) and __.8(d)—240
hours.
Section __.8(f)(3)—50 hours.
Section __.9(e)—10 hours (on average
of 3 times per year).
Sections 237.22(a)(1) and 237.22(e)
(Board only)—7 hours.
Recordkeeping
Sections __.2 (definition of ‘‘eligible
master netting agreement,’’ item 4),
237.8(g), and 237.10—5 hours.
Section __.5(c)(2)(i)—4 hours.
Section __.7(c)—100 hours.
Sections __.8(e) and 237.8(f)—40
hours.
Section __.8(h)—20 hours.
Disclosure
Section __.1(h)—1 hour.
OCC
Respondents: Any national bank or a
subsidiary thereof, Federal savings
association or a subsidiary thereof, or
Federal branch or agency of a foreign
bank that is registered as a swap dealer,
major swap participant, security-based
swap dealer, or major security-based
swap participant.
Estimated number of respondents: 10.
Proposed revisions only estimated
annual burden: ¥2,500 hours.
Total estimated annual burden:
14,900 hours.
Board
Respondents: Any state member bank
(as defined in 12 CFR 208.2(g)), bank
holding company (as defined in 12
U.S.C. 1841), savings and loan holding
company (as defined in 12 U.S.C.
1467a), foreign banking organization (as
defined in 12 CFR 211.21(o)), foreign
bank that does not operate an insured
branch, state branch or state agency of
a foreign bank (as defined in 12 U.S.C.
3101(b)(11) and (12)), or Edge or
agreement corporation (as defined in 12
CFR 211.1(c)(2) and (3)) that is
registered as a swap dealer, major swap
participant, security-based swap dealer,
or major security-based swap
participant.
Estimated number of respondents: 41.
Proposed revisions only estimated
annual burden: ¥10,209 hours.
Total estimated annual burden:
61,104 hours
in 12 U.S.C.
3101(b)(11) and (12)), or Edge or
agreement corporation (as defined in 12
CFR 211.1(c)(2) and (3)) that is
registered as a swap dealer, major swap
participant, security-based swap dealer,
or major security-based swap
participant.
Estimated number of respondents: 41.
Proposed revisions only estimated
annual burden: ¥10,209 hours.
Total estimated annual burden:
61,104 hours.
FDIC
FDIC: Any FDIC-insured state-
chartered bank that is not a member of
the Federal Reserve System or FDIC-
insured state-chartered savings
association that is registered as a swap
dealer, major swap participant, security-
based swap dealer, or major security-
based swap participant.
Estimated number of respondents: 1.
Proposed revisions only estimated
annual burden: ¥249 hours.
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56 We base our estimate of the number of small
entities on the Small Business Administration’s
(SBA’s) size thresholds for commercial banks and
savings institutions, and trust companies, which are
$600 million and $41.5 million, respectively.
Consistent with the General Principles of
Affiliation, 13 CFR 121.103(a), we count the assets
of affiliated financial institutions when determining
if we should classify an OCC-supervised institution
as a small entity. We use December 31, 2019, to
determine size because a ‘‘financial institution’s
assets are determined by averaging the assets
reported on its four quarterly financial statements
for the preceding year.’’ See footnote 8 of the SBA’s
Table of Size Standards.
57 As one way of determining whether any of the
small entities is a covered swap entity, the OCC
reviewed the CFTC’s listing of registered swap
dealers at http://www.cftc.gov/LawRegulation/
DoddFrankAct/registerswapdealer
are determined by averaging the assets
reported on its four quarterly financial statements
for the preceding year.’’ See footnote 8 of the SBA’s
Table of Size Standards.
57 As one way of determining whether any of the
small entities is a covered swap entity, the OCC
reviewed the CFTC’s listing of registered swap
dealers at http://www.cftc.gov/LawRegulation/
DoddFrankAct/registerswapdealer. 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.
58 See 5 U.S.C. 603(a).
59 See 13 CFR 121.201 (effective December 2,
2014, as amended by 84 FR 34261, effective August
19, 2019); see also 13 CFR 121.103(a)(6) (noting
factors that the SBA considers in determining
whether an entity qualifies as a small business,
including receipts, employees, and other measures
of its domestic and foreign affiliates).
60 The CFTC has published a list of provisionally
registered swap dealers as of February 27, 2020, that
does not include any small financial institutions.
See http://www.cftc.gov/LawRegulation/
DoddFrankAct/registerswapdealer. 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.
61 The SBA defines a small banking organization
as having $600 million or less in assets, where an
organization’s ‘‘assets are determined by averaging
the assets reported on its four quarterly financial
statements for the preceding year.’’ See 13 CFR
121.201 (as amended by 84 FR 34261, effective
August 19, 2019). In its determination, the ‘‘SBA
counts the receipts, employees, or other measure of
size of the concern whose size is at issue and all
of its domestic and foreign affiliates.’’ See 13 CFR
121.103
sets are determined by averaging
the assets reported on its four quarterly financial
statements for the preceding year.’’ See 13 CFR
121.201 (as amended by 84 FR 34261, effective
August 19, 2019). In its determination, the ‘‘SBA
counts the receipts, employees, or other measure of
size of the concern whose size is at issue and all
of its domestic and foreign affiliates.’’ See 13 CFR
121.103. Following these regulations, the FDIC uses
a covered entity’s affiliated and acquired assets,
averaged over the preceding four quarters, to
determine whether the covered entity is ‘‘small’’ for
the purposes of RFA.
Total estimated annual burden: 1,490
hours.
Regulatory Flexibility Act Analysis
OCC: In general, the Regulatory
Flexibility Act (RFA) (5 U.S.C. 601 et
seq.) requires that in connection with a
final rulemaking, an agency publish a
final regulatory flexibility analysis that
describes the impact of the rule on small
entities. Under section 605(b) of the
RFA, this analysis is not required if an
agency certifies that the rule will not
have a significant economic impact on
a substantial number of small entities
and publishes its certification and a
brief explanatory statement in the
Federal Register along with its rule.
As part of our analysis, we consider
whether, pursuant to the RFA, the final
rule would have a significant economic
impact on a substantial number of small
entities. The OCC currently supervises
approximately 745 small entities.56
Among these 745 small entities, 42
could be affected by the final rule if one
or more of these small entities are a
party to a financial contract with a
covered swap entity. Because we believe
banks will incur de minimis costs, if
any, to comply with the final rule, we
conclude that the final rule would not
have a significant economic impact on
a substantial number of small entities.57
Board: The Regulatory Flexibility Act,
5 U.S.C. 601 et seq
he final rule if one
or more of these small entities are a
party to a financial contract with a
covered swap entity. Because we believe
banks will incur de minimis costs, if
any, to comply with the final rule, we
conclude that the final rule would not
have a significant economic impact on
a substantial number of small entities.57
Board: The Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (RFA), generally
requires that an agency prepare and
make available for public comment a
final regulatory flexibility analysis in
connection with a final rulemaking or
certify that the final rule will not have
a significant economic impact on a
substantial number of small entities.58
As described above, the final rule
amends the Swap Margin Rule as
follows:
First, the final rule provides relief by
allowing legacy swaps to be amended to
replace interbank offered rates (IBORs)
and other interest rates that are
reasonably expected to be discontinued
or are reasonably determined to have
lost their relevance as a reliable
benchmark due to a significant
impairment, without such swaps losing
their legacy status.
Second, the final rule adds an
additional initial margin compliance
period for swaps with certain small
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