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2017-22616
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Federal Register, Volume 82 Issue 200 (Wednesday, October 18, 2017)
[Federal Register Volume 82, Number 200 (Wednesday, October 18, 2017)]
[Rules and Regulations]
[Pages 48394-48413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-22616]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
Comparability Determination for the European Union: Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Notification of determination.
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SUMMARY: The following is the analysis and determination of the
Commodity Futures Trading Commission (``Commission'') regarding a
request by the European Commission (``EC'') that the Commission
determine that laws and regulations applicable in the European Union
(``EU'') provide a sufficient basis for an affirmative finding of
comparability with respect to margin requirements for uncleared swaps
applicable to certain swap dealers (``SDs'') and major swap
participants (``MSPs'') registered with the Commission. As discussed in
detail herein, the Commission has found the margin requirements for
uncleared swaps under the laws and regulations of the EU comparable in
outcome to those under the Commodity Exchange Act (``CEA'') and
Commission regulations.
DATES: This determination was made and issued by the Commission on
October 13, 2017.
FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, [email protected], or Katherine S. Driscoll, Associate Chief
Counsel, 202-418-5544, [email protected], Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
Pursuant to section 4s(e) of the CEA,\1\ the Commission is required
to promulgate margin requirements for uncleared swaps applicable to
each SD and MSP for which there is no Prudential Regulator
(collectively, ``Covered Swap Entities'' or ``CSEs'').\2\ The
Commission published final margin requirements for such CSEs in January
2016 (the ``Final Margin Rule'').\3\
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\1\ 7 U.S.C. 1 et seq.
\2\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a
Prudential Regulator must meet the margin requirements for uncleared
swaps established by the applicable Prudential Regulator. 7 U.S.C.
6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining the term
``Prudential Regulator'' to include: The Board of Governors of the
Federal Reserve System; the Office of the Comptroller of the
Currency; the Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency). The
Prudential Regulators published final margin requirements in
November 2015. See Margin and Capital Requirements for Covered Swap
Entities, 80 FR 74840 (Nov. 30, 2015) (``Prudential Regulators'
Final Margin Rule'').
\3\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The Final
Margin Rule, which became effective April 1, 2016, is codified in
part 23 of the Commission's regulations. See Sec. Sec. 23.150--
23.159 and 23.161. The Commission's regulations are found in Chapter
I of Title 17 of the Code of Federal Regulations, 17 CFR parts 1
through 199.
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Subsequently, on May 31, 2016, the Commission published in the
Federal Register its final rule with respect to the cross-border
application of the Commission's margin requirements for uncleared swaps
applicable to CSEs (hereinafter, the ``Cross-Border Margin Rule'').\4\
The Cross-Border Margin Rule sets out the circumstances under which a
CSE is allowed to satisfy the requirements under the Final Margin Rule
by complying with comparable foreign margin requirements (``substituted
compliance''); offers certain CSEs a limited exclusion from the
Commission's margin requirements; and outlines a framework for
assessing whether a foreign jurisdiction's margin requirements are
comparable in outcome to the Final Margin Rule (``comparability
determinations''). The Commission promulgated the Cross-Border Margin
Rule after close consultation with the Prudential Regulators and in
light of comments
[[Page 48395]]
from and discussions with market participants and foreign
regulators.\5\
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\4\ See Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Cross-Border Application of the Margin
Requirements, 81 FR 34818 (May 31, 2016). The Cross-Border Margin
Rule, which became effective August 1, 2016, is codified in part 23
of the Commission's regulations. See Sec. 23.160.
\5\ In 2014, in conjunction with re-proposing its margin
requirements, the Commission requested comment on three alternative
approaches to the cross-border application of its margin
requirements: (i) A transaction-level approach consistent with the
Commission's guidance on the cross-border application of the CEA's
swap provisions, see Interpretive Guidance and Policy Statement
Regarding Compliance with Certain Swap Regulations, 78 FR 45292
(July 26, 2013) (the ``Guidance''); (ii) an approach consistent with
the Prudential Regulators' proposed cross-border framework for
margin, see Margin and Capital Requirements for Covered Swap
Entities, 79 FR 57348 (Sept. 24, 2014); and (iii) an entity-level
approach that would apply margin rules on a firm-wide basis (without
any exclusion for swaps with non-U.S. counterparties). See Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants, 79 FR 59898 (Oct. 3, 2014). Following a review of
comments received in response to this release, the Commission's
Global Markets Advisory Committee (``GMAC'') hosted a public panel
discussion on the cross-border application of margin requirements.
See GMAC Meeting (May 14, 2015), transcript and webcast available at
http://www.cftc.gov/PressRoom/Events/opaevent_gmac051415.
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On November 22, 2016, the EC (the ``applicant'') submitted a
request that the Commission determine that laws and regulations
applicable in the EU provide a sufficient basis for an affirmative
finding of comparability with respect to the Final Margin Rule.\6\ The
Commission's analysis and comparability determination for the EU
regarding the Final Margin Rule is detailed below.
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\6\ The Commission understands that competent authorities in the
individual EU Member States have direct supervisory authority over
CSEs in their respective Member State with respect to the EU margin
requirements (as defined below) and are responsible for
administering those margin requirements. Nevertheless, given that
the EU comprises the Member States and the EU margin requirements
are directly applicable in the Member States, the Commission
recognizes the EC as the relevant foreign regulatory authority for
purposes of Sec. 23.160(c)(1)(ii).
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II. Cross-Border Margin Rule
A. Regulatory Objective of Margin Requirements
The regulatory objective of the Final Margin Rule is to further the
congressional mandate to ensure the safety and soundness of CSEs in
order to offset the greater risk to CSEs and the financial system
arising from the use of swaps that are not cleared.\7\ As the
Commission has previously stated, the primary function of margin is to
protect a CSE from counterparty default, allowing it to absorb losses
and continue to meet its obligations using collateral provided by the
defaulting counterparty. While the requirement to post margin protects
the counterparty in the event of the CSE's default, it also functions
as a risk management tool, limiting the amount of leverage a CSE can
utilize by requiring that it have adequate eligible collateral to enter
into an uncleared swap. In this way, margin serves as a first line of
defense not only in protecting the CSE but in containing the amount of
risk in the financial system as a whole, reducing the potential for
contagion arising from uncleared swaps.\8\
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\7\ See 7 U.S.C. 6s(e)(3)(A).
\8\ See Final Margin Rule, 81 FR 689.
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However, the global nature of the swap market, coupled with the
interconnectedness of market participants, also necessitate that the
Commission recognize the supervisory interests of foreign regulatory
authorities and consider the impact of its choices on market efficiency
and competition, which the Commission believes are vital to a well-
functioning global swap market.\9\ Foreign jurisdictions are at various
stages of implementing margin reforms. To the extent that other
jurisdictions adopt requirements with different coverage or timelines,
the Commission's margin requirements may lead to competitive burdens
for U.S. entities and deter non-U.S. persons from transacting with U.S.
CSEs and their affiliates overseas.
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\9\ In determining the extent to which the Dodd-Frank swap
provisions apply to activities overseas, the Commission strives to
protect U.S. interests, as determined by Congress in Title VII, and
minimize conflicts with the laws of other jurisdictions, consistent
with principles of international comity. See Guidance, 78 FR 45300-
45301 (referencing the Restatement (Third) of Foreign Relations Law
of the United States).
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B. Substituted Compliance
To address these concerns, the Cross-Border Margin Rule provides
that, subject to certain findings and conditions, a CSE is permitted to
satisfy the requirements of the Final Margin Rule by complying with the
margin requirements in the relevant foreign jurisdiction. This
substituted compliance regime is intended to address the concerns
discussed above without compromising the congressional mandate to
protect the safety and soundness of CSEs and the stability of the U.S.
financial system. Substituted compliance helps preserve the benefits of
an integrated, global swap market by reducing the degree to which
market participants will be subject to multiple sets of regulations.
Further, substituted compliance builds on international efforts to
develop a global margin framework.\10\
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\10\ In October 2011, the Basel Committee on Banking Supervision
(``BCBS'') and the International Organization of Securities
Commissions (``IOSCO''), in consultation with the Committee on
Payment and Settlement Systems and the Committee on Global Financial
Systems, formed a Working Group on Margining Requirements to develop
international standards for margin requirements for uncleared swaps.
Representatives of 26 regulatory authorities participated, including
the Commission. In September 2013, the Working Group on Margin
Requirements published a final report articulating eight key
principles for non-cleared derivatives margin rules. These
principles represent the minimum standards approved by BCBS and
IOSCO and their recommendations to the regulatory authorities in
member jurisdictions. See BCBS/IOSCO, Margin requirements for non-
centrally cleared derivatives (updated March 2015) (``BCBS/IOSCO
Framework''), available at http://www.bis.org/bcbs/publ/d317.pdf.
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Pursuant to the Cross-Border Margin Rule, any CSE that is eligible
for substituted compliance under Sec. 23.160 \11\ and any foreign
regulatory authority that has direct supervisory authority over one or
more CSEs and that is responsible for administering the relevant
foreign jurisdiction's margin requirements may apply to the Commission
for a comparability determination.\12\
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\11\ See Sec. 23.160(c)(1)(i).
\12\ See Sec. 23.160(c)(1)(ii).
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The Cross-Border Margin Rule requires that applicants for a
comparability determination provide copies of the relevant foreign
jurisdiction's margin requirements \13\ and descriptions of their
objectives,\14\ how they differ from the BCBS/IOSCO Framework,\15\ and
how they address the elements of the Commission's margin
requirements.\16\ The applicant must identify the specific legal and
regulatory provisions of the foreign jurisdiction's margin requirements
that correspond to each element and, if necessary, whether the relevant
foreign jurisdiction's margin requirements do not address a particular
element.\17\
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\13\ See Sec. 23.160(c)(2)(v).
\14\ See Sec. 23.160(c)(2)(i).
\15\ See Sec. 23.160(c)(2)(iii). See also Sec. 23.160(a)(3)
(defining ``international standards'' as based on the BCBS-ISOCO
Framework).
\16\ See 17 CFR 23.160(c)(2)(ii) (identifying 12 particular
elements of the Commission's margin requirements). Section
23.160(c)(2)(ii) largely tracks the elements of the BCBS/IOSCO
Framework but breaks them down into their components as appropriate
to ensure ease of application.
\17\ See id.
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C. Standard of Review for Comparability Determinations
The Cross-Border Margin Rule identifies certain key factors that
the Commission will consider in making a comparability determination.
Specifically, the Commission will consider the scope and objectives of
the relevant foreign jurisdiction's margin requirements; \18\ whether
the relevant foreign jurisdiction's margin requirements achieve
comparable outcomes to the Commission's
[[Page 48396]]
corresponding margin requirements; \19\ and the ability of the relevant
regulatory authority or authorities to supervise and enforce compliance
with the relevant foreign jurisdiction's margin requirements.\20\
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\18\ See Sec. 23.160(c)(3)(i).
\19\ See Sec. 23.160(c)(3)(ii). As discussed above, the
Commission's Final Margin Rule is based on the BCBS/IOSCO Framework;
therefore, the Commission expects that the relevant foreign margin
requirements would conform to such Framework at minimum in order to
be deemed comparable to the Commission's corresponding margin
requirements.
\20\ See Sec. 23.160(c)(3)(iii). See also Sec.
23.160(c)(3)(iv) (indicating the Commission would also consider any
other relevant facts and circumstances).
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This process reflects an outcomes-based approach to assessing the
comparability of a foreign jurisdiction's margin requirements. Instead
of demanding strict uniformity with the Commission's margin
requirements, the Commission evaluates the objectives and outcomes of
the foreign margin requirements in light of foreign regulator(s)'
supervisory and enforcement authority. Recognizing that jurisdictions
may adopt different approaches to achieving the same outcome, the
Commission will focus on whether the foreign jurisdiction's margin
requirements are comparable to the Commission's in purpose and effect,
not whether they are comparable in every aspect or contain identical
elements.
In keeping with the Commission's commitment to international
coordination on margin requirements for uncleared derivatives, the
Commission believes that the standards it has established are fully
consistent with the BCBS/IOSCO Framework.\21\ Accordingly, where
relevant to the Commission's comparability analysis, the BCBS/IOSCO
Framework is discussed to explain certain internationally agreed upon
concepts.
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\21\ The Final Margin Rule was modified substantially from its
proposed form to further align the Commission's margin requirements
with the BCBS/IOSCO Framework and, as a result, the potential for
conflict with foreign margin requirements should be reduced. For
example, the Final Margin Rule raised the material swaps exposure
level from $3 billion to the BCBS/IOSCO standard of $8 billion,
which reduces the number of entities that must collect and post
initial margin. See Final Margin Rule, 81 FR at 644. In addition,
the definition of uncleared swap was amended to not include swaps
cleared by derivatives clearing organizations that are not
registered with the Commission but pursuant to Commission orders are
permitted to clear for U.S. persons. See id. at 638. The Commission
notes, however, that the BCBS/IOSCO Framework leaves certain
elements open to interpretation (e.g., the definition of
``derivative'') and expressly invites regulators to build on certain
principles as appropriate. See, e.g., Element 4 (eligible
collateral) (national regulators should ``develop their own list of
eligible collateral assets based on the key principle, taking into
account the conditions of their own markets''); Element 5 (initial
margin) (the degree to which margin should be protected would be
affected by ``the local bankruptcy regime, and would vary across
jurisdictions''); Element 6 (transactions with affiliates)
(``Transactions between a firm and its affiliates should be subject
to appropriate regulation in a manner consistent with each
jurisdiction's legal and regulatory framework.'').
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The Cross-Border Margin Rule provided a detailed discussion
regarding the facts and circumstances under which substituted
compliance for the requirements under the Final Margin Rule would be
available and such discussion is not repeated here. CSEs seeking to
rely on substituted compliance based on the comparability
determinations contained herein are responsible for determining whether
substituted compliance is available under the Cross-Border Margin Rule
with respect to the CSE's particular status and circumstances.
D. Conditions to Comparability Determinations
The Cross-Border Margin Rule provides that the Commission may
impose terms and conditions it deems appropriate in issuing a
comparability determination.\22\ Specific terms and conditions with
respect to margin requirements are discussed in the Commission's
determinations detailed below.
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\22\ See 17 CFR 23.160(c)(5).
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As a general condition to all determinations, however, the
Commission requires notification of any material changes to information
submitted to the Commission by the applicant in support of a
comparability finding, including, but not limited to, changes in the
relevant foreign jurisdiction's supervisory or regulatory regime. The
Commission also expects that the relevant foreign regulator will enter
into, or will have entered into, an appropriate memorandum of
understanding or similar arrangement with the Commission in connection
with a comparability determination.\23\
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\23\ Under Commission regulations 23.203 and 23.606, CSEs must
maintain all records required by the CEA and the Commission's
regulations in accordance with Commission regulation 1.31 and keep
them open for inspection by representatives of the Commission, the
U.S. Department of Justice, or any applicable prudential regulator.
See 17 CFR 23.203, 23.606. The Commission further expects that
prompt access to books and records and the ability to inspect and
examine a non-U.S. CSE will be a condition to any comparability
determination.
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Finally, the Commission will generally rely on an applicant's
description of the laws and regulations of the foreign jurisdiction in
making its comparability determination. The Commission considers an
application to be a representation by the applicant that the laws and
regulations submitted are finalized,\24\ that the description of such
laws and regulations is accurate and complete, and that, unless
otherwise noted, the scope of such laws and regulations encompasses the
swaps activities \25\ of CSEs \26\ in the relevant jurisdictions.\27\
Further, the Commission requires that an applicant would notify the
Commission of any material changes to information submitted in support
of a comparability determination (including, but not limited to,
changes in the relevant supervisory or regulatory regime) as, depending
on the nature of the change, the Commission's comparability
determination may no longer be valid.\28\
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\24\ The Commission notes that finalized rules of the foreign
jurisdiction must be in full force and effect before a CSE may rely
on this comparability determination for purposes of substituted
compliance.
\25\ ``Swaps activities'' is defined in Commission regulation
23.600(a)(7) to mean, ``with respect to a registrant, such
registrant's activities related to swaps and any product used to
hedge such swaps, including, but not limited to, futures, options,
other swaps or security-based swaps, debt or equity securities,
foreign currency, physical commodities, and other derivatives.'' The
Commission's regulations under 17 CFR part 23 are limited in scope
to the swaps activities of CSEs.
\26\ No CSE that is not legally required to comply with a law or
regulation determined to be comparable may voluntarily comply with
such law or regulation in lieu of compliance with the CEA and the
relevant Commission regulation. Each CSE that seeks to rely on a
comparability determination is responsible for determining whether
it is subject to the laws and regulations found comparable.
\27\ The Commission has provided the relevant foreign
regulator(s) with opportunities to review and correct the
applicant's description of such laws and regulations on which the
Commission will base its comparability determination. The Commission
relies on the accuracy and completeness of such review and any
corrections received in making its comparability determinations. A
comparability determination based on an inaccurate description of
foreign laws and regulations may not be valid.
\28\ 78 FR 45345.
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III. Margin Requirements for Swaps Activities in the EU
As represented to the Commission by the applicant, margin
requirements for swap activities in the EU are governed by the
Regulatory Technical Standards for Risk-Mitigation Techniques for OTC
Derivative Contracts Not Cleared by a Central Counterparty
(``RTS'').\29\ The RTS supplement the requirements of EMIR with a more
detailed direction
[[Page 48397]]
with respect to margin requirements \30\ and are directly applicable in
all countries that are members of the EU (each country a ``Member
State''). Article 12 of EMIR further gives Member States the authority
to ``lay down the rules on penalties'' that apply to infringements of
the RTS and to take all measures necessary to ensure that those rules
are implemented.\31\
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\29\ Regulation No. 2016/2251 of October 4, 2016 Supplementing
Regulation (EU) No 648/2012 of the European Parliament and of the
Council of July 4, 2012 on OTC Derivatives, Central Counterparties
and Trade Repositories with Regard to Regulatory Technical Standards
for Risk-Mitigation Techniques for OTC Derivative Contracts Not
Cleared by a Central Counterparty (as corrected by Commission
Delegated Regulation (EU) 2017/323 of January 20, 2017). Regulation
(EU) No 648/2012 of the European Parliament and the Council of July
4, 2012 is more commonly known as the European Market Infrastructure
Regulation or ``EMIR.''
\30\ Together, EMIR and RTS are referred to herein as the ``EU
margin rules,'' ``the EU's margin regime,'' ``EU margin
requirements'' or the ``laws of the EU.''
\31\ See RTS, Article 40 and EMIR, Article 12(1).
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IV. Comparability Analysis
The following section describes the regulatory objectives of the
Commission's requirements with respect to margin for uncleared swaps
imposed by the CEA and the Final Margin Rule and a description of such
requirements. Immediately following a description of the requirement(s)
of the Final Margin Rule for which a comparability determination was
requested by the applicant, the Commission provides a description of
the foreign jurisdiction's comparable laws, regulations, or rules. The
Commission then provides a discussion of the comparability of, or
differences between, the Final Margin Rule and the foreign
jurisdiction's laws, regulations, or rules.
A. Objectives of Margin Requirements
1. Commission Statement of Regulatory Objectives
The regulatory objectives of the Final Margin Rule are to ensure
the safety and soundness of CSEs in order to offset the greater risk to
CSEs and the financial system arising from the use of swaps that are
not cleared. The primary function of margin is to protect a CSE from
counterparty default, allowing it to absorb losses and continue to meet
its obligations using collateral provided by the defaulting
counterparty. While the requirement to post margin protects the
counterparty in the event of the CSE's default, it also functions as a
risk management tool, limiting the amount of leverage a CSE can incur
by requiring that it have adequate eligible collateral to enter into an
uncleared swap. In this way, margin serves as a first line of defense,
not only in protecting the CSE, but in containing the amount of risk in
the financial system as a whole, reducing the potential for contagion
arising from uncleared swaps.\32\
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\32\ See Cross-Border Margin Rule, 81 FR 34819.
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2. EC Statement of Regulatory Objectives
The applicant states that, in the absence of clearing of OTC
derivatives by a CCP, it is essential that counterparties apply robust
risk-mitigation techniques to their bilateral relationships to reduce
counterparty credit risk and to mitigate the potential systemic risk
that could arise. Article 11 of EMIR prescribes risk-mitigation
techniques for OTC derivative contracts not cleared by a CCP. The RTS
supplement EMIR with regard to regulatory technical standards for risk-
mitigation techniques for OTC derivative contracts not cleared by a CCP
and take into account the Basel Committee-IOSCO margin framework for
non-centrally cleared OTC derivatives and the Basel Committee
guidelines for managing settlement risk in foreign exchange
transactions.\33\
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\33\ See RTS, Explanatory Memorandum at 3.
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B. Products Subject to Margin Requirements
The Commission's Final Margin Rule applies only to uncleared swaps.
Swaps are defined in section 1a(47) of the CEA \34\ and Commission
regulations.\35\ ``Uncleared swap'' is defined for purposes of the
Final Margin Rule in Commission regulation Sec. 23.151 to mean a swap
that is not cleared by a registered derivatives clearing organization,
or by a clearing organization that the Commission has exempted from
registration by rule or order pursuant to section 5b(h) of the Act.\36\
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\34\ 7 U.S.C. 1a(47).
\35\ See, e.g., Sec. 1.3(xxx), 17 CFR 1.3(xxx).
\36\ 17 CFR 23.151.
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The EU's margin rules apply to OTC derivatives not cleared by a CCP
(``non-centrally cleared OTC derivative'').\37\ ``Derivative'' for
purposes of the EU margin rules is defined in Article 2(5) of EMIR as a
financial instrument as set out in points (4) to (10) of Section C of
Annex I to MIFID \38\ as implemented by Articles 38 and 39 of EU
Regulation No. 1287/2006.\39\ Initial margin need not be collected for
physically-settled foreign exchange forwards, physically-settled
foreign exchange swaps, or cross-currency swaps.\40\ Regarding covered
bonds for hedging purposes, no variation margin needs to be posted by a
covered bond issuer or covered pool but must be collected from a
counterparty in cash and returned to a counterparty when due, and no
initial margin required.\41\
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\37\ See EMIR, Article 11(1) and RTS, Recital (1). CCP is
defined in Article 2(1) of EMIR to mean ``a legal person that
interposes itself between the counterparties to the contracts traded
on one or more financial markets, becoming the buyer to every seller
and the seller to every buyer.''
\38\ Under MiFID, such financial instruments are: (4) Options,
futures, swaps, forward rate agreements and any other derivative
contracts relating to securities, currencies, interest rates or
yields, or other derivatives instruments, financial indices or
financial measures which may be settled physically or in cash; (5)
Options, futures, swaps, forward rate agreements and any other
derivative contracts relating to commodities that must be settled in
cash or may be settled in cash at the option of one of the parties
(otherwise than by reason of a default or other termination event);
(6) Options, futures, swaps, and any other derivative contract
relating to commodities that can be physically settled provided that
they are traded on a regulated market and/or an MTF; (7) Options,
futures, swaps, forwards and any other derivative contracts relating
to commodities, that can be physically settled not otherwise
mentioned in C.6 and not being for commercial purposes, which have
the characteristics of other derivative financial instruments,
having regard to whether, inter alia, they are cleared and settled
through recognised clearing houses or are subject to regular margin
calls; (8) Derivative instruments for the transfer of credit risk;
(9) Financial contracts for differences; (10) Options, futures,
swaps, forward rate agreements and any other derivative contracts
relating to climatic variables, freight rates, emission allowances
or inflation rates or other official economic statistics that must
be settled in cash or may be settled in cash at the option of one of
the parties (otherwise than by reason of a default or other
termination event), as well as any other derivative contracts
relating to assets, rights, obligations, indices and measures not
otherwise mentioned in this Section, which have the characteristics
of other derivative financial instruments, having regard to whether,
inter alia, they are traded on a regulated market or an MTF, are
cleared and settled through recognised clearing houses or are
subject to regular margin calls. See MiFID, Annex I, Section C(4)-
(10).
\39\ Article 38 of EU Regulation No. 1287/2006 further defines
the financial instruments described in Point (7) of Section C of
Annex I to MiFID to generally be physically-settled FX forwards and
swaps. Article 39 of EU Regulation No. 1287/2006 further refines the
definition of financial instruments described in Point (10) of
Section C of Annex I to MiFID to generally be exchanges of principal
of currency swaps.
\40\ See RTS, Article 27.
\41\ See RTS, Article 30.
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An OTC derivative is a derivative which is not executed on a
regulated market or on a third-country market considered as equivalent
to a regulated market.\42\ While it is beyond the scope of this
comparability determination to definitively map any differences between
the definitions of ``swap'' and ``uncleared swap'' under the CEA and
Commission regulations and the EU's definitions of ``OTC derivative''
and ``non-centrally cleared OTC derivative,'' the Commission believes
that such definitions largely cover the same products and instruments.
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\42\ See EMIR, Article 2(7).
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However, because the definitions are not identical, the Commission
recognizes the possibility that a CSE may enter into a transaction that
is an uncleared swap as defined in the CEA and Commission regulations,
but that is not a non-centrally cleared OTC
[[Page 48398]]
derivative as defined under the laws of the EU. In such cases, the
Final Margin Rule would apply to the transaction but the EU's margin
rules would not apply and thus, substituted compliance would not be
available. The CSE could not choose to comply with the EU's margin
rules in place of the Final Margin Rule.
Likewise, if a transaction is a non-centrally cleared OTC
derivative as defined under the laws of the EU but not an uncleared
swap subject to the Final Margin Rule, a CSE could not choose to comply
with the Final Margin Rule pursuant to this determination, unless the
EU determines that it will permit the EU entity to follow the
Commission's margin requirements. CSEs are solely responsible for
determining whether a particular transaction is both an uncleared swap
and a non-centrally cleared OTC derivative before relying on
substituted compliance under the comparability determinations set forth
below.
C. Entities Subject to Margin Requirements
As stated previously, the Commission's Final Margin Rule and Cross-
Border Margin Rule apply only to CSEs, i.e., SDs and MSPs registered
with the Commission for which there is not a Prudential Regulator.\43\
Thus, only such CSEs may rely on the determinations herein for
substituted compliance, while CSEs for which there is a Prudential
Regulator must look to the determinations of the Prudential Regulators.
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\43\ See 7 U.S.C. 6s(e)(1)(B). SDs and MSPs for which there is a
Prudential Regulator must meet the margin requirements for uncleared
swaps established by the applicable Prudential Regulator. 7 U.S.C.
6s(e)(1)(A). See also 7 U.S.C. 1a(39) (defining the term
``Prudential Regulator'' to include the Board of Governors of the
Federal Reserve System; the Office of the Comptroller of the
Currency; the Federal Deposit Insurance Corporation; the Farm Credit
Administration; and the Federal Housing Finance Agency). The
Prudential Regulators published final margin requirements in
November 2015. See Prudential Regulators' Final Margin Rule, 80 FR
74840 (Nov. 30, 2015).
---------------------------------------------------------------------------
CSEs are not required to collect and/or post margin with every
uncleared swap counterparty. Under the Final Margin Rule, the initial
margin obligations of CSEs apply only to uncleared swaps with
counterparties that meet the definition of ``covered counterparty'' in
Sec. 23.151.\44\ Such definition provides that a ``covered
counterparty'' is a counterparty that is a financial end user \45\ with
material swaps exposure \46\ or a swap entity \47\ that enters into a
swap with a CSE. The variation margin obligations of CSEs under the
Final Margin Rule apply more broadly. Such obligations apply to
counterparties that are swap entities and all financial end users,
regardless of their level of material swaps exposure.\48\
---------------------------------------------------------------------------
\44\ See Sec. 23.152.
\45\ See definition of ``Financial end user'' in Sec. 23.150.
\46\ See Sec. 23.150, which states that ``material swaps
exposure'' for an entity means that the entity and its margin
affiliates have an average daily aggregate notional amount of
uncleared swaps, uncleared security-based swaps, foreign exchange
forwards, and foreign exchange swaps with all counterparties for
June, July and August of the previous calendar year that exceeds $8
billion, where such amount is calculated only for business days.
That provision further states that an entity shall count the average
daily aggregate notional amount of an uncleared swap, an uncleared
security-based swap, a foreign exchange forward, or a foreign
exchange swap between the entity and a margin affiliate only one
time. For purposes of this calculation, an entity shall not count a
swap that is exempt pursuant to Sec. 23.150(b) or a security-based
swap that qualifies for an exemption under section 3C(g)(10) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4)) and
implementing regulations or that satisfies the criteria in section
3C(g)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78-
c3(g)(4)) and implementing regulations.
\47\ ``Swap entity'' is defined in Sec. 23.150 as a person that
is registered with the Commission as a swap dealer or major swap
participant pursuant to the Act.
\48\ See Sec. 23.153.
---------------------------------------------------------------------------
As represented by the applicant, the EU's margin rules apply to all
financial counterparties, which include investment firms, credit
institutions, insurance companies, and alternative investment funds
that are authorized or registered in accordance with various EU
directives (``FC'').\49\ CCPs not authorized as credit institutions are
outside the scope of Article 11 of EMIR and CCPs authorized as credit
institutions are exempt from the RTS.\50\ The EU's margin rules also
apply to non-financial counterparties (any EU entity other than an FC
or a CCP \51\) (``NFC'') that are above a certain clearing threshold
(``NFC+'').\52\ Under the EU rules, no margin is required for non-
centrally cleared OTC derivatives with NFCs that fall below the
clearing threshold (``NFC-'') or non-EU entities that would be NFC-s if
established in the EU.\53\ However, under the EU margin rules,
counterparties must take into account the different risk profiles of
NFC-s when entering into non-centrally cleared OTC derivatives with
such counterparties and determine whether or not the level of
counterparty credit risk posed by those NFC-s needs to be mitigated
through the exchange of collateral.\54\ Like the Final Margin Rule, the
EU margin rules include a threshold under which initial margin
requirements will not apply, while the variation margin requirements
apply more broadly.\55\
---------------------------------------------------------------------------
\49\ See EMIR, Article 11 (Risk-Mitigation Techniques for OTC
Derivative Contracts Not Cleared by a CCP). While the definition of
``financial counterparty'' under EMIR includes credit institutions
authorized in accordance with Directive 2006/48/EU, CCPs that are
authorized as credit institutions are exempted from the EU's margin
rules. See RTS, Article 23. As explained in the RTS, since CCPs
might be authorized as a credit institution according to Union
legislation, it is necessary to excluded non-centrally cleared OTC
derivative contracts that CCPs enter into during a default
management process from the requirements of this Regulation since
those contracts are already subject to the provisions of Commission
Delegated Regulation (EU) No 153/2013 and therefore they are not
subject to the provisions of these Regulations.
\50\ See RTS, Article 23.
\51\ See EMIR, Article 2(9).
\52\ See EMIR, Article 11(3) (``[NFCs] . . . shall have risk-
management procedures that require the timely, accurate and
appropriately segregated exchange of collateral with respect to OTC
derivative contracts that are entered into on or after the clearing
threshold is exceeded.''). The clearing threshold values are
measured by asset class as follows:
(a) EUR 1 billion in gross notional value for OTC credit
derivative contracts;
(b) EUR 1 billion in gross notional value for OTC equity
derivative contracts;
(c) EUR 3 billion in gross notional value for OTC interest rate
derivative contracts;
(d) EUR 3 billion in gross notional value for OTC foreign
exchange derivative contracts;
(e) EUR 3 billion in gross notional value for OTC commodity
derivative contracts and other OTC derivative contracts not provided
for under points (a) to (d).
See Article 11 of Commission Delegated Regulation (EU) No 149/
2013 of December 19, 2012 Supplementing EMIR with Regard to
Regulatory Technical Standards on Indirect Clearing Arrangements,
the Clearing Obligation, the Public Register, Access to a Trading
Venue, Non-Financial Counterparties, and Risk Mitigation Techniques
for Uncleared OTC Derivatives (pursuant to Article 10(4)(b) of
EMIR).
\53\ See RTS, Article 24.
\54\ See RTS, Recital (2).
\55\ See RTS, Article 28, stating: Counterparties may provide in
their risk management procedures that initial margins are not
collected for all new OTC derivative contracts entered into within a
calendar year where one of the two counterparties has an aggregate
month-end average notional amount of non-centrally cleared OTC
derivatives for the months March, April and May of the preceding
year of below EUR 8 billion. The aggregate month-end average
notional amount referred to in the first subparagraph shall be
calculated at the counterparty level or at the group level where the
counterparty belongs to a group.
---------------------------------------------------------------------------
Given the definitional differences and differences in activity
thresholds with respect to the scope of application of the Final Margin
Rule and the EU's margin requirements, the Commission notes the
possibility that the Final Margin Rule and the EU's margin rules may
not apply to every uncleared swap that a CSE may enter into with a EU
counterparty. For example, it appears possible that a financial end
user with ``material swaps exposure'' would meet the definition of
``covered counterparty'' under the Final Margin Rule (and thus the
initial and variation margin
[[Page 48399]]
requirements) while at the same time fall under the EU's clearing
threshold (an NFC-) and not be subject the EU margin requirements. It
may also be possible that the Final Margin Rule's definition of
``financial end user'' could capture an entity that is an NFC under the
EU's margin regime.
With these differences in scope in mind, the Commission reiterates
that no CSE may rely on substituted compliance unless it and its
transaction are subject to both the Final Margin Rule and the EU's
margin rules; a CSE may not voluntarily comply with the EU's margin
rules where such law does not otherwise apply. Likewise, a CSE that is
not seeking to rely on substituted compliance should understand that
the EU's margin rules may apply to its counterparty irrespective of the
CSE's decision to comply with the Final Margin Rule.
D. Treatment of Inter-Affiliate Derivative Transactions
The BCBS/IOSCO Framework recognizes that the treatment of inter-
affiliate derivative transactions will vary between jurisdictions.
Thus, the BCBS/IOSCO Framework does not set standards with respect to
the treatment of inter-affiliate transactions. Rather, it recommends
that regulators in each jurisdiction review their own legal frameworks
and market conditions and put in place margin requirements applicable
to inter-affiliate transactions as appropriate.\56\
---------------------------------------------------------------------------
\56\ See BCBS/IOSCO Framework, Element 6: Treatment of
transactions with affiliates.
---------------------------------------------------------------------------
1. Commission Requirements for Treatment of Inter-Affiliate
Transactions
The Commission determined through its Final Margin Rule to provide
rules for swaps between ``margin affiliates.'' In defining ``margin
affiliate,'' those rules provide that a company is a margin affiliate
of another company if: (1) Either company consolidates the other on a
financial statement prepared in accordance with U.S. Generally Accepted
Accounting Principles, the International Financial Reporting Standards,
or other similar standards; (2) both companies are consolidated with a
third company on a financial statement prepared in accordance with such
principles or standards; or (3) for a company that is not subject to
such principles or standards, if consolidation as described in (1) or
(2) would have occurred if such principles or standards had
applied.\57\
---------------------------------------------------------------------------
\57\ Sec. 23.151.
---------------------------------------------------------------------------
With respect to swaps between margin affiliates, the Final Margin
Rule, with one exception explained below, provides that a CSE is not
required to collect initial margin \58\ from a margin affiliate
provided that the CSE meets the following conditions: (i) The swaps are
subject to a centralized risk management program that is reasonably
designed to monitor and to manage the risks associated with the inter-
affiliate swaps; and (ii) the CSE exchanges variation margin with the
margin affiliate.\59\
---------------------------------------------------------------------------
\58\ ``Initial margin'' is margin exchanged to protect against a
potential future exposure and is defined in Sec. 23.151 to mean the
collateral, as calculated in accordance with Sec. 23.154 that is
collected or posted in connection with one or more uncleared swaps.
\59\ See Sec. 23.159(a).
---------------------------------------------------------------------------
In an exception to the foregoing general rule, the Final Margin
Rule does require CSEs to collect initial margin from non-U.S.
affiliates that are financial end users that are not subject to initial
margin collection requirements on their own outward-facing swaps with
financial end users that are not comparable in outcome to the Final
Margin Rule.\60\ This provision is an important anti-evasion measure.
It is designed to prevent the potential use of affiliates to avoid
collecting initial margin from third parties. For example, suppose that
an unregistered non-U.S. affiliate of a CSE enters into a swap with a
financial end user and does not collect initial margin. Suppose further
that the affiliate then enters into a swap with the CSE. Effectively,
the risk of the swap with the third party would have been passed to the
CSE without any initial margin. The rule would require this affiliate
to post initial margin with the CSE in such cases. The rule would
further require that the CSE collect initial margin even if the
affiliate routed the trade through one or more other affiliates.\61\
---------------------------------------------------------------------------
\60\ See Sec. 23.159(c).
\61\ See id.
---------------------------------------------------------------------------
The Commission has stated that its inter-affiliate initial margin
requirement is consistent with its goal of harmonizing its margin rules
as much as possible with the BCBS/IOSCO Framework. Such Framework, for
example, states that the exchange of initial and variation margin by
affiliated parties ``is not customary'' and that initial margin in
particular ``would likely create additional liquidity demands.'' \62\
With an understanding that many authorities, such as those in Europe
and Japan, are not expected to require initial margin for inter-
affiliate swaps, the Commission recognized that requiring the posting
and collection of initial margin for inter-affiliate swaps generally
would be likely to put CSEs at a competitive disadvantage to firms in
other jurisdictions.
---------------------------------------------------------------------------
\62\ See BCBS/IOSCO Framework, Element 6: Treatment of
transactions with affiliates.
---------------------------------------------------------------------------
The Final Margin Rule however, does require CSEs to exchange
variation margin with affiliates that are SDs, MSPs, or financial end
users (as is also required under the Prudential Regulators' rules).\63\
The Commission stated that marking open positions to market each day
and requiring the posting or collection of variation margin reduces the
risks of inter-affiliate swaps.
---------------------------------------------------------------------------
\63\ See Sec. 23.159(b); see also Prudential Regulators' Final
Margin Rule, 80 FR 74909.
---------------------------------------------------------------------------
2. Requirement for Treatment of Inter-Affiliate Derivatives Under the
Laws of the EU
Under Article 11 of EMIR, the EU's margin requirements generally
apply to intragroup transactions as defined in Article 3 of EMIR. Such
``intragroup transactions'' are defined differently for intragroup
transactions in relation to an FC (``FC Intragroup Transactions'') \64\
and intragroup transactions in relation to an NFC (``NFC Intragroup
Transactions'' and, together with FC Intragroup Transactions,
``Intragroup Transactions'').\65\ What the EU defines
[[Page 48400]]
as Intragroup Transactions is generally in keeping with the
Commission's definition of ``margin affiliate'' for purposes of the
Final Margin Rule, discussed above.
---------------------------------------------------------------------------
\64\ Article 3(2) of EMIR defines an ``intragroup transaction''
for an FC to be:
(a) An OTC derivative contract entered into with another
counterparty which is part of the same group, provided that the
following conditions are met:
(i) The financial counterparty is established in the Union or,
if it is established in a third country, the Commission has adopted
an implementing act under Article 13(2) in respect of that third
country;
(ii) the other counterparty is a financial counterparty, a
financial holding company, a financial institution or an ancillary
services undertaking subject to appropriate prudential requirements;
(iii) both counterparties are included in the same consolidation
on a full basis; and
(iv) both counterparties are subject to appropriate centralised
risk evaluation, measurement and control procedures;
(b) an OTC derivative contract entered into with another
counterparty where both counterparties are part of the same
institutional protection scheme, referred to in Article 80(8) of
Directive 2006/48/EC, provided that the condition set out in point
(a)(ii) of this paragraph is met;
(c) an OTC derivative contract entered into between credit
institutions affiliated to the same central body or between such
credit institution and the central body, as referred to in Article
3(1) of Directive 2006/48/EC; or
(d) an OTC derivative contract entered into with a non-financial
counterparty which is part of the same group provided that both
counterparties are included in the same consolidation on a full
basis and they are subject to an appropriate centralised risk
evaluation, measurement and control procedures and that counterparty
is established in the Union or in a third-country jurisdiction for
which the Commission has adopted an implementing act as referred to
in Article 13(2) in respect of that third country.
\65\ Article 3(1) of EMIR defines an ``intragroup transaction''
for an NFC to be:
[A]n OTC derivative contract entered into with another
counterparty which is part of the same group provided that both
counterparties are included in the same consolidation on a full
basis and they are subject to an appropriate centralised risk
evaluation, measurement and control procedures and that counterparty
is established in the Union or, if it is established in a third
country, the Commission has adopted an implementing act under
Article 13(2) in respect of that third country.
---------------------------------------------------------------------------
For Intragroup Transactions between counterparties established in
the same Member State, no margin requirements will apply, but only as
long as there is no legal impediment to the prompt transfer of own
funds or repayment of liabilities between counterparties.\66\ A legal
impediment to the prompt transfer of own funds and repayment of
liabilities shall be deemed to exist where there are actual or foreseen
restrictions of a legal nature.\67\
---------------------------------------------------------------------------
\66\ See EMIR, Article 11(5); see also RTS, Article 33
(Applicable Criteria for the Legal Impediment to the Prompt Transfer
of Own Funds and Repayment of Liabilities).
\67\ See RTS, Article 33. Such restrictions include:
(a) Currency and exchange controls;
(b) a regulatory, administrative, legal or contractual framework
that prevents mutual financial support or significantly affects the
transfer of funds within the group;
(c) any of the conditions on the early intervention, recovery
and resolution as referred to in Directive 2014/59/EU of the
European Parliament and of the Council (1) are met, as a result of
which the competent authority foresees an impediment to the prompt
transfer of own funds or repayment of liabilities;
(d) the existence of minority interests that limit decision-
making power within entities that form the group;
(e) the nature of the legal structure of the counterparty, as
defined in its statutes, instruments of incorporation and internal
rules.
See RTS, Article 33(a)-(e).
---------------------------------------------------------------------------
For Intragroup Transactions between counterparties established in
different Member States, the EU margin rules generally provide,
depending on the nature and location of the counterparties, that such
Intragroup Transactions may be excluded from the EU margin requirements
but only if, in addition to there being no current or legal impediment
to the prompt transfer of own funds or repayment of liabilities between
the counterparties, the counterparties (i) have risk management
procedures that are sound, robust, and consistent with the level of
complexity of the derivative transaction, and (ii) in keeping with the
procedures established under the RTS,\68\ the counterparties have
notified the relevant competent authority \69\ or authorities of the
intention to use the exemption and the authority or authorities have
reached a positive decision to allow the exemption.\70\ The
counterparties to an exempted Intragroup Transaction must publicly
disclose information about the exemption.\71\
---------------------------------------------------------------------------
\68\ See RTS, Article 32.
\69\ See EMIR, Article 2(13) for the definition of ``competent
authority'' for purposes of the RTS.
\70\ See EMIR, Article 11(6) to (10).
\71\ See EMIR, Article 11(11).
---------------------------------------------------------------------------
Where one of the two counterparties in the group is domiciled in a
third-country for which an equivalence determination under Article
13(2) of EMIR has not yet been provided, the group has to exchange
variation and appropriately segregated initial margins for all the
Intragroup Transactions with the subsidiaries in those third-
countries.\72\ However, the requirements are delayed for three years in
these cases.\73\ This is to allow enough time for completion of the
process to produce the equivalence determinations, while not requiring
an inefficient allocation of resources to the groups with subsidiaries
domiciled in third-countries.\74\ Where an equivalence decision has
been made, counterparties may then apply for an exemption pursuant to
the timing and process established under EMIR and the RTS.\75\
---------------------------------------------------------------------------
\72\ See RTS, Recital (40).
\73\ See RTS, Articles 36 and 37.
\74\ See RTS, Recital (40).
\75\ See RTS, Articles 36 and 37.
---------------------------------------------------------------------------
3. Commission Determination
Having compared the outcomes of the EU's margin requirements
applicable to Intragroup Transactions to the outcomes of the
Commission's corresponding margin requirements applicable to inter-
affiliate swaps, the Commission finds that the treatment of inter-
affiliate transactions under the Final Margin Rule and under the EU's
margin requirements are comparable in outcome.
A CSE entering into a transaction with a consolidated affiliate
under the Final Margin Rule would be required to exchange variation
margin in accordance with Sec. Sec. 23.151 through 23.161, and in
certain circumstances, collect initial margin in accordance with Sec.
23.159(c). The Commission continues to deem this provision an important
anti-evasion measure, designed to prevent the potential use of
affiliates to avoid collecting initial margin from third parties.\76\
In adopting its Final Margin Rule, the Commission recognized that, in
absence of proper anti-evasion measures, a CSE could import risk from
another jurisdiction, one with potentially less stringent margin
protections, through inter-affiliate trades.\77\ In analyzing the EU's
margin rules, the Commission specifically notes that the EU margin
rules will apply to inter-affiliate trades involving an affiliate that
is established in a third-country (non-EU) jurisdiction, unless
specifically excluded. Any exclusion from the EU margin rules is
subject to an application process, which would require a finding that
the relevant non-EU jurisdiction's margin requirements are equivalent.
This comparability requirement provides protection to the consolidated
entity, as the consolidated entity would not be able to import risk
from third country jurisdictions that are not equivalent, without
posting and collecting initial margin and exchanging variation margin.
Therefore, the Commission believes that the EU's review process for
finding comparability in third-country jurisdictions addresses the
Commission's anti-evasion concerns relating to inter-affiliate
transactions.
---------------------------------------------------------------------------
\76\ See Final Margin Rule, 81 FR 674.
\77\ See id.
---------------------------------------------------------------------------
In addition, where a CSE and its inter-affiliate counterparty are
subject to the Commission's margin requirements and the EU's margin
requirements, all of the EU's margin requirements would apply,
including the requirement to exchange variation margin, absent meeting
the specific conditions detailed above. Other than where the two
counterparties are established in the same Member State, those specific
conditions involve a process of applying to the relevant Member State
competent authority(ies) \78\ and receiving a positive determination
from either or both competent authorities \79\ or upon notification to
the relevant Member State competent authority(ies) and agreement of
those competent authorities.\80\ All exemptions are also predicated on
the absence of any current or foreseen practical or legal impediment to
the prompt transfer of own funds or repayment of liabilities between
the counterparties \81\ and on the
[[Page 48401]]
existence of adequately sound and robust risk management practices that
are consistent with the level of complexity of the derivatives
transaction.\82\
---------------------------------------------------------------------------
\78\ RTS, Recital (37) states:
When a counterparty notifies the relevant competent authority
regarding its intention to take advantage of the exemption of
intragroup transactions, in order for the competent authority to
decide whether the conditions for the exemption are met, the
counterparty should provide a complete file including all relevant
information necessary for the competent authority to complete its
assessment.
\79\ See EMIR, Article 11(6), (8), and (10).
\80\ See EMIR, Article 11(7) and (9).
\81\ See EMIR, Article 11(6)-(10). In addition, RTS, Recital
(39) states:
In order for the exemption for intragroup transactions to be
applicable, it must be certain that no legislative, regulatory,
administrative or other mandatory provisions of applicable law could
legally prevent the intragroup counterparties from meeting their
obligations to transfer monies or repay liabilities or securities
under the terms of the intragroup transactions. Similarly, there
should be no operational or business practices of the intragroup
counterparties or the group that could result in funds not being
available to meet payment obligations as they fall due on a day-to-
day basis, or in prompt electronic transfer of funds not being
possible.
\82\ RTS, Recital (38) states:
For a group to be deemed to have adequately sound and robust
risk management procedures, a number of conditions have to be met.
The group should ensure a regular monitoring of the intragroup
exposures, and the timely settlement of the obligations resulting
from the intragroup OTC derivative contracts should be guaranteed
based on the monitoring and liquidity tools at group level that are
consistent with the complexity of the intragroup transactions.
---------------------------------------------------------------------------
E. Methodologies for Calculating the Amounts of Initial and Variation
Margin
As an overview, the methodologies for calculating initial and
variation margin as agreed under the BCBS/IOSCO Framework state that
the margin collected from a counterparty should (i) be consistent
across entities covered by the requirements and reflect the potential
future exposure (initial margin) and current exposure (variation
margin) associated with the particular portfolio of non-centrally
cleared derivatives, and (ii) ensure that all counterparty risk
exposures are covered fully with a high degree of confidence.
With respect to the calculation of initial margin, as a minimum the
BCBS/IOSCO Framework generally provides that:
Initial margin requirements will not apply to
counterparties that have less than EUR 8 billion of gross notional in
outstanding derivatives.
Initial margin may be subject to a EUR 50 million
threshold applicable to a consolidated group of affiliated
counterparties.
All margin transfers between parties may be subject to a
de-minimis minimum transfer amount not to exceed EUR 500,000.
The potential future exposure of a non-centrally cleared
derivative should reflect an extreme but plausible estimate of an
increase in the value of the instrument that is consistent with a one-
tailed 99% confidence interval over a 10-day horizon, based on
historical data that incorporates a period of significant financial
stress.
The required amount of initial margin may be calculated by
reference to either (i) a quantitative portfolio margin model or (ii) a
standardized margin schedule.
When initial margin is calculated by reference to an
initial margin model, the period of financial stress used for
calibration should be identified and applied separately for each broad
asset class for which portfolio margining is allowed.
Models may be either internally developed or sourced from
the counterparties or third-party vendors but in all such cases, models
must be approved by the appropriate supervisory authority.
Quantitative initial margin models must be subject to an
internal governance process that continuously assesses the value of the
model's risk assessments, tests the model's assessments against
realized data and experience, and validates the applicability of the
model to the derivatives for which it is being used.
An initial margin model may consider all of the
derivatives that are approved for model use that are subject to a
single legally enforceable netting agreement.
Initial margin models may account for diversification,
hedging, and risk offsets within well-defined asset classes such as
currency/rates, equity, credit, or commodities, but not across such
asset classes and provided these instruments are covered by the same
legally enforceable netting agreement and are approved by the relevant
supervisory authority.
The total initial margin requirement for a portfolio
consisting of multiple asset classes would be the sum of the initial
margin amounts calculated for each asset class separately.
Derivatives for which a firm faces zero counterparty risk
require no initial margin to be collected and may be excluded from the
initial margin calculation.
Where a standardized initial margin schedule is
appropriate, it should be computed by multiplying the gross notional
size of a derivative by the standardized margin rates provided under
the BCBS/IOSCO Framework and adjusting such amount by the ratio of the
net current replacement cost to gross current replacement cost (NGR)
pertaining to all derivatives in a legally enforceable netting set. The
BCBS/IOSCO Framework provides the following standardized margin rates:
\83\
---------------------------------------------------------------------------
\83\ See BCBS/IOSCO Framework.
------------------------------------------------------------------------
Initial margin
requirement (% of
Asset class notional
exposure)
------------------------------------------------------------------------
Credit:
0-2 year duration................................. 2
2-5 year duration.................................. 5
5+ year duration................................... 10
Commodity............................................ 15
Equity............................................... 15
Foreign exchange..................................... 6
Interest rate:
0-2 year duration.................................. 1
2-5 year duration.................................. 2
5+ year duration................................... 4
Other................................................ 15
------------------------------------------------------------------------
For a regulated entity that is already using a schedule-
based margin to satisfy requirements under its required capital regime,
the appropriate supervisory authority may permit the use of the same
schedule for initial margin purposes, provided that it is at least as
conservative.
The choice between model- and schedule-based initial
margin calculations should be made consistently over time for all
transactions within the same well defined asset class.
Initial margin should be collected at the outset of a
transaction, and collected thereafter on a routine and consistent basis
upon changes in measured potential future exposure, such as when trades
are added to or subtracted from the portfolio.
In the event that a margin dispute arises, both parties
should make all necessary and appropriate efforts, including timely
initiation of dispute resolution protocols, to resolve the dispute and
exchange the required amount of initial margin in a timely fashion.
With respect to the calculation of variation margin, as a minimum
the BCBS/IOSCO Framework generally provides that:
The full amount necessary to fully collateralize the mark-
to-market exposure of the non-centrally cleared derivatives must be
exchanged.
Variation margin should be calculated and exchanged for
derivatives subject to a single, legally enforceable netting agreement
with sufficient frequency (e.g., daily).
In the event that a margin dispute arises, both parties
should make all necessary and appropriate efforts, including timely
initiation of dispute resolution protocols, to resolve the dispute and
exchange the required amount of variation margin in a timely fashion.
1. Commission Requirement for Calculation of Initial Margin
In keeping with the BCBS/IOSCO Framework described above, with
respect to the calculation of initial
[[Page 48402]]
margin, the Commission's Final Margin Rule generally provides that:
Initial margin is intended to address potential future
exposure, i.e., in the event of a counterparty default, initial margin
protects the non-defaulting party from the loss that may result from a
swap or portfolio of swaps, during the period of time needed to close
out the swap(s).\84\
---------------------------------------------------------------------------
\84\ See Final Margin Rule, 81 FR 683.
---------------------------------------------------------------------------
Potential future exposure is to be an estimate of the one-
tailed 99% confidence interval for an increase in the value of the
uncleared swap or netting portfolio of uncleared swaps due to an
instantaneous price shock that is equivalent to a movement in all
material underlying risk factors, including prices, rates, and spreads,
over a holding period equal to the shorter of 10 business days or the
maturity of the swap or netting portfolio.\85\
---------------------------------------------------------------------------
\85\ See Sec. 23.154(b)(2)(i).
---------------------------------------------------------------------------
The required amount of initial margin may be calculated by
reference to either (i) a risk-based margin model or (ii) a table-based
method.\86\
---------------------------------------------------------------------------
\86\ See Sec. 23.154(a)(1)(i) and (ii).
---------------------------------------------------------------------------
All data used to calibrate the initial margin model shall
incorporate a period of significant financial stress for each broad
asset class that is appropriate to the uncleared swaps to which the
initial margin model is applied.\87\
---------------------------------------------------------------------------
\87\ See Sec. 23.154(b)(2)(ii).
---------------------------------------------------------------------------
CSEs shall obtain the written approval of the Commission
or a registered futures association to use a model to calculate the
initial margin required.\88\
---------------------------------------------------------------------------
\88\ See Sec. 23.154(b)(1)(i).
---------------------------------------------------------------------------
An initial margin model may calculate initial margin for a
netting portfolio of uncleared swaps covered by the same eligible
master netting agreement.\89\
---------------------------------------------------------------------------
\89\ See Sec. 23.154(b)(2)(v).
---------------------------------------------------------------------------
An initial margin model may reflect offsetting exposures,
diversification, and other hedging benefits for uncleared swaps that
are governed by the same eligible master netting agreement by
incorporating empirical correlations within the following broad risk
categories, provided the CSE validates and demonstrates the
reasonableness of its process for modeling and measuring hedging
benefits: Commodity, credit, equity, and foreign exchange or interest
rate.\90\
---------------------------------------------------------------------------
\90\ See id.
---------------------------------------------------------------------------
Empirical correlations under an eligible master netting
agreement may be recognized by the model within each broad risk
category, but not across broad risk categories.\91\
---------------------------------------------------------------------------
\91\ See id.
---------------------------------------------------------------------------
If the initial margin model does not explicitly reflect
offsetting exposures, diversification, and hedging benefits between
subsets of uncleared swaps within a broad risk category, the CSE shall
calculate an amount of initial margin separately for each subset of
uncleared swaps for which such relationships are explicitly recognized
by the model and the sum of the initial margin amounts calculated for
each subset of uncleared swaps within a broad risk category will be
used to determine the aggregate initial margin due from the
counterparty for the portfolio of uncleared swaps within the broad risk
category.\92\
---------------------------------------------------------------------------
\92\ See Sec. 23.154(b)(2)(vi).
---------------------------------------------------------------------------
Where a risk-based model is not used, initial margin must
be computed by multiplying the gross notional size of a derivative by
the standardized margin rates provided under Sec. 23.154(c)(i) \93\
and adjusting such amount by the ratio of the net current replacement
cost to gross current replacement cost (NGR) pertaining to all
derivatives under the same eligible master netting agreement.\94\
---------------------------------------------------------------------------
\93\ The standardized margin rates provided in Sec.
23.154(c)(i) are, in all material respects, the same as those
provided under the BCBS/IOSCO Framework. See supra note 83 and table
in accompanying text.
\94\ See Sec. 23.154(c).
---------------------------------------------------------------------------
A CSE shall not be deemed to have violated its obligation
to collect or post initial margin if, inter alia, it makes timely
initiation of dispute resolution mechanisms, including pursuant to
Sec. 23.504(b)(4).\95\
---------------------------------------------------------------------------
\95\ See Sec. 23.152(d)(2)(i).
---------------------------------------------------------------------------
2. Commission Requirements for Calculation of Variation Margin
In keeping with the BCBS/IOSCO Framework described above, with
respect to the calculation of variation margin, the Commission's Final
Margin Rule generally provides that:
Each business day, a CSE must calculate variation margin
amounts for itself and for each counterparty that is an SD, MSP, or
financial end user. Such variation margin amounts must be equal to the
cumulative mark-to-market change in value to the CSE of each uncleared
swap, adjusted for any variation margin previously collected or posted
with respect to that uncleared swap.\96\
---------------------------------------------------------------------------
\96\ See Sec. 23.155(a).
---------------------------------------------------------------------------
Variation margin must be calculated using methods,
procedures, rules, and inputs that to the maximum extent practicable
rely on recently-executed transactions, valuations provided by
independent third parties, or other objective criteria.\97\
---------------------------------------------------------------------------
\97\ See id.
---------------------------------------------------------------------------
CSEs may comply with variation margin requirements on an
aggregate basis with respect to uncleared swaps that are governed by
the same eligible master netting agreement.\98\
---------------------------------------------------------------------------
\98\ See Sec. 23.153(d)(1).
---------------------------------------------------------------------------
A CSE shall not be deemed to have violated its obligation
to collect or post variation margin if, inter alia, it makes timely
initiation of dispute resolution mechanisms, including pursuant to
Sec. 23.504(b)(4).\99\
---------------------------------------------------------------------------
\99\ See Sec. 23.153(e)(2)(i).
---------------------------------------------------------------------------
3. EU Requirements for Calculation of Initial Margin
In keeping with the BCBS/IOSCO Framework, with respect to the
calculation of initial margin, the EU's margin requirements generally
provide:
Initial margin protects counterparties against potential
losses which could stem from movements in the market value of the
derivatives position occurring between the last exchange of variation
margin before the default of a counterparty and the time that the OTC
derivatives are replaced or the corresponding risk is hedged.\100\ It
is the collateral collected by a counterparty to cover its current and
potential future exposure in the interval between the last collection
of margin and the liquidation of positions or hedging of market risk
following a default of the other counterparty.\101\
---------------------------------------------------------------------------
\100\ See RTS, Recital (3).
\101\ See RTS, Article 1.
---------------------------------------------------------------------------
The assumed variations in the value of the non-centrally
cleared OTC derivative contracts within the netting set for the
calculation of initial margins using an initial margin model shall be
based on a one-tailed 99% confidence interval over a margin period of
risk (``MPOR'') of at least 10 days.\102\
---------------------------------------------------------------------------
\102\ See RTS, Article 15(1).
---------------------------------------------------------------------------
Counterparties shall calculate the amount of initial
margin to be collected using either a standardized approach or an
initial margin model or both.\103\
---------------------------------------------------------------------------
\103\ See RTS, Article 11(1).
---------------------------------------------------------------------------
Parameters used in initial margin models shall be
calibrated, at least annually, based on historical data from a time
period with a minimum duration of three years and a maximum duration of
five years.
The data used for calibrating the parameters of initial
margin models shall include the most recent continuous period from the
date on which the calibration is performed and at least 25% of those
data shall be
[[Page 48403]]
representative of a period of significant financial stress (stressed
data).\104\
---------------------------------------------------------------------------
\104\ See RTS, Article 16(1) and (2).
---------------------------------------------------------------------------
Where a counterparty uses an initial margin model, that
model may be developed by any of, or both, counterparties or by a third
party agent.
Where a counterparty uses an initial margin model
developed by a third party agent, the counterparty shall remain
responsible for ensuring that that model complies with the EU's margin
rules.\105\
---------------------------------------------------------------------------
\105\ See RTS, Article 14.
---------------------------------------------------------------------------
Initial margin models shall only include non-centrally
cleared OTC derivative contracts within the same netting set.\106\
---------------------------------------------------------------------------
\106\ See RTS, Article 17(1) and (2).
---------------------------------------------------------------------------
Initial margin models may provide for diversification,
hedging and risk offsets arising from the risks of the contracts within
the same netting set, provided that the diversification, hedging or
risk offset is only carried out within the same underlying asset class
as referred to in these requirements.
Diversification, hedging, and risk offsets may only be
carried out within the following underlying asset classes: (a) Interest
rates, currency and inflation; (b) equity; (c) credit; (d) commodities
and gold; (e) other.\107\
---------------------------------------------------------------------------
\107\ See RTS, Article 17(1) and (2).
---------------------------------------------------------------------------
In the event of a dispute over the amount of initial
margin due, counterparties shall provide at least the part of the
initial margin amount that is not being disputed within the same
business day of the calculation date determined in accordance with
Article 9(3).\108\
---------------------------------------------------------------------------
\108\ See RTS, Article 13(3).
---------------------------------------------------------------------------
4. EU Requirements for Calculation of Variation Margin
In keeping with the BCBS/IOSCO Framework, with respect to the
calculation of variation margin, the EU's margin requirements generally
provide:
FCs and NFC+s shall mark-to-market on a daily basis the
value of outstanding contracts. Where market conditions prevent
marking-to-market, reliable and prudent marking-to-model shall be
used.\109\
---------------------------------------------------------------------------
\109\ See EMIR, Article 11(2); RTS, Article 9.
---------------------------------------------------------------------------
The amount of variation margin to be collected by a
counterparty shall be the aggregation of the values calculated for
purposes of variation margin of all contracts in the netting set, minus
the value of all variation margin previously collected, minus the net
value of each contract in the netting set at the point of entry into
the contract, and plus the value of all variation margin previously
posted.\110\
---------------------------------------------------------------------------
\110\ See EMIR, Article 11(2); RTS, Article 10.
---------------------------------------------------------------------------
In the event of a dispute over the amount of variation
margin due, counterparties shall provide at least the part of the
variation margin amount that is not being disputed.\111\
---------------------------------------------------------------------------
\111\ See RTS, Article 12(3).
---------------------------------------------------------------------------
5. Commission Determination
Based on the foregoing and the representations of the applicant,
the Commission has determined that the amounts of initial and variation
margin calculated under the methodologies required under the EU's
margin rules would be similar to those calculated under the
methodologies required under the Final Margin Rule. Specifically, under
the Final Margin Rule and the EU's margin rules:
The definitions of initial and variation margin are
similar, including the description of potential future exposure agreed
under the BCBS/IOSCO Framework;
Margin models and/or a standardized margin schedule may be
used to calculate initial margin;
Criteria for historical data to be used in initial margin
models is similar;
Eligibility for netting is similar;
Correlations may be recognized within broad risk
categories, but not across such risk categories;
The required method of calculating initial margin using
standardized margin rates is essentially identical; and
The proscribed standardized margin rates are essentially
identical.
Accordingly, the Commission finds that the methodologies for
calculating the amounts of initial and variation margin for non-
centrally cleared OTC derivatives under the laws of the EU are
comparable in outcome to those of the Final Margin Rule.
F. Process and Standards for Approving Margin Models
Pursuant to the BCBS/IOSCO Framework, initial margin models may be
either internally developed or sourced from counterparties or third-
party vendors but in all such cases, models must be approved by the
appropriate supervisory authority.\112\
---------------------------------------------------------------------------
\112\ See BCBS/IOSCO Framework Requirement 3.3.
---------------------------------------------------------------------------
1. Commission Requirement for Margin Model Approval
In keeping with the BCBS/IOSCO Framework, the Final Margin Rule
generally requires:
CSEs shall obtain the written approval of the Commission
or a registered futures association to use a model to calculate the
initial margin required.\113\
---------------------------------------------------------------------------
\113\ See Sec. 23.154(b)(1)(i).
---------------------------------------------------------------------------
The Commission or a registered futures association will
approve models that demonstrate satisfaction of all of the requirements
for an initial margin model set forth above in Section IV(E)(1), in
addition to the requirements for annual review; \114\ control,
oversight, and validation mechanisms; \115\ documentation; \116\ and
escalation procedures.\117\
---------------------------------------------------------------------------
\114\ See Sec. 23.154(b)(4), discussed further below.
\115\ See Sec. 23.154(b)(5), discussed further below.
\116\ See Sec. 23.154(b)(6), discussed further below.
\117\ See Sec. 23.154(b)(7), discussed further below.
---------------------------------------------------------------------------
CSEs must notify the Commission and the registered futures
association in writing 60 days prior to extending the use of an initial
margin model to an additional product type; making any change to the
model that would result in a material change in the CSE's assessment of
initial margin requirements; or making any material change to modeling
assumptions.
The Commission or the registered futures association may
rescind its approval, or may impose additional conditions or
requirements if the Commission or the registered futures association
determines, in its discretion, that a model no longer complies with the
requirements for an initial margin model summarized above in Section
IV(E)(1).
2. EU Requirement for Approval of Margin Models
The EU's margin rules generally require:
Upon request, counterparties using a non-standardized
initial margin model shall provide the competent authorities with any
documentation relating to the risk management procedures relating to
such model at any time.\118\
---------------------------------------------------------------------------
\118\ See RTS, Article 2(6).
---------------------------------------------------------------------------
3. Commission Determination
Based on the foregoing and the representations of the applicant,
the Commission has determined that the EU margin rules' requirement
that an FC/NFC+ make documentation supporting an initial model
available to a competent authority at any time is comparable in outcome
to, the regulatory approval requirements of the Final Margin Rule.
While the Commission recognizes that keeping documents open to
regulatory review is not the same as requiring specific pre-approval
from a regulator, the EC has represented that competent authorities
within the Member States responsible for supervising FCs and, where
applicable NFC+s, as part of their ongoing prudential regulation and
supervision will enforce applicable
[[Page 48404]]
legislation and control whether the models adopted by these entities
comply with the requirements under the EU margin rules. Furthermore,
Article 12 of EMIR grants the competent authorities in each Member
State the authority to impose fines in case of infringement of the
rules promulgated under EMIR, such as the RTS.\119\ Such infringement
could include an FC's or NFC+'s violations of the provisions under
Section 4 of the RTS that establish the general requirements for
initial margin models.\120\
---------------------------------------------------------------------------
\119\ See RTS, Article 40.
\120\ The applicant noted that, in a November 23, 2016 report to
the European Parliament and the Council on areas where further
action is necessary to ensure that the objectives of EMIR are
fulfilled ``in a more appropriate, efficient and effective manner,''
on the issue of margin model approval, the EC stated:
[W]ith respect to non-cleared transactions, some respondents,
notably financial institutions, noted the absence of a clear mandate
for initial margin models to be endorsed by authorities, which could
lead to uncertainty among market participants as to whether their
calculations are considered by authorities to be fully compliant
with regulations. A mandate for initial margin models to be endorsed
by authorities could promote certainty for market participants and
authorities alike.
See November 23, 2016 Report from the EC to the European
Parliament and the Council under Article 85(1) of EMIR on OTC
Derivatives, Central Counterparties and Trade Repositories, section
4.1.2 (emphasis included), at http://ec.europa.eu/finance/financial-markets/docs/derivatives/161123-report_en.pdf.
---------------------------------------------------------------------------
G. Timing and Manner for Collection or Payment of Initial and Variation
Margin
1. Commission Requirement for Timing and Manner for Collection or
Payment of Initial and Variation Margin
With respect to the timing and manner for collection or posting of
initial margin, the Final Margin Rule generally provides that:
Where a CSE is required to collect initial margin, it must
be collected on or before the business day after execution of an
uncleared swap, and thereafter the CSE must continue to hold initial
margin in an amount equal to or greater than the required initial
margin amount as re-calculated each business day until such uncleared
swap is terminated or expires.
Where a CSE is required to post initial margin, it must be
posted on or before the business day after execution of an uncleared
swap, and thereafter the CSE must continue to post initial margin in an
amount equal to or greater than the required initial margin amount as
re-calculated each business day until such uncleared swap is terminated
or expires.
Required initial margin amounts must be posted and
collected by CSEs on a gross basis (i.e., amounts to be posted may not
be set-off against amounts to be collected from the same counterparty).
With respect to the timing and manner for collection or posting of
variation margin, the Final Margin Rule generally provides that:
Where a CSE is required to collect variation margin, it
must be collected on or before the business day after execution of an
uncleared swap, and thereafter the CSE must continue to collect the
required variation margin amount, if any, each business day as re-
calculated each business day until such uncleared swap is terminated or
expires.\121\
---------------------------------------------------------------------------
\121\ See Sec. 23.153(a).
---------------------------------------------------------------------------
Where a CSE is required to post variation margin, it must
be posted on or before the business day after execution of an uncleared
swap, and thereafter the CSE must continue to post the required
variation margin amount, if any, each business day as re-calculated
each business day until such uncleared swap is terminated or
expires.\122\
---------------------------------------------------------------------------
\122\ See Sec. 23.153(b).
---------------------------------------------------------------------------
With respect to both initial and variation margin, a CSE shall not
be deemed to have violated its obligation to collect or post margin if,
inter alia, it makes timely initiation of dispute resolution
mechanisms, including pursuant to Sec. 23.504(b)(4).\123\
---------------------------------------------------------------------------
\123\ See Sec. 23.153(e)(2)(i).
---------------------------------------------------------------------------
2. EU Requirements for Timing and Manner for Collection of Initial and
Variation Margin
With respect to the timing and manner for collection or posting of
initial margin, the EU's margin rules generally provide that:
Counterparties shall calculate initial margin no later
than the business day following one of these events: (a) Where a new
non-centrally cleared OTC derivative contract is executed or added to
the netting set; (b) where an existing non-centrally cleared OTC
derivative contract expires or is removed from the netting set; (c)
where an existing non-centrally cleared OTC derivative contract
triggers a payment or a delivery other than the posting and collecting
of margins; (d) where the initial margin is calculated in accordance
with the standardized approach and an existing contract is reclassified
in terms of the asset category referred to by the RTS as a result of
reduced time to maturity; (e) where no calculation has been performed
in the preceding 10 business days.\124\
---------------------------------------------------------------------------
\124\ See RTS, Article 9(2).
---------------------------------------------------------------------------
The posting counterparty shall provide the initial margin
within the same business day of the calculation date.\125\
---------------------------------------------------------------------------
\125\ See RTS, Article 13(2).
---------------------------------------------------------------------------
Where two counterparties are located in the same time-
zone, the calculation shall be based on the netting set of the previous
business day.\126\
---------------------------------------------------------------------------
\126\ See RTS, Article 9(3)(a).
---------------------------------------------------------------------------
Where two counterparties are not located in the same time-
zone, the calculation shall be based on the transactions in the netting
set which are entered into before 16:00 hours of the previous business
day of the time-zone where it is first 16:00 hours.\127\
---------------------------------------------------------------------------
\127\ See RTS, Article 9(3)(b).
---------------------------------------------------------------------------
In the event of a dispute over the amount of initial
margin due, counterparties shall provide at least the part of the
initial margin amount that is not being disputed within the same
business day of the calculation date.\128\
---------------------------------------------------------------------------
\128\ See RTS, Article 13(3).
---------------------------------------------------------------------------
With respect to the timing and manner for collection or posting of
variation margin, the EU's margin rules generally provide that:
Counterparties shall calculate variation margin at least
on a daily basis.\129\
---------------------------------------------------------------------------
\129\ See RTS, Article 9(1).
---------------------------------------------------------------------------
The posting counterparty shall provide the variation
margin as follows: (a) Within the same business day of the calculation
date; (b) where certain conditions are met,\130\ within two business
days of the calculation date.\131\
---------------------------------------------------------------------------
\130\ The provision of variation margin within two business of
the calculation date may only be applied to the following: (a)
Netting sets comprising derivative contracts not subject to initial
margin requirements in accordance with this Regulation, where the
posting counterparty has provided, at or before the calculation date
of the variation margin, an advance amount of eligible collateral
calculated in the same manner as that applicable to initial margins
in accordance with Article 15, for which the collecting counterparty
has used a margin period of risk (MPOR) at least equal to the number
of days in between and including the calculation date and the
collection date; (b) netting sets comprising contracts subject to
initial margin requirements in accordance with this Regulation,
where the initial margin has been adjusted in one of the following
ways: (i) By increasing the MPOR referred to in Article 15(2) by the
number of days in between, and including, the calculation date
determined in accordance with Article 9(3) and the collection date
determined in accordance with paragraph 1 of this Article; (ii) by
increasing the initial margin calculated in accordance with the
standardised approach referred to in Article 11 using an appropriate
methodology taking into account a MPOR that is increased by the
number of days in between, and including, the calculation date
determined in accordance with Article 9(3) and the collection date
determined in accordance with paragraph 2 of this Article. For the
purposes of point (a), in case no mechanism for segregation is in
place between the two counterparties, those counterparties may
offset the amounts to be provided.
\131\ See RTS, Article 12(1).
---------------------------------------------------------------------------
In the event of a dispute over the amount of variation
margin due,
[[Page 48405]]
counterparties shall provide at least the part of the variation margin
amount that is not being disputed.\132\
---------------------------------------------------------------------------
\132\ See RTS, Article 12(3).
---------------------------------------------------------------------------
3. Commission Determination
Having compared the EU's margin requirements applicable to the
timing and manner of collection and payment of initial and variation
margin to the Commission's corresponding margin requirements, the
Commission finds that the EU's margin requirements are, despite
apparent differences in certain respects, comparable in outcome.
Under the Final Margin Rule, where initial margin is required, a
CSE must calculate the amount of initial margin each business day. The
EU's margin rules only require initial margin to be calculated after
certain events, including the addition or removal of a non-centrally
cleared OTC derivative from the netting set or at least within 10 days
after the last initial margin calculation. While this is different from
the Final Margin Rule's requirement that the amount of initial margin
be calculated each business day, the EC has explained that the more
sophisticated counterparties subject to the EU margin rules actively
operate in non-centrally cleared OTC derivatives to the point where the
RTS requirement to recalculate whenever there is a change to the
netting set will in practice require these types of counterparties to
recalculate daily. Because of this, the EC views the 10-day allowance
under Article 9(2)(e) of the RTS as a backstop only and one that is
likely to be exercised only in the case of a static portfolio. The
Commission believes that as a result of these entities still exchanging
variation margin, and thereby eliminating current exposure, this
difference will be mitigated.
With respect to the timing of collecting/posting margin, the Final
Margin Rule requires CSEs to collect/post any required margin amount
within one business day of calculation which, under the Final Margin
Rule, must occur daily. In contrast, the EU's margin rules allow for a
variation margin posting date within two business days of the
calculation date (T+2) when certain conditions are met.\133\ As
explained in the Recitals to the RTS, additional time for posting of
variation margin is allowed only where compensated by an adjustment to
initial margin by an adequate recalculation of MPOR.\134\ Where initial
margin is required, an adequate recalculation of MPOR under the RTS
would occur by increasing the MPOR by the number of days in between,
and including, the calculation and collection dates or by increasing
the initial margin calculated with the standardized approach taking
into account a MPOR increased by the number of days in between, and
including, the calculation and collection dates.\135\ Where no initial
margin requirements apply, additional time is permitted for posting of
variation margin if the posting counterparty has provided, at or before
the variation margin calculation date, an advance amount of eligible
collateral calculated in the same manner as required for initial margin
with an MPOR at least equal to the number of days in between, and
including, the calculation and collection dates.\136\
---------------------------------------------------------------------------
\133\ See RTS, Article 12(2).
\134\ See RTS, Recital (20).
\135\ See RTS, Article 12(2)(b).
\136\ See RTS, Recital (20) and Article 12(2)(a).
---------------------------------------------------------------------------
While the RTS conditions to a delay in the exchange of variation
margin do not make the EU's rule in this area the same as the Final
Margin Rule, they do serve to mitigate the potential risks, as
described above, by increasing the initial margin's MPOR by the
corresponding number of days associated with a delay in the exchange of
variation margin. Furthermore, although the EU's allowance for a delay
of up to 10 days to recalculate initial margin is not the same as the
Final Margin Rule's daily recalculation requirement, as detailed above,
the EC has represented that, in practice, it expects the most
sophisticated counterparties subject to the EU margin rules to
recalculate initial margin on a daily basis. Thus, the Commission finds
that the requirements of the EU margin rules with respect to the timing
and manner for collection or payment of initial and variation margin
are comparable in outcome to the Final Margin Rule.
H. Margin Threshold Levels or Amounts
The BCBS/IOSCO Framework provides that initial margin could be
subject to a threshold not to exceed EUR 50 million. The threshold is
applied at the level of the consolidated group to which the threshold
is being extended and is based on all non-centrally cleared derivatives
between the two consolidated groups.
Similarly, to alleviate operational burdens associated with the
transfer of small amounts of margin, the BCBS/IOSCO Framework provides
that all margin transfers between parties may be subject to a de-
minimis minimum transfer amount not to exceed EUR 500,000.
1. Commission Requirement for Margin Threshold Levels or Amounts
In keeping with the BCBS/IOSCO Framework, with respect to margin
threshold levels or amounts the Final Margin Rule generally provides
that:
CSEs may agree with their counterparties that initial
margin may be subject to a threshold of no more than $50 million
applicable to a consolidated group of affiliated counterparties.\137\
---------------------------------------------------------------------------
\137\ See Sec. 23.154(a)(3) and definition of ``initial margin
threshold'' in Sec. 23.151.
---------------------------------------------------------------------------
CSEs are not required to collect or to post initial or
variation margin with a counterparty until the combined amount of
initial margin and variation margin to be collected or posted is
greater than $500,000 (i.e., a minimum transfer amount).\138\
---------------------------------------------------------------------------
\138\ See Sec. 23.152(b)(3).
---------------------------------------------------------------------------
2. EU Requirement for Margin Threshold Levels or Amounts
In keeping with the BCBS/IOSCO Framework, with respect to margin
threshold levels or amounts, the EU's margin requirements generally
provide that:
Counterparties may provide in their risk management
procedures that initial margin collected is reduced by an amount up to
EUR 50 million where neither counterparty belongs to any group or the
counterparties are part of different groups; or EUR 10 million where
both counterparties belong to the same group.\139\
---------------------------------------------------------------------------
\139\ See RTS, Article 29(1).
---------------------------------------------------------------------------
Counterparties may provide in their risk management
procedures that no collateral is collected from a counterparty where
the amount due from the last collection of collateral is equal to or
lower than the amount agreed by the counterparties. The minimum
transfer amount shall not exceed EUR 500,000 or the equivalent amount
in another currency.\140\
---------------------------------------------------------------------------
\140\ See RTS, Article 25(1).
---------------------------------------------------------------------------
3. Commission Determination
Based on the foregoing and the representations of the applicant,
the Commission has determined that the EU requirements for margin
threshold levels or amounts, in the case of FCs and NFC+s, are
comparable in outcome to those required by the Final Margin Rule, in
the case of CSEs.
The Commission notes that at current exchange rates, EUR 50 million
is approximately $59 million, while EUR 500,000 is approximately
$588,000. Although these amounts are greater than those permitted by
the Final Margin Rule, the Commission recognizes that
[[Page 48406]]
exchange rates will fluctuate over time and thus the Commission finds
that such requirements under the laws of the EU are comparable in
outcome to those of the Final Margin Rule.
I. Risk Management Controls for the Calculation of Initial and
Variation Margin
1. Commission Requirement for Risk Management Controls for the
Calculation of Initial and Variation Margin
With respect to risk management controls for the calculation of
initial margin, the Final Margin Rule generally provides that:
CSEs are required to have a risk management unit pursuant
to Sec. 23.600(c)(4). Such risk management unit must include a risk
control unit tasked with validation of a CSE's initial margin model
prior to implementation and on an ongoing basis, including an
evaluation of the conceptual soundness of the initial margin model, an
ongoing monitoring process that includes verification of processes and
benchmarking by comparing the CSE's initial margin model outputs
(estimation of initial margin) with relevant alternative internal and
external data sources or estimation techniques, and an outcomes
analysis process that includes back testing the model.\141\
---------------------------------------------------------------------------
\141\ See Sec. 23.154(b)(5).
---------------------------------------------------------------------------
In accordance with Sec. 23.600(e)(2), CSEs must have an
internal audit function independent of the business trading unit and
the risk management unit that at least annually assesses the
effectiveness of the controls supporting the initial margin model
measurement systems, including the activities of the business trading
units and risk control unit, compliance with policies and procedures,
and calculation of the CSE's initial margin requirements under this
part.\142\
---------------------------------------------------------------------------
\142\ See Sec. 23.154(b)(5)(iv).
---------------------------------------------------------------------------
At least annually, such internal audit function shall
report its findings to the CSE's governing body, senior management, and
chief compliance officer.\143\
---------------------------------------------------------------------------
\143\ See Sec. 23.154(b)(5)(iv).
---------------------------------------------------------------------------
With respect to risk management controls for the calculation of
variation margin, the Final Margin Rule generally provides that:
CSEs must maintain documentation setting forth the
variation methodology with sufficient specificity to allow a
counterparty, the Commission, a registered futures association, and any
applicable prudential regulator to calculate a reasonable approximation
of the margin requirement independently.
CSEs must evaluate the reliability of its data sources at
least annually, and make adjustments, as appropriate.
CSEs, upon request of the Commission or a registered
futures association, must provide further data or analysis concerning
the variation methodology or a data source, including: (a) The manner
in which the methodology meets the requirements of the Final Margin
Rule; (b) a description of the mechanics of the methodology; (c) the
conceptual basis of the methodology; (d) the empirical support for the
methodology; and (e) the empirical support for the assessment of the
data sources.
2. EU Requirement for Risk Management Controls for the Calculation of
Initial and Variation Margin
With respect to risk management controls for the calculation of
initial margin, the EU's margin requirements generally provide that:
Counterparties shall establish an internal governance
process to assess the appropriateness of the initial margin model on a
continuous basis, including all of the following: (a) An initial
validation of the model by suitably qualified persons who are
independent from the persons developing the model; (b) a follow up
validation whenever a significant change is made to the initial margin
model and at least annually; and (c) a regular audit process to assess
the following: (i) The integrity and reliability of the data sources;
(ii) the management information system used to run the model; (iii) the
accuracy and completeness of data used; (iv) the accuracy and
appropriateness of volatility and correlation assumptions.\144\
---------------------------------------------------------------------------
\144\ See RTS, Article 1.
---------------------------------------------------------------------------
The documentation of the risk management procedures
relating to the initial margin model shall meet all of the following
conditions: (a) It shall allow a knowledgeable third-party to
understand the design and operational detail of the initial margin
model; (b) it shall contain the key assumptions and the limitations of
the initial margin model; (c) it shall define the circumstances under
which the assumptions of the initial margin model are no longer
valid.\145\
---------------------------------------------------------------------------
\145\ See RTS, Article 18(2).
---------------------------------------------------------------------------
Counterparties shall document all changes to the initial
margin model. That documentation shall also detail the results of the
validations carried out after those changes.\146\
---------------------------------------------------------------------------
\146\ See RTS, Article 18(3).
---------------------------------------------------------------------------
3. Commission Determination
Based on the foregoing and the representations of the applicant,
the Commission has determined that the EU requirements applicable to
FCs and NFC+s pertaining to risk management controls for the
calculation of initial and variation margin are substantially the same
as the corresponding requirements under the Final Margin Rule.
Specifically, the Commission finds that under both the EU's
requirements and the Final Margin Rule, a CSE is required to establish
a unit that is tasked with comprehensively managing the entity's use of
an initial margin model, including establishing controls and testing
procedures. Accordingly, the Commission finds that the EU's
requirements pertaining to risk management controls over the use of
initial margin models are comparable in outcome to the controls
required by the Final Margin Rule.
J. Eligible Collateral for Initial and Variation Margin
As explained in the BCBS/IOSCO Framework, to ensure that
counterparties can liquidate assets held as initial and variation
margin in a reasonable amount of time to generate proceeds that could
sufficiently protect collecting entities from losses on non-centrally
cleared derivatives in the event of a counterparty default, assets
collected as collateral for initial and variation margin purposes
should be highly liquid and should, after accounting for an appropriate
haircut, be able to hold their value in a time of financial stress.
Such a set of eligible collateral should take into account that assets
which are liquid in normal market conditions may rapidly become
illiquid in times of financial stress. In addition to having good
liquidity, eligible collateral should not be exposed to excessive
credit, market and FX risk (including through differences between the
currency of the collateral asset and the currency of settlement). To
the extent that the value of the collateral is exposed to these risks,
appropriately risk-sensitive haircuts should be applied. More
importantly, the value of the collateral should not exhibit a
significant correlation with the creditworthiness of the counterparty
or the value of the underlying non-centrally cleared derivatives
portfolio in such a way that would undermine the effectiveness of the
protection offered by the margin collected. Accordingly, securities
issued by the counterparty or its related entities should not be
accepted as collateral. Accepted
[[Page 48407]]
collateral should also be reasonably diversified.
1. Commission Requirement for Eligible Collateral for Initial and
Variation Margin
With respect to eligible collateral that may be collected or posted
to satisfy an initial margin obligation, the Final Margin Rule
generally provides that CSEs may collect or post: \147\
---------------------------------------------------------------------------
\147\ See Sec. 23.156(a)(1).
---------------------------------------------------------------------------
Cash denominated in a major currency, being United States
Dollar (USD); Canadian Dollar (CAD); Euro (EUR); United Kingdom Pound
(GBP); Japanese Yen (JPY); Swiss Franc (CHF); New Zealand Dollar (NZD);
Australian Dollar (AUD); Swedish Kronor (SEK); Danish Kroner (DKK);
Norwegian Krone (NOK); any other currency designated by the Commission;
or any currency of settlement for a particular uncleared swap.
A security that is issued by, or unconditionally
guaranteed as to the timely payment of principal and interest by, the
U.S. Department of Treasury.
A security that is issued by, or unconditionally
guaranteed as to the timely payment of principal and interest by, a
U.S. government agency (other than the U.S. Department of Treasury)
whose obligations are fully guaranteed by the full faith and credit of
the U.S. government.
A security that is issued by, or fully guaranteed as to
the payment of principal and interest by, the European Central Bank or
a sovereign entity that is assigned no higher than a 20 percent risk
weight under the capital rules applicable to SDs subject to regulation
by a prudential regulator.
A publicly-traded debt security issued by, or an asset-
backed security fully guaranteed as to the timely payment of principal
and interest by, a U.S. Government-sponsored enterprise that is
operating with capital support or another form of direct financial
assistance received from the U.S. government that enables the
repayments of the U.S. Government-sponsored enterprise's eligible
securities.
A security that is issued by, or fully guaranteed as to
the payment of principal and interest by, the Bank for International
Settlements, the International Monetary Fund, or a multilateral
development bank as defined in Sec. 23.151.
Other publicly-traded debt that has been deemed acceptable
as initial margin by a prudential regulator as defined in Sec. 23.151.
A publicly-traded common equity security that is included
in the Standard & Poor's Composite 1500 Index (or any other similar
index of liquid and readily marketable equity securities as determined
by the Commission) or an index that a CSE's supervisor in a foreign
jurisdiction recognizes for purposes of including publicly traded
common equity as initial margin under applicable regulatory policy, if
held in that foreign jurisdiction.
Securities in the form of redeemable securities in a
pooled investment fund representing the security-holder's proportional
interest in the fund's net assets and that are issued and redeemed only
on the basis of the market value of the fund's net assets prepared each
business day after the security-holder makes its investment commitment
or redemption request to the fund, if the fund's investments are
limited to securities that are issued by, or unconditionally guaranteed
as to the timely payment of principal and interest by, the U.S.
Department of the Treasury, and immediately-available cash funds
denominated in U.S. dollars; or securities denominated in a common
currency and issued by, or fully guaranteed as to the payment of
principal and interest by, the European Central Bank or a sovereign
entity that is assigned no higher than a 20% risk weight under the
capital rules applicable to SDs subject to regulation by a Prudential
Regulator, and immediately-available cash funds denominated in the same
currency; and assets of the fund may not be transferred through
securities lending, securities borrowing, repurchase agreements,
reverse repurchase agreements, or other means that involve the fund
having rights to acquire the same or similar assets from the
transferee.
Gold.
A CSE may not collect or post as initial margin any asset
that is a security issued by: The CSE or a margin affiliate of the CSE
(in the case of posting) or the counterparty or any margin affiliate of
the counterparty (in the case of collection); a bank holding company, a
savings and loan holding company, a U.S. intermediate holding company
established or designated for purposes of compliance with 12 CFR
252.153, a foreign bank, a depository institution, a market
intermediary, a company that would be any of the foregoing if it were
organized under the laws of the United States or any State, or a margin
affiliate of any of the foregoing institutions; or a nonbank financial
institution supervised by the Board of Governors of the Federal Reserve
System under Title I of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5323).\148\
---------------------------------------------------------------------------
\148\ See Sec. 23.156(a)(2).
---------------------------------------------------------------------------
The value of any eligible collateral collected or posted
to satisfy initial margin requirements must be reduced by the following
haircuts: an 8% discount for initial margin collateral denominated in a
currency that is not the currency of settlement for the uncleared swap,
except for eligible types of collateral denominated in a single
termination currency designated as payable to the non-posting
counterparty as part of an eligible master netting agreement; and the
discounts set forth in the following table: \149\
---------------------------------------------------------------------------
\149\ See Sec. 23.156(a)(3).
Standardized Haircut Schedule
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash in same currency as swap obligation................ 0.0
Eligible government and related debt (e.g., central 0.5
bank, multilateral development bank, GSE securities
identified in paragraph (a)(1)(iv) of this section):
Residual maturity less than one-year...................
Eligible government and related debt (e.g., central 2.0
bank, multilateral development bank, GSE securities
identified in paragraph (a)(1)(iv) of this section):
Residual maturity between one and five years...........
Eligible government and related debt (e.g., central 4.0
bank, multilateral development bank, GSE securities
identified in paragraph (a)(1)(iv) of this section):
Residual maturity greater than five years..............
Eligible corporate debt (including eligible GSE debt 1.0
securities not identified in paragraph (a)(1)(iv) of
this section): Residual maturity less than one-year....
Eligible corporate debt (including eligible GSE debt 4.0
securities not identified in paragraph (a)(1)(iv) of
this section): Residual maturity between one and five
years..................................................
Eligible corporate debt (including eligible GSE debt 8.0
securities not identified in paragraph (a)(1)(iv) of
this section): Residual maturity greater than five
years..................................................
Equities included in S&P 500 or related index........... 15.0
[[Page 48408]]
Equities included in S&P 1500 Composite or related index 25.0
but not S&P 500 or related index.......................
Gold.................................................... 15.0
------------------------------------------------------------------------
With respect to eligible collateral that may be collected or posted
to satisfy a variation margin obligation, the Final Margin Rule
generally provides that CSEs may collect or post: \150\
---------------------------------------------------------------------------
\150\ See Sec. 23.156(b)(1).
---------------------------------------------------------------------------
With respect to uncleared swaps with an SD or MSP, only
immediately available cash funds that are denominated in: U.S. dollars,
another major currency (as defined in Sec. 23.151), or the currency of
settlement of the uncleared swap.
With respect to any other uncleared swaps for which a CSE
is required to collect or post variation margin, any asset that is
eligible to be posted or collected as initial margin, as described
above.
The value of any eligible collateral collected or posted
to satisfy variation margin requirements must be reduced by the same
haircuts applicable to initial margin described above.\151\
---------------------------------------------------------------------------
\151\ See Sec. 23.156(b)(2).
---------------------------------------------------------------------------
Finally, CSEs must monitor the value and eligibility of collateral
collected and posted: \152\
---------------------------------------------------------------------------
\152\ See Sec. 23.156(c).
---------------------------------------------------------------------------
CSEs must monitor the market value and eligibility of all
collateral collected and posted, and, to the extent that the market
value of such collateral has declined, the CSE must promptly collect or
post such additional eligible collateral as is necessary to maintain
compliance with the margin requirements of Sec. Sec. 23.150 through
23.161.
To the extent that collateral is no longer eligible, CSEs
must promptly collect or post sufficient eligible replacement
collateral to comply with the margin requirements of Sec. Sec. 23.150
through 23.161.
2. EU Requirement for Eligible Collateral for Initial and Variation
Margin
With respect to eligible collateral that may be collected to
satisfy an initial or variation margin obligation, the EU's margin
requirements generally provide that counterparties may collect: \153\
---------------------------------------------------------------------------
\153\ See RTS, Article 4.
---------------------------------------------------------------------------
Cash in the form of money credited to an account in any
currency, or similar claims for the repayment of money, such as money
market deposits.
Gold.
Debt securities issued by Member States' central
governments or central banks.
Debt securities issued by Member States' regional
governments or local authorities whose exposures are treated as
exposures to the central government of that Member State in accordance
with Article 115(2) of Regulation (EU) No 575/2013.
Debt securities issued by Member States' public sector
entities whose exposures are treated as exposures to the central
government, regional government or local authority of that Member State
in accordance with Article 116(4) of Regulation (EU) No 575/2013.
Debt securities issued by multilateral development banks
listed in Article 117(2) of Regulation (EU) No 575/2013.
Debt securities issued by the international organizations
listed in Article 118 of Regulation (EU) No 575/2013.
Debt securities issued by third countries' governments or
central banks.
Where the assets are not issued by the posting
counterparty, not issued by entities that are part of the same group as
the posting counterparty, or not otherwise subject to any wrong way
risk, a counterparty may collect:
[ssquf] Debt securities issued by Member States' regional
governments or local authorities whose exposures are not treated as
exposures to the central government of that Member State;
[ssquf] Debt securities issued by Member States' public sector
entities whose exposures are treated as exposures to the central
government, regional government, or local authority of that Member
State;
[ssquf] Debt securities issued by third countries' regional
governments or local authorities whose exposures are treated as
exposures to the central government, regional government, or local
authority of that third country;
[ssquf] Debt securities issued by third countries' regional
governments or local authorities whose exposures are not treated as
exposures to the central government, regional government, or local
authority of that third country;
[ssquf] Debt securities issued by credit institutions or investment
firms including bonds referred to in Article 52(4) of Directive 2009/
65/EC of the European Parliament and of the Council;
[ssquf] Corporate bonds;
[ssquf] The most senior tranche of a securitization, as defined in
Article 4(61) of Regulation (EU) No 575/2013, that is not a re-
securitization as defined in Article 4(63) of that Regulation;
[ssquf] Convertible bonds provided that they can be converted only
into equities which are included in an index specified pursuant to
point (a) of Article 197 (8) of Regulation (EU) No 575/2013;
[ssquf] Equities included in an index specified pursuant to point
(a) of Article 197(8) of Regulation (EU) No 575/2013;
[ssquf] A counterparty may only use units or shares in undertakings
for collective investments in transferable securities (UCITS) as
eligible collateral where all the following conditions are met: (a) The
units or shares have a daily public price quote; (b) the UCITS are
limited to investing in assets that are eligible in accordance with
Article 4(1); (c) the UCITS meet the criteria laid down in Article
132(3) of Regulation (EU) No 575/2013. For the purposes of point (b),
UCITS may use derivative instruments to hedge the risks arising from
the assets in which they invest. In addition, where a UCITS invests in
shares or units of other UCITS, these conditions shall also apply to
those UCITS.\154\
---------------------------------------------------------------------------
\154\ See RTS, Article 5(1).
---------------------------------------------------------------------------
[ssquf] Where a UCITS or any of its underlying UCITS do not only
invest in assets that are eligible collateral under the RTS, only the
value of the unit or share of the UCITS that represents investment in
eligible assets may be used as eligible collateral.\155\
---------------------------------------------------------------------------
\155\ See RTS, Article 5(2).
---------------------------------------------------------------------------
[ssquf] Where non-eligible assets of a UCITS can have a negative
value, the value of the unit or share of the UCITS that may be used as
eligible collateral shall be determined by deducting the maximum
negative value of the non-eligible assets from the value of eligible
assets.\156\
---------------------------------------------------------------------------
\156\ See RTS, Article 5(3).
---------------------------------------------------------------------------
Counterparties must assess the credit quality of certain
asset classes.\157\
---------------------------------------------------------------------------
\157\ See RTS, Article 6.
---------------------------------------------------------------------------
Counterparties shall adjust the value of collected
collateral in accordance with either a methodology prescribed by the
RTS \158\ or a methodology using their own volatility estimates.\159\
---------------------------------------------------------------------------
\158\ See RTS, Annex III.
\159\ See RTS, Article 21.
---------------------------------------------------------------------------
There are certain concentration limits for collateral
collected as initial margin.\160\
---------------------------------------------------------------------------
\160\ See RTS, Article 8.
---------------------------------------------------------------------------
[[Page 48409]]
If a counterparty chooses to not use its own volatility estimates,
the value of any eligible collateral collected or posted to satisfy
initial margin requirements must be reduced by the following haircuts:
\161\
---------------------------------------------------------------------------
\161\ See RTS, Annex II.
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash in same currency as swap obligation................ 0.0
Debt securities issued by entities describe in Article 0.5
4(1)(c) to (e) and (h) to (k): Residual maturity less
than one-year..........................................
Debt securities issued by entities describe in Article 2.0
4(1)(c) to (e) and (h) to (k): Residual maturity
between one and five years.............................
Debt securities issued by entities describe in Article 4.0
4(1)(c) to (e) and (h) to (k): Residual maturity
greater than five years................................
Debt securities issued by entities describe in Article 1.0
4(1)(f), (g) and (l) to (n): Residual maturity less
than one-year..........................................
Debt securities issued by entities describe in Article 4.0
4(1)(f), (g) and (l) to (n): Residual maturity between
one and five years.....................................
Debt securities issued by entities describe in Article 8.0
4(1)(f), (g) and (l) to (n): Residual maturity greater
than five years........................................
Securitization positions meeting the criteria in Article 2.0
4(1)(o): Residual maturity of less than one year.......
Securitization positions meeting the criteria in Article 8.0
4(1)(o): Residual maturity between one and five years..
Securitization positions meeting the criteria in Article 16.0
4(1)(o): Residual maturity of more than five years.....
Equities included in main indices, bonds convertible to 15.0
equities in main indices, and gold.....................
------------------------------------------------------------------------
In addition to the foregoing, under the EU's margin requirements,
for the purpose of exchanging initial margin, all cash and non-cash
collateral posted in a currency other than the currency in which the
payments in case of early termination or default have to be made in
accordance with the single derivative contract, the relevant exchange
of collateral agreement or the relevant credit support annex
(``termination currency''). Each of the counterparties may choose a
different termination currency. Where the agreement does not identify a
termination currency, the haircut shall apply to the market value of
all the assets posted as collateral.\162\
---------------------------------------------------------------------------
\162\ See RTS, Annex II, Table 3.
---------------------------------------------------------------------------
3. Commission Determination
Based on the foregoing and the representations of the applicant,
the Commission finds that the EU's requirements pertaining to assets
eligible for posting or collecting by FCs and NFC+s as collateral for
non-centrally cleared OTC derivatives, while different than the Final
Margin Rule in some respects, are comparable in outcome to the Final
Margin Rule.
For example, under the EU margin regime, cash in the form of a
claim for the repayment of money, such as money market deposits, is
eligible collateral while under the Final Margin Rule it is not.
However, although the EU margin regime and Final Margin Rule take
different approaches on this point, the Commission did recognize the
need for flexibility provided to counterparties by money market funds
when it allowed for the use of redeemable securities in a pooled
investment fund that holds only securities that are issued by, or
unconditionally guaranteed as to the timely payment of principal and
interest by, the U.S. Department of the Treasury, and cash funds
denominated in U.S. dollars.\163\
---------------------------------------------------------------------------
\163\ See Final Margin Rule, 81 FR 636, 665.
---------------------------------------------------------------------------
The EU's requirements are also different with respect to the
eligible collateral for variation margin for non-centrally cleared OTC
derivatives between FC/NFC+s that are CSEs and FC/NFC+s that are SDs
and MSPs (including other CSEs). For uncleared swaps with an SD or MSP,
the Final Margin Rule only permits variation margin to be posted or
collected as immediately available cash funds that are denominated in
U.S. dollars, another major currency (as defined in Sec. 23.151), or
the currency of settlement of the uncleared swap, while the EU's margin
requirements would permit any form of eligible collateral (as described
above). The Commission did state in the Final Margin Rule, however,
that requiring variation margin to be posted or collected as
immediately available cash funds is ``consistent with regulatory and
industry initiatives to improve standardization and efficiency in the
OTC swaps market.'' \164\ Thus, in outcome, an SD or MSP that is also
subject to the EU margin rules likely would, in the normal course of
business, be exchanging variation margin in immediately available cash
funds.
---------------------------------------------------------------------------
\164\ See id. at 668.
---------------------------------------------------------------------------
Other differences concern corporate bonds, the most senior tranche
of a securitization, and convertible bonds that can be converted only
into equities listed on specific indexes, all of which are allowed
under the EU margin rules but not under the Final Margin Rule. However,
the EU margin rules do address the inherent risk posed by these assets
by including additional safeguards when using these types of
collateral. Regarding corporate bonds and convertible bonds, a
counterparty subject to the EU margin rules must assess the credit
quality of the assets using a specified internal rating or a credit
quality assessment issued by a recognized External Credit Assessment
Institution (``ECAI'').\165\ Regarding the most senior tranche of a
securitization, a counterparty must use an ECAI's credit quality
assessment to assess the tranche's credit quality.\166\
---------------------------------------------------------------------------
\165\ See RTS, Article 6(1).
\166\ See RTS, Article 6(2).
---------------------------------------------------------------------------
The EU's margin rules on eligible collateral also differ from the
Final Margin Rule in ways that make the EU rules more stringent than
the Final Margin Rule. For example, the EU margin rules require a
larger haircut than the Final Margin Rule on government, central bank,
and corporate debt where a credit quality assessment, as required under
Article of the RTS, indicates low credit quality for such debt.\167\ In
addition, the EU's margin rules impose concentration limits for initial
margin.\168\
---------------------------------------------------------------------------
\167\ See RTS, Articles 6 and 7.
\168\ See RTS, Article 8.
---------------------------------------------------------------------------
While not identical, the Commission finds that the forms of
eligible collateral for initial and variation margin under the laws of
the EU provide protections that are comparable in outcome, as explained
above, to the forms of eligible collateral mandated by the Final Margin
Rule. Specifically, the Commission finds that the EU's margin regime
ensures that assets collected as collateral for initial and variation
margin purposes are highly liquid and able to hold their value in a
time of financial stress. Because under the EU's margin regime a non-
defaulting party would be able to liquidate assets held as initial and
variation margin in a reasonable amount of time to generate proceeds
that could sufficiently protect collecting entities from losses on
uncleared swaps in the event of a counterparty default, the Commission
finds the EU's margin regime with respect to the forms of eligible
collateral for initial and variation margin for uncleared swaps is
comparable in outcome to the Final Margin Rule.
K. Requirements for Custodial Arrangements, Segregation, and
Rehypothecation
As explained in the BCBS/IOSCO Framework, the exchange of initial
margin on a net basis may be
[[Page 48410]]
insufficient to protect two market participants with large gross
derivatives exposures to each other in the case of one firm's failure.
Thus, the gross initial margin between such firms should be
exchanged.\169\
---------------------------------------------------------------------------
\169\ See BCBS/IOSCO Framework, Key principle 5.
---------------------------------------------------------------------------
Further, initial margin collected should be held in such a way as
to ensure that (i) the margin collected is immediately available to the
collecting party in the event of the counterparty's default, and (ii)
the collected margin must be subject to arrangements that protect the
posting party to the extent possible under applicable law in the event
that the collecting party enters bankruptcy.\170\
---------------------------------------------------------------------------
\170\ See id.
---------------------------------------------------------------------------
1. Commission Requirement for Custodial Arrangements, Segregation, and
Rehypothecation
In keeping with the principles set forth in the BCBS/IOSCO
Framework, with respect to custodial arrangements, segregation, and
rehypothecation, the Final Margin Rule generally requires that:
All assets posted by or collected by CSEs as initial
margin must be held by one or more custodians that are not the CSE, the
counterparty, or margin affiliates of the CSE or the counterparty.\171\
---------------------------------------------------------------------------
\171\ See Sec. 23.157(a) and (b).
---------------------------------------------------------------------------
CSEs must enter into an agreement with each custodian
holding initial margin collateral that:
[ssquf] Prohibits the custodian from rehypothecating, repledging,
reusing, or otherwise transferring (through securities lending,
securities borrowing, repurchase agreement, reverse repurchase
agreement or other means) the collateral held by the custodian;
[ssquf] May permit the custodian to hold cash collateral in a
general deposit account with the custodian if the funds in the account
are used to purchase an asset that qualifies as eligible collateral
(other than equities, investment vehicle securities, or gold), such
asset is held in compliance with Sec. 23.157, and such purchase takes
place within a time period reasonably necessary to consummate such
purchase after the cash collateral is posted as initial margin; and
[ssquf] Is a legal, valid, binding, and enforceable agreement under
the laws of all relevant jurisdictions including in the event of
bankruptcy, insolvency, or a similar proceeding.\172\
---------------------------------------------------------------------------
\172\ See Sec. 23.157(c)(1) and (2).
---------------------------------------------------------------------------
A posting party may substitute any form of eligible
collateral for posted collateral held as initial margin.\173\
---------------------------------------------------------------------------
\173\ See Sec. 23.157(c)(3).
---------------------------------------------------------------------------
A posting party may direct reinvestment of posted
collateral held as initial margin in any form of eligible
collateral.\174\
---------------------------------------------------------------------------
\174\ See id.
---------------------------------------------------------------------------
Collateral that is collected or posted as variation margin
is not required to be held by a third party custodian and is not
subject to restrictions on rehypothecation, repledging, or reuse.\175\
---------------------------------------------------------------------------
\175\ See Final Margin Rule, 81 FR at 672.
---------------------------------------------------------------------------
2. EU Requirement for Custodial Arrangements, Segregation, and
Rehypothecation
In keeping with the principles set forth in the BCBS/IOSCO
Framework, with respect to custodial arrangements, segregation, and
rehypothecation, the EU's margin rules generally require that:
Cash collected as initial margin must be maintained in
cash accounts at central banks or credit institutions which fulfill all
of the following conditions: (i) They are authorized in accordance with
Directive 2013/36/EU or are authorized in a third country whose
supervisory and regulatory arrangements have been found to be
equivalent in accordance with Article 142(2) of Regulation (EU) No 575/
2013; and (ii) they are neither the posting nor the collecting
counterparties, nor part of the same group as either of the
counterparties.\176\
---------------------------------------------------------------------------
\176\ See RTS, Article 19(1)(e).
---------------------------------------------------------------------------
Any collateral posted as initial or variation margin may
be substituted by alternative collateral where all of the following
conditions are met: (a) The substitution is made in accordance with the
terms of the collateral agreement between the counterparties; (b) the
alternative collateral is eligible under the RTS; (c) the value of the
alternative collateral is sufficient to meet all margin requirements
after applying any relevant haircut.\177\
---------------------------------------------------------------------------
\177\ See RTS, Article 19(2).
---------------------------------------------------------------------------
Initial margin shall be protected from the default or
insolvency of the collecting counterparty by segregating it in either
or both of the following ways: (a) On the books and records of a third
party-holder or custodian; (b) via other legally binding
arrangements.\178\
---------------------------------------------------------------------------
\178\ See RTS, Article 19(3).
---------------------------------------------------------------------------
Counterparties shall ensure that non-cash collateral
exchanged as initial margin is segregated as follows: (a) Where
collateral is held by the collecting counterparty on a proprietary
basis, it shall be segregated from the rest of the proprietary assets
of the collecting counterparty; (b) where collateral is held by the
posting counterparty on a non-proprietary basis, it shall be segregated
from the rest of the proprietary assets of the posting counterparty;
(c) where collateral is held on the books and records of a custodian or
other third party holder, it shall be segregated from the proprietary
assets of that third-party holder or custodian.\179\
---------------------------------------------------------------------------
\179\ See RTS, Article 19(5).
---------------------------------------------------------------------------
The collecting counterparty shall not rehypothecate,
repledge nor otherwise reuse the collateral collected as initial
margin.\180\
---------------------------------------------------------------------------
\180\ See RTS, Article 20(1).
---------------------------------------------------------------------------
A third party holder may use the initial margin received
in cash for reinvestment purposes.\181\
---------------------------------------------------------------------------
\181\ See RTS, Article 20(2).
---------------------------------------------------------------------------
3. Commission Determination
The Commission notes that in one respect, the EU's margin
requirements with respect to custodial arrangements are less stringent
than those of the Final Margin Rule. Under the Final Margin Rule, all
assets posted by or collected by CSEs as initial margin must be held by
one or more custodians that are not the CSE, the counterparty, or
margin affiliates of the CSE or the counterparty.\182\ The EU's margin
rules do not prohibit an FC or NFC+ from using an affiliated entity as
custodian to hold initial margin other than cash collected from
counterparties.
---------------------------------------------------------------------------
\182\ See Sec. 23.157(a) and (b).
---------------------------------------------------------------------------
However, the EC has highlighted in its application that Article
19(3) of the RTS, which governs how initial margin must be held, leads
with the requirement that ``initial margin shall be protected from the
default or insolvency of the collecting counterparty.'' As the
applicant further represented, the EC and the European Supervisory
Authorities favor the use of third-party holders or custodians for non-
cash collateral but recognize through Article 19(3)(b) of the RTS that
the legal framework in the EU and, in particular, the Financial
Collateral Directive,\183\ allows Member States to authorize other
specific legally binding arrangements with equivalent finality and
protection. An example, according to the applicant, would be a third-
country trust bank that, while not necessarily recognized as a
custodian in the EU or individual Member State, may offer equivalent
collateral protection, both legally and operationally.
---------------------------------------------------------------------------
\183\ See http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:02002L0047-20140702&from=EN.
---------------------------------------------------------------------------
To further encourage the use of arrangements that protect initial
margin from the default or insolvency of a counterparty, FCs and NFC+s
subject to the EU margin regime must get legal certainty (either by way
of an internal
[[Page 48411]]
and independent opinion or via an external independent third party) as
to whether the segregation requirements have been met.\184\ In
addition, the RTS require counterparties to provide documentation to
their competent authority upon request supporting that the segregation
arrangements in all relevant jurisdictions meet these requirements. The
RTS also require counterparties subject to the EU margin regime to have
procedures that ensure ongoing compliance with these requirements,
particularly to show that initial margin is freely transferable to the
posting counterparty in a timely manner in case of default of the
collecting counterparty.\185\
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\184\ See RTS, Article 19(6).
\185\ See RTS, Article 19(1)(g).
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Accordingly, despite the differences in required custodial
arrangements, the Commission has determined that the EU's margin
requirements applicable to FCs and NFC+s pertaining to custodial
arrangements, segregation, and rehypothecation are comparable in
outcome to the corresponding requirements under the Final Margin Rule.
Specifically, the Commission finds that under both the EU's
requirements and the Final Margin Rule, a CSE/FC/NFC+ is required to
segregate the initial margin posted by its counterparties under terms
that ensure initial margin is protected from the default or insolvency
of the collecting counterparty and freely transferable to the posting
counterparty in a timely manner in case of any such default. Both
regimes also prohibit the rehypothecation of initial margin.
Accordingly, the Commission finds that the EU's requirements pertaining
to custodial arrangements, segregation, and rehypothecation are
comparable in outcome to those required by the Final Margin Rule.
L. Requirements for Margin Documentation
1. Commission Requirement for Margin Documentation
With respect to requirements for documentation of margin
arrangements, the Final Margin Rule generally provides that:
CSEs must execute documentation with each counterparty
that provides the CSE with the contractual right and obligation to
exchange initial margin and variation margin in such amounts, in such
form, and under such circumstances as are required by the Final Margin
Rule.\186\
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\186\ See Sec. 23.158(a).
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The margin documentation must specify the methods,
procedures, rules, inputs, and data sources to be used for determining
the value of uncleared swaps for purposes of calculating variation
margin; describe the methods, procedures, rules, inputs, and data
sources to be used to calculate initial margin for uncleared swaps
entered into between the CSE and the counterparty; and specify the
procedures by which any disputes concerning the valuation of uncleared
swaps, or the valuation of assets collected or posted as initial margin
or variation margin may be resolved.\187\
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\187\ See Sec. 23.158(b).
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2. EU Requirement for Margin Documentation
With respect to requirements for documentation of margin
arrangements, the EU's margin rules generally provide that the terms of
all necessary agreements to be entered into by counterparties, at the
latest, at the moment in which a non-centrally cleared OTC derivative
contract is concluded. Such documentation shall include the terms of
the netting agreement and the terms of the exchange of collateral
agreement, and (a) any payment obligations arising between
counterparties; (b) the conditions for netting payment obligations; (c)
events of default or other termination events of the non-centrally
cleared OTC derivative contracts; (d) all calculation methods used in
relation to payment obligations; (e) the conditions for netting payment
obligations upon termination, (f) the transfer of rights and
obligations upon termination; (g) the governing law of the transactions
of the non-centrally cleared OTC derivative contracts.\188\
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\188\ See RTS, Article 2(g).
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3. Commission Determination
Based on the foregoing and the representations of the applicant,
the Commission has determined that the EU's margin requirements
pertaining to margin documentation are substantially the same as the
margin documentation requirements under the Final Margin Rule.
Specifically, the Commission finds that under both the EU's
requirements and the Final Margin Rule, a CSE/FC/NFC+ is required to
enter into documentation with each OTC derivative/swap counterparty
that sets forth the method for calculating and transferring initial and
variation margin. Accordingly, the Commission finds that the EU's
requirements pertaining to margin documentation are comparable in
outcome to those required by the Final Margin Rule.
M. Cross-Border Application of the Margin Regime
1. Cross-Border Application of the Final Margin Rule
The general cross-border application of the Final Margin Rule, as
set forth in the Cross-Border Margin Rule, is discussed in detail in
Section II above. However, Sec. Sec. 23.160(d) and (e) of the Cross-
Border Margin Rule also provide certain alternative requirements for
uncleared swaps subject to the laws of a jurisdiction that does not
reliably recognize close-out netting under a master netting agreement
governing a swap trading relationship, or that has inherent limitations
on the ability of a CSE to post initial margin in compliance with the
custodial arrangement requirements \189\ of the Final Margin Rule.\190\
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\189\ See Sec. 23.157 and Section IV(K) above.
\190\ See Sec. 23.160(d) and (e). Paragraph (d) of the rule
addresses requirements for non-netting jurisdictions, and paragraph
(e) addresses jurisdictions where compliance with custodial
arrangement requirements is unavailable.
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Section 23.160(d) generally provides that where a jurisdiction does
not reliably recognize close-out netting, the CSE must treat the
uncleared swaps covered by a master netting agreement on a gross basis
with respect to collecting initial and variation margin, but may treat
such swaps on a net basis with respect to posting initial and variation
margin.\191\
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\191\ See id.
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Section 23.160(e) generally provides that where certain CSEs are
required to transact with certain counterparties in uncleared swaps
through an establishment in a jurisdiction where, due to inherent
limitations in legal or operational infrastructure, it is impracticable
to require posted initial margin to be held by an independent custodian
pursuant to Sec. 23.157, the CSE is required to collect initial margin
in cash (as described in Sec. 23.156(a)(1)(i)) and post and collect
variation margin in cash, but is not required to post initial margin.
In addition, the CSE is not required to hold the initial margin
collected with an unaffiliated custodian.\192\ Finally, the CSE may
only enter into such affected transactions up to 5% of its total
uncleared swap notional outstanding in each broad category of swaps
described in Sec. 23.154(b)(2)(v).
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\192\ See Sec. Sec. 23.160(e) and 23.157(b).
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2. Cross-Border Application of EU's Margin Regime
With respect to cross-border transactions, the EU's margin
requirements generally provide that the
[[Page 48412]]
EC may, in order to avoid duplicative and conflicting requirements in
respect of derivatives transactions, adopt implementing acts declaring
that the legal, supervisory, and enforcement arrangements of a non-EU
country are equivalent to the margin requirements for non-centrally
cleared OTC derivatives in Article 11 or EMIR.\193\ An implementing act
determining equivalence shall imply that counterparties entering into a
transaction within the scope of EMIR will be deemed to have fulfilled
their requirements where at least one of the counterparties is
established in the third country in respect of which the implementing
act has been adopted, and with respect to the requirements to which the
implementing act applies.\194\
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\193\ See EMIR, Article 13(2).
\194\ See EMIR, Article 13(3).
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With respect to non-centrally cleared OTC derivatives subject to
the laws of a jurisdiction where legal enforceability of netting
agreements or collateral protection cannot be ensured, the EU's margin
regime provides that:
Where counterparties enter into a netting or an exchange
of collateral agreement, they shall perform an independent legal review
of the enforceability of those agreements. The review may be conducted
by an internal independent unit or by an independent third party.\195\
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\195\ See RTS, Article 2(3).
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Counterparties shall perform an independent legal review
in order to verify that the segregation arrangement meets the
requirements of the RTS. The review may be conducted by an internal
independent unit or by an independent third party.\196\
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\196\ See RTS, Article 19(6).
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Counterparties established in the EU may provide in their
risk management procedures that variation and initial margins are not
required to be posted for non-centrally cleared OTC derivative
contracts concluded with counterparties established in a third-country
for which any of the following apply: (a) The legal review referred to
in Article 2(3) of the RTS confirms that the netting agreement and,
where used, the exchange of collateral agreement cannot be legally
enforced with certainty at all times; (b) the legal review referred to
in Article 19(6) of the RTS confirms that the segregation requirements
of the RTS cannot be met. For the purposes of subparagraph (a),
counterparties established in the EU shall collect margin on a gross
basis.\197\
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\197\ See RTS, Article 31(1).
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Counterparties established in the EU may provide in their
risk management procedures that variation and initial margins are not
required to be posted or collected for contracts concluded with
counterparties established in a third-country where all of the
following conditions apply: (a) The legal review referred to in Article
2(3) of the RTS confirms that the netting agreement and, where used,
the exchange of collateral agreement cannot be legally enforced with
certainty at all times and, where applicable, the legal review referred
to in Article 19(6) of the RTS confirms that the segregation
requirements of the RTS cannot be met; (b) the legal reviews confirm
that collecting collateral in accordance with this RTS is not possible,
even on a gross basis; and (c) the OTC derivatives in a counterparty's
portfolio from counterparties in non-netting jurisdictions is below
2.5%.\198\
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\198\ See RTS, Article 31(2) and (3).
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3. Commission Determination
Based on the foregoing and the representations of the applicant,
the Commission finds that the EU's margin regime with respect to its
cross-border application is comparable in outcome to that of the Final
Margin Rule as set forth in the Cross-Border Margin Rule.
First, the Commission recognizes that the EU's margin regime
permits substituted compliance to substantially the same extent as the
Cross-Border Margin Rule. For example, where a CSE finds itself subject
to both the Final Margin Rule and the EU's margin regime, it may be
possible under an EC equivalence determination that such CSE's
compliance with the Final Margin Rule will have fulfilled the
corresponding obligation under the EU's margin regime.
Second, with respect to transactions subject to the laws of a non-
netting jurisdiction or a jurisdiction where collateral protection
cannot be ensured, the EU's margin regime requires that margin be
collected on a gross basis and, where that is not possible, that the
FC/NFC+ limit their dealings in such jurisdiction to 2.5% of the OTC
derivatives in the FC/NFC+'s portfolio. While this framework for non-
centrally cleared OTC derivatives transacted with counterparties in
these types of jurisdictions is not identical to the Final Margin Rule
on this subject, the Commission recognizes that the conditions
requiring that margin be collected on a gross basis or, where that is
not possible, such transactions be subject to a conservative limit,
will serve to mitigate the potential risks associated with these types
of transactions. The RTS also provides that ``these treatments would be
considered sufficiently prudent, because there are also other risk-
mitigation techniques as an alternative to margins.'' \199\ Moreover,
before a counterparty may even consider collecting margin on a gross
basis or be permitted to transact with counterparties in a non-netting
jurisdiction up to any level, the EU margin rules obligate
counterparties to conduct a legal review on the enforceability of
netting agreements in the third-country jurisdiction and to obtain a
negative independent legal review.\200\
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\199\ See RTS, Recital (18).
\200\ See RTS, Article 31(2).
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The Commission also notes that a CSE, including a CSE that would be
operating under a substituted compliance determination, is required to
have a risk management program pursuant Sec. 23.600, and thus the
Commission has the authority to inquire as to the adequacy of the risk
management covering uncleared swaps in non-netting jurisdictions.
Having considered the similarities and differences described above,
the Commission finds that: (1) The availability of reciprocity of
substituted compliance available from the EU makes the EU margin regime
comparable in outcome in this respect to that of the Final Margin Rule
and the Cross-Border Margin Rule; and (2) the conditions that would
allow an FC/NFC+ to engage in up to 2.5% of its OTC derivatives
portfolio in jurisdictions that do not recognize non-netting agreements
or where collateral protection cannot be ensured, including that a
counterparty must obtain a negative independent legal opinion about the
enforceability of netting agreements before even considering trading
with counterparties in non-netting jurisdictions, plus other risk-
mitigation techniques that FC/NFC+s must have, make the EU margin
regime comparable in outcome in this respect to that of the Final
Margin Rule and the Cross-Border Margin Rule. Accordingly, the
Commission finds the cross-border aspects of the EU's margin regime
comparable in outcome to those of the Commission.
N. Supervision and Enforcement
The Commission has a long history of regulatory cooperation with
the Member State competent authorities, including cooperation in the
regulation of registrants of the Commission that are also FCs.\201\
These competent
[[Page 48413]]
authorities, as noted above, are responsible for supervising FCs as
part of their ongoing prudential regulation and supervision of such
FCs, will enforce the RTS, which are directly applicable in the Member
States, and will take all measures necessary to ensure that those rules
are implemented. Thus, the Commission finds that the EC, through the
competent authorities, has the necessary powers to supervise,
investigate, and discipline entities for compliance with its margin
requirements and recognizes the relevant competent authorities' ongoing
efforts to detect and deter violations of, and ensure compliance with,
the margin requirements applicable in the EU.
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\201\ To facilitate this cooperation, the Commission has
concluded memoranda of understanding with many of the competent
authorities. See the Commission's Web site at http://www.cftc.gov/International/MemorandaofUnderstanding/index.htm.
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V. Conclusion
As detailed above, the Commission has noted several differences
between the Final Margin Rule and the EU margin rules. However, having
considered the scope and objectives of the margin requirements for
uncleared swaps under the laws of the EU,\202\ whether such margin
requirements achieve comparable outcomes to the Commission's
corresponding margin requirements,\203\ and the ability of the Member
State competent authorities to supervise and enforce compliance with
the margin requirements for non-centrally cleared OTC derivatives under
the laws of the EU,\204\ the Commission has determined that the EU
margin rules are comparable in outcome to the Final Margin Rule.
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\202\ See Sec. 23.160(c)(3)(i).
\203\ See Sec. 23.160(c)(3)(ii). As discussed above, the
Commission's Final Margin Rule is based on the BCBS/IOSCO Framework;
therefore, the Commission expects that the relevant foreign margin
requirements would conform to such Framework at minimum in order to
be deemed comparable in outcome to the Commission's corresponding
margin requirements.
\204\ See Sec. 23.160(c)(3)(iii). See also Sec.
23.160(c)(3)(iv) (indicating the Commission would also consider any
other relevant facts and circumstances).
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As noted above, the Final Margin Rule's regulatory objective is to
ensure the safety and soundness of CSEs in order to offset the greater
risk to CSEs and the financial system arising from the use of swaps
that are not cleared. The EU margin rules require counterparties to
apply robust risk-mitigation techniques to their bilateral
relationships to reduce counterparty credit risk and to mitigate the
potential systemic risk that could arise. Moreover, the EU margin rules
achieve comparable outcomes to the Final Margin Rule in the following
specific areas: The products and entities subject to the EU's margin
requirements; the treatment of inter-affiliate derivative transactions;
the methodologies for calculating the amounts of initial and variation
margin; the process and standards for approving models for calculating
initial and variation margin models; the timing and manner in which
initial and variation margin must be collected and/or paid; any
threshold levels or amounts; risk management controls for the
calculation of initial and variation margin; eligible collateral for
initial and variation margin; the requirements of custodial
arrangements, including segregation of margin and rehypothecation;
margin documentation requirements; and the cross-border application of
the EU's margin regime. Finally, based on the long history of
regulatory cooperation between the Commission and Member State
competent authorities with supervisory and enforcement authority under
the RTS, the Commission finds that the EC, through the competent
authorities, has the necessary powers to supervise, investigate, and
discipline entities for compliance with its margin requirements, and
recognizes the relevant authorities' ongoing efforts to detect and
deter violations of, and ensure compliance with, the margin
requirements applicable in the EU.
Accordingly, a CSE that is subject to both the Final Margin Rule
and the EU's margin rules with respect to an uncleared swap that is
also a non-centrally cleared OTC derivative may rely on substituted
compliance for all aspects of the Final Margin Rule and the Cross-
Border Margin Rule. Any such CSE that, in accordance with this
comparability determination, complies with the EU margin rules, would
be deemed to be in compliance with the Final Margin Rule but would
remain subject to the Commission's examination and enforcement
authority.\205\
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\205\ See Sec. 23.160(c)(4).
Issued in Washington, DC, on October 13, 2017, by the
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Appendix to Comparability Determination for the European Union: Margin
Requirements for Uncleared Swaps for Swap Dealers and Major Swap
Participants--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz
and Behnam voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2017-22616 Filed 10-17-17; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: October 18, 2017