2019-06103
Federal Register, Volume 84 Issue 62 (Monday, April 1, 2019)
[Federal Register Volume 84, Number 62 (Monday, April 1, 2019)]
[Rules and Regulations]
[Pages 12065-12073]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06103]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 23
[3038-AE85]
Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants
AGENCY: Commodity Futures Trading Commission.
ACTION: Interim final rule; request for comments.
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SUMMARY: The United Kingdom (``UK'') has provided formal notice of its
intention to withdraw from the European Union (``EU''). The withdrawal
may happen as soon as April 12, 2019 and may transpire without a
negotiated agreement between the UK and EU (``No-deal Brexit''). To the
extent there is a No-deal Brexit, affected swap dealers (``SDs'') and
major swap participants (``MSPs'') may need to effect legal transfers
of uncleared swaps that were entered into before the relevant
compliance dates under the CFTC Margin Rule or Prudential Margin Rule
(each, as defined herein) and that are not now subject to such rules,
in whole or in part. The Commodity Futures Trading Commission
(``Commission'' or ``CFTC'') is adopting, and invites comments on, an
interim final rule amending its margin requirements for uncleared swaps
for SDs and MSPs for which there is no prudential regulator (``CFTC
Margin Rule'') such that the date used for purposes of determining
whether an uncleared swap was entered into prior to an applicable
compliance date will not change under the CFTC Margin Rule if the swap
is transferred, and thereby amended, in accordance with the terms of
the interim final rule in respect of any such transfer, including that
the transfer be made solely in connection with a party to the swap's
planning for or response to a No-deal Brexit. The interim final rule is
designed to allow an uncleared swap to retain its legacy status under
the CFTC Margin Rule or Prudential Margin Rule when so transferred.
DATES: Effective Date: This rule is effective April 1, 2019.
Comment Date: Comments must be received on or before May 31, 2019.
Comments submitted by mail will be accepted as timely if they are
postmarked on or before this comment due date.
ADDRESSES: You may submit comments, identified by RIN 3038-AE85, by any
of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Center, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods.
Submissions through the CFTC Comments Portal are encouraged.
Instructions: All submissions received must include the agency name
and RIN number for this rulemaking. For additional details on
submitting comments, see the ``Public Participation'' heading of the
SUPPLEMENTARY INFORMATION section of this document.
FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, [email protected]; Frank Fisanich, Chief Counsel, 202-418-5949,
[[Page 12066]]
[email protected]; or Jacob Chachkin, Special Counsel, 202-418-5496,
[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. Background
A. The CFTC Margin Rule
Section 731 of the Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') \1\ added a new section 4s to the Commodity
Exchange Act (``CEA'') \2\ setting forth various requirements for SDs
and MSPs. Section 4s(e) of the CEA directs the Commission to adopt
rules establishing minimum initial and variation margin requirements on
all swaps \3\ that are (i) entered into by an SD or MSP for which there
is no Prudential Regulator \4\ (collectively, ``covered swap entities''
or ``CSEs'') and (ii) not cleared by a registered derivatives clearing
organization (``uncleared swaps'').\5\ To offset the greater risk to
the SD or MSP \6\ and the financial system arising from the use of
uncleared swaps, these requirements must (i) help ensure the safety and
soundness of the SD or MSP and (ii) be appropriate for the risk
associated with the uncleared swaps held as an SD or MSP.\7\
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\2\ 7 U.S.C. 1 et seq.
\3\ For the definition of swap, see section 1a(47) of the CEA
and Commission regulation 1.3. 7 U.S.C. 1a(47) and 17 CFR 1.3. It
includes, among other things, an interest rate swap, commodity swap,
credit default swap, and currency swap.
\4\ 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 Federal Deposit Insurance Corporation,
the Office of the Comptroller of the Currency, the Farm Credit
Administration, and the Federal Housing Finance Agency). The
definition further specifies the entities for which these agencies
act as Prudential Regulators. 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 Margin Rule''). The Prudential Rule is similar to the
CFTC Margin Rule, including with respect to the CFTC's phasing-in of
margin requirements, as discussed herein.
\5\ See 7 U.S.C. 6s(e)(2)(B)(ii). In Commission regulation
23.151, the Commission further defined this statutory language to
mean all swaps that are not cleared by a registered derivatives
clearing organization or a derivatives clearing organization that
the Commission has exempted from registration as provided under the
CEA. 17 CFR 23.151.
\6\ For the definitions of SD and MSP, see section 1a of the CEA
and Commission regulation 1.3. 7 U.S.C. 1a and 17 CFR 1.3.
\7\ 7 U.S.C. 6s(e)(3)(A).
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To this end, the Commission promulgated the CFTC Margin Rule in
January 2016,\8\ establishing requirements for a CSE to collect and
post initial margin \9\ and variation margin \10\ for uncleared swaps.
These requirements vary based on the type of counterparty to such swaps
and the location of the CSE and its counterparty.\11\ These
requirements also generally apply only to uncleared swaps entered into
on or after the compliance date applicable to a particular CSE and its
counterparty (``covered swap'').\12\ An uncleared swap entered into
prior to a CSE's applicable compliance date for a particular
counterparty (``legacy swap'') is generally not subject to the margin
requirements in the CFTC Margin Rule.\13\
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\8\ Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 81 FR 636 (Jan. 6, 2016). The CFTC Margin
Rule, which became effective April 1, 2016, is codified in part 23
of the Commission's regulations. 17 CFR 23.150 through 23.159,
23.161. In May 2016, the Commission amended the CFTC Margin Rule to
add Commission regulation 23.160, providing rules on its cross
border application. 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). 17 CFR 23.160.
\9\ Initial margin, as defined in Commission regulation 23.151
(17 CFR 23.151), is the collateral (calculated as provided by Sec.
23.154 of the Commission's regulations) that is collected or posted
in connection with one or more uncleared swaps. Initial margin is
intended to secure potential future exposure following default of a
counterparty (i.e., adverse changes in the value of an uncleared
swap that may arise during the period of time when it is being
closed out), while variation margin is provided from one
counterparty to the other in consideration of changes that have
occurred in the mark-to-market value of the uncleared swap. See CFTC
Margin Rule, 81 FR at 664 and 683.
\10\ Variation margin, as defined in Commission regulation
23.151 (17 CFR 23.151), is the collateral provided by a party to its
counterparty to meet the performance of its obligation under one or
more uncleared swaps between the parties as a result of a change in
the value of such obligations since the trade was executed or the
last time such collateral was provided.
\11\ See Commission regulations 23.152 and 23.153, 17 CFR 23.152
and 23.153. For example, the CFTC Margin Rule does not require a CSE
to collect margin from, or post margin to, a counterparty that is
neither a swap entity nor a financial end user (each as defined in
17 CFR 23.151). Pursuant to section 2(e) of the CEA, 7 U.S.C. 2(e),
each counterparty to an uncleared swap must be an eligible contract
participant (``ECP''), as defined in section 1a(18) of the CEA, 7
U.S.C. 1a(18). See Commission regulation 23.160 on the cross-border
application of the CFTC Margin Rule. 17 CFR 23.160.
\12\ Pursuant to Commission regulation 23.161, compliance dates
for the CFTC Margin Rule are staggered such that CSEs must come into
compliance in a series of phases over four years. The first phase
affected CSEs and their counterparties, each with the largest
aggregate outstanding notional amounts of uncleared swaps and
certain other financial products. These CSEs began complying with
both the initial and variation margin requirements of the CFTC
Margin Rule on September 1, 2016. The second phase began March 1,
2017, and required CSEs to comply with the variation margin
requirements of Commission regulation 23.153 with all relevant
counterparties not covered in the first phase. See 17 CFR 23.161. On
each September 1 thereafter ending with September 1, 2020, CSEs must
comply with the initial margin requirements with counterparties with
successively lesser outstanding notional amounts.
\13\ See CFTC Margin Rule, 81 FR at 651 and Commission
regulation 23.161. 17 CFR 23.161.
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To the extent that more than one uncleared swap is executed between
a CSE and its covered counterparty, the CFTC Margin Rule permits the
netting of required margin amounts of each swap under certain
circumstances.\14\ In particular, the CFTC Margin Rule, subject to
certain limitations, permits a CSE to calculate initial margin and
variation margin, respectively, on an aggregate net basis across
uncleared swaps that are executed under the same eligible master
netting agreement (``EMNA'').\15\ Moreover, the CFTC Margin Rule
permits swap counterparties to identify one or more separate netting
portfolios (i.e., a specified group of uncleared swaps the margin
obligations of which will be netted only against each other) under the
same EMNA, including having separate netting portfolios for covered
swaps and legacy swaps.\16\ A netting portfolio that contains only
legacy swaps is not subject to the initial and variation margin
requirements set out in the CFTC Margin Rule.\17\ However, if a netting
portfolio contains any covered swaps, the entire netting portfolio
(including all legacy swaps) is subject to such requirements.\18\
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\14\ See CFTC Margin Rule, 81 FR at 651 and Commission
regulations 23.152(c) and 23.153(d). 17 CFR 23.152(c) and 23.153(d).
\15\ Id. The term EMNA is defined in Commission regulation
23.151. 17 CFR 23.151. Generally, an EMNA creates a single legal
obligation for all individual transactions covered by the agreement
upon an event of default following certain specified permitted
stays. For example, an International Swaps and Derivatives
Association form Master Agreement may be an EMNA, if it meets the
specified requirements in the EMNA definition.
\16\ See CFTC Margin Rule, 81 FR at 651 and Commission
regulations 23.152(c)(2)(ii) and 23.153(d)(2)(ii). 17 CFR
23.152(c)(2)(ii) and 23.153(d)(2)(ii).
\17\ Id.
\18\ Id.
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A legacy swap may lose its legacy treatment under the CFTC Margin
Rule, causing it to become a covered swap and causing any netting
portfolio in which it is included to be subject to the requirements of
the CFTC Margin Rule. For reasons discussed in the CFTC Margin Rule,
the Commission elected not to extend the meaning of legacy swaps to
include (1) legacy swaps that
[[Page 12067]]
are amended in a material or nonmaterial manner; (2) novations of
legacy swaps; and (3) new swaps that result from portfolio compression
of legacy swaps.\19\ Therefore, and as relevant here, a legacy swap
that is amended after the applicable compliance date may become a
covered swap subject to the initial and variation margin requirements
in the CFTC Margin Rule. In that case, netting portfolios that were
intended to contain only legacy swaps and, thus, not be subject to the
CFTC Margin Rule may become so subject.
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\19\ See CFTC Margin Rule, 81 FR at 675. The Commission notes
that certain limited relief has been given from this standard. See
Margin Requirements for Uncleared Swaps for Swap Dealers and Major
Swap Participants, 83 FR 60341 (Nov. 26, 2018) and CFTC Staff Letter
No. 17-52 (Oct. 27. 2017), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/17-52.pdf.
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B. Brexit and Transfers of Uncleared Swaps
The UK has provided formal notice of its intention to withdraw from
the EU (``Brexit''). The withdrawal may occur as soon as April 12,
2019.\20\ Financial entities, including CSEs in the UK,\21\ face
uncertainty about the applicable regulatory framework they will operate
within after such withdrawal, especially a UK exit from the EU absent a
negotiated agreement (a ``Withdrawal Agreement'') on the specific terms
of the UK's exit (a ``No-deal Brexit'').\22\ These firms have been
mindful that one consequence of a No-deal Brexit would be an inability
of the firms, if located in the UK, to continue providing investment
services in the EU under the current passporting regime. As a result,
they might not be in a position to perform certain operations in
relation to swaps they presently have with EU clients. In order to
address this situation, these firms could attempt to transfer their
swaps to a related establishment in an EU Member State, which in turn
would benefit from the passporting regime,\23\ or to another related
entity outside of the EU.
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\20\ See Special meeting of the European Council (Art. 50) (21
March 2019)--Conclusions, at https://data.consilium.europa.eu/doc/document/XT-20004-2019-INIT/en/pdf (visited March 22, 2019).
\21\ In many instances, these firms made a strategic decision
decades ago to use a UK establishment as their base of operations to
provide financial services to customers across the EU, consistent
with the EU's system of cross-border authorizations to engage in
regulated financial activities (known as ``passporting'').
\22\ See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/759019/25_November_Agreement_on_the_withdrawal_of_the_United_Kingdom_of_Great_Britain_and_Northern_Ireland_from_the_European_Union_and_the_European_Atomic_Energy_Community.pdf (visited February 21, 2019). The
Commission notes that if a No-deal Brexit occurs, it will be as a
result of political events beyond the control of the parties to the
legacy swap and not driven by U.S. regulatory policy.
\23\ In recent months, for example, some financial entities have
initiated processes under which a UK court sanctions a bulk transfer
of their business, including derivatives, from the balance sheets of
their UK establishments to a different location established by the
dealer in another EU Member State. See, e.g., Barclays Bank plc Part
VII Business transfer to Barclays Bank Ireland plc (2019) EWHC 129
(Ch), at http://www.bailii.org/ew/cases/EWHC/Ch/2019/129.pdf
(visited February 21, 2019); ``Two Banks Begin Moving Swaps out of
London, Pre-Brexit,'' Risk.net (November 30, 2018), at https://www.risk.net/derivatives/6168671/banks-begin-moving-swaps-out-of-london-pre-brexit (visited February 21, 2019); ``UBS Wins Approval
for [euro]32bn Brexit Swaps Transfer,'' Risk.net (February 6, 2019),
at https://www.risk.net/derivatives/6367306/ubs-wins-approval-for-eu32bn-brexit-swaps-transfer (visited February 21, 2019).
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Similarly, EU financial entities, including CSEs, may also be
directly affected by a No-deal Brexit if, for example, they have
entered into uncleared swaps with financial entities located in the UK.
They might face UK counterparties that request to transfer their swaps
to an affiliate or other related establishment as discussed above or
might themselves desire to transfer such swaps (e.g., to a U.K entity)
in response to a No-deal Brexit.
In addition, financial entities, including CSEs, regardless of
their location may also be affected by a No-deal Brexit and choose to
engage in various reorganizations or consolidations of their swaps
business in planning for or responding to such an event.\24\
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\24\ As discussed later in this Supplementary Information, the
Commission has designed this Interim Final Rule to recognize the
need for flexibility on the part of financial entities as they
attempt to work through the unanticipated effects of a No-deal
Brexit. For example, this Interim Final Rule, subject to its
requirements, is designed to allow CSEs who, as a result of a No-
deal Brexit, make a strategic decision to refrain from opening a new
EU establishment post-withdrawal, to pull their UK uncleared swap
portfolios to related entities outside of the EU, or to otherwise
restructure their swaps business as they deem appropriate.
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Each of the transfers and reorganizations described above would
require the amendment of transferred swaps. As discussed above, to the
extent that these swaps are legacy swaps and a CSE is either a
remaining party or a transferee of such swaps, these amendments may
cause the swaps to lose their legacy status, thereby converting them
into covered swaps and causing them and any uncleared swaps in the same
netting portfolio to become subject to the applicable margin
requirements of the CFTC Margin Rule. If these requirements were to
apply to such swaps following a No-Deal Brexit, the change in the
status of the swaps could cause CSEs and other market participants to
incur significant costs, potentially in a short period of time
following a No-deal Brexit, due to the additional requirement to post
variation and possibly initial margin. This could cause disruptions or
have unanticipated negative consequences for affected market
participants and swap markets that could, for example, create cash flow
or liquidity concerns for some swap counterparties.
II. Interim Final Rule
The Commission is issuing this interim final rule (this ``Interim
Final Rule'') in order to maintain the status quo for legacy swaps with
respect to the CFTC Margin Rule to the extent any amendments thereto
are made solely to transfer such swaps in response to a No-deal Brexit,
as discussed above, and otherwise pursuant to the requirements of this
Interim Final Rule.\25\ Specifically, this Interim Final Rule amends
Commission regulation 23.161 \26\ to provide that in a No-Deal Brexit,
subject to certain conditions,\27\ a legacy swap may be transferred and
amended without revising the date (``swap date'') used for purposes of
determining whether such uncleared swap was entered into prior to the
applicable compliance date under the CFTC Margin Rule. By preserving
the swap date and limiting the transferees of each party to its margin
affiliate,\28\ or a
[[Page 12068]]
branch or other authorized form of establishment \29\ of the party (an
``Eligible Transferee''), the Interim Final Rule allows an uncleared
swap to retain its legacy status under the CFTC Margin Rule or
Prudential Margin Rule when transferred.\30\
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\25\ The Commission notes that the Prudential Regulators and the
European Supervisory Authorities (``ESAs'') have provided or
proposed similar relief for certain swaps subject to their
respective margin requirements. See Margin and Capital Requirements
for Covered Swap Entities, 84 FR 9940 (Mar. 19, 2019) and ESAs
Propose to Amend Bilateral Margin Requirements to Assist Brexit
Preparations for OTC Derivative Contracts (November 29, 2018), at
https://www.esma.europa.eu/press-news/esma-news/esas-propose-amend-bilateral-margin-requirements-assist-brexit-preparations-otc
(visited February 21, 2019). In addition, certain EU Member states
are providing related relief. See British Banks Are Getting a Last-
Minute Break From the EU (February 20, 2018), at https://www.bloomberg.com/news/articles/2019-02-20/brexit-fears-drive-eu-nations-to-seek-reprieve-for-london-banks (visited February 21,
2019).
\26\ 17 CFR 23.161.
\27\ See 17 CFR 23.161(d)(2).
\28\ As defined in Commission regulation 23.151 (17 CFR 23.151),
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 paragraph
(1) or (2) of this definition would have occurred if such principles
or standards had applied.
Under Commission regulation 23.161, 17 CFR 23.161, a margin
affiliate's relevant swaps are included in determining the
applicable compliance date for the CSE and counterparty under
Commission regulation 23.161, 17 CFR 23.161, and thus the compliance
date of a CSE and its margin affiliates facing the same counterparty
(or its margin affiliates) should generally be the same.
\29\ The text of this Interim Final Rule is intended to be
flexible as to the nature of the legal establishment of the
financial entity to which a legacy swap is transferred so long as
that financial entity is the party or a margin affiliate of that
party to the swap. See Sec. 23.161(d)(2)(ii). The Commission's
references to an establishment of a financial entity is intended to
be flexible as to whether the relationship of the financial entity
to the business unit is due to an affiliation between separately-
incorporated entities, branching of a single business entity in
different jurisdictions, or some other form of business
establishment through which an arm of the financial entity may be
legally authorized to conduct business in that location. A financial
entity may, for example, use its establishment in the EU to take on
uncleared swap portfolios from its swap dealing affiliate in the UK.
In a different case, the financial entity's establishments in the EU
and the UK may both be branches of the same financial entity.
Alternatively, there may be yet a different relationship due to the
structure of the specific financial entity involved. On the other
hand, the financial entity may not move its operations in any way,
but it may have existing portfolios of uncleared swaps facing
counterparties who are themselves relocating out of or into the UK,
to an affiliate, or a branch, or some other type of form of
establishment of the party outside of or in the UK.
\30\ The Commission notes that to the extent that the parties to
a transferred legacy swap are subject to the Prudential Margin Rule
in addition to the CFTC Margin Rule, the legacy swap may become
subject to the margin requirements of the Prudential Margin Rule
notwithstanding this Interim Final Rule.
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To be effective, the Commission believes this Interim Final Rule
must cover all the different scenarios that would trigger the need for
a CSE or its counterparty to participate in amending an uncleared swap
in order to ``relocate'' the swap in preparation for or in response to
a No-deal Brexit. However, to benefit from the treatment of this
amendment, the financial entity must arrange to make the amendments to
the uncleared swap solely for the purpose of transferring the uncleared
swap to an Eligible Transferee once the UK has withdrawn from the EU,
as further discussed herein.\31\ This purpose test also contains a
requirement that the transfer be made in connection with the entity's
planning for the possibility of a No-deal Brexit, or the entity's
response to such event.\32\
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\31\ See Sec. 23.161(d)(2)(ii).
\32\ Id.
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For compliance purposes, this Interim Final Rule makes one
distinction between a transfer initiated by the financial entity
standing as the CSE at the completion of the transaction, versus a
transfer initiated by the CSE's counterparty. For the latter, the
transferor must make a representation to the CSE that the transferee is
an Eligible Transferee, and the transfer was made solely in connection
with the transferor's planning for or response to a No-deal Brexit.\33\
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\33\ See Sec. 23.161(d)(2)(ii)(B).
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The Interim Final Rule is designed to permit only such amendments
as financial entities find necessary to relocate uncleared swap
portfolios under the purpose test. These changes may be carried out
using any of the methods typically employed for effecting uncleared
swap transfers, including industry protocols, contractual amendments,
or contractual tear-up and replacement. To the extent they would
otherwise trigger margin requirements, judicially-supervised changes
that result in an uncleared swap being booked at or held by a related
establishment, including by means of the court-sanctioned process
available under Part VII of the UK's Financial Services and Markets Act
of 2000, are similarly within the scope of this Interim Final Rule.
However, the Commission does not believe the relief being provided
for relocation purposes should be expansively applied to encompass
economic changes to a legacy swap. Accordingly, the benefits of this
Interim Final Rule are unavailable if the amendments to an uncleared
swap modify the payment amount calculation methods, the maturity date,
or the notional amount of the uncleared swap.\34\ Thus, for example, if
the day count convention of an uncleared swap changes as a consequence
of re-locating a uncleared interest rate swap several time zones away
from the UK, the parties to the swap would not be changing the payment
amount calculation methods. On the other hand, a change to one of the
payment amount calculation economic factors (e.g., an interest rate
margin or base rate) would be a change outside the scope of this
Interim Final Rule and could trigger application of the CFTC's margin
requirements.
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\34\ See 17 CFR 23.161(d)(2)(iii). The Commission does not
intend that this Interim Final Rule provide an opportunity for
parties to renegotiate the economic terms of their legacy swaps, but
rather is providing the Interim Final Rule solely to allow a party
to a legacy swap to transfer the swap to an Eligible Transferee in
connection with the transferor's planning for the possibility of a
No-deal Brexit, or its response to such event. See Sec.
23.161(d)(2)(ii). If any amendment to a legacy swap does not meet
this purpose test in the Interim Final Rule, the legacy swap would
not be eligible for the relief provided by it.
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The Commission also seeks to establish a reasonable period of time
for the necessary work to achieve the transfers to be performed. The
Interim Final Rule permits transfers for a period of one year after a
UK withdrawal.\35\ The 1-year period commences at the point at which
the law of the EU ceases to apply in the UK pursuant to Article 50(3)
of the Treaty on European Union, without conclusion of a Withdrawal
Agreement between the UK and EU pursuant to Article 50(2).\36\ If the
present withdrawal date is extended, and withdrawal later occurs at the
end of that extension without a Withdrawal Agreement, this Interim
Final Rule's 1-year period would begin at that time.\37\ The Commission
contemplates that, if the withdrawal date is extended, financial
entities may negotiate and document their desired transfers during the
intervening period, under terms that delay consummation of any transfer
until withdrawal takes place without an agreement and this Interim
Final Rule's substantive provisions are thereby triggered.
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\35\ See Sec. 23.161(d)(2)(iv) and (v).
\36\ See Sec. 23.161(d)(2)(iv). For an overview of the process
by which an EU Member State may withdraw from the EU, see the
European Parliament Briefing, Article 50 TEU: Withdrawal of a Member
State from the EU (February 2016), available at http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/577971/EPRS_BRI(2016)577971_EN.pdf (visited February 21, 2019).
\37\ Id.
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The Commission believes that this Interim Final Rule would be most
effective if the timeframe allowed takes into account the timeframe
under corresponding EU legislation. The ESAs have submitted novation
amendments for their margin rules in proposed form to the European
Commission, but the relief that would be afforded thereby has not yet
been finalized under the EU process.\38\ The ESAs' draft Regulatory
Technical Standards provides relief for one year after the amendments
are finalized by official publication, after parliamentary approval. If
the EU amendments are not yet finalized at the time of a UK withdrawal,
affected financial entities may delay consummation of their uncleared
swap transfers until the ESA's proposed amendments apply. The
Commission anticipates some transferring financial entities will
operate under both sets of
[[Page 12069]]
regulations and will accordingly seek to coordinate their transfer
operations for compliance purposes under both sets of amendments. To
facilitate this, this Interim Final Rule has a ``tacking'' provision
that will extend the provided 1-year period by the amount of any
additional time available under the ESAs' 1-year period.\39\
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\38\ See Final Report on EMIR RTS on the novation of bilateral
contracts not subject to bilateral margins, ESAs 2018 25 (November
27, 2018), at https://eiopa.europa.eu/Publications/Reports/ESAs%202018%2025%20-%20Final%20Report%20-%20Bilateral%20margining%20%28novation%29.pdf (visited February 21,
2019).
\39\ See Sec. 23.161(d)(2)(v).
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III. Public Participation
The Commission is issuing this Interim Final Rule to revise
Commission regulation 23.161 to address certain concerns relating to a
No-deal Brexit, as discussed above. This approach enables these
regulatory changes to take effect sooner than would be possible with
the publication of a notice of proposed rulemaking in advance.
Nonetheless, the Commission welcomes public comments from interested
persons regarding any aspect of the changes made by this Interim Final
Rule as well as on the following specific questions.
(1) This Interim Final Rule permits certain amendments to uncleared
swaps without changing their swap date in order to facilitate the
transfer of uncleared swaps in response to a No-deal Brexit. As
explained above, the Commission seeks to encompass changes through a
variety of methods, including industry protocols, contractual
amendments, transfers permitted by judicial proceedings, and
contractual tear-up and replacement. What, if any, additional
clarification in the rule as to types of permissible amendments should
the Commission provide? What specifically should be added or clarified,
and why is it necessary in order to achieve the Commission's policy
objectives in the context of a No-deal Brexit?
(2) This Interim Final Rule only accommodates transfers to an
Eligible Transferee. The Commission does not intend the relief provided
by this Interim Final Rule to provide an opportunity for financial
entities to seek out a new dealer relationship and retain legacy swap
treatment. However, the Commission requests comment on whether there
may be financial entities that are unable to arrange a transfer of
legacy swaps unless the transfer is to an entity that is not an
Eligible Transferee and are thus not covered under the terms of this
Interim Final Rule. Commenters should provide descriptions of the
factual circumstances, including the frequency of its occurrence.
(3) This Interim Final Rule is intended to limit relief to only
those amendments to legacy swaps that satisfy the purpose test in this
Interim Final Rule (i.e., that are made to transfer them to an Eligible
Transferee in connection with the transferor's planning for the
possibility of a No-deal Brexit, or its response to such event). Should
any of the conditions be modified or should other conditions be
included to achieve this limitation?
All comments must be submitted in English, or if not, accompanied
by an English translation. Please refer to the ADDRESSES section above.
Except as described herein regarding confidential business information,
all comments are considered part of the public record and will be
posted as received to https://comments.cftc.gov for public inspection.
The information made available online includes personal identifying
information (such as name and address) which is voluntarily submitted
by the commenter. You should submit only information that you wish to
make available publicly.
If you want to submit material that you consider to be confidential
business information as part of your comment, but do not want it to be
posted online, you must submit your comment by mail or hand delivery/
courier and include a petition for confidential treatment as described
in Sec. 145.9 of the Commission's regulations.\40\
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\40\ 17 CFR 145.9.
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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 https://comments.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 rulemaking record
and will be considered as required under the Administrative Procedure
Act (``APA'') \41\ and other applicable laws, and may be accessible
under the Freedom of Information Act.\42\
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\41\ 5 U.S.C. 553 et seq.
\42\ 5 U.S.C. 552.
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IV. Related Matters
A. Administrative Procedure Act
The APA generally requires federal agencies to publish a notice of
proposed rulemaking and provide an opportunity for public comment
before issuing a new rule.\43\ However, an agency may issue a new rule
without a pre-publication public comment period when it for ``good
cause'' finds that prior notice and comment is ``impracticable,
unnecessary, or contrary to the public interest.'' \44\ The Commission
has determined that there is good cause to find that a pre-publication
comment period is impracticable and contrary to the public interest
here. The UK's exit may occur on April 12, 2019, or soon thereafter,
and the Interim Final Rule addresses a potential impact of a No-deal
Brexit. The Interim Final Rule facilitates the ability of financial
entities with uncleared swaps to relocate existing swap portfolios over
to an Eligible Transferee, without causing the swap dates of legacy
swaps in their portfolios to change. As such, this Interim Final Rule
benefits financial entities by removing an impediment to the transfer,
and allowing them to maintain the status quo, of certain of their
legacy swaps. The Interim Final Rule does not impose any requirements
or mandatory burden on any financial entity, including CSEs.
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\43\ See 5 U.S.C. 553(b).
\44\ See 5 U.S.C. 553(b)(3)(B).
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The Commission believes that the public interest is best served by
making this Interim Final Rule effective as soon as possible as a
result of the potential timing of events in the UK. The Commission
believes that issuing this Interim Final Rule will provide the
certainty necessary to facilitate the industry's efforts to begin
arranging their transfers immediately upon a No-deal Brexit. In
addition, the Commission believes that providing a notice and comment
period prior to issuance of this Interim Final Rule is impracticable
given the potential need for relief to begin on April 12, 2019. For
these reasons, the Commission's implementation of this rule as an
Interim Final Rule, with provision for post-promulgation public
comment, is in accordance with section 553(b) of the APA.\45\
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\45\ 5 U.S.C. 553(b)(B); 553(d)(3).
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Similarly, for the same reasons set forth above under the
discussion of section 553(b)(B) of the APA, the Commission, for good
cause, finds that no transitional period, after publication in the
Federal Register, is necessary before the amendment to Sec. 23.161
made by this Interim Final Rule becomes effective. Accordingly, this
Interim Final Rule shall be effective immediately upon publication in
the Federal Register.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act \46\ requires federal agencies to
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities
[[Page 12070]]
and, if so, to provide a regulatory flexibility analysis regarding the
economic impact on those entities. Because, as discussed above, the
Commission is not required to publish a notice of proposed rulemaking
for this rule, a regulatory flexibility analysis is not required.\47\
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\46\ 5 U.S.C. 601 et seq.
\47\ See 5 U.S.C. 603(a).
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C. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \48\ imposes certain
requirements on Federal agencies, including the Commission, in
connection with their conducting or sponsoring any collection of
information, as defined by the PRA. The Commission may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget (``OMB'') control number.
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\48\ 44 U.S.C. 3501 et seq.
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The Commission believes that this Interim Final Rule does not
affect the current recordkeeping or information collection requirements
in a significant manner. However, by requiring that in certain
transfers of legacy swaps the transferor makes certain representations
to a CSE that is a party to the swap, this Interim Final Rule modifies
a collection of information for which the Commission has previously
received a control number from OMB. The title for this collection of
information is ``Confirmation, Portfolio Reconciliation, Portfolio
Compression, and Swap Trading Relationship Documentation Requirements
for Swap Dealers and Major Swap Participants, OMB control number 3038-
0088,'' \49\ which is currently in force with its control number having
been provided by OMB. Collection 3038-0088 already includes
requirements for creating and maintaining swap trading relationship
documentation, and this Interim Final Rule would require only that an
additional standard representation be added to that documentation if
amendments are entered into, and the Commission estimates that the
burden change required by this Interim Final Rule is de minimis.
Nevertheless, the Commission will, by separate action, publish in the
Federal Register a notice and request for comment on the amended PRA
burden associated with the Interim Final Rule, and submit to OMB an
information collection request to amend the information collection, in
accordance with 44 U.S.C. 3507(c) and 5 CFR 1320.10.
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\49\ See OMB Control No. 3038-0088, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0055# (last visited
June 12, 2018).
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D. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA. Section 15(a) further specifies that the costs and
benefits shall be evaluated in light of the following five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the section 15(a) considerations.
This Interim Final Rule provides that an amendment to transfer a
legacy swap, subject to certain limitations, and solely in planning for
or responding to a No-deal Brexit will not cause its swap date to
change.\50\ The purpose of this Interim Final Rule is to allow market
participants to maintain the status quo of their legacy swaps with
respect to the CFTC Margin Rule or Prudential Margin Rule when so
transferred.
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\50\ The Commission notes that in a Brexit with a Withdrawal
Agreement or where there is no Brexit this Interim Final Rule does
not provide any relief. In these cases, there are no costs and
benefits other than the costs of requiring parties to read and
understand this Interim Final Rule.
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The baseline against which the benefits and costs associated with
this Interim Final Rule is compared is the uncleared swaps markets as
they exist today.\51\ With this as the baseline for this Interim Final
Rule, the following are the benefits and costs of this Interim Final
Rule.
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\51\ The Commission notes that the consideration of costs and
benefits below is based on the understanding that the markets
function internationally, with many transactions involving United
States firms taking place across international boundaries; with some
Commission registrants being organized outside of the United States;
with leading industry members typically conducting operations both
within and outside the United States; and with industry members
commonly following substantially similar business practices wherever
located. Where the Commission does not specifically refer to matters
of location, the below discussion of costs and benefits refers to
the effects of this Interim Final Rule on all activity subject to
it, whether by virtue of the activity's physical location in the
United States or by virtue of the activity's connection with or
effect on United States commerce under CEA section 2(i). In
particular, the Commission notes that some persons affected by this
rulemaking are located outside of the United States.
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1. Benefits
As described above, this Interim Final Rule allows legacy swaps to
maintain their swap date, notwithstanding that they are transferred and
amended as provided in the rule text to this release in connection with
a No-deal Brexit, so that they can maintain their legacy status with
respect to the CFTC Margin Rule or Prudential Margin Rule, as
applicable. This Interim Final Rule provides certainty to CSEs and
their counterparties about the treatment of certain of their legacy
swaps and any applicable netting arrangements in light of amendments to
legacy swaps that may be made in connection with their transfer in a
No-deal Brexit. In addition, the Interim Final Rule can be expected to
benefit the parties to the affected legacy swaps by allowing them to
maintain the existing margin status for the legacy swaps. Without this
Interim Final Rule, the imposition of margin requirements on these
legacy swaps and swaps in the same netting portfolio could have
negative consequences for some of the affected parties, which could
include, for example, changing the cash flow and liquidity
characteristics of those parties.
2. Costs
Because this Interim Final Rule does not require market
participants to take any action, the Commission believes that this
Interim Final Rule will not impose any additional required costs on
market participants. Nevertheless, some market participants that elect
to rely on this Interim Final Rule may incur legal costs to include the
representations required by it in their transfer documentation.
3. Section 15(a) Considerations
In light of the foregoing, the CFTC has evaluated the costs and
benefits of this Interim Final Rule pursuant to the five considerations
identified in section 15(a) of the CEA as follows:
(a) Protection of Market Participants and the Public
As noted above, this Interim Final Rule will allow market
participants, subject to certain limitations, to transfer their legacy
swaps in connection with a No-deal Brexit without being disadvantaged
under the CFTC Margin Rule. As such, this Interim Final Rule should
give affected market participants more flexibility in negotiating the
transfer of their legacy swaps but it is unclear whether or not
participants who might use this Interim Final Rule are better protected
by facing the new counterparty or not relative to their current
counterparty. If this Interim Final Rule were not adopted and some of
these legacy swaps and swaps in the same netting portfolio became
subject to
[[Page 12071]]
the CFTC Margin Rule's margin requirements and, thus, required more
collateral to be posted by counterparties, there would be a reduction
in counterparty credit risk in the financial system overall. However,
as noted above, the imposition of such margin requirements on these
swaps could negatively impact the cash flow and liquidity
characteristics of those parties.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
Absent this Interim Final Rule, market participants that transfer
their legacy swaps in a No-deal Brexit may thereafter be required to
comply with the applicable margin requirements of the CFTC Margin Rule
for such swaps, and may be placed at a competitive disadvantage as
compared to those market participants that do not transfer their legacy
swaps in a No-deal Brexit. Therefore, this Interim Final Rule may
increase the competitiveness of the uncleared swaps markets. In
addition, providing the relief may increase efficiency by reducing the
impact of a No-deal Brexit by allowing the parties to undertake swap
transfers without having to establish new margining arrangements that
were not contemplated for the legacy swaps.
(c) Price Discovery
The Commission has not identified an impact on price discovery as a
result of this Interim Final Rule. To the extent that a transfer of a
legacy swap in accordance with the conditions of this Interim Final
Rule triggers a real-time public reporting obligation of pricing
information under part 43 of the Commission's rules,\52\ such rules
require that transfers of swaps carry a notation so that the public
will be aware that the swap is not a new swap and can consider the
reported pricing information of such swap accordingly.\53\
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\52\ See paragraph 1(ii) of the definition of ``publicly
reportable swap transaction'' in Sec. 43.2, 17 CFR 43.2.
\53\ See Table A1 to Appendix A to Part 43. The data field in
such table labeled ``Price-forming continuation data'' requires an
indication of whether a publicly reportable swap transaction is a
post-execution event that affects the price of such transaction,
including whether the event was a transfer or novation.
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(d) Sound Risk Management
The Commission has not identified a significant impact on sound
risk management as a result of this Interim Final Rule. The Commission
notes that without this Interim Final Rule, some market participants
may have to pay and collect margin on certain legacy swaps, which may
lower the overall credit risk in the financial system. However, as
discussed above, these are legacy swaps that were not intended to be
covered by the CFTC Margin Rule and, but for a No-deal Brexit, would
not be amended pursuant to the terms of the Interim Final Rule.
Further, the Commission notes that a market participant might be facing
a counterparty with better or worse credit standing as a result of the
transfers. Inasmuch as there is no collateral required to be posted as
collateral in these transactions to mitigate credit risk, there may be
a change in the credit risk for some of these legacy swaps when the
counterparties change.
(e) Other Public Interest Considerations
The Commission has not identified an impact on other public
interest considerations as a result of this Interim Final Rule.
4. Request for Comments on Cost-Benefit Considerations
The Commission invites public comment on its cost-benefit
considerations, including the section 15(a) factors described herein.
Commenters are also invited to submit any data or other information
that they may have quantifying or qualifying the costs and benefits of
the proposed amendments with their comment letters.
D. Antitrust Laws
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or 4c(b)
of the CEA), or in requiring or approving any bylaw, rule, or
regulation of a contract market or registered futures association
established pursuant to section 17 of the CEA.\54\
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\54\ 7 U.S.C. 19(b).
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The Commission believes that the public interest to be protected by
the antitrust laws is generally to protect competition. The Commission
requests comment on whether this Interim Final Rule implicates any
other specific public interest to be protected by the antitrust laws.
The Commission has considered this Interim Final Rule to determine
whether it is anticompetitive and has preliminarily identified no
anticompetitive effects. The Commission requests comment on whether
this Interim Final Rule is anticompetitive and, if it is, what the
anticompetitive effects are.
Because the Commission has preliminarily determined that this
Interim Final Rule is not anticompetitive and has no anticompetitive
effects, the Commission has not identified any less anticompetitive
means of achieving the purposes of the CEA. The Commission requests
comment on whether there are less anticompetitive means of achieving
the relevant purposes of the CEA that would otherwise be served by
adopting this Interim Final Rule.
List of Subjects in 17 CFR Part 23
Capital and margin requirements, Major swap participants, Swap
dealers, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR chapter I as follows:
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
1. The authority citation for part 23 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1,6c, 6p, 6r, 6s, 6t,
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).
0
2. In Sec. 23.161, revise paragraph (d) to read as follows:
Sec. 23.161 Compliance dates.
* * * * *
(d) For purposes of determining whether an uncleared swap was
entered into prior to the applicable compliance date under this
section, a covered swap entity may disregard:
(1) Amendments to the uncleared swap that were entered into solely
to comply with the requirements of 12 CFR part 47; 12 CFR part 252,
subpart I; or 12 CFR part 382, as applicable; or
(2) Amendments to the uncleared swap that were entered into in
compliance with each of the following conditions:
(i) The law of the European Union ceases to apply to the United
Kingdom pursuant to Article 50(3) of the Treaty on European Union,
without conclusion of a withdrawal agreement between the United Kingdom
and the European Union pursuant to Article 50(2) thereof; and
(ii) Solely in connection with a party to the swap's planning for
or response to the event described in paragraph (d)(2)(i) of this
section, one or both parties to the swap transfers the swap to its
margin affiliate, or a branch or other
[[Page 12072]]
authorized form of establishment of the transferor, and the parties
make no other transfers of the swap; and
(A) A covered swap entity is a transferee from a party to the swap;
or
(B) A covered swap entity is a remaining party to the swap, and the
transferor represents to the covered swap entity that the transferee is
a margin affiliate, or a branch or other authorized form of
establishment of the transferor, and the transfer was made solely in
connection with the transferor's planning for or response to the event
described in paragraph (d)(2)(i) of this section; and
(iii) The amendments do not modify any of the following: the
payment amount calculation methods, the maturity date, or the notional
amount of the swap; and
(iv) The amendments take effect no earlier than the date of the
event described in paragraph (d)(2)(i) of this section transpires; and
(v) The amendments take effect no later than:
(A) The date that is one year after the date of the event described
in paragraph (d)(2)(i) of this section; or
(B) Such other date permitted by transitional provisions under
Article 35 of Commission Delegated Regulation (EU) No. 2016/2251, as
amended.
Issued in Washington, DC, on March 26, 2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Margin Requirements for Uncleared Swaps for Swap Dealers
and Major Swap Participants--Commission Voting Summary, Chairman's
Statement, and Commissioners' Statements
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
As we well know at the CFTC, trading markets crave certainty.
Thus, market regulators have a responsibility to avoid creating
market apprehension and doubt, whenever possible.
At a time of heightened market uncertainty caused by Brexit,
this Commission has worked over the past several weeks to bring
clarity to participants in global derivatives markets by a series of
separate actions and statements with its regulatory counterparts in
London, Brussels and Singapore.
Four weeks ago, the Commission and the Bank of England,
including the Prudential Regulation Authority and the Financial
Conduct Authority, issued a statement regarding derivatives trading
and clearing activities between the United Kingdom and the United
States after the UK's withdrawal from the European Union.
The statement assured market participants of the continuity of
derivatives trading and clearing activities between the UK and U.S.,
after the UK's withdrawal from the EU.
Today the Commission takes another important step to bring
certainty to the global derivatives markets.
Consistent with actions already taken by U.S. prudential
regulators, we are providing regulatory certainty regarding the
transfer of uncleared legacy swaps to facilitate global swaps market
participants' needs in the event that the UK withdraws from the EU
without a negotiated withdrawal agreement.
Soon the Commission and the Financial Conduct Authority intend
to sign two memoranda of understanding related to the UK's
withdrawal from the EU.
The two signed MOUs will update existing MOUs originally signed
in 2016 and 2013 to provide for continued supervisory cooperation
with respect to certain firms in the derivatives and the alternative
investment fund industry.
The signing of these supervisory MOUs with the FCA will ensure
continuity in effective cross-border oversight of derivatives
markets and participants.
These measures will help support financial stability and the
sound functioning of financial markets. They also will give
confidence to market participants about their ability to trade and
manage risk through these markets.
I compliment the DSIO staff for putting together this interim
final rule and request for comment.
I commend them for their many hours of hard work, the quality of
the results and their thoughtfulness and engagement throughout.
I also am grateful to my fellow Commissioners for their
commitment and engagement in these critical actions.
Appendix 3--Statement of Commissioner Brian D. Quintenz
I support today's interim final rule providing relief from the
Commission's uncleared margin requirements \1\ for legacy swaps
transferred to counterparties outside of the UK, in the case of a
British exit from the European Union in the absence of a withdrawal
agreement (``No-deal Brexit'').
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\1\ Commission regulations 23.150 through 23.161 (17 CFR 23.150
through 23.161).
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I believe the rule will provide necessary legal certainty to
market participants as they consider how they will respond to the
possibility of a No-deal Brexit. I believe it is correct for the
rule to exempt a legacy swap from the Commission's uncleared margin
requirements if the swap is amended due to a No-deal Brexit. When
the Commission issued margin regulations for uncleared swaps in
2016, the Commission adopted a compliance timetable such that swaps
entered into prior to a particular compliance date would not be
subject to the new margin requirements.\2\ An event such as a No-
deal Brexit, one that is outside of counterparties' control, should
not cause counterparties to bear the costs and operational
challenges of margining a swap that the Commission had previously
exempted. I note that last year, the Commission similarly granted
relief to a legacy swap that is amended to comply with the
``Qualified Financial Contracts'' rules issued by the U.S.
prudential regulators in 2017.\3\
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\2\ Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 81 FR 636, 674-677 (Jan. 6, 2016) (new
regulation 23.161).
\3\ Margin Requirements for Uncleared Swaps for Swap Dealers and
Major Swap Participants, 83 FR 60341, 60344 (Nov. 26, 2018) (new
regulation 23.161(d)).
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I would like to thank the CFTC staff for having coordinated with
the U.S. prudential regulators on this matter to ensure that their
interim final rule \4\ and ours are consistent. I look forward to
supporting any future efforts by the CFTC to assist derivatives
market participants address complications arising from Brexit.
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\4\ Margin and Capital Requirements for Covered Swap Entities,
Office of the Comptroller of the Currency, Board of Governors of the
Federal Reserve System, Federal Deposit Insurance Corp., Farm Credit
Administration, and the Federal Housing Finance Agency, March 15,
2019, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190315a.htm.
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Appendix 4--Statement of Commissioner Dan M. Berkovitz
I am voting in favor of the Interim Final Rule (``IFR''), which
provides relief from certain margin requirements for certain legacy
swap transfers in case of a ``No-deal Brexit.''
Although we do not yet know the date of the United Kingdom's
withdrawal from the European Union (``EU''), the form it will take,
or whether it will even take place, market participants worldwide
are preparing for Brexit. The Commission is committed to working
with our domestic and international partners to facilitate
regulatory continuity and provide stability to the derivatives
markets if and when Brexit occurs. Today's action is a continuation
of that effort.
I commend the Chairman and Commission staff for their efforts to
address these and other Brexit-related cross-border issues. I note
in particular that these actions are all taken pursuant to, and are
consistent with, the existing regulations and guidance in place at
the CFTC governing cross-border activities.
The IFR will maintain the legacy status of swaps that were
executed prior to the relevant compliance dates for the CFTC swap
margin rule if those swaps are legally transferred solely as a
result of a No-deal Brexit. The transfer of these swaps to
affiliates outside the United Kingdom would be needed so that the
swaps can continue to be properly serviced under EU law.
A No-deal Brexit would be the result of political events beyond
the control or anticipation of the parties at the time they first
entered into the legacy swaps in question. Under these
circumstances, if the
[[Page 12073]]
CFTC's margin rules were applied, the transfer of these legacy swaps
could entail significant expenses, which could impede such
transfers. The failure to effectively and efficiently accomplish
these transfers could introduce new systemic risks globally.
The IFR release makes clear that legacy swap transfers get
relief solely if they are undertaken in connection with a No-deal
Brexit. The release also makes clear that the IFR does not create an
opportunity for the parties to renegotiate the economic terms of
legacy swaps. Swaps that are amended or renegotiated, other than to
the extent permitted by the IFR, would still be subject to the CFTC
margin rules. These limitations are important as they prevent abuse
of the flexibility provided by the IFR.
[FR Doc. 2019-06103 Filed 3-29-19; 8:45 am]
BILLING CODE 6351-01-P