[Federal Register Volume 84, Number 216 (Thursday, November 7, 2019)]
[Proposed Rules]
[Pages 59970-59989]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23541]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 84, No. 216 / Thursday, November 7, 2019 /
Proposed Rules
[[Page 59970]]
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: Proposed rule and request for comment.
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SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (each, an agency, and
collectively, the agencies) request comment on a proposed rule that
would amend 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). The Swap Margin Rule
as adopted in 2015 takes effect under a phased compliance schedule
spanning from 2016 through 2020, and the dealers 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 proposed rule would permit 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, repeal the inter-
affiliate initial margin provisions, introduce an additional compliance
date for initial margin requirements, clarify the point in time at
which trading documentation must be in place, permit 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 make 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.
DATES: Comments should be received on or before December 9, 2019.
ADDRESSES: Interested parties are encouraged to submit written comments
jointly to all of the agencies. Commenters are encouraged to use the
title ``Margin and Capital Requirements for Covered Swap Entities'' to
facilitate the organization and distribution of comments among the
agencies.
OCC: You may submit comments to the OCC by any of the methods set
forth below. Commenters are encouraged to submit comments through the
Federal eRulemaking Portal or email, if possible. Please use the title
``Margin and Capital Requirements for Covered Swap Entities'' to
facilitate the organization and distribution of the comments. You may
submit comments by any of the following methods:
Federal eRulemaking Portal--Regulations.gov Classic or
Regulations.gov Beta
Regulations.gov Classic: Go to https://www.regulations.gov/. Enter
``Docket ID OCC-2019-0023'' in the Search Box and click ``Search.''
Click on ``Comment Now'' to submit public comments. For help with
submitting effective comments please click on ``View Commenter's
Checklist.'' Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
Regulations.gov Beta: Go to https://beta.regulations.gov/ or click
``Visit New Regulations.gov Site'' from the Regulations.gov classic
homepage. Enter ``Docket ID OCC-2019-0023'' in the Search Box and click
``Search.'' Public comments can be submitted via the ``Comment'' box
below the displayed document information or click on the document title
and click the ``Comment'' box on the top-left side of the screen. For
help with submitting effective comments please click on ``Commenter's
Checklist.'' For assistance with the Regulations.gov Beta site please
call (877) 378-5457 (toll free) or (703) 454-9859 Monday-Friday, 9
a.m.-5 p.m. ET or email to [email protected].
Email: [email protected].
Mail: Chief Counsel's Office, Attention: Comment
Processing, Office of the Comptroller of the Currency, 400 7th Street
SW, Suite 3E-218, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
Fax: (571) 465-4326.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2019-0023'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the Regulations.gov website without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not include any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this
[[Page 59971]]
rulemaking action by any of the following methods:
Viewing Comments Electronically--Regulations.gov Classic
or Regulations.gov Beta
Regulations.gov Classic: Go to https://www.regulations.gov/. Enter
``Docket ID OCC-2019-0023'' in the Search box and click ``Search.''
Click on ``Open Docket Folder'' on the right side of the screen.
Comments and supporting materials can be viewed and filtered by
clicking on ``View all documents and comments in this docket'' and then
using the filtering tools on the left side of the screen. Click on the
``Help'' tab on the Regulations.gov home page to get information on
using Regulations.gov. The docket may be viewed after the close of the
comment period in the same manner as during the comment period.
Regulations.gov Beta: Go to https://beta.regulations.gov/ or click
``Visit New Regulations.gov Site'' from the Regulations.gov classic
homepage. Enter ``Docket ID OCC-2019-0023'' in the Search Box and click
``Search.'' Click on the ``Comments'' tab. Comments can be viewed and
filtered by clicking on the ``Sort By'' drop-down on the right side of
the screen or the ``Refine Results'' options on the left side of the
screen. Supporting Materials can be viewed by clicking on the
``Documents'' tab and filtered by clicking on the ``Sort By'' drop-down
on the right side of the screen or the ``Refine Results'' options on
the left side of the screen. For assistance with the Regulations.gov
Beta site please call (877)-378-5457 (toll free) or (703) 454-9859
Monday-Friday, 9 a.m.-5 p.m. ET or email to
[email protected].
The docket may be viewed after the close of the comment period in
the same manner as during the comment period.
Viewing Comments Personally: You may personally inspect
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For
security reasons, the OCC requires that visitors make an appointment to
inspect comments. You may do so by calling (202) 649-6700 or, for
persons who are deaf or hearing impaired, TTY, (202) 649-5597. Upon
arrival, visitors will be required to present valid government-issued
photo identification and submit to security screening in order to
inspect comments.
Board: You may submit comments, identified by Docket No. R-1682 and
RIN No. 7100-AF62, by any of the following methods:
Agency Website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Email: [email protected]. Include the
docket number and RIN number in the subject line of the message.
Fax: (202) 452-3819.
Mail: Address to Ann E. Misback, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue NW, Washington, DC 20551.
All public comments are available from the Board's website at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons or to remove
personally identifiable information at the commenter's request.
Accordingly, comments will not be edited to remove any identifying or
contact information. Public comments may also be viewed electronically
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006
between 9:00 a.m. and 5:00 p.m. on weekdays.
FDIC: You may submit comments, identified by RIN 3064-AF08, by any
of the following methods:
Agency Website: https://www.FDIC.gov/regulations/laws/federal.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
Hand Delivered/Courier: The guard station at the rear of
the 550 17th Street Building (located on F Street) on business days
between 7:00 a.m. and 5:00 p.m.
Email: [email protected]. Comments submitted must include
``FDIC'' and ``RIN 3064-AF08--Margin Amendments'': Margin and Capital
Requirements for Covered Swap Entities.'' Comments received will be
posted without change to https://www.fdic.gov/regulations/laws/federal,
including any personal information provided.
FCA: We offer a variety of methods for you to submit your comments.
For accuracy and efficiency reasons, commenters are encouraged to
submit comments by email or through the FCA's website. As facsimiles
(fax) are difficult for us to process and achieve compliance with
section 508 of the Rehabilitation Act, we are no longer accepting
comments submitted by fax. Regardless of the method you use, please do
not submit your comments multiple times via different methods. You may
submit comments by any of the following methods:
Email: Send us an email at [email protected].
FCA Website: http://www.fca.gov. Click inside the ``I want
to . . .'' field near the top of the page; select ``comment on a
pending regulation'' from the dropdown menu; and click ``Go.'' This
takes you to an electronic public comment form.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Barry F. Mardock, Deputy Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
You may review copies of all comments we receive at our office in
McLean, Virginia or on our website at http://www.fca.gov. Once you are
on the website, click inside the ``I want to . . .'' field near the top
of the page; select ``find comments on a pending regulation'' from the
dropdown menu; and click ``Go.'' This will take you to the Comment
Letters page where you can select the regulation for which you would
like to read the public comments. We will show your comments as
submitted, including any supporting data provided, but for technical
reasons we may omit items such as logos and special characters.
Identifying information that you provide, such as phone numbers and
addresses, will be publicly available. However, we will attempt to
remove email addresses to help reduce internet spam.
FHFA: You may submit your written comments on the proposed
rulemaking, identified by regulatory information number: (RIN) 2590-
AB03, by any one of the following methods:
Agency Website: www.fhfa.gov/open-for-comment-or-input.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments. If you submit your
comment to the Federal eRulemaking Portal, please also send it by email
to FHFA at [email protected] to ensure timely receipt by the agency.
Please include ``RIN 2590-AB03'' in the subject line of the message.
Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AB03,
Federal Housing Finance Agency, Constitution Center (OGC Eighth Floor),
400 7th St. SW, Washington, DC 20219. Deliver the package to the
Seventh Street entrance Guard Desk, First Floor, on business days
between 9:00 a.m. and 5:00 p.m.
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AB03, Federal
Housing Finance Agency, Constitution Center (OGC Eighth Floor), 400 7th
St. SW, Washington, DC 20219.
[[Page 59972]]
Please note that all mail sent to FHFA via U.S. Mail is routed through
a national irradiation facility, a process that may delay delivery by
approximately two weeks.
All comments received by the deadline will be posted for public
inspection without change, including any personal information you
provide, such as your name, address, email address and telephone number
on the FHFA website at http://www.fhfa.gov. In addition, copies of all
comments received will be available for examination by the public
through the electronic rulemaking docket for this proposed rule also
located on the FHFA website.
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, Jason Shafer, Senior Counsel, (202) 728-5811, 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, [email protected],
Capital Markets Branch, Division of Risk Management Supervision, (202)
898-3843; Thomas F. Hearn, Counsel, [email protected], Legal Division,
Federal Deposit Insurance Corporation, 550 17th Street NW, Washington,
DC 20429.
FCA: Jeremy R. Edelstein, Associate Director, Finance & Capital
Market Team, Timothy T. Nerdahl, Senior Policy Analyst, Clayton D.
Milburn, Senior Financial Analyst, Office of Regulatory Policy, (703)
883-4414, TTY (703) 883-4056, or Richard A. Katz, Senior Counsel,
Office of General Counsel, (703) 883-4020, TTY (703) 883-4056, Farm
Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
FHFA: Christopher Vincent, Senior Financial Analyst, Office of
Financial Analysis, Modeling & Simulations, (202) 649-3685,
[email protected], or James P. Jordan, Associate General
Counsel, Office of General Counsel, (202) 649-3075,
[email protected], 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. Background on the Swap Margin Rule
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) required the OCC, Board, FDIC, FCA, and FHFA (each, an
agency, and collectively, 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).\1\ 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).\2\ 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.
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 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).
\2\ 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).
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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).\3\
Following the establishment of the BCBS/IOSCO framework, on November
30, 2015, the agencies published 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), which
includes many of the principles and other aspects of the BCBS/IOSCO
framework.\4\ 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.\5\
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\3\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
\4\ 80 FR 74840 (November 30, 2015).
\5\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (March 2015), available at https://www.bis.org/bcbs/publ/d317.pdf.
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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.\6\ 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.
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\6\ 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 Sec.
__.1(e) of the Swap Margin Rule. In this proposed rule, the agencies
are also proposing to add one additional year to this schedule for
certain counterparties.
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The Swap Margin Rule's requirements generally apply only to a non-
cleared swap entered into on or after the applicable compliance
date.\7\ A non-cleared swap entered into prior to an entity's
applicable compliance date is essentially ``grandfathered'' by this
regulatory provision, in that the non-cleared swap is generally not
subject to the margin requirements in the Swap Margin Rule (legacy
swap). However, the agencies explained in the preamble of the Swap
Margin Rule that a legacy swap that is later amended or novated on or
after the applicable compliance
[[Page 59973]]
date should be subject to the requirements of the Swap Margin Rule, in
the interests of preventing evasion of the Rule's margin
requirements.\8\
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\7\ See Sec. _.1(e) of the Swap Margin Rule.
\8\ 80 FR 74850-51.
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The Swap Margin Rule has recently been amended to (1) provide
relief to legacy swaps that are amended to achieve compliance with
final rules that established restrictions on and requirements for
certain non-cleared swaps and certain other qualified financial
contracts of U.S. global systemically important banking organizations
and their subsidiaries and the U.S. operations of foreign global
systemically important banking organizations (QFC Rules) \9\ and (2)
subject to certain conditions, provide relief for entities located in
the United Kingdom to transfer their existing swap portfolios that face
counterparties located in the European Union to an affiliate or other
related establishment located within the European Union or the United
States while maintaining legacy status for such portfolios.\10\ This
notice of proposed rulemaking would make the following changes to the
Swap Margin Rule:
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\9\ 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).
\10\ 84 FR 9940 (March 19, 2019).
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First, the proposal would provide relief by allowing legacy swaps
to be amended to replace existing interest rate provisions based on
certain 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 proposal would amend the Swap Margin Rule's
requirements for inter-affiliate swaps. The proposal would repeal the
requirement for a covered swap entity to collect initial margin from
its affiliates, but would retain the requirement that variation margin
be exchanged for affiliate transactions.
Third, the proposal would add an additional initial margin
compliance period for certain smaller counterparties, and clarify the
existing trading documentation requirements in Sec. _.10 of the Rule.
Fourth, the proposal would amend the Swap Margin Rule to permit
amendments caused by conducting certain routine life-cycle activities
that covered swap entities may conduct for legacy swaps, such as
reduction of notional amounts and portfolio compression exercises,
without triggering margin requirements.
These aspects of the proposal are each discussed in greater detail
below.
II. Interbank Offered Rates
A. Background on IBORs
The proposed rule would amend the Swap Margin Rule to permit a
covered swap entity to amend a legacy swap in order to replace an IBOR
with an alternative reference rate or rates, without triggering margin
requirements.
An IBOR is a benchmark interest rate that is intended to represent
banks' cost of unsecured wholesale borrowing. IBORs \11\ have been used
as the benchmark interest rate for a large volume and broad range of
existing financial products and contracts, including for an estimated
$190 trillion US Dollar LIBOR (USD LIBOR) exposure, of which $145
trillion represents over-the-counter derivatives exposure (as of year-
end 2016).\12\ However, the discovery of, and numerous regulatory
actions to seek redress of, market manipulation and false reporting of
the many IBORs, together with the post-crisis decline in liquidity in
interbank unsecured funding markets, have undermined confidence in the
reliability and robustness of IBORs.
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\11\ IBORs include the London Interbank Offered Rate (LIBOR),
the Tokyo Interbank Offered Rate (TIBOR), the Bank Bill Swap Rate
(BBSW), the Singapore Interbank Offered Rate (SIBOR), the Canadian
Dollar Offered Rate (CDOR), the Euro Interbank Offered Rate
(EURIBOR), and the Hong Kong Interbank Offered Rate (HIBOR).
\12\ ``Second Report of the Alternative Reference Rates
Committee'' published in March 2018, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.
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As a result, the Financial Stability Board (FSB) and the U.S.
Financial Stability Oversight Council (FSOC) requested that government
and industry stakeholders undertake implementation of new designs and
methodologies for IBORs, and the identification of viable alternative
near risk-free rates in their respective currencies (U.S. dollar in the
case of the United States) with a focus on the feasibility of new rate
methodologies, including identification of suitable administrators and
any necessary infrastructure to support these rates.\13\
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\13\ ``Reforming Major Interest Rate Benchmarks'' published by
the Financial Stability Board on July 22, 2014, available at http://www.fsb.org/wp-content/uploads/r_140722.pdf. Several central banks
responded to this request and convened working groups of market
participants and official sector representatives, including the
United Kingdom, Japan, Switzerland, and the Eurozone. The work has
also been coordinated at the international level by the FSB's
Official Sector Steering Group (OSSG).
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The Federal Reserve Board and Federal Reserve Bank of New York
convened the Alternative Reference Rates Committee (ARRC) \14\ in 2014
to identify an alternative reference rate for USD LIBOR and create an
implementation plan to promote the use of the selected alternative on a
voluntary basis. In 2017, the ARRC selected the Secured Overnight
Funding Rate (SOFR), which is designed to be representative of general
funding conditions in the overnight Treasury repo market. The ARRC has
noted that use of SOFR is voluntary and that other benchmarks can also
be considered as potential alternatives for USD LIBOR. For example, the
American Financial Exchange is offering Ameribor as a potential USD
LIBOR replacement rate.\15\ In addition, benchmarks such as an
Overnight Bank Funding Rate were suggested by some market participants
as a potential alternative.
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\14\ The voting members of the 2014 ARRC were Bank of America,
Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank,
Goldman Sachs, HSBC, JP Morgan Chase & Co., Morgan Stanley, Nomura,
RBS, Soci[eacute]t[eacute] G[eacute]n[eacute]rale, UBS, and Wells
Fargo; the non-voting members were Bank of New York Mellon, CME,
DTCC, ISDA and LCH.Clearnet; the ex officio members were Board of
Governors of the Federal Reserve System, Federal Reserve Bank of New
York, U.S. Commodity Futures Trading Commission, U.S. Treasury
Department and Office of Financial Research. The ARRC's membership
has changed over time. For a list of the latest members, see https://www.newyorkfed.org/arrc.
\15\ See https://ameribor.net/.
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In July 2017, the U.K. Financial Conduct Authority (UKFCA), which
regulates ICE Benchmark Administration, the administrator of LIBOR,
announced that it has sought commitments from LIBOR panel banks to
continue to contribute to LIBOR through the end of 2021, but that the
UKFCA will not use its powers to compel or persuade contributions
beyond that date. The UKFCA has also warned that it may judge LIBOR to
no longer be representative of its underlying market should it persist
past this date. Thus, it is possible that LIBOR will cease to be
published at the end of 2021. Consequently, it is likely that
derivatives contracts that reference LIBOR will need to be amended to
replace LIBOR.
In consideration of this uncertainty, the International Swaps and
Derivatives Association, Inc. (ISDA), which produces standard
documentation used by parties to derivatives contracts, indicated that
it plans to amend its documentation to ``include fallbacks that would
apply upon the permanent discontinuation of certain key
[[Page 59974]]
IBORs.'' \16\ For new non-cleared swaps, market participants will have
an option to amend their documentation via an ISDA benchmark
supplement. For non-cleared swaps that are already in place, market
participants will have the option to utilize an ISDA protocol that will
specify amended definitions, triggers, and other adjustments.\17\
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\16\ ISDA Consultation on Pre-Cessation Issues for LIBOR and
Certain Other Interbank Offered Rates (IBORs), May 16, 2019,
available at https://www.isda.org/a/md6ME/FINAL-Pre-cessation-issues-Consultation.pdf.
\17\ ISDA Supplemental Consultation on Spread and Term
Adjustments for Fallbacks in Derivatives Referencing USD LIBOR, CDOR
and HIBOR and Certain Aspects of Fallbacks for Derivatives
Referencing SOR, May 16, 2019, available at https://www.isda.org/a/n6tME/Supplemental-Consultation-on-USD-LIBOR-CDOR-HIBOR-and-SOR.pdf.
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Due to the potential discontinuation of LIBOR at the end of 2021,
covered swap entities face uncertainty about the way their swap
contracts based on LIBOR and other IBORs will operate after the
permanent discontinuation date without a reliable benchmark rate. A
benchmark rate is a critical term for calculating payments under a swap
contract. In many instances, these firms may decide to amend existing
swap contracts to replace an IBOR before the IBOR becomes discontinued.
Such amendments may also trigger follow-on amendments \18\ that the
counterparties determine are necessary to maintain the economics of the
contract. Absent the proposed revisions to the Swap Margin Rule, one or
more of these amendments could affect the legacy status of a non-
cleared swap and make it subject to the requirements of the Rule. In
order to enable covered swap entities and their counterparties to avoid
the risk of future financial instability, the agencies believe it is
appropriate to permit covered swap entities to amend the reference
rates in a legacy swap contract and to adopt necessary follow-on
amendments without converting the legacy swap into a swap subject to
the Swap Margin Rule. The conditions of eligibility for the amendments
are described in the next section of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
\18\ Follow-on amendments may include a variety of spread
adjustments resulting from the move from a term rate to an overnight
rate, from unsecured to secured, or could result from a change in
tenor, among others.
---------------------------------------------------------------------------
B. Proposed Rule on IBORs
In recognition of the ongoing efforts to transition away from key
IBORs due to their potential discontinuation, the agencies are
proposing to amend the Swap Margin Rule to remove impediments that
would limit the ability of covered swap entities to replace certain
rates in their legacy non-cleared swaps. Specifically, the agencies
propose to amend Sec. _.1(h) to preserve the legacy status of a non-
cleared swap after a covered swap entity replaces certain reference
rates. Proposed Sec. _.1(h) recognizes 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 the limitations discussed
below.
The proposed rule is intended to be flexible with respect to the
method of amendment. The proposal would permit amendments to be
executed with respect to an individual non-cleared swap or on a netting
set level, as long as the other proposed criteria are met.
The proposed rule describes the type of rate that can be replaced
and the accompanying changes that would be permitted. Proposed section
Sec. _.1(h)(3)(i) would permit amendments that are made solely to
accommodate the replacement of an IBOR or a replacement of any other
non-IBOR interest rate 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 with an alternate
reference rate.\19\ For example, if a benchmark administrator
materially changes the inputs in the benchmark calculation because an
input is no longer available, a covered swap entity may determine that
the benchmark has lost its relevance as a reliable benchmark due to a
significant impairment.
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\19\ Under the EU Benchmark Regulation (Regulation (EU) 2016/
1011 (June 8, 2016)), a benchmark administrator is expected to
regularly assess whether a critical benchmark measures the
underlying market or economic reality. In certain circumstances, a
regulatory authority of a benchmark administrator may complete its
own assessment of a benchmark's representativeness as well. Covered
swap entities may refer to such assessments or other public
statements by benchmark administrators or regulatory authorities in
order to inform their expectations about whether a benchmark will be
discontinued or continues to be reliable. In addition, covered swap
entities may consult the IOSCO Principles for Financial Benchmarks
(July 2013), to assist in determining whether a benchmark has lost
its relevance as a reliable benchmark, available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf.
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The proposed rule lists the IBORs that could be replaced, including
LIBOR, TIBOR, BBSW, SIBOR, CDOR, EURIBOR, and HIBOR. Although the
current uncertainty surrounding reference rates is tied to IBORs, the
agencies are also proposing a second, more qualitative standard that
would be applicable to other categories of reference rates, should the
need arise in the future. This forward-looking standard is designed to
encourage covered swap entities to resolve critical uncertainties
before an interest rate benchmark is discontinued, or loses its market
relevance, in order to minimize disturbance to the markets.
The agencies also anticipate that a reference 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 rate is
not yet available or amendment documentation has not yet been
developed. Subsequently, fallback provisions may be replaced with
permanent alternative rates. If the original rate that is being
replaced is an IBOR or any other non-IBOR interest rate benchmark that
otherwise meets the requirements of the proposed rule that a covered
swap entity reasonably expects it to be discontinued or reasonably
determines that it 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 rate. There is no limit to the number of amendments that
can take place, as long as the rate that was originally present in the
non-cleared swap met the criteria in either Sec. _.1(h)(3)(i)(A) or
Sec. _.1(h)(3)(i)(B). The proposed approach of permitting subsequent
amendments takes into account that any subsequent changes to the
reference rate will be the subject of negotiations among counterparties
that are incentivized to agree to a reasonable rate. The proposed rule
would not permit subsequent amendments that change rates or other terms
of the non-cleared swap for any purpose other than for those purposes
explicitly set out in Sec. _.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 a rate described in the
proposed rule. The proposed rule is flexible as to the incoming
replacement rate by leaving it up to the counterparties to select a
mutually agreeable replacement rate. The agencies expect that any
replacement rate, including any subsequent replacement rate, would be
agreed upon by the parties after assessing its complexity, safety and
soundness, and taking into
[[Page 59975]]
consideration associated risk management practices.\20\
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\20\ 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.
---------------------------------------------------------------------------
The agencies also acknowledge that replacing a reference rate could
require other contractual changes to maintain the economics of the non-
cleared swap and to preserve the relative values to the parties after
incorporating changes in the reference rate. The proposed rule would
permit changes that incorporate spreads and other adjustments that
accompany and implement the replacement rate amendment. The 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 rate, including changes to
determination dates, calculation agents, and payment dates. These types
of administrative changes may be necessary to adjust computations and
operational provisions to reflect the differences between an IBOR and
the replacement rate or rates.
The agencies envision that a number of contractual changes could be
necessary to maintain the economics of the non-cleared swap, and for
this reason, have drafted the proposed rule so it permits these
changes. For example, legacy swaps that contain USD LIBOR may be
referencing 1-day LIBOR, 1-week LIBOR, 1-month LIBOR, 2-month LIBOR, 3-
month LIBOR, 6-month LIBOR or 12-month LIBOR. In these cases, a
replacement rate that could be overnight and could be based, for
example, on a fully secured funding rate (e.g., SOFR) may need to
incorporate a market risk (term structure) spread to substitute for the
market risk component of LIBOR that is of a longer maturity than
overnight. Similarly, because LIBOR is unsecured and therefore includes
an element of bank credit risk, it is likely that a replacement rate
that could be overnight and could be based, for example, on a fully
secured funding rate (e.g., SOFR) would need a credit spread to adjust
the new reference rate to a comparable legacy LIBOR rate. This may also
be the case for non-USD IBORs that could be replaced by overnight
funding rates.
The proposed rule would also permit administrative and technical
changes necessary for operational purposes. For example, for an
overnight rate, interest on financial instruments that pay periodically
(e.g., quarterly) may be set in arrears by compounding or averaging the
daily observations over the relevant period. To offer flexibility in
the transition to a new reference rate, the proposed rule would permit
the replacement of an IBOR or other discontinued reference rate in the
floating leg of a fixed-floating rate swap, and would also permit the
interest rate in the fixed leg to be modified in order to maintain the
economics of the non-cleared swap.
However, the agencies do not believe that the relief being provided
for rate replacement purposes should be expansively applied to
encompass all changes to a legacy swap. Accordingly, the proposed rule
text clarifies 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. For example, a one
time, lump-sum compensatory payment in lieu of a spread adjustment
would not increase the total effective notional amount and would be
permitted. On the other hand, extending the maturity date to allow for
additional payments to be made under the non-cleared swap would be a
change outside the scope of the proposed rule.
The agencies envision that covered swap entities may carry out
certain amendments, including those executed by method of termination
and replacement, for the purpose of implementing changes that might
qualify for more than one exemption provided under Sec. _.1(h). When a
legacy swap is replaced with a new contract that reflects more than one
exemption, each of the provisions in the replacement contract that
differs from the terminated contract must be permitted under the
respective subsection of Sec. _.1(h). For example, a covered swap
entity and its counterparty may decide to replace an IBOR with a
different reference rate and, at the same time, make changes to comply
with the QFC Rules. The IBOR-related changes must comply with Sec.
_.1(h)(3) and the QFC Rules changes must comply with Sec. _.1(h)(1)
for the replacement contract to meet the ``solely to comply'' standard
and, in the case of Sec. _.1(h)(3), the ``solely to accommodate''
standard.
III. Non-Cleared Swaps Between CSEs and an Affiliate
The proposal would 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.\21\ The proposal
would, however, retain the requirement that affiliates exchange
variation margin.
---------------------------------------------------------------------------
\21\ Under the BCBS/IOSCO framework, no common standard was set
for inter-affiliate transactions, in recognition of the existing and
varied approaches to the topic across jurisdictions.
---------------------------------------------------------------------------
Currently, Sec. _.11 of the Swap Margin Rule establishes special
rules for transactions between a covered swap entity and an
``affiliate,'' generally defined in the Swap Margin Rule as an entity
that is consolidated with the dealer on an accounting basis, or
consolidated on a common basis by another entity.\22\ The rules
applicable to transactions with affiliates differ from the rules
applicable to transactions with non-affiliates. For example, a covered
swap entity is not required to post initial margin to an affiliate or
use an independent custodian for most forms of initial margin collected
from an affiliate. In addition, the covered swap entity does not need
to apply a $50 million initial margin threshold amount to the covered
swap entity's affiliates on an aggregate basis, and the covered swap
entity is not required to use the ten-day holding period for
calculating initial margin using an initial margin model under Sec.
_.8(d)(1).\23\ Consistent with the requirements for non-cleared swaps
between non-affiliated counterparties, current Sec. _.11 requires the
exchange of variation margin for affiliate transactions. As discussed
in the preamble to the final Swap Margin Rule, the initial and
variation margin requirements applicable to affiliate transactions were
intended to advance the mandate under the Dodd-Frank Act to ``offset
the greater risk to swap entities from the use of swaps that are not
cleared and help ensure the safety and soundness of the covered swap
entity and are appropriate for the risk associated with the non-cleared
swap entity.'' \24\ The agencies noted that the requirement to collect
initial margin from, but not post initial margin to, affiliates
``should help to protect the safety and soundness of covered swap
entities in the event of an affiliated counterparty default.'' \25\
Furthermore, by requiring that inter-affiliate swaps be margined, the
requirement was intended
[[Page 59976]]
to prevent unmargined swaps from posing a risk to systemic
stability.\26\
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\22\ Section _.2 provides that two companies are ``affiliates''
if either company consolidates the other on financial statements
prepared in accordance with U.S. Generally Accepted Accounting
Principles, the International Financial Reporting Standards, or
other similar standards, or if both companies are consolidated with
a third company.
\23\ For a description of the application of this set of
exemptions, see the preamble to the final rule, 80 FR at 74887.
\24\ 80 FR at 74889.
\25\ Id.
\26\ 80 FR at 74889.
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Since the Swap Margin Rule was implemented, supervisory experience
has shown that inter-affiliate swaps are used by covered swap entities
for internal risk management purposes whereby a banking organization
transfers risk to a centralized risk management function, which is
considered to be a prudent risk management practice. As more covered
swap entities have come into scope, the amount of inter-affiliate
initial margin collected by covered swap entities has increased. This
has led the affected banking organizations to borrow increasing amounts
of cash in the debt markets to fund eligible collateral, placing
additional demands on their asset-liability management structure and
increasing their liability exposure to depositors and other creditors
in the market. The removal of the inter-affiliate initial margin
requirement would provide these banking organizations with additional
flexibility for internal allocation of collateral. The agencies believe
that such risk management practices often improve the safety and
soundness of a covered swap entity, and therefore, to encourage such
prudent risk management, propose to exempt inter-affiliate swaps from
the Rule's initial margin requirements. The proposal does not remove
the requirement that covered swap entities must collect and post
initial margin with other non-affiliate covered swap entities.
The agencies also note that because other jurisdictions (as well as
the U.S. market regulators) do not consistently apply swap margin rules
to inter-affiliate swaps, the Rule's imposition of initial margin
requirements for inter-affiliate swaps may have provided limited
systemic risk benefits and put U.S. banking firms at a competitive
disadvantage. For example, many covered swap entities subject to the
Swap Margin Rule are banking organizations that are typically
internationally active with operations in many jurisdictions that may
exempt or not impose initial margin requirements on inter-affiliate
transactions.\27\ In addition, the imposition of initial margin
requirements may depend on the banking organization's home country,
presence in the United States, corporate organization, or business
strategy. For example, internationally active banking organizations
that have a cross-border organizational structure that relies on
separate legal entities must currently use inter-affiliate swaps to
centralize risk management of the overall banking organization's
outward-facing derivatives exposures, whereas other internationally
active banks that operate cross-border through branching structures do
not have a comparable risk management need for such inter-affiliate
swaps. The agencies do not believe this difference in corporate
organization justifies different initial margin requirements under the
Swap Margin Rule.
---------------------------------------------------------------------------
\27\ Under the BCBS/IOSCO framework, no common standard was set
for inter-affiliate swap transactions, in recognition of these
existing and varied approaches to the topic of inter-affiliate
transactions generally. 79 FR at 57353; Article 6 of the BCBS and
IOSCO ``Margin Requirements for Non-Centrally Cleared Derivatives''
(September 2013), available at https://www.bis.org/publ/bcbs261.pdf.
---------------------------------------------------------------------------
The agencies are not proposing to alter the Rule's uniform
requirements for covered swap entities to exchange variation margin
with their affiliates. The agencies note it has become routine in
recent years for covered swap entities to exchange variation margin on
non-cleared swaps with their affiliates. As a best practice for risk
management, the exchange of variation margin serves to reflect ongoing
economic transfers of current exposure for assets and liabilities
between the various parts of the banking organization over the life of
each non-cleared swap. This in turn contributes to the safety and
soundness of the covered swap entity, and the larger banking
organization as a whole. The exchange of variation margin will remain a
requirement under the general rules of Sec. _.4 and will continue to
be applicable to inter-affiliate swaps.
The proposal would also supplement the definition of ``affiliate''
for purposes of Sec. _.11 to include not only the definition of
``affiliate'' found in Sec. _.2 of the Swap Margin Rule, focusing on
consolidation under applicable accounting rules, but also the
established ``catch-all'' legal standard for affiliation in banking
focusing on the direct or indirect exercise of controlling influence
over the management or policies of the controlled company. Absent this
change, the Swap Margin Rule would, by its general provisions, require
covered swap entities to post initial margin to, and collect initial
margin from, unconsolidated entities that are treated as affiliates of
the covered swap entity for other legal or regulatory purposes.
Finally, the agencies note that certain affiliate transactions are
subject to the requirements of sections 23A and 23B of the Federal
Reserve Act as implemented by the Federal Reserve's Regulation W, as
these requirements continue to apply to affiliate transactions with an
insured depository institution.\28\ Currently, almost all U.S. covered
swap entities are insured depository institutions that would be subject
to Sections 23A, 23B, and Regulation W. These provisions are
specifically tailored to address risks arising from transactions,
including non-cleared swaps, between affiliates. As such, the agencies
believe that they are the more effective tools to address risks arising
from transactions between affiliates. The Board continues to consider
how inter-affiliate non-cleared swaps can be addressed under Regulation
W.
---------------------------------------------------------------------------
\28\ 12 U.S.C. 371c and 371c-1; 12 CFR part 223. In adopting the
Swap Margin Rule, the agencies noted that transactions between banks
and their affiliates have long been subject to their own special set
of regulatory restrictions, particularly in the case of U.S. banks
pursuant to sections 23A and 23B of the Federal Reserve Act. See 80
FR at 74889 (noting the obligation of banks that are covered swap
entities to comply with additional regulatory restrictions on inter-
affiliate swap transactions, such as those required by sections 23A
and 23B).
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IV. Additional Compliance Date for Initial Margin Requirements
The agencies are proposing 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 are 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.
The phase-in schedule for initial margin is based on the average
daily aggregate notional amount (AANA) of non-cleared swaps held in
each party's market-wide portfolio, measured separately from the
standpoint of the covered swap entity and the standpoint of the
counterparty.\29\ With the recent
[[Page 59977]]
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.\30\
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\29\ As noted above, the AANA is determined based on the non-
cleared swaps, foreign exchange forwards and foreign exchange swaps
of each 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 corresponding average daily notional
thresholds for each compliance date currently 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 covered swap entities and their
counterparties. See Sec. _.1(e) of the Swap Margin Rule.
\30\ 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 Sec. _.3 and the
definition of ``material swaps exposure'' in Sec. _.1.
---------------------------------------------------------------------------
The industry's implementation work to execute new trading
documentation to meet variation margin compliance obligations by 2017
largely excluded any rule-compliant 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. The industry
has 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. In recognition of these difficulties,
the BCBS/IOSCO framework was recently revised to permit an additional
phase for smaller counterparties, and the agencies believe it is
appropriate to amend the Swap Margin Rule in a similar manner. \31\
Accordingly, the agencies are proposing 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 require 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 be extended to September 1, 2021.
---------------------------------------------------------------------------
\31\ See BCBS and IOSCO ``Margin requirements for non-centrally
cleared derivatives,'' (July 2019), available at https://www.bis.org/bcbs/publ/d475.pdf.
---------------------------------------------------------------------------
V. Documentation Requirements
Complying with initial margin requirements creates regulatory
obligations for covered swap entities and implications for their
counterparties.\32\ Covered swap entities must calculate initial margin
to be collected and posted to determine if and when collection or
posting of initial margin is required. Under Sec. _.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. It is
only at the time at which the covered swap entity is required to
collect or post initial margin pursuant to Sec. _.3 that it is
required to have completed the initial margin trading documentation
required by Sec. _.10. For the avoidance of doubt, the agencies are
proposing to amend Sec. _.10 to expressly state that 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 Sec. _.3.\33\
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\32\ See Sec. _.1(f) (providing that once a covered swap entity
must comply with the margin requirements for non-cleared swaps and
non-cleared security-based swaps with respect to a particular
counterparty, the covered swap entity remains subject to the
requirements of the Swap Margin Rule with respect to that
counterparty).
\33\ Section _.10 has parallel requirements for covered swap
entities to execute trading documentation providing the covered swap
entity with the contractual right to collect and post variation
margin in such amounts, in such form, and under such circumstances
as are required by the Swap Margin Rule. There is no threshold
margin amount for variation margin pursuant to Sec. _.4, and Sec.
_.10 requires covered swap entities to execute variation margin
trading documentation no later than the time the covered swap entity
commences trading non-cleared swaps with any swap entity or
financial end user covered by the Swap Margin Rule.
---------------------------------------------------------------------------
As discussed in the Swap Margin 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 Sec.
_.1(d).\34\ 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
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.\35\
---------------------------------------------------------------------------
\34\ 80 FR 74886-74887 (describing the trading documentation
requirements of Sec. _.10).
\35\ Id.
---------------------------------------------------------------------------
The custody agreement requirements in Sec. _.7 of the Swap Margin
Rule require such agreements to be in place only after initial margin
is required to be collected or posted pursuant to Sec. _.3, or when
initial margin is posted by a covered swap entity beyond an amount
required by the Rule. The agencies 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 Sec. _.3. The agencies
note 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.\36\
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\36\ 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
[euro]50 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.''
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VI. Portfolio Compression Exercises and Other Amendments
The Swap Margin Rule applies to non-cleared swaps entered into on
or after the applicable compliance date. As discussed above, the
agencies have also expressed concerns 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 have
been concerned whether market participants would amend legacy swaps,
rather than entering into new ones and exchanging margin pursuant to
the Rule once the legacy swaps expire according to their original
terms. The industry has raised concerns whether 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
[[Page 59978]]
compressions, could be executed while still allowing those amended
legacy swaps to remain exempt from the Swap Margin Rule.
The agencies are proposing amendments to clarify the agencies'
implementation of the legacy swaps provisions of the Swap Margin Rule
since its adoption in 2015. These amendments are 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 or risk-management purposes. The proposed
amendments are those 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.
One of these proposed amendments recognizes 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. The types of technical changes described 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. While the technical changes listed
above would be permitted, a change in the non-cleared swap's underlying
index would not be a technical change.
The second proposed amendment recognizes 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.
The third proposed amendment recognizes the legacy status of non-
cleared swaps that have been modified as part of certain portfolio
compression exercises used as a risk management tool. 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 general, these compression exercises make use of third party service
providers to assist in the choice of trades to be modified and the risk
composition of the resulting portfolios.
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.
One reason that the agencies are permitting amendments resulting
from compression exercises is to reduce the operational burden
associated with IBOR replacements. While protocols to amend non-cleared
swaps that reference an IBOR or another discontinued rate are in
development, there is a possibility that counterparties may choose to
replace portfolios of IBOR-based non-cleared swaps with replacement
swaps generated through compression exercises.
In recognition of the value of risk-reducing compression exercises,
the agencies are proposing to amend the Swap Margin Rule to expressly
recognize the benefits of amending or replacing non-cleared swaps
solely to accomplish risk-reducing or risk-neutral portfolio
compression between or among covered swap entities and their
counterparties, without converting the legacy swap into a swap subject
to the Swap Margin Rule.
Under the proposed rule, amended swaps that reflect the outcome of
a compression exercise are treated slightly differently than
replacement swaps that are issued as a result of the compression
exercise. If a non-cleared swap is amended solely as a result of a
compression exercise, the amendments cannot extend the remaining
maturity of the amended non-cleared swap or increase the total
effective notional amount of the non-cleared swap.
Example 1: The limitations on remaining maturity and total
effective notional amount in a compression exercise resulting in a
replacement swap are different. For example, if swap 1 entered into
by a covered swap entity and counterparty A has a total effective
notional amount of $10 (long position) and a remaining maturity of 5
years, and swap 2 entered into by the same covered swap entity and
the same counterparty A has a total effective notional amount of $5
(short position) and a remaining maturity of 4 years, the
compression exercise might result in a cancellation of swap 2 and an
amendment to swap 1 such that the total effective notional amount
would become $5 (long position) and the remaining maturity would
remain at 5 years. This amendment would be permitted under the
proposed rule since the maturity of the amended swap is not longer
than the maturity of swap 1 (5 years) and the total effective
notional amount of the amended swap is not greater than the total
effective notional amount of swap 1 ($10 long position). However, an
amendment to swap 1 that extends the remaining maturity of the
amended swap beyond the original 5 years or increases the total
effective notional amount higher than the original $10 would not be
able to take advantage of the proposed safe harbor.
A replacement swap cannot extend the longest remaining maturity
of all of the swaps in the compression exercise and cannot have a
total effective notional amount that exceeds the total effective
notional amount of that longest remaining maturity swap.
Example 2: Using the terms of swap 1 in the example above,
assume that swap 2 has a total effective notional amount of $5
(short position) and a remaining maturity of 3 years. The two swaps
could be in a compression exercise in which both swaps are
terminated and replaced with a new swap. The replacement swap must
have a remaining maturity that does not extend the longest remaining
maturity of swaps 1 and 2 (swap 1 has the longer remaining maturity
of 5 years). The replacement swap must also have a total effective
notional amount that does not exceed the total effective notional
amount of the swap with the longest remaining maturity (swap 1 has
the longer remaining maturity of 5 years, so the replacement swap
cannot exceed swap 1's total effective notional amount of $10 long
position).
[[Page 59979]]
Example 3: Assume that the following swaps are part of a
compression exercise:
------------------------------------------------------------------------
Total effective Remaining
Swap contract No. notional amount maturity
------------------------------------------------------------------------
1................................. 10 (long)........... 5
2................................. 4 (short)........... 4
3................................. 7 (long)............ 3
4................................. 3 (short)........... 2
5................................. 17 (short).......... 1
------------------------------------------------------------------------
If a compression exercise terminates all the swaps listed above
and replaces them with a new replacement swap, the total effective
notional amount of the replacement swap cannot exceed the sum of the
total effective notional amounts for all swaps with the same or
longer remaining maturity than the replacement swap. Therefore, if
one assumes the compression exercise results in a remaining maturity
of 3 years for the replacement swap, the replacement swap with a
remaining maturity of 3 years could have a maximum total effective
notional amount of the sum of the total effective notional amounts
of the 5 year swap, the 4 year swap, and the 3 year swap, or 10 + 4
+ 7 = $21.\37\ Alternatively, if one assumes the compression
exercise results in a remaining maturity of 2 years for the
replacement swap, the replacement swap with a remaining maturity of
2 years could have a maximum total effective notional amount of the
sum of the total effective notional amounts of the 5 year swap, the
4 year swap, the 3 year swap, and the 2 year swap or 10 + 4 + 7 + 3
= $24.
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\37\ Note, however, that a replacement swap with a total
effective notional amount of $21 would only be acceptable if the
result is also risk-neutral or risk-reducing based on the long or
short positions of each swap's total effective notional amount. The
overall effect of the compression exercise must be either risk-
neutral or risk-reducing.
The agencies are also concerned about clarifying the legacy status
of swaptions that are entered into before the applicable compliance
date but exercised after that compliance date. As a general matter, a
swaption is created when a covered swap entity and its counterparty
enter into a derivative transaction granting one party an option to, at
a later time, call for the transaction to be converted into a non-
cleared swap between the two parties, the terms of which are set out in
the derivative contract itself. The agencies believe it is not
necessary to propose rule text to address the legacy status of
swaptions that become non-cleared swaps once exercised. Although the
exchange of payments under the non-cleared swap does not commence until
after the applicable compliance date, the terms of that non-cleared
swap were established and entered into during the original creation of
the swaption contract, which was entered into before the applicable
compliance date and therefore the resulting non-cleared swap retains
legacy status. The exercise of the option under the derivative is not
an amendment of the contract, but rather a second phase that
operationalizes the original contract.
VII. Technical Changes
The proposed rule would delete Sec. _.1(e)(7), which includes an
amendment relating to the QFC Rules. The text of Sec. _.1(e)(7), with
slight modifications, would be moved to Sec. _.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 Sec. _.1(h) would
apply not only to IBOR replacements, but also to any other contractual
modifications permitted under Sec. _.1(h), including amendments
relating to the QFC Rules.
VIII. Request for Comments
A. IBORs
The agencies request comment on all aspects of the proposed rule as
well as on the following specific questions.
(1) The proposed rule permits amendments to non-cleared swaps by
method of 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). Should the agencies provide additional clarification
in the rule as to types of permissible amendments to better reflect
established or emerging industry practices? What specifically should be
added or clarified, and why?
(2) Does the proposed rule provide sufficient flexibility regarding
contract-by-contract, netting set, and compression amendments to the
reference rate? What, if any, additional flexibility is needed, and
why?
(3) The agencies have listed a number of IBORs as examples of rates
that would be permitted to be replaced. To what extent should this list
be revised to remove or to include any additional rates, such as the
Swap Offer Rate of Singapore?
(4) The relief provided by the proposed rule would apply to the
replacement of an IBOR. The agencies are also proposing to allow
replacement of other non-IBOR reference rates if the covered swap
entity reasonably expects that the rate will be discontinued or
reasonably determines has lost its relevance as a reliable benchmark
due to a significant impairment. Is there a need to provide relief for
replacement of rates under other circumstances? What potential criteria
could the agencies impose on non-IBOR interest rate benchmarks in order
for such a benchmark to be considered to have lost its relevance as a
reliable benchmark due to a significant impairment? If so, please
provide a description of the circumstances creating this need and a
description of the rates that may need to be replaced, either now or in
the future.
(5) The proposed rule anticipates that a reference rate may need to
be amended more than once. What types of criteria should the regulation
establish for subsequent amendments to reference rates? Please explain
how those criteria maintain the robustness of the new reference rate
and avoid the problems that plagued LIBOR, such as market manipulation,
etc. Should the agencies impose a cap on the number of times a
reference rate may be amended and, if so, how should that cap be
structured?
(6) The proposed rule does not specify any criteria for a
replacement rate, but rather leaves this open to the parties. What
types of rates might parties settle on? Should the agencies limit the
scope of the replacement rate to specific criteria, such as that the
rate must be based on observable, risk-free characteristics? If so,
what other criteria might be appropriate, or what specific rates might
be appropriate?
(7) The proposed rule intends to be accommodating to accompanying
amendments that may be necessary to maintain the relative economics of
the non-cleared swap following the replacement of a reference rate. Do
the accompanying amendments provide sufficient flexibility to permit
the additional modifications that parties plan to make? If not, please
explain what changes the agencies should contemplate and why, and
explain how
[[Page 59980]]
they should be permitted under the rule. Alternatively, would the
accompanying amendments change the non-cleared swap such that it does
not resemble the original legacy contract? If this is a concern, how
should the rule address it? For example, should the agencies prohibit
an amendment to the currency from being eligible for the safe harbor?
(8) The proposed rule does not specify an end date by which these
IBOR-related amendments must be completed. Should the agencies include
an end date? Should it be one year, two years, five years, ten years?
Are there legacy contracts that would still be in place in ten years
such that a ten-year timeframe would be realistic?
(9) As noted above, the agencies propose to permit the replacement
of an IBOR in the floating-rate leg of the swap with a new reference
rate, and would also permit the fixed-rate leg in a fixed-floating
interest rate swap to be modified to maintain the economics of the non-
cleared swap. Is this approach appropriate in order for the fixed-
floating swap to retain its legacy status, and if not, how should it be
modified?
B. Non-Cleared Swaps Between CSEs and an Affiliate
(1) What, if any, additional conditions or limitations should the
agencies impose before allowing a covered swap entity to take advantage
of the exemption from initial margin requirements for inter-affiliate
swaps? For example, the CFTC imposes certain limitations and conditions
on its initial margin exemption for inter-affiliate swaps. Discuss why
any additional conditions may be appropriate to ensure the safety and
soundness of the covered swap entity.
(2) Should the definitions of ``affiliate'' and ``control'' in
Sec. _.11 be revised to match with the definitions of the Board's
Regulation W, Regulation Y, Regulation Q, or any other regulations? Why
or why not?
C. Additional Compliance Date for Initial Margin Requirements
(1) Does the proposed one-year extension of the final
implementation timeline to September 1, 2021 substantially address all
implementation challenges? Please explain.
D. Documentation Requirements
(1) What issues are there, if any, related to how parties document
transactions in compliance with the Swap Margin Rule that should be
considered by the agencies?
(2) Are there any reasons why covered swap entities would not be
able to reasonably anticipate the point in time at which they will
cross the $50 million initial margin threshold amount such that they
can prepare the required documentation in time? Please explain.
E. Portfolio Compression Exercises and Other Amendments
(1) What are the methods used by covered swap entities to determine
whether portfolio compression exercises would meet the requirements set
out in the proposal, including not extending the remaining maturity or
increasing the total effective notional amounts?
(2) Should the Rule limit compression exercises to mitigating only
certain types of risk and if so, which types of risk?
(3) For a replacement swap that results from a compression
exercise, should the agencies consider a different method of
restricting either the total effective notional amount or the remaining
maturity? Would commenters be supportive of an approach that limits the
remaining maturity to an ``effective maturity'' calculation based on
the total effective notional amounts in the exercise? For example, swap
1 has a notional amount of 10 and 3 years remaining maturity and swap 2
has a notional amount of 8 and 5 years remaining maturity. Under the
``effective maturity'' calculation, the replacement swap could not
exceed an effective maturity of 3 years and 10 months, calculated as
(3*10 + 5*8)/(10+8). The replacement swap with a 3 year and 10 month
maturity would also not be able to exceed a total effective notional
amount of 18 (10+8).
(4) How should the Rule be more specific about technical amendments
that are permitted? How can the Rule better explain that amending a
swap's underlying asset or indicator, such as a security, currency,
interest rate, commodity, or price index, is not a technical amendment?
IX. Administrative Law Matters
A. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \38\ requires the OCC,
Board, and FDIC to use plain language in all proposed and final rules
published after January 1, 2000. The OCC, Board, and FDIC have sought
to present the proposed rule in a simple and straightforward manner and
invite comments on whether the proposal is clearly stated and
effectively organized, and how to make this proposal easier to
understand. For example:
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\38\ Public Law 106-102, 113 Stat. 1338, 1471 (codified at 12
U.S.C. 4809).
---------------------------------------------------------------------------
Have we organized the material to suit your needs? If not,
how could this material be better organized?
Are the requirements in the proposed rule clearly stated?
If not, how could the proposed rule be more clearly stated?
Does the proposed rule contain language or jargon that is
not clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the proposed rule easier to
understand? If so, what changes to the format would make the proposed
rule easier to understand?
What else could we do to make the proposed rule easier to
understand?
B. Paperwork Reduction Act Analysis
Certain provisions of the proposed 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 proposed rulemaking and determined that
it revises 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). 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 notice of proposed 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 notice of proposed rulemaking
does not contain any
[[Page 59981]]
collection of information for which the agency must obtain clearance
under the PRA.
Comments are invited on:
a. Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
b. The accuracy or the estimate of the burden of the information
collections, including the validity of the methodology and assumptions
used;
c. Ways to enhance the quality, utility, and clarity of the
information to be collected;
d. Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
e. Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates should be sent to the
addresses listed in the ADDRESSES section of this document. A copy of
the comments may also be submitted to the OMB desk officer by mail to
U.S. Office of Management and Budget, 725 17th Street NW, #10235,
Washington, DC 20503; facsimile to (202) 395-6974; or email to
[email protected], Attention, Federal Banking Agency Desk
Officer.
Current Actions
The proposed rulemaking removes the recordkeeping requirement in
section _.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
section _.3(b) and provide documentation of such amount to each
affiliate on a daily basis.
Proposed 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).
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.
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.\39\
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\39\ The FDIC estimates zero entities, but is estimating one
here as a placeholder.
---------------------------------------------------------------------------
Proposed revisions only estimated annual burden: -249 hours.
Total estimated annual burden: 1,490 hours.
C. 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 rulemaking, an agency
prepare and make available for public comment a 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 proposed rule would have a significant economic impact on a
substantial number of small entities. The OCC currently supervises
approximately 782 small entities.\40\ Among these 782 small entities,
44 could be affected by the proposed 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 proposed rule, we conclude that the proposed rule,
if implemented, would not have a significant economic impact on a
substantial number of small entities.\41\
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\40\ 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, 2018, 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.
\41\ 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.
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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 an initial regulatory flexibility analysis in connection with a
notice of proposed
[[Page 59982]]
rulemaking or certify that the proposed rule will not have a
significant economic impact on a substantial number of small
entities.\42\ The Board welcomes comment on all aspects of the initial
regulatory flexibility analysis. A final regulatory flexibility
analysis will be conducted after consideration of comments received
during the public comment period.
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\42\ See 5 U.S.C. 603(a).
---------------------------------------------------------------------------
As described above, the proposed rule would (i) permit legacy swaps
to retain their legacy status in the event that they are amended to
replace an IBOR or other discontinued rate, (ii) repeal the inter-
affiliate initial margin provisions, introduce an additional compliance
date for initial margin requirements, (iii) introduce an additional
compliance date for initial margin requirements, (iv) clarify the point
in time at which trading documentation must be in place, (v) permit
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 (vi) make technical changes to relocate the
provision addressing amendments to legacy swaps that are made to comply
with the QFC Rules.
This proposed rule applies to financial institutions that are
covered swap entities that are subject to the requirements of the Swap
Margin Rule. Under SBA regulations, the finance and insurance sector
includes commercial banking, savings institutions, credit unions, other
depository credit intermediation and credit card issuing entities
(financial institutions). With respect to financial institutions that
are covered swap entities under the Swap Margin Rule, a financial
institution generally is considered small if it has assets of $600
million or less.\43\ Covered swap entities would be considered
financial institutions for purposes of the RFA in accordance with SBA
regulations. The Board does not expect that any covered swap entity is
likely to be a small financial institution, because a small financial
institution is unlikely to engage in the level of swap activity that
would require it to register as a swap dealer or a major swap
participant with the CFTC or a security-based swap dealer or security-
based major swap participant with the U.S. Securities and Exchange
Commission (SEC).\44\ None of the current Board-regulated covered swap
entities are small entities.
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\43\ 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).
\44\ The CFTC has published a list of provisionally registered
swap dealers as of October 17, 2017 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.
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The Board does not believe the proposed rule will result in any new
reporting, recordkeeping or other compliance requirements. In light of
the foregoing, the Board does not believe that this proposed rule would
have a significant economic impact on a substantial number of small
entities and therefore there are no significant alternatives to the
proposed rule that would reduce the impact on small entities.
FDIC: The RFA generally requires that, in connection with a
proposed rulemaking, an agency prepare and make available for public
comment an initial regulatory flexibility analysis describing the
impact of the proposed rule on small entities. However, a regulatory
flexibility analysis is not required if the agency certifies that the
proposed rule will not have a significant economic impact on a
substantial number of small entities. The SBA has defined ``small
entities'' to include banking organizations with total assets of less
than or equal to $600 million that are independently owned and operated
or owned by a holding company with less than or equal to $600 million
in total assets.\45\ Generally, the FDIC considers a significant effect
to be a quantified effect in excess of 5 percent of total annual
salaries and benefits per institution, or 2.5 percent of total non-
interest expenses. The FDIC believes that effects in excess of these
thresholds typically represent significant effects for FDIC-supervised
institutions. For the reasons described below, the FDIC certifies
pursuant to section 605(b) of the RFA that the proposed rule will not
have a significant economic impact on a substantial number of small
entities.
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\45\ 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. 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.
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According to data from recent Consolidated Reports of Income and
Condition (Call Report),\46\ the FDIC supervised 3,465 institutions. Of
those, 2,705 are considered ``small,'' according to the terms of the
RFA. As discussed previously, the proposed rule directly applies to
covered swap entities (which includes persons registered with the CFTC
as swap dealers or major swap participants pursuant to the Commodity
Exchange Act of 1936 and persons registered with the SEC as security-
based swap dealers and major security-based swap participants under the
Securities Exchange Act of 1934) that are subject to the requirements
of the Swap Margin Rule. The FDIC has identified 105 swap dealers and
major swap participants that, as of May 22, 2019, have registered as
swap entities.\47\ None of these institutions are supervised by the
FDIC.
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\46\ FDIC Call Report, March 31, 2019.
\47\ While the SEC had adopted a regulation that would require
registration of security-based swap dealers and major security-based
swap participants, as of June 28, 2019, there was no date
established as the compliance date and no SEC-published list of any
such entities that so registered (see 84 FR 4906 at 4925).
Accordingly, no security-based swap dealers and no major security-
based swap participants have been identified as swap entities by the
FDIC. In identifying the 105 institutions referred to in the text,
the FDIC used the list of swap dealers set forth, on June 28, 2019
(providing data as of May 22, 2019) at https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html. Major swap
participants, among others, are required to apply for registration
through a filing with the National Futures Association. Accordingly,
the FDIC reviewed the National Futures Association https://www.nfa.futures.org/members/sd/index.html to determine whether there
were registered major swap participants. As of June 21, 2019, there
were no major swap participants listed on this link.
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As an amendment to the Swap Margin Rule, the proposed rule also
affects counterparties to swaps entered into by covered swap entities.
However, the Terrorism Risk Insurance Program Reauthorization Act of
2015 excludes non-cleared swaps entered into for hedging purposes by a
financial institution with total assets of $10 billion or less from the
requirements of the Swap Margin Rule. Given this exclusion, a non-
cleared swap between a covered swap entity and a small FDIC-supervised
entity that is used to hedge a commercial risk of the small entity will
not be subject to the Swap Margin Rule. The FDIC believes that it is
unlikely that any small entity it supervises will engage in non-cleared
swaps for purposes other than hedging.
Given that no FDIC-supervised small entities are covered swap
entities and that it is unlikely that FDIC-supervised small entities
enter into non-cleared swaps for purposes other than hedging, this
proposed rule is not expected to have a significant economic impact on
[[Page 59983]]
a substantial number of small entities supervised by the FDIC. For
these reasons, the FDIC certifies that the proposed rule will not have
a significant economic impact on a substantial number of small
entities, within the meaning of those terms as used in the RFA.
Accordingly, a regulatory flexibility analysis is not required.
The FDIC invites comments on all aspects of the supporting
information provided in this section, and in particular, whether the
proposed rule would have any significant effects on small entities that
the FDIC has not identified.
FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act
(5 U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule
will not have a significant economic impact on a substantial number of
small entities. Each of the banks in the Farm Credit System, considered
together with its affiliated associations, has assets and annual income
in excess of the amounts that would qualify them as small entities; nor
does the Federal Agricultural Mortgage Corporation meet the definition
of ``small entity.'' Therefore, Farm Credit System institutions are not
``small entities'' as defined in the Regulatory Flexibility Act.
FHFA: The Regulatory Flexibility Act (5 U.S.C. 601 et seq.)
requires that a regulation that has a significant economic impact on a
substantial number of small entities, small businesses, or small
organizations must include an initial regulatory flexibility analysis
describing the regulation's impact on small entities. FHFA need not
undertake such an analysis if the agency has certified the regulation
will not have a significant economic impact on a substantial number of
small entities. 5 U.S.C. 605(b). FHFA has considered the impact of the
proposed rule under the Regulatory Flexibility Act, and certifies that
the proposed rule does not have a significant economic impact on a
substantial number of small entities because the proposed rule is
applicable only to FHFA's regulated entities, which are not small
entities for purposes of the Regulatory Flexibility Act.
D. Unfunded Mandates Reform Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded
Mandates Act) (2 U.S.C. 1532) requires that the OCC prepare a budgetary
impact statement before promulgating a rule that includes any Federal
mandate that may result in the expenditure by State, local, and Tribal
governments, in the aggregate, or by the private sector, of $100
million or more (adjusted annually for inflation, currently $154
million) in any one year. If a budgetary impact statement is required,
section 205 of the Unfunded Mandates Act also requires the OCC to
identify and consider a reasonable number of regulatory alternatives
before promulgating a rule.
The OCC analyzed the amendments proposed in this notice of proposed
rulemaking, and has determined that they would not result in
expenditures by State, local, and Tribal governments, in the aggregate,
or by the private sector, of $154 million in any one year. Accordingly,
the OCC has not prepared a written statement under sections 202 and
205.
E. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (RCDRIA), in determining the
effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on insured depository institutions, each Federal banking
agency must consider, consistent with principles of safety and
soundness and the public interest, any administrative burdens that such
regulations would place on depository institutions, including small
depository institutions, and customers of depository institutions, as
well as the benefits of such regulations.\48\ In addition, section
302(b) of RCDRIA requires new regulations and amendments to regulations
that impose additional reporting, disclosures, or other new
requirements on insured depository institutions generally to take
effect on the first day of a calendar quarter that begins on or after
the date on which the regulations are published in final form.\49\ Each
Federal banking agency has determined that the proposed rule would not
impose additional reporting, disclosure, or other requirements;
therefore the requirements of the RCDRIA do not apply. However, the
agencies note that comments on these matters have been solicited in
other sections of this Supplementary Information section, and that the
requirements of RCDRIA will be considered as part of the overall
rulemaking process. In addition, the agencies also invite any other
comments that will further inform the agencies' consideration of
RCDRIA.
---------------------------------------------------------------------------
\48\ 12 U.S.C. 4802(a).
\49\ 12 U.S.C. 4802.
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 45
Administrative practice and procedure, Capital, Margin
requirements, National Banks, Federal Savings Associations, Reporting
and recordkeeping requirements, Risk.
12 CFR Part 237
Administrative practice and procedure, Banks, banking, Foreign
banking, Holding companies, Reporting and recordkeeping requirements,
Swaps.
12 CFR Part 349
Administrative practice and procedure, Banks, banking, Holding
companies, Capital, Margin Requirements, Reporting and recordkeeping
requirements, Savings associations, Risk, Swaps.
12 CFR Part 624
Accounting, Agriculture, Banks, Banking, Capital, Cooperatives,
Credit, Margin requirements, Reporting and recordkeeping requirements,
Risk, Rural areas, Swaps.
12 CFR Part 1221
Government-sponsored enterprises, Mortgages, Securities.
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the common preamble and under the
authority of 12 U.S.C. 93a and 5412(b)(2)(B), the Office of the
Comptroller of the Currency proposes to amend part 45 of Title 12, Code
of Federal Regulations, as follows:
PART 45--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
0
1. The authority citation for part 45 continues to read as follows:
Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et seq., 12 U.S.C. 93a,
161, 481, 1818, 3907, 3909, 5412(b)(2)(B), and 15 U.S.C. 78o-10(e).
0
2. Section 45.1 is amended by:
0
a. Revising paragraphs (e)(6), (e)(7), (h) introductory text, and
(h)(1); and
0
b. Adding paragraphs (h)(3) through (h)(5).
The revisions and additions read as follows:
Sec. 45.1 Authority, purpose, scope, exemptions and compliance dates.
* * * * *
[[Page 59984]]
(e) Compliance dates. * * *
* * * * *
(6) September 1, 2020 with respect to requirements in Sec. 45.3
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021 with respect to requirements in Sec. 45.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
* * * * *
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this part for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant
compliance dates for variation margin and for initial margin
established in paragraph (e) of this section. Any non-cleared swap or
non-cleared security-based swap entered into before such relevant date
shall remain outside the scope of this part if amendments are made to
the non-cleared swap or non-cleared security-based swap by method of
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, as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of part 47, subpart I
of part 252 or part 382 of title 12, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate 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; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph (h)(3)(i)(A) or (h)(3)(i)(B) of this section. An amendment
made under this paragraph (h)(3)(i)(C) could be one of multiple
amendments made under this paragraph (h)(3)(i)(C). For example, an
amendment could replace an IBOR with a temporary interest rate and
later replace the temporary interest rate with a permanent interest
rate.
(ii) Amendments to accommodate replacement of a rate described in
paragraph (h)(3)(i) may also incorporate spreads or other adjustments
to the replacement rate and make other necessary technical changes to
operationalize the determination of payments or other exchanges of
economic value using the replacement rate, including changes to
determination dates, calculation agents, and payment dates, so long as
the changes do not extend the maturity or increase the total effective
notional amount of the non-cleared swap or non-cleared security-based
swap.
(4) The non-cleared swap or non-cleared security-based swap was
amended or replaced solely to reduce risk or remain risk-neutral
through portfolio compression between or among covered swap entities
and their counterparties as long as:
(i) A non-cleared swap or non-cleared security-based swap that is
amended to reflect the outcome of the compression exercise does not:
(A) Extend the remaining maturity; or
(B) Increase the total effective notional amount of that swap; or
(ii) A non-cleared swap or non-cleared security-based swap that is
entered into as a replacement to reflect the outcome of the compression
exercise does not:
(A) 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 replacement swap; or
(B) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
indicator, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or
(B) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
novated to a third party, who complies with applicable margin rules for
the novated portion upon the transfer.
0
3. Amend Sec. 45.10 by revising paragraph (a) to read as follows:
Sec. 45.10 Documentation of margin matters.
* * * * *
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this subpart, and at such time as initial margin or
variation margin is required to be collected or posted under Sec. 45.3
or Sec. 45.4, as applicable; and
* * * * *
0
4. Section 45.11 is revised to read as follows:
Sec. 45.11 Initial margin exemption for affiliates.
(a) The requirement for a covered swap entity to collect or post
initial margin under Sec. 45.3 does not apply with respect to any non-
cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
(b) For purposes of this section, an affiliate means:
(1) An affiliate as defined in Sec. 45.2; and
(2) Any company that controls, is controlled by, or is under common
control with the covered swap entity through the direct or indirect
exercise of controlling influence over the management or policies of
the controlled company.
[[Page 59985]]
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the common preamble, the Board of
Governors of the Federal Reserve System proposes to amend 12 CFR part
237 to read as follows:
PART 237--SWAPS MARGIN AND SWAPS PUSH-OUT
0
5. The authority citation for part 237 continues to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 15 U.S.C. 8305,
12 U.S.C. 221 et seq., 12 U.S.C. 343-350, 12 U.S.C. 1818, 12 U.S.C.
1841 et seq., 12 U.S.C. 3101 et seq., and 12 U.S.C. 1461 et seq.
Subpart A-- Margin and Capital Requirements for Covered Swap
Entities (Regulation KK)
0
6. Section 237.1 is amended by:
0
a. Revising paragraphs (e)(6), (e)(7), (h) introductory text, and
(h)(1); and
0
b. Adding paragraphs (h)(3) through (h)(5).
The revisions and additions read as follows:
Sec. 237.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
(6) September 1, 2020 with respect to requirements in Sec. 237.3
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021 with respect to requirements in Sec. 237.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
* * * * *
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this subpart for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant
compliance dates for variation margin and for initial margin
established in paragraph (e) of this section. Any non-cleared swap or
non-cleared security-based swap entered into before such relevant date
shall remain outside the scope of this subpart if amendments are made
to the non-cleared swap or non-cleared security-based swap by method of
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, as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of part 47, subpart I
of part 252 or part 382 of title 12, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate 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; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph (h)(3)(i)(A) or (h)(3)(i)(B) of this section. An amendment
made under this paragraph (h)(3)(i)(C) could be one of multiple
amendments made under this paragraph (h)(3)(i)(C). For example, an
amendment could replace an IBOR with a temporary interest rate and
later replace the temporary interest rate with a permanent interest
rate.
(ii) Amendments to accommodate replacement of a rate described in
paragraph (h)(3)(i) may also incorporate spreads or other adjustments
to the replacement rate and make other necessary technical changes to
operationalize the determination of payments or other exchanges of
economic value using the replacement rate, including changes to
determination dates, calculation agents, and payment dates, so long as
the changes do not extend the maturity or increase the total effective
notional amount of the non-cleared swap or non-cleared security-based
swap.
(4) The non-cleared swap or non-cleared security-based swap was
amended or replaced solely to reduce risk or remain risk-neutral
through portfolio compression between or among covered swap entities
and their counterparties as long as:
(i) A non-cleared swap or non-cleared security-based swap that is
amended to reflect the outcome of the compression exercise does not:
(A) Extend the remaining maturity; or
(B) Increase the total effective notional amount of that swap; or
(ii) A non-cleared swap or non-cleared security-based swap that is
entered into as a replacement to reflect the outcome of the compression
exercise does not:
(A) 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 replacement swap; or
(B) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
indicator, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or
(B) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
novated to a third party, who complies with applicable margin rules for
the novated portion upon the transfer.
0
7. Amend Sec. 237.10 by revising paragraph (a) to read as follows:
Sec. 237.10 Documentation of margin matters.
* * * * *
[[Page 59986]]
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this subpart, and at such time as initial margin or
variation margin is required to be collected or posted under Sec.
237.3 or Sec. 237.4, as applicable; and
* * * * *
0
8. Section 237.11 is revised to read as follows:
Sec. 237.11 Initial margin exemption for affiliates.
(a) The requirement for a covered swap entity to collect or post
initial margin under Sec. 237.3 does not apply with respect to any
non-cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
(b) For purposes of this section, an affiliate means:
(1) An affiliate as defined in Sec. 237.2; and
(2) Any company that controls, is controlled by, or is under common
control with the covered swap entity through the direct or indirect
exercise of controlling influence over the management or policies of
the controlled company.
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the Supplementary Information section,
the Federal Deposit Insurance Corporation proposes to amend 12 CFR
Chapter III as follows:
PART 349--DERIVATIVES
0
9. The authority citation for subpart A of part 349 continues to read
as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), and 12 U.S.C.
1818 and 12 U.S.C. 1819(a)(Tenth), 12 U.S.C. 1813(q), 1818, 1819,
and 3108.
0
10. Section 349.1 is amended by:
0
a. Revising paragraphs (e)(6), (e)(7), (h) introductory text, and
(h)(1); and
0
b. Adding paragraphs (h)(3) through (h)(5).
The revisions and additions read as follows:
Sec. 349.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
* * * * *
(6) September 1, 2020 with respect to requirements in Sec. 349.3
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021 with respect to requirements in Sec. 349.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
* * * * *
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this part for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant
compliance dates for variation margin and for initial margin
established in paragraph (e) of this section. Any non-cleared swap or
non-cleared security-based swap entered into before such relevant date
shall remain outside the scope of this part if amendments are made to
the non-cleared swap or non-cleared security-based swap by method of
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, as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of part 47, subpart I
of part 252 or part 382 of title 12, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate 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; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph (h)(3)(i)(A) or (h)(3)(i)(B) of this section. An amendment
made under this paragraph (h)(3)(i)(C) could be one of multiple
amendments made under this paragraph (h)(3)(i)(C). For example, an
amendment could replace an IBOR with a temporary interest rate and
later replace the temporary interest rate with a permanent interest
rate.
(ii) Amendments to accommodate replacement of a rate described in
paragraph (h)(3)(i) may also incorporate spreads or other adjustments
to the replacement rate and make other necessary technical changes to
operationalize the determination of payments or other exchanges of
economic value using the replacement rate, including changes to
determination dates, calculation agents, and payment dates, so long as
the changes do not extend the maturity or increase the total effective
notional amount of the non-cleared swap or non-cleared security-based
swap.
(4) The non-cleared swap or non-cleared security-based swap was
amended or replaced solely to reduce risk or remain risk-neutral
through portfolio compression between or among covered swap entities
and their counterparties as long as:
(i) A non-cleared swap or non-cleared security-based swap that is
amended to reflect the outcome of the compression exercise does not:
(A) Extend the remaining maturity; or
(B) Increase the total effective notional amount of that swap; or
(ii) A non-cleared swap or non-cleared security-based swap that is
entered into as a replacement to reflect the outcome of the compression
exercise does not:
(A) 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 replacement swap; or
(B) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
[[Page 59987]]
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
indicator, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or
(B) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
novated to a third party, who complies with applicable margin rules for
the novated portion upon the transfer.
0
11. Amend Sec. 349.10 by revising paragraph (a) to read as follows:
Sec. 349.10 Documentation of margin matters.
* * * * *
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this subpart, and at such time as initial margin or
variation margin is required to be collected or posted under Sec.
349.3 or Sec. 349.4, as applicable; and
* * * * *
0
12. Section 349.11 is revised to read as follows:
Sec. 349.11 Initial margin exemption for affiliates.
(a) The requirement for a covered swap entity to collect or post
initial margin under Sec. 349.3 does not apply with respect to any
non-cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
(b) For purposes of this section, an affiliate means:
(1) An affiliate as defined in Sec. 349.2; and
(2) Any company that controls, is controlled by, or is under common
control with the covered swap entity through the direct or indirect
exercise of controlling influence over the management or policies of
the controlled company.
Farm Credit Administration
Authority and Issuance
For the reasons set forth in the preamble, the Farm Credit
Administration proposes to amend chapter VI of title 12, Code of
Federal Regulations, as follows:
PART 624--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
0
13. The authority citation for part 624 continues to read as follows:
Authority: 7 U.S.C 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 2154,
12 U.S.C. 2243, 12 U.S.C. 2252, 12 U.S.C. 2279bb-1.
0
14. Section 624.1 is amended by
0
a. Revising paragraphs (e)(6), (e)(7), (h) introductory text, and
(h)(1); and
0
b. Adding paragraphs (h)(3) through (h)(5).
The revisions and additions read as follows:
Sec. 624.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
* * * * *
(6) September 1, 2020 with respect to requirements in Sec. 624.3
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021 with respect to requirements in Sec. 624.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
* * * * *
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this part for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant
compliance dates for variation margin and for initial margin
established in paragraph (e) of this section. Any non-cleared swap or
non-cleared security-based swap entered into before such relevant date
shall remain outside the scope of this part if amendments are made to
the non-cleared swap or non-cleared security-based swap by method of
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, as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of part 47, subpart I
of part 252 or part 382 of title 12, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate 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; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph (h)(3)(i)(A) or (h)(3)(i)(B) of this section. An amendment
made under this paragraph (h)(3)(i)(C) could be one of multiple
amendments made under this paragraph (h)(3)(i)(C). For example, an
amendment could replace an IBOR with a temporary interest rate and
later replace the temporary interest rate with a permanent interest
rate.
(ii) Amendments to accommodate replacement of a rate described in
paragraph (h)(3)(i) may also incorporate spreads or other adjustments
to the replacement rate and make other necessary technical changes to
operationalize the determination of payments or other exchanges of
economic value using the replacement rate, including changes to
determination dates, calculation agents, and payment dates, so long as
the changes do not extend the maturity or increase the total effective
notional amount of the non-cleared swap or non-cleared security-based
swap.
(4) The non-cleared swap or non-cleared security-based swap was
amended or replaced solely to reduce risk or remain risk-neutral
through portfolio compression between or
[[Page 59988]]
among covered swap entities and their counterparties as long as:
(i) A non-cleared swap or non-cleared security-based swap that is
amended to reflect the outcome of the compression exercise does not:
(A) Extend the remaining maturity; or
(B) Increase the total effective notional amount of that swap; or
(ii) A non-cleared swap or non-cleared security-based swap that is
entered into as a replacement to reflect the outcome of the compression
exercise does not:
(A) 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 replacement swap; or
(B) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
indicator, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or (B) All payment obligations attached to the total
effective notional amount being eliminated as a result of the amendment
are fully novated to a third party, who complies with applicable margin
rules for the novated portion upon the transfer.
0
15. Amend Sec. 624.10 by revising paragraph (a) to read as follows:
Sec. 624.10 Documentation of margin matters.
* * * * *
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this subpart, and at such time as initial margin or
variation margin is required to be collected or posted under Sec.
624.3 or Sec. 624.4, as applicable; and
* * * * *
0
16. Section 624.11 is revised to read as follows:
Sec. 624.11 Initial margin exemption for affiliates.
(a) The requirement for a covered swap entity to collect or post
initial margin under Sec. 624.3 does not apply with respect to any
non-cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
(b) For purposes of this section, an affiliate means:
(1) An affiliate as defined in Sec. 624.2, and
(2) Any company that controls, is controlled by, or is under common
control with the covered swap entity through the direct or indirect
exercise of controlling influence over the management or policies of
the controlled company.
Federal Housing Finance Agency
Authority and Issuance
For the reasons set forth in the preamble, the Federal Housing
Finance Agency proposes to amend chapter XII of title 12, Code of
Federal Regulations, as follows:
PART 1221--MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP
ENTITIES
0
17. The authority citation for part 1221 continues to read as follows:
Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 4513,
and 12 U.S.C. 4526(a).
0
18. Section 1221.1 is amended by:
0
a. Revising paragraphs (e)(6), (e)(7), (h) introductory text, and
(h)(1); and
0
b. Adding paragraphs (h)(3) through (h)(5).
The revisions and additions read as follows:
Sec. 1221.1 Authority, purpose, scope, exemptions and compliance
dates.
* * * * *
(e) * * *
* * * * *
(6) September 1, 2020 with respect to requirements in Sec. 1221.3
for initial margin for any non-cleared swaps and non-cleared security-
based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an
average daily aggregate notional amount of non-cleared swaps, foreign
exchange forwards and foreign exchange swaps for March, April and May
2020 that exceeds $50 billion, where such amounts are calculated only
for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii)
of this section, an entity shall count the average daily aggregate
notional amount of a non-cleared swap, a non-cleared security-based
swap, a foreign exchange forward or a foreign exchange swap between the
entity and an affiliate only one time, and shall not count a swap or
security-based swap that is exempt pursuant to paragraph (d) of this
section.
(7) September 1, 2021 with respect to requirements in Sec. 1221.3
for initial margin for any other covered swap entity with respect to
non-cleared swaps and non-cleared security-based swaps entered into
with any other counterparty.
(h) Legacy swaps. Covered swaps entities are required to comply
with the requirements of this part for non-cleared swaps and non-
cleared security-based swaps entered into on or after the relevant
compliance dates for variation margin and for initial margin
established in paragraph (e) of this section. Any non-cleared swap or
non-cleared security-based swap entered into before such relevant date
shall remain outside the scope of this part if amendments are made to
the non-cleared swap or non-cleared security-based swap by method of
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, as follows:
(1) Amendments to the non-cleared swap or non-cleared security-
based swap solely to comply with the requirements of part 47, subpart I
of part 252 or part 382 of title 12, as applicable;
* * * * *
(3)(i) Amendments to the non-cleared swap or non-cleared security-
based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to,
the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered
Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank
Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), the Euro
Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered
Rate (HIBOR);
(B) Any other interest rate 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; or
(C) Any other interest rate that succeeds a rate referenced in
paragraph (h)(3)(i)(A) or (h)(3)(i)(B) of this section. An amendment
made under this paragraph (h)(3)(i)(C) could be one of multiple
amendments made under this
[[Page 59989]]
paragraph (h)(3)(i)(C). For example, an amendment could replace an IBOR
with a temporary interest rate and later replace the temporary interest
rate with a permanent interest rate.
(ii) Amendments to accommodate replacement of a rate described in
paragraph (h)(3)(i) may also incorporate spreads or other adjustments
to the replacement rate and make other necessary technical changes to
operationalize the determination of payments or other exchanges of
economic value using the replacement rate, including changes to
determination dates, calculation agents, and payment dates, so long as
the changes do not extend the maturity or increase the total effective
notional amount of the non-cleared swap or non-cleared security-based
swap.
(4) The non-cleared swap or non-cleared security-based swap was
amended or replaced solely to reduce risk or remain risk-neutral
through portfolio compression between or among covered swap entities
and their counterparties as long as:
(i) A non-cleared swap or non-cleared security-based swap that is
amended to reflect the outcome of the compression exercise does not:
(A) Extend the remaining maturity; or
(B) Increase the total effective notional amount of that swap; or
(ii) A non-cleared swap or non-cleared security-based swap that is
entered into as a replacement to reflect the outcome of the compression
exercise does not:
(A) 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 replacement swap; or
(B) Exceed the longest remaining maturity of all the swaps
submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was
amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of
parties for delivery of formal notices, and other administrative or
operational provisions as long as they do not alter the non-cleared
swap's or non-cleared security-based swap's underlying asset or
indicator, the remaining maturity, or the total effective notional
amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
terminated; or
(B) All payment obligations attached to the total effective
notional amount being eliminated as a result of the amendment are fully
novated to a third party, who complies with applicable margin rules for
the novated portion upon the transfer.
0
19. Amend Sec. 1221.10 by revising paragraph (a) to read as follows:
Sec. 1221.10 Documentation of margin matters.
* * * * *
(a) Provides the covered swap entity and its counterparty with the
contractual right to collect and post initial margin and variation
margin in such amounts, in such form, and under such circumstances as
are required by this part, and at such time as initial margin or
variation margin is required to be collected or posted under Sec.
1221.3 or Sec. 1221.4, as applicable; and
* * * * *
0
20. Section 1221.11 is revised to read as follows:
Sec. 1221.11 Initial margin exemption for affiliates.
(a) The requirement for a covered swap entity to collect or post
initial margin under Sec. 1221.3 does not apply with respect to any
non-cleared swap or non-cleared security-based swap with a counterparty
that is an affiliate.
(b) For purposes of this section, an affiliate means:
(1) An affiliate as defined in Sec. 1221.2; and
(2) Any company that controls, is controlled by, or is under common
control with the covered swap entity through the direct or indirect
exercise of controlling influence over the management or policies of
the controlled company.
Dated: September 17th, 2019.
Joseph M. Otting,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, October 21, 2019.
Ann E. Misback,
Secretary of the Board. Federal Deposit Insurance Corporation. By order
of the Board of Directors.
Dated at Washington, DC, on September 17, 2019.
Robert E. Feldman,
Executive Secretary.
By order of the Board of the Farm Credit Administration.
Dated at McLean, VA, this 17th day of September, 2019.
Dale L. Aultman,
Secretary.
Dated: August 27, 2019.
Mark A. Calabria,
Director, Federal Housing Finance Agency.
[FR Doc. 2019-23541 Filed 11-6-19; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 8070-01-P; 6705-01-P