2011-9598

Federal Register, Volume 76 Issue 82 (Thursday, April 28, 2011)[Federal Register Volume 76, Number 82 (Thursday, April 28, 2011)]

[Proposed Rules]

[Pages 23732-23749]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2011-9598]

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Proposed Rules

Federal Register

________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of

the proposed issuance of rules and regulations. The purpose of these

notices is to give interested persons an opportunity to participate in

the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 76, No. 82 / Thursday, April 28, 2011 /

Proposed Rules

[[Page 23732]]

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038--AC97

Margin Requirements for Uncleared Swaps for Swap Dealers and

Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

``CFTC'') is proposing regulations to implement new statutory

provisions enacted by Title VII of the Dodd-Frank Wall Street Reform

and Consumer Protection Act (``Dodd-Frank Act''). The proposed

regulations would implement the new statutory framework of Section

4s(e) of the Commodity Exchange Act (``CEA''), added by Section 731 of

the Dodd-Frank Act, which requires the Commission to adopt capital and

initial and variation margin requirements for certain swap dealers

(``SDs'') and major swap participants (``MSPs''). The proposed rules

address initial and variation margin requirements for SDs and MSPs. The

proposed rules will not impose margin requirements on non-financial end

users. The Commission will propose rules regarding capital requirements

for SDs and MSPs at a later date. The Commission will align the comment

periods of these two proposals so that commenters will have an

opportunity to review each before commenting on either.

DATES: Comments must be received on or before June 27, 2011.

ADDRESSES: You may submit comments, identified by RIN 3038-AC97, and

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap

Participants by any of the following methods:

Agency Web site, via its Comments Online process at http://comments.cftc.gov. Follow the instructions for submitting comments

through the Web site.

Mail: Send to David A. Stawick, Secretary, Commodity

Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,

NW., Washington, DC 20581.

Hand Delivery/Courier: Same as mail above.

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for submitting comments.

Please submit your comments using only one method.

All comments must be submitted in English, or if not, accompanied

by an English translation. Comments will be posted as received to

http://www.cftc.gov. You should submit only information that you wish

to make available publicly. If you wish the Commission to consider

information that may be exempt from disclosure under the Freedom of

Information Act, a petition for confidential treatment of the exempt

information may be submitted according to the established procedures in

Sec. 145.9 of the Commission's regulation, 17 CFR 145.9.

The Commission reserves the right, but shall have no obligation, to

review, pre-screen, filter, redact, refuse or remove any or all of your

submission from http://www.cftc.gov that it may deem to be

inappropriate for publication, such as obscene language. All

submissions that have been redacted or removed that contain comments on

the merits of the rulemaking will be retained in the public comment

file and will be considered as required under the Administrative

Procedure Act and other applicable laws, and may be accessible under

the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: John C. Lawton, Deputy Director,

Thomas Smith, Deputy Director, or Thelma Diaz, Associate Director,

Division of Clearing and Intermediary Oversight, 1155 21st Street, NW.,

Washington, DC 20581. Telephone number: 202-418-5480 and electronic

mail: [email protected]; [email protected]; or [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

A. Legislation Requiring Rulemaking for Margin Requirements of SDs and

MSPs

On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

Title VII of the Dodd-Frank Act amended the CEA \2\ to establish a

comprehensive regulatory framework to reduce risk, increase

transparency, and promote market integrity within the financial system

by, among other things: (1) Providing for the registration and

comprehensive regulation of SDs and MSPs; (2) imposing clearing and

trade execution requirements on standardized derivative products; (3)

creating rigorous recordkeeping and real-time reporting regimes; and

(4) enhancing the Commission's rulemaking and enforcement authorities

with respect to all registered entities and intermediaries subject to

the Commission's oversight.

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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection

Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

\2\ 7 U.S.C. 1 et seq.

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The legislative mandate to establish registration and regulatory

requirements for SDs and MSPs appears in Section 731 of the Dodd-Frank

Act, which adds a new Section 4s to the CEA. Section 4s(e) explicitly

requires the adoption of rules establishing margin requirements for SDs

and MSPs, and applies a bifurcated approach that requires each SD and

MSP for which there is a prudential regulator to meet margin

requirements established by the applicable prudential regulator, and

each SD and MSP for which there is no prudential regulator to comply

with Commission's regulations governing margin.

The term ``prudential regulator'' is defined in a new paragraph 39

of the definitions set forth in Section 1a of the CEA, as amended by

Section 721 of the Dodd-Frank Act. This definition includes the Federal

Reserve Board; the Office of the Comptroller of the Currency (``OCC'');

the Federal Deposit Insurance Corporation (``FDIC''); the Farm Credit

Administration; and the Federal Housing Finance Agency. The definition

also specifies the entities for which these agencies act as prudential

regulators, and these consist generally of Federally insured deposit

institutions, farm credit banks, Federal home loan banks, the Federal

Home Loan Mortgage

[[Page 23733]]

Corporation, and the Federal National Mortgage Association. In the case

of the Federal Reserve Board, it is the prudential regulator not only

for certain banks, but also for bank holding companies and any foreign

banks treated as bank holding companies. The Federal Reserve Board also

is the prudential regulator for subsidiaries of these bank holding

companies and foreign banks, but excluding their nonbank subsidiaries

that are required to be registered with the Commission as a SD or MSP.

In general, therefore, the Commission is required to establish

margin requirements for all registered SDs and MSPs that are not banks,

including nonbank subsidiaries of bank holding companies regulated by

the Federal Reserve Board. In addition, certain swap activities

currently engaged in by banks may be conducted in such nonbank

subsidiaries and affiliates as a result of the prohibition on Federal

assistance to swap entities under Section 716 of the Dodd-Frank Act.

Generally, insured depository institutions (``IDIs'') that are required

to register as SDs may be required to comply with Section 716 by

``pushing-out'' to an affiliate all swap trading activities with the

exception of: (1) The IDI's hedging or other similar risk mitigating

activities directly related to the IDI's activities; and (2) the IDI

acting as a SD for swaps involving rates or reference assets that are

permissible for investment under banking law.

B. Considerations for SD and MSP Rulemaking Specified in Section 4(s)

Section 4s(e)(3)(A) states the need to offset the greater risk that

swaps that are not cleared pose to SDs, MSPs, and the financial system,

and directs the Commission, United States Securities and Exchange

Commission (``SEC''), and prudential regulators to adopt capital and

margin requirements that: (1) Help ensure the safety and soundness of

the registrant; and (2) are appropriate for the risk associated with

the uncleared swaps they hold. Section 4s(e)(3)(C) permits the use of

noncash collateral, as the Commission and the prudential regulators

each determines to be consistent with: (1) Preserving the financial

integrity of markets trading swaps; and (2) preserving the stability of

the United States financial system.

C. Consultation With SEC and Prudential Regulators

The Commission has worked closely with the prudential regulators

and the SEC in designing these rules. Every effort has been made to be

as consistent as possible with the rules being considered by the

prudential authorities. Section 4s(e)(3)(D) of the CEA requires that

the Commission, SEC, and prudential regulators (together, referred to

as ``Agencies'') establish and maintain, to the maximum extent

practicable, comparable minimum initial and variation margin

requirements for SDs, MSPs, security-based swap dealers (``SSDs'') and

major security-based swap participants (``MSSPs'') (together, referred

to as ``swap registrants''). Section 4s(e)(3)(D) also requires the

Agencies to periodically, but not less frequently than annually,

consult on minimum margin requirements for swap registrants. As

directed by Dodd-Frank, and consistent with precedent for harmonizing

where practicable the minimum margin requirements of dual registrants,

staff from each of the Agencies has had the opportunity to provide oral

and written comments on the proposal and the proposed regulations

incorporate elements of the comments provided.

D. Structure and Approach

Consistent with the objectives set forth above, this release

summarizes regulations that the Commission proposes in order to

establish minimum initial and variation margin requirements for SDs and

MSPs that are not banks. As noted in previous proposed rulemaking

issued by the Commission, the Commission intends, where practicable, to

consolidate regulations implementing Section 4s of CEA in a new Part

23.\3\ By this Federal Register release, the Commission is proposing to

adopt Subpart E of Part 23, pertaining to the capital and margin

requirements and related financial condition reporting requirements of

SDs and MSPs.\4\

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\3\ See 75 FR 71379 (Nov. 23, 2010).

\4\ As noted above, the Commission will propose rules related to

capital and financial condition reporting in a separate release.

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II. Proposed Margin Regulations

A. Introduction

Section 4s(e)(2)(B) of the CEA provides that:

The Commission shall adopt rules for swap dealers and major swap

participants, with respect to their activities as a swap dealer or

major swap participant, for which there is not a prudential regulator

imposing--

(i) Capital requirements; and

(ii) Both initial and variation margin requirements on all swaps

that are not cleared by a registered derivatives clearing organization.

Section 4s(e)(3)(A) of the CEA provides that:

To offset the greater risk to the swap dealer or major swap

participant and the financial system arising from the use of swaps that

are not cleared, the requirements imposed under paragraph (2) shall

(i) Help ensure the safety and soundness of the swap dealer or

major swap participant; and

(ii) Be appropriate for the risk associated with the non-cleared

swaps.

During the recent financial crisis, derivatives clearing

organizations (``DCOs'') met all their obligations without any

financial infusions from the government. By contrast, significant sums

were expended as the result of losses incurred in connection with

uncleared swaps, most notably at AIG. A key reason for this difference

is that DCOs all use variation margin and initial margin as the

centerpiece of their risk management programs while these tools were

often not used in connection with uncleared swaps. Consequently, in

designing the proposed margin rules for uncleared swaps, the Commission

has built upon the sound practices for risk management employed by

central counterparties for decades.

Variation margin entails marking open positions to their current

market value each day and transferring funds between the parties to

reflect any change in value since the previous time the positions were

marked. This process prevents losses from accumulating over time and

thereby reduces both the chance of default and the size of any default

should one occur.

Initial margin serves as a performance bond against potential

future losses. If a party fails to meet its obligation to pay variation

margin, resulting in a default, the other party may use initial margin

to cover most or all of any loss based on the need to replace the open

position.

Well-designed margin systems protect both parties to a trade as

well as the overall financial system. They serve both as a check on

risk-taking that might exceed a party's financial capacity and as a

resource that can limit losses when there is a failure.

The statutory provisions cited above reflect Congressional

recognition that (i) margin is an essential risk-management tool and

(ii) uncleared swaps pose greater risks than cleared swaps. In

particular, it is noteworthy that Section 4s(e)(2)(B)(ii) requires both

variation margin and initial margin for SDs and MSPs on all uncleared

swaps and that Section 4s(e)(3)(A) explicitly refers to the greater

risk of uncleared swaps. In addition to the disciplines of regular

collection of initial and variation margin previously mentioned,

central clearing

[[Page 23734]]

provides additional means of risk mitigation.

First, unlike an SD or MSP, a DCO is not in the business of taking

positions in the market. By definition, a DCO runs a perfectly matched

book. Second, a DCO only deals with members who must meet certain

financial, risk management, and operational standards. Third, a DCO may

turn to those members to help liquidate or transfer open positions in

the event of a member default. Fourth, DCOs typically, by rule, have

the ability to mutualize a portion of the tail risk associated with a

clearing member default through the use of guarantee funds and similar

mechanisms.

Concern has been expressed that the imposition of margin

requirements on uncleared swaps will be very costly for SDs and MSPs.

However, margin has been, and will continue to be, required for all

cleared products. Given the Congressional reference to the ``greater

risk'' of uncleared swaps and the requirement that margin for such

swaps ``be appropriate for the risk,'' the Commission believes that

establishing margin requirements for uncleared swaps that are at least

as stringent as those for cleared swaps is necessary to fulfill the

statutory mandate. Within these statutory bounds the Commission has

endeavored to limit costs appropriately. For example, as discussed

below, the proposal would permit margin reductions for positions with

offsetting risk characteristics.

The proposals set forth below were developed in consultation with

the prudential regulators. They are consistent in almost all material

respects with provisions that the Commission understands are being

proposed by the prudential regulators.\5\ Salient differences will be

noted below.

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\5\ The Commission anticipates that the prudential regulators

will publicly post their proposed rules on their Web sites, see,

e.g., http://www.fdic.gov/.

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The discussion below addresses: (i) The products covered by the

proposed rules; (ii) the market participants covered by the proposed

rules; (iii) permissible methods of calculating initial margin; (iv)

permissible methods of calculating variation margin; (v) permissible

margin assets; and (vi) permissible custodial arrangements.

B. Products

The proposal would cover only swaps executed after the effective

date of the regulation that are not cleared by a DCO. The proposal

would not apply to swaps executed before the effective date of the

final regulation. The Commission believes that the pricing of existing

swaps reflects the credit arrangements under which they were executed

and that it would be unfair to the parties and disruptive to the

markets to require that the new margin rules apply to those positions.

However, the Commission requests comment on whether SDs and MSPs should

be permitted voluntarily to include pre-effective date swaps in

portfolios margined pursuant to the proposed rules. The Commission also

anticipates that existing positions would be taken into account under

the capital rule to be proposed at a later date.

The Commission also wishes to emphasize that the proposal does not

apply to forward contracts. Under the CEA, the CFTC does not regulate

forward contracts. Accordingly, the Commission believes that the

requirements of Section 4s(e) do not apply to forward contracts.

C. Market Participants

1. Overview

The proposed regulations would impose requirements on SDs and MSPs

for which there is no prudential regulator (``covered swap entities''

or ``CSEs''). Because different types of counterparties may pose

different levels of risk, the requirements would vary in some respects

depending on the category of counterparty. The proposed regulations

would not impose margin requirements on non-financial end users.

Proposed Sec. 23.151 would require each CSE to execute

documentation regarding credit support arrangements that is consistent

with the requirements of these rules with each counterparty. The

documentation would specify in advance material terms such as how

margin would be calculated, what types of assets would be permitted to

be posted, what margin thresholds, if any, would apply, and where

margin would be held. This provision is consistent with the

documentation requirement recently proposed by the Commission as Sec.

23.504.\6\ Having comprehensive documentation in advance concerning

these matters would allow each party to a swap to manage its risks more

effectively throughout the life of the swap and to avoid disputes

regarding issues such as valuation. The Commission solicits comment

regarding whether it should require SDs and MSPs to document the

procedures by which any disputes concerning the valuation of a swap or

the valuation of assets collected or posted as initial or variation

margin may be resolved.

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\6\ Swap Trading Relationship Documentation Requirements for

Swap Dealers and Major Swap Participants, 76 FR 6715 (Feb. 8, 2011).

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Under rules being proposed by the prudential regulators for SDs and

MSPs that are banks, the parties are allowed to make particular

variation margin calculations pursuant to a qualifying master netting

agreement. The Commission understands that this term will be defined

under rules proposed by the prudential regulators to mean a legally

enforceable agreement to offset positive and negative mark-to-market

values of one or more swaps or security-based swaps that meet a number

of specific criteria designed to ensure that these offset rights are

fully enforceable, documented, and monitored by the covered swap

entity.

As noted, the Commission has previously proposed Sec. 23.504,

which requires SDs and MSPs to have swap trading relationship

documentation with each counterparty. Under proposed Sec.

23.504(b)(1), this documentation ``shall be in writing and shall

include all terms governing the trading relationship between the swap

dealer or major swap participant and its counterparty, including,

without limitation, terms addressing payment obligations, netting of

payments, events of default or other termination events, calculation

and netting of obligations upon termination, transfer of rights and

obligations, governing law, valuation, and dispute resolution

procedures.'' \7\

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\7\ Id.

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Under proposed Sec. 23.600(c)(4)(v)(A), SDs and MSPs would be

required to have risk management policies and procedures addressing

legal risks associated with their business as swap dealers or major

swap participants, including risks associated with ``determinations

that transactions and netting arrangements entered into have a sound

legal basis.'' \8\ Taken together, it is the Commission's belief that

all SDs and MSPs entering into trading relationship documentation with

their counterparties would be required to have a sound legal basis to

determine that such agreements will be enforceable in accordance with

their terms.

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\8\ See Regulations Establishing and Governing the Duties of

Swap Dealers and Major Swap Participants, 75 FR 71397, 71405 (Nov.

23, 2010).

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The Commission solicits comment regarding whether proposed

Sec. Sec. 23.501 and 23.600 are sufficient to ensure that SDs and MSPs

have a sound legal basis for their swap documentation or whether the

Commission should adopt the concept of ``qualifying master netting

agreements'' from existing banking regulations.

[[Page 23735]]

2. Positions Between CSEs and Other SDs or MSPs

Proposed Sec. 23.152 addresses initial margin and variation margin

requirements for positions of CSEs with other SDs or MSPs. (The latter

would include both SD/MSPs that are CSEs and SD/MSPs for which there is

a prudential regulator.) The regulation would require CSEs to collect

initial margin for every uncleared swap with another SD or MSP on or

before the date of execution of the swap.\9\ The proposed rule would

require the CSEs to maintain initial margin from its counterparty equal

to or greater than an amount calculated pursuant to proposed Sec.

23.155, discussed below, until the swap is liquidated.\10\ The credit

support arrangements between a CSE and its counterparty would be

prohibited from containing a threshold below which the CSE was not

required to post initial margin, i.e., zero thresholds would be

required.

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\9\ In previously proposed rules, execution has been defined to

mean, ``with respect to a swap transaction, an agreement by the

counterparties (whether orally, in writing, electronically, or

otherwise) to the terms of the swap transaction that legally binds

the counterparties to such terms under applicable law.''

Confirmation, Portfolio Reconciliation, and Portfolio Compression

Requirements for Swap Dealers and Major Swap Participants, 75 FR

81519, 81530 (Dec. 28, 2010). Additionally, swap transaction has

been defined to mean ``any event that results in a new swap or in a

change to the terms of a swap, including execution, termination,

assignment, novation, exchange, transfer, amendment, conveyance, or

extinguishing of rights or obligations of a swap.'' Id. at 81531.

\10\ The use of the term ``liquidated'' in this context should

be construed to include all ownership events related to that swap,

including expiration or maturation.

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(In order to reduce transaction costs, proposed Sec. 23.150 would

establish a ``minimum transfer amount'' of $100,000. Initial and

variation margin payments would not be required to be made if below

that amount. This amount was selected in consultation with the

prudential regulators. It represents an amount sufficiently small that

the level of risk reduction might not be worth the transaction costs of

moving the money. It only affects the timing of collection; it does not

change the amount of margin that must be collected once the $100,000

level is exceeded.)

CSEs also would be required to collect variation margin for all

trades with another SD or MSP. Again, zero thresholds would be

required, and the obligation would continue on each business day until

the swap is liquidated. The proposal contains a provision stating that

a CSE would not be deemed to have violated its obligation to collect

variation margin if it took certain steps. Specifically, if a

counterparty failed to pay the required variation margin to the CSE,

the CSE would be required to make the necessary efforts to attempt to

collect the variation margin, including the timely initiation and

continued pursuit of formal dispute resolution mechanisms, or otherwise

demonstrate upon request to the satisfaction of the Commission that it

has made appropriate efforts to collect the required variation margin

or commenced termination of the swap.

It is the nature of the dealer business that dealers are at the

center of the markets in which they participate. Similarly, a major

swap participant, by its terms, is a significant trader. Collectively,

SDs and MSPs pose greater risk to the markets and the financial system

than other swap market participants. Accordingly, under the mandate of

Section 4s(e), the Commission believes that they should be required to

collect margin from one another.

3. Positions Between CSEs and Financial Entities

Proposed Sec. 23.153 addresses initial margin and variation margin

requirements for positions between CSEs and financial entities.

Proposed Sec. 23.150 would define a financial entity as a counterparty

that is not an SD or MSP and that is either: (i) A commodity pool as

defined in Section 1a(5) of the Act; (ii) a private fund as defined in

Section 202(a) of the Investment Advisors Act of 1940; (iii) an

employee benefit plan as defined in paragraphs (3) and (32) of section

3 of the Employee Retirement Income and Security Act of 1974; (iv) a

person predominantly engaged in activities that are in the business of

banking, or in activities that are financial in nature as defined in

Section 4(k) of the Bank Holding Company Act of 1956; (v) a person that

would be a financial entity described in (i) or (ii) if it were

organized under the laws of the United States or any State thereof;

(vi) the government of any foreign country or a political subdivision,

agency, or instrumentality thereof; or (vii) any other person the

Commission may designate. With three modifications discussed below,

this definition tracks the definition in Section 2(h)(7)(C) of the Act

that is used in connection with an exception from any applicable

clearing mandate.

Item (v) of the proposed definition adds entities that would be a

commodity pool or private fund if organized in the United States. The

Commission believes that such entities would pose similar risks to

those of similar entities located within the United States.

Item (vi) of the proposed definition adds any government of any

foreign country or any political subdivision, agency, or

instrumentality thereof. The Commission notes that these types of

sovereign counterparties do not fit easily into the proposed rule's

categories of financial and nonfinancial entities. In comparing the

characteristics of sovereign counterparties with those of financial and

nonfinancial entities, the Commission preliminarily believes that the

financial condition of a sovereign will tend to be closely linked with

the financial condition of its domestic banking system, through common

effects of the business cycle on both government finances and bank

losses, as well as through the safety net that many sovereigns provide

to banks. Such a tight link with the health of its domestic banking

system, and by extension with the broader global financial system,

makes a sovereign counterparty similar to a financial entity both in

the nature of the systemic risk and the risk to the safety and

soundness of the covered swap entity. As a result, the Commission

preliminarily believes that sovereign counterparties should be treated

as financial entities for purposes of the proposed rule's margin

requirements.

Item (vii) in the proposed definition permits the Commission to

designate additional entities as financial entities. The Commission

understands that the prudential regulators are proposing the same

provision. This would enable regulators to accomplish the purposes of

Section 4s in circumstances where they identify additional entities

whose activities and risk profile warrant inclusion. The Commission

solicits comment on whether these entities are appropriate, whether

additional entities should be designated as financial entities, and

what criteria should be applicable.

The Commission believes that financial entities, which generally

are not using swaps to hedge or mitigate commercial risk, potentially

pose greater risk to CSEs than non-financial entities. Accordingly, if

a CSE chooses to expose itself to such risk, it should take steps to

mitigate such risks.

Initial margin would be required to be collected by CSEs for every

trade with a financial entity on or before the date of execution of the

swap. The proposed rule would require the CSEs to maintain initial

margin from its counterparty equal to or greater than an amount

calculated pursuant to proposed Sec. 23.155, discussed below, until

the swap is liquidated.

[[Page 23736]]

Zero thresholds would be required except for certain financial

entities \11\ that: (i) Are subject to capital requirements established

by a prudential regulator or a State insurance regulator; (ii)

predominantly use swaps to hedge; and (iii) do not have significant

swaps exposure.\12\ The proposal set forth ranges within which the

threshold would fall. These eligibility standards and ranges were

established in consultation with the prudential regulators.

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\11\ The prudential regulators proposed rulemaking refers to

these financial entities as ``low-risk'' financial entities based on

the relative risk posed by the type of counterparty.

\12\ Significant swap exposure is defined by reference to rules

previously proposed by the Commission. See Further Definition of

``Swap Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap

Participant,'' ``Major Security-Based Swap Participant'' and

``Eligible Contract Participant'' 75 FR 80174 (Dec. 21, 2010).

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The Commission solicits comment on whether thresholds should be

permitted at all, and if so, what entities should be eligible, and at

what level they should be set. If the Commission determines to permit

thresholds, it anticipates that the final rule would establish a single

level rather than a range.

Similarly, variation margin would also be required to be collected

by CSEs on all transactions with a financial entity. Zero thresholds

would be required with the same exception discussed above for initial

margin. Any applicable thresholds for initial and variation margin

would be separate and therefore could be cumulative. The obligation

would continue on each business day until the swap is liquidated.

The Commission notes that under the proposed rule each CSE would be

required to collect variation margin from financial entities but would

not be required to pay variation margin to them. This approach is

consistent with what the prudential regulators are proposing in their

margin rules. The rationale is that when an SD pays variation margin to

an financial entity that is not subject to capital requirements, money

is flowing from a regulated entity to an unregulated one. By following

this approach in its proposed rules, the Commission is endeavoring to

follow Section 4s(e)(D)(ii)'s requirement that Commission regulations

on margin be comparable to those of the prudential regulators ``to the

maximum extent practicable.''

The Commission wishes to highlight and solicits comment regarding

the risk management effects of this approach and its appropriateness

under Section 4s(e)(E)(3)(A) of the CEA. As noted above, two-way

variation margin has been a keystone of the ability of DCOs to manage

risk. Each day current exposure is removed from the market through the

payment and collection of variation margin for all products and all

participants regardless of their identity or financial resources.

If two-way variation margin were not required for uncleared swaps

between CSEs and financial entities, the CSE's exposures may be allowed

to accumulate. In contrast to initial margin, which is designed to

cover potential future exposures, variation margin addresses actual

current exposures, that is, losses that have already occurred.

Unchecked accumulation of such exposures was one of the characteristics

of the financial crisis which, in turn, led to the enactment of the

Dodd-Frank Act.

Moreover, both payment and collection of variation margin help

ensure the safety and soundness of the swap dealer or major swap

participant. Daily collection helps the safety and soundness of the CSE

by removing current exposure from each counterparty. But daily payment

also helps safety and soundness by preventing the CSE from building up

exposures that it cannot fulfill.

Finally, two-way variation would address the risk associated with

the non-cleared swaps held as a swap dealer or major swap participant.

Uncleared swaps are likely to be more customized and consequently trade

in a less liquid market than cleared swaps. As a result, uncleared

swaps might take a longer time and require a greater price premium to

be liquidated than cleared swaps, particularly in a distressed market

conditions. Failure to remove current exposures in advance of such a

situation through daily, two-way variation margin could exacerbate any

losses in the event of a SD or MSP default.

Accordingly, in addition to requesting comment on the proposed

requirement for collection of variation margin set forth below as

23.153(b)(1), the Commission also requests comment on whether it should

adopt an additional provision as follows:

For each uncleared swap between a covered swap entity and a

financial entity, each covered swap entity shall pay variation

margin as calculated pursuant to Sec. 23.156 of this part directly

to the financial entity or to a custodian selected pursuant to Sec.

23.158 of this part. Such payments shall start on the business day

after the swap is executed and continue each business day until the

swap is liquidated.

Many of the considerations discussed above also might apply to two-

way initial margin. The Commission solicits comments on whether two-way

initial margin is appropriate for transactions between CSEs and

financial entities.

4. Positions Between CSEs and Non-financial Entities

The proposal would not impose margin requirements on non-financial

entities. Proposed Sec. 23.150 would define a non-financial entity as

a counterparty that is not a swap dealer, a major swap participant, or

a financial entity. The Commission believes that such entities, which

are using swaps to hedge commercial risk, pose less risk to CSEs than

financial entities. Consistent with Congressional intent,\13\ the

proposal would not impose margin requirements on such positions.

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\13\ Letter from Chairman Debbie Stabenow, Committee on

Agriculture, Nutrition and Forestry, U.S. Senate, Chairman Frank D.

Lucas, Committee on Agriculture, United States House of

Representatives, Chairman Tim Johnson, Committee on Banking,

Housing, and Urban Affairs, U.S. Senate, and Chairman Spencer

Bachus, Committee on Financial Services, United States House of

Representatives to Secretary Timothy Geithner, Department of

Treasury, Chairman Gary Gensler, U.S. Commodity Futures Trading

Commission, Chairman Ben Bernanke, Federal Reserve Board, and

Chairman Mary Shapiro, U.S. Securities and Exchange Commission

(April 6, 2011); Letter from Chairman Christopher Dodd, Committee on

Banking, Housing, and Urban Affairs, U.S. Senate, and Chairman

Blanche Lincoln, Committee on Agriculture, Nutrition, and Forestry,

U.S. Senate, to Chairman Barney Frank, Financial Services Committee,

United States House of Representatives, and Chairman Collin

Peterson, Committee on Agriculture, United States House of

Representatives (June 30, 2010); see also 156 Cong. Rec. S5904

(daily ed. July 15, 2010) (statement of Sen. Lincoln)

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The proposal would require that CSEs have credit support

arrangements in place consistent with proposed Sec. 23.504.\14\ This

would ``help ensure the safety and soundness of the swap dealer or

major swap participant'' by providing clarity as its rights and

obligations. The proposal would not dictate the terms of any margin

arrangements other than stating that each covered swap entity may

accept as margin from non-financial entities only assets for which the

value is reasonably ascertainable on a periodic basis in a manner

agreed to by the parties in the credit support arrangements.

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\14\ Swap Trading Relationship Documentation Requirements for

Swap Dealers and Major Swap Participants, 76 FR 6715 (Feb. 8, 2011).

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The parties would be free to set initial margin and variation

margin requirements in their discretion and any thresholds agreed upon

by the parties would be permitted. The proposal would require that CSEs

pay and collect initial margin and variation margin as set forth in

their agreements with their counterparties. The Commission understands

that the proposal differs

[[Page 23737]]

from the proposal of the prudential regulators which would require that

CSEs collect variation margin from non-financial entities at least once

per week, if applicable thresholds were exceeded.

The proposal would require each CSE to calculate hypothetical

initial and variation margin amounts each day for positions held by

non-financial entities. That is, the CSE must calculate what the margin

amounts would be if the counterparty were another SD or MSP.\15\ These

calculations would serve as risk management tools that would assist the

CSE in measuring its exposure. Moreover, they would likely be necessary

for CSEs in computing any capital requirements that might be

applicable.

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\15\ This is consistent with the requirement set forth in

Section 4s(h)(3)(B)(iii)(II) that SDs and MSPs must disclose to

counterparties who are not SDs or MSPs a daily mark for uncleared

swaps.

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D. Calculation of Initial Margin

Proposed Sec. 23.155 addresses how initial margin should be

calculated. Models meeting specified standards would be permissible. If

no model meeting the standards of the rule is available, the CSE would

set margin in accordance with an alternative approach described below.

1. Models

Proposed Sec. 23.155(b) sets forth requirements for models. Under

proposed Sec. 23.155(b)(1), the following would be eligible: (i) A

model currently in use for margining cleared swaps by a DCO, (ii) a

model currently in use for margining uncleared swaps by an entity

subject to regular assessment by a prudential regulator, or (iii) a

model available for licensing to any market participant by a vendor.

Unlike the banking institutions that will be overseen by the prudential

regulators, the CSEs subject to the Commissions regulations may not

have proprietary models. Moreover, given current budget constraints,

the Commission does not have the resources to review numerous models

individually. Accordingly, at this time, the Commission is proposing to

permit the use of certain non-proprietary models. The proposal,

however, also contains a provision which would permit the Commission to

issue an order that would allow the use of proprietary models in the

future should the Commission obtain sufficient resources.

This is an aspect of the proposal that differs from the prudential

regulators' approach. Because many banks already have proprietary

models, and because the prudential regulators have the resources to

review individual proprietary models, the prudential regulators would

not permit the use of DCO models or the use of models licensed to

market participants. The Commission solicits comment on the feasibility

of the use of DCO models or third party models by CSEs for margining

uncleared swaps.

Proposed Sec. 23.155(b)(2) further requires that a model meet

specified standards. The following are some of the elements that would

be required in a model:

The valuation of a swap must take into account all

significant, identifiable risk factors, including any non-linear risk

characteristics;

The valuation of a swap must be based on pricing sources

that are accurate and reliable;

The model must set margin to cover at least 99% of price

changes by product and by portfolio over at least a 10-day liquidation

horizon;

The model must be validated by an independent third party

before being used and annually thereafter;

The swap dealer or major swap participant must conduct

back testing and stress testing of the model on a regular basis; and

If the swap product is also offered for non-mandatory

clearing by a registered DCO, the initial margin collected may not be

less than the initial margin required by the DCO.

Parties could add individualized credit surcharges to the margin amount

produced by the model.

These standards are consistent with the standards that the

Commission understands that the prudential regulators are proposing.

They are also similar to the standards the Commission has used in

evaluating DCO margin models, and that prudential regulators have used

in assessing bank margin models.

Proposed Sec. 23.155(b)(3) would require that models be filed with

the Commission. The filing would include a complete explanation of:

The manner in which the model meets the requirements of

this section;

The mechanics of the model;

The theoretical basis of the model;

The empirical support for the model; and

Any independent third party validation of the model.

Under proposed Sec. 23.155(b)(4), the Commission could approve or

deny the application by an SD or MSP to use an initial margin model, or

approve an amendment to the application, in whole or in part, subject

to any conditions or limitations the Commission may require, if the

Commission finds the approval to be necessary or appropriate in the

public interest after determining, among other things, whether the

applicant had met the requirements of the section and was in compliance

with other applicable rules promulgated under the Act and by self-

regulatory organizations.

Under proposed Sec. 23.155(b)(4), the Commission also could at any

time require a CSE to provide further data or analysis concerning the

amount of initial margin required or on deposit. In addition, the

Commission could at any time require a CSE to modify the model to

address potential vulnerabilities. These measures are designed to be

prudent safeguards to be used to address weaknesses that may only

become apparent over time.

2. Alternative Method

Proposed Sec. 23.155(c) provides that if a model meeting the

standards of the rule is not used, margin must be calculated in

accordance with a specified alternative method. The Commission

determined that a potentially effective way to measure the risk of

uncleared swaps in cases where models were unavailable would be to base

the margin requirements on the margin requirements for related cleared

products.

Proposed Sec. 23.155(c)(1) provides that the CSE identify in the

credit support arrangements the swap cleared by a DCO in the same asset

class as the uncleared swap for which the terms and conditions most

closely approximate the terms and conditions of the uncleared swap. If

there is no cleared swap whose terms and conditions closely approximate

the uncleared swap, the swap dealer or major swap participant must

identify in the credit support arrangements the futures contract

cleared by a DCO in the same asset class as the uncleared swap which

most closely approximates the uncleared swap and would be most likely

to be used to hedge the uncleared swap.

The CSE would ascertain the margin the DCO would require for the

position. The CSE would then multiply the amount for a cleared swap by

2.0 in order to determine the margin required for the uncleared swap or

multiply the amount for a cleared futures contract by 4.4 in order to

determine the margin required for the uncleared swap.

The multiplier is calculated by comparing the anticipated

liquidation time horizon for the cleared product to the anticipated

liquidation time horizon for the uncleared swap and then applying

several add-ons for additional risk factors. To illustrate, typically,

a cleared futures contract is margined

[[Page 23738]]

using a one-day liquidation time period, while under the proposal, an

uncleared swap would be margined using a 10-day period. A standard way

to measure the increase in risk over the longer period is to multiply

the margin for the shorter period by the square root of the longer

period. The square root of 10 is 3.162.

The proposal would increase this number to address several

additional risks. A 10% cushion would be added to reflect that a 10-day

period may be insufficient for some customized products. An additional

10% cushion would be added to reflect that the square root method

assumes a normal distribution of prices which might not be true for

customized products. An additional 20% cushion would be added to

reflect the basis risk between the cleared and uncleared products.

Taking into account these add-ons yields a total multiplier of 4.4.

A similar calculation for cleared swaps yields a multiplier of 2.0.

The margin for cleared swaps generally would be higher than the margin

for cleared futures because cleared swaps generally would be subject to

a 5-day liquidation time.\16\ The greater similarity in the anticipated

liquidation time results in a smaller multiplier when comparing

uncleared swaps to cleared swaps than when comparing uncleared swaps to

cleared futures.

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\16\ In rules the Commission previously proposed for DCOs,

cleared swaps traded on a swap execution facility or executed

bilaterally would be subject to a minimum five-day liquidation

period for purposes of calculating initial margin, whereas swaps

traded on a designated contract market may be subject to a minimum

one-day requirement. Risk Management Requirements for Derivatives

Clearing Organizations, 76 FR 3698, 3704-05 (Jan. 20, 2011). To the

extent that a cleared swap was subject to the one-day requirement,

the appropriate multiplier would be the same as the futures

multiplier.

---------------------------------------------------------------------------

This alternative model is another aspect of the proposal that

differs from the prudential regulators' approach. Their alternative

uses percentages of notional value. The Commission considered using a

similar approach but recognized that the use of notional percentages is

an imprecise measure that does not capture the nuances of risk and it

appeared to be more appropriate to base initial margins for uncleared

swaps on those required by DCOs for similar cleared swaps. The

Commission invites comment on the relative merits of the two

alternative approaches. In this regard, the Commission requests comment

on the appropriateness of the levels of initial margin set forth in the

prudential regulators' alternative approach.

Proposed Sec. 23.155(c)(2) addresses portfolio offsets for swaps

with correlated risk profiles under the alternative method. Again, the

proposal is conservative. Reductions in margin based on offsetting risk

characteristics of products would not be permitted across asset classes

except between currencies and interest rates. Any reductions in margin

based on offsetting risk characteristics of products within an asset

class must have a sound theoretical basis and significant empirical

support. No reduction may exceed 50% of the amount that would be

required for the swap in the absence of a reduction.

Proposed Sec. 23.155(c)(3) provides for modifications for

particular products or positions. Each CSE would be required to monitor

the coverage provided by margin established pursuant to this paragraph

posed by particular products or positions.

Under proposed Sec. 23.155(c)(4), the Commission could at any time

require the CSE to post or collect additional margin because of

additional risk posed by a particular product. Furthermore, the

Commission could at any time require a CSE to post or collect

additional margin because of additional risk posed by a particular

party to the swap. For example, if the Commission were to learn that a

particular counterparty was experiencing financial difficulty, it might

need to take steps to ensure that the CSE held margin appropriate for

the risk associated with the position. These measures are designed to

be prudent safeguards similar to those discussed above.

E. Calculation of Variation Margin

Proposed Sec. 23.156 addresses how variation margin should be

calculated. Proposed Sec. 23.156(b) sets forth several requirements.

The valuation of each swap must be determined pursuant to a method

agreed upon by the parties in the credit support arrangements. It must

be consistent with the requirements set forth in proposed Section

23.504(b) of this part.\17\ It must be set forth with sufficient

specificity to allow the counterparty, the Commission, and any

applicable prudential regulator to calculate the requirement

independently.

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\17\ Swap Trading Relationship Documentation Requirements for

Swap Dealers and Major Swap Participants, 76 FR 6715 (Feb. 8, 2011).

---------------------------------------------------------------------------

Under proposed Sec. 23.155(c), the Commission could at any time

require the CSE to provide further data or analysis concerning the

methodology. Furthermore, the Commission could at any time require a

CSE to modify the methodology to address potential vulnerabilities.

These measures are designed to be prudent safeguards to be used to

address weaknesses that may only become apparent over time.

As noted above, the Commission previously proposed Sec.

23.504(b)(4), which would require that the swap trading documentation

include written documentation in which the parties agree on the

methods, procedures, rules and inputs for determining the value of each

swap at any time from execution to the termination, maturity, or

expiration of the swap. The agreed methods, procedures, rules and

inputs would be required to constitute a complete and independently

verifiable methodology for valuing each swap entered into between the

parties. Proposed Sec. 23.504(b)(4)(iii) would require that the

methodology include complete alternative methods for determining the

value of the swap in the event that one or more inputs to the

methodology become unavailable or fail, such as during times of market

stress or illiquidity. The provisions proposed in this release are

intended together with those previously proposed rules to ensure that

all swap positions are accurately and reliably marked to market and all

valuation disputes are resolved in a timely manner, thereby reducing

risk.

F. Forms of Margin

Proposed Sec. 23.157 addresses the types of assets that would be

acceptable as margin in transactions involving CSEs. There are

differences between initial margin and variation margin and within each

category depending on counterparties.

1. Initial Margin

Proposed Sec. 23.157(a)(2) provides that CSEs may only accept as

initial margin from SDs, MSPs, or financial entities, the following

assets:

Immediately available cash funds denominated in U.S.

dollars or the currency in which payment obligations under the swap are

required to be settled;

Any obligation which is a direct obligation of, or fully

guaranteed as to principal and interest by, the United States or an

agency of the United States; or

Any senior debt obligation of the Federal National

Mortgage Association, the Federal Home Loan Mortgage Corporation, a

Federal Home Loan Bank, the Federal Agricultural Mortgage Corporation,

or any obligation that is an ``insured obligation,'' as that term is

defined in 12 U.S.C. 2277a(3), of a Farm Credit System bank.

[[Page 23739]]

These are assets for which there are deep and liquid markets and,

therefore, assets that can be readily valued and easily liquidated. The

Commission requests comment on whether additional types of assets

should be acceptable.

To the extent a non-financial entity and a CSE have agreed that the

non-financial entity will post initial margin, proposed Sec.

23.157(a)(3) provides flexibility for initial margin posted by non-

financial entities with CSEs as to what assets are permissible. The

standard is simply that the value of the asset is reasonably

ascertainable on a periodic basis. This is in accordance with the

statement in Section 4s(e)(3)(C) that the Commission permit the use of

non-cash collateral as it determines consistent with preserving the

financial integrity of the markets and preserving the stability of the

United States financial system. The Commission understands that current

market practice would support a periodic valuation of the assets used

as noncash collateral, but solicits comment from market participants

regarding how practical the requirement is. In particular, the

Commission requests comment on how frequently such collateral could and

should be valued.

The Commission understands that this differs from the proposal of

the prudential regulators. The prudential regulators would require CSEs

to collect as initial margin for non-financial entities only the assets

listed previously to cover any exposure above the credit exposure

limit.

2. Variation Margin

Proposed Sec. 23.157(b) would require that variation payments by

CSEs, or financial entities be in cash or United States Treasury

securities. This is consistent with the general purpose of variation

margin of eliminating current exposure through the use of liquid,

easily valued assets.

To the extent a non-financial entity and a CSE have agreed that the

non-financial entity will post variation margin, proposed Sec.

23.157(b)(3) provides flexibility for variation margin posted by non-

financial entities with CSEs as to what assets are permissible. The

standard is simply that the value of the asset is reasonably

ascertainable on a periodic basis. As was the case for initial margin,

this is in accordance with the statement in Section 4s(e)(3)(C) that

the Commission permit the use of non-cash collateral.

Proposed Sec. 23.157(c) establishes haircuts for assets received

by a CSE from an SD, MSP, or financial entity as follows:

Margin Value Ranges for Non-Cash Collateral

[% of market value]

------------------------------------------------------------------------

Duration (years)

--------------------------------------

0-5 5-10 > 10

------------------------------------------------------------------------

U.S. Treasuries and Fully

Guaranteed Agencies:

Bills/Notes/Bonds/Inflation [98-100] [95-99] [94-98]

Indexed.....................

Zero Coupon, STRIPs.......... [97-99] [94-98] [90-94]

FHFA-Regulated Institutions

Obligations and Insured

Obligations of FCS Banks:

Bills/Notes/Bonds............ [96-100] [94-98] [93-97]

Zero Coupon.................. [95-99] [93-97] [89-93]

------------------------------------------------------------------------

These haircuts were based on a consultation with prudential regulators

who use them in other contexts.

Proposed Sec. 23.157(d) would authorize certain actions by the

Commission regarding margin assets. The Commission could:

Require a CSE to provide further data or analysis

concerning any margin asset posted or received;

Require a CSE to replace a margin asset posted to a

counterparty with a different margin asset to address potential risks

posed by the asset;

Require a CSE to require a counterparty that is an SD,

MSP, or a financial entity to replace a margin asset posted with the

CSE with a different margin asset to address potential risks posed by

the asset;

Require a CSE to provide further data or analysis

concerning margin haircuts; or

Require a CSE to modify a margin haircut applied to an

asset received from an SD or MSP, or a financial entity to address

potential risks posed by the asset.

All these actions are intended to be methods for ensuring the safety

and soundness of the CSE and protecting the financial system.

G. Custodial Arrangements

Proposed Sec. 23.158 addresses custodial arrangements. The

proposal is intended to safeguard margin assets.

Under proposed Sec. 23.158(a) each CSE must offer each

counterparty the opportunity to select a custodian that is not

affiliated with the CSE. Further, each CSE must hold initial margin

received from a counterparty that is an SD or MSP at a custodian that

is independent of the CSE and the counterparty. Similarly, a CSE that

posts initial margin with a counterparty that is an SD or MSP must

require the counterparty to hold the initial margin at a custodian that

is independent of the SD or MSP and the counterparty.

Further, the proposal would require that the custodian be subject

to the same insolvency regime as the CSE. This would facilitate quicker

recovery of margin assets.

Under proposed Sec. 23.158(b)(1) each CSE must specify in each

custodial agreement that the custodian may not rehypothecate margin

assets or reinvest them in assets that are not permitted forms of

margin. Further, upon certification to the custodian in accordance with

the provisions of 23.602(b)(1) by a party that it is entitled to

receipt of margin, the custodian must release margin to the certifying

party.\18\

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\18\ Protection of Collateral of Counterparties to Uncleared

Swaps; Treatment of Securities in a Portfolio Margining Account in a

Commodity Broker Bankruptcy, 75 FR 75432 (Dec. 3, 2010).

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Under proposed Sec. 23.158(b)(2), upon receipt of initial margin

from a counterparty, no CSE may post such assets as margin for a swap,

a security-based swap, a commodity for future delivery, a security, a

security futures product, or any other product subject to margin. These

provisions are designed to prevent the same asset from being passed

around as margin for multiple positions.

Under proposed Sec. 23.158(c), the Commission may at any time

require a CSE to provide further data or analysis concerning any

custodian. Further, the Commission may at any time require a CSE

participant to move assets held on behalf of a counterparty to another

custodian to address risks posed by the

[[Page 23740]]

original custodian. These provisions are designed to protect the assets

of the parties to the contract.

H. Request for Comment

The Commission requests comment on all aspects of the proposed

rules regarding margin. In particular, the Commission requests comment

on the following:

Are proposed Sec. Sec. 23.501 and 23.600 sufficient to

ensure that SDs and MSPs have a sound legal basis for their swap

documentation, or should the Commission adopt the concept of

``qualifying master netting agreements'' from existing banking

regulations?

It is the Commission's understanding that the prudential

regulators would require SDs and MSPs that are banks to appropriately

take into account and address the credit risk posed by the counterparty

and the risks of uncleared swaps, and further the prudential

authorities would require SDs and MSPs that are banks to enforce those

credit limit policies, or credit thresholds, with regard to the banks'

counterparties. The Commission previously proposed Sec.

23.600(c)(1),\19\ which would require SDs and MSPs to set risk

tolerance limits for themselves. One of the critical risk limits in any

risk management program would relate to credit risk. The Commission

solicits comment regarding whether it should adopt a requirement,

similar to the one proposed by the prudential authorities, requiring

non-bank SDs and MSPs to enforce their credit risk limits as a matter

of policy.

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\19\ See Regulations Establishing and Governing the Duties of

Swap Dealers and Major Swap Participants, 75 FR 71397, 71404 (Nov.

23, 2010) (requiring that SDs and MSPs ``take into account market,

credit, liquidity, foreign currency, legal, operational, settlement,

and any other applicable risks together with a description of the

risk tolerance limits set by the swap dealer or major swap

participant and the underlying methodology''). Additionally, the

risk tolerance limits would have to be reviewed and approved

quarterly by senior management and annually by the governing body,

and exceptions to risk tolerance limits would require prior approval

of a supervisor in the risk management unit.

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What effects will the proposed rules have on the overall

liquidity of the financial markets?

Would the proposed rules have differing effects on

liquidity by asset class?

Would the proposed rules have differing effects on

liquidity by class of participant?

Should the Commission permit thresholds for either initial

margin or variation margin?

If so, what standards should apply?

Is the proposed definition of financial entity

appropriate?

Should the Commission instead define financial entity as a

person that is not eligible to claim an exception from mandatory

clearing under section 2(h)(7) of the Act?

Should the Commission exercise authority to designate

additional persons as financial entities?

If so, what standards should apply?

Do the definitions adequately identify financial entities

that have different levels of risk?

Should nonfinancial entities also be separated according

to levels of risk?

If so, on what basis (e.g., in a manner similar to the

classification of financial entities)?

If so, how should the requirement apply differently to

such nonfinancial entities?

Is the classification of sovereign counterparties as

financial entities appropriate in light of the risks posed by these

counterparties?

If not, what other classification would be appropriate,

and why?

Should sovereign counterparties receive their own distinct

counterparty classification that is different from those

classifications in the proposed rule?

If so, why?

How should the permitted uncollateralized exposures to a

sovereign counterparty differ from those that are allowed for financial

or non-financial entities?

Is it appropriate to distinguish between financial and

non-financial counterparties for the purpose of this risk-based

approach?

Does the proposed rule require greater clarity with

respect to the treatment of U.S. Federal, State, or municipal

government counterparties? If so, how should such counterparties be

treated?

Should a counterparty that is a bank holding company or

nonbank financial firm subject to enhanced prudential standards under

Section 165 of the Dodd-Frank Act be treated similarly to swap entity

counterparties?

Should counterparties that are small financial

institutions using derivatives to hedge their risks be treated in the

same manner as non-financial entities for purposes of the margin

requirements?

Would requiring a CSE to post initial margin to non-SD/MSP

counterparties reduce systemic risk (e.g., by reducing leverage in the

financial system or reducing systemic vulnerability to the failure of a

covered swap entity)?

Are there alternatives that address those risks more

efficiently or with greater transparency?

Would requiring a CSE to post initial margin to non-SD/MSP

counterparties raise any concerns with respect to the safety and

soundness of the CSE, taking into consideration the requirement that

initial margin be segregated and held with a third party custodian?

Would requiring a CSE to post initial margin to non-SD/MSP

counterparties remove one or more incentives for that CSE to choose,

where possible, to structure a transaction so that it need not be

cleared through a DCO in order to avoid pledging initial margin?

Would this approach be consistent with the statutory

factors the Commission is directed to take into account under sections

4s of the Act?

Is one-way initial margin in trades between CSEs and